TechnoPro Holdings Inc

TSE:6028

Earnings Call Analysis

TechnoPro Q3: Stable Revenue Amid Challenges

In Q3, TechnoPro reported a 9.6% rise in revenue to JPY 162.5 billion and a 10% increase in gross profit, despite fewer working days reducing the average unit sales price. Productivity challenges arose from wage hikes and high turnover, but domestic demand remained strong. The company expects a 26.6% gross profit margin for the year. Although facing recruitment issues and overseas market difficulties, TechnoPro aims to maintain its competitive edge through strategic hires and salary adjustments. They announced a JPY 2.5 billion share buyback program, projecting a 75% total return ratio this fiscal year.

Navigating Through Changes

TechnoPro Holdings has exhibited resilience in its recent earnings, despite facing external challenges like wage inflation and higher employee turnover. In the third quarter of this fiscal year, the company reported revenue of JPY 162.5 billion, marking a 9.6% year-on-year increase, while gross profit (GP) also rose to JPY 43.2 billion, up by 10.0%. These figures are indicative of a robust demand landscape in their domestic market, helping to mitigate cost pressures that have arisen from rising operational expenses.

Operational Difficulties and Profitability

While the top-line growth remains commendable, the company faced some operational headwinds. The GP margin for the quarter saw a slight decline to 26.6%, reflecting a 0.4-point deterioration compared to the previous year. The number of working days decreased, which negatively impacted productivity metrics. Moreover, SG&A expenses rose to JPY 25 billion, primarily due to higher hiring costs and inflationary pressures affecting their overseas segments.

Strategic Adjustments for Future Growth

In light of these challenges, TechnoPro is not resting on its laurels. The company is bolstering its workforce, with the aim to onboard 1,002 new graduates and maintain an engineer headcount of 26,050, an 8.0% increase year-on-year. This hiring strategy is coupled with enhanced training programs, particularly in digital technology, to improve billing rates and unit sales prices, which are projected to recover as the fiscal year progresses.

Cost Management and Shareholder Value Enhancement

TechnoPro has proactively launched a JPY 2.5 billion share buyback program, focusing on maintaining a solid cash management approach while addressing working capital needs. This reflects their commitment to returning value to shareholders amid growing cash reserves. The total return ratio for this fiscal year, including a projected dividend of JPY 80, is expected to hit approximately 75%.

Looking Ahead: Guidance and Future Initiatives

While the management anticipates challenges in the upcoming quarters, particularly with expected drops in utilization and training costs due to new hires, they remain optimistic about their market positioning. The contract renewal ratio was robust at 90.4%, and price adjustments during negotiations exceeded last year's levels. TechnoPro is focused on driving sustainable growth and enhancing shareholder value by aligning their operational capabilities with emerging market demands.

Earnings Call Transcript 2024-Q3

[Toshihiro Hagiwara, executive]

I am Hagiwara, CFO of TechnoPro Holdings. Thank you for your time today.

Since our last financial results briefing for the second quarter, TechnoPro stock price has been on a downward trend, and some investors have asked for our views on this. Although the first half results beat the plan at the beginning of the period, we left our full year guidance unchanged, which may have raised concerns about the business conditions surrounding us. At the moment, order flows from our customers continue to be robust and domestic demand has not shown any signs of slowing down.

On the flip side, it is true that the assumptions made at the formulation of our medium-term plan 3 years ago have changed significantly regarding the supply side, such as sudden wage hike momentum in Japan, worsening turnover ratio due to higher job mobility and [ surge fees ].

We just kicked off the budgeting process for next fiscal year under the guidelines to at least deliver the originally planned operating profit, including M&A contribution in the fourth year of the medium-term plan even if we face more severe supply constraints than anticipated or even if any new acquisitions will not materialize.

I recognize that KPI-driven management and execution capabilities, both of which are our strengths, are being increasingly tested. March, with a higher percentage of contracts up for renewals, is an extremely important month for aggressively negotiating prices with an eye on customers' budgets for their new fiscal year. The contract renewal ratio this March ended up with 90.4%, almost same as last year, and the total amount of increase in contract unit price obtained through charge-up and shift-up initiatives was able to exceed last year's one, which was substantial.

With regular pay revisions due to annual wage hike and promotions for our engineers coming up in July, we will earnestly negotiate with the labor union while taking into account retention of our engineers and GP margin expansion. TechnoPro has also raised the starting salary for new graduates who joined this April. So far, we have received more orders for new graduates than usual, securing higher price for initial assignments than last year. So we expect to be able to fully absorb the increment in starting salary.

Now I will explain the summary of the third quarter financial results, the key KPIs in Japan, and the update of Overseas subsidiaries. First, let's look at the financial overviews on Page 2. Revenue for the cumulative third quarter of this fiscal year totaled JPY 162.5 billion, up 9.6% year-on-year, while GP was JPY 43.2 billion, up 10.0% year-on-year, and GP margin was 26.6%, an improvement of 0.1 points year-on-year.

GP for 3 months in the third quarter grew by only 6.8% year-on-year or a decrease of JPY 800 million quarter-on-quarter and GP margin deteriorated by 0.4 points year-on-year. As shown in the table on Page 3, the number of working days in the third quarter of this fiscal year was 54.2 days, 1.4 days less year-on-year, 3.7 days less quarter-on-quarter or 0.6 days less than forecasted at the second quarter briefing.

For this reason, the average monthly unit sales price for the third quarter was JPY 675,000, down JPY 4,000 year-on-year or down JPY 9,000 quarter-on-quarter. As I mentioned before, GP for our domestic core business is supposed to decrease by about JPY 400 million with 1 fewer working day. So GP growth rate and GP margin in the third quarter were both weak. In addition to government-led work style reforms, companies and individual thoughts on work styles are also changing in the post-pandemic era.

Moreover, the use of paid leave by assigned engineers who are scheduled to retire might be related to fewer working days as well. As the number of engineers increases, the financial impact of the fluctuation in working days and overtime hours, which are beyond our control, cannot be ignored. Accordingly, we will strive to improve the prediction accuracy of these KPIs when formulating budget and announcing guidance going forward.

SG&A expenses for the cumulative third quarter were JPY 25 billion, plus JPY 2.2 billion year-on-year, of which the hiring related was plus JPY 400 million, and the Overseas segment related was plus JPY 1 billion. Surge in cost per hire, upfront investment in sales and marketing at Robosoft and local inflation at foreign subsidiaries are main factors.

Core operating profit and operating profit for the cumulative third quarter were JPY 18.1 billion and JPY 18.3 billion progressing at 74.0% and 74.9% against the full year guidance, respectively. In the fourth quarter, in our main domestic business, which continues to perform well, we would anticipate a temporary drop in utilization and an increase in training costs due to new graduates.

The speed of reassignment of engineers who returned to the company due to contract expiration in March and the acceleration of investments that will contribute to next fiscal year's performance. Considering such uncertain factors, we don't think that we could easily achieve our full year guidance. Now that the business environment on the supply side is becoming tougher, we see this as an opportunity to gain an overwhelming advantage over our competitors. And even in the fourth quarter, we will continue to actively engage in initiatives that will lead to the sustainable growth and the shareholder value enhancement over the mid- to long term.

Pages 3 and 4 show the quarterly performance of each P&L item and key KPIs in Japan, along with the updated KPIs outlook for the fourth quarter. Pages 5 and 6 show the performance by segment for the cumulative third quarter and the third quarter, respectively.

Based on the first half financial results, in the second quarter briefing, we revised revenue and operating profit for each segment to the extent that the consolidated full year guidance remained unchanged. While the R&D outsourcing and the Construction Management outsourcing are roughly progressing in line with each upwardly revised plan, the other businesses in Japan missed the new target for the third quarter, which may make it difficult to catch up in the fourth quarter.

The other businesses in Japan are struggling for sure, but please kindly note that the cumulative third quarter operating profit in the Japan total has grown by 14.4% year-on-year, which surpasses top line growth of 9.3%. Although there is a boost in SG&A expenses, including hiring and training costs, it can be said that in domestic operations, we are beginning to enjoy operating leverage due to scale expansion.

TechnoPro Construction, which belongs to the Construction Management Outsourcing replaced its President in July last year. Under the new leadership, we have prioritized the increased number of engineers through more inexperienced hires than ever before and have also improved contract unit price, especially for low-price groups in anticipation of the end of the grace period for work style reforms.

In order to accelerate these initiatives, we just announced a new presidential appointment today, aiming for further growth from next fiscal year and beyond. The third quarter results of the Overseas business were slightly higher than its revised plan, but we have to go the extra mile, given a larger earnings recovery to be incorporated in the fourth quarter.

Page 7 shows balance sheet and cash flows. Same as December 31 last year. The cash balance as of March 31 this year needs to be adjusted by around JPY 4 billion for social insurance premium and other payments due in the following month because of the bank holiday. In the fourth quarter, even if we pay summer bonuses to our engineers, the cash would continue to pile up every month. Based on such forecast, last month's Board of Directors meeting resolved to implement a JPY 2.5 billion share buyback program.

This is a part of appropriate cash management while being conscious of working capital level necessary for our operations as well as capital efficiency. From Page 8 onward, we will show the key KPIs for our domestic business. Please refer to the Factbook file posted on our website for the detailed KPIs, including solution business data. The number of engineers at the end of March this year was 24,926 plus 801 for the first 9 months of this fiscal year, while the expected number of engineers at the end of June this year is 26,050, up 8.0% year-on-year.

The average utilization ratio for the cumulative third quarter was 95.6%, down 0.4 points year-on-year. We are not worried about this decline because each GP margin for the R&D outsourcing and the Construction Management outsourcing has expanded. On April 1, TechnoPro onboarded 1,002 new graduates, the exact same number as last year. We plan to provide strategic training for more than 3 months mainly in the digital technology field to approximately 200 people, almost same number as last year, targeting higher unit sales price for their initial assignments.

In the meantime, deployment of new graduates for this year is progressing faster than usual. And with the exception of those eligible for strategic training program, we try to make all of them billable by July 1, the start of our new fiscal year.

Pages 9 and 10 show the distribution and year-on-year growth rate of assigned engineers by technology and industry sector. I'll spare you the details.

The next topic is the current status of recruitment and turnover. The number of hires for the cumulative third quarter was 2,636. Despite the war for talent, we have continued to hire around 880 mid-careers for each quarter of this fiscal year. Although higher turnover tends to drive our recruitment activity, it does not mean that we are chasing the numbers by relaxing hiring standards.

On the other hand, the number of retirees continues to increase, and the LTM based permanent employee turnover ratio has risen to 8.6%, with higher one being projected in the fourth quarter as well. In the next fiscal year's budget, which is currently being formulated, the headcount growth would change depending on the turnover assumption. And if retirement is covered by additional recruitment, hiring costs will rise consequently, making it even more difficult to forecast earnings.

We will work on business operations with an emphasis on return on investment, such as how to link the regular pay hike in July this year to the turnover prevention.

Page 12 shows the change in its waterfall chart in the unit sales price per month. The average monthly unit sales price for the cumulative third quarter was JPY 676,000, plus JPY 9,000 or up 1.3% year-on-year. Also, the base charge or contract unit price for our existing dispatch engineers at the end of March this year, which is not affected by working days or overtime hours, stays at up 4% level compared to a year ago. The average pay hike for our engineers last year was in the higher 2% range, while the momentum for wage inflation this year is stronger than last year.

Not satisfied with the price improvement gained through tenacious efforts this March, we strive to secure sufficient funds by passing incremental outflows on to our customers at each contract renewal so that we can give our engineers better treatment and recover rising costs for recruitment and training as much as possible.

Next is the update of our Overseas subsidiaries. The yen continues to be weak this fiscal year and the positive effects of the difference in exchange rates compared to the previous year are plus JPY 1.4 billion for revenue plus JPY 200 million for SG&A expenses and plus JPY 100 million for operating profit for the cumulative third quarter. The currencies that are most affected by the yen depreciation are the Singapore dollar and the British pound sterling and Helius and Orion's yen-based financial results for this fiscal year, shown in the bar graphs, are exaggerated to some extent.

Robosoft's financial performance has been far below the initial plan for this fiscal year due to delayed recruitment of sales and marketing-related investments, lower utilization caused by advanced securing of bench resources and unexpected occurrence of unprofitable projects in India.

For now, we have implemented thorough TechnoPro style micromanagement and short-term and controllable countermeasures such as optimizing resources and redesigning delivery organization progressed well in the third quarter resulting in GP margin back to the 40% range. However, we still have a long way to go in accumulating sufficient pipelines and growing top line and revenue in the third quarter remained at the same level as the second quarter. Existing projects for existing customers will inevitably shrink. So unless we can win new projects to make up for such shrinkage at least, Robosoft's earnings are forced to decline despite maintaining profit margin.

We have currently introduced detailed KPI management into sales activities, focusing on productivity improvement and efficient pipeline buildup. In the United States, where new digital spending continues to be held back and in the United Kingdom, where we have just tapped, it may take some time to overcome tough situations, but we are now making progress in cultivating Japanese new customers through collaboration with TechnoPro.

At the full year financial results briefing, we will keep you informed on the outlook and actions for the next fiscal year based on this year's reflections and insights. In the China business, we were able to maintain top line by new contracts to offset the phased completion of high-margin projects, although profit margin has declined.

In order to ensure earnings growth next fiscal year, we will proceed with a strategic shift to the solution areas that lead to margin recovery, including offshoring for Japan. Helius revenue on a local currency basis has been approximately 10% lower than planned. IT and digital-related investments in the financial sector, which is Helius specialty, has been stagnant, and we are facing a difficult situation in Thailand, Vietnam and Malaysia, where Helius has expanded so far.

On a more positive note, one-stop solution services, leveraging Indian offshore delivery to Singaporean customers have begun to grow steadily, and the improved GP margin in India is supporting Helius bottom line. Although Orion's revenue on a local currency basis is growing by 10% or more, it has not been able to absorb the cost pressure arising from high inflation in England and its earnings continued to decline year-on-year. Meanwhile, profit margin is on a recovery trend, and we estimate year-on-year and quarter-on-quarter earnings growth in the fourth quarter.

Page 14 is the guidance for this fiscal year. And Page 15 is a breakdown by segment. Only key KPIs in Japan have been partially revised from last time. Given 100 more hires and 100 more retirees, the number of engineers on June 30 this year remains unchanged at 26,050. While slightly raising the full year average utilization ratio from 94.7% to 94.9%, we have lowered the full year average monthly unit sales price by JPY 3,000 assuming fewer working days than previous forecast in the second half.

Finally, please see Page 16. Based on the stock price level and with the signaling effect in mind, we launched a new share buyback program of JPY 2.5 billion in the fourth quarter and began purchasing shares in the market. Once the repurchase amount is used up, the total return ratio for this fiscal year, including the annual dividend of JPY 80, is expected to be about 75%.

Up until now, TechnoPro has implemented such programs in conjunction with the start of share repurchases. While in the future, we would like to consider setting up a certain long-term one in advance to enable opportunistic buyback. In the explanation so far, there have been some references to numbers that are not listed on the slides.

Today's script will be uploaded to our website immediately and some data can also be checked on the Factbook.

That's all for my presentation. Thank you very much.