Link and Motivation Inc

TSE:2170

Earnings Call Transcript 2022-Q3

[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 9 months ended September 30, 2022. 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 a business report. Third, I'll give you an update on the progress on our growth strategies centered on the Organizational Development Division. And lastly, I will talk about dividend increase.

So let's begin with the company overview. The diagram represents our operating structure, and here is our mission. Through Motivation Engineering, we provide opportunities to transform organizations and individuals and create a more meaningful society. We have 3 business divisions to accomplish our mission. From upper left, Organizational Development Division, it supports creating organizations that individuals choose or what we call Motivation Companies. Next to the right is Individual Development Division. It supports creating or developing individuals that organizations choose. We call them i-Company. And the third one, which is just below, is Matching Division, which provides opportunities to link organizations and individuals. In addition, we also have venture incubation business.

Next, agenda item #2, business report, announcement of consolidated results for 9 months ended September 30, 2022. These are consolidated statements of operations. Revenues remained almost flat from the same quarter last year. Gross profit was up 4.4% from the same quarter last year. In addition to the transfer of the domestic temp staff business, the rationalization of our schools in the Career School business following the shift of providing services online resulted in substantial increases in adjusted operating income and the line items below it. Adjusted operating income soared 52.2%, operating income jumped 48.6%, and net income shot up 46.3% from the same quarter last year.

This slide is showing revenues and gross profit by segment and comparing them with the results from the same quarter last year. The Consulting & Cloud business and Organizational Development Division was driving growth by successfully capturing the corporate needs to improve employee engagement. Organizational Development Division saw revenues up 10.3% and gross profit up 7.2% from the same quarter last year.

As for Individual Development Division, the Career School business is currently going through structural reforms as the impact of the COVID-19 pandemic still remains. Its revenues declined 5.3%, and gross profit inched down 0.3% from the same quarter last year.

In Matching Division, OpenWork has been the key driver of growth in the highly profitable Personnel Placement business. Matching Division's third quarter revenue slipped 3.3%, but gross profit rose 3.9% from the same quarter last year.

Let's take a look at the brief summary of each division. For Organizational Development Division, Consulting & Cloud business enjoyed a substantial increase in revenues and gross profit, up 12.6% and 7.1%, respectively, from the same quarter last year.

When it comes to IR Support business, although the greater difficulty of disclosing nonfinancial information caused delays in the publication of integrated reports, our efforts to improve the profit margin for video production led to a slight increase in gross profit. Its revenue slipped 4.3%, but the gross profit inched up 1% from the same quarter last year.

The chart you see on the right side is showing monthly fee revenue of Motivation Cloud series. It's been growing strongly and consistently. And the latest figure as of the end of the third quarter of 2022 is JPY 306.934 million, up 30.1% from the same quarter last year.

Next is the summary for Individual Development Division. For Career School business, although the B2C services were still significantly impacted by the pandemic, the decline in gross profit was minimal thanks to steady growth in DX support business for individuals at companies, which is a high-profit margin B2B business. Its third quarter revenues declined 6.7% and its gross profit inched down 0.9% from the same quarter last year. For Cram School business, both revenues and gross profit rose year-on-year due to an increase in the number of enrollees, up 9.4% and 4.4%, respectively. The chart you see on the right side is showing revenue from DX support for individuals and companies in Career School business. It's been growing strongly and jumped 35.8% for the quarter from the same quarter last year.

Individual Development Division, as I said earlier, is currently going through structural reforms. And the keyword is provide services online. The pandemic spurred the shift in a mindset that learning should take place not only at in-person settings but also online. That's why we are promoting more online services to meet these change needs and to enhance value for customers and improve business efficiency at the same time.

Next is Matching Division. For ALT Placement business, we had to raise prices due to the eligibility expansion of the social insurance program in October this year. Some local governments and municipalities withdrew their bids because the new prices exceeded their budget. As a result, both revenues and gross profit dropped 7.7% and 7.8%, respectively, from the same quarter last year.

Personnel Placement business, on the other hand, continued to have brilliant results thanks to a strong growth of OpenWork Recruiting. Revenues increased to 24% and gross profit rose 24.2% from the same quarter last year. The chart you see on the right side is showing the pace of revenue growth of OpenWork Recruiting. When the revenue figure of the third quarter 2020 is indexed at 100, the revenue for the latest quarter has soared 212% from what it was just 2 years ago.

These are SG&A expenses on a consolidated basis. Total SG&A expenses inched up just slightly by 1.5% from the same quarter last year. The decrease in expenses due to office relocations was reallocated for investment for future business growth, so it is a well-balanced allocation of SG&A expenses.

These are consolidated statements of our financial position. Assets decreased by JPY 2.568 billion due to the transfer of the domestic temp staff business and office relocations. Liabilities also shrank by JPY 3.903 billion thanks to a decrease in lease liabilities associated with the rationalization of our schools in the Career School business. Equity increased by JPY 1.335 billion due to the posting of net income.

Let's move on to the next item of the agenda, progress on our growth strategy centered on the Organizational Development Division. This is the overview of our growth strategies. Over the medium term, our focus should be on the Consulting & Cloud business because it is a high-profit margin business and backed by favorable market conditions. We want this business to grow much bigger, and we will grow other businesses to have synergy with this business.

There are 3 critical components to our strategy. First, we will make Organizational Development Division much bigger with a particular focus on supporting companies in improving their employee engagement. The rising attention to human capital management and disclosure of human capital information is expected to provide tailwinds. Second, we will enhance synergies between the Organizational Development Division and the Individual Development Division. The customer base of the Organizational Development Division will be shared with the Individual Development Division to simultaneously support the Consulting & Cloud business in improving employee engagement and the Career School business in promoting digital transformation efforts and reskilling for employees. Third, we will enhance synergies between the Organizational Development Division and Matching Division. The 2 divisions will share the same customer base to boost the Consulting & Cloud business focus on improving employee engagement as well as the recruiting efforts of the Personnel Placement business at the same time.

Attention to human capital management and disclosure of human capital information is rising and is expected to provide additional tailwinds to the Consulting & Cloud business. The number of inquiries has been increasing, and we aim for further growth in 2023 and beyond. You can find the results of our survey on human capital on the right side of the slide. Employee engagement and HR training are ranked high among the challenges related to human capital that companies think they need to do more.

The Organizational Development Division's competitive advantage lies in our core technology, Motivation Engineering, and its application not only in diagnosing but also transforming organizations. And we provide a one-stop support to both visualize and improve employee engagement. This is our strength. Our services include not only providing diagnosis but also right solutions based on the results of our diagnosis to drive organizational transformation and improvement in employee engagement. This is our advantage that no competitor has.

Since 2016, we have moved to the cloud to provide the organizational and personnel consulting services we have been delivering since the founding of the company for a wider audience and for better penetration. And in 2019, in an attempt to bring stability and improvement in productivity to the business, we started to offer Communication Cloud, which is focused on driving transformation in the area of corporate culture or communication.

This year, in the same vein, we started to offer what we call Stretch Cloud back in July. This is a service focused on driving transformation in the area of training based on the results of our diagnosis.

We have maintained #1 share of sales for 5 consecutive years in the employee engagement market in Japan. We are focused on approaching large corporations to offer our services because we see a lot of room for growth in this space. In addition, we also target local offices of multinational companies and local governments and municipalities here in Japan as potential customers. We are expanding our customer base right now. Stay tuned to what we are up to.

There is a correlation between employee engagement and corporate earnings. Our joint research with Keio University has demonstrated that improvement in employee engagement has a positive impact on the company's operating margin and labor productivity.

We launched Stretch Cloud, a cloud-based human resource development service, back in July. Stretch Cloud provides solutions to support companies' human resource development that contributes to business growth by leveraging the know-how we developed in Motivation Cloud business. We are making inroads to the human resource development market, which is estimated at more than JPY 500 billion. This is another upsell product which we would like you to pay attention to.

When it comes to Motivation Cloud series monthly revenue, we are making steady progress towards our target of JPY 320 million by the end of this year. With the launch of Stretch Cloud, we expect that the monthly revenue will continue to increase in 2023.

Synergies with the Organizational Development Division will spur the growth of the Individual Development Division. We expect that revenues will grow strongly as corporate needs for DX and reskilling are rising quite rapidly. In addition, we can drive further revenue growth by leveraging the customer base of the Organizational Development Division and Aviva's track record and brand power for providing IT skills training and support. The graph on the right side of the slide is showing just that. Revenues will reach JPY 800 million by the end of this year.

Synergies with the Organizational Development Division will spur the growth of the Matching Division as well. The number of employee reviews and the page views of OpenWork Recruiting's website have been growing at a healthy clip. The focus continues to be on working closely with the organizational development division to have more job openings on OpenWork Recruiting's platform so that we aim for greater growth of this business. The graph you see on the right side is showing the rapid growth in revenue of OpenWork Recruiting.

Last but not least, here is the announcement of dividend increase. The payment of the third quarter dividend, JPY 1.9 per share, is scheduled for Friday, December 23. We continue to pay quarterly dividends. We will raise quarterly dividend by JPY 0.10 from the fourth quarter of this year. And that will also raise the annual payout to JPY 7.70 per share.

We have been raising our dividend as we have grown bigger. We consider sharing our success with our stockholders to be a management priority and remain committed to raising our dividend as we become more successful.

That brings to an end of this briefing. As I mentioned earlier, we are backed by tailwinds from the rising attention to human capital management and disclosure of human capital information, so it is critical that we accelerate what we are trying to do in each business and aim for even higher goals with the help of the massive tailwinds. So please stay tuned to what we are up to.

And that's it for our earnings briefing on consolidated financial information for the 9 months ended September 30, 2022. Thank you very much for watching.

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