TWOSTONE&Sons Inc. Q1 FY2026 earnings call

• Core Business and Market Position

  • The company operates as a one-stop provider of growth capabilities for client companies, including engineer resourcing, contracted development, web marketing, upstream consulting, and M&A brokerage, with a goal of building mutual growth with clients.
  • The company holds a top-tier position in the Japanese freelance engineer matching market, with over 60,000 registered freelance engineers, which creates a self-reinforcing virtuous cycle: top market awareness draws high-quality freelance talent and high-value client projects, which in turn attracts more talent and projects, and also accelerates strategic roll-up M&A activity.
  • Market tailwinds are strong: the digital talent services market is projected to reach 1.05 trillion yen in 2025, and accelerating inflation and the shift to flexible work are driving growth in the freelance engineer market. Rising freelance unit rates expand the company's absolute revenue and profit even with a fixed take rate, with potential for future take rate increases as market position strengthens.
  • The company's service brings Western-style job mobility to Japan, driving innovation at Japanese companies by matching freelance engineers with diverse experience to client projects, improving overall service competitiveness for clients.

• 2026 August Fiscal Year Core Focus Areas

  1. Active Investment in Existing Business
  • Engineer utilization increased 17.1% year-over-year, and the core engineer matching business has posted 26 consecutive quarters of record revenue.
  • The company hired 44 full-time engineers and 9 consulting talent in Q1, a 194.4% increase in hiring volume year-over-year. Total hiring investment increased 165 million yen year-over-year, and the ratio of hiring costs to revenue is declining quarter-over-quarter, with expected long-term contributions to profit margin expansion.
  • The company is expanding hybrid team delivery that combines full-time employees and freelance engineers to scale the business.
  1. Execution of Strategic Roll-up M&A
  • M&A deal evaluation volume increased 37.4% year-over-year to 239 deals. The company closed the acquisition of enableX in Q1, and completed the strategic acquisition of FAM via the company's first-ever share swap transaction.
  • FAM specializes in training programs for aspiring engineers with no prior experience, and the acquisition is expected to expand the company's share and presence in the junior engineer segment via synergies with its existing engineer platform.
  • The company pursues a repeatable roll-up M&A strategy focused on acquiring adjacent assets around its core business, expanding this strategy from the engineer segment to the consulting segment. It targets companies that will not suffer from goodwill impairment, and leverages its existing post-merger integration (PMI) expertise, with revised standards for 2026 to pursue more aggressive M&A while maintaining the no-goodwill-impairment requirement.
  1. Governance Strengthening
  • Former outside director Hajime Hasegawa was appointed as an internal director in November 2025, bringing experience leading group management at a Prime Market company to strengthen the company's operating structure and improve speed and agility for growth across existing and new businesses.
  • The company continues PMI for acquired companies and evaluates potential group company mergers to improve operating efficiency. It introduced a performance-based incentive plan for directors to strengthen commitment to enterprise value improvement.

• New Business and Strategic Initiatives

  • The company positions AI as a key growth driver, and plans to leverage its existing engineering, development, and marketing capabilities to launch new AI-integrated services to expand its service portfolio and drive long-term growth.
  • The company focuses on new business expansion in areas that leverage its existing assets, rather than entering unrelated industries, with Hasegawa's appointment expanding the range of feasible initiatives.

1. Engineer Platform Service (Midworks / Engineer Matching Business): Q1 revenue was 3.992 billion yen, a 16% increase year-over-year, hitting a new all-time high. This segment contributed 69.5% of total company revenue. Operating profit for the segment decreased 37.1% year-over-year, which the company attributes to large strategic investments in full-time engineer hiring and advertising for freelance engineers, and frames this decline as a positive strategic choice for long-term growth. Connected engineer utilization and registered user counts continue to hit new all-time highs.
2. Consulting & Advisory Service: This segment delivered strong growth in Q1, driven by the closing of a large project, and contributed significantly to the company's overall 117.8% year-over-year increase in group operating profit. While the segment has a smaller current revenue base than the engineer matching business, it is growing strongly in line with prior guidance.
3. Total Group: Total Q1 revenue was 5.74 billion yen, an increase of 1.603 billion yen (38.7%) year-over-year, marking the first time the company has surpassed 5 billion yen in quarterly revenue. Gross profit increased 90.3% year-over-year, and consolidated operating profit reached 629 million yen, an increase of 117.8% year-over-year.

• The company maintains its full-year 2026 August fiscal year guidance, with no upward revision despite strong Q1 performance, where operating profit reached 47.5% of the full-year target and net profit reached 55.6% of the full-year target. Management states that it is standard practice not to revise full-year guidance after only one quarter, and it reserves flexibility to increase investment for long-term growth; guidance may be updated in the second half of the fiscal year if needed.
  • The full-year revenue target for 2026 August fiscal year is 24 billion yen, and the company remains on track to hit this goal.
  • Hiring costs are expected to decline in the second half of the fiscal year as organic hiring improves, and the ratio of hiring costs to overall revenue will continue to decline as the business scales. Advertising costs are not expected to increase sharply, as the company has a pre-set upper limit for web marketing investment.
  • The company's long-term target is to achieve a minimum of 30% annual revenue growth alongside increasing profit, and to build enterprise value by combining organic growth of existing business with non-organic growth from M&A and new business initiatives. Management targets reaching a market capitalization of over 100 billion yen.

No explicit material risks or operational failures were discussed in the provided transcript.

Q: What is the company's target stock price?

A: It is difficult to specify an explicit target, but the share swap acquisition of FAM indicates that FAM's leadership believes the company's stock price will rise in the future. The company has previously reached a market capitalization exceeding 70 billion yen, and current business performance is significantly stronger than at that time, so the company aims to hit a new all-time high market capitalization between the 2026 and 2027 August fiscal years through continued business growth.

Q: Why is the full-year guidance maintained despite large Q1 profit growth? Are there hidden negative factors?

A: There are no negative factors driving the decision to hold guidance steady. It is standard for almost all companies not to revise full-year guidance after only the first quarter. The company wants to retain flexibility to pursue large growth investments as opportunities arise, so it maintains the existing guidance at this stage. Guidance may be updated in the second half of the year, and any changes will be communicated via IR channels.

Q: How much did goodwill amortization increase year-over-year?

A: Goodwill amortization was 43 million yen in the year-ago quarter and 115 million yen in the current quarter, an increase of approximately 70 million yen year-over-year. Goodwill amortization is spread over multiple years, and after amortization is complete, the full amount of the former goodwill will flow directly to operating profit, so this M&A strategy will drive large profit contributions over the medium to long term.

Q: The consulting & advisory segment has an unusually large contribution this quarter, which creates concerns about a future pullback, and other segments appear to have slower growth. How should we understand the current segment performance?

A: The engineer platform and marketing platform segments have a large pipeline of planned initiatives, so investors can expect strong future growth from them. The consulting & advisory segment is performing exactly in line with the strong growth guidance the company provided last year. It is true that the engineer platform segment, which already has over 10 billion yen in annual revenue, finds it harder to deliver the same high growth rates as the smaller consulting segment, but the company is focused on driving strong growth for the engineer platform segment that matches the performance of consulting.

Q: Is the current Q1 operating profit within expectations, and why was there no upward guidance revision?

A: The result was not a surprise, but it was a solidly good outcome. The company invested very heavily in full-time engineer hiring in Q1, with total hiring investment reaching roughly 200 million yen even after accounting for agency fees, and still delivered solid profit, which is a strong performance. As noted previously, almost no public companies revise guidance after the first quarter, so that is the only reason for no upward revision.

Q: Hiring and advertising costs are growing quickly quarter-over-quarter. Will this trend continue?

A: Hiring costs are expected to be significantly lower in the second half, as organic hiring is now performing very well. Most hiring costs are one-time agency fees paid when new hires join, so while new hires are unprofitable in their first year, they contribute entirely to profit starting from the second year. This structure works well for the company's focus on long-term growth, and hiring costs as a share of revenue will continue to decline as the business scales and brand recognition improves. For advertising costs, the company has a set upper limit for web marketing investment, and while it is still investing aggressively at this stage, costs will not increase sharply from current levels.

Q: What IR initiatives will the company pursue to increase market capitalization?

A: IR meetings with institutional investors have increased significantly, and the company is now approaching the sweet spot for market attention as it nears a 50 billion yen market capitalization. The company recognizes that trading volume is as important as market capitalization, so it works to encourage trading from hedge funds and individual investors to gain broader market attention. It also targets long-only institutional investors to build recognition of the company's long-term growth story, with a goal of building a convincing narrative for a 100 billion yen+ market capitalization.

Q: What new businesses or areas is the company planning to enter?

A: The company is only evaluating new areas that can leverage its existing assets, rather than entering completely unrelated businesses. Hasegawa's appointment as internal director has expanded the range of feasible initiatives the company can pursue, and the company will continue to advance this approach.

Q: Is overseas expansion a possibility for the company?

A: The company is open to expansion both domestically and internationally, and overseas expansion is under consideration and could happen in the near future.

Q: What impact has Hajime Hasegawa had since joining as an internal director?

A: Hasegawa has already had a very strong positive impact. He has experience founding, taking public, and growing a Prime Market PR company to nearly 10 billion yen in annual operating profit, so his experience provides very valuable insights for the company's current challenges and gaps. His expertise also aligns perfectly with the company's marketing platform segment, so we expect significant future contributions to that segment's performance.

Q: Why does work style reform act as a tailwind for freelance adoption? Isn't work style reform intended to help companies retain existing full-time employees?

A: That observation is correct, but work style reform has still increased the availability of the freelance option for workers. Historically, Japanese engineers had a strong fear of freelance work due to job insecurity, but now the engineer job market is persistently tight, so the risk of unemployment for freelance engineers is very low, reducing the main barrier to entry. Government promotion of work style reform has also increased worker awareness of freelance as a valid career option, and companies have become more open to hiring freelancers regardless of employment format. This has increased labor market mobility, and the growing acceptance of side work has also led more people to try freelance work part-time, so work style reform has ultimately accelerated freelance adoption.

Q: What are the benefits of M&A via share swap compared to traditional cash M&A?

A: Share swap does not use cash, so the company can preserve its cash holdings for additional M&A or new business investment, enabling larger-scale strategic investments. It also incentivizes the leadership of the acquired company to stay and grow the business after the acquisition, as they remain shareholders of the combined company and directly benefit from future stock price growth. This creates a mutually beneficial structure that is lost in all-cash acquisitions, so this transaction was a very positive outcome for the company and also reinforced the importance of growing the stock price.

Q: How many M&A deals does the company target this fiscal year?

A: The company cares more about the size and strategic fit of deals than the raw number of deals. The primary target is to complete M&A deals exceeding 1 billion yen in total size, and the company will work to achieve this goal.

Q: How do you see AI evolving in 2026, and what impact will it have on the business?

A: AI will become increasingly integrated into daily life and work, similar to how smartphones made the internet universally accessible after the PC era. Going forward, the ability to use AI effectively will create a large productivity gap between workers, just as PC skill created a gap in the 1990s. However, AI cannot do everything, and success will still require people to execute on the opportunities and information AI provides. The company is already working to build an organizational focused on leveraging AI to improve productivity.

Q: Are you considering shareholder return measures such as dividends or share repurchases to support the stock price?

A: The company recognizes the importance of this issue. Historically, as a growth company, the company has prioritized reinvesting all profit into growth investment, but the company now recognizes the importance of returning a portion of profit growth to shareholders. The company is actively evaluating different options, including dividends and shareholder benefits, and will continue to consider this issue carefully going forward.

Q: Why does half of your M&A pipeline come from industries outside your core? Is this to support new business initiatives?

A: The company keeps its pipeline broad to avoid missing out on high-potential deals that have synergies with the existing business that might be excluded if the industry filter was too narrow. It is not specifically driven by new business planning, but rather a strategy to cast a wider net to identify high-quality, synergistic deals.

Q: How long will the company continue its aggressive strategic investment?

A: The company sees significant growth opportunities in its current market, and will continue aggressive investment as long as the market is growing and the company can deliver strong growth rates. When growth slows and the company has captured most of its target market, it will shift focus to increasing profit and raising the payout ratio, but that point has not been reached yet.

Q: Will AI evolution eliminate demand for engineers?

A: There is no chance that AI will eliminate demand for engineers. In fact, demand for engineers will almost certainly increase going forward, especially demand for engineers to customize, maintain, and operate AI agents and integrate different AI APIs. All of the company's leadership actively uses AI, and we see it as a tool that increases demand for skilled engineering work rather than a replacement.

Q: When do you plan to list on the Prime Market?

A: I cannot comment on a specific timing due to insider trading rules, but the company will move forward at the most appropriate time. The company prioritizes being a prominent player in the Prime Market when it lists, rather than listing just to meet the minimum requirements.

Q: What is your medium-term (3-5 year) business growth plan?

A: The company's publicly stated consensus commitment is to deliver at least 30% annual revenue growth alongside increasing profit. The company does not currently have a formal 3 or 5-year plan, because completing a large M&A would make a formal plan obsolete immediately, and the company wants to avoid creating a plan that ends up being just a theoretical document. The company will create and disclose a formal medium-term plan when it reaches the point where it makes sense to lock in a specific multi-year plan and communicate it to investors.