Quick Look

Sessa Investment Research

Aug 29, 2024

GEECHS｜7060

1Q Follow-up

TSE Standard

Making steady progression in the IT freelance matchingbusiness (Japan)
Hiddenassets1Q FY2025/3 results review: On August 9th, 2024, Geechs Inc. (hereafter, the“Company") announced its 1Q FY2025/3 earnings results. Net sales fell 2.0% YoY to¥5,825 mn, EBITDA rose 7.2% YoY to ¥107 mn, and operating profit rose 175.8% YoY to¥80 mn. The sharp rise in operating profit was attributable to the sale of G2 Studios(previous Game business) at the end of FY2024/3, which prevented 1Q FY2025/3
operating profit from being dragged down by the business as it did in 1Q FY2024/3,
when it recorded an operating loss of ¥74 mn. On the other hand, progress versus planfor the first three months of FY2025/3 appeared slightly lackluster, coming in at 22%
for net sales, 16% for EBITDA, and 15% for operating profit. However, existing
businesses remained on track to grow in line with the Company's forecasts. Seeing thatits share price did not fall after the 1Q results announcement, it is fair to say that theresults were in line with both the Company's and the market's expectations.

Focus Point• Largest company in Japan that
handles only freelancers
specializing in IT engineers.
• With the structural tailwind of a
growing shortage of IT engineers
every year, the Company's
business performance can becalculated to a certain extent.
• Looking forward to the midterm management plan tofurther accelerate growth.

Key Indicators

Full-year FY2025/3 earnings forecast: In FY2025/3, the Company expects net sales
to grow 11% YoY, EBITDA to rise 85% YoY, as well as a return to net profitability, on theback of a steady expansion of its IT freelance matching business (Japan) andelimination of unprofitable businesses, the Seed Tech business turning profitable forthe first time on the back of higher offshore development sales, and a recovery in
profitability of the IT freelance matching business (Overseas). It has not made anychanges to its projections for EBITDA, operating profit, and ordinary profit to recover tothe same level as seen in FY2023/3. Having set a target dividend payout ratio of 30%,
the Company will likely continue to pay a dividend per-share of ¥10. If it is able to dothat, it is highly likely to achieve an ROE in the 10% range.

Share price (8/28)
YH (24/4/10)
YL (24/8/5)
10YH (19/4/2)
10YL (24/8/5)
Shrs out. (1K shrs)
Mkt cap (¥ mn)
Equity ratio (24/6)
CY2024/6 P/B (act)
FY2025/3 P/E (CE)FY2024/3 ROE (act)
FY2025/3 DY (CE)Share price insights: Despite earnings having bottomed in the previous fiscal year
and the outlook for a firm recovery in earnings this fiscal year, GEECHS’s shares aretraded at historical lowest level. Although a microcap stock, the Company's shares
offer a rare bargain valuation for an IT-related stock from a single-year fundamental
perspective, with a forward dividend yield at the 2% level, a forward P/E ratio below
14x, EV/EBITDA below 4x, and a P/B ratio below 2x based on figures at end-1Q.

Daily Stock Price Chart

The Company set a target dividend payout ratio of 30%, and has indicated that it may
boost dividends in line with EPS growth. Accordingly, SIR used a dividend discountmodel to work out what level of dividend growth is factored into the latest share price.
The results suggest that the latest share price of ¥453 implies a profit and dividend
growth rate of around 4%, but does not reflect the Company's sustainable growth rate
of 7% (calculated as projected ROE of 10% x (1 - dividend payout ratio of 30%)).
YoY

YoY

Operating YoY
Profit- N.M.

1,133

EBITDA

Ordinary
ProfitEPS(¥) DPS(¥)

59.1

54.1

67.18

10.00

244 -65.4

23.20

10.00

Sales

2022/3

14,340 N.M.

2023/3

15,99711.6

651 N.M.

2024/323,73948.4

362 -44.4

90 -84.6

82 -85.52025/3 CE

26,300

10.8

670

85.0

550 505.3

545 560.72024/3Q1

5,945

68.7

100

-

29

27

2025/3Q1

5,825

-2.0

107

7.2

53.5

589 -48.0-

80 175.8

1,135

Source: Trading view

YoY Net profit YoY¥mn, %

567 -50.0705-1,473 N.M. -142.75
336 N.M.

453
567
327
2,715
327
10,326
4,678
39.8%
1.68x
13.9x
-41.5%
2.21%

10.00

32.54

10.00

-

4

-

0.46

-

84 200.9

58

-

5.70

-

Kenichi Sugimoto, Analyst
research@sessapartners.co.jp

Source: Compiled by SIR from the Company IR material. *EBITDA: Operating profit + Depreciation + Amortization of goodwill + Stockbased compensation expenses

This report was prepared by Sessa Partners on behalf of the subject company. Please refer to the legal disclaimer at the end for details.
Quick Look Reports are released every other quarter to follow earnings.

1

GEECHS｜70602025/3 1Q
Results Review* Managed service providers
offer comprehensive services
for a range of process, fromfinding human resources forcustomers to contracts.
Having built a firm customer
foundation, the Company
expects stable growth for thebusiness.

Sessa Investment Research Overview: generally in line with plan
By business segment, sales in the IT freelance matching business (Japan), a key growth
driver, rose 6.7% YoY to ¥3,694 mn, setting a new quarterly sales record. In terms ofcosts, although personnel expenses rose in line with business expansion, operating profit
grew 4.5% YoY to ¥295 mn, as the Company was able to control advertising expenses
within an appropriate level (developments in the IT freelance matching business (Japan)
are described in detail on the next page).
The Australia-based Launch Group, which the Company acquired in January 2023, hasbeen included in the Company‘s scope of consolidation since 1Q FY2024/3 and classified
under the IT freelance matching business (Overseas) segment. Launch operates ahuman resource service business that specializes in casually employed workers andfreelancers and an MSP business*, mainly in Sydney and Melbourne. In 1Q, segment
sales rose 11.3% YoY to ¥2,048 mn but generated an operating loss of ¥36 mn, as
demand for human resources from local customer companies (i.e. major global IT
companies) was still undergoing recovery, while the business was in the process ofrestructuring as well as hiring career representatives and consultants. However, themanagement team explained that performance is on track to reach its forecast targets(sales of ¥10 bn, operating profit of ¥0).
The Seed Tech Business provides the SaaS-type DX/IT human resource development
service Sodatech, which supports the reskilling of non-engineers, offering IT study
abroad programs in Cebu, Philippines. With conditions normalizing following the COVID19 pandemic, the number of offline non-business corporate IT study abroad programs ison the rise, with offshore development also steadily increasing. As a result, sales rose
37.5% YoY to ¥72 mn while generating an operating loss of ¥13 mn, but the
management team is confident that the business will turn profitable from 2Q onward.

Segment Information
Segment

Business(¥ mn)

12,76314,08915,800

3,460

3,694

6.8

997

1,060

1,144

1,280

282

295

4.6

9.3%
-

8.3%
-

8.1%
7,162

8.1%
10,000

8.2%
1,840

8.0%
2,048

11.3

116

Other
(Former x-TechBusiness until
2023/3)G2 Studios(Former GameBusiness until
2023/3)
Tolal

Change10,767(27)

FY2025/3 CE

2025/3Apr-JunFY2023/3

IT Freelance
IT freelancer and customer Net Sales
Matching
company matching
Operating Profit
Business (Japan) business in JapanOP Margin
IT Freelance
IT freelancer and customer Net Sales
Matching
company matching
Operating Profit
Businessbusiness in Australia
OP Margin(Overseas)
Net Sales
Seed Tech
Human resources
development tool sales, IT Operating Profit
study abroad program, andOP Margin
offshore development

FY2024/3

2024/3Apr-JunFY2022/3

（％）

-

-

(135)

0

(21)

(36) Red Widen

0.0%

0.0%

-1.9%

0.0%

-1.1%

-1.8%

176

282

400

52

72

(32)

(23)

50

(9)

(13) Red Widen

38.5-23.1%-18.0%

-8.2%

12.5%

-17.3%

Marketing video
production for golf club
manufacturers, etc.

Net Sales

304

183

128

100

33

14

Operating Profit

15

40

4

0

3

(9) Turned Red

OP Margin

4.9%

21.6%

3.4%

0.0%

9.1%

-64.3%

Commissioned gamedevelopment and game
title operation business

Net Sales

3,154

2,896

2,111

-

561

-

584

121

(357)

-

(74)

-

OP Margin

18.5%

4.2%

-16.9%

0.0%-13.2%

0.0%

Net Sales

14,34015,99823,73926,300

5,945

5,825

(2.0)

Operating Profit

1,134

589

90

550

29

80

175.9

Operating Profit-18.1%(57.6)OP Margin
7.9%
3.7%
0.4%
2.1%
0.5%
1.4%
Source: Complied by SIR from the company IR materials.
Note: Applied Accounting Standard for Revenue Recognition and other standards starting in FY2023/3. Figures for FY2022/3 have been revised to reflect theretroactive application of these standards

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GEECHS｜7060
Trends in IT
freelance matchingbusiness (Japan)* Man-month is one of theunits of work volume, thevolume of work that one
person can complete eachmonth. Man-month unit priceis the order price in terms ofprice per man-month.
Man-months worked is the
product of the number offreelancers working on a job
and the duration (months)
each freelancer is engaged in
the project.
The volume of work that
requires 1 person to work 1
month is 1 man-month, andthe volume of work that
requires 5 people to work 6
months is 30 man-months (5 x
6) .

Sessa Investment Research Confirmed that IT freelance matching business (Japan) is progressing smoothly
Sales in the IT freelance matching business (Japan) represent the amount earned bymatching IT freelancers with work requests from customer companies—that is price ofwork orders = transaction value. The transaction value for the IT freelance matchingbusiness (Japan) is calculated as man-months worked* x monthly unit price of orders (oneman-month is the amount of work one IT freelancer does in one month) . In 1Q FY2025/3,
man-months worked was 4,626, and the average monthly unit price of orders came to arecord-high ¥824,000, which translates into a transaction value (product of man-months
worked and monthly unit price of orders) of ¥3,811 mn. This is close to the ¥3,694 mn that
the Company reports as its net sales.
Man-months worked was trending upward, but fell slightly QoQ. The management team
explains that this is attributable to a subtle change in the Company's customer profile,with the mix of operation system development companies increasing relative to internet
service companies. Internet service companies tend to employ freelancers on acontinuous basis, regardless of budget cycles, but major SIers and their subcontractors
tend to end their contracts with freelancers at the fiscal year-end in March and start newcontracts from the new fiscal year. The Company noted that it did not have any
operational issues, adding that the sluggish numbers for man-months worked stemmed
from seasonal factors, namely the increase in mix of development projects from operation
system development companies, which tends to conclude at March end.
Monthly unit price of orders is trending gradually upward on the back of sustained
strong demand for IT human resources, rising steadily 3.2% YoY or 2.2% QoQ to ¥824,000.

Source: Compiled by SIR from the Company IR material

3GEECHS｜7060

Note: *1 Until the previous
year, each KPI was calculated
based on the period average,
but from the FY2024/3,
calculations are based on
ARPU, average duration, andCAC. In line with this change,
the above figures for
FY2023/3 also reflect the new
calculation method.
*2 Average total engagement
duration including projectchanges.

Sessa Investment Research Profitability of IT freelance matching business (Japan) may be at its highest level
GEECHS gross profit (net revenue) is the agent fee, net sales minus compensation paid
to IT freelancers, and the take rate is gross profit divided by net sales. With theintroduction of the invoice system in October 2023, the Company took on the burden of
a portion of the consumption tax related to IT freelancers, and its take rate hasremained around 17.6% for three consecutive quarters since 3Q FY2024/3. Even so, theimpact on earned profit will likely be limited because the take rate was revised to reflect
the impact of the invoice system before it was introduced. In 1Q FY2025/3, the Company
posted net sales of ¥3,694 mn, of which ¥650 mn was retained as gross profit (¥651 mn
in 1Q FY2024/3).
New registrations in 1Q rose 14.5% YoY to 419, the second highest level after 430 in
4Q FY2023/3. In addition to the ongoing friend referral campaign, the Company's
improved brand awareness may also be contributing to this with a time delay. It is worth
noting that the Company attracted more than 400 new registrations in 1Q in a highly
cost-efficient manner as it cut advertising expenses in half YoY as part of its efforts tosystematically reduce advertising expenses from 2H FY2024/3. This brought its
advertising expense ratio to 1.3%, the same level it delivered in 1H FY2022/3.
SIR conducted a comparative analysis of this over time from the perspective of profit
gained per IT freelancer. GEECHS manages how well it secures IT freelancers, its source of
earnings, using the following KPIs and discloses that information every half year. The
Company did not disclose this information in 1Q, but it can be estimated to a certain
degree. For example, the average revenue per user (ARPU) is calculated as gross sales
generated from orders from companies minus compensation paid to IT freelancers andother costs of sales of GEECHS. This is the average monthly unit price per IT freelancer,
which is equivalent to ¥145,000 for 1Q FY2025/3, calculated by multiplying unit price oforders (¥824,000) by the take rate (17.6%). From here, annualized estimates can be
made. The Company does not disclose the average engagement duration for IT
freelancers, but assuming this is 18 months, in line with the previous fiscal year, the lifetime value (LTV) based on average gross profit generated by an IT freelancer during their
engagement is estimated to be around ¥2,610,000. Assuming that the averageacquisition cost per IT freelancer (CAC) is kept at around ¥480,000, the same level as in
FY2022/3, its Unit Economics, or return on IT freelancer acquisition cost, is estimated to
be around a record-high 5.4x.
As mentioned earlier, the Company controlled its advertising expense ratio at areasonably appropriate level of 1.3%. Furthermore, it worked to create a forwardlooking business structure designed to support sustainable growth, such as by adding
headcount to bolster its organization and improving internal training and development,
while also systematically spending its budget, particularly on personnel expenses (which
account for around 40% of SG&A expenses). As a result, 1Q segment profit for thebusiness rose 4.5% YoY to ¥296 mn.

KPI of IT Freelance Matching Business (Japan)
KPI

Definition

ARPU (thousand yen)
Average engagement
duration (months)
LTV (thousand yen)*

CAC (thousand yen)
Unit Economics*

1

1

FY2021/3 FY2022/3 FY2023/3 FY2024/3

Average monthly unit price (gross profit) per IT
freelancer

119

123

130

141

Average duration of engagement for an IT freelancer*2

16.4

16.4

17.3

17.8

Average gross profit generated by one IT freelancer
during their engagement(= ARPU x Average engagement duration)

1,948

2,017

2,249

2,510

510

473

998

1,036

4.1

4.5

2.3

2.4

Average acquisition cost per IT freelancer

Return on IT freelancer acquisition cost(= LTV / CAC)
Source: Compiled by SIR from the Company IR material.

4

GEECHS｜7060* “GEECHS Project-toFreelance Ratio Report”
gives demand trends in the
IT freelance market—
Cumulative quarterly
Projects-to-Freelancer
Ratio hits 7.50x
https://geechs.com/new
srelease/20240808_anke
nbairitsu/

Sessa Investment Research The ”GEECHS Project-to-Freelance Ratio Report”* indicates sustained strong demand
In 1Q FY2025/3 alone, the Company brought in 37 new customer companies, bringing
the total to 1,659 companies as of the end of June. The number of freelance projectlistings from these companies on the Company’s job search site geechs job(https://geechs-job.com/) fluctuates daily, but there were over 6,200 listings as ofAugust 22.
GEECHS also announces its projects-to-freelancer ratio (ratio of projects that theCompany handles to number of registered IT freelancers searching for projects) in its
quarterly “GEECHS Project-to-Freelance Ratio Report”*. The ratio is not a KPI but offersa semi-macro perspective on demand in the IT freelance market. According to thisreport, the quarterly cumulative ratio for April-June 2024 was 7.50x. In addition, Javaand PHP skills remain in high demand, with TypeScript also gaining popularity.
Interestingly, the report also includes a trend forecast for the July-September 2024
period. First, the Company expects the number of projects to remain flat from July toAugust, and then to gradually increase from September. Secondly, it expects the numberof projects to rise in line with the digital transformation of the construction industry,
which is aimed at streamlining operations and reducing manpower, in order to address
the aging workforce and labor shortages in the construction industry, otherwise known
as the “2024 problem in the construction industry”, as well as to comply with the “Work
Style Reform-Related Act” to combat long working hours. Finally, the Company expects
the number of freelancers searching for projects come in flat in July, then gradually
increase from mid-August onward, as it anticipates an increase in freelancers looking fortheir next project after completing their existing projects at the end of September.
Given the continued strong demand as mentioned above, it is difficult to imagine theCompany‘s number of man-months worked and unit price of orders will suddenly
weaken. Accordingly, it is highly likely that the IT freelance matching business (Japan)
will continue to expand steadily going forward.

GEECHS Project-to-Freelance Ratio Report

Projects-to-freelancer ratio

(x)

April

May

June

July

Aug

Sep

Oct

Nov

Dec

2023

Jan

Feb

Mar

Apr

May

June

2024
Number of registered IT
freelancers searching for
projects

The numberof projects

projects-tofreelancer
ratio

Source: The Company’s website
5

GEECHS｜7060
Share price insights

1)

The Ministry of Finance's
interest rate data

https://www.mof.go.jp/jgbs/reference/interest_rate/in
dex.htm
2)

The Stock Market Data
websitehttps://stockmarketdata.com/riskpremiu
m-japan.html
3)

The Cost of Capital website

https://costofcapital.jp/bet
a/historicalbeta/

Sessa Investment Research Growth potential implied by the DDM only comes out to around 4%
Despite earnings having bottomed in the previous fiscal year and the outlook for a firm
recovery in earnings this fiscal year, GEECHS’s shares are traded at historical lowest level.
The Company also discloses IR information simultaneously in both Japanese and English
with high transparency. Although a microcap stock, the Company's shares offer a rarebargain valuation for an IT-related stock from a single-year fundamental perspective,
with a forward dividend yield at the 2% level, a forward P/E ratio below 14x, EV/EBITDA
below 4x, and a P/B ratio below 2x based on figures at end-1Q.
The Company set a target dividend payout ratio of 30%, and has indicated that it may
boost dividends in line with EPS growth. Accordingly, SIR used a Dividend Discount Model(DDM) to work out what level of dividend growth is factored into the latest share price. In
calculating the Company's cost of shareholders' equity, the risk-free rate was set at 0.90%
based on the Ministry of Finance's interest rate data*1, the market risk premium was set at5.50% based on the Stock Market Data website*2 , and the Company's beta value was set at
0.98 based on the Company's daily data for the past two years from the Cost of Capital
website*3. One point to note is that the beta value of the Company's stock fluctuates greatly
depending on the timeframe and frequency. For the latest five-year period, the daily value is
1.26, the weekly value is 1.07, and the monthly value is 0.96, but for the latest two-year
period, these values are 0.98, 0.48, and 0.12, respectively. In this instance, SIR will use thedaily beta for the latest two-year period, when the Company restructured its business. As aresult, the cost of shareholders' equity came to 6.29%. Next, the base dividend was set at ¥10
for FY2025/3, with the perpetuity growth rate remaining the same for FY2026/3 onward.
Using a 4.0% growth rate in the model, ¥10 ÷ (cost of shareholders' equity of 6.30% dividend growth rate of 4.0%) = ¥435. The sensitivity analysis in the table below presents
beta and perpetuity growth rate as variables, and the latest share price range (highlighted inyellow) implies combinations of the perpetuity growth rate and beta level.
SIR believes that this means the latest share price of ¥453 implies around 4% profit growth,
but does not reflect the Company's sustainable growth rate of 7% (calculated as projected
ROE of 10% x (1 - dividend payout ratio of 30%)), and that there is significant room for its
share price to appreciate.

The latest share price growth position implied by the dividend discount model
Forecasts
2025/32026/32027/32028/32029/3

10.00

10.40

10.82

11.25

11.70

DPS growth rate (same as Perpetuity Growth Rate)

4.0%

4.0%

4.0%

4.0%

Dividend per Share (JPY)Calculating the cost of capital

DDM Analysis (JPY)Calculation of Debt Cost (End of 2024/3)
Interest expense

Present value of dividends for 5 years
18 JPY mn

46

Perpetuity Growth Rate

4.0%

Interest-bearing debt (term-ave.)

1,591 JPY mn

Perpetuity Growth Rate × DPS in the final fiscal year

12

Pre-tax Debt Costs

1.1%

Terminal Value

531

Effective tax rate

46.4%

Present value of Terminal Value

386

After-tax debt costs

0.62%

Theoretical value per Share432

Calculating the Cost of Capital (CAPM)
Risk-Free Rates

Sensitivity analysis
0.900%

Perpetuity Growth Rate

Beta

0.98

432

2.0%

3.0%

4.0%

4.5%

5.0%

Equity Risk Premium

5.50%

0.60

409

747

4,466

-2,972-1,113

Cost of Equity

6.29%-3,663

Interest-bearing debt

1,505

24.3%

Beta

0.70

336

526

1,224

3,668

0.80

287

411

726

1,178

3,138

0.90

252

340

524

717

1,138

Market Cap.

4,678

75.7%

1.00

226

293

414

523

709

Total

6,183

100.0%

1.10

206

258

345

416

522

Weighted Average Cost of Capital

4.91%

1.20

190

232

298

348

417

Source: Compiled by SIR from the Company financial statements.

6

Sessa Investment Research

LEGAL DISCLAIMER
This report is intended to provide information about the subject company, and it is not intended tosolicit or recommend investment. Although the data and information contained in this report havebeen determined to be reliable, we do not guarantee their authenticity or accuracy.
This report has been prepared by Sessa Partners on behalf of the concerned company for which it hasreceived compensation. Officers and employees of Sessa Partners may be engaged in transactions
such as trading in securities issued by the company, or they may have the possibility of doing so in
the future. For this reason, the forecasts and information contained in this report may lackobjectivity. Sessa Partners assumes no liability for any commercial loss based on use of this report.
The copyright of this report belongs to Sessa Partners. Modification, manipulation, distribution ortransmission of this report constitutes copyright infringement and is strictly prohibited.

Sessa Partners Inc.
#5a i-o Azabu, 2-8-14
Azabujyuban, Minato-ku, Tokyo

info@sessapartners.co.jp

7