HIP CORPORATION Q3 FY2025 earnings call

• Company Overview & Strategic Transformation

  • Founded in 1995, HIP is headquartered in Yokohama with 9 sales offices nationwide and 852 total employees. It specializes in technical services for mechanical design, electrical/electronic design, and system design for Japanese manufacturing clients.
  • The company is transitioning from a technical staffing firm to an organization focused on supporting engineers' career formation, aiming to become a 100-year company following its 30th anniversary, aligned with the founding mission of being "a company for engineers" that enables lifelong careers as technical professionals.
  • HIP's core competitive strengths include: specialization in the high-value development and design segment, cross-industry experience for engineers to support skill growth, a customer base that avoids over-reliance on any single industry or client, and a balanced customer portfolio that reduces business volatility.

• Operational & Financial Performance Trend

  • Over the past 10 years (2014 to 2024), total revenue grew approximately 20%, operating profit margin rose to nearly 10%, and the company recovered quickly from a temporary COVID-19 pandemic decline.
  • The number of technical engineers grew approximately 25% compared to 2014, current operating rate stands at 94.1%, hourly technical rates increased 12% compared to 2014 as clients recognize engineer performance. Daily operating hours and annual operating days have declined moderately due to work style reform and paid leave promotion, but operating hours have now leveled off.
  • HIP's revenue is calculated as the product of 5 factors: number of engineers, operating rate, hourly technical rate, daily operating hours, and annual operating days. 78% of revenue goes to engineer-related costs (salaries, training, activity costs), 10-13% goes to selling, general and administrative costs. HIP cannot easily reduce human costs (and aims to raise them), so it focuses on improving SG&A efficiency to increase overall profitability.

• Recent Operational Initiatives

  • Adjusted hiring strategy: reduced new graduate hiring and increased mid-career hiring because new graduate hiring costs have risen to match mid-career hiring costs, and continuous year-round education is more efficient than bulk new graduate onboarding. Mid-career hires with engineering backgrounds looking for a skill change receive the same foundational training as new graduates, and retention rates between new graduates and mid-career hires are similar.
  • Overhauled the education system: top-performing veteran engineers now serve as full-time trainers for new and junior engineers, prioritizing long-term talent cultivation over short-term revenue from client projects.
  • Added new support systems: a new growth-focused evaluation system, internal SNS to build peer connections between engineers, a mentorship program aligned with the "mental welfare" founding principle, and updated branding including a website refresh to improve recognition for hiring.
  • Maintains a stable shareholder return policy: targeting a 50%+ payout ratio, with a planned 51 yen per share dividend for the 2025 March fiscal year, and continues to pursue progressive dividends for long-term shareholders.

By technical service field: Mechanical accounts for 40%, Electrical/Electronics accounts for 20%, Systems accounts for 40%. By customer industry: Transportation equipment accounts for ~30%, Electrical/electronic and semiconductor related accounts for 13%, Information communication and precision equipment related accounts for 17%, Machinery related accounts for 14%, Information processing and software related accounts for 24%. For the third quarter of the 2025 March fiscal year, total revenue was 4.49 billion yen, with a year-over-year increase of less than 5%. Recurring profit increased 9% year-over-year. For the full year, HIP expects total revenue of 5.88 billion yen and recurring profit of 0.55 billion yen, with a projected operating rate of 94.7%, up 0.6 percentage points year-over-year, and projected daily operating hours of 8.67 hours.

• Medium-term operational targets: 1,000 total technical engineers (current headcount is ~800), which is manageable under HIP's existing sales and management structure, will improve operational and management efficiency, and increase client proposal capabilities; 95% annual operating rate, which is considered the optimal sustainable level that accounts for required training time for new hires and project transitions; 10% operating profit margin, which is viewed as the appropriate level for stable long-term growth.
• Full-year 2025 March fiscal year guidance is maintained from the initial announcement: 5.88 billion yen in total revenue and 0.55 billion yen in recurring profit, with the company on track to meet these targets on the back of continued strong demand for technical engineers and client acceptance of technical rate increases to cover wage hikes.
• HIP expects sustained long-term growth beyond 2025: manufacturing clients continue to have strong development investment demand and increasing need for external technical support, so HIP will continue investing in talent and expects steady growth. A Prime market listing is a long-term option, but the company will first focus on increasing corporate value before evaluating any potential move.
• Wage strategy: HIP implemented a 4.6% wage increase in the current fiscal year, and is negotiating with clients to raise contract rates accordingly; the company plans to implement a similar wage increase next fiscal year, and is currently negotiating these rate increases with clients.

• Over-reliance on a single industry or client is mitigated through HIP's diversified customer portfolio, but the company acknowledges that uneven industry cycles can still lead to varying client acceptance of technical rate increases, with some industries facing more difficult negotiations than others.
• Rapidly rising new graduate hiring costs have forced a shift in hiring strategy, creating execution risk as HIP scales up mid-career hiring for the first time at its current size.
• Pulling top veteran engineers off client projects to serve as full-time trainers creates a short-term opportunity cost in terms of foregone revenue, requiring long-term cultivation to see returns from the new education model.
• Compared to larger peer technical staffing firms, HIP has had slower revenue growth historically, as it has prioritized sustainable growth aligned with its founding mission over rapid expansion into non-design business areas or unsustainable bulk hiring.

Q: Why does HIP have many engineers who rotate across multiple clients and industries instead of specializing in one sector? Is engineer input on their next project placement accommodated? / A: Most engineers join HIP specifically because they want diverse design experience to expand their skills. Rotating across different clients and industries exposes engineers to different design methodologies, materials, and approaches, which lets them grow their skills tangibly. Sales staff regularly check in with engineers about their career goals, and actively place engineers in projects that match their stated skill growth interests, such as moving from metal design to resin design.

Q: Why did HIP reduce new graduate hiring and increase mid-career hiring targets this year? Do mid-career hires have better retention rates than new graduates? / A: New graduate hiring costs have risen sharply in recent years, and are now comparable to mid-career hiring costs, eliminating the former cost advantage of bulk new graduate hiring. HIP restructured its education system to support continuous year-round training, which is more efficient when combining new graduates and mid-career hires, and there is a large pool of mid-career workers with engineering backgrounds who want to switch into design roles. At HIP, retention rates are similar between new graduates and mid-career hires, because all hires join explicitly to work in design, so there is little misalignment on core job expectations regardless of hiring cohort.

Q: How does HIP approach technical rate negotiations to cover wage increases, given the current national wage hike momentum? / A: The general industry wage hike momentum has made clients much more receptive to rate increase requests, so negotiations now center around the size of the increase rather than whether an increase will happen. Some industries with tighter margins are less receptive to larger increases, so increases vary across clients. HIP generally passes along wage increases to clients with a small markup, matching the expectation that a ~4.5% wage increase leads to a 5-6% rate increase request.

Q: HIP's revenue growth is slower than peer technical staffing firms; how will you improve growth to close the gap? / A: HIP has prioritized steady sustainable growth over rapid expansion, and has avoided chasing headcount growth with low-quality hiring or expanding into non-design areas that conflict with its founding mission and engineer values. Going forward, HIP will improve its external outreach to highlight its focus on engineer career growth, attract more qualified engineers, and grow revenue by raising engineer value to support higher technical rates while maintaining high-quality targeted hiring and improved education to cultivate skilled engineers.