Link and Motivation Inc. (2170) Earnings Call Transcript & Summary

I am Yoshihisa Ozasa, and I'm Chairman and Representative Director of the Board of Link and Motivation. Welcome to our earnings briefing for the fiscal year ended December 31, 2023. Let's get started. Here is today's agenda. First, I will give you our company overview. Second, I'm going to give you the business report that is the announcement of our business results and the report on the organizational condition. And third, I'll share with you our full year guidance for the fiscal year ending December 2024. Fourth, I am going to talk about our strategy and priorities going forward. Fifth, I will give you an update on our share buyback program. And lastly, I want to wrap up this briefing by talking about dividend payouts. So let's begin with the company overview. This is our mission. Through motivation engineering, we provide organizations and individuals with opportunities to transform themselves and create a more meaningful society. And this mission is at the center of everything we do. This is the diagram that shows our operating structure. We have 3 business divisions. From upper left, Organizational Development Division, which is our original business. It is a B2B business that supports creating organizations that individuals choose, or what we call motivation companies. It includes consulting and a cloud business where we help our corporate clients raise their employee engagement. One of our products is Motivation Cloud series, which is the market share leader for the last 6 years in a row in the employee engagement product market in Japan. The other business we have in this division is IR Support business. where we help our corporate clients raise engagement with their investors. And ours is one of the biggest in the investor relations communications industry in Japan in terms of revenue. Next to the right is Individual Development Division. This is a B2C business that supports creating or developing individuals that organizations choose. We call them i-Company. It includes Career School business, which aims to support career development for working adults. We help individuals to obtain qualifications, certifications or licenses, and we also teach computer skills or how to code. We own and manage 53 schools nationwide, offering comprehensive wide-ranging courses. And we are one of the biggest in Japan in this area. The other business in this division is Cram School business, where we help students from elementary school to high school, attain and improve academic skills. So this is an education support business in a nutshell. But our focus is not just on improving academic skills, but also teaching more practical skills that are necessary to survive and thrive in this world, offering quite a unique set of courses as well. And the third one, which is just below is Matching Division, which provides opportunities to link organizations and individuals. It includes ALT Placement business. ALT stands for assistant language teacher or English adjunct instructor position to teach English as a second language to Japanese students at schools. We provide a service that matches local municipalities and education boards that need English teachers with those native English speakers who want to work in Japan as English teachers. And we are the dominant player in this field as a private entity, except for the JET program, which offers similar services and is run by the Ministry of Education. The other line of business is Personnel Placement business, where we provide matching support to job seekers and companies. We have a company named OpenWork in our group. This company manages one of the largest job posting, job hunting websites in Japan with millions of word-of-mouth workplace reviews from employees actually working in those companies. And today, jobs seekers and companies are matched on this platform. Next, I'd like to move on to Agenda Item #2, business report and the announcement of our business results. This is our P&L on a consolidated basis. Revenues came in at JPY 33.969 billion, which were short of our own expectations, but up 3.6% from the year before. On the other hand, gross profit came in, in line with our expectations at JPY 17.704 billion, up 10.2% from a year earlier. It's a big jump. Adjusted operating income was just slightly below our expectations at JPY 4.623 billion, but up 27.4% from the year before, far exceeding the record profit of JPY 3.820 billion recorded in fiscal year 2018. Last, but not least, we reaped a net income of JPY 3.174 billion, which was well above our expectations at a whopping 50.7% from a year earlier. This table is showing revenues and gross profit by segment. First, both revenues and gross profit of the Organizational Development Division rose year-on-year. Revenues up 6.6% and gross profit up 9.5% from a year earlier. The Individual Development Division was undergoing the structural reforms, including the relocation and closures of schools in the Career School business, and the overall teaching efficiency was improved a lot as we switch to online classes. Its revenues came in at JPY 6.418 billion, down 7.8% from the year before, but the gross profit was JPY 2.931 billion, up 6.4% year-on-year. The Matching Division continued to grow very strongly, thanks to further acceleration of Personnel Placement business, including open work. Its revenues increased to 5.7% year-on-year to JPY 15.398 billion, and its gross profit also came in well above our expectations at JPY 6.377 billion, up 10.4% from a year earlier. Let's take a look at the brief summary for each division. For Organizational Development Division, Consulting & Cloud business slowed down in Q2, but starting to grow again rapidly at a faster-than-expected pace from the second half, and -- so the full year revenues were up 6.2% from a year earlier. Motivation Cloud series monthly fee revenue was slightly below our expectations of JPY 430 million, but it grew very strongly by 30.1% over the past year to JPY 427 million at the end of the fourth quarter of fiscal 2023. And as a result, the gross profit of Consulting & Cloud business jumped 11.8% from the year before. With respect to IR support business, because it's core service of helping our clients put together integrated reports grew over the past year, as expected, its revenues rose 5.9% year-on-year and the gross profit soared 17.1% from a year earlier. Next is the summary for Individual Development Division. We were restructuring Career School business to adapt to the changing needs of learning during the pandemic by closing and relocating some of our existing schools and shifting towards online teaching. As you can see the right side of the slide, we reduced the number of schools from 81 to 53, and yet, the revenue from online courses increased substantially. And accordingly, the gross profit margin of Career School business dramatically improved to 45.8%. The full year revenue from Career School business actually dropped 10% from the year before, whereas the gross profit increased to 5.9% year-on-year. When it comes to Cram School business, revenues grew substantially, up 11.3% year-over-year, thanks to an increase in the number of total enrollees. Gross profit to increased 9.8% from a year earlier. This is the summary of Matching Division on the next slide. For ALT Placement business, we are legally required to pay part of the social insurance premium for teachers who work for 20 hours or longer per week after the revised law that expanded eligibility took effect in October 2022. This particular revision was first applied to those hiring a large number of ALTs. So we expected that the competitive landscape would be tougher for us. However, we successfully managed to generate the same level of revenue as we had done the year before. The revenue came in flat for fiscal 2023. Gross profit, on the other hand, declined 7.4% year-on-year due to the increase in cost such as social insurance premium. But again, these are not surprises, we anticipated these results. With respect to Personnel Placement business, we saw both revenues and gross profit soared more than expected as OpenWork recruiting continued to grow very strongly. The revenue rose 32.7% from the year before, and the gross profit jumped 34.2% year-on-year. As you can see, the graph at the bottom right of the slide, its sales more than doubled, up 103.3% over the past year. These are SG&A expenses on a consolidated basis. Total SG&A expenses increased to 2.7% from a year earlier. Sales-related expenses rose substantially year-on-year because we invested heavily in marketing for OpenWork. These are consolidated statements of our financial position. Total equity increased by JPY 1.697 billion from a year earlier due to the posting of net income and the sale of the incubation stocks. Return on equity improved substantially year-on-year at 29.6% because of the increase in net income. Let's move on to the report on the Organizational Condition. Here is our approach to human capital management. First of all, create the links between business strategy and organizational strategy. And with that, we focus on maximizing human capital as organizational strategy becomes increasingly important for any organization. And we are committed to increasing our human resource capabilities and organizational capabilities or engagement as KPIs so that our productivity, and this is our KGI will increase. Let me talk about our human resource capabilities first. We measure our human resource capabilities with the roll survey score. This is an 11 grade evaluation from AAA to DD, which measures the degree of agreement between the expectations and the satisfaction of coworkers of the subjects of the survey with respect to the fulfillment of the roles required at their respective job levels. The middle grade is B., the sixth grade from the top. At Link and Motivation, over 55% of our entire workforce in an A or higher. And among our managers and above, that percentage is at 73.1%. So that indicates that we have strong human resource capabilities. When it comes to our organizational capabilities, we measure it with engagement ratings, and the positive correlation between higher engagement ratings and higher labor productivity is supported by data. So engagement is a very high priority for the management. This is also an 11-grade evaluation, and the chart on the right shows you the results of the latest survey. Of the 8 group companies, 6 had a rating of AAA and 2 had AA. So you can say that our employees remain highly engaged all across our group. And as a result of increasing our human resource capabilities and organizational capabilities, our productivity has been improving. The chart on the left side shows our human capital return on investment. Human capital investment is defined as the sum of expenditures, including employee salaries and bonuses, welfare and commuting expenses and other executive compensations. Return is our adjusted operating income. From 33% in 2021 to 41% in 2022 and 48.4% in 2023, the human capital ROI improved rather dramatically over these years. The graph on the right side is showing gross profit per employee. This has also improved consistently since 2021. And in 2023, the gross profit per employee reached JPY 10,595,000. These numbers demonstrate how much we care about human capital management at Link and Motivation, and that we are transforming ourselves into a highly productive organization by increasing both our human resource capabilities and organizational capabilities. The next agenda item is our full year guidance and outlook for 2024. Let me share with you a brief summary of our guidance for 2024. We expect that revenues will increase 8.6% to JPY 36.9 billion, and gross profit will jump 15.3% to JPY 5.330 billion for 2024 with the Consulting & Cloud business driving much of the growth. And these are the guidance figures for revenues and gross profit by segment. We are projecting that the Organization Development Division will grow more than 15% in 2024 with the Cloud business expected to grow more than 20% from 2023. When it comes to the Individual Development Division, we finally put an end to the loss of students in our Career School business due to this restructuring by the end of 2023. Going forward, we will continue to improve business efficiency, while maintaining the current level of revenues and expanding our online course offerings. And lastly, for the Matching Division, we expect that revenues from the ALT Placement business will recover on the back of a pool of high-quality teachers despite the flattening of the competitive landscape. As for the Personnel Placement business, we are projecting more than 15% growth for OpenWork in 2024. Please take a look at the chart on the slide for more details. These are our targets of the organizational indicators for 2024. As I said earlier, our objective is to raise our total productivity by increasing both our human resource capabilities and organizational capabilities. So we set targets for each indicator. For human resource capabilities, the goal for 2024 is to raise the roll survey score and the percentage of employees with A or higher to over 77% for managers and above and over 57% overall. With respect to organizational capabilities or engagement, the goal is to have all of the 8 group companies maintain a AA or higher rating in our engagement rating throughout 2024. The next thing I want to talk about is our strategy and priorities going forward or future policies. This slide gives you an overview of our growth strategies, and how we view our business environment. One of the changes that have happened to our external environment is that human capital management has been gaining a lot of momentum, and with that, we believe that companies around the world will face some serious management challenges, such as the need to improve human resource capabilities. And I would say it will be increasingly urgent for a lot of companies to win the competition for talent before improving their human resource capabilities. Another challenge is, of course, the need to improve organizational capabilities. There may be a variety of measurements and indicators for human capital management, but engagement is clearly the one that is proven by science to positively impact the labor productivity and performance. And as we continue to boost both capabilities, we are going to focus on the Organizational Development Division and its Consulting & Cloud business, in particular. Our competitive advantage is that we have the ability that nobody else has, which is the ability to provide one-stop comprehensive support to our clients in their human capital management through the cycle of diagnosis and transformation of their organizational problems and disclosure of the transformation results. We own the largest database on employee engagement in Japan in terms of the diagnostic ability. We provide one-stop organizational HR consulting in terms of transformation. And we don't stop there. We are committed to helping our clients disclosing their engagement ratings through the publication of an integrated report, for example. As of the end of 2023, 116 companies disclosed their engagement ratings that we provided. Let me also talk about our growth potential. Our Consulting & Cloud business is providing support to approximately 1,500 companies in Japan today. But there are more than 100,000 potential clients out there, at least in Japan, these are companies with 50 employees or more. So we have substantially more room to grow. Not only that, we are going global. Already, 28 Japanese companies in Thailand, Vietnam and other Asian countries subscribe to our Motivation Cloud services. We are going to expand our global footprint as well as put focus on more corporate clients and local municipalities in Japan. We will work more vigorously to bring our Motivation Cloud series to the global market. One of the key indicators of consulting in a cloud business is, of course, Motivation Cloud series monthly fee revenue. The target for this year is to increase the monthly fee revenue by 24% in 2024 to JPY 530 million. Another key indicator is the amount of orders. I have said that we expect the Organizational Development Division's revenues to increase 16.4% this year to JPY 15 billion with much of the growth expected to be driven by the Consulting & Cloud business. And in fact, as of the end of 2023, the amount of orders to be delivered in 2024 already reached JPY 7 billion, and this figure itself is 16% higher than what we had at the same period of the previous year. So we got off to a really good start in 2024. The fifth item of the agenda is an update on our share buyback program. We believe that our stock price did not accurately reflect our future profitability, so we decided at a Board of Directors meeting on November 13, 2023, to buy back our outstanding shares up to 4 million shares or JPY 2 billion. As of the end of January this year, we repurchased about 2,810,000 shares. That's about 70% and or JPY 1.587 billion, and that's about 79% to the target. And we will continue to buy back our shares, and we'll report to you when it's completed. The final item of the agenda is the announcement of dividend. For the final quarter of 2023, we will pay JPY 2.9 a share as dividend on Monday, March 25, 2024. And throughout 2024, we will pay a quarterly dividend of JPY 2.9 a share so that the full year payout will be JPY 11.6 a share. Return to our shareholders remains one of our top management priorities, and we will continue to uphold our policy of paying due dividends based on our business performance. Once again, let me show you our operating structure. I've been running this company all these years since I founded it, but truth to be told, only now I can say with confidence that I finally hit a gold mine, if you will. Employee engagement is in the spotlight like never before as long as the Organizational Development Division is concerned. Companies across the board are now focused on human capital management, recognizing employee engagement as a management KPI and using our Motivation Cloud series to raise engagement, which correlates with increased productivity. This is exactly the vision that I had and is now coming through. And I am fully convinced that my vision will come true for the Matching Division as well that's OpenWork in the Personnel Placement business. Today, many job seekers and those who want to change their jobs are flocking to our platform for its excellent source of employee reviews to find the best match for their needs and aspirations, so please stay tuned to what we are up to. And that's it for our earnings briefing for 2023. Thank you very much for watching.