Strike Group Co., Ltd. (6196) Earnings Call Transcript & Summary

Welcome to today's financial results presentation for the six months ended March 31, 2024. Allow me to start with the overall market environment. Strike operates in the M&A brokerage industry, which continues seeing very strong tailwinds with the number of M&A deals conducted by listed Japanese companies exceeding 1,000 in 2023. This trend remains in play in 2024 with strong growth in the number of M&A deals announced by listed companies between the months of January and March. Against this backdrop, we have been seeing very significant inflows in terms of new entrants to this industry, some of which offers subpar services, not up to industry standards. To address this issue, it is therefore necessary to begin implementing industry self-regulatory rules established by an M&A Intermediaries Industry Association. Naturally, Strike is a member of the M&A Intermediaries Industry Association so we will be operating in strict compliance with the self-regulatory rules governing for example, sales and follow the association's ethical code of conduct. Through this, we will work to ensure an environment conducive to peace of mind for SMEs, engaging in M&A deals. Ensuring this is the association's objective and so is Strike's, so that our customers get adequate quality assurances when using our services. Another factor is the Japanese government's policy of encouraging M&A deals involving SMEs. So there are expectations on this front. I believe the need to grow the number of M&A deals was a topic discussed at the Council of New Form of Capitalism Realization hosted by the current administration. And the open innovation tax incentive also went into effect last year, offering favorable tax breaks to companies who purchased stock in start-ups. In 2024, the government will be introducing a new SME group taxation regime to scale small companies into medium-sized companies and medium-sized companies into large companies. These various incentive structures seek to improve M&A, not just in the context of business succession, but also as a conduit to growth. There are very favorable tax incentive systems offering an income deduction of up to JPY 10 billion per deal to be broken down over 5 years after an initial period of 10 years. And there are great expectations in this area in our industry. Against this backdrop, Strike's first half performance exceeded the forecast. First half net sales, therefore, were JPY 9.23 billion and the number of deals closed stood at 130 coming in above the forecast and growing by 26 deals on a year-on-year basis. Overall, net sales were up 51.8% on a year-on-year basis in what represents a rather strong performance. We also delivered a better-than-expected operating profit performance in the first half, which came in at JPY 3.706 billion, up 82.9% on a year-on-year basis. Strike raised the first half guidance. And although we didn't raise the full fiscal year forecast, we do expect a strong performance in the second half, meaning that we naturally expect to be able to meet the full year targets and are working to deliver a performance exceeding expectations. In summary, we expect a strong performance in the second half as well. Another management indicator is the number of consultants. We are aiming for a net increase of 40 consultants this fiscal year and the consultant head count had increased by 15 during the first half. One might conclude that 15 is rather low. But as I have emphasized on previous occasions, Strike issues a policy of hiring merely for the sake of hiring. Additionally, head count went up at Strike in the third quarter as we welcomed 17 new graduates in April alone so we think the annual target of 40 consultants is within reach. Lastly, the number of new contracts totaled 446 which corresponds to just over half of the full year target and underscores the fact that we have been making good progress in terms of contract acquisitions. Overall, we expect to continue making good progress in the third quarter and beyond. Next is a review of operating performance through to the end of the second quarter. We closed 130 deals during the period under review for a year-on-year increase of over 20%. Delving into the details, average sales per deal closed increased with the number of large deals closed going from 13 to 23 on a year-on-year basis in the first half. We, therefore, saw a significant increase in large deals and the corresponding increase in average sales per deal closed, which went from JPY 58 million to JPY 71 million, an overperformance versus the forecast. The year-on-year comparison is as detailed on the table on Page 6. Net sales were up 51.8% year-on-year as was operating profit, which increased by 82.9% during the same period. Next, we will be looking at expenses. This fiscal year, expenses are up due to head office expansion and higher rent costs from the relocation and expansion of the Osaka office. We also had plans for the airing of TV commercials, but we are going through the budget allocated to these commercials at a rate slower than expected. Consequently, total SG&A expenses came in below the forecast and this boosted operating profit results. Next is the quarterly trend in net sales and deals and contracts closed. We usually tend to see a dip in first and third quarter results. And while this trend remains in play to some extent, we believe we are seeing a gradual improvement in reducing this type of seasonal variance. Some variance remains, but the overall trend is up and to the right. Naturally, we will continue working to smooth out this trend to the greatest extent possible and are aware of the need to carry out sales operations so that we don't see a large slump in the third quarter. One noteworthy topic is how net sales exceeded JPY 5 billion for the first time on a quarterly basis in the second quarter. We are guiding for JPY 18.2 billion this fiscal year, and we believe this to have been a milestone towards achieving this target. In terms of the progress made, we are approximately halfway through to achieving the full year net sales target. This is faster progress compared to previous years. The same holds true for operating profit, which stood at JPY 3.706 billion as of the end of the second quarter, corresponding to just over 50% of a full year target of JPY 7.037 billion. The graph on Page 11 shows net sales results on a quarterly basis over the past 5 fiscal years. One question we often get from stakeholders pertains to the relevant KPIs the company tracks so we have divided these into KPIs over the short, medium and long term. Over the short term, we positioned a number of memorandums of understanding signed as a KPI driving sales. We normally close deals around 3 months, 6 months at the latest after the MOU is signed. So we view this KPI as a good indicator of future results over this time frame. While the expected revenue from deals with a MOU signed is a more appropriate data point, we disclosed the number of MOUs signed as a proxy. Additionally, we positioned the number of new contracts as a medium-term KPI. For the most part, it takes between around 8 months to 1 year to grow from new contract acquisition to closing deals. So this is a good proxy for net sales results over the following 1 to 2 years. The nature of the M&A industry involves consultants guiding business owners through a decision process culminating in the sale or purchase of businesses. And this is a process that requires consultants to work in close collaboration with both parties. This decision process is therefore an organic process as opposed to something mechanical and algorithmic, and in light of this, we positioned the number of consultants as a long-term KPI. The quality of our consultants is naturally a very important aspect, but we believe increasing the number of consultants will drive sales going forward. I would now like to go over the trend in the number of MOUs signed and MOU signing fees over the past 3 fiscal years. The number of MOUs signed through to the end of the second quarter stood at 151. Naturally, some of these MOUs translated into sales through to the end of the second quarter, but the bulk will translate into sales in the third quarter and beyond. So this is a good proxy for that. The number of MOUs signed increased by 12 year-on-year, and the average sales per MOU is also slightly higher. We are, therefore, expecting a rather strong performance in the third quarter and beyond. We're also seeing a very strong performance in terms of new contract acquisitions. In the period immediately after we stopped charging a mobilization fee, Strike took on projects with a low probability of closing, and this led to a temporary decrease in productivity. But we have since then reviewed and rationalized the criteria we apply, allowing us to grow the number of new contracts we take on without any of these productivity drawbacks. We expect new contracts to ultimately translate into sales within 1 or 2 years. Indispensable to securing new contracts and closing deals are our consultants and we continue making good progress in terms of hiring. As I mentioned earlier, the consultant head count increased by 15 in the first half. Some stakeholders might view this number as being indicative that we're behind in terms of our hiring target of 40 consultants, but new graduates alone accounted for an increase of 17 consultants in the third quarter. So as it stands, we expect to be able to meet our hiring target. Strike's total head count too exceeded 300 for the first time ever. This concludes our overview of Strike's key performance indicators. I would now like to report on Strike's various initiatives and activities through to the end of the second quarter. Our relationships with tax accountants are an important source route, and we are building relationships with tax accountant cooperatives located throughout Japan. In particular, during the period under review, we established partnerships in the regions of Southern Kyushu, Wakayama prefecture and part of Hyogo prefecture. Strike has invested in for Startups, Inc. which is a company specializing in helping startups secure talent through new graduate hires as well as mid-career hires. We entered a business and capital alliance with for Startups, Inc. with the objective of catalyzing M&A deals involving start-ups. More specifically, the company operates STARTUP DB, and Strike intends to utilize this platform to promptly identify start-ups looking for buyers and to leverage this to secure contracts. Another important function is information security management. Keeping confidential information secure is an integral part of the M&A industry. So it goes without saying that Strike views proper information security management practices as being of the utmost importance. Within this scope, we obtained ISO 27001 certification and continue to put in place a framework ensuring that clients can feel safe in the assurance that their information is safe with us. I would now like to go over the forecast for the fiscal year ending September 2024. As I mentioned earlier, we expect strong performance in the third and fourth quarters. As a long-term target, Strike is guiding for a sales CAGR of 20%, a level which we believe we will be able to achieve this fiscal year in which we would, in fact, like to exceed. We will also continue taking an active approach towards sales initiatives. Earlier, I mentioned how we are going through the budget allocated to our TV commercials at a rate slower than expected, but we intend to take an active approach here as well while also carrying out efforts in terms of hosting seminars and similar events. The pandemic is now behind us, so we are dedicating our efforts to hosting seminars held in fiscal venues. In terms of hiring, as I mentioned earlier, while Strike issues a policy of hiring merely for the sake of hiring, our company has seen a large influx of job applications from mid-career professionals as well as from new graduates. We are already actively interviewing new graduates graduating next spring and extrapolating the current pace of hiring, we are fairly confident that we will be able to achieve our target of growing the consultant head count by 40 people during the current fiscal year. In addition to Strike headquarters in Tokyo, we have offices in various regions throughout Japan. And against this backdrop, we completed the relocation of our Osaka sales office earlier this fiscal year. We relocated to more spacious office space and increased hiring thus creating capacity for a large number of employees. Next, I would like to discuss the topic of compliance with the M&A guidelines for SMEs. As Chairperson of the M&A Intermediaries Association, I believe establishing a set of guidelines to be indispensable in providing SME operators with quality assurances in the M&A process. Complaints abound regarding M&A brokers that resort to intrusive and/or misleading sales practices and as industry players, we feel there is a need to address this issue. Against this backdrop, we established the operations review department in January 2024 as a department independent from sales and are in the process of putting in place a framework ensuring adequate sales practices. Some might fear this type of oversight might end up stifling sales efforts, but the objective is to improve service quality assurances, making it easier for companies to take part in the M&A process. We, therefore, view this as a necessary process in obtaining broader support from clients. So we believe that complying with these guidelines will be an overall positive development for the industry. Lastly, we have received a large volume of stakeholder questions regarding our decision to raise the first half target forecast while leaving the full fiscal year forecast unchanged. Of course, we are carrying out sales initiatives with the intention of exceeding the forecast as recent results point to a strong performance in the third and fourth quarters. As such, we would like to assuage any fears stakeholders might have on this front. Page 20 contains the average sales per deal target forecast and other forecasts. Our plan calls for closing 270 deals, and we are currently carrying out efforts to warrant achieving this target. Next is the topic of shareholder returns. We are targeting an ROE of 20% or higher, and we have been able to meet this target. Over the past 4 years, Strike has delivered a dividend payout ratio of 25% or higher but we received a pertinent question from stakeholders regarding a possible dividend cut in the face of a potential decrease in profits. Our policy is to maintain the dividend payout at JPY 62 per share as announced, provided that profits remain above 70% of our initial plan. There are frequent inquiries pertain to the effective utilization of cash on hand and within this scope, our strategy is to leverage this cash for new business investment, including the acquisition of other companies by Strike. Naturally, should the opportunity for this type of investment failed to present itself, then we will consider raising the dividend payout ratio and carrying out share buybacks. That being said, we hold cash on hand as we are currently on the lookout for business investment and M&A opportunities. I would now like to discuss initiatives to enhance corporate value. As I mentioned earlier, Strike continues upholding a net sales CAGR target of 20% or more. And depending on realized results for this current fiscal year, there is a possibility we will exceed this target. We will, therefore, be reviewing and updating this target in light of the results for the current fiscal year. I would like to discuss Strike's competitive advantages, which is an area we often receive inquiries about. We listed 5 competitive advantages, which we will be going over in detail starting on Page 26. Our proprietary sourcing channels are Strike's first competitive advantage. In broad strokes, the sourcing routes for the M&A brokerage industry can be broken down into direct sales and referrals from partnerships with financial institutions, tax accountants, et cetera. Over the past number of years, Strike has maintained a good balance between direct sourcing, accounting for 54% and referrals accounting for 46%, and we employ different sales strategies optimized for each sourcing route. Within direct sourcing, we tend to focus on direct sales to larger companies offering higher average sales per deal, and we have achieved some level of success on this front. Regarding referrals from our partner network, this isn't a market we can explore freely on our own terms as we have no control over the types of clients that come our way through these referrals. Because of this, our sales strategy here focuses on deal flow and volume as we cannot target the size of the project and the business area of these deals. Both routes work as intended and are producing good results. Strike's second competitive advantage is its matching capability. Naturally, both sellers and buyers come to us in the hopes of finding an M&A counterparty so further refining this process is one of Strike's flagship operations. We use the 4 methods listed here to search for potential buyers and sellers and ensure optimal matches. Strike's third competitive advantage is our sales management system. Databases are indispensable in the process of matching buyers and sellers, but simply having a database isn't enough as it is only through knowledgeable consultants with best domain experience that these databases can be leveraged in the client acquisition process. Strike, as an internal proprietary system, making this possible. And in addition to data purchased from third-party sources, we leverage corporate identification numbers and other information in our sales efforts. Our proprietary system is therefore an aggregate of and built upon sales efforts carried out by our consultants over time, giving us an increasingly more accurate image of acquisition needs. Lastly, we also have our M&A brokerage site, SMART, which allows companies that desire to be acquired to advertise themselves in an anonymous manner. Within the scope, annually, we received around 4,000 inquiries from potential buyers. Strike's fourth competitive advantage is the way our teams are organized. The M&A brokerage industry tends to put quite a lot of emphasis on individual consultants and their abilities. But we at Strike take a team-based approach to avoid the negatives stemming from this focus on the individual. We have approximately 30 teams consisting of between 5 and 15 consultants. Some teams specialize in specific industries and regions, while others have a more general focus, and each team devises and executes a strategy. Naturally, we also create opportunities for consultants to share information with members of their own team as well as with other teams with the objective of improving overall productivity. Strike's fifth competitive advantage is its people and culture. This isn't the type of advantage that can be built overnight, as Strike has been in business for the past 26 years. 26 years isn't that long in the grand scheme of things, but this makes us a well-established business by M&A brokerage industry standards since this is still a fairly new industry. We try to stay young in our way of thinking and strive to incorporate new ideas into our business, while at the same time, building a strong core corporate culture. It's important that we have been doing this over a period of many years, allowing us to create our own corporate culture. Our mission statement at Strike is create partnerships that change the world. And the reason we offer M&A brokerage services to clients is that the value proposition of M&A is that it allows companies to come together to achieve something they wouldn't be able to achieve on their own, generating a tremendous economic boost some of which flows to Strike in the form of the fees we charge. We work to ensure there is enough opportunity to convey this corporate philosophy to our consultants on the ground. While this is a time-consuming process, we believe doing this today will allow us to further extend our competitive advantage in the future. An indispensable requirement in building a successful organization and corporate culture is providing employee training. More specifically, there is a need to provide training tailored to the employees' position and based on how long they have been working at Strike. We do outsource some of this training process, but some of it is done in-house as well. By further expanding and refining this process, we seek to hire people who want to work with us. And by offering high-quality training to consultants, we want to offer high-quality assurances to our clients. And I believe it is this dynamic that ultimately allows us to differentiate ourselves from the competition. We already offered this type of training, but we will be further dedicating efforts to this area going forward. Another area is training in professional ethics, and this is becoming increasingly important in the M&A brokerage industry. We will be focusing our efforts on these various training programs as a way to differentiate from the competition. Next is the trend in the number of employees. As I mentioned earlier, the number of employees exceeded 300 for the first time in company history in the first half, and we continue hiring at a robust clip in the third quarter and beyond. In light of our current accomplishments and our plans for the future, we believe an employee head count of 300 people to be insufficient. We have only accomplished some of our goals. So working back from this vision of our plans for the future, we conclude that there is a need to expand our team to include an even larger number of talented professionals. Naturally, Strike's mission lies in creating partnerships that change the world. As it stands, M&A drives the bulk of sales. But also within M&A, in addition to our bread and butter of business succession M&A, there is demand for innovation M&A, giving birth to growth businesses. In light of this, Strike seeks to leverage its ability to match companies together to create partnerships so that we can offer other services outside M&A brokerage services. In other words, we want to keep M&A brokerage as our core business while simultaneously expanding into peripheral areas as we believe this strategy to be indispensable in generating growth over the long term. To this end, we have already started a number of initiatives within this scope. We welcome you to peruse the appendix containing the company overview at your convenience later on. Allow me to discuss something I forgot to mention earlier in my presentation. First, we plan to relocate the Sendai and Takamatsu offices. But unlike the expansion of our head office and the relocation and expansion of the Osaka office, we don't expect this to translate into an increase in expenses overall. Second, we have plans to establish a base of operations for nurturing start-ups in Kyoto. This is a small-scale project and the opening is scheduled for June of this year. Next is the topic of M&A online, which is part of Strike's owned media in which we operate as a complement to a variety of M&A brokerage services. There is a substantive difference in public perception in discussing mergers and acquisitions as a provider of M&A brokerage services and discussing these same mergers and acquisitions through a media publication. We will continue actively promoting this type of content publication with the objective of generating sales leads. Our initiatives to strengthen governance are as listed here. As agreed upon in the most recent General Meeting of Shareholders, Strike transitioned to a company with an Audit and Supervisory Committee in December 2023. Going forward, we will continue dedicating our efforts towards strengthening the company's governance structure. This concludes Strike's financial results presentation for the 6 months ended March 31, 2024. Thank you for your time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]