TechnoPro Holdings Inc

TSE:6028

Earnings Call Transcript 2022-Q3

[Toshihiro Hagiwara, executive]

I am Hagiwara, CFO of TechnoPro Holdings. Thank you for coming today. The situation in Ukraine has increased the geopolitical risks, pushing up energy and crop prices and continuing inflation. There's also a concern for a global recession.

As for our company, a huge number of contracts were renewed in March, and many new graduates joined in April, and we haven't seen any impact on our business so far. Judging from the situation of our customers who started the new fiscal year in April, they seem to have secured their R&D budget as planned to increase their competitiveness looking forward post-COVID. The renewal ratio of contracts in March was 90.5%, lending at almost the same level as the last year. We also gained charge-up as expected.

In addition, against the backdrop of strong demand, there have been many shift-ups in which our company has not renewed the contract but has already deployed a few projects with higher unit sales price. Without this, the renewal ratio would have exceeded 92% in real terms. On the other hand, the utilization ratio dropped for a moment in April due to the engineers who have returned from their previous assignments and the new graduates. But the reassignment process is progressing significantly.

This fiscal year marks the first year of the new midterm management plan. And I believe that we have made a good start in terms of both strategic and financial performance. However, we will make up for the lack of progress in Q4 and firm leading to the next year.

Now I would like to explain the overview of Q3 financial results and the main KPIs using the slides. First, Page 2 shows financial overview. The revenue of 3 quarters or 9 months was JPY 131.7 billion, up 9.6% year-on-year.

GP was JPY 34.2 billion, up 18.7% year-on-year. The growth is mainly due to the increased level of active engineers, expansion of the project assignments and the addition of the Indian subsidiary of Robosoft with the consolidated P&L. In the medium-term management plan, a continuous growth of GP margin is one of the key factors. GP margin in Q3 alone was 27.3%, making a record high on a quarterly basis.

Core operating profit was JPY 14.4 billion, up 9.6% year-on-year basis, absorbing a huge increase of higher earning costs. On the other hand, operating profit was JPY 16.5 billion, up 11.0% year-on-year. This includes JPY 1.8 billion of our Singaporean subsidiary, Helius, put option liability reversal gain. As this gain is not taxable, the estimated effective tax rate was reduced to 27.0%, making the net profit of JPY 12 billion, up 17.8% year-on-year. Based on the progress rate up to Q3 and the current KPIs, we believe that previously revised full year guidance is sufficiently achievable. Page 3 shows operating profit bridge year-on-year. In the upper graph of returning to normality, result of 9 months, improvement of GP offsets the higher AI and data costs as well as dissipation of governmental subsidy for continuous employment, making pro forma operating costs including the spending to execute the midterm management plan exceed the previous year. Expenses recorded to implement our midterm management plan remains at 55% at the end of the Q3. Compared to the first half of this year, we have made some progress in recruiting and training for the solution business.

However, we may not be able to complete all of this year's investment budgets, and some of them may be carried over to the next year. The first 2 years of the new midterm management plan are positioned as the foundation building period, and we plan to achieve high growth in the latter 2 years. Therefore, we plan to make steady investments necessary for the evolution of our company's business. Considering the characteristic of the human resources businesses, the return on investment is high, and the payback period is short. Therefore, as long as we focus on pure play in the technology area, we believe the risk of damaging shareholders' value is lower. Page 4 shows quarterly performance of revenue and operating profit and GP and SG&A and core operating profit on Page 5. The table under the revenue graph shows the main KPI results of the domestic business as well as Q4 and full year guidance. Since 550 more graduate joined compared to same period last year, utilization ratio of Q4 becomes 93.0%, lower than last year's 94.7%, making GP margin for Q4 decreased year-on-year for the fast time this fiscal year. The strength of the result of KPIs up to FY '20 are displayed in the Excel file of Factbook, which are uploaded to our website. Please have a look.

Page 6 shows Q3 results year-to-date, and Page 7 shows Q3 results for 3 months. In R&D Outsourcing, revenue and GP increased year-on-year, whereas operating profit decreased year-over-year. However, governmental subsidy for continuous employment was included in the special item of last year's operating profit.

In addition, our company allocate all the SG&A expenses incurred by the holding company to each segment of domestic business with the largest amount allocated to R&D digital segment. In this fiscal year, head office expenses increased due to the cost of implementing the midterm management plan. Therefore, the negative operating profit compared to the previous fiscal year was also affected by this.

Please note that profit margin of each segment differs depending on where the holding companies' head office expenses are held. Please be careful when comparing with competitors in the same industry.

Construction Management Outsourcing, which made a slow start in the first half, turned back to the path of growth with operating profit of Q3 positively year-on-year. Also, domestic and other segment in which are profitable investment business belongs remained strong with a strong hiring demand in the field of digital, IT and semiconductors. Also, the contribution to the entire consolidated results is small.

The overall -- the Overseas segment, which has consolidated Robosoft in Q2, shows the improvement of GP margin more significantly. And GP margins have been disclosed since the previous presentation. Robosoft makes a contribution to the growth of other overseas subsidiaries. On the other hand, businesses in China, which is -- which has one of the offices in Shanghai, are expected to have negative impact in Q4 performance due to the strict lockdown by 0 COVID measures.

Page 8 shows balance sheet and cash flow. British Orion's put option liability in sterling and the Indian Robosoft's share acquisition organization in rupees amounted to JPY 4.5 billion. However, prior to the recent sharp depreciation of the yen, more than half of the exposure was hedged, thereby mitigating the negative impact.

Page 9 shows main KPIs of domestic business. As of the end of March this year, the number of engineers was 21,054, exceeding the peak of 21,453 2 years ago in April when 851 new graduates were hired. In June of the fiscal year, the number of engineers is expected to be 22,000 compared with the initial forecast of 21,600 and the previously revised forecast of 21,800. The next fiscal year is expected to be a launch part of record-high resources and starting an increasing trend. The accumulating 3 quarters average utilization ratio was 95.7%, and the full year average is expected to be 95.0%.

The number of new graduates assigned to this portion is also progressing smoothly with 60% assigned by May and more than 70% assigned by June. This year, we plan to conduct over 3 months of strategy training for about 20% of new graduates. Therefore, the return to normal utilization ratio of 95.0% will be delayed until July, but this is part of our strategy to expand our solution business centered on digital demand.

Next, I will explain recruitment and turnover. Also, the new midterm management plan focuses on quality rather than quantity. We were able to hire 772 mid-carrier engineers in Q3. However, the environment for hiring talented engineers who are ready to work is becoming increasingly difficult. Therefore, in addition to hiring inexperienced construction management engineers, we are gradually starting to hire potential candidates for education and training and of developing human resources in the digital domain.

In March of this year, we were fully certified as AWS human resources services partners by Amazon. And in the next 3 years, we have formulated a plan to acquire a total of 3,000 AWS-related certifications. With the support of the AWS training content, our group has planned to leverage its engineering training infrastructures to significantly develop and increase the number of engineers capable of responding to increasing demand for cloud technologies.

In addition, global recruitment, which has been temporarily suspended due to the COVID-19 pandemic, has resumed. And approximately 40 foreign engineers are expected to come to Japan from India and Sri Lanka by the end of June this year. While it may take some time to build up applicant pools before we can fully resume our global recruitment efforts, this initiative is becoming increasingly important to overcome the supply concerns of Japanese engineers.

On the other hand, you can see of the fiscal year and the overview, the turnover ratio of permanent employees was 7.4%, and the LTM ratio was 7.6%. We plan to make major revisions to its employee compensation system for engineers from July this year in order to ensure that it is in line with the strategy set out in the new midterm management plan. Under the new compensation system, market value is used more than ever as a basis for evaluation on the compensation.

In addition, with the expansion of solution business, the company has provided career paths for consulting and project managers. We believe that this will not only increase the motivation of existing engineers but also contribute to the recruitment of talented human resources. And I think we will be able to talk more specifically about this in our full year financial results presentation.

Page 11 shows assigned engineers by technology, and the Page 12 shows assigned engineers by industry. For the first time in 7 quarters, the number of assigned engineers with embedded control systems by technology sector and the transportation equipment by industry sector turned positive year-on-year. Major Japanese automakers are also planning to invest heavily in R&D or EVs and software, and this is expected to continue.

On the other hand, there may be some customers who place orders but are cautious about signing contracts. Although the impact on new orders due to the situation of Ukraine has not yet been seen, it is common to be at the timing of budget execution in times of uncertainty. So our company will keep a close eye on our customer change.

The next slide was the monthly average unit sales price, which grows by 4.0% year-on-year to JPY 607,000 in the accumulating 3 quarters. This is due to the additional subsidiaries with relatively high unit sales price from fiscal year. But even extending -- excluding this, unit sales price increased 2.7% to JPY 649,000. By the way, the different unit sales price of JPY 8,000 is included in the [ other bridge plus ] JPY 21,000.

In addition, the contract price of existing temporary engineers has increased by 2.4% from a year ago, and the ratio of increase has been included. The impact of charge-ups and shift-ups obtained in the contract negotiation in March this year will be seen in the figures at the end of Q4. On Page 14 is the situation of Robosoft. The company has closed in March. Revenue for the most recent 1 year was approximately JPY 4.6 billion, up 66% year-on-year. EBITDA after adjusting for transaction costs owned by the seller was approximately JPY 1.6 billion, up 43% year-on-year. And EBITDA margin was 34.4%.

In consolidated accumulated 3 quarters, Robosoft's P&L for the 6 months from October to March were included. And after deduction of JPY 250 million in sales expense and JPY 150 million in amortization of PPA assets, a total of JPY 440 million detail the company's consolidated operating profit, as shown in the bridge chart on Page 3. The cost to be borne by the seller will be preliminary recorded by Robosoft but will be reduced -- but will be deducted from the purchase price of the remaining 20% of the shares. So there will be no material cost to our company.

As I mentioned in the previous fiscal financial results presentation, we have started joint sales for Japanese customers and also hiring [ bilingual presales ] and bridge engineers. We have built a pipeline of potential projects, and I think we will start to see results in the next fiscal year.

On the other hand, we do not believe that Robosoft's profit margin of more than 30% is sustainable, and it is a result of the company's ability to save operating expenses during the COVID-19 pandemic supported by strong digital demand from existing customers. By the way, the operating margin of major global players, mainly offshore delivery companies, is in the mid-20% range.

Robosoft's new fiscal year budget, which began in April, aims to expand its sales organization with the aim of developing new customers in the United States and Japan. In addition, Robosoft plans to make significant upfront investments by actively acquiring personnel in advanced technology field to meet some demand such as [ megabus ].

In addition, with the rising wages and the turnover ratio of highly qualified engineers in India, a flat deterioration in GP margins is inevitable due to keeping retention rates and acquiring new talent. However, we have strong ongoing orders from existing customers and are starting receiving new orders from potential customers. So we are aiming for double-digit revenue and profit growth in the new fiscal year.

Page 15 and Page 16 show full year guidance and segment guidance. The P&L has not been revised since the last time, and only major KPIs have been updated based on the Q3 results. Since the announcement of previous -- since the announcement of the previous financial results, we have received many opinions that the guidance for the second half may be too conservative and fully understand that we expect a further upward revision of the full year guidance based on the full year progress rate in today's Q3 financial results. Although it is difficult to achieve year-on-year increase in operating profit excluding special items in the second half, we will strive to at least exceed the result of the previous fiscal year.

The shareholder return on Page 17 is the same slide as the previous one as we have committed to dividend payout ratio of 50%. If net profit exceeds the full year guidance, the year-end dividend will increase accordingly. The materials on the progress of the midterm management plan disclosed at the time of the Q2 financial results show new KPIs and strategic initiatives, which are used for dialogues with investors. We will make every effort to disclose information in a transparent manner in the next full year fiscal results while deferring to the advice and insights we have received.

In this briefing, we also mentioned the contract renewal ratio in March, which is not mentioned in the slides. You can also check the Factbook, which is published information, and today's first would be posted on our company website without delay.

That's all for my explanation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]