- Why do they separate out additional corporate expenses outside of segmental ebitda? Try to understand the large increases in this uncharacterized corporate expense.
- Seems like while HR PF seems to be a the dominant product in its niche (excluding Hello Work), however the medical PF seems to be underpenetrated? I might be incorrect, but cannot seem to find info on their marketshare or churn rate. I assume their offering should have very low churn but surprised to see it not on the IR presentation deck.
- I would have imagined the CEO focus to be 100% on growing medical PF and they are communicating that is the case in 2025. But still trying to understand rational for insisting on USA business.
This has been an excellent read, even two years later! What do you think about Medley now? Temporary slowdown, but long-term guidance remains intact. Looks like an interesting opportunity to add... Mmh...
I should write an update to this thesis. The most significant two changes since the publishing of this thesis is 1) the regulatory change of "congratulatory" fees paid to successful candidate placements (this was the key way that Medley verified job placements and billed clients on the HR PF side of the business. This change is resulting in a seemingly short-term revenue recognition/cash collection issue that will likely abate. 2) Medley's acquisitions in the last two years have increased in size and multiple paid, and its too early to determine what ROI is going to be on these. This latter issue is the biggest concern of the two (imo) given that it has had the effect of significantly increasing invested capital with little to no return yet. Broadly the thesis remains intact and the growth opportunity is still there, I really wish to see an increase in the Medical PF organic growth rate and and inflection on earnings, with no further acquisitions, and for HR PF to continue to grow at a high rate (which it should be able to achieve). The valuation is attractive and I believe is discounting an overly pessimistic forecast of future earnings. But... its a Japanese small cap and so playing a short-term multiple re-rating game is not usually a winning strategy. It all depends on your time horizon.
Hi Jake, great write up. Do you have a view on how they would verify employment if the 10K yen or whatever bonus that they pay 60 days post employment is prohibited? How many employees they would have to hire and how much price would have to go up to protect absolute profits? seems even if it 300-400 people at 7M yen pa, which seems aggressive, they only need to increase price by less than 20% on 140K avg per placement, which would still keep them very competitive? Also do you know what is the "settlement" non operating income they are getting, how long its going to last, and how to model it out? thank you!
Hi Yev. Thanks for the kind words and thoughtful questions. They haven't disclosed how many people they would need to hire or the amount that they would need to pay for those people, except to say that initially they believe that they would have to increase prices by ~100%, thus taking the average success fee from ~150k p/placement to ~300k p/placement. They believe that this will also result in a 100% increase in opex, thus maintaining their ~45% HR PF operating margins.
Therefore, in the short term, HR PF EBITDA would effectively double, meaning that if you took LTM HR PF Revenue of 17.8b and doubled it to 34.8b, then grew it by 20% over NTM (which is less than the 30% run-rate guidance) you get to 41.8b of NTM HR PF Revenue, times a 45% HR PF EBITDA margin, then you'd get to 18.8b of NTM HR PF EBITDA for a 147% increase in NTM HR PF EBITDA.
This would likely be a short-term boon for the share price because the company would go from trading at 21x LTM EBITDA (or FCF; because EBITDA historically converts to FCF >100%) to more like 6-10x (assuming 10-15b of consolidated EBITDA in FY25) but it would come at the cost of future growth because Medley's delta between competitors like SMS and Tryt would be diminished. Medley would still be the low-cost provider in the space (with a 10% take rate versus 25-35% of competitors) and also the most convenient and most effective solution in the market, but Medley's customers would bear the brunt of the price increases and it might make them more willing to use the free alternative solution (Hello Work) and it also might open the door for an insurgent competitor to enter the market en masse (like Recruit which has tried and failed before), whereas currently they can't do it.
Re Settlement fees: those are the fines that Medley charges to the 1% of clinics that have been outright fraudulent in trying to skirt paying Medley's success fee. It is excluded from Medley's EBITDA calculations.
FWIW -- I don't know what the outcome would be. For the sake of Medley's long-term investment thesis, I hope the regulation does not go through.
Hi Jake, thanks for sharing your insights with the rest of us. Medley seems to be really well positioned in the healthcare industry. Just wondering what resources you use to keep track of the company? There’s not much management commentary on their IR page either
Hey Chris. Generally, I think their earnings decks are very clear and straightforward. I have found their CFO to be pretty trustworthy and transparent in conversations with him. Also, through semi-regular conversations with their competitors (SMS Co, Tryt, and previously... Guppy) I find that the industry is largely how they articulate it. There is some government data that I have found to verify the number of job transitions per year, but this is not something that you really want to track on a monthly basis because it is a very stable industry.
Hi Jake, thanks for such a thoughtful writeup!
Curious regarding some aspects:
- Why do they separate out additional corporate expenses outside of segmental ebitda? Try to understand the large increases in this uncharacterized corporate expense.
- Seems like while HR PF seems to be a the dominant product in its niche (excluding Hello Work), however the medical PF seems to be underpenetrated? I might be incorrect, but cannot seem to find info on their marketshare or churn rate. I assume their offering should have very low churn but surprised to see it not on the IR presentation deck.
- I would have imagined the CEO focus to be 100% on growing medical PF and they are communicating that is the case in 2025. But still trying to understand rational for insisting on USA business.
appreciate any insights. thank you!
This has been an excellent read, even two years later! What do you think about Medley now? Temporary slowdown, but long-term guidance remains intact. Looks like an interesting opportunity to add... Mmh...
Thanks Roman,
I should write an update to this thesis. The most significant two changes since the publishing of this thesis is 1) the regulatory change of "congratulatory" fees paid to successful candidate placements (this was the key way that Medley verified job placements and billed clients on the HR PF side of the business. This change is resulting in a seemingly short-term revenue recognition/cash collection issue that will likely abate. 2) Medley's acquisitions in the last two years have increased in size and multiple paid, and its too early to determine what ROI is going to be on these. This latter issue is the biggest concern of the two (imo) given that it has had the effect of significantly increasing invested capital with little to no return yet. Broadly the thesis remains intact and the growth opportunity is still there, I really wish to see an increase in the Medical PF organic growth rate and and inflection on earnings, with no further acquisitions, and for HR PF to continue to grow at a high rate (which it should be able to achieve). The valuation is attractive and I believe is discounting an overly pessimistic forecast of future earnings. But... its a Japanese small cap and so playing a short-term multiple re-rating game is not usually a winning strategy. It all depends on your time horizon.
An update would be highly appreciated! Thanks for your insightful comment.
Hi Jake, great write up. Do you have a view on how they would verify employment if the 10K yen or whatever bonus that they pay 60 days post employment is prohibited? How many employees they would have to hire and how much price would have to go up to protect absolute profits? seems even if it 300-400 people at 7M yen pa, which seems aggressive, they only need to increase price by less than 20% on 140K avg per placement, which would still keep them very competitive? Also do you know what is the "settlement" non operating income they are getting, how long its going to last, and how to model it out? thank you!
Hi Yev. Thanks for the kind words and thoughtful questions. They haven't disclosed how many people they would need to hire or the amount that they would need to pay for those people, except to say that initially they believe that they would have to increase prices by ~100%, thus taking the average success fee from ~150k p/placement to ~300k p/placement. They believe that this will also result in a 100% increase in opex, thus maintaining their ~45% HR PF operating margins.
Therefore, in the short term, HR PF EBITDA would effectively double, meaning that if you took LTM HR PF Revenue of 17.8b and doubled it to 34.8b, then grew it by 20% over NTM (which is less than the 30% run-rate guidance) you get to 41.8b of NTM HR PF Revenue, times a 45% HR PF EBITDA margin, then you'd get to 18.8b of NTM HR PF EBITDA for a 147% increase in NTM HR PF EBITDA.
This would likely be a short-term boon for the share price because the company would go from trading at 21x LTM EBITDA (or FCF; because EBITDA historically converts to FCF >100%) to more like 6-10x (assuming 10-15b of consolidated EBITDA in FY25) but it would come at the cost of future growth because Medley's delta between competitors like SMS and Tryt would be diminished. Medley would still be the low-cost provider in the space (with a 10% take rate versus 25-35% of competitors) and also the most convenient and most effective solution in the market, but Medley's customers would bear the brunt of the price increases and it might make them more willing to use the free alternative solution (Hello Work) and it also might open the door for an insurgent competitor to enter the market en masse (like Recruit which has tried and failed before), whereas currently they can't do it.
Re Settlement fees: those are the fines that Medley charges to the 1% of clinics that have been outright fraudulent in trying to skirt paying Medley's success fee. It is excluded from Medley's EBITDA calculations.
FWIW -- I don't know what the outcome would be. For the sake of Medley's long-term investment thesis, I hope the regulation does not go through.
Hi Jake, thanks for sharing your insights with the rest of us. Medley seems to be really well positioned in the healthcare industry. Just wondering what resources you use to keep track of the company? There’s not much management commentary on their IR page either
Hey Chris. Generally, I think their earnings decks are very clear and straightforward. I have found their CFO to be pretty trustworthy and transparent in conversations with him. Also, through semi-regular conversations with their competitors (SMS Co, Tryt, and previously... Guppy) I find that the industry is largely how they articulate it. There is some government data that I have found to verify the number of job transitions per year, but this is not something that you really want to track on a monthly basis because it is a very stable industry.