Recruit : Transcript for Earnings Results Call

Recruit Holdings Q4 FY2022 Earnings Call

May 15, 2023

Shen: Welcome to the Recruit Holdings FY2022 earnings conference call.

This call is simultaneous translation of the original call in Japanese and translation is provided for the convenience of investors only.

I'm Mizuho Shen, group manager of Investor Relations and Public Relations and joining me today are, Hisayuki Idekoba, Representative Director, President and CEO, Yoshihiro Kitamura, Managing Executive Officer, Matching & Solution Business, and Junichi Arai, Executive Officer, Corporate Planning Division

The first 30 minutes at this call will be the Fireside Chat among the three participants and the latter half hour will be a QA session.

Please note that today's session, including the QA, will be posted on our IR website later today.

Please refer to the earnings release, FAQ, and four presentations regarding the full-year financial results and our three management strategies, available on our IR website, which are Simplify Hiring, Help Businesses Work Smarter, and Prosper Together.

Although our COO, Ayano Senaha, is not participating today, we will have a separate event to give an overview on progress of our ESG strategy, Prosper Together on July 4. Details will be provided as soon as possible.

Now I'll turn the call over to Jun.

Arai: Thank you very much. First I have a few questions for you, Deko. How do you plan to navigate the near-term challenging economic environment? Any measures you have in mind?

Idekoba: It's all about "preparing for the worst and doing the best we can". As you know, the global HR matching business is heavily impacted by the economic environment. Therefore it's very important to continue investing for the future and improving the efficiency of our business, while conservatively assuming a downturn followed by a period of economic stagnation.

Arai: Thank you. In the first half of FY2022, you hired aggressively in HR Technology, and then reduced the workforce at the end of the fiscal year. There was such fluctuation during one fiscal year, and some have pointed out that it was an error in management decision. Can you please explain the sudden change in the business environment, changes made in the business operating structure, and executions of multiple actions?

Idekoba: Yes, historically speaking, the tight job market has shown gradual improvement over the past year as assumed, the current rate of decline is concerning. However, in comparison to the 2008 and 2009 recessions, where approximately 2.7 million jobs were lost over a two-year period, the number of jobs in FY2022 alone has declined by around 2.5 million. It has been challenging to predict the speed of this decline.

It was also difficult to predict that companies' willingness to spend on hiring would decline at a rate faster than the decline in job openings. Based on such rapid change, we paused hiring in our HR Technology business in October of last year, and in March we announced a workforce reduction. We are currently working to further optimize organizational efficiency and productivity.

Arai: Thank you. Our policy for the past few years has been to disclose financial guidance in the beginning of the fiscal year. Why not this year? What's so different this year compared to previous years?

Idekoba: We are managing our business on the assumption that a recession is likely to come this fiscal year. However, to forecast the depth and length of the recession is nearly impossible and the degree of uncertainty

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is so different compared to the same time last year. We intend to provide fiscal year guidance again when the outlook becomes clearer.

Arai: Okay. For this year, FY2023, what kind of business environment should we expect to see a revenue decline of, let's say, 20% for HR Technology?

Idekoba: As I mentioned earlier, from 2007 to 2009, the number of US open jobs fell 2.7 million from a peak of 5 million. Back then, the leading US job advertising company at the time, saw its revenue drop by about 30%, despite having long-term contracts with employers.

Indeed's business model is not based on long-term contracts with employers, therefore, the correlation between the number of jobs and revenue is much stronger in the short term, leading to the potential for significant fluctuations in revenue. Therefore, a revenue decline of 20% or more in FY2023 is possible, depending on the severity and timing of the downturn.

Arai: If the revenue of the HR Technology business were to decrease by 20%, what would be the level of the adjusted EBITDA margin?

Idekoba: Given the recent cost reduction measures, and assuming we maintain our current cost structure, we should be able to achieve mid 20% 's adjusted EBITDA margins for the full year. However, there is a possibility that it may fall below that level in the short term during a rapid economic deterioration.

Arai: If the business environment deteriorates further than the worst-case scenario you mentioned earlier, will you implement another headcount reduction or further cost-cutting measures in the HR Technology business?

Idekoba: We are managing our business under the assumption that a recession will come in this fiscal year. For the time being we will not resume hiring activity, but we are expecting the decline of headcount through attrition. But having said that, a sudden change in the environment could happen. We will continue to manage our business wisely and will consider all options if conditions are worse than our expectations. Even then, the recession will impact all companies in the HR industry, including our competitors, and compared to other competitors, we have a relatively strong balance sheet to survive and hold ample cash and minimal debt.

Arai: I see. So changing the question, you said that revenue generated per successful hire through the HR Technology business is less than 1% of the annual base salary of the candidate last year. In the recovery and expansion period after a recession, will it be possible for the rate to double or even triple? In that case, what do you think will happen to revenue and adjusted EBITDA margins?

Idekoba: Recruiting agencies and headhunters charge about 25% to 30% or even more of a candidate's annual base salary as a performance fee. We are not immediately aiming for that, but if we add more value to employers' recruiting processes through advancing technology and improving matching efficiency, we can possibly get 1.3%, 1.5%, or 2%, for example. We will continue running tests to achieve this goal.

If these tests succeed, we will continue to make upfront investments for the next phase of growth and challenges.

I believe many of the most successful technology companies in the world are able to balance mid to long-term growth rates and healthy margins. As a growing technology company, we are also committed to growth rates and margin, and therefore, if mid to long-term growth rates were to slow, we would plan to deliver higher margins, but we are still in the growing phase.

Arai: I see. You mentioned that you will advance the technology and improve matching efficiency. How will the recent advances in AI affect Recruit Holdings? Is the competitive environment going to become tougher?

Idekoba: Recently I have received many questions regarding AI. I think many of you have used ChatGPT and are feeling the evolution of AI. GPT stands for "Generative Pretrained Transformer". The important part is the pre-trained part. In other words, ChatGPT is not using a theory that is significantly different from previous

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machine learning systems, however it is pretrained, in other words, it replies with something that has been trained by some data in advance.

The very important thing here is what type of data is being used to train the system, in other words, without the data to pretrain the system, it doesn't work.

Recruit Group has access to online and offline data that only we possess. For example, in the past year, there were approximately 2.5 billion job applications submitted on Indeed. This uniqueness, the quantity and the quality of the data, that competitors don't possess, is the most important thing.

For example, what are the different skills, attributes and preferences that lead to a hire vs others that end up in rejection? At the same time, we recognize the importance of ensuring that our data and its outputs are safe, accurate, and free from any potential biases. We are confident that our unique data set can improve the quality of matching and I strongly believe in our company's ability to harness the power of machine learning and AI effectively. As long as we possess the most comprehensive and relevant unique data, I am confident that we can maintain our competitive edge in the market.

Arai: Now questions to you, Kitamura san. You talked about the Marketing Solutions business and the HR Solutions business separately under the Matching & Solutions SBU. I understand that the HR solutions aim is to grow using a matching engine. In the mid term, should we expect an increase in revenue or an improvement in margins?

Kitamuta: I would like you to imagine revenue growth in the mid term.

The HR Matching market in Japan is very fragmented and we are partly responsible for that. There are many HR companies specialized to each industry, job type, employment type, and region. Job seekers and employers fit themselves to this situation.

Previously, we also defined the market as "the area our sales people can cover." However, by evolving our matching engine and promoting a self-serve model in which AirWORK ATS enables employers to create job advertisements and automatically post them to the most appropriate matching platform, we believe that we can expand our services regardless of the speciality, sizes, and regions. This will simplify options for individual users and business clients. Therefore, we believe revenue will grow in the medium term.

Additionally, the HR matching business is heavily impacted by the economy, therefore, with the evolution of the matching engine, we will also work on moving away from a labor-intensive model.

Arai: Thank you. For Marketing Solutions, the strength of your existing vertical businesses stands out while you are making upfront investments in new businesses, such as fintech services. From the mid-term perspective, should we expect an increase in margins by improving the efficiency of the operations? Or should we expect an increase in revenue from new businesses but will not lead to an increase in margins due to upfront investment?

Kitamura: In Marketing Solutions, we will build on the strengths of each vertical's existing businesses, while working on collaborating between existing and new businesses.

You may think Marketing Solutions' existing businesses have no connections with the fintech service, but that's not the case. With many matches already being made on the matching platform, it would be convenient for both individual users and business clients if we could not only make reservations but also complete payment at the time of reservation. For us, this would mean an increase of GPV in our ecosystem. While the revenue contribution of fintech services in the mid term may be limited, we believe it can contribute to long term growth.

Similar to HR Solutions, we will work on moving away from a labor-intensive model, and aim to maintain a stable margin while making upfront investments.

Arai: In July last year, you said, "In the mid term, we target revenue of 1 trillion yen and adjusted EBITDA margin in the low 20s % in the Matching & Solutions business. " Do you plan to achieve this target through

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both revenue growth and margin expansion in HR Solutions due to its continued evolution, and an improvement in margins in Marketing Solutions?

Kitamuta: As I explained, we believe that this can be achieved through revenue growth in HR Solutions with the evolution of HR matching businesses, stable revenue growth of Marketing Solutions, and margin expansion in both HR Solutions and Marketing Solutions. For the long term opportunity, I talked about fintech services.

Thanks to early efforts and strategic investments during the post COVID-19 recovery period, we are on track to achieve this mid term target for now.

Arai: I see. Should we rather consider the two subsegments separately and expect different evolutions? Or in the presentation you also touched on collaborations between Marketing and HR Solutions.

Kitamuta: As the matching engine is shared across the Group, I am aware that the time has come for the Group as a whole to consider revising its segments.

Of course, each segment should achieve its target, but I think it is important for the Group as a whole to evolve in line with its strategy and growth.

Arai: Thank you. Lastly, I would like to ask both of you about the specifics of creating new business models and collaborating between segments and businesses. I felt the future. What do you think our company will be like in 5 years? I would like to get some hints that will spark the imagination of the capital market participants.

Kitamura: I will start. The moment you think it's complete, it begins to degenerate, so we always need to keep evolving, and we will continue to do so. Five years from now, I want to be used by more business clients and individual users. By doing so, I believe that the scope of our business will naturally expand. In fact, Air BusinessTools is celebrating its 10th anniversary this year, and we have released a special website that summarizes the voices of many businesses and the history of our products. We hope you will take a look at it and look forward to the next 5 to 10 years.

Idekoba: Looking back at the history of Recruit, we could not imagine transitioning from a magazine business to an internet business. We also could not imagine then evolving into global businesses, and into SaaS businesses. I would like Recruit to continue to be a company that changes and evolves in ways that we cannot imagine today.

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Forward-Looking Statements

This document contains forward-looking statements, which reflect the Company's assumptions and outlook for the future and estimates based on information available to the Company and the Company's plans and expectations as of the date of this document or other date indicated. There can be no assurance that the relevant forecasts and other forward-looking statements will be achieved.

Please note that significant differences between the forecasts and other forward-looking statements and actual results may arise due to various factors, including changes in economic conditions, changes in individual users' preferences and business clients' needs, competition, changes in the legal and regulatory environment, fluctuations in foreign exchange rates, climate change or other changes in the natural environment, the impact of the spread of COVID-19, the occurrence of large-scale natural disasters, and other factors.

Accordingly, readers are cautioned against placing undue reliance on any such forward-looking statements. The Company has no obligation to update or revise any information contained in this document based on any subsequent developments except as required by applicable law or stock exchange rules and regulations.

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