Great writeup. Any thoughts on the recent drop after earning release? The results seemed pretty good to me. Maybe it's the slightly lower revenue growth due to seasonality that Mr. Market didn't like?
The reason for the drop is because it became clear that the company would not be able to meet its full year operating profit (EBIT) guidance. In the past two fiscal years, the company reached about 70% of the full year EBIT guidance in nine months, whereas this year it is 65%. I don't have an opinion on whether this disappointment is worth -16% share price yet.
Why the EBIT shortfall? The drag was HR Solutions segment which is mainly Talent Palette, its profit driver. For the full year ending September 2024, the company targeted Y4.8bn of EBIT (before corporatewide expense adjustments) for the segment: Y4.5bn for Talent Palette and Y0.3bn for Growup, which it acquired in 2022. The large shortfall was in Growup, which booked -Y0.1bn of EBIT for nine months (vs. target of +Y0.3bn for full year). But Talent Palette was also a bit disappointing. The business booked Y2.9bn of EBIT or 65% of the full year target; in the past two fiscal years, it achieved 70%. Even considering the seasonality, in Q4 I estimate the business will earn up to Y1.2bn of EBIT, hence full year EBIT will be ~Y4.1bn.
Here is the puzzle. As you pointed out, revenue was not wide off the mark, both consolidated and Talent Palette. Talent Palette booked Y6.3bn of revenue in nine months, 71% of the business' full year target and also in line with the historical trend. To me, this indicates that the company mismanaged the cost. Did they hire too many people with hopes of realizing a higher revenue growth, only to fall short? Is it really the marketing expense (the company commented that marketing expense is high in Q3), though the disclosed marketing expense does not look outrageous (Y626mn for the quarter vs. baseline of Y450-500mn)?
As of now, I am afraid that the company is struggling with a slower-than-expected revenue growth (this will change my thesis) and am getting in touch with the company for clarification. On the other hand, the company announced an interesting acquisition at the end of July (acquiring a profitable vertical market software company with growing revenue for less than 10x P/E) and I hope to get color on that. However, the company's investor relations has historically not been informative.
Great writeup. Any thoughts on the recent drop after earning release? The results seemed pretty good to me. Maybe it's the slightly lower revenue growth due to seasonality that Mr. Market didn't like?
Thank you for your comment.
The reason for the drop is because it became clear that the company would not be able to meet its full year operating profit (EBIT) guidance. In the past two fiscal years, the company reached about 70% of the full year EBIT guidance in nine months, whereas this year it is 65%. I don't have an opinion on whether this disappointment is worth -16% share price yet.
Why the EBIT shortfall? The drag was HR Solutions segment which is mainly Talent Palette, its profit driver. For the full year ending September 2024, the company targeted Y4.8bn of EBIT (before corporatewide expense adjustments) for the segment: Y4.5bn for Talent Palette and Y0.3bn for Growup, which it acquired in 2022. The large shortfall was in Growup, which booked -Y0.1bn of EBIT for nine months (vs. target of +Y0.3bn for full year). But Talent Palette was also a bit disappointing. The business booked Y2.9bn of EBIT or 65% of the full year target; in the past two fiscal years, it achieved 70%. Even considering the seasonality, in Q4 I estimate the business will earn up to Y1.2bn of EBIT, hence full year EBIT will be ~Y4.1bn.
Here is the puzzle. As you pointed out, revenue was not wide off the mark, both consolidated and Talent Palette. Talent Palette booked Y6.3bn of revenue in nine months, 71% of the business' full year target and also in line with the historical trend. To me, this indicates that the company mismanaged the cost. Did they hire too many people with hopes of realizing a higher revenue growth, only to fall short? Is it really the marketing expense (the company commented that marketing expense is high in Q3), though the disclosed marketing expense does not look outrageous (Y626mn for the quarter vs. baseline of Y450-500mn)?
As of now, I am afraid that the company is struggling with a slower-than-expected revenue growth (this will change my thesis) and am getting in touch with the company for clarification. On the other hand, the company announced an interesting acquisition at the end of July (acquiring a profitable vertical market software company with growing revenue for less than 10x P/E) and I hope to get color on that. However, the company's investor relations has historically not been informative.
Really appreciate the details you provided!