Core Concept Technologies Inc. Q4 FY2024 earnings call

Current Growth Status and Root Cause of Slowdown

• Full year 2024 delivered double-digit top and bottom line growth exceeding prior downward-revised guidance, with revenue and operating profit slightly beating the revised forecast, though gross profit came in slightly below plan. Growth pace has slowed over 2023 and 2024, with the slowdown primarily driven by underperformance in new customer revenue, while existing customer revenue continued to grow steadily.
• Key structural causes of the new customer growth slowdown: 1) High growth post-IPO led to a backlog in training and hiring for core project roles (project managers, architects), with insufficient supply of skilled full-time core staff to support new project growth. 2) Senior management had to spend significant time on-site to ensure project quality, leading to inflated internal management workloads and leaving insufficient time for senior leadership to focus on new business development. 3) The existing siloed business division structure, where each division handles end-to-end sales and delivery for its own projects, limits cross-selling across divisions to existing large customers, creating a structural cap on lead generation.

Strategic Operational Reforms

• DX Support Reforms: The company created a new central "Honjin" business division to drive cross-selling of all company offerings to existing customers, building on existing trust relationships to generate new leads from existing clients. The company also reallocated talent across the business: new customer-focused divisions received high-priority placement of experienced ready talent, while existing customer follow-on projects pair experienced leaders with new graduate hires to enable training while delivering work, creating a balanced growth and talent development structure. Improved cross-selling will also enable better lead reciprocity with solution partners, supporting increased new lead generation from partner networks.
• IT Personnel Sourcing Support Reforms: To address growth slowdown and improve sales productivity, the company is removing non-sales workload from sales teams, who currently spend 45% of their time sourcing candidates and partner firms and 20% of their time on post-contract onboarding and engineer support (65% of total time non-direct sales work). A new central Partner Relations team at head office will handle all candidate/partner sourcing, and on-site full-time engineers will handle onboarding and ongoing support for placed engineers. This shift is projected to triple sales team time available for client negotiations, double to triple proposal volume, and double per-salesperson order intake, while also improving support quality.

Talent and PM Capacity Building

• The company targets adding 10 to 13 new project managers annually: 2 to 3 will be hired externally as ready experienced talent, and 8 to 10 will be promoted internally from new graduate hires after 2 to 5 years of on-site experience. This pace matches the company's current size and is feasible with current hiring plans, and will free senior management from internal management work to focus on growth.

M&A and Group Collaboration

• The company's core M&A strategy of expanding the national "Ohgi" IT engineer network via regional acquisitions remains unchanged, but the company will now prioritize targets with 1 billion yen or more in annual revenue to improve post-acquisition integration (PMI) efficiency and better drive group growth. Collaboration with existing group companies (PG System, Denso, Pro-X) is progressing well on large DX and personnel sourcing projects, enabling higher local engineer rates, stronger internal control, and higher gross profit as third-party contractor relationships are converted to in-group collaboration.

Capital Return and Capital Policy

• Starting in fiscal 2025 (payout in March 2026), the company will introduce a progressive dividend policy, with a target payout ratio of 20% to 30% and planned 19 yen per share dividend for FY2025. The company will also conduct flexible opportunistic share repurchases to support shareholder value. The company is targeting a move to the Prime Market from the current Growth Market, having already met the Prime listing requirements of 5 billion yen in net assets and 25 billion yen in market capitalization.

Core Concept Technology operates two primary service segments: 1) DX Support: Full year 2024 gross profit margin declined 1.9 percentage points year-over-year to just below 40%, driven by missed sales targets and unprofitable results from a small number of large projects. In Q4 2024, DX Support revenue declined quarter-over-quarter, due to the unprofitable large project impact plus intentional pullback from low-margin unviable follow-on projects to isolate negative impacts to 2024 results. 2) IT Personnel Sourcing Support: IT Personnel Sourcing Support revenue grew quarter-over-quarter in Q4 2024, though overall segment growth has slowed as the business has scaled. All other segments performed roughly in line with plan for the full year. Full year 2024 consolidated results: total revenue of 19.166 billion yen, up 20.4% year-over-year; operating profit of 2.007 billion yen, up 15.1% year-over-year; operating margin of 10.5%. Q4 2024 revenue declined quarter-over-quarter, with operating profit also falling sequentially, though the company contained year-end bonus accruals to offset lower-than-planned revenue and maintain appropriate profit levels. Depreciation and goodwill amortization totaled 50 million yen in Q4 2024, consisting primarily of goodwill from past M&A activity and depreciation on prior software investments.

• Fiscal 2025 (FY2025) organic growth guidance (no new M&A included) calls for 21.8 billion yen in total revenue, 5.9 billion yen in gross profit (27.1% margin), 2.3 billion yen in operating profit, 1.576 billion yen in net profit, and 10.6% operating margin. Revenue growth is forecast at 13.7% year-over-year, down from 20.4% in FY2024, with a planned "low first half, high second half" growth pattern: 9.5% revenue growth in H1 as organizational restructuring is implemented, and 17.6% growth in H2 as reform efforts drive growth. The company targets 610 total group employees at the end of FY2025, with plans to hire ~50 new graduates and 33 mid-career hires, focused on experienced management and project manager talent. • The company projects 4 billion to 5 billion yen in cumulative operating cash flow from FY2025 to FY2027, allocating 1.5 billion to 3.5 billion yen to M&A and growth investment and 1.5 billion to 2.5 billion yen to shareholder return, with sufficient capacity for both growth investment and shareholder returns while maintaining disciplined financial strength. • Medium-term, after implementing the announced operational reforms, the company targets returning to 15%+ annual organic sales growth starting in 2026, with faster growth possible if M&A is included. The company targets restoring DX Support gross margin to 40%+ as soon as possible via improved project management and PM capacity building. The company will maintain a target of 30%+ ROE, which it has already achieved.

• The company has experienced slowing growth over the past two years driven by structural issues: insufficient core project talent development, overstretched senior management time on internal quality control, and siloed organizational structure limiting cross-selling growth. Failure to successfully implement the planned operational and organizational reforms could mean growth remains below targeted levels. • DX Support has recently experienced unprofitable large projects, and failure to improve project selection and management could continue to pressure segment margins and overall profitability. • IT Personnel Sourcing Support has shown early signs of growth slowdown as it scales, and productivity improvement reforms may not deliver the projected 2x increase in per-salesperson order intake, limiting segment growth.

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