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

Thank you all for joining us today, especially right in the middle of the Golden Week holiday. I you through our earnings results for the second quarter before outlining our strategic direction moving forward. Turning to the second quarter results. We unfortunately fell short of our first half targets and issued a downward revision to company guidance. As a result, our full year outlook is now lower than initially projected. That said, even with these adjustments, we are still on track to achieve record high net sales and operating profit. I want to be clear. There is no fundamental change to our underlying business. Let's start with a look at the external environment. The broader M&A market remains highly robust, driven by a particularly strong surge in large-scale transactions. This momentum is creating a positive ripple effect, supporting steady expansion in the SME M&A space, which is our core market. Transaction volume through the January to March period remained solid, and the data we already have for April confirms that deal volume is continuing at a healthy pace. Looking at our year-over-year performance for the second quarter, both net sales and operating profit increased by approximately 10%. While we initially expected to trend slightly higher, the first half saw a shift in our buyer profile, which is now more weighted towards listed companies. We will be going over the details later, but in broad strokes, this shift has led to longer lead times. That said, the deals that were delayed will close and be recorded in April and May. We expect these longer lead times to persist in the third and fourth quarters, eventually pushing a similar number of second half deals into next year. Because this rolling effect effectively zeros out the net impact on the second half, our projections for the period remain unchanged, meaning that our downward revision to the full year forecast reflects only the first half shortfall. Another key topic is our commitment to shareholder returns. We are on track to achieve our 11th consecutive year of net sales and dividend growth despite a temporary pause in profit growth last year. Additionally, as we will detail during our discussion on cash allocation, we intend to further enhance shareholder returns and are thus raising our dividend from JPY 60 to JPY 65 per share. The net sales figures and other key metrics are exactly as shown on the slide, and the number of deals closed is also on a steady growth trajectory. Circling back to what I touched on earlier during our year-over-year breakdown, we delivered roughly 10% growth across both net sales and profit. Turning to expenses. We continue optimizing our cost structure. Specifically, beginning in the first half, we significantly scaled back our direct mail marketing. While direct mail has historically been a primary channel for acquiring new contracts in our industry, market saturation has led to diminishing returns as there has both been an increase in problematic mailing practices by certain operations and also due to the risk of legitimate promotional materials increasingly getting lost in the shuffle. Coupled with rising postage costs, we are essentially phasing out this approach entirely. We have also optimized our TV and online campaigns to ensure our advertising and promotion expenses remain strictly managed. Overall, our costs are tracking exactly as planned. Going forward, as net sales grow, we expect profit to grow in direct proportion to this and in line with our targets. While our quarterly net sales are as shown on the slide, we believe the last 12 months, or LTM trend, provides a clearer picture of our long-term trajectory. As we started highlighting in our earnings presentation for the first quarter, tracking the number of deals closed and net sales on an LTM basis helps adjust for quarterly seasonality and clarifies our underlying growth trends. In fact, looking at our performance data since our IPO reveals a broader historical pattern. We experienced a similar plateau around the third quarter of fiscal year 2024, a period when our stock price was also under some pressure. However, that consolidation phase ultimately gave way to a renewed strong upward trajectory. While we saw a slight dip in the second quarter this year, similar temporary contractions have occurred in the past, and they have always been followed by a strong recovery. Because this long-term resilience is a consistent characteristic of our business, we plan to provide a more extended historical view in our future investor relations materials. Reviewing our KPIs across our targeted time horizons. Starting with the short term, the number of MOUs signed has reached a record high. We expect this robust pipeline to consistently translate into closed deals throughout the third and fourth quarters. For our medium-term metric, new contracts, we have intentionally tightened our screening process to elevate deal quality. Despite this more selective approach, our acquisition of new contracts remains strong. Turning finally to our long-term KPI for consultant headcount. Some of you have asked about the occasional net decreases in certain quarters. This is a natural byproduct of our strategic shift toward prioritizing new graduate hires. Because new graduates traditionally enter the workforce in April, our hiring is heavily concentrated in the third quarter. As a result, slight net decreases in the intervening periods are a fully expected part of our seasonal hiring cycle. In the current recruitment market, we are not only competing for talent against our industry peers, but also against consulting firms and financial institutions. Given the limited pool of top-tier professionals and the backdrop of skyrocketing recruitment agency fees, we began shifting our focus toward new graduate hires a few years ago. While it naturally takes new graduates a bit longer to get fully up to speed, we provide rigorous internal training to develop them into exceptional consultants. We are confident this strategy represents the best path for our long-term growth. Moving to our pipeline, as shown on the slide, the number of MOUs signed has reached a record high. While some of these MOUs already converted into deals closed during the second quarter, we expect others to contribute to our third and fourth quarter performance. As noted in our earlier discussion, even with our more selective approach, we continue to secure new contracts at a steady pace. Moving to consultant headcount. While we recorded a net decrease compared to the end of fiscal year 2025, we successfully onboarded 42 new graduates this April. Factoring in mid-career hires, our headcount increased by a total of about 50 employees in April alone. We have consistently said this ever since the IPO. We absolutely refuse to compromise on the quality of our talent. While we issue an annual hiring plan, we are always prepared to exceed that target if we encounter an abundance of exceptional candidates, just as we are willing to fall short if there is a paucity of candidates who meet our rigorous standards. Fortunately, at this stage, our overall hiring progress remains on track with our plan. Lastly, we remain highly proactive in our investor relations and communication efforts, having recently published our annual integrated report and hosted a retail investor briefing. On the sales front, we are evolving how we engage with our direct sourcing targets. Rather than approaching prospects exclusively with traditional M&A pitches, we are broadening our top-of-funnel direct market initiatives. For example, we have begun co-hosting IPO seminars featuring representatives from the TSE's listing promotion department. Additionally, as noted on this slide, we have been selected for inclusion in the JPX Startup 100 Index. I would now like to outline our earnings forecast for the full fiscal year ending September 2026. While we have lowered the full year guidance, our underlying business momentum remains more or less intact. Rather, this adjustment is primarily a matter of timing. Although several deals did not close in time to be recorded in the second quarter, our pipeline is stronger than ever. The numbers speak for themselves. MOUs signed have hit a record high and new contract volume remains robust. As a result, while we have indeed lowered our full year forecast, depending on our outlook from the third quarter onward, we believe there may come a time to review these figures, potentially revising both the forecast for the ongoing fiscal year ending September 2026 and our medium-term management plan. Turning to our future initiatives. I would like to highlight that this is our first earnings presentation since transitioning to a holding company structure this April. Turning to our medium-term strategy. As of this April, we have transitioned to a 5-company structure, which includes our listed holding company, Strike Group. Currently, Strike's M&A brokerage business still accounts for roughly 99% of our total net sales. Historically, approximately 95% to 97% of our operations have been in traditional brokerage services, where we receive fees from both parties. However, as our client base expands to include larger enterprises, we are seeing a growing preference, particularly among listed companies, for us to act as dedicated financial advisers representing only one side rather than acting as a broker for both parties. To ensure we capture this specific demand and avoid missing out on these opportunities, we established our new financial advisory firm, Strike Financial Advisory on April 1. Turning to Japan Corporate Investment Platform Company Ltd., which we launched about 3 years ago. While Strike and our financial advisory firm, STFA, handle our clients' majority equity transactions, we previously lacked a solution for those looking to divest minority stakes in unlisted companies. To fill this gap, we created JCIP to acquire and hold these minority stakes directly within the Strike Group. Although the immediate revenue contribution remains minimal since it currently primarily consists of dividend income, this vehicle has proven highly effective for building relationships with new and potential clients. Furthermore, we recently launched Strike Strategic Consulting to focus specifically on helping clients craft their M&A strategies. To give you some context, we often see listed companies allocating massive strategic investment budgets within their medium-term management plans. A company might announce a plan to invest JPY 100 billion over the next 3 years with, say, JPY 50 billion specifically earmarked for M&A. However, these companies frequently lack a clear target profile. While introducing available targets is naturally a core function of Strike and STFA, we believe acquisitions should never be executed in a vacuum. They require a clear strategic foundation, which is precisely where we step in. We start by thoroughly analyzing a client's business and competitive landscape. We then combine that insight with our deep understanding of the SME M&A market, including target availability within specific industries and prevailing price levels. In other words, we launched this new corporate entity to serve as a navigator, feeding this practical expertise back to large enterprises looking to utilize M&A strategically. We have seen solid interest right out of the gate, receiving inquiries from reputable companies. Although we currently sense that securing talent in this specific market may be somewhat challenging, we believe our competitive advantage lies in our ability to not only formulate M&A strategies, but also execute them backed by our first-hand market knowledge. Successfully capitalizing on this demand will drive our medium-term growth. Turning to our initiatives to enhance corporate value, maintaining a high ROE is naturally a priority. However, starting with this presentation, we are outlining our cash allocation policy for the first time. Investors occasionally ask how we intend to deploy our capital given the substantial cash balance on our balance sheet. Historically, we have stated our intent to utilize these funds for our own M&A initiatives. While I am actively evaluating potential targets that align with Strike's strategic vision, finding the right partner takes time, and those specific opportunities have not yet materialized. Recognizing our shareholders' expectations for capital efficiency in the interim, we increased the dividend last fiscal year and have now formalized the Strike Group's cash allocation policy. That said, we must balance this efficiency with stability. As our business naturally experiences quarterly fluctuations and remains sensitive to broader macroeconomic shocks as we saw during the global financial crisis, the 2011 Tohoku earthquake and the pandemic, maintaining adequate defensive cash is a critical part of this framework. Fortunately, we successfully navigated those past macro shocks, although in retrospect, it's apparent Strike was operating on a much smaller scale during those earlier cycles. We believe that protecting our downside is a prerequisite for us to be able to go on the offense. Cash remains our ultimate safeguard against unforeseen risks. Therefore, we have allocated JPY 10.2 billion as defensive cash, which covers the equivalent of our annualized fixed costs. We have also earmarked JPY 5.4 billion as offensive cash for growth investments to fund strategic initiatives, primarily office expansion and talent acquisition. Specifically, as we intentionally shift our hiring mix toward new graduates, we are factoring in a longer ramp-up time to full productivity. Furthermore, as our business domains expand, we are simply outgrowing our current Tokyo headquarters. Lastly, the remaining JPY 1 billion is designated as surplus funds, acting as cash for continuous returns. For example, our recent JPY 5 per share dividend increase is being funded directly from this specific pool. As it stands, we are committing to maintaining a dividend payout ratio of 50%. Specifically, while our current payout percentage exceeds that level, our policy is to ensure it acts as a hard floor. Of course, should our earnings outperform the forecast for the ongoing fiscal year ending September 2026 or beyond, our payout ratio will inevitably fall. Should that occur, we will raise the dividend to maintain that 50% threshold. Returning to the earlier point regarding market trends, the operating environment in our sector remains highly robust as detailed in the subsequent slides. I would like to highlight one recent regulatory topic in this space. As many of you are likely aware, the small and medium enterprise agency intends to introduce a professional qualification system for M&A advisers. I previously served as the Representative Director of the M&A Advisers Association, a role now held by President Miyake of Nihon M&A Center Holdings. During my tenure, I consistently advocated for a qualification system of this nature. So while this framework will introduce new regulatory constraints, I view it as a highly positive development for the industry. We often use the shorthand SME M&A, but the reality is that these transactions often involve massive life-changing amounts of capital for these business owners. Executing these deals requires sophisticated expertise in law, taxation and valuation. And because these SMEs employ many people, a change in ownership heavily impacts the livelihoods of employees and the broader community. Given these high stakes, it is simply untenable that our industry still lacks a formal qualification system. The absence of strict standards has led to the widely reported issues over the past 2 years, where predatory buyers used M&A as a vehicle for fraud. Unfortunately, inexperienced M&A brokers inevitably enabled these bad actors. This is not a matter that can be resolved simply by refunding fees. The priority must be proactive prevention. Once the SMEA officially establishes this qualification system, I intend to make it mandatory for every professional across our M&A brokerage and financial advisory teams. What's more, I believe in leading by example. So despite the obvious challenge of studying for a licensing exam at 55, I will be sitting for it right alongside our consultants. This concludes my prepared remarks for today. We will now be using this opportunity to answer a few questions from investors.

Thank you, as always, for the detailed presentation. First, you lowered the first half guidance, citing extended deal timelines as a primary factor for this downward revision. Could you provide some color on how the closing rate and average deal duration actually changed during the first half? Second, turning to your efforts to improve the quality of new contracts, how has this changed quantitatively? Can you provide specific metrics such as the ratio of direct sourcing to referrals? What percentage of these deals are nonexclusive or the proportion of large deals? Lastly, the M&A sector as a whole has come under scrutiny over the past 2 years, and recent media reports suggest a lack of improvement. I know Strike is adjusting its direct sourcing approach to protect its own brand, but looking at the broader landscape, even with the introduction of a new qualification system, what initiatives are necessary to restore trust and ensure the industry is viewed as sound and transparent?

Thank you for the question, as always. To start, allow me to hand it over to CFO Nakamura, so he can give you some more color on the growing proportion of listed companies acting as buyers and walk you through the specific data on our deal closing rates and the extended time lines we're seeing.

This is Nakamura speaking. Let's look at the first half results. In the fiscal year ended September 2025, listed companies accounted for about 20% of buyers. In the first half of this year, however, that figure, which includes group subsidiaries, jumped to 30%, representing a strong upward trend. Naturally, this shift is impacting the deal duration. Last year, the median deal closure timeline was about 9 months. The median stretched to 10 months in the first half of this year, confirming a clear lengthening in our closing cycles. Specifically, the period from MOU signing to closing averaged 3.3 months for the full 2025 fiscal year. For deals closed in the first half of fiscal year 2026, that time line extended to 3.7 months, illustrating a slight lengthening in the deal duration. As a practical aside, and this makes a lot of sense, of course, when the buyer is a listed company, they typically prefer an effective date on the 1st of the month. The mechanics behind this are straightforward. If a deal closes on March 31, this forces the listed buyer to consolidate the target's financials for a single day of ownership. Consequently, they strongly prefer to close on April 1 or perhaps October 1, for example. With a growing proportion of listed buyers, we are seeing this scheduling dynamic play out much more frequently. Unlisted sellers by contrast, usually do not have a strict preference on the exact closing date. Consequently, deals we project to close at the end of March frequently get pushed to April 1. This single day delay bumps our revenue recognition into the third quarter. And with listed buyers accounting for a growing share of our client base, this trend is becoming much more pronounced. We have lowered our earnings guidance to account for this, assuming this extended time line will become our new normal from the third quarter onward with similar delays spilling over into the fourth quarter, at least to some extent. Turning to our focus on improving the quality of new contracts. This initiative is driven by the fact that broken deals represent our most significant operational drag. When a deal falls through during due diligence after we have already secured a new contract and reached MOU signing, we incur substantial opportunity and financial costs. While we still collect the MOU signing fee, missing out on the contingent success fee constitutes a major financial hit for us, which is why we are strictly prioritizing quality right from the initial new contract acquisition phase. Ultimately, regardless of our efforts, some companies simply lack marketability. We do not have a magic wand that can suddenly make an unappealing business attractive to buyers. So we must remain disciplined and walk away from certain deals. This reality is the driving force behind our current focus on elevating deal quality. CFO, Nakamura, will now walk you through the specifics of our new contracts, including our nonexclusive and direct sourcing ratios. To expand on that point, last year, nonexclusive agreements made up about 37% of our new contracts. This year, in the first half, we brought that down a bit. We see this rising ratio of exclusive contracts as a direct win for our recent quality improvement initiatives. Turning to our sourcing channels. Direct sourcing accounted for 45% of our new contracts in the first half, with referrals making up the remaining 55%. Historically, we've targeted a direct sourcing ratio above 50%. However, we've intentionally tightened our screening criteria for direct outreach, focusing heavily on specific industries, optimal company sizes and stronger financial profiles to elevate our overall deal quality. Conversely, referral quality is inherently harder to control since we occasionally accept mandates to maintain vital relationships with our partners. Naturally, our stricter vetting on the direct side caused its share of total volume to dip slightly. That said, while we still prefer to drive the majority of our deals internally, if you look at our pipeline by revenue rather than sheer deal count, direct sourcing continues to drive the majority of our business. I believe your final question was on how we can improve the industry's image moving forward. Through my regular media appearances and conversations with the financial press, my read on the situation is that their scrutiny is really aimed at a few specific actors rather than the M&A sector as a whole. That said, at the M&A Advisers Association, we are actively addressing this through various initiatives. Notably, we established a qualification system subcommittee and maintain close communication with government agencies. Naturally, we also lean on other subcommittees to strictly enforce our self-regulatory rules. And furthermore, we also set up a public relations subcommittee. Recognizing that M&A activity inherently attracts media attention, both positive and negative, we wanted to solidify our public relations posture. To that end, we have hosted about 3 media briefings in the past. Through these channels, whenever the industry faces valid criticism, we clearly outlined the steps we are taking, communicate them to our member companies and enforce strict compliance. It's also worth noting that we are making tangible progress resolving disputes through our dedicated complaint desk. Thanks to these collective efforts, my sense from speaking directly with reporters, even those who were previously quite harsh critics, is that the narrative has genuinely shifted as we are now at a point where media scrutiny is focused on isolated incidents at specific companies. Naturally, because we all operate in the same space, we must remain vigilant about industry-wide risks, but I feel the media's overall stance is finally reflecting this distinction.

I have 2 questions today. First, my understanding is that your competitive landscape includes companies registered with the M&A Advisers Association. How do you plan to differentiate the Strike Group from its competitors? Second, you noted that Strike intends to actively pursue its own M&A investments as a buyer. Outside of your industry peers, what specific types of companies or assets do you intend to target?

To address your first point about whether our perceived competitors are member companies of the M&A Advisers Association, yes, fundamentally, that is correct. On the topic of differentiation, while I would love to point to one simple definitive factor, the reality of the market is more nuanced. That said, one thing I can state with certainty, and this reflects my core resolve as President and CEO, is that we are dedicating our utmost effort to talent development. This is a strategy we intend to execute with complete confidence. Historically, our industry sees high talent mobility. The conventional wisdom is often that it's more profitable to simply hire established top performers rather than invest in training, backed by the fear that once you do train people, they'll just go to other firms in search of higher pay or leave to start their own firms anyway. But when I look at it from an employee's perspective, the kind of firm I would want to join is one that actively prioritizes my professional growth. Before our IPO, I was heavily involved in frontline dealmaking. In fact, I still get referrals today from clients I worked with back then. When I reflect on why that work was so fulfilling, it really comes down to having the right foundation. I was able to genuinely enjoy the process because I had the freedom to dive into sectors that fascinated me, backed by the technical expertise I built during my time as a CPA. That deep foundational knowledge is what allowed me to truly engage with the work, and it continues to serve me well to this day. When I look back at my time at EY, a firm that size barely registers a single departure, yet on a personal level, I am incredibly grateful for the foundation I built there. I want to cultivate that exact kind of environment here at Strike. I want us to be known as the firm where if you join us, you will master the complexities of M&A and develop a higher caliber of expertise than you could anywhere else. That is exactly why I'm so committed to investing heavy time and capital into our training programs. Even if our people eventually move on to new roles or start their own firms, their success out there in the market only builds our reputation and inspires the next wave of top talent to join us. We are playing the long game with these investments, even if conventional industry wisdom says otherwise. As the war for talent intensifies, we have to differentiate ourselves as an employer and robust professional development is our strongest magnet. Beyond recruiting, this directly elevates our client service. If I were selling my life's work or making a large acquisition, I certainly wouldn't feel comfortable with an inexperienced consultant handling the deal. Everything we do is built around that fundamental client perspective. Of course, compensation matters. We operate in a highly competitive market and the employee pay must reflect that. That said, my ultimate goal is to build a culture where our consultants aren't just chasing the next big bonus for closing a deal. I want them driven by the deep professional pride of delivering truly exceptional work. I have championed this philosophy for several years now, and the results speak for themselves. In the past, when we relied heavily on mid-career recruiting, we drew our top talent almost entirely from major mega banks, large securities firms and regional banks. Over the last year or 2, however, we've started to see the reverse. Those very same mega banks are now recruiting our consultants. To me, this is the ultimate proof that our training programs are producing top-tier industry talent. People might argue that intensive training is becoming obsolete that we should just hand things over to AI, but put yourself in the client's shoes. When your company's future is at stake, you want an adviser who can look you in the eye and navigate a complex nuanced conversation. You aren't going to entrust a critical deal to someone reading answers off the screen. That core reality is exactly why we refuse to compromise on talent development. Whether that's a differentiating factor or not is for the market to decide. But regardless, I am deeply committed to pushing our training programs until they meet my own exacting standards. Mr. Kaneda, the new President of our operating subsidiary, shares this same philosophy. He actually led the charge on this, stating that the moment an official certification rolls out, we are making it mandatory across the board. So we are in lockstep on this vision. In terms of our own acquisition strategy, while we haven't completely ruled out acquiring within our industry peer group, our primary focus is outward looking. For example, as I touched on earlier, we recently launched our financial advisory business, which sits in an adjacent space, and we are actively expanding into M&A strategic consulting, which takes us into new territory. While we expect mid-career recruiting to drive the bulk of our growth in these new arenas, we do have specific target companies on our radar and are open to M&A if the right strategic fit comes along. While establishing a dedicated PMI function was not part of our recent transition to a holding company structure, it is an area we view as increasingly critical. As a matter of policy, the government has been actively promoting roll-up strategies to build more robust enterprises. For context, the most acquisitive company in Japan last year completed 18 acquisitions in 2025. Seeing a domestic company execute deals at that scale is a highly encouraging development for the broader market. When you examine the companies successfully executing these roll-up strategies, the common denominator is undeniably their mastery of the PMI process. From the outside looking in, I obviously don't have visibility on whether this is a conscious strategy on their part or not. But as intermediaries, we can attest that their integration processes are highly systematized. While M&A inherently carries risk, these robust PMI capabilities allow them to sustain overall growth despite this string of acquisitions. Going forward, we expect PMI expertise to become a crucial differentiator in the market. Naturally, our core M&A brokerage business has better profit margins, historically reaching levels of around 40%. In contrast, services like strategic consulting and PMI support generally command lower margins because they rely on managing headcount and billable hours. However, a lower margin profile is no reason to shy away from important business lines, especially since at our current stage of growth, I firmly believe that driving absolute profit is more critical than optimizing for margin percentage alone. As such, our acquisition strategy will deliberately target these complementary areas. Roughly half of our new engagements are sourced through referrals from partner financial institutions and accounting firms. If we identify a target that can cement and expand this network and assuming clear operational synergies, we are entirely open to pursuing acquisitions to secure those vital sourcing routes.