Financial Summary

Recent Updates

Highlights

SR Inc. initiates coverage with this report.

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Trends & Outlook

Quarterly Trends

Q3 FY02/2011 Cumulative Results

The company announced Q3 FY02/11 results on January 13, 2011 (see table above), commenting that consolidated sales and operating profit were largely in line with plan.

Sales increased 7.5% YoY. All businesses posted increased revenues, led by Creative & Technical (Japan). While operating profit turned positive for Creative & Technical (Japan), operating losses in Medical Staffing led to an overall drop of 9.1%YoY.

The primary factor in YoY losses by the Medical Staffing segment was new business investment. While operating profit fell 159 million yen YoY, this was due to 195 million yen of such investments, according to the company. New business investment included a medical nurse staffing business launched in December 2009, as well as relocating and expanding the offices in Tokyo and Osaka in February 2011. The company also added 25 new people to enhance existing and new businesses.

The company focused on investing in new businesses in other areas too, spending 90 million yen in the Creative & Technical (Japan) segment and 15 million yen in IT Staffing. This impacted the operating profit.

Full Year (02/11) Outlook

The company called FY02/11 a period of investment in the future. At a group level, it has invested 220 million yen in new businesses as mentioned above (for details, see “Management Strategy”). As a result, SG&A expenses, mostly personnel costs, increased by roughly the same amount. The forecast calls for a 7.3% increase in total consolidated revenues, led by the Creative & Technical (Japan) segment. The company expects the increase in revenues to more than offset the abovementioned spending, resulting in a significant increase in the operating profit for the full year.

Returns to Shareholders

The company’s plan calls for an annual dividend of 100 yen per share.

Future Outlook

The company expects new businesses that it invested in FY02/11 to start contributing to profitability from FY02/12. The main contributors to the company’s operating profit are Creative & Technical (Japan) and Medical Staffing. Operating profit for Creative & Technical (Japan) was 500 million yen in FY02/09. Operating profit for the Medical Staffing segment was 276 million yen in FY02/10. The company estimates it could generate around 150 million yen in total operating profit from its Creative & Technical (Korea) business and IT, Legal, and Accounting Staffing services in FY02/12. While the overall economic environment is a factor, it is probably fair to assume that without any new one-off expenses Creek & River has the potential to generate around 800 million yen in consolidated operating profit after eliminations.

In SR Inc.’s opinion, the mid-term growth potential of the company hinges on whether it can expand in new areas (e.g. IT, legal, architectural etc.), make the outsourcing business (Creative and Technical) truly profitable, and properly develop its intellectual property rights business. If any of the new businesses really take off, this could theoretically generate a lot of growth and this is the optionality that investors may like. However, the uncertainty about break-through potential of new initiatives and the ability to execute (the company’s execution track record is somewhat mixed), is what separates the opportunity from reality. Taking the existing businesses (such as outsourcing) to their full earning potential might be an important first step in the right direction. (It should be noted that this alone could boost the operating profit to over one billion yen level.) SR Inc. believes that the company understands the challenges and has started working to address them.

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Business

Business Description

The company defines its business as an "agency business". While the main sources of earnings are currently in its staffing business, one may see Creek & River as simply an employment agency. However, President Ikawa’s ambition is broader – providing higher value added services, including outsourcing of creative work and intellectual rights representation. Therefore it is probably more accurate to see the company as aspiring to be a matching agent for talent and the intellectual product that such talent produces with final customers.

The company's business officially consists of three areas: the Agency Business, Education & Training, and Rights Business. It should be noted that practically speaking only the Agency Business produces meaningful revenues and earnings as of early 2011. The Rights Business is a nascent area that has yet to contribute to profitability. Education &Training is more about supporting the creative and technical staff employed by the company. Creek & River provides services in five sectors, namely the Creative & Technical, Medical, IT, Legal, and Accounting. The company’s roots are in the creative sector which includes such areas as TV and cinematic production, web design, computer game development, etc.

Agency Business

The company acts as an agent between client companies and various specialists. The three contractual forms of the relationship are employment agency (or recruiter; for long-term positions), temporary staffing (for short-term temporary positions such as a duration of a project), and subcontracting (or outsourcing; when Creek & River is the managing entity).

Temporary Staffing

After an employment contract is signed between the company and a specialist, Creek & River dispatches the specialist to client sites to perform work. The company invoices the wage amount plus its own management fee.

Employment Agency (Permanent and Long-Term Staffing)

The company refers professionals who are registered with the company to its clients. The business model is such that if the referred professional is hired directly by the employer as an employee of the client, then the client pays the company a fixed finder's fee.

Subcontracting

The company performs some parts of clients’ business, using its own full-time or contract employees.

Education & Training

This area mostly serves to improve the professional skills of the staff the company works with (either its own employees or registered temporary staff). Typical activities include specialist seminars and events, or providing professional information via websites. The company regards those to be a sort of capital investment in long-term skill development. The majority of the events are free of charge but the company would charge for some. As of FY02/10 the impact on revenues and earnings was limited.

Rights Business

The company distributes and manages copyrighted material created by the creative staff registered with the company. Negligible effect on revenues and earnings in FY02/10.

Below are specific descriptions of each segment.

Creative & Technical (Japan) (68.2% FY02/10 sales; operating loss of 34 million yen)

The Creative & Technical business is run by the parent company, Creek & River Co., Ltd. (established 1990), and is the core of the consolidated operations.

“Creative & Technical” refers to mostly freelance persons working as specialists in the areas such as audiovisual production, web development, video game development, software application development, advertising, and publishing. In terms of specific professions, examples include TV and movie directors and producers, script writers, cameramen, web designers, graphics designers, game programmer, copy writer, illustrators, etc. This meaning applies also to the company’s operations in Korea and China. The number of creative and technical staff registered with the company stood at approximately 30,000 at the end of November 2010.

The company’s clients include businesses that create and provide content, like TV stations, game development companies, website design companies, advertising agencies, publishers, as well as general business firms that do not produce any content but only use it (examples of services here include promotional videos, web content, and printed materials). Overall, about 30% of the segment sales come from TV stations, 20% from game developers, and about 10% from advertising agencies. There were approximately 3,000 client companies at the end of Q3 FY02/11.

While the company classifies Agency Business, Education & Training Business, and Rights Business as three components of the Creative & Technical segment, the only material part as of FY02/11 revenues is the Agency Business.

In its Agency Business the company mostly provides permanent and temporary staffing services, as well as outsourcing (subcontracting) services. In FY02/10, approximately 60% of the parent company’s revenues came from staffing services (95% within that from temporary staffing) and 40% from outsourcing. By client type, the content producing clients, such as TV stations and advertising agencies, tend to use Creek & River’s staffing services, while general business clients normally go for outsourcing.

Details of contractual relationships and revenue/margin implications are as follows:

Temporary Staffing

After the company and an employee sign an employment contract, the company assigns the employee to perform services at the client’s place of business. The company invoices the wage amount plus its own management fee. Charges to clients vary depending on the desired skill sets, normally in the 350,000-500,000 yen a month range. In this business, sales are the invoiced amounts sent to clients. The direct costs are wages paid (labor cost). The gross profit margin is relatively high compared to companies that provide temporary office staff, such as PASONA Group Inc. (TSE 2168) or Temp Holdings Co., Ltd. (TSE 2181), where the margins tend to be in 15%-18% range.

Long-Term and Permanent Staffing

The company introduces specialist staff to clients and receives a fee when a permanent employment contract is signed. In some instances, professionals who are at the end of their temporary contracts may receive a permanent employment offer from the client. The fees tend to be about 30% of the base annual salary and only the fees are booked as sales by Creek & River. This results in 100% accounting gross profit margins.

Outsourcing

While in its staffing service the company mostly provides specialists to assist in production of creative work, in outsourcing Creek & River would be involved in creation itself, starting from the concept and planning and finishing with production. In outsourcing, the money paid by the client is booked as revenue, and the cost of revenue is wages paid to the staff (or subcontractors if an external production team is used). According to the company, the gross profit margin is about 25%. Actual examples of outsourcing projects include creating help-wanted ads for a recruitment company, operating a mobile phone game site in cooperation with a major TV company, or developing and providing a social game for a popular social game network.

In terms of SG&A costs, the company spends very little on attracting its registered staff. It does not advertise itself on TV, relying instead on word-of-mouth and its own portal-type website. The main cost component, particularly pronounced in the case of small outsourcing projects, is sales personnel expense. The company refers to its salespeople as “agents”. Creek & River agents are responsible for developing new clients, writing proposals, negotiating contracts, managing the projects, and confirming final product delivery. The parent company employed approximately 100 agents as of January 2011. Same agents handle both staffing and outsourcing requests and are divided into groups by the client type, e.g. TV stations, game companies, advertising agencies etc.

Creative & Technical (Korea) (12.0% of FY02/10 sales; 11.4% of operating profit)

Consolidated subsidiary CREEK & RIVER KOREA Co., Ltd. (established 2001, C&R holds 90.0% share) operates businesses in Korea similar to that of the parent company in Japan. The company described the differences between the Japanese and Korean operations are as follows:

• The majority of business in Korea is in TV and video-related work. About 900 staff are dispatched to approximately 70 Korean TV channels, which means that the company was involved in about 80% of TV shows in FY02/10.
• The company plans to focus on the web and gaming industries in the future.

The intellectual property rights management business in Korea is more advanced vs. Japan. The Korean subsidiary would actually produce films, publish books, etc. based on the work of some of its top creative staff.

Medical Staffing (14.4% of FY02/10 sales; 186.5% of operating profit)

Consolidated subsidiary Medical Principle Co., Ltd. (established 1997, Creek & River holds 65.3% stake) provides medical specialist employment services.

The personnel targeted by Medical Principle include physicians, resident physicians, and medical students. The company targets doctors who work as hospital or clinic employees, and not physicians with a private practice (doctors who operate their own clinics or hospitals). The company also targets part-time physicians. As of November 2010, approximately 38,000 physicians were registered with the company. The company also started providing similar services for medical nurses from December 2009. A small part of the revenues comes from Education & Training activities targeting medical specialists.

Medical Principle’s clients are medical institutions throughout the country, healthcare related firms, and government organizations employing physicians. As of the end of September 2010, roughly 7,800 institutions were registered with the company.

The company only provides permanent staffing services (recruiting services) in this segment as temporary staffing services are not allowed under the law.

If a staff doctor who is registered with the company moves from hospital A to hospital B, then the revenue to the company is determined by the expected annual salary of the doctor from hospital B. If a part-time physician splits time between hospital A and hospital B, the revenue of the company would be determined according to the income of the part-time physician from each hospital. Because the operation is based on commission, sales amount and gross profit is nearly identical.

The company provides its services under the Minkan Ikyoku brand. In Japanese, Minkan Ikyoku approximately means “private HR department of a university hospital” although it is only a branding referral to an ikyoku system. This service is simply providing referrals (introductions) for physicians to hospitals they are interested in for permanent (long-term) employment.

Ikyoku is a practice unique to the Japanese medical community. The term, best translated as “medical office” refers to a group in charge of physician hiring and placement decisions at university (medical school) hospitals. Such groups exist in each medical department and are hierarchically organized with a university professor, the head of that particular department, at the top, followed by assistant professors, instructors, assistants, physicians, residents and graduate students in that order. The ikyoku groups are not contained within one university hospital, but often cover affiliated hospitals. The ability of physicians to change their professional affiliation more flexibly has been growing since 2004, because of new policies from the Ministry of Health, Labor and Welfare (such as the New Resident Physician Policy). Prior to 2004, ikyoku held more power. For instance, if a doctor was a graduate of a certain university hospital, he or she would normally rotate every 2-3 years from hospital to hospital within their particular ikyoku affiliation. Medical Principle owes its existence to the increased mobility of the medical specialists made possible by deregulation that started in 2004.

When thinking about the potential market size, the following data may be of use. There were 8,670 hospitals in Japan in September 2010 (Source: Ministry of Health, Labor and Welfare "Investigation of Medical Institutions Movements"). Approximately 7,800 facilities (about 90% of all hospitals in Japan) may be considered potential clients of the company. There were approximately 270,000 medical doctors in Japan in 2008 (Source: Ministry of Health, Labor and Welfare "Overall Conditions of Physicians, Dentists, and Pharmacists"). As previously mentioned, roughly 38,000 of those physicians (or about 14% of the total) are registered with the company. By both the number of registered hospitals and physicians Medical Principle is one of the largest staffing agencies of physicians in Japan. The company credits its success in the area to its long track record. By the way, there were about 1.3 million medical nurses in Japan in 2007 (Source: Japanese Nursing Association "Nursing Statistics"), and the company sees this as another source of Medical Staffing business expansion.

According to the company, it does not spend heavily on advertising and promotions to encourage physicians to register. This is similar to the approach used for the Creative & Technical segment. However, the company does host joint presentation meetings at hospitals throughout Japan where it invites attending medical students to register.

IT Staffing, Legal Staffing, Accounting Staffing (6.6% of FY02/10 sales, operating loss of 81 million yen)

IT

Leading Edge Co., Ltd. (established 2000, C&R holds 32.4% stake) provides permanent and temporary staffing, outsourcing, and training services for IT engineers. Client firms include manufacturers, vendors, system integrators, and general businesses.

Legal

C&R Legal Agency Co., Ltd. (established 2007, C&R holds 80.0% stake) provides permanent and temporary staffing, as well as training services, for lawyers and paralegals. Clients include law firms and general purpose businesses. Of the total of about 30,000 lawyers in Japan as of January 2011 (Source: Japan Federation of Bar Associations website), 2,900 of them (about 10%) were registered with the company as of Q3 FY02/11.

Accounting

JUSNET Communications Co., Ltd (established 1996, C&R holds 100.0% stake, became part of the C&R group in 2009) provides permanent and temporary staffing, outsourcing, and training services for chartered accountants and licensed tax accountants. Clients include accounting firms, licensed tax accounting offices, and general businesses.

Strengths, Weaknesses

Strengths:

• Brand recognition and track record in Creative & Technical and Medical staffing. Creek & River has a solid reputation in both of its core business areas, to such an extent that it attracts new members with minimal advertising. The fact that word of mouth is the main channel for attracting new candidates suggests that the company is the de facto choice for workers in those industries who are looking for job placement assistance. Strength in the Medical Staffing has the added benefit of providing a relatively stable source of business for the company, offsetting volatility from other segments.
• President Ikawa’s unique insights and ideas. President Ikawa’s personal experience as a freelance specialist have provided him firsthand knowledge of the challenges connecting creative and technical staff with the firms that need those skills. Ikawa’s insight that other specialists (like medical doctors) may face similar challenges led him to start the company’s Medical Staffing business, which has been a key contributor to the company’s growth.
• Unique business structure. Creek & River’s structure (part staffing agency, part talent agency) structure is part of what makes the company successful. The company is able to provide a “one stop” destination for client firms that need skilled creative staff for a short term, and also connect companies with permanent staffing needs with qualified specialists. In SR Inc.’s understanding, there are no other competitors that offer these types of services in similar areas. Although this structure is unique, SR Inc. also notes that it could also create a possible conflict in the company’s identity (as discussed below).

Weaknesses:

• Low profitability poorly matching company’s stated growth ambitions. Creek & River’s operating profit margin peaked at only 3.5% in FY02/09. SR Inc. thinks that the 20-80 principle applies well to Creek & River – 20% of its clients produce 80% of sales. This affects financial performance because agents perform a similar amount of work on projects of all sizes. SR Inc. This is likely impacting the efficiency of the operations and their earnings ability..
• Issues with execution. President Ikawa’s ideas are one of the company’s strengths, but only limited projects and businesses contribute to earnings. Without proper execution, great ideas may remain just that, but could also turn into a source of distraction from core business operations. SR Inc. sees this as a weakness because competitors who lack Creek & River’s creative spark could try to become “fast followers” and benefit from Creek & River’s innovative thinking.
• The outsourcing business model is still a work-in-progress. The company has been offering outsourcing since FY02/03, but arguably the necessary project management skills differ from Creek & River’s core staffing expertise. SR Inc. thinks that if the company can get the model right, it could be an area of future growth, but until that is achieved it seems to drag on resources, financial and otherwise.

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Cost Analysis

The cost structure analysis above is based on the parent company numbers. Gross profit margin was between 23.1-26.5% (FY02/06-FY02/10). Spread changes (client prices minus wages) and the sales mix (permanent staffing vs. temporary staffing vs. outsourcing) are the main factors affecting gross profit margins. Gross margins are stable highlighting the fact that the bulk of cost of sales is variable.

Looking at operating profitability, the picture is different. While the FY02/08 operating profit margin was 6.0%, the company booked operating losses in FY02/10. SR Inc. believes that this is due to the high ratio of fixed costs in SG&A, with personnel costs and rent accounting for 60% or more. In other words, for the company’s operating profitability to improve, it needs to increase sales while maintaining headcount, i.e. increase sales per agent. SR Inc. thinks that while the overall economic environment obviously impacts sales productivity, it is extremely important for the company to find ways to increase the inherent productivity of its sales force. Looking for sales and project/client management approaches that match the gross profitability of individual projects (particularly in outsourcing) appears to be an important task for the company management.

Market & Value Chain

Market Overview

The above table summarizes statistical data relevant for assessing the business environment Creek & River operates in. There are a couple of conclusions that one can draw looking at the data above. First, such client businesses as TV stations, Web design companies, advertising agencies, and system integrators are substantially and immediately affected by the macroeconomic trends. Therefore, Creek & River’s Creative & Technical and IT Staffing businesses would tend to fluctuate with changes in macroeconomic factors. On the other hand, the job-to-applicant ratio for physicians and medical nurses is well above that of other fields, and seems to be unaffected by economic trends. There is clearly a persistently strong demand for doctors and nurses independent of what the economy is doing. If the company could effectively work to help meet such demand then there is probably room for stable growth in the Medical Staffing.

The market for digital content and e-commerce has also remained strong irrespective of the economic situation. SR Inc. sees this area as another avenue of potential growth for the company.

Barriers to Entry

It might be easy to start a business similar to Creek & River’s. However, the network of clients and staff that the company built over years cannot be duplicated overnight. At the same time, in areas which are new for the company, such as legal, IT, and accounting staffing, Creek & River is itself a smaller competitor. Therefore, for those areas the barriers to entry can be characterized as low.

Competition

No other companies appear to be providing a wide variety of creative and technical staffing services similar to Creek & River. However, there are a number of listed production companies like Tohoku Shinsha Film Corporation (JASDAQ 2329), Aoi Advertising Promotion (TSE 9607), and TYO (JASDAQ 4358). Also, in many cases Creek & River clients have a choice of doing the work using internal resources or employing staff not registered with the company (e.g. available through informal networks). Therefore it is probably fair to say that despite uniqueness of the company’s business structure, it operates in a highly competitive environment.

The next largest company in the Medical Staffing segment after Creek & River is Recruit Doctor’s Career, a group company of unlisted Recruit. A large number of firms of various sizes have been entering the market recently and while the company does not see them yet as direct competitors, this may change in the future.

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Strategy

Strategy

In his thinking about the business, President Ikawa relies on his own early experiences and focuses on difficulties that even very talented freelance specialists face in marketing their skills and securing clients. The core of the company strategy is to create a win-win proposition for all sides involved, staff, clients, and Creek & River itself, by marketing the skills of its registered staff.

The company believes that all professionals share similar challenges in the networking aspect of their business. This belief underlies its gradual expansion to various sectors such as creative and technical, medical, IT, legal, and accounting. Going forward, Creek & River plans to further expand into medical nurse staffing and architectural job matching.

For the first ten years after its founding, the company’s business development focused on staffing services. Later, it added producer services in its core Creative & Technical area, starting the outsourcing business. FY02/11 is seen by the company as the year of major changes. It believes that investments made in FY02/11 will determine the future growth. Creek & River assumes that the ability (and desire) of emerging markets to buy Japanese skilled labor and services is rising enough to start making business sense. It is therefore working to develop a business model that would use intellectual property rights owned by the Japanese creators, to generate revenues overseas.

Shanghai Subsidiary established in March 2010

The company established Creek & River Shanghai Co., Ltd. as its non-consolidated subsidiary involved in publishing business (selling Japanese book rights to local publishers).

Partnership with Hanvon

In July 2010, the company signed a cooperation agreement with Hanvon, a leading e-reader (e-book) manufacturer controlling 60% of the Chinese e-book market (Source: Creek & River estimate). Under this agreement Creek & River will be the exclusive distributor of Japanese content on Hanvon platform (published materials, computer games and video products).

Partnership with the Beijing International Copyright Trade Center

In November 2010, signed an agreement with the Beijing International Copyright Trade Center (BICTC), a copyrighted works exchange, gives Creek & River exclusive rights to register and represent Japanese copyrighted content at the BICTC. The BICTC is the only nationally established copyright trading platform in China, established in February 2009. With the proliferation of pirated DVDs and knock-offs of copyrighted promotional characters becoming an international problem, the center was established on the need for copyright verification and organized distribution. The Center has a member organization made up of around 10,000 Chinese publishers and television stations.

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Other Information

History

Creek & River was formed in March 1990 by President Ikawa, himself a former freelance film producer, with the mission to increase the lifetime value of creative staff and help customers create value. The company started as a staffing agency focusing on the video production area and subsequently expanded into web and mobile application development staffing, as well as broader creative and technical staffing and outsourcing. The company sees its business model as applying to any type of professional staff and it has been expanding to include such professions as medical doctors, IT engineers, lawyers, and accountants.

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By the Way

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Latest Q&A

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