Link and Motivation Inc

TSE:2170

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Yoshihisa Ozasa, executive]

I am Yoshihisa Ozasa, Chairman and Representative Director of the Board of Link and Motivation. Welcome to our earnings webcast for the 6 months ended June 30, 2024. 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 reports, which are about our consolidated financial results and our organizational condition. Third, I will share with you how much progress we've made with regards to our growth strategy centered on consulting and cloud business. And lastly, I will explain the business alliance with FCE Inc.

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 diagram 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, which helps enterprise raise and improve employee engagement and IR support business, which helps enterprises raise and improve engagement with investors.

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, which helps mostly working adults, build and develop their professional career and cram school business, which helps students from elementary to high school not only improve their academic abilities, but also achieve their goals and flourish in society.

And the third one, which is just below is Matching Division, which provides opportunities to link organizations and individuals. It includes ALT Placement Business, which provides matching services for local governments and foreign workers in Japan, who want to work as assistant language teacher teaching English to school children. The other is personnel placement business, which provides matching services for job seekers and companies through OpenWork Inc., which is an operator of one of the largest job posting hunting websites in Japan.

Next, Agenda Item #2, business report on business results for the 6 months ended June 30, 2024. This is our P&L. Revenues increased to 7.7% year-on-year due to growth in the consulting and cloud business and the ALT Placement business as expected. Gross profit jumped 11.9% year-on-year, thanks to strong growth in the high-margin consulting and cloud business and the personnel placement business, including OpenWork in line with the expectations.

Operating income also grew substantially, up 20.5% year-on-year, driven by growth in the consulting and cloud business, which we, as a group, are focused on, and it's also in line with expectations. And finally, net income sored as expected, up 28.7% year-on-year following the increase in operating income.

This table is showing revenues and gross profit by segment. For every division, the second quarter revenues and gross profit came in well above the same period a year ago, in line with our expectations that business would further pick up in the second quarter and beyond.

Let's take a look at the brief summary for each division. For Organizational Development Division, the consulting and the cloud business saw its Motivation Cloud series monthly fee revenue rise sharply following an increase in new contracts in Q2, sending both revenues and gross profit up 10% and 10.4%, respectively, year-on-year. As showed in the graph, the Motivation Cloud series monthly fee revenue was JPY 458,130,000 as of the end of the second quarter of this year, a big jump of 27.7% year-on-year.

With respect to IR support business, our core service of helping our clients put together integrated reports grew over the past year as expected, sending its revenues up 5.7%. Its gross profit sored 32.6% year-on-year, thanks to productivity improvement.

Next is the summary for Individual Development Division. For the career school business, revenues grew as a result of an increase in revenue per enrollee, thanks to the addition of new courses and other factors. Gross profit margin also rose as expected because of restructuring. As shown in the graph, our restructuring efforts led to an increase in the career school business' gross profit margin from 44.8% in Q2 last year to 46.5% in the second quarter.

When it comes to the cram school business, revenues and gross profit grew substantially year-over-year, following increases in both enrollment and revenue per enrollee. Revenues jumped to 10.3% and gross profit sored 16%.

This is the summary of Matching Division. For the ALT Placement Business, revenues were up 5.5% and gross profit increased to 9.9% year-on-year, following an increase in ALT placements in line with our expectations.

With respect to the Personnel Placement Business, both revenues and gross profit increased substantially over the past 12 months as OpenWork recruiting continued to grow strongly as expected. Revenues were up 10.4% and gross profit was up 10.8% year-on-year. The graph at the bottom right shows OpenWork recruiting sales figures, which grew very strongly, up 28.5% from the same quarter last year.

These are SG&A expenses on a consolidated basis. Sales-related expenses increased to 10.2%. This is an investment, and we increased ad spend for OpenWork in Q1. We also spent more on payroll, recruitment, training and welfare benefits as we focus on investing in human resources.

Total SG&A expenses increased to 7.7% year-on-year. These are consolidated statements of our financial position. Both assets and liabilities increased. Current liabilities decreased and noncurrent liabilities increased because of a change in the balance of long and short-term borrowings. Total equity increased as the group posted net income for the quarter.

This 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 a quarterly dividend based on performance. For the second quarter, we are going to pay JPY 3 a share on Wednesday, September 25. The graph on the right side shows our full year dividends over the past decade or so, we continue to ensure and enhance shareholder returns based on our performance for each quarter.

Let's move on to the report on the organizational condition. Here is our approach to human capital management. First of all, it is fundamental that we create links between business strategy and organizational strategy. When it comes to organizational strategy, it boils down to human resource capabilities and organizational capabilities. And we believe that we can raise productivity by enhancing both capabilities.

Now we have role survey score as a key indicator to quantify and measure human resource capabilities. And we also have our proprietary engagement rating as a key indicator to quantify and measure organizational capabilities. And we invest in recruiting, training, putting in place systems. By that, we mean compensation or evaluation systems and reshaping our corporate culture.

So let me explain one by one, beginning with human resource capabilities, more specifically talking about role survey score. This is an 11 grade evaluation, which measures the degree of matching between expectation and the satisfaction of those range on the level of your fulfillment of the role required at each job level. The middle grade is B and here is our latest result. More than 50% of our people were ranked A or above. Over 70% of those who are managers or at higher job levels were ranked A or above, indicating that we maintain a relatively high degree of human resource capabilities.

With respect to organizational capabilities or engagement, we have engagement rating, which is also 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.

Our latest results show that among the 8 companies in the Link and Motivation group, 6 got a AAA and 2 got AA ratings, and these results have met our target for all the 8 companies to be ranked at AA or higher. We also put focus on promoting digital transformation, or DX, to improve productivity. Our DX score continues to improve. And in 2023, our score of 124.3 was well above the average of 102.6%, meaning that we have more people with high digital skills than other companies. And we will continue to invest in and promote DX to further improve our productivity.

So for example, we provide a group-wide ChatGPT trainings and promote the use of Generative AI in our consulting projects and others. And these initiatives have already boosted our productivity.

Next agenda item #3, report on growth strategy centered on consulting and cloud business. Our focus is on the consulting and cloud business in the organizational development division because it is and continues to be driving our business growth. We leverage our unique abilities that allow us to provide companies with comprehensive support and assistance in managing their human capital. That is to say we have the ability to diagnose the level of employee engagement, the ability to provide a one-stop organization HR consultation to drive transformation based on the diagnosis and the ability to help our clients disclose the results of and commitments to human capital management.

There is no other company that covers the whole process of diagnosis, transformation and disclosure. We continue to leverage this unique competitive advantage, providing more support and further drive our business growth. Let me talk about our growth potential and strategy. There are more than 100,000 potential clients here in Japan. These are companies with 50 employees or more. So we have substantially more room to grow in Japan, and we can target these companies. Not only that, the business alliance with FCE Inc, will enable us to tap their customer base so that we can bring our Motivation Cloud series to more small businesses in Japan.

In addition, we are going global. We are rolling out Motivation Cloud series to overseas subsidiaries of big Japanese corporations, particularly in Thailand and Vietnam. We currently provide our services to 30 companies around the world, mostly in Asia, and we continue to expand our global footprint.

This graph shows Motivation Cloud series monthly fee revenue, which is one of the key indicators of the consulting and cloud business. What I wanted to highlight here is that we were well above the target for this Q2, which was JPY 450 million. I also want to point out that we are likely to achieve our annual target of JPY 530 million by the end of this year.

These big Japanese companies are subscribing to Motivation Cloud series, and this is not an exhaustive list of our corporate clients. What you see on the slide is just a subset of the companies that allow us to show their logo on this page. I also want to stress that almost all those companies make the results of their diagnosis that is their employee engagement score or engagement ratings accessible to the public, for example, in their integrated report. So it's safe to say that increasingly more and more companies in Japan recognize the importance of engagement, which is fundamental to human capital management and the need for its disclosure to investors.

This graph shows the total orders for the consulting and the cloud business, including those yet to be delivered. The orders increased substantially year-on-year. As of June 30, it was approximately JPY 14 billion, up 20% from a year earlier. And the orders to be delivered by the end of this year are about JPY 5 billion, up 25% year-on-year, and we are increasingly more likely to meet our earnings forecast.

Here's a topic that I want to draw your attention to. There has been increased attention to human capital management in Japan. And we can tell because the HR transformation summit 2024, where the organizer of this event had approximately 18,000 registrations, and it was attended by many CEOs, corporate officers in charge of HR and HR managers. And this is a great opportunity for us to showcase our comprehensive human capital management services.

And last, but not least, I'd like to explain the business alliance with FCE Inc. First, let me give you some basic information who FCE is and what they do. FCE is an educational support services company with unique strengths in enhancing human resource capabilities. And we signed a business alliance agreement that allows both of us to sell each other's products. Following the basic capital and business alliance agreement we signed back in May, we are going to acquire a 20% stake in FCE and make it an equity method affiliate.

What you see on the right side of the page is a list of their products that we begin to cross-sell. Smart boarding is an onboarding DX system, which is clearly distinct from general e-learning systems. Already more than 900 companies use Smart Boarding. Robo-Pat is a very strong brand. It is a personal RPA tool and is ranked #1 as the most powerful IT tool according to a 2023 industry survey. And currently, more than 1,300 companies are using this tool.

Lastly, FCE Prompt Gate is a generative AI prompt platform that offers trainings to prompt engineers. This business alliance will enable FCE to sell our Motivation Cloud series to small- and medium-sized companies. As I said earlier, our current focus is on big companies in Japan. So we are going to tap FCE's customer base, which comprises SMEs or companies with 50 employees or more to further drive our business.

In exchange, we are going to sell their Robo-Pat and FCE Prompt Gate as part of our Motivation Cloud series to our customer base, which comprises mostly big companies in Japan. And we believe that this business alliance will enable us to better help our clients improve their productivity, attain authentic improvement in engagement and achieve success in human capital management.

That almost brings to an end to my presentation. It is critical to focus on the organizational development division and its businesses given the attention and the interest in human capital management. And we will continue to do everything we can to hit and go beyond our revenues as well as profit targets for this year. So stay tuned to what we are up to. That's it. Thank you very much for watching.