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Edited Transcript of 6098.T earnings conference call or presentation 13-Nov-19 10:59am GMT

Q2 2020 Recruit Holdings Co Ltd Earnings Presentation

Chiyoda-ku Tokyo-to Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Recruit Holdings Co Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Keiichi Sagawa

Recruit Holdings Co., Ltd. - CFO, Senior Managing Corporate Executive Officer & Director

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Presentation

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Keiichi Sagawa, Recruit Holdings Co., Ltd. - CFO, Senior Managing Corporate Executive Officer & Director [1]

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Thank you very much for your time today. My name is Keiichi Sagawa, CFO and Senior Managing Corporate Executive Officer of Recruit Holdings.

First of all, I'd like to talk about Rikunabi DMP Follow service before starting the results presentation.

In relation to this service, Japanese authorities issued an administrative admonishment and an administrative directive to Recruit Career, our group company in the Media & Solutions SBU from August to September. We regret any inconvenience and concern this caused for students who used our Rikunabi service and for shareholders and investors.

Recruit Group takes the protection of personal information very seriously. And as we already announced, we'll implement measures to strengthen our governance in order to prevent recurrences of such issues. The investigations by the regulators are still ongoing, and we will keep you updated regarding any development on this issue.

I will begin with the recent developments in the first half of FY '19. On August 28, 2019, the Board of Directors resolved to conduct a secondary offering of 121.5 million shares of its common stock. The settlement was completed as of September 30, 2019. The purpose of this secondary offering was to provide an opportunity for a number of our shareholders to reduce their holdings in a coordinated manner, and thereby, address the potential impact on our stock price from uncoordinated sales of our shares in the open market.

In addition, we resolved to conduct share repurchases to enhance shareholder returns and to balance the supply and demand of our stock in the aftermarket following the secondary offering.

As of October 31, 2019, we have completed share repurchases totaling approximately 60% of the maximum total purchase amount of JPY 80.0 billion. We intend to purchase the remaining amount, approximately JPY 30.0 billion by November 29, 2019.

Next, I will touch upon the highlights of the first half of fiscal 2019.

Consolidated revenue increased 5.1% to JPY 1,201.2 billion. Adjusted EBITDA grew 14.5% to JPY 177.7 billion. Adjusted EPS grew 15.9% year-on-year to JPY 67.96. All of these hit record highs.

By segment, revenue and adjusted EBITDA grew in the HR Technology and Media & Solutions segment, while those of the Staffing segment decreased as a result of the challenging economic environment, mainly in Europe.

In the HR Technology segment, strong revenue growth continued in the first half of fiscal 2019, up 40.1% in U.S. dollar terms.

From this quarter, HR Technology segment revenue growth will no longer benefit from acquired revenue related to the Glassdoor acquisition as Glassdoor has been consolidated from the second quarter of fiscal 2018.

Staffing revenue for the first half decreased 3.8% year-on-year. However, excluding the negative impact of foreign exchange, revenue decreased 0.6%, almost flat year-on-year.

Next, here are the consolidated financial results for the 3 months of the second quarter of fiscal 2019. Quarterly revenue increased 5.0% year-on-year. Quarterly adjusted EBITDA grew 18.1%, and adjusted EBITDA margin was 14.9%. Adjusted EPS in the second quarter grew 18.5% year-on-year.

I will now explain the 3-month financial results by segment, beginning with the HR Technology segment. Revenue in the second quarter increased 34.8% in U.S. dollar terms. Revenue growth was primarily driven by increased sponsored job advertising against the backdrop of a tight labor market in the United States and Japan.

While strong revenue growth continued in the United States, non-U. S. markets continues to outpace the United States. Also, recruiting solutions, including resume searching, employer branding and placement services are contributing to the revenue growth. However, the business scale is still small.

Adjusted EBITDA margin in the second quarter was 22.9% for the second quarter of fiscal 2019. This was primarily due to the timing difference of investments in sales and marketing expenses.

To accelerate revenue growth, the HR Technology segment will continue to invest in sales and marketing activities and in product enhancement. The timing of these investments will fluctuate on a quarterly basis. As a result, adjusted EBITDA margin for fiscal 2019 is still expected to be approximately the same level of fiscal 2018, plus or minus a few percent, as previously announced.

Next, I will discuss the Media & Solutions segment. Revenue in the second quarter increased 8.3% year-on-year, adjusted EBITDA grew 8.8%, and adjusted EBITDA margin was 25.2%.

First, I will walk through some of the highlights of the Marketing Solutions subsegment in Media & Solutions. Revenue growth in Media & Solutions was mainly driven by the housing and real estate, travel, beauty and other subsegments. In the travel business, revenue in the second quarter increased 20.8% year-on-year, mainly due to increased booking fees on Jalan, which went into effect from April 1, 2019.

In the beauty business, revenue in the second quarter increased 13.8% year-on-year as a result of an increase in the number of beauty salon clients advertising on Hot Pepper Beauty.

The other subsegment includes a number of different businesses, such as automobile and Air BusinessTools, renamed from AirSeries, which is SaaS-based operational and management support services.

Revenue in the other subsegment in the second quarter increased 11.4% year-on-year, mainly due to high demand for Air BusinessTools, especially from SMEs, such as retailers, against the backdrop of a tax hike and the point reward project for consumers using cashless payments initiated by the government beginning October 1, 2019. As a result, second quarter revenue in Marketing Solutions increased 9.7%, and adjusted EBITDA increased 5.2% year-on-year, with an adjusted EBITDA margin of 28.3%.

I will now talk about HR solutions. In the recruiting in Japan subsegment, revenue in the second quarter increased, especially in the placement business in mid-career. As the Japanese labor market remained extremely tight in this environment, the subsegment focused on strengthening its organizational structure. As a result, the second quarter revenue in HR Solutions increased to 6.5% year-on-year, and adjusted EBITDA increased 17.7%, with adjusted EBITDA margin of 27.0%.

Earlier, I referred to Air BusinessTools. While we pursued advertising type businesses in Japan in the past, now we are strengthening the SaaS-type products to be a growth pillar in the Media & Solutions segment in the future, in addition to the advertising business.

As you can see on Slide 9, we have multiple services in Air BusinessTools, including reservation management systems, such as SALON BOARD, supporting marketing activities; and POS function, AirREGI, that grew strongly in terms of the number of accounts.

Going forward, we will focus on expanding the number of transactions through other services, including AirPay, a payment function; and AirSHIFT, an attendance management tool to support efficiency and enhancement of non-mainstay operations of SMEs and retailers.

As to these various different business tools that we introduced, the total number of SaaS accounts has grown quickly with a 5-year growth rate of 31% that already exceeded that of our Classified Ads account. We aim to increase the total number of SaaS accounts by attracting new clients to these Air BusinessTools.

Thanks to the recent promotion of cashless payments by the government, growth in the number of accounts for payment service, AirPay, in particular, has been strong. The chart on Page 11 shows the trend of number of AirPay accounts. Please allow me to refrain from giving detailed figures. But recently, the number of accounts has increased considerably by more than 80% in the 6 months from the end of March to the end of September 2019, growing by 1.8x, a significant growth.

Even after the consumption tax hike enforcement on October 1, 2019, we are continuing to see high demand for new AirPay accounts from SMEs, and we expect this demand to continue for some time.

Going forward, we aim to grow our sales business, mainly with new clients who have not previously utilized our advertising services by using AirPay and AirREGI, which has approximately 450,000 accounts already as a driver, while encouraging them to add other services such as AirSHIFT, so to grow the total number of accounts and to strengthen the solid foundation of SaaS business for the future growth.

Finally, the Staffing segment. Revenue in the second quarter were down by 2.6% year-on-year, while adjusted EBITDA was up by 5%. Adjusted EBITDA margin was 6.7%. Excluding the negative impact of ForEx. Segment revenue in the second quarter increased by 1.7% year-on-year.

As to the Japanese operations, revenue in the second quarter increased by 5.5% year-on-year as the Japanese labor market remained tight. Adjusted EBITDA was up by 20.4% year-on-year as a result of the absence of the one-off expenses related to abnormally high holiday pay in the second quarter of last year, affected by the Revised Worker Dispatching Act in Japan. Adjusted EBITDA margin was 8.2%.

Now, the revenue of Overseas operations in the second quarter declined by 8.0% year-on-year, mainly due to an uncertain outlook for the European economy. Adjusted EBITDA was lower by 8.7% year-on-year, with adjusted EBITDA margin of 5.5%, which is flat year-on-year.

With the current uncertain economic environment in certain European countries, the Staffing segment will focus on generation of its adjusted EBITDA margin through optimizing personnel allocation and further reducing administrative costs, while continuing to focus on utilizing the Unit Management System.

Next, regarding the consolidated financial guidance for the full year of FY '19, we made no changes from the announcement on May 14, 2019. Year-to-date performance has trended well, but as I mentioned, we plan to invest heavily to drive future growth, mainly in the HR Technology segment, while we expect uncertain economic outlook for the Overseas Staffing business to continue.

So as a result, we foresee our adjusted EBITDA to be within the range of JPY 310 million to JPY 330 billion for FY '19, as we previously disclosed.

Let me also inform you that the Board of Directors resolved today on the payment of interim dividends of JPY 15 per share, in line with our initial expectations.

As to the segment financial guidance, no changes were made from the first quarter of FY '19.

This concludes my presentation. Thank you for your attention.