Recruit Holdings Co Ltd

TSE:6098

Earnings Call Analysis

Recruit Holdings Q2 FY23 Financial Overview

Recruit Holdings faced a revenue decline of 2.7% year over year in Q2 FY23, dropping to JPY 855.1 billion, while adjusted EBITDA rose 11.7% to JPY 162.2 billion, indicative of robust cost management techniques overshadowing the revenue drop. Operating income and profits for owners surged by 7% and 34.9%, respectively. Despite the economic uncertainty, Q3 forecasts show a potential decrease in revenue between 2.3% to 4.6% but the company withheld full-year guidance. While full-year revenue is anticipated to fall, EBITDA might slightly decrease or hold steady; earnings per share (EPS) could rise, benefiting from a one-time lower tax rate.

Recruit Holdings Navigates a Tight Labor Market: A Tale of Resilience Amidst Economic Shifts

Recruit Holdings, facing a global labor market that is still tight but adjusting, presented their financial results for the second quarter of fiscal year 2023. Despite headwinds, the company exhibited a noteworthy performance, with consolidated revenue reaching JPY 855.1 billion, which was a slight decline of 2.7% year over year. However, when the positive impact of foreign exchange is excluded, this decline was more significant at 5.7%. Notably, their revenue outperformed the forecasted upper end of JPY 825 billion to JPY 850 billion. The resilience of Recruit Holdings was further highlighted by an 11.7% increase in adjusted EBITDA to JPY 162.2 billion, nearly hitting the upper boundary of their outlook. This impressive margin performance was due to robustness in HR Technology and their Matching & Solutions sector.

Tax Restructuring and EPS Growth Paint Profitable Picture

The company's successful internal legal restructuring within the HR Technology segment yielded tangible benefits, significantly decreasing the consolidated income tax rate and generating a one-time effect for FY 2023. Consequently, profit attributable to owners rose by an impressive 34.9%, reaching JPY 115 billion. As a reflection of Recruit Holdings' growing profitability, both basic EPS and adjusted EPS, which excludes one-off gains and losses, surged by 38.7% and showed a figure of JPY 64.41 respectively. This boost in earnings per share marks a substantial gain for shareholders and paints a positive picture of the company's financial health.

Conservative Outlook Amidst Market Uncertainty

Looking forward, Recruit Holdings is cautiously optimistic. For Q3 of FY 2023, they project a consolidated revenue decrease between 4.6% and 2.3%, with numbers ranging from JPY 840 billion to JPY 860 billion. The adjusted EBITDA is anticipated to lie between JPY 130 billion and JPY 145 billion. However, the company is withholding full year FY 2023 guidance due to the unpredictable nature of the HR and matching market, especially for Q4. They do, however, expect to release consolidated full-year guidance once it becomes feasible. This conservative approach embodies the company’s strategy to navigate economic uncertainty while maintaining financial discipline.

HR Technology Segment Adjusts to Market Dynamics

Within the HR Technology segment, a decrease in U.S. dollar-based revenue by 5.2% quarter-over-quarter was witnessed, with an 18.2% drop year over year, or 19.1% on a constant currency basis. This decline was attributed to easing labor market tightness and ongoing pricing model enhancements, which are expected to influence the volume of paid job ads. Despite the decrease in paid job ads, job seeker activity on Indeed and Glassdoor platforms is on the rise, indicating a continued interest in these services. The company's foresight in adjusting to these market dynamics will be critical for sustaining long-term growth.

Earnings Call Transcript 2024-Q2

[Junichi Arai, executive]

I am Junichi Arai, Senior Vice President, Corporate Strategy and Investor Relations of Recruit Holdings. Today, I'll present the financial results for the second quarter of fiscal year 2023. In this presentation, FY 2023 means the fiscal year ending March 31, 2024.

Please note that all comparisons during this conference call are year over year unless otherwise stated.

I will begin with the consolidated results of operations. Consolidated revenue in Q2 decreased 2.7% to JPY 855.1 billion. Excluding the positive impact of foreign exchange, revenue decreased 5.7%.

Consolidated revenue was slightly above the upper end of the outlook range of JPY 825 billion to JPY 850 billion, which we provided at the earnings announcement in August. The expected revenue decline in HR Technology and in Europe, U.S. and Australia in staffing was partially mitigated by the positive impact of foreign exchange and revenue increased in Matching & Solutions.

Consolidated adjusted EBITDA increased 11.7% to JPY 162.2 billion, which was close to the upper end of the outlook range of JPY 143 billion to JPY 166 billion. Adjusted EBITDA margin increased 2.4 percentage points to 19% due to higher adjusted EBITDA margins in HR Technology and Matching & Solutions.

Operating income increased 7% to JPY 116.1 billion. Profit attributable to owners of the parent increased 34.9% to JPY 115 billion due to the impact of an internal legal entity restructuring in the HR Technology segment, which decreased the consolidated income tax rate. This decrease in the consolidated income tax rate is a one-time impact only for FY 2023.

Basic EPS was JPY 73.46, an increase of 38.7% and adjusted EPS, after excluding one-time gains and losses, was JPY 64.41.

For the first half of FY 2023, consolidated revenue decreased 0.9%, consolidated adjusted EBITDA increased 10.3% and adjusted EBITDA margin was 19.2%. Profit attributable to owners of the parent increased 25.5%.

Today, we disclosed our outlook for Q3 FY 2023, assuming there will not be a sudden deterioration in the economic environment. For Q3, we expect consolidated revenue to be in the range of JPY 840 billion to JPY 860 billion, a decrease of 4.6% to 2.3%. Adjusted EBITDA is expected to be in a range of JPY 130 billion to JPY 145 billion. Due to the uncertain outlook in the HR and matching market, particularly for Q4 FY 2023, we are again not providing full year FY 2023 guidance at this time. We expect to provide consolidated full year guidance when it becomes reasonably feasible to do so.

We had previously announced that we expected a decline in both revenue and adjusted EBITDA for the full year. Our expectation for a decline in revenue remains unchanged. However, based on the first half performance and assuming the current business environment does not deteriorate significantly, we believe adjusted EBITDA for the full year will either decrease slightly or remain at the same level compared to last year.

Additionally, if no significant one-time losses are incurred in the second half of this fiscal year, profit attributable to owners of the parent and basic EPS are expected to increase this fiscal year as a result of the lower consolidated income tax rate mentioned earlier.

Now, I will explain the second quarter results and the third quarter outlook for each business segment.

First, I will talk about HR Technology. U.S. dollar based revenue was $1.77 billion, representing a decrease of 5.2% quarter-over-quarter. This result was close to the midpoint of the previously announced outlook range provided in August, which was an expected decrease of 7% to 2.5% from the first quarter of this fiscal year.

Year-over-year, U.S. dollar based revenue decreased 18.2%, or 19.1% on a constant currency basis. On a U.S. dollar basis, revenue in the U.S. decreased 6.5%, while outside of the U.S. revenue decreased 1.9% quarter-over-quarter. On a year-over-year basis, revenue in the U.S. decreased 23.5% and 2.9% outside of the U.S.

On a Japanese yen basis, revenue decreased 0.2% quarter-over-quarter and 14.4% year-over-year. Although the labor market remained tight globally and total job openings were still above pre-pandemic levels from February 1, 2020, the supply and demand mismatch between job seekers and employers continued to ease.

This was also reflected on Indeed and Glassdoor. While total job postings, which include both free and sponsored listings, continued to decrease, job seeker activity, as measured by traffic and applies on our hiring platforms, continued to increase.

In Q2, Indeed's total job openings in the U.S. were down approximately 16% year-over-year, while paid job ads declined approximately 50% compared to the same period last year, when hiring demand was near its peak. The decline in paid job ads can be attributed to two primary factors: The easing of the tightness in the labor market; and ongoing enhancements to Indeed's pricing model, which are designed to deliver a better job search and hiring experience for job seekers and employers.

In particular, pricing improvements including the shift to Pay Per Started Application in combination with minimum budgets, were further implemented. These changes led to a continued decline in the overall volume of paid job ads on Indeed, especially for jobs with very low budgets. As a result, the average revenue per job ad increased.

Given that these pricing adjustments and improvements are expected to continue impacting paid job ad volumes on Indeed, this metric is no longer considered to be a reliable indicator of HR Technology revenue trends. Consequently, we will no longer report the change in the number of paid jobs on a quarterly basis.

Adjusted EBITDA was JPY 92.1 billion, resulting in an adjusted EBITDA margin of 35.8%, slightly above the midpoint of the outlook range announced in August, from 33% to 37%. Adjusted EBITDA margin increased 5.5 percentage points primarily due to lower advertising expenses and personnel costs. However, adjusted EBITDA margin decreased 2.2 percentage points quarter-over-quarter.

For the six months period, revenue on a U.S. dollar basis in the U.S. decreased 21.0%, and revenue outside of the U.S. decreased 2.4% year-over-year.

Cost control measures have been implemented throughout the first half of FY 2023. As a result, sales commission, promotion expenses and advertising expenses amounted to approximately 11% of revenue, while employee benefit expenses and service outsourcing expenses totaled approximately 51% of revenue. Adjusted EBITDA increased 1.9% to JPY 190.2 billion and adjusted EBITDA margin was 36.9%.

Regarding our third quarter and FY 2023 outlook, we expect revenue in Q3 will decline approximately 9% quarter-over-quarter, which is equal to a decrease of approximately 18% year-over-year. Revenue on a U.S. dollar basis in October decreased approximately 18%. Adjusted EBITDA margin for Q3 is expected to be approximately 27%, as we expect operating expenses to remain approximately flat quarter-over-quarter, while revenue declines. Going forward, we will respond to changes in the business environment and implement appropriate cost control measures as needed, while balancing continued strategic investments for long-term growth.

As we have mentioned previously in May, we do not prioritize maintaining a specific adjusted EBITDA margin level, such as the level we expect for Q3. As for the FY 2023 outlook for HR Technology, since we expect a year-over-year decrease in revenue and adjusted EBITDA for the second half of the fiscal year, the full year outlook for a decrease in both revenue and adjusted EBITDA for HR Technology remains unchanged.

At the fireside chat in May, Deko presented a hypothetical scenario: If revenue declined 20% in HR Technology for FY 2023, adjusted EBITDA margin would be around the mid 20s. Considering the progress on cost controls implemented during the first half of the fiscal year, we now anticipate the margin would be in the upper 20s range under this hypothetical scenario, in which the business environment in Q4 becomes more challenging than we currently expect.

Next, I will talk about the results of Matching & Solutions. Revenue in Matching & Solutions was JPY 200.1 billion, an increase of 8.1% with revenue growth both in Marketing Solutions and HR Solutions.

Adjusted EBITDA increased 65.5% to JPY 46.2 billion due to appropriate cost control measures related to advertising expenses, while continuing to invest in marketing activities and other areas for future growth. Adjusted EBITDA margin was 23.1%, an increase of 8 percentage points.

Revenue in Marketing Solutions was JPY 123.4 billion, an increase of 10.3%, exceeding our outlook. Revenue increased across all verticals including Housing & Real Estate, Beauty, Travel, Bridal, and Dining, as the business environment in Japan remained relatively stable compared to Q1.

Revenue in Housing & Real Estate increased due to higher advertising demand from business clients. Revenue in Beauty increased due to continued growth in new business clients. Revenue in Travel increased mainly due to higher unit prices driven by stronger demand from overseas travelers.

Adjusted EBITDA margin for Marketing Solutions was approximately 32% due to appropriate cost controls mainly related to advertising expenses. The SaaS business, represented by Air BusinessTools, is included in Marketing Solutions. During Q2, the number of SaaS accounts rose 22.2% to 3.46 million, driven by growth in AirPAY and AirSHIFT accounts.

In HR Solutions, the outlook provided in August was revenue growth of approximately 9%. However, the job advertising service did not grow as much as expected due to lower demand from some business clients.

At the same time, demand for the placement service continued to increase as the recruiting market as a whole saw continued growth in hiring demand across a wide range of industries. As a result, revenue in HR Solutions increased approximately 5.5% to JPY 74.1 billion.

In Q2 FY 2023, adjusted EBITDA margin for HR Solutions was approximately 21%.

For the six months period, revenue in Marketing Solutions increased 10.7%, and revenue in HR Solutions increased 8.4%, and total revenue in Matching & Solutions increased 9.4%. The total amount of sales commission, promotion expenses and advertising expenses were approximately 21% of revenue, and employee benefit expenses and service outsourcing expenses totaled approximately 40% of revenue.

Adjusted EBITDA increased 49.7% to JPY 88.7 billion, and adjusted EBITDA margin was 22.2%. Adjusted EBITDA margin for Marketing Solutions was approximately 30% and for HR Solutions was approximately 23%.

Regarding the Q3 outlook for Matching & Solutions, revenue in Marketing Solutions for Q3 is expected to increase approximately 7% year-over-year, and revenue in HR Solutions for Q3 is expected to increase approximately 2% year-over-year. Adjusted EBITDA margin is expected to be approximately 23% in Q3.

Regarding the FY 2023 outlook, on the May 15th earnings call, we had announced that revenue in Marketing Solutions was expected to increase by approximately 4% and in HR Solutions by approximately 6%, and adjusted EBITDA margin was expected to be approximately 20%. However, we have revised our outlook to an increase in revenue in Marketing Solutions of approximately 8.5% and an increase in revenue in HR Solutions of approximately 4.5%. This is based on the results of the first half of the fiscal year, and the most recent second half outlook for each area, assuming that Japan's economic environment will not change significantly. The outlook for adjusted EBITDA margin of approximately 20% for FY 2023 remains unchanged, as we plan to book significant advertising expenses in Q4 as in previous years.

Next, I will talk about the results of Staffing. Revenue in Q2 was JPY 406.3 billion, an increase of 1.5% or a decrease of 2.4% on a constant currency basis. Revenue in Japan was JPY 184 billion, an increase of 10.9%, driven by an increase in the number of temporary staff on assignment as a result of continued growth in demand for staffing services. Revenue in Europe, U.S. and Australia was JPY 222.2 billion, a decrease of 5.1%, or a decrease of 11.8% on a constant currency basis, as demand for temporary staffing services slowed continuously against the backdrop of an uncertain economic outlook. Adjusted EBITDA for the segment was JPY 25.3 billion, a decrease of 9.2%, and adjusted EBITDA margin was 6.2%.

In the first half of FY 2023, revenue in Japan increased 11.8% while revenue in Europe, U.S. and Australia decreased 3.8%. Adjusted EBITDA for the first half of FY 2023 was JPY 52 billion, a decrease of 5.6%.

Regarding the Q3 outlook for staffing. Quarter-over-quarter, revenue is expected to increase approximately 4%. Year-over-year, revenue in Japan is expected to increase approximately 11%, and revenue in Europe, U.S. and Australia is expected to decrease approximately 5%. Adjusted EBITDA margin is expected to be approximately 7%.

On May 15th, we announced that revenue for staffing in Japan was expected to increase by approximately 9% for FY 2023, but this has been revised upwards to approximately 10% based on the results of the first half and the outlook for the second half. At the same time, we expect demand for temporary staffing services in Europe, U.S. and Australia to continue to slow due to the uncertain economic outlook. The outlook for adjusted EBITDA margin of 6% for FY 2023 remains unchanged at this point. Please refer to the IR website for more details.

Finally, I would like to provide an additional breakdown of revenue in the Marketing Solutions business in Matching & Solutions. Since the reorganization of core operating and functional subsidiaries into Matching & Solutions in April 2021, we have not disclosed revenue for each vertical in Marketing Solutions. However, we have received a number of questions from global institutional investors about each vertical, and about the positioning and progress of our SaaS business.

To help you better understand our strategic pillar, Help Businesses Work Smarter in Japan, we have decided to disclose a breakdown of revenue in Marketing Solutions for the first half of FY 2023. The breakdown in line with the current business strategy is shown in this pie chart. We believe it is appropriate to look at Beauty, Travel, and Dining together with SaaS, as those verticals have the highest need among our business clients for SaaS solutions and the highest number of actions by individual users among our matching platforms.

In the first half of FY 2023, revenue in these 3 verticals, including from SaaS solutions, increased approximately 17% to JPY 120 billion year-over-year, which is approximately 50% of the total revenue of Marketing Solutions. Revenue in Beauty, which represents approximately 22% of total revenue in Marketing Solutions, increased steadily by approximately 8% year-over-year to JPY 52.7 billion in the first half of FY 2023.

Additionally, revenue in Travel, Dining, and SaaS solutions each increased significantly compared to the same period last year. Air BusinessTools has not only helped us strengthen relationships with existing business clients, but has also helped us acquire new clients across various industries. AirPAY in SaaS solutions continues to perform well. Gross payment volume, which is a KPI of our strategic pillar, Help Businesses Work Smarter, and a crucial element to expand fintech services, is growing steadily. We are advancing in our effort to establish a unique ecosystem in Japan.

Housing & Real Estate is the largest business in Marketing Solutions with revenue of JPY 70.1 billion or approximately 29% of overall revenue in Marketing Solutions in the first half of FY 2023. Others in Marketing Solutions including Car, Education, Bridal and others account for approximately 21% of revenue. We aim to grow revenue in Housing & Real Estate and Others in the future by continuously providing services, which offer greater convenience for both individual users and business clients while further enhancing our services.

This concludes my presentation. Thank you.