Link and Motivation Inc

TSE:2170

Earnings Call Transcript 2023-Q2

[Yoshihisa Ozasa, executive]

I am Yoshihisa Ozasa, and I'm Chairman and Representative Director of the Board of Link and Motivation. Welcome to our earnings webcast for the 6 months ended June 30, 2023. So let's get started. Here is today's agenda. First, I will give you our company overview. Second, I'm going to give you the business report, which consists of the report on our consolidated financial results and the semi-annual report on the organizational status. And third, I will share with you our business forecast. So let's begin with the company overview.

This is our mission through Motivation Engineering, which is our core technology, we provide organizations and individuals with opportunities to transform themselves and create a more meaningful society. And this mission is at the center of everything we do. This is the diagram that shows our operating structure. We have 3 business divisions. From upper left, Organizational Development Division, it supports creating organizations that individuals choose or what we call motivation companies. It includes consulting and cloud business and IR support business.

Next to the right is Individual Development Division, it supports creating or developing individuals that organizations choose. We call them i-Company. It includes Career School business and the Cram School business. And the third one, which is just below is Matching Division, which provides opportunities to link organizations and individuals. It includes ALT Placement business and personnel placement business.

Next, agenda item #2, business report on business results for the 6 months ended June 30, 2023. This is our P&L on a consolidated basis. Revenues were basically flat, and I'm going to tell you why. The Career School business suffered a temporary drop in revenue because we downsized the number of classrooms as part of the restructuring program. And we try to recruit the revenue loss by growing the B2B reskilling business, but that didn't grow as much as we had expected.

In addition, ALT Placement business, which is a staffing service business and generates a sizable chunk of our total revenue was not as successful as we had anticipated. These are the major reasons why the revenues were almost unchanged from the year before. On the other hand, because the high-margin businesses, such as matching businesses and Motivation Cloud series grew at pace, our income at every level increased very substantially from the year before. Operating income was up by 12.5%. Net income attributable to owners of the parent sold 22.3% after deduction of the IAS 12.

This table is showing revenues and gross profit by segment. First, revenues of the Organizational Development division etched up slightly as the stagnation in the growth of our consulting business, which we believe to be temporary was offset by an increase in the cloud subscriptions. The Individual Development division saw a significant decline in revenues due to the structural reforms, including the relocation and closures of schools in the Career school business. The Matching division, on the other hand, grew strongly over the past 6 months, thanks to further acceleration of personnel placement business, including open work.

Let's take a look at the brief summary for each division. For Organizational Development Division, revenues from consulting and cloud business remained unchanged from a earlier due to the stagnation in the growth of consulting business. However, gross profit increased on the healthy growth of the Motivation Cloud series. The bar chart at the bottom right of the slide shows that Motivation Cloud series monthly fee revenue grew 26% over the past year at JPY 358,792,000. With respect to IR support business, although our core service of helping our clients put together integrated reports grew over the past year, the weaker demand for website production kept revenue flat and yet gross profit increased slightly from the year before.

Next is the summary for Individual Development division. As I mentioned earlier, in B2B services, we had an issue with the repeat rate for the one-off skills training over the past 6 months. In B2C services, revenues fell sharply year-on-year due to the school closures, but gross profit decreased at a slower rate because the increase in online classes improved profitability. The progress in restructuring our career school business is shown here at the bottom right of the page.

The number of schools was down from 81% in Q2 of last year to 54% in Q2 of this year. We are reducing the number of schools we try to be light on tangible assets. Instead, we have been shifting our focus to online courses and the revenue has almost doubled for online courses and growing at a healthy clip. When it comes to Cram School business, revenues grew substantially year-over-year, thanks to an increase in the number of total enrollees as more students continue to take our courses even after the exams. Gross profit, however, increased only slightly because hiring more people pushed up the cost of sales. This is the summary of matching division on the next slide. For ALT Placement business, revenues were down slightly from the year before because the number of ALT placements for the academic year of 2023 didn't grow.

Gross profit, on the other hand, dropped sharply as we continue to struggle against competitors in terms of prices because we had more teachers, they had to be covered by the social insurance program eligibility expansion took effect back in October. Having said that, however, we believe this disadvantage go away in the near future. And we will be back on growth trajectory so stay tuned. With respect to personnel placement business, we saw both revenues and gross profit sold as open work recruiting continued to grow very strongly.

As you can see at the bottom right of the page, its sales jumped 144.9% year-over-year. There is significant momentum in the growth of recruiting or matching services on this open work platform. These are SG&A expenses on a consolidated basis. Total SG&A expenses increased only slightly year-on-year. These are consolidated statements of our financial position. Assets increased on the rising valuation of our incubation stocks, while liabilities decreased as we pay back borrowings. Total equity increased by JPY 2.310 billion on the rising valuation of the incubation stocks and the net profit we have posted for the year so far. And as a result of that, our equity ratio now stands at around 40%, meaning that we are in a very firm financial position.

The next slide is about our dividend payouts. We consider shareholder return as one of our important management priorities and continue to stick to the policy of paying dividends based on performance. For the second quarter, we are going to pay JPY 2.8 a share on Monday, September 25. We have been raising full year dividend payouts over the past decade, as you can see the chart on the slide. Let's move on to the report on the organizational status. Here is our approach to human capital management.

First of all, create links between business strategy and organizational strategy. And we define organizational strategy as something that serves to raise productivity based on the synergy between organizational strength, and human resource strength. And today, I'm going to talk about engagement rating and role survey score as one of the key indicators of our organizational and human resource strengths, respectively. Let me begin with our engagement rating results. First of all, engagement rating is an 11 grade evaluation of engagement based on the engagement score, which quantifies the levels of employee expectation for and satisfaction with the company they belong to and the degree of matching between these 2.

It is a deviation score and the middle grade is B. And here are the results for the month of August this year. As you can see, on the 11 companies in the Link and Motivation Group, 9 got a AAA rating, maintaining a high level of engagement. The key indicator of human resource strength is our role survey score. This is also an 11 great valuation, which measures the degree of matching between expectation and the satisfaction of those around you on the level of your fulfillment of the role required at each job level.

Again, the middle grade is B. So far, we have surveyed more than 7,000 companies and over 700,000 individuals. And here are our results for the month of April. Overall, 54.2% of our people were ranked A or above. And among those who are managers or at higher job levels, 73.1% were ranked A or above. These results indicate that our organization continues to have really high human resource strength. The last agenda item for today is our business forecast. But before talking about it, let me tell you what we are aiming for, especially with regards to our organizational development division, which has high growth potential.

We believe that it will be increasingly more important for companies to be chosen by customers, not only in the product market, but also by employees and job applicants in the labor market. In other words, for companies to be successful, adapting to the change in product market is no longer enough. Companies must now adapt to the change in labor market as well. And just as there are tools to measure how companies adapt into the product market such as P&L, balance sheet and other financial information we believe there should be tools to measure how companies are adapting to the labor market.

We believe that such nonfinancial information as engagement score and open work evaluation score serves its purpose and should be set as standards. And thereby, we work to achieve our mission to raise engagement for companies across the world. The next slide is about the growth direction or where we see growth going forward. We understand that the labor market is changing more rapidly than ever before for businesses. In the short term, human capital management will be necessary as human capital disclosure becomes mandatory for publicly traded companies. In the short and midterm, companies will find it more difficult to hire as talent mobility increases. And in the long term, as Japan's labor force is expected to shrink faster, companies will be required to do more to raise labor productivity.

And that is exactly the context that has led us to focus on expanding our consulting and cloud business as much as we can by leveraging our expertise and knowledge on organizational and human resource consulting that we have accumulated since the founding of Link and Motivation. As you can see on the right side of the slide, it is clear that this business has huge growth potential. In Japan, there are approximately 100,000 companies with 50 employees or more, but we currently serve only 1,300 of them.

I just wanted to say that there are plenty more companies out there that we can help with our expertise. So what are our competitive advantages that we leverage to drive further growth going forward? If you take human capital management as just one example, our support is as comprehensive as it can be. Of course, we start with diagnosis. But not only that, we also support transformation and disclosure. And our capabilities to support the whole cycle of human capital management is the biggest competitive advantage that we have. Let me give you a little bit more details. As for diagnosis, our support doesn't end with just doing surveys and collecting data.

We provide a more precise diagnosis, which leads to transformation. That's what Motivation Cloud is all about. We have the largest database in Japan with more than [ 10,603 ] companies and 3.4 million people surveyed so far, and it has been named the most popular product in Japan's engagement market for 6 years in a row. We go beyond diagnosis and provide support for transformation. Rather than meeting companies' needs for recruitment and trainings, we provide one-stop organizational and human resource consulting services.

Currently, we serve approximately 800 companies in a year. The last important piece of our service is disclosure. Our support goes beyond just disclosure of information, we help our clients bring their human capital management disclosure to a next level based on the diagnosis and the outcomes of the transformation. And more companies are disclosing their engagement rating. As of the end of June, 81 companies made public their engagement rating. And in August, close to 100 companies disclose their engagement rating today.

We take pride in being unique and the only company in the sense that our service embodies the essence of human capital management and provides the whole cycle of support from diagnosis, transformation to disclosure.

That sets us apart from companies and drives our future growth. This is our forecast for the second half of this year. We will expand revenue by meeting wide ranging needs for human capital management. We had the groups realigned by product categories in the beginning of this year so that each group was focused on growing revenue of its own product. As a corollary to that, our ability is to respond to diverse needs for human capital management, somewhat diminished during the first half. So based on this lesson learned, we are going to shift our focus to expanding cross-selling across the cycle of diagnosis, transformation and disclosure.

And we have already made some adjustments to our accounting system and it tweaked our organizational structure. As more companies have become ready for disclosure during the second half and are now poised to put human capital management in practice. We are moving into top gear to accelerate our support for those companies. Just so you know, this chart is showing the amount of orders for our consulting and cloud services. Organizational and human resource issues are difficult to be solved in the short term.

That is exactly why we are changing our business model to provide a medium to long-term support and commitment our clients deserve. The amount of orders in this chart represents the total amount of future project contracts received at a given point in time for our consulting in the cloud business.

It is clear that the amount of orders has been growing consistently, and we expect that it continues to grow in the second half and beyond. And I believe I covered almost everything I wanted to talk about today. As I mentioned earlier, the Organizational Development Division has particularly huge growth potential among the 3 divisions we have. So it is only natural for us to shift our focus on this division and do more to raise EPS even higher as well as improved PER by better managing Investor Relations going forward. So stay tuned to what we are up to.

And that's it for our earnings webcast for the 6 months ended June 30, 2023. Thank you very much for watching.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]