Link and Motivation Inc

TSE:2170

Earnings Call Transcript 2021-Q3

[Yoshihisa Ozasa, executive]

I am Yoshihisa Ozasa-san, and I'm Chairman and Representative Director of the Board of Link and Motivation. Welcome to the third quarter 2021 financial results webcast. So let's get started.

Here is today's agenda. First, I will give you a brief introduction of our company. Second, I'm going to talk about our third quarter financial results. And then I'll share with you progress updates on our growth businesses, which we identified. Lastly, I want to talk about selection and concentration in order to strengthen our growth businesses, especially with regards to the divestiture of our domestic temp staff business.

So let's begin with the company overview. This diagram shows the operating structure of our group. Our mission is to provide opportunities to transform organizations and individuals and create a more meaningful society through Motivation Engineering, the core technology of our group.

The mission is at the center of everything we do at Link and Motivation. On the right side of the slide, you see 3 circles representing our business divisions. From upper left, Organizational Development Division, it supports creating organizations that individuals choose or what we call motivation companies. This division includes Consulting & Cloud business and Event & Media business.

Next to the right is Individual Development Division. It's a B2C business. It supports creating or developing individuals that organizations choose. Those individuals who have a strong sense of ownership and entrepreneurship or what we refer to as i-Company.

And the third one, which is just below is Matching Division, which provides opportunities to link organizations and individuals. It includes Global Personnel Placement & Temp Staff business as well as Domestic Personnel Placement & Temp Staff business. We also have venture incubation business.

Let me move on to talk about our Q3 financial results on a consolidated basis. These are our revenues and income for Q3. The third quarter revenues rose 4.8% from the same quarter of last year. The adjusted operating income and operating income soared dramatically, up 56% and 46.9%, respectively, over the past year. Net income also jumped 50.9% from the same period of the previous year. Healthy performance of our Organizational Development Division, which captured the needs of companies to improve employee engagement was in large part responsible for the higher results.

These are the third quarter revenues and gross profits by segment as compared with the same quarter of last year. Organizational Development Division's Consulting & Cloud Business grew substantially over the past year, driving the revenue growth for the entire group. Its revenues were up 10.8% and gross profit was up 14.1% year-on-year.

Individual Development Division, in the middle, performed markedly better, thanks to an improved gross profit margin in the Career School business as our schools also shifted to online learning. Its revenues increased 14.7% and gross profit margin soared 46.2% from the same period of last year.

Matching Division, at the bottom, saw both revenues and gross profit down 1.8% year-on-year. Global Personnel Placement & Temp Staff business has generated stable revenues but the domestic business was performing poorly.

As the headline of this slide reads, support for steady progress from Organizational Development Division, Consulting & Cloud Business continues to expand and get more big corporate clients. As more and more companies become aware of the need to improve employee engagement, rank-based trainings also grew substantially along with the cloud business.

The graph on the left shows the Consulting & Cloud Business' third quarter revenues from major companies from 2019 to 2021. This third quarter result is 28.2% higher than it was last year and 8.8% higher than in 2019, 2 years ago. So it is growing at a very healthy clip.

When it comes to the latest highlights for Consulting & Cloud Business, on the right, we've already achieved our year-end target for Motivation Cloud's monthly fee revenue of JPY 230 million during this third quarter. That's diagnosis part of the business. For transformation part of the business, consulting services and training programs saw their revenues increased 12.9% for the third quarter from the same period of 2019 or before the pandemic.

This slide shows our third quarter SG&A expenses on a consolidated basis. Total SG&A expenses rose 3.2% from the same quarter of last year. As we did in the first half, we continued to invest in personnel expenses during the third quarter. And office and system expenses increased sharply by 15.5% year-on-year because of a onetime accelerated depreciation and relocation costs associated with the office relocation project.

This is our consolidated balance sheet. Both assets and liabilities decreased substantially due to a large decrease in right-of-use assets and leasing liabilities associated with the relocation of the head office. Equity also decreased slightly due to the acquisition of additional shares of OpenWork.

This is our dividend policy. We continue to pay a quarterly dividend. And from this third quarter on, we have raised the dividend to JPY 1.9 a share. The third quarter dividend payment is scheduled for Friday, December 24, 2021.

Next, let us move on to agenda item 3, progress report on growth businesses. We are going to step up investment in the following 4 businesses where we see the greatest potential for future growth in order to earn a record profit in 2022 and further speed up the growth momentum in 2023 and beyond.

For Organizational Development Division, it is Motivation Cloud series business. As for Individual Development Division, we will focus more on individual employees of companies and help them adapt to digital transformation of their workplace.

There are 2 businesses from Matching Division that we will focus on going forward. One is OpenWork. We're going to further promote direct recruiting through one of the largest employee online review platforms in Japan. The other is ALT Placement business, we launched Teachers Cloud, a cloud-based placement service for school teachers. We will add more clients to this service and further increase our market share.

From the next slide on, I will give you a little bit more detail about each of these businesses. Let's start with Motivation Cloud series. Our Motivation Cloud has captured more than 50% share of the employee engagement market in Japan, and we maintained the top spot in terms of sales share for 4 years in a row.

As part of the broader HR tech market, the size of the employee engagement market in Japan is still small, less than JPY 10 billion today. But more and more companies become aware of the need to improve their employee engagement and promote human capital disclosure, and that will certainly drive the expansion of the employee engagement market into a JPY 30 billion, JPY 50 billion or even JPY 100 billion market in the future.

And of course, we're going to step up our efforts in driving the market growth. As I noted earlier, we reached a year-end target of JPY 230 million in monthly fee revenue ahead of schedule after our efforts to drive subscriptions among major companies proved successful.

Please take a look at the graph below. We saw a slight increase in suspensions and cancellations of the Motivation Cloud subscriptions during the second and third quarters of last year because of the pandemic. But since then, the business has bounced back nicely and in more big corporate subscriptions. The third quarter monthly fee revenue was up 7.7% from the previous quarter and up 23.8% from the same quarter of last year, growing at a brisk pace.

The share of major companies in monthly fee revenue has been rising consistently. As you can see this bar chart, the dark blue bars represent the share of major companies. About a year ago, the share of major companies in monthly fee revenue surpassed that of SMEs and venture companies and has been growing consistently since then.

In addition, approximately 30% of our monthly fee revenue now comes from major companies hiring more than 5,000 employees. The share of major companies in monthly fee revenue was at 57.8% for the third quarter, up 6.8 percentage points from the same quarter of last year.

Subscriptions among major companies, including those hiring more than 10,000 employees are increasing at pace across wide-ranging sectors. These are our clients who allowed us to show their company logo.

The HR tech market is an established market outside Japan estimated at around JPY 2.6 trillion globally. In the United States, it becomes mandatory for companies of certain size to disclose information on human capital. And in Europe as well, employee engagement is the #1 criterion when it comes to successful HR. And it is expected that not only the HR tech market in general, but also the employee engagement market, in particular, will get bigger and more active.

If you look at the right half of the slide, there is a projection of how big the HR tech market in Japan will become by 2025. It's expected to exceed JPY 171 billion, catching up with the trend seen in other countries than Japan.

As the employee engagement market is expected to grow even bigger, we should address the following key themes. The first one is to expand our customer base by adding not only more major companies as our clients but also companies in smaller cities and other areas than Tokyo. There are many fine companies across Japan. We are showing just a few of such excellent companies who've become our customers. The Awa Bank is a regional bank in Shikoku area, and Saishunkan Pharmaceutical manufactures and sells basic skincare products and is headquartered in Kumamoto Prefecture.

The second key theme is to step up the development of Cloud series to add more functions. We're going to add new upsell products to the existing Motivation Cloud series. The development is now underway, and we will launch the new series next year. So I think you will continue to be excited to see how much and how fast monthly fee revenue will grow going forward.

When it comes to Individual Development Division, we are going to focus on individual employees of companies and provide support as they go through digital transformation or DX. The COVID-19 pandemic has dramatically boosted demand for digital transformation, and yet many companies have been struggling to find enough human resources in digital and technology fields.

Please take a look at the left-hand side of the slide. The number of companies who consider DX as a management issue has skyrocketed just over the past year. In fact, there are 4.6x more companies today than there were last year who mentioned DX in their securities reports. Also, their annual budget for DX is close to JPY 500 million on average.

On the other hand, if you look at the right, you'll see the many companies citing the shortage of staff who are able to take charge of in-house training or the lack of in-house training programs and opportunities as reasons for not being able to promote digital transformation. And that's exactly why we are here to fulfill the needs and wants of those companies by focusing on their individual employees to support their skill development.

This business area is expected to grow even bigger driven by our IT skills support services we've developed over the years. Also today, we have about 2,200 corporate customers in our Organizational Development Division and approximately 450 local government customers in the ALT Placement business of our Matching Division. And we are going to step up our DX support with those companies in local municipalities through increased coordination among the 3 divisions. In fact, the third quarter revenues from the DX support for individual employees soared 80.5% from the year before and are expected to keep going up.

The third one is OpenWork within our Matching Division. OpenWork is both a company name and a brand name. It is one of our subsidiaries and the one that operates one of the largest employee online review platforms for job seekers in Japan in terms of the number of reviews with approximately 11.8 million reviews and evaluation scores. And it has about 4.4 million registered users today and counting.

This is, first and foremost, an online platform that provides job seekers with employee reviews of companies. But it also has 3 different revenue streams. The first one is a subscription model where job seekers pay a membership fee to access high-quality company reviews. The second revenue stream is charging recruiting companies for access to those job seekers' resume and other personal data. The third stream is the so-called direct recruiting model where companies placing their job ads can communicate directly to job seekers posting their resume on the same platform, it's a direct matching service. And it is this direct recruiting model that we are going to focus on more and invest more of our resources into.

The number of its registered users and the number of reviews are both increasing at pace. Please take a look at the graph on the left. It has 4.4 million registered users and 11.8 million reviews today, making OpenWork one of the largest online employee review platforms in Japan. Also, OpenWork Recruiting, that is direct recruiting, which I just talked about, has more than 1,000 active corporate users and counting. OpenWork Recruiting's annual revenue is expected to jump 75.4% between 2020 and 2021.

The fourth and last business that we're going to focus on is ALT Placement business in our Matching division. This is a business which provides ALTs, assistant language teachers to elementary, junior high and high schools across Japan.

If you take a look at the pie chart on the left, you see that our share, Link Interac's share within the entire ALT market is at 24.3% today. The other players in this market include, of course, other private companies, JET Programme of the Ministry of Education and direct employment by schools themselves.

Now the other chart next to the right is showing our market share within the private companies. And as you see, we hold an overwhelming share at 51.6%. But when you look at the entire picture, there is much more room for us to grow. In fact, we can increase our market share fourfold.

The bar chart on the right side of the slide shows average numbers of ALTs dispatched over the past 12 months. It grew nicely in 2020 despite the pandemic and has continued to grow steadily during this year, although much of the immigration restrictions still remain in place.

I also want to mention that more than 1,000 schools have signed up for our Teachers Cloud service, 1,385 schools across Japan to be exact as of the end of the third quarter. We will reinforce its brand power going forward and expect further growth as the immigration restrictions are being relaxed. Teachers Cloud provides a series of video materials that help and assist school teachers in preparing for English class and is being received very well by teachers using the service. We are confident that our ALT Placement business' market share will continue to increase more reliably if more schools sign up for Teachers Cloud.

Let's move on to agenda item 4, selection and concentration to strengthen growth businesses. As I said in the beginning, we decided to divest our domestic temp staff business. Again, here is the operating structure of our group. From left to right, Organizational Development Division and Individual Development Division. And there is Matching Division just below them, linking the 2 divisions.

And we decided to divest the domestic temp staff business from our Domestic Personnel Placement & Temp Staff business within Matching Division. So we decided to divest the domestic temp staff business so that we can focus on personnel placement business. This is what selection and concentration is all about. We will capitalize on OpenWork's growing direct recruitment, enhance the agent functions of our domestic personnel placement business and ensure greater coordination between the 2 to bring engagement matching to the next level.

This is a quick summary of the divestiture and transfer. We will divest and transfer only the temp staff business of Link Staffing, which is a subsidiary of our group. And we are going to retain the people we hired and trained. We will just reassign them to the personnel placement business, which we continue to run. We will transfer the temp staff business to IDA. We signed the agreement on November 12, and the transfer will take effect as of January 1, 2022.

The 2 bar charts on the right side of the slide indicate the business performance of Link Staffing over the past few years. It clearly shows that the business was struggling for quite some time because of COVID-19. This divestiture and transfer will allow us to shift our focus in human resources to the personnel placement business, where there are a lot of opportunities for synergy with OpenWork. This is part of our strategy of selection and concentration.

According to the IFRS criteria, our domestic temp staff business must be removed from the scope of consolidation for fiscal year 2021 financial reporting, and that's why we need to revise our earnings forecast. Although we've lowered our revenue guidance, we have raised our income forecast. Revenues are now expected to be JPY 32.3 billion, up 5.1% year-on-year. Adjusted operating income after revision will be JPY 30.3 billion, up 48.2% year-on-year. Operating income is going to jump 781.2% from what it was a year ago, again after revision.

And this business transfer will significantly improve our adjusted operating income margin to 9.4%, turning us into a highly profitable company. And that's why we decided to go ahead with the business transfer.

Let me show you our operating structure once again before I finish my presentation. Our 3 business divisions are certainly core of Link and Motivation. But recently, the overlapping areas between each division have become increasingly more important. For instance, where Organizational Development Division and Individual Development Division overlap, the digital transformation support services that we provide to individual employees of companies feed off the strong corporate support programs developed by Organizational Development Division.

Similarly, the overlapping area between Organizational Development Division and Matching Division is where OpenWork comes into play and its OpenWork Recruiting, in particular, feeds off the corporate customer base of Organizational Development Division because they will certainly boost the number of job postings.

And finally, in the area that overlaps between Individual Development Division and the Matching Division, our i-Company business is leveraging OpenWork's data of what employers want to see on a candidate's document so that it can provide a more relevant and useful advice about the necessary skills or qualifications to our students or career partners who want to earn more money.

Of course, each and every division is independent and is working to expand on its own. But at the same time, we need to be keenly aware of those overlapping areas and continue to work better and harder to complete the overall engagement chain. So I want you to stay tuned to what we are up to. Thank you very much for watching.

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