Recruit : Transcript

Recruit Holdings

FY2022 Consolidated Results

Slide1-01

Idekoba: Hi, I'm Deko. I will discuss our financial results for FY2022.

Slide1-02

In FY2022, demand for hiring that had increased dramatically due to the COVID-19 pandemic began to normalize, especially in the US. While still at historically high levels, hiring demand has begun to decline very quickly as concerns about an economic slowdown increase.

We saw a similar trend occur in Europe, but with a time lag. However, both revenue and adjusted EBITDA reached record highs, partly due to the weak yen and the strong dollar.

Net income attributable to owners of the parent was down 9.1% from the previous fiscal year. This was mainly due to a one-time charge associated with the recent headcount reduction in HR Technology in preparation for the anticipated economic downturn, as well as impairment charges in other segments. Excluding the impact of these one-time impacts, adjusted net income increased slightly.

Slide1-03

With regard to our full-year financial guidance, we expect a decrease in both revenue and adjusted EBITDA, due to further uncertainty in the global HR matching market, especially in the U.S. and Europe. Because of this uncertainty it is currently very difficult to forecast revenue, especially in the U.S. and Europe for this fiscal year.

We intend to provide guidance when it becomes reasonably feasible to do so.

At this moment, still under this very uncertain situation, we believe we can make some reasonable forecasts for Q1. With the assumption that there will not be a sudden slowdown in the economic environment, we forecast consolidated revenue in Q1 of 800 to 830 billion yen, adjusted EBITDA will be 140 to 160 billion yen and adjusted EBITDA margin will be in a range of approximately 17 to 19 percent.

Jun Arai will discuss the details of the consolidated and segment results for FY2022 and the current assumptions for FY2023 for each segment.

For more information about the global HR market outlook for FY2023, please watch my presentation in the Simplify Hiring video.

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Arai: Thank you Deko.

I'm Jun Arai.

I will start with a review of the consolidated results of FY2022, followed by the results and outlook for each segment.

Slide1-06

Deko explained the consolidated revenue and adjusted EBITDA results earlier.

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Operating income decreased by 9.1% to 344.3 billion yen, primarily due to one-time charges in each segment in Q4. Operating income before other operating income or expenses, in other words Non-GAAP operating income, which excludes the following one time charges in each segment, decreased by 1.5% to 393.6 billion yen.

HR Technology recorded restructuring charges of 17.6 billion yen related to employee severance benefits and other associated costs related to its recently announced workforce reduction.

HR Technology also recorded an impairment loss of 13.9 billion yen related to a planned office consolidation in order to improve efficiency.

In addition, impairment losses of 17.1 billion yen were recorded for software and other assets in Matching & Solutions and Staffing, as well as for Goodwill in Staffing.

Profit attributable to owners of the parent is shown as Deko explained earlier.

Regarding the consolidated balance sheet as of March 31, 2023, net cash was 842.0 billion yen, subtracting interest-bearing debt of 35.2 billion yen from cash and cash equivalents of 877.3 billion yen. Net assets were 1.63 trillion yen, and ROE for FY2022 was 18.0%.

The per share dividend amount is 11 yen for the second half and 22 yen for the full year.

The capital allocation priorities remain unchanged, and these are: investing in product development and marketing expense to drive growth in our existing businesses, continuous payment of stable per-share dividends, strategic M&A mainly focused on HR Technology in the HR Matching Market, and implementing a share repurchase program, subject to the capital markets environment and the outlook of the Company's financial position.

We expect to disclose full year FY2023 guidance when it becomes reasonably feasible to do so.

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Our global HR matching business consists of HR Technology, HR Solutions in Matching & Solutions, and Staffing.

Under our long-term strategy "Simplify Hiring," since FY2020 with the leadership of HR Technology, we aim to enhance the quality of matching significantly in the global HR matching market. We have increased the scale of our global HR matching businesses to approximately 1.7 trillion yen in FY2022, a 3-year CAGR of 20.9% amid the expansion of the global HR matching market. In order to evolve and expand our HR matching businesses, we will continue to promote further collaboration among our business segments.

Furthermore, in the Marketing Solutions area of Matching & Solutions, revenue in FY2022 recovered to the pre-pandemic level. Going forward, under the long-term strategy "Help Businesses Work Smarter," we will continue to further refine existing businesses while steadily developing the SaaS businesses and the fintech services over the long term.

Next, I will explain the results and outlook of each segment.

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Hiring demand continued to normalize globally and, as a result, US dollar revenue for HR Technology in Q4 of FY2022 was approximately 1.89 billion dollars, a decrease of 6.7%.

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Indeed's total job openings in the US in Q4 were down approximately 13%, while paid job ads were down approximately 30%.

Adjusted EBITDA margin in Q4 improved by 2.4 percentage points quarter over quarter to 30.5%, but decreased by 2.3 percentage points year over year as personnel costs grew more than revenue, due to the aggressive hiring in the first half of this fiscal year and despite implementing multiple cost control measures and savings initiatives, including reductions in advertising expenses.

In FY2022, full year US dollar revenue was 8.24 billion dollars, an increase of 7.7%, or 11.4% on a constant currency basis.

By region, revenue in the US increased by 4.9% to 6.0 billion dollars. Revenue outside of the US increased by 16.1% on a US dollar basis, or 30.8% on a constant currency basis.

Revenue per sponsored job in the US for FY2022 increased by approximately 7% on a US dollar basis.

In light of the changing business environment, we paused hiring in the second half of this fiscal year and significantly reduced operational costs, including promotion and advertising expenses.

In FY2022, the total amount of sales commission, promotion expenses and advertising expenses were kept to approximately 13% of revenue. Employee benefit expenses and service outsourcing expenses totaled approximately 50% of revenue, as the expense increased significantly in the second half of the fiscal year due to aggressive recruiting efforts during the first half of the fiscal year.

As a result, Non-GAAP operating income margin was approximately 23%.

Adjusted EBITDA after adding back depreciation, PPA amortization and share-based compensation expenses was 342.3 billion yen, and adjusted EBITDA margin was 30.7%, exceeding the revised outlook announced on February 13, as we implemented appropriate cost control measures in Q4.

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As for the FY2023 outlook, on a US dollar basis, in Q4 of FY2022, revenue decreased by 6.7% year over year or 4.4% quarter over quarter. The declining trend continued in April as revenue decreased by approximately 12% to about 625 million dollars, an approximately 4% decline from March.

In Q1, assuming no sharp deterioration in the economic environment, revenue on a US dollar basis is expected to decline approximately 13.5% to 17.5% compared to Q1 FY2022 when the market had been expanding, or flat to down approximately 5% quarter over quarter.

Adjusted EBITDA margin is expected to be approximately 33% to 36% as a result of the previously mentioned cost reduction measures.

Revenue and adjusted EBITDA in HR Technology is expected to decrease in FY2023, however, we are not providing a full year revenue outlook for the fiscal year at this time because of the high degree of uncertainty regarding the macroeconomic environment and the speed with which the HR matching market will shrink, especially after this coming summer.

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HR Technology has implemented cost reduction measures since the second half of FY2022, including the workforce reduction, which as announced on March 23, is expected to reduce employee benefit expenses by approximately 500 million dollars on an annualized basis.

The total amount of share-based compensation in FY2023 is expected to be slightly above 700 million dollars.

We will continue to control costs flexibly by monitoring the business environment while balancing with investments in our long-term strategy. However, we don't expect to maintain the level of forecasted Adjusted EBITDA margin in Q1 throughout the fiscal year.

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Revenue in Matching & Solutions increased by 15.5% to 760.6 billion yen, and recovered to exceed pre-pandemic FY2019 revenue of 755.9 billion yen.

Revenue in Marketing Solutions increased by 13.9% to 451.5 billion yen as revenue in all verticals increased. Revenue in HR Solutions increased by 19.3% to 297.4 billion yen as revenue in the job advertising service and the placement service both increased.

In FY2022, the total amount of sales commission, promotion expenses and advertising expenses of Matching

• Solutions were approximately 28% of revenue, and employee benefit expenses and service outsourcing expenses totaled approximately 40% of revenue.

As a result, Non-GAAP operating income margin was approximately 9%, adjusted EBITDA after adding back depreciation, PPA amortization and share-based compensation expenses was 109.8 billion yen, and adjusted EBITDA margin was 14.4%.

Adjusted EBITDA margin for Marketing Solutions, which includes the up-front investment phase of the SaaS business, was approximately 25% and adjusted EBITDA margin for HR Solutions which aggressively invested in marketing activities and strengthening workforce was approximately 12%. [unaudited internal measures]

Total overhead costs in Matching & Solutions, which include headquarters related expenses and expenses to upgrade the technology infrastructure and core systems, were approximately 5% of revenue. (unaudited internal measures)

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For the FY2023 outlook for Matching & Solutions, we estimate an increase in both revenue and adjusted EBITDA, based upon the assumption that the business environment in Japan will continue and will not experience a sudden slowdown.

While we continue to invest for future growth, we will be prepared to respond quickly to the potential impact on the Japanese economy that may arise from the potential economic recession in the US and in other countries around the world.

Based on this assumption, we expect revenue for Q1 in Marketing Solutions to increase by approximately 8% and to increase by approximately 10% in HR Solutions, and adjusted EBITDA margin to be approximately 23%.

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For the full year, we expect revenue in Marketing Solutions to increase by approximately 4% and in HR Solutions by approximately 6%.

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We believe in FY2023 Marketing Solutions can achieve adjusted EBITDA margin of approximately 28% by continuing to control costs appropriately, while making investments for future growth including marketing activities.

HR Solutions is expected to achieve an adjusted EBITDA margin of approximately 22% mainly by controlling advertising expenses compared to last year's level, when we invested aggressively.

We will continue to invest in technology infrastructure and core systems in FY2023.

Considering all of this, we expect adjusted EBITDA margin for FY2023 in the segment to be approximately 20%.

We will prioritize investments and scrutinize costs, while being prepared to act flexibly in an uncertain business environment.

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Revenue in Staffing was 1.58 trillion yen, an increase of 15.0% due to increased demand for temporary staff globally. Adjusted EBITDA margin was 6.5%.

For Japan, revenue increased by 13.1% to 684.1 billion yen driven by an increase in the number of temporary staff on assignment due to increased demand, and adjusted EBITDA margin was 8.2%.

Revenues in Europe, US, and Australia, were 430.8 billion yen, 273.0 billion yen, and 197.1 billion yen respectively in each region, an increase of 16.5% in total or 3.7% on a constant currency basis. However, demand slowed in the second half of FY2022 in some areas of Europe and the US.

Adjusted EBITDA margin was 5.2%

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For the outlook for Staffing in Q1 of FY2023, revenue in Japan is expected to increase by approximately 12%, based upon the assumption that a rapid change in the business environment will not occur.

For Europe, US and Australia, we expect revenue to decrease by approximately 8% as the downward trend in revenue since the second half of the last fiscal year continues.

Adjusted EBITDA margin is expected to be approximately 6%.

For the full year of FY2023, revenue in Japan is expected to increase by approximately 9% year over year, based upon the assumption that the business environment in Japan will continue and will not experience a sudden slowdown.

For Europe, US and Australia, although we expect revenue will decrease in FY2023, but because of the uncertainty in the labor market environment and its impact to our businesses in Europe and the US, we have determined that we will not provide a full-year segment revenue outlook at this moment.

Regarding profitability, we will continue to promote operational efficiency and expect adjusted EBITDA margin in Staffing segment to be approximately 6%.

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