Link and Motivation Inc
TSE:2170
Earnings Call Analysis
Summary
Q3-2023
The company's revenue grew by a modest 2.7% year-on-year, while gross profit saw a stronger growth of 8.1%, largely fueled by gains in the consulting and cloud business as well as in the personnel placement sector. Operating income rose from the prior year and is on track to beat 2018's record, with a 20% real terms increase in the third quarter of 2023. Net income surged by 13.4% year-on-year. The company's transition to online courses and restructuring efforts in the Career School business, despite a reduction in the number of schools, led to improved gross profit margins. Additionally, significant growth in OpenWork recruiting contributed to a 37.7% increase in gross profit for the personnel placement business. Overall, the company's focus on its competitive advantage in human capital management, where it offers a unique one-stop service, along with a growing balance of orders, positions it well for continued growth.
You don't have any saved screeners yet
I am Ozasa, Chairman and Representative Director of Link and Motivation. I'll start financial results briefing for the third quarter. Here's today's agenda. Firstly, I'll give you a company overview; secondly, announcement of business results for the 9 months, thirdly, forecast. Fourthly, announcement of share buyback. And lastly, and fifthly, announcement of dividend increase. Firstly, company overview. Under our mission through motivation, engineering, our core technology, we provide opportunities to transform organizations and individuals and create a more meaningful society, we are developing each business.
We have 3 main business divisions. From upper left, Organizational Development division supports creating organizations that individuals choose we call motivation companies. This division consists of 2 businesses. Firstly, Consulting and Cloud business supports improving employee engagement. This includes Motivation Cloud series, having the largest share for 6 years in a row in the engagement market. Secondly, IR support business, providing support for improving investor engagement.
Next to the right, Individual Development Division supports creating individuals that organizations choose. We use the keyword, i-companies. This division consists of 2 main businesses. Firstly, Career School business provides career development support for working assets. We operate 54 schools nationwide. Secondly, Cram School business supports improving the academic ability of elementary high and high school students besides we operate characteristic grown schools, providing education about money and communication skills. On the bottom, Matching division provides opportunities to link organizations and individuals and consists of 2 businesses.
Firstly, ALT assistant language teacher, placement business. We place foreigners who are native English speakers at elementary, junior high and high schools nationwide, except for JET program provided by MEXT. We have an overwhelming #1 share among private sector companies. Secondly, personnel Price net business is led by our listed subsidiary, OpenWork. OpenWork is the largest company-related word-of-mouth information platform in Japan. On the platform, support is provided for matching mid-career workers and companies. I move on to the second item, business results for the 9 months. This slide shows consolidated statements of operations. Revenue slightly increased by 2.7% year-on-year, but below the original forecast. Gross profit increased 8.1% year-on-year, driven by the rapid recovery of the consulting and cloud business and the substantial growth of the Personnel Placement business, both of which have high profit margin.
Operating income increased year-on-year even absent the onetime income recorded in the same period a year earlier. I'll explain details on the next page. It is progressing as expected toward the full year forecast and projected to surpass the record high of 2018. Net income substantially increased by 13.4% year-on-year when aligned with the calculation criteria and is progressing as expected toward the full year forecast. As I said earlier, I'll give you the details of operating income please look at the bottom table.
In the third quarter of 2022, operating income was JPY 3,143 billion. The final output after calculating all the factors. But in 2022, we recorded onetime income of JPY 700 million on the reversal of lease liabilities under IFRS accounting standards as part of the relocation and closure of schools in the Career School business. Excluding onetime items, operating income in real terms was JPY 2,699 billion in the third quarter of 2022. On the same criteria, operating income in real terms was JPY 3,239 billion increased substantially by 20.0% year-on-year in the third quarter of 2023, that is shown on the right graph. This slide shows revenues and gross profit by segment. Organizational Development division increased year-on-year driven by growth of motivation, cloud and integrated reports.
Revenues increased 5.9% and gross profit increased 8.2% year-on-year. In Individual Development Division, revenues decreased substantially year-on-year due to the relocation and closure of schools in Career School business in line with our expectation. However, gross profit was essentially unchanged as business efficiency improved with a shift to online courses. Matching division increased year-on-year. As personnel placement business, including OpenWork drove growth. Revenues increased 5.9% and gross profit increased 9.8% year-on-year. This slide shows Organizational Development Division summary.
In Consulting & Cloud business, revenues increased year-on-year with consulting recovering as expected. Gross profit increased substantially by 10.1% year-on-year, reflecting strong growth of the Motivation Cloud series. In IR support business, revenues increased 9.6% year-on-year and gross profit increased substantially by 20.1% as a core service of integrated port production grew in line with expectations. The graph on the right shows motivation class series monthly fee revenue, which shows steady growth and exceeded JPY 395 million. At the end of the third quarter, the fee revenue increased 28.8% year-on-year.
The details are shown on this slide. In the first 6 months, growth weakened temporarily in both the consulting and cloud businesses. It is because companies were pressed with mandatory human capital disclosure and their theme didn't shift to essential human capital management. However, we have expanded gross-selling between businesses to meet wide-ranging needs for human capital management and revenues for the third quarter alone increased substantially by 14.2% year-on-year. In addition, monthly fee revenues for the Motivation Cloud series achieved record growth quarter-on-quarter.
This slide shows Individual Development Division Summary. In Career School business, restructuring to relocate and closed schools in response to changes in learning needs was accelerated by the COVID-19 pandemic and the shift to online courses moved forward as planned. As you see on the right, the number of schools shrunk from 81 at the start of restructuring to 54. Gross profit margin improved as expected due to the successful shift to online courses. Also in Cram School business, the number of annual lease grew revenues increased substantially by 11.6% year-on-year, and gross profit increased 8.7% year-on-year.
This slide shows Matching division summary for ALT Placement business, a low expanding social insurance coverage to ALTs who work 20 hours or more per week took effect. This revision is being applied, starting with companies with the most employees we have an overwhelming share in this business among private sector companies.
Our subsidiary, Link Interact is involved in this business, and we get business under very challenging and unfavorable conditions even in unfavorable conditions, revenues were essentially unchanged year-on-year. Gross profit decreased substantially due to the cost increase from social insurance premiums in ALT Placement business, revenues decreased 0.7% year-on-year and gross profit decreased 10.7% year-on-year. For personnel placement business, revenues and gross profit was increased substantially due to greater-than-expected growth in OpenWork recruiting, revenues increased 37.5% year-on-year and gross profit increased 37.7%. The graph on the right shows OpenWork recruiting sales supports a word-of-mouth information platform called OpenWork is the first floor of value.
OpenWork is trying to transform into recruiting platform on a second floor. OpenWork, recruiting sales increased rapidly by 128.0% year-on-year. This slide shows consolidated SG&A expenses. There are almost no major changes. On the sales-related expenses increased substantially due to marketing investment in OpenWork, which is growing rapidly. Next, consolidated statement of financial position in assets, cash and cash equivalents increased due to sales of incubation stocks et cetera, liabilities decreased due to repayment of loans. Equity increased due to recording of net income and sales of incubation stocks.
Total equity increased JPY 2,354 billion. I'll move on to the third item forecast. Firstly, environment and growth strategies as shown on the right we will thoroughly focus on the consulting and cloud business of the Organizational Development Division, which has the most significant growth potential.
And we will use our knowledge we have gained since our founding and make sure to capture the current tailwind of Human capital disclosure and Human capital management to make it the growth driver for accomplishing our mission. Next, growth potential, as shown on the left, companies which have a potential to be our clients are companies with roughly 50 or more employees, there are approximately 100,000 such companies in Japan but the number of companies supported by our consulting and cloud business last year was only 1,300 companies.
Please look at the right for our competitive advantage for human capital management, firstly, we provide a precise diagnosis in diagnosis of employees engagement provided as motivation cloud series, we have an overwhelming #1 share we not only provide diagnosis, but also support transformation according to diagnosis results. To be more specific, we support transformation of recruiting, training systems and organizational culture. We are the only company which can provide these as one stop services in addition to diagnosis and transformation, results are disclosed eventually. The number of companies disclosing our engagement rating exceeded 100 and reached 108 as of September 30.
In that sense, in human capital management, we can provide diagnosis and support transformation and disclosure as one-stop services which is our biggest advantage other companies do not have. I said the employee engagement is the most important correlation of employee engagement with investment indicators such as operating profit margin and ROIC has been clearly proved companies are obligated to discuss various items for human capital disclosure. Among other things, employee engagement is linked with business performance. Therefore, as the overwhelming front runner, we will provide one-stop support for diagnosis transformation and disclosure to enhance engagement of companies.
Besides to promote the shift of consulting services to our recurring revenue business model, we are focusing on increasing orders total orders for future projects obtained at a given point in time as key indicators. As shown in the bottom graph, the balance of orders has been increasing year-by-year. The red bar on the far right indicates orders already obtained for 2024 projects of that total. When you compare only the red bars, you can see the balance of order have increased during the past 3 years.
As for growth investments to achieve substantial growth in consulting and cloud business policy is to proactively make investment in businesses, including through M&As and in human resources in order to expand services, all functions, including AI that will promote the shift to our recurring revenue business model and to acquire development technology and know-how. The fourth item is announcement of share buyback. Considering that our future profitability is not fully reflected in our stock price, we have decided on a share buyback of up to JPY 2 billion and 4 million shares.
We continue to carry out the flexible capital policy to enhance capital efficiency and shareholder returns after comprehensively considering our financial condition and stock price. Reason for this share repurchase is, as I said earlier, as we have sufficient cash necessary to fund growth investments we set buyback period from November 14, 2023 to June 30, 2024. We conduct share buyback of up to JPY 2 billion and 4 million shares, as I said earlier. Next, announcement of dividend increase. Announcement of the third quarter dividend and fourth quarter dividend increase. For the third quarter, a dividend of JPY 2.8 per share is scheduled to be paid on Monday, December 25.
From the quarter, we are planning a dividend increase of JPY 0.1 and for an annual dividend of JPY 11.3 per share. We continue to view shareholder returns as an important management issue with a policy of increasing dividends continuously in the long term. That concludes my presentation on the financial results for the third quarter. In the first half, our results were sluggish as we were not able to capture the tailwind of human capital disclosure and human capital management Finally, in the third quarter, our performance recovered very smoothly and rapidly, mainly due to structural change and change of internal management accounting.
Besides clients had live to face human capital management essentially. I have you will watch our future growth with a sense of other expectations. That concludes financial results briefing for the third quarter. Thank you very much for your attention.