TWOSTONE&Sons Inc. Q4 FY2025 earnings call

• Overall Fiscal 2025 Performance

  • Full-year total sales reached 18.077 billion yen, up 26.5% year-over-year, marking 12 consecutive years of revenue growth and 6x growth since 2020 listing; operating profit reached 819 million yen, up 72.7% year-over-year, with both sales and gross profit hitting new all-time highs. Adjusted EBITDA exceeded 1 billion yen for the first time, up 61.9% year-over-year.
  • Q4 sales reached 4.674 billion yen, up 11.1% year-over-year; operating profit turned negative due to one-off recruitment investment and delayed revenue from some consulting projects, but the core Midworks business achieved 25 consecutive quarters of record-high sales.
  • Full-year recruitment investment reached 490 million yen, up 155.4% year-over-year; Q4 recruitment investment increased 775.5% year-over-year, with 53 full-time engineers and 30 sales/consulting talent hired in Q4, building a growth foundation for future periods.

• Strategic Priorities and M&A

  • The company adopted a repeatable roll-up M&A strategy, initially focused on the engineer space, and is now expanding to the consulting sector. M&A targets are limited to synergistic adjacent areas, prioritizing targets that will not result in goodwill impairment, with the company relaxing its criteria slightly in fiscal 2026 to pursue more active opportunities.
  • The recent acquisition of Strategy Campus Co., Ltd. by group subsidiary enableX expands the group's service coverage, enables end-to-end support for client management challenges from strategy to implementation, and enables cross-selling and new customer acquisition growth.
  • The company positions AI Technology as a key growth area centered on enableX, with three core directions: existing AI/DX enterprise service, in-house Neuron∞AI Lab R&D focused on human-AI thinking integration, and Deeptech Hub which builds proprietary LLMs via overseas alliances for enterprise clients.

• Market Positioning and Competitive Advantage

  • The company aims to establish a "WEBIer" position in the fast-growing web system market, leveraging its 60,000+ freelance engineer database for fast resource allocation, hybrid team formation of full-time and freelance engineers, and end-to-end support from strategy consulting to implementation to achieve both high growth and high profitability.
  • The company benefits from a positive virtuous cycle as a top-tier player in the freelance engineer market: high brand awareness attracts more excellent engineers and high-quality, high-margin projects, which in turn attract more talent and projects, and also facilitates M&A activity as target firms gain access to the group's resources for faster growth.

1. Engineer Platform Service (centered on Midworks engineer matching business): Q4 2025 fiscal year sales were 3.935 billion yen, up 19.8% year-over-year, reaching a new all-time high, and drove overall company sales growth. Operating profit decreased 45.4% year-over-year due to large-scale upfront recruitment investment, which management classifies as forward-looking investment for future growth. Total connected engineer registrations exceeded 60,000, a new all-time high. This segment is the company's core revenue driver, accounting for approximately 84.2% of Q4 total company sales. 2. Marketing Platform Service: The segment is expanding existing marketing support coverage and building a full marketing service capability to drive sustained revenue growth and productivity improvement, with no specific full-year or quarterly absolute financial figures disclosed. 3. Consulting & Advisory Service: The segment continued active investment centered on recruitment in fiscal 2025, and completed 3 consulting-related M&As via enableX in Q4, with an additional M&A completed in September post-period. This segment is in an investment and growth phase, with revenue expected to contribute more significantly starting from fiscal 2026.

• For the 2026 August fiscal year, management guides 33.8% year-over-year sales growth to 24.182 billion yen, and 61.6% year-over-year operating profit growth to 1.324 billion yen, targeting over 30% sales growth and over 60% operating profit growth, with net profit expected to grow over 30% year-over-year to a new all-time high.
• Key growth assumptions for fiscal 2026 include over 25,000 annual engineer working days and over 68,000 registered engineers, with the Midworks business continuing to drive overall revenue growth, and the consulting and advisory segment beginning to contribute meaningfully to profit.
• The company will maintain aggressive strategic investment in fiscal 2026, focused on organizational strengthening, with priority on three core areas: growth investment for existing businesses, strategic roll-up M&A, and governance strengthening to support expanding organizational scale.
• For the engineer platform segment, the company will strengthen AI utilization to improve matching efficiency between clients and engineers, scale the newly launched dispatch business to expand access to large enterprise clients, and drive further growth via combined full-time and freelance team service.
• For the consulting segment, the company will continue active recruitment investment, with enableX focusing on AI and digital strategy consulting and M&A successor advisory providing comprehensive advisory services, to drive segment expansion.

• Revenue recognition timing mismatch from large consulting/M&A advisory projects can cause near-term revenue volatility and budget misses, though management expects volatility to decrease naturally as the segment scales.
• Aggressive upfront recruitment investment pressure near-term profit margins, though most recruitment agency fees are one-off costs that will not recur in future periods.
• Generative AI development could theoretically reduce demand for engineering services, though management believes this risk is limited.
• Inflation and macroeconomic uncertainty could impact client demand, though management sees net positive effects for its business model.

Q: How does management view the risk of revenue timing mismatches (period shifts) from M&A-related projects, and what steps are taken to reduce earnings volatility? / A: Management states there is no fundamental problem, as the company is not unprofitable so delayed revenue does not threaten operations. What matters most is that deals are ultimately successfully closed, not booking them in a specific quarter. Since the M&A advisory and upper-stream consulting business is still small (tens of billions of yen in revenue), volatility will naturally decrease as the segment scales, so the company prioritizes deal certainty over near-term booking.

Q: Will expanding direct client transactions improve gross margin and operating profit margin, and how much improvement can be expected? / A: Management acknowledges that its sales capability is still underdeveloped, which creates large room for improvement. Increasing direct transactions will meaningfully improve both gross margin, operating margin, and top-line growth. Management estimates that expanding direct sales could improve operating margin by at least 10 percentage points, so the company is prioritizing strengthening this capability.

Q: What is the company's M&A strategy for target selection, does it target same-sector peers or adjacent areas? / A: Management pursues both directions: first, scaling existing core business via same-sector acquisitions; second, acquiring targets that complement the group's weaknesses, such as firms with large client bases but limited engineer resources that can leverage the group's existing assets for mutual growth. All targets must have clear synergy with existing operations, and the company does not pursue completely unrelated new areas, while also considering both M&A and organic development for new initiatives.

Q: Could advances in generative AI reduce demand for engineers, and how does management assess this risk? / A: Management notes that generative AI improves engineer productivity but does not eliminate the need for engineers. AI is good at incremental tasks like cleaning up existing code or debugging, but struggles with end-to-end product development from zero to one, which still requires human engineer input. Therefore, management does not see significant downside risk to engineer demand from AI advancement.