Link and Motivation Inc

TSE:2170

Earnings Call Analysis

Strong Revenue Growth and Optimistic Future Outlook.

In the latest earnings call, the company showcased robust growth with overall revenues rising 11.1% year-on-year and net income increasing by 34.5%. The Consulting & Cloud division emerged as a key driver, forecasting full-year profits of JPY 5.33 billion, their highest yet. Monthly membership revenues for the Motivation Cloud series reached JPY 493 million, nearing a target of JPY 530 million. They project a 20% increase in future project orders and aim for a 35% return on equity. Investment in human resources and strategic alliances, including with FCE and GO, further underscores their commitment to sustainable growth and enhancing corporate client support.

Strong Revenue Growth Across Divisions

In this earnings call, it was reported that the company's revenues increased by 9.5% year-on-year, driven primarily by the growth in the Consulting & Cloud and ALT Placement businesses. This consistent growth aligns with the management's expectations, signaling a robust operational performance.

Impressive Profit Margins

The gross profit for the company rose by 11.7% compared to the same period last year, highlighting a successful strategy in maintaining high profit margins, particularly in the Consulting & Cloud and Personnel Placement businesses, where operating income increased an impressive 21.3% year-on-year.

Significant Increase in Net Income

Net income for the quarter grew by 34.5% year-on-year, with net income attributable to the owners of the parent company increasing by 36.3%. This is a clear indication that the company is not only growing its revenues but also enhancing profitability at a remarkable rate.

Segment Performance Breakdown

Analyzing the divisions more closely, the Organizational Development Division recorded a revenue increase of 13.4% year-on-year, while the Individual Development Division's revenues remained stable at 101.2%. The Matching Division also performed well, showing a revenue increase of 8.3%. Each of these segments contributed positively to the overall growth narrative.

Investment in Consulting & Cloud Strategy

The company is placing significant emphasis on its Consulting & Cloud business, which has presented high growth potential. By providing comprehensive human capital management solutions, the company is aiming to strengthen its market position and continue expanding its service offerings to large domestic companies.

Strategic Alliances for Future Growth

The company has embarked on strategic partnerships, including an alliance with FCE for training programs such as 'The 7 Habits of Highly Effective People.' This collaboration aims to diversify service offerings and tap into new customer bases, enhancing both revenue and client engagement.

Future Earnings Guidance

Looking forward, the company has provided a strong earnings forecast with an expected profit of JPY 5.33 billion, marking it as the highest profit forecast to date. With an existing order backlog totaling JPY 11.5 billion, which is approximately 20% higher than the previous year's figure, the outlook remains very optimistic.

Growth in Shareholder Value

To enhance shareholder returns, the company announced a cancellation of 4,068,000 treasury shares aimed at improving capital efficiency, alongside a dividend increase of 10%, maintaining a commitment to rewarding investors amidst growth.

Commitment to Human Resource Development

The management is investing further in human resources with a year-on-year increase in SG&A expenses by 7.3%. This reflects a focus on growth through talent acquisition and development, crucial for sustaining their competitive edge in human capital consulting.

Global Expansion Initiatives

New subsidiaries in Southeast Asia (Singapore, Vietnam, Thailand, and the Philippines) are set to begin operations in January next year, signaling a strategic move to expand the Motivation Cloud series into international markets, reflecting a long-term growth vision that leverages both domestic and international client bases.

Earnings Call Transcript 2024-Q3

[Yoshihisa Ozasa, executive]

I'm Yoshihisa Ozasa, Chairman and Representative Director of Link and Motivation Inc. Let me begin by explaining the business results for the 9 months ended September 30, 2024. This is today's agenda: first, I will give a company overview; secondly, report on our business results. Third, I'll report on the progress of our growth strategy centered on the Consulting & Cloud business. The fourth point is our progress report on business alliances. The fifth point is an announcement regarding the decision to cancel treasury stocks. And the sixth and final point is an announcement of a dividend increase.

Now the first point is the company overview. Through Motivation Engineering, we provide opportunities to transform organization and individuals and create a more meaningful society. Each of our business is based on this mission. This is a concrete description of our business. We're divided into 3 main divisions. And the first one on the left is the Individual Development Division, and the one on the right is the top one. This includes the Consulting & Cloud business and the IR Support business. This is the top right of the 3 circles. This is the Individual Development Division. And on the right, it is the middle column. The Individual Development Division includes the Career School business and the Cram School business. And in the middle, the bottom, the Matching Division, this includes the ALT Placement business and the Personnel Placement business.

Now I'd like to move on to the second point, which is the business report. This is the consolidated statements of operations. The Consulting & Cloud business and the ALT Placement business have both grown, and revenues have increased compared to the previous year, up 9.5% year-on-year. This is progressing as we had expected.

Move on to the gross profit. The high profit margin Consulting & Cloud business and the Personnel Placement business, including OpenWork, progressed as expected, and there was a significant increase compared to the previous year. Gross profit was 11.7% compared to the previous year.

As for operating income, the Consulting & Cloud business, which is a focal point for the group, drove growth. As a result, there was a significant increase compared to the previous year, and operating income was up 21.3% year-on-year. As for the full year earnings forecast of JPY 5.33 billion, which is the highest profit ever, we are making steady progress.

The lower section shows net income for the period. In line with the increase in operating income, there was a significant year-on-year increase. Net income for the period was up 34.5% year-on-year, and net income attributable to owners of the parent company was up 36.3% year-on-year, and both are progressing as expected.

Here are the sales and gross profit by segment. Continuing from the second quarter, each division is progressing very smoothly. In all divisions, revenues and gross profit have exceeded the previous year's figures. Looking at the figures by division, the Organizational Development Division saw revenues increase by 13.4% year-on-year and gross profit increase by 12.6% year-on-year. In the Individual Development Division, revenues were 101.2% (sic) [ 1.2% ] of the previous year and gross profit was 103.7% (sic) [ 3.7% ] of the previous year. Finally, the Matching Division, revenues were 108.3% (sic) [ 8.3% ] of the previous year and gross profit was 111.5% (sic) [ 11.5% ] of the previous year.

Here's a summary of each division. First, the Organizational Development Division. In the Consulting & Cloud business, following on from the second quarter, the monthly fee revenues of the Motivation Cloud series grew significantly, resulting in a significant increase in both revenues and gross profit compared to the previous year. Revenues in the Consulting & Cloud business were up 13.4% year-on-year and gross profit was up 10.2%. Please look at the graph showing the change in monthly fee revenues of the Motivation Cloud series in the bottom right-hand corner. At the end of the third quarter, monthly revenues were JPY 493,684,000, a sharp increase of 24.9% year-on-year.

The other business is the IR Support business. The growth was driven by growth in integrated report production, which is a core service. As a result, both revenue and gross profit increased significantly compared to the previous year. In terms of revenues, the IR Support business increased by 12.3% compared to the previous year and gross profit increased by 37.3% compared to the previous year.

The following is a summary of the Individual Development Division. In the Career School business, revenues remained almost unchanged year-on-year. On the other hand, as a result of structural reforms, the gross profit margin has improved as expected. The gross profit margin of the Career Schools business, on the right-hand side, is gradually improving and has reached 46.6%. In summary, revenues in the Career School business were 99.9% (sic) [ negative 0.1% ] of the previous year's level, while gross profit was 102.1% (sic) [ 2.1% ] of the previous year's level.

In the Cram School business, both sales and gross profit increased substantially year-on-year as a result of the expected increase in both enrollment and revenue per enrollee. Revenues increased by 11.1% year-on-year and gross profit by 16.5% year-on-year.

This is a summary of the Matching Division. First is the ALT Placement business. As a result of the expected increase in the number of ALTs signed, both revenues and gross profit increased year-on-year. Revenues were 106.2% (sic) [ 6.2% ] of the previous year's level, while gross profit was 106.6% (sic) [ 6.6% ] of the previous year's level.

This is Personnel Placement business. Both revenues and gross profit increased substantially year-on-year as a result of growth in OpenWork Recruiting as expected. Revenues were up 15.3% year-on-year and gross profit was up a substantial 15.6% year-on-year. The graph on the right shows the change in revenues for OpenWork Recruiting. At the end of the third quarter, revenues were JPY 1.81 billion, a substantial increase of 31% year-on-year.

This is the consolidated selling, general and administrative expenses. We accelerated investment in human resources as planned at the beginning of the period. As a result, the total year-on-year increase in SG&A expenses was 7.3%. Of these, one, personnel expenses; and two, recruiting, training and welfare expenses, both increased significantly year-on-year.

This is the consolidated statements of financial position. Assets increased due to the acquisition of FCE Inc. shares. Liabilities, on the other hand, also increased due to the borrowing for the acquisition of FCE shares. Net assets decreased due to the acquisition of treasury shares but increased due to the sale of incubation shares and the recording of net income. Net assets amounted to JPY 13.593 billion, an increase of JPY 653 million year-on-year.

Next, I'd like to report on the progress of the growth strategy centered on the Consulting & Cloud business. First of all, I'd like to explain the competitive advantage of the Consulting & Cloud business. In the corporate sector, the importance of labor market adaptation is increasing as is the level of difficulty in doing so. For the time being, we will focus on the Consulting & Cloud business, which has high growth potential. We can provide comprehensive support for company's human capital management. This is an advantage that other companies do not have.

Please refer to the diagram on the right for details. First, we can provide support for overall human capital management. Furthermore, we can provide diagnosis mainly of engagement. We have been the market leader in the engagement market for 7 consecutive years. And we don't stop at diagnosis, but also provide support for change in improvement in line with the results of the diagnosis. In addition, in the area of transformation, we can provide one-stop support for not only recruitment, but also human resource development and training, remuneration and salary systems and the dissemination of company philosophy and corporate culture reform.

In addition to this process of diagnosis and transformation, we're also involved in the field of disclosure, Investor Relations communication, so we can support attractive disclosure based on diagnosis and transformation. Specifically, the number of client companies that have disclosed the results of their diagnosis on Motivation Cloud has already reached 152.

In terms of growth potential, our first step is to increase sales by focusing on major domestic companies, which still have a lot of room to grow. This is the first step. The second step is to accelerate the development of the Motivation Cloud series, mainly for small- and medium-sized companies and venture companies, by utilizing the customer base of FCE Inc., with which we have formed a business alliance.

In addition, we have established subsidiaries in Singapore, Vietnam, Thailand and the Philippines, which are scheduled to start operations in January next year in order to promote overseas development. We will mainly develop the Motivation Cloud series in the Asia region. We already have more than 30 Motivation Cloud customers in Asia because our multinational corporate clients have overseas corporations. So we have decided to expand our business overseas in line with these major companies.

As a key indicator for the Consulting & Cloud business, here are the monthly membership fee revenues for the Motivation Cloud series, which exceeded JPY 490 million at the end of the third quarter. We're making good progress towards our year-end target of JPY 530 million.

We hope to accelerate the growth of the monthly membership fee revenues of the Motivation Cloud series in the future as we continue to introduce the system to major companies and, more recently, to local governments. These are some of the major companies that have introduced the Motivation Cloud series. We have almost all top-class, large companies in various industries such as manufacturing, finance, retail, real estate, et cetera, using the Motivation Cloud series. In the future, we aim to expand our support by not only providing diagnosis, but also by providing consulting services for transformation and by disclosing the achievements to the outside world.

This is number two of the key indicators for the Consulting & Cloud business, the order backlog. The total amount of orders for future projects that we have won at the moment, which is the order backlog, has increased significantly year-on-year. The total amount of orders for projects to be delivered in 2025 and beyond is JPY 11.5 billion. This is approximately 120% (sic) [ 20% ] of the previous year's figure. Of this, the balance of orders already received for projects to be delivered in the year ending December 2025 is approximately JPY 7 billion, which is also approximately 120% (sic) [ 20% ] of the previous year's figure. So the near future and the current situation are very bright.

We will accelerate business investment and investment in human resources in order to further accelerate the growth of the Consulting & Cloud business. Specifically, in terms of the business investment, we will actively consider mergers and acquisitions and business alliances with the aim of expanding new products and sales channels. In terms of investment in human resources, we will continue our efforts to become a company of choice in the labor market by recruiting and training consultants and engineers and by continuously revising remuneration.

And the fourth point is our progress report on the business alliances. First, we have entered into a business alliance with FCE. In August, we concluded a business alliance agreement with FCE, a company with unique strengths in improving human resources. We acquired 21.31% of FCE shares, and it became an equity-method affiliate of our company in September.

In addition to the existing Smart Boarding, Robo-Pat and FCE Prompt Gate, we have also entered into a new partnership with FCE for the 7 Habits of Highly Effective People project, in which we have acquired a license for the 7 Habits training program from Franklin Covey Japan. FCE is licensed by Franklin Covey Japan to provide training on the 7 Habits. We will be selling and providing the 7 Habits through our sales channels. We'll be offering courses on the 7 Habits and 7 Habits self-coaching, which are licensed by FCE, mainly to clients in the Individual Development Division. Our target customers are our Career School business, which has a total of 26,500 students per year. Our Cram School business also has a total of 1,700 students per year. By combining our existing services with the 7 Habits, we plan to expand the value we provide to support our customers and students in creating i-Company.

The other thing is business alliance with GO Inc. This company has strengths in corporate branding support. We have concluded a business alliance agreement with GO. Combining GO's purpose formulation capabilities and LMI's purpose inculcation consulting capabilities will support purpose-driven management and further enhance the competitive advantage of the Consulting & Cloud business. GO's main clients are shown on the right-hand side, and they are mainly major companies that have achieved a lot of success in branding, purpose inculcation and messaging. The aim is to develop each other's business quickly by combining GO and our company.

The fifth point is the cancellation of treasury shares. In order to improve shareholder returns and capital efficiency, we have decided to cancel 4,068,000 treasury shares. In the future, we have decided to aim for an ROE of 35% or more, exceeding the ROE target of 30% disclosed in June 2024. We believe that we'll be able to achieve this figure in the not too distant future. The graph on the right shows the evolution of our ROE. We expect it to exceed 30% by the end of this year, and we intend to move towards achieving a clear target of 35% ROE in the near future by improving capital efficiency.

The sixth point is the announcement of a dividend increase. We regard shareholder returns as one of the most important management issues, and we'll continue to pay quarterly dividends. We have continuously increased the dividend in line with our business performance. The graph on the right shows the change in the annual dividend amount, which increased dramatically in 2023. We abolished shareholder benefits as of the record date in June 2023. The reason for this is that the abolition of shareholder benefits was based on the idea that it violated the principle of shareholder equality, and the amount of benefits was allocated to dividends as a direct return of profits. We will provide a more active long-term and stable return of profits to our shareholders, taking into account our business performance, the future business environment and our investment plans.

For the third quarter, we plan to pay a dividend of JPY 3 per share on 25th December. From the fourth quarter onwards, the dividend will be increased by JPY 0.3 to JPY 3.3 per share, an increase of 10% on the previous year. This will bring the annual dividend to JPY 12.2 for this year only.

Here is a chart of the group's business development. All divisions are progressing well as expected. We plan to accelerate the growth of the group as a whole by accelerating the Organizational Development Division, top left, particularly in the Consulting & Cloud business, so we ask for your continued attention and support. Thank you very much for your attention.

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