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

I am Yoshihisa Ozasa, Chairman and Representative Director of Link and Motivation Inc. I will start financial results briefing for the fiscal year ended December 2024. Here's today's agenda. There are 5 items. Firstly, I will give you a brief company overview; secondly, business report. First, report on business results; and second, report on organizational conditions. Thirdly, outlook for this year, 2025. Fourthly, Consulting and Cloud business growth strategy. And lastly, the fifth item is announcement of dividend increase. Firstly, company overview. This slide shows our mission. Through motivation engineering, we provide opportunities to transform organizations and individuals and create a more meaningful society. Under this mission, group companies are united. This slide shows our group business. From upper left, Organizational Development division. Companies and organizations for the future need to be organizations chosen by individuals. We call such organizations motivation companies. This division provides support for creating motivation companies. As shown on the upper right, specifically, this division includes consulting and cloud business, which supports improving employee engagement and IR support business, which supports improving investor engagement. Next, Individual Development division. Individuals also need to be chosen by organizations in the current era. We call such individuals [ I ] companies. This division, which supports creating I companies includes 2 businesses. First, Career School business mainly provides career development support for working adults. It is a so-called classroom business. The other business is also a classroom business, cram school business, providing support for improving the academic ability of elementary, junior high and high school students. Thirdly, matching division, providing opportunities to link organizations and individuals. This division includes 2 businesses. Firstly, ALT Placement business supports matching local governments, mainly Board of Education with foreigners who want to work in Japan. ALT stands for Assistant Language Teacher or English Assistant Teacher. This is a business of placing English assistant teachers to each school. Second, Personnel Placement business supports matching job seekers and companies. Now I'd move on to the second item, business report. First, report on business results. This slide shows consolidated statements of operations. Revenues surpassed forecast with substantial increase year-on-year. Revenues were JPY 37,458 million, up 10.3% year-on-year. Gross profit surpassed forecast as the gross margin improved across the company and was up 12.3% year-on-year. Operating income also surpassed forecast with substantial increase year-on-year and recorded high for the second consecutive year, significantly exceeding the record high of JPY 4.62 billion in 2023. Operating income was up 18.6% year-on-year. Net income significantly surpassed forecast due to tax credits related to tax incentives for wage increases and was up 29.2% year-on-year. This slide shows revenue and gross profit by division. Firstly, for Organizational Development Division, revenues and gross profit increased substantially year-on-year and reached record high. Revenues were up 15.2% and gross profit was up 13.5% year-on-year. Secondly, for Individual Development division, revenues exceeded the previous year and gross profit increased year-on-year. With improved business efficiency in the Career School business, gross profit exceeded the forecast slightly. Revenues were up 0.1% and gross profit was up 3.5% year-on-year. For Matching division on the bottom, revenues increased year-on-year and gross profit increased substantially. Gross profit exceeded the forecast, driven by strong growth in the personnel placement business centered on OpenWork. In this division, revenues were up 9.2% and gross profit was up 12.3% year-on-year. I'll give you a brief summary of Organizational Development division. In Consulting & Cloud business, monthly fee revenue of the Motivation Cloud series grew substantially by 20.7% year-on-year, although it was slightly below originally planned JPY 530 million as shown on the bottom right. Revenues and gross profit increased substantially. For Consulting & Cloud business, revenues were up 15.5% and gross profit was up 12.0% year-on-year. For IR Support business, sales related to integrated report production, a core service drove growth to a record level. Revenues and gross profit increased substantially. revenues were up 12.8% and gross profit was up 25.9% year-on-year. Next, Individual Development Division summary. For Career School business, revenues decreased slightly year-on-year, but the gross profit margin increased as expected as a result of restructuring as shown in the graph on the bottom right. Revenues were down 1.4% and gross profit was up 1.8% year-on-year. For Cram School business, revenues and gross profit increased significantly year-on-year because enrollment and revenues per enrollee increased as expected. Revenues were up 10.4% and gross profit was up 15.8% year-on-year. Next, Matching Division summary. For ALT Placement business, the number of ALTs dispatched increased in line with expectations, resulting in increases in both revenues and gross profit year-on-year. Revenues were up 7.2% and gross profit was also up 7.2% year-on-year. For Personnel Placement business, revenues and gross profit both increased substantially year-on-year due to growth in OpenWork recruiting in line with expectations. Revenues were up 16.3% and gross profit was up 16.8% year-on-year. This slide shows consolidated SG&A expenses. Total SG&A expenses were up 8.1% year-on-year. In particular, personnel expenses and recruiting, training and welfare expenses increased significantly year-on-year due to accelerated investment in human resources in line with the 2024 plan. Next, consolidated statements of financial position. Assets increased due to the acquisition of shares of FCE Inc. Liabilities increased due to borrowing to acquire FCE Inc. shares. Equity increased by JPY 1,444 million due to the sale of incubation stocks and recording of net income. ROE increased significantly as a result of a substantial increase in net income. Our near-term ROE target is 35%. ROE in 2024 was 34.4%, quite close to 35%. I'll move on to the second point of business report, report on organizational conditions. This slide shows our approach to human capital management. We think it is quite important to place equal importance on business strategy and organizational strategy of both sides of a coin and managed by linking both of them together. When you click on organizational strategy, it is divided into human resource capabilities and organizational capabilities. Priority indicator for human resource capabilities is our unique role survey rating. Priority indicator for organizational capabilities is engagement rating. By enhancing human resource capabilities, our organizational capabilities will enhance the total productivity. That is our approach to human capital management. As shown in investment areas on the bottom, we intend to concentrate investment in recruiting of human resources, training and development of human resources, system for evaluation and compensation and penetration of organizational culture or philosophy. As for productivity, in 2024, gross profit and operating income grew substantially year-on-year by 12.3% and 18.6%, respectively. Human capital ROI increased significantly to 54.2% in 2024. As shown on the right, gross profit per employee also grew substantially from 2023 to 2024. Now I will talk about human resource capabilities and organizational capabilities. Firstly, role survey rating for human resource capabilities and 11-level rating scale is calculated by measuring the degree of alignment between the expectation and satisfaction of others regarding the performance of the survey subject. More than 55% of all employees and more than 70% of managers were A rank or higher as our group maintained high resource capabilities. The average rating in 11-level ratings in general is B. I'm sure the hurdle is high to receive A rank or higher. In 2024, in our company, 55.6% of all employees and 73.9% of managers and above acquired scores for A rank or higher. Next, engagement rating, an indicator for organizational capabilities. Companies are ranked and rated on an 11-point rating scale according to the engagement score, which is calculated based on the levels of employee expectation and satisfaction with the company, supervisor and workplace and the degree of matching between the 2 factors with the use of one of the largest database in Japan we own. Of the 7 group companies, 5 had a rating of AAA and 2 had a rating of AA. As a result, the group achieved its target of all 7 companies ranked AA or higher. We continue to make efforts to enhance engagement to achieve the target of all 7 companies ranked AA or higher. Next, I'll explain outlook for 2025. This slide shows a summary of forecast for 2025. We project revenues will increase by 10.0% year-on-year to a record JPY 41.2 billion, driven by a substantial growth in the Consulting and Cloud business. We project operating income of JPY 6.22 billion, a record for the third consecutive year, up 13.4% year-on-year as we move toward a lean management structure with high profit margins. ROE is expected to remain at the high level of over 30%. If possible, we want to achieve a higher level of 35%. This slide shows consolidated summary of forecast by segment. For Organizational Development Division, we are projecting substantial growth centered on expansion of our core consulting and cloud business. For Individual Development division, we expect growth to surpass the previous year due to our focus on online courses in the career school business. For Matching division, we ranked first in share of ALT Placement business in the private sector. In addition to market share expansion in the business, we expect substantial growth of Matching division also due to expansion of the personnel placement business, including OpenWork, OpenWork Recruiting, we expect a significant year-on-year growth, 7.0% in revenues and 11.7% in gross profit. Next, growth outlook of Organizational Development Division. In the Consulting & Cloud business, the core business, orders for projects to be delivered in 2025 are approximately JPY 9.0 billion. Revenue forecast for Organizational Development Division, which mainly consists of the Consulting and Cloud business is JPY 17.3 billion, up 16.5% year-on-year. Out of that, orders for projects to be delivered in 2025 are JPY 9.0 billion, up 25% year-on-year. In that sense, we expect significant growth this year. Let me explain growth outlook of Motivation Cloud, the core product. Monthly fee revenue at the end of 2025 for the product is projected to be JPY 620 million, a 20.2% increase year-on-year. This slide shows organizational indicators. I explained human resource capabilities and organizational capabilities earlier. For human resource capabilities, 2025 goal of A rank or higher is 75% and 57% for overall, although the hurdle is quite high. To reinforce organizations and enhance productivity further, we want to invest in these areas. For organizational capabilities, engagement, our continued goal is 7 out of 7 companies with high level of AA rank or higher. We continue to work towards further enhancement of productivity for the entire group. Next, I will explain the fourth item, growth strategy for the Consulting and Cloud business, the core business. This slide shows our competitive advantage in the Consulting and Cloud business. Our unique advantage is the ability to comprehensively support companies in human capital management. As you see on the right, for human capital management, we conduct diagnosis, mainly diagnosis of employee engagement with our core product, Motivation Cloud. This product keeps #1 share in the engagement market for 7 consecutive years. We have one of Japan's largest databases. Diagnosis is not the end. According to the results of diagnosis, we provide support for transformation or improvement, which is also our advantage. The areas of transformation and improvement include recruiting of human resources, training of human resources, systems for evaluation and compensation and corporate culture. There is no other company which can provide one-stop support for these 4 areas. One-stop support for transformation and precise diagnosis before that are our advantages. In transformation area, the number of companies supported annually is approximately 940. Besides, there is a recent trend of disclosing status of human capital management in IR information. Without only remaining in diagnosis and transformation through our group companies, we can also provide support for disclosure. That is a very strong advantage. The number of companies that disclose motivation cloud diagnosis results, engagement rating finally exceeded 100 and reached 153. Although I repeat myself, human capital management has been highly publicized as a very important management theme. We will continue to leverage our ability to provide one-stop support for diagnosis, transformation and disclosure and use it to drive our growth. Next, key themes. In human capital management, regular diagnosis of engagement and support for transformation tailored to organizational issues are essential. As I said earlier, with our competitive advantage that covers all areas, we will designate areas for improvement to achieve further growth and aim for expansion in both cloud and consulting businesses. Key point for human capital management is to conduct not on time or once every few years, but regular diagnosis of engagement expose issues and support transformation tailored to the issues. As for time of support, organizational diagnosis is conducted with cloud. According to the results of diagnosis, we provide transformation support as the next step. One of the support is cloud-based transformation support. The other one is consulting-based transformation support through human resources. There are 3 key themes. For diagnosis, we will focus on major domestic companies further. For cloud-based transformation, we will aim for upsell by expanding services. The third theme is for consulting-based transformation support. We will increase sales capacity by improving productivity. Now I will briefly explain each theme. Motivation Cloud monthly fee revenue per customer of JPY 3 million or more grew 37% year-on-year as a result of focusing on introductions at major domestic companies. In other words, services for major companies with many employees and significant monthly fee revenue have been growing substantially. By continuing to focus on introductions at major companies, which have high revenue per customer, we expect to achieve accelerated growth of Motivation Cloud monthly fee revenue. There is one more point in focus on major domestic companies. In the market, we have held the #1 share for 7 consecutive years, but we think there is still ample room for expansion among listed companies. Please look at the left, although we have held the #1 share for 7 consecutive years, the number of companies using Motivation Cloud is only about 5% of about 4,000 listed companies. We plan to continue to promote the introduction of Motivation Cloud to major companies in a wide range of industries. On the right, you see just some examples of listed companies using Motivation Cloud. Secondly, the area of transformation. First, we aim at upsell by expanding services. All services will be integrated into Motivation Cloud. Diagnosis service on the left is engagement service, which was formerly Motivation Cloud. For transformation, former Communication Cloud is positioned as communication service in Motivation Cloud, and we provide support for penetration of management philosophy and others. The second point in transformation is role development service, which was formerly Stretch Cloud. We provide support for improving human resource capabilities. The third point is productivity improvement service to be specific with the use of RPA or generative AI, we will increase productivity. Besides by adding services, we plan to increase monthly fee revenue from the series rapidly. As for upsell, by expanding services through our partnership with FCE last year, we can sell RPA Robo-Pat, FCE Prompt Gate and others. Besides, we also start creating new services through in-house development. In addition, as we have abundant free cash flow, we intend to expand services through M&As and business partnerships. Thirdly, consulting-based transformation. More than anything, the important theme is to increase sales capacity by improving productivity. We developed approximately 100 generative AI tools to boost business efficiency. Consequently, in business results, sales per employee increased approximately 40% year-on-year. Work time was also reduced by approximately 25% year-on-year. We will use surplus capacity gained through productivity improvements to focus on deepening customer relationships. Lastly, strengthening recruiting competitiveness in consulting and cloud business. Obtaining top talent will become even more difficult due to the decline in the working age population, we will continue to make the necessary investments as a company that continues to be chosen by job seekers. We continuously increase base pay. We increased base pay 7x since 2020, base pay was up 34% compared with 2019. As you see on the right, many students go to school with scholarship. They need to repay scholarship over a long period of time after starting to work. We newly decided introduction of scholarship repayment program. We use the Japan student services organization program for ongoing support until repayment is complete. The target is new graduate employees who will join the group in 2026 and after. The rule is to cover the full amount of scholarship. New hires in 2026 are expected to increase by 23% year-on-year. We want to enhance Link and Motivation brand for recruiting by taking these measures and continue to make investments. The fifth item is announcement of dividend increase. For the fourth quarter, we plan to pay a dividend of JPY 3.3 per share on March 25. From the first quarter of 2025, we plan to increase the quarterly dividend by JPY 0.6 with an annual dividend of JPY 15.6, a year-on-year increase of 27.9%. This chart shows our businesses. Going forward to expand businesses, we continue to focus on marketing, product development, investment in human resources as well as M&A. In parallel, we intend to enhance shareholder returns. So please pay attention to our businesses in which our tailwind is blowing. I would appreciate your continued support. That concludes financial results briefing. Thank you very much for your attention.