TWOSTONE&Sons Inc. Q3 FY2025 earnings call

Core Financial Results

• Total Q3 revenue: 4.493 billion yen, up 902 million yen (25.1% YoY)
• Operating profit: 81 million yen, flat YoY, as higher growth investment offset revenue expansion
• Selling, general and administrative expenses increased 311 million yen YoY, driven by aggressive hiring and recruiting investments

2025 Fiscal Year Focus Areas & Progress

• Executive and Talent Recruiting + Development: 13 sales/consulting hires and 42 full-time engineer hires in Q3; total annual recruiting volume up 122.7% YoY. New hire onboarding is progressing on plan.
• Existing Business Growth + Strategic M&A Execution: Engineer matching revenue has grown for 24 consecutive quarters to new records. Three consulting firm acquisitions were completed by group subsidiary enableX in Q3, with total M&A target evaluation volume up 23.1% YoY.
• Inter-Group Collaboration + Governance Improvement: Post-M&A integration (PMI) is ongoing, and group company merger evaluations are in progress to improve operational efficiency and governance.

Strategic Positioning & Market Environment

• Management views the accelerating trend of top corporate talent moving from full-time employment to freelance work as a strong tailwind; the company acts as a value-added matchmaker that also provides career consulting to freelance engineers, differentiating from basic platform competitors.
• Industry top market position creates a self-reinforcing positive cycle: strong brand attracts high-quality freelance engineers and high-value client projects, which further attract more participants and accelerate M&A activity.
• The digital talent service market is projected to reach 1.05 trillion yen by 2025, and the company targets growth that outpaces overall market expansion.

M&A Strategy

• The company pursues a repeatable roll-up M&A strategy centered on acquiring peripheral assets around its core engineer matching business, expanding the strategy from the engineer space to the consulting space. The strategy leverages benefits including cross-sharing of technical knowledge, improved scalability, faster growth, and consolidated corporate functions to deliver discontinuous growth. The three acquired consulting firms add DX consulting capabilities, South Korean market expertise, and marketing/EC domain experience, which expands enableX's end-to-end client support capabilities from upstream planning to downstream execution.

1. Engineer Platform Service (Midworks / Engineer Matching Business): Third quarter revenue was 3.782 billion yen, which represents a 22.7% year-over-year increase, reached a new all-time high. This segment contributed 84.2% of total company revenue in the quarter. Segment profit decreased 18.3% year-over-year due to increased advertising and hiring investments, which management framed as a positive, forward-looking investment for future growth. Both active working engineer count and registered engineer count hit consecutive all-time records, with active engineer count growing 21% year-over-year. 2. Other unsegregated business segments (strategic consulting, M&A advisory, marketing related services): The remaining revenue was 711 million yen, accounting for 15.8% of total company revenue. Total company third quarter revenue hit an all-time high of 4.493 billion yen, up 25.1% year-over-year.

• Full fiscal 2025 plans remain on track to deliver 12 consecutive years of revenue growth, with operating income projected to exceed 1 billion yen for the first time.
• Q4 will accelerate engineer recruiting investment, funded by accumulated profit from the first three quarters of the fiscal year, with investments focused on full-time engineer hiring to build out the hybrid team operating model combining full-time and freelance engineers.
• Aggressive growth investment focused on recruiting, training, and advertising for the core engineer matching business will continue to secure market share and build long-term growth foundations, with investments expensed in the current fiscal year expected to contribute to profit with no incremental recurring costs starting from the next fiscal year.
• The company will continue to pursue targeted roll-up M&A in engineer and consulting adjacent domains, combining organic continuous growth with inorganic discontinuous growth to drive overall company expansion.

• Higher than expected early project terminations occurred in Q3, though existing organizational improvements mitigated the impact on active engineer utilization growth.
• Aggressive upfront hiring and advertising investments in the current fiscal year will suppress near-term profit, with profit contributions from these investments not expected until the next fiscal year and beyond.
• Ongoing inflation and yen depreciation create macro uncertainty, though management judges the net impact on the business to be a tailwind due to upward pressure on freelance engineer rates that increases absolute revenue and profit for the company at a steady take rate.

Q: How will profit margins change for team-based hybrid (full-time + freelance) project engagements? / A: The hybrid team model is designed to win larger enterprise clients, raise average project size, and improve contract retention rates. While upfront hiring investments reduce near-term margins, the acquired full-time engineers will contribute incremental profit with no additional recurring hiring costs starting next fiscal year, which will improve long-term segment margins. The model also enables cross-selling of consulting services from the newly acquired enableX group firms, adding additional high-margin revenue. /

Q: What areas will the company prioritize for future M&A activity? / A: The company will continue to focus M&A on peripheral domains adjacent to the core engineer matching platform, specifically engineering services and IT/management consulting. The company follows three core rules: target only firms within its existing areas of expertise, only acquire firms that will not experience goodwill impairment, and execute high-certainty PMI using existing accumulated experience. The company is also open to AI-related M&A that would complement its existing core service offerings. /

Q: What is the impact of accelerated engineer hiring on Q3 profit, and how much investment is planned for Q4? / A: The bulk of Q3's increased selling, general and administrative expense came from upfront hiring costs for new full-time engineers, which directly led to the year-over-year decline in Midworks segment profit. Q4 will continue this accelerated pace of hiring investment, using the profit accumulated over the first three quarters as funding, to build out the team base that will drive profit growth starting in the next fiscal year. /

Q: How strong is current client demand for the company's services? / A: Client demand for skilled freelance engineers and hybrid team solutions remains very strong, aligned with the long-term trend of enterprises utilizing flexible external talent to complete digital transformation projects. The company's market leading position gives it access to the highest quality talent and projects, allowing it to capture growing demand faster than smaller competitors.