ExaWizards Inc. (4259) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. This is official English voiceover of Financial Results Briefing for ExaWizards for the third quarter of the fiscal year ending March 2025. Original speaker was Representative Director and President, Makoto Haruta and English translation is by Yukinira from Investor Relationship team. Before we get into the presentation, I have a few announcements: Presentation slides and the other materials on our website, so please check them as needed. If you have any questions regarding to the financial results, let us know by our contact forms on our website too. Now let's move on to the presentation. Thank you all for taking time to join us here today. I would like to explain ExaWizards' financial results for the third quarter. I will explain to -- according to the materials, skipping some parts. So please feel free to ask if you have any questions or anything is unclear. First, I would like to present the executive summary as our overview. As stated here, for the third quarter, sales were JPY 2.54 billion, an increase of 8.8% year-on-year, marking the highest ever for the third quarter. Operating profit was JPY 6 million, continuing the profitability from the second quarter. Additionally, EBITDA from the cumulative third quarter exceeded JPY 400 million and with the third quarter also being profitable. I believe it is fair to say that our earning power has significantly improved. Regarding individual segments. First, the AI product business segment is progressing smoothly. Products such as generative AI and [Daya] for human resource development are steady being accepted by customers, with third quarter sales exceeding JPY 833 million, an 83% increase year-on-year. Furthermore, segment profit was JPY 199 million, also ended positive with a profit margin of about 24%, indicating that we are steadily generating profits while growing. We have reached this point without using significant advertising expenses, but we are gradually gaining the capacity to do so if necessary, which I consider a positive development. On the other hand, regarding the IR platform we have been working on, as previously mentioned, we are currently transitioning the model. However, we are seeing progress with exaBase role playing and exaBase meeting summary. And in the medical field, our AI medical devices for dementia is progressing smoothly. I will touch on this later, but we recognize that the timing for approval has accelerated. Additionally, exaBase Studio, which is crucial is being well received by customers, leading to an increase in product using exaBase Studio, indicating that the model transformation is progressing steadily. In terms of number for this quarter, it is at the same level as the second quarter with slight decrease in year-on-year JPY 1.323 billion. However, as mentioned at the beginning of the fiscal year, we aim for a scale as of last year, and we are on track with that target. Regarding profit, I will discuss this later, but we -- as we continue to develop and provide products that are beneficial to customer, temporary costs have increased, resulting in segment profit being limited to JPY 313 million. Regarding the other service business, sales in the third quarter have been progressing smoothly, reaching JPY 474 million, and we are now in a position to generate solid profits. More importantly, the business which has primarily been driven by a team that act as a cell proxy or promote cells on behalf of customers has now developed an AI product for call center called Dr. Tell. This product aims to improve and enhance quality of customer service, and we are currently promoting it. We are transitioning from businesses model that relied on human resource to one that integrates people, system, service and finances. The shift is gradually becoming more apparent. As mentioned in the business update, you may have heard a lot about AI agents recently. By 2025, we expect domestic company's investment in AI to increase further which we believe will be a significant tailwind of our company. In this context, our existing assets and new service are becoming more interconnected rather than independent. By linking on product service with customer data, we are on the verge of providing new value. I would like to touch on this later. To summarize the current state of our product and platform from the executive perspective, as mentioned, our products are progressing quite well. This is largely because the market has evolved to assume the usage of generative AI by customers. To meet these needs, we have been focusing on multi LMM support, making various LLMs available, ensuring ease of use of customers and providing promotes specialized for specific domains. We have been committed to understanding what is user friendly for the customer's perspective and it's seen that these efforts are being accepted. Furthermore, as we advance these initiatives, there's a renewed focus on human resource development within each customer leading to a reevaluation and increased use of our service. Regarding the AI platform business, as mentioned earlier, we are gradually building deeper relationship with larger customers among our diverse clientele and our sales approach is becoming more standardized. Consequently, the number of exaBase studio-related projects has increased significantly to 34 this term. While sales have been mentioned earlier, profit has slightly decreased due to ongoing development. However, we are also addressing various customer needs, leading to an increase in POC product as fees to larger Studio involved project. This has resulted in a slight decrease in the unit price affecting overall revenue and profit. Nevertheless, in terms of our original goal of developing products service, we are progressing smoothly. Looking ahead to the fourth quarter and the fiscal -- next fiscal year, as there is a strong demand from customers, we aim to respond by developing robust service product. New service are being developed smoothly and to use exaBase Studio, our customer is gradually increasing. We are increasingly receiving inquiries from the other companies about collaborating on service development, and we plan to pursue joint service creation with customers in the future. For a conclusion, to put it simple in my words, I believe our performance is progressing smoothly. Ideally, I was hoping a bit more number from the AI platform section mentioned earlier, but new products have emerged to compensate for that. And the qualitative use of exaBase studio has advanced significantly indicating progress in business transformation, which I appreciate. Therefore, in terms of the result of these efforts, I expect that if things continue smoothly, the current fourth quarter might become the best quarter ever. We have -- we still have 1 month and a half left in the fiscal year, and I want to ensure we do our best. Now if you look at the materials, as mentioned on Page 9, on Point 3, we have reported this before, but we have transferred the shares of [Trink] which provide AI photo service for the child care and education industry to [indiscernible] resolving a special profit recorded this time. Additionally, we have conducted impairment loss on software. As we continue to review our asset and advanced business transformation, we will reassess and use on underperforming assets toward the fourth quarter, we may periodically record impairment, but we aim to effectively utilize our asset as we move toward the fourth quarter. Now let me provide more details by segment. This aligns with what I mentioned earlier. But as you can see, the AI product business has truly been driving the company's growth, achieving 83% compared to the same period last year. As I mentioned earlier, we are generating profits within the segments in the AI product business with its high gross profit margin exceeding the 70% is comparable to the AI platform in terms of operating profit margin. We anticipate that as sales expand, operating profit can be further increased and we aim to lead the companies with the product business. Regarding the AI platform business, it is generally as expected. We will continue to create product service particularly with the business structure transformation centered around the exaBase Studio, we plan to launch more products. Currently, we have separated segments from the AI product business and AI platform business, but as product emerged from this area and are promoted as a part of the product business, we will consider how to best segment them. We aim to disclose this in a way that is easy for everyone to understand. As for the other service, as mentioned earlier, we're transitioning from human center to a human plus systems business model. And if this progress smoothly, we will have the AI product business, AI Platform business and other service business as our business segments, but each driven by their own product service. We are gradually gathering the necessary elements of our tools for this, and we aim to further promote it. Regarding the AI product business, the numbers are shown here. I hope you will take a look. The main KPIs, the DX AI products aim to improving corporate productivity, our center of the AI product business segment, but we are also introducing service for other areas such as social AI for the nursing facilities. We have included this in the lower right corner, with 1250 facilities using it, and we are gradually expanding -- we are launching new service and improve the efficiency of facility operations. We aim to expand the use of those tools and service. This area has been part of our focus since the company's establishment, specifically in the nursing care sector, which was recognized as a significant social issue. We tend to continue doing what we can do in this area more diligently than ever before. Here's the KPI for exaBase Generative AI. As you can see, the number of companies and users is steadily increasing, and the MRR has also expressed a certain level. These figures will be finalized by the end of the fourth quarter, and we are currently preparing for the next fiscal year's plan. As the number accumulates, it will become easier to create plans for the next year. So we want to ensure we maintain this growth momentum. In this context, the key question is how our product will continue to be accepted by customers. As mentioned earlier, the term AI agent is frequently heard these days. The definition of an agent may vary slightly. But if we define it as an autonomous system that operates without human intervention, then we are currently developing a browser operating autonomous AI agent. This agent can autonomously log and operate within a browser, and we are currently testing this implementation. We are also ensuring that we can adopt to new technologies while addressing the needs of integration with existing system used by our customers. This involves identifying the location of data within the customers' environment and ensuring proper integration. As a result, log or connection of internal data becomes essential, and we are working to ensure proper log. Additionally, we are extending our service to handle not only text data but also images and audio. The topic of LLMs is hot in these days. Recently, there has been a lot of buzz around DeepSeek, and the new technologies are constantly emerging. Since DeepSeek is an open technology, we should anticipate new development based on it. The question of how to use these light-weighted and cost-effective technology is a customized matter is also being raised. Within LLMs, there are areas where GPT excels in areas where Gemini excels, which -- with slight differences. Our role is to provide solutions that are truly user-friendly, assess the risk and determine the cost effectiveness from the customer's perspective, we aim to keep up with the changes and trends in new technologies. Among our products, we also have exaBase IR assistant. We are currently aiming to increase the number of companies using it from over 60 to around 90 to 100 by the end of the fiscal year. This product is gaining traction, especially among large corporations where IR is considered a major strategic component. The advantage of exaBase IR assistant is that it is used in the department close to corporate planning, making it easier to convey the potential of AI to executives. By introducing exaBase IR assistant, we hope to spark interest in AI among executives leading to potential connection with our other products. This makes it highly effective service for exploring new opportunities with customers, and we aim to further expand its reach. Additionally, as we consider the utilization of AI within the company, the question of discovering talent capable of implementing these technologies arises. As we receive the assessment learning tool called [Daya] that we originally developed is now being used by 2,000 companies and 280,000 individuals, resulting in sales exceeding JPY 300 million on a standalone basis. The [Daya] tool is designed to accurately measure the digital skill of the clients' employees, serving as a benchmark for the various companies. By using it, companies can understand industry-specific differences and their own unique characteristic and [digital run]. We are currently preparing to expand our service, indicating analytic tools to further enhance customer's usage. Furthermore, understanding these digital skills allows us to identify areas where skills are locking and how to further educate individuals, we aim to expand our service in this area, increasing the number of employees who can effectively use these skills and enhancing our human service. Regarding the AI platform business, as mentioned earlier, we are committed to expanding our product service, and we aim to offer them in a different way to our existing customers. We're continuously disclosing our progress and as cross-segment usage by the customer increases, we are considering how to disclose information in the future. Our goal is to have customers use as many of our product service as possible, and we are contemplating the best indicators for this. Example case shown on screen, which originated from discussion with customer, and we were developed into product and service. This process began with exaBase role playing to enhance sales productivity leading to the development of tools that simplify exaBase meeting summary. This allows our quick learning effective sales techniques and self improvement, resulting in service expansion. Each service is released as a product. But when viewed from a border sales perspective, it becomes a tool to support individual employees. We are expanding service around these products with a development road map in place, and we hope customers will use them as a result. As the development progress, we are receiving contract from customers. However, implementing these solutions involves preparing scenarios and data connection for each company, which can cause a time lag between contracting and actual usage. We expect the financial impact to be reflected in the next fiscal year and aim to further increase in these numbers. Additionally, beyond corporate and productivity improvement, we have been involved in Dementia-related initiatives. We are developing a system for early dementia detection, which is finally taking shape. As previously announced, we established a society [indiscernible] to pursue this business, focusing on dementia detection medical devices optimized for the global market. As I mentioned earlier, there's a system called the Innovation Program of Medical Devices designated by the Ministry of Health Labor and Welfare, which allows for priority review on the fast track basis. As a result, there is a possibility that the time when this is recognized as a medical device can be brought forward, which is beneficial for business and allows customers to use it as soon as possible. We hope to proceed without any delays. In the field of medical device, we have another program and product prepared, and we -- and when these take shape, we would like to inform everyone again. Some of the things we have been working on for a long time are gradually taking shape, and we want to think about how to make them more usable. As I explained earlier, if the initiatives related to service for children, such as [Trink] transferred to [indiscernible] can be provide to customer and utilize, we're considering delivering them to a customer in that way while gradually making effective use of our assets. This is a reputation of what I have said before. But the other service business, especially the heavily influenced by the customer sentiment have traditionally been quite dependent on human factors. However, we are now moving forward, providing service not only through human efforts but also through AI system. This approach allows us to offer services that are not solely affected by economic sentiment. This kind of qualitative changes is gradually progressing in our industry. We aim to further solidify and implement these changes soon. Usually, we provide a business update after this. And although I have touched on some of these points earlier, there may be some overlap, but I hope you may listen again. The company was originally established to solve social issues with AI. And currently, we are focusing on improving productivity among these social issues. The original issue was, of course, the super aging society, which leads to a decrease in the working population. Recent indicators show that the number of people decreased -- the number of workers also had decreased, raising the question of how to expand business in corporate management. Among these, the improvement of white collar productivity has been mentioned, but there are many -- there may have been parts that we are not addressed. With the emergence of AI and generative AI, there's a belief that white color productivity can be dramatically increased. As a company that interacts with the such service and AI from the outside, we are increasingly able to propose these 2 customers. And it seems that customers are gradually taking this initiative seriously. Initially, as shown on the left side, we started with an AI platform to create AI models together, asking what can we -- what can be done. We have been developing this alongside our customers. On the other hand, we have also been creating individual products thinking that can we develop generic products that suits a wide range of customers. This is the start of our creation of AI Products. While expanding the offering of generic products to customers who initially wanted to work together, we are also considering integrating it through the exaBase Studio, as I mentioned earlier. I will explain a little more. As mentioned earlier, the platform was centered around people and business development. We have been conducting business with customer on [indiscernible] month basis. Regarding the products, we have been conducting business by selling products with pricing model like how much product. When trying to enhance or dramatically increase productivity within the company, it is not about each being independent but about how to incorporate the data that customers have into AI and how to use that data. This raises a question of how to connect the data that customers have, which seems simple, but it's actually difficult. You may have heard that it is difficult to insert data when using log system. And customers have also mentioned that even with efforts, the data can be read. As you can hear, it's not always easy to connect and get the exact answer you expect. Therefore, how we incorporate and classify customer data is extremely important. The better we classify it, the more likely we are to get to the desired output. The basic idea of exaBase studio is to build this in collaboration with product and platforms connecting around exaBase studio. We believe this is gradually starting to happen. Originally, we called the AI Guru spinning gear model aiming to transform specific customer issues into general issue and create product to address them. This has gradually taken shape. And as I have mentioned repeatedly, more and more products are being developed and accepted by customers. Currently, in terms of sales, we are seeing growth exceeding 30%. Additionally, AI agent have become a popular topic for investment. I believe no company can ignore these agents. Companies will like consider how to engage with AI agents and what they can do, and they will actively use what is available. However, when trying to use AI agent in internal operations, as I mentioned earlier, if you don't properly understand internal matters, meaning if you don't understand internal data, you won't get expected answers. In actual operation, it's crucial to connect internal database with internal data and doing so brings real value. We feel that the data integration with core system is becoming increasing important. We believe that having the exaBase Studio to facilitate this integration is a significant competitive advantage of our company. When we break down what is needed for a customer to use AI to improve productivity, we have already made product that customers can use from the start. Additionally, if customer have a specific need for creating something, we can work together and create as a tailor-made solution. The key is how to integrate and connect these solutions with the system customers already have. exaBase plays are centered -- exaBase Studio plays as a central role in this. If the integration is successful, it will become something customers can use themselves and can be used by reviewing business process. Ultimately, as stated in the second point of our business direction, our role is to support customer lead lending application development. When customers outsource this is to the third party, they will likely face 2 issues: First, they may encounter delays and uncertainty about completion timelines. Second, if they need to make minor adjustment after the initial completion, they will not face additional delays. The cycle of waiting adjusting can be quite time-consuming. When customers can lead development by themselves, it speed up the process, allowing them to respond immediately to their needs. Finally, if customers can create what they need and when they need it. It can significantly reduce development cost. Our job is to provide an environment where a customer can lead and create what they need and when they need it, and we aim to advance this. From our perspective, in the AI application and in the AI platform business, as shown on the far left, we start with consulting, developing AI models for customers in reviewing their operations. We are starting from a point of reviewing adjusting. Meanwhile, there has been a demand from customers to connect AI models to core system after they are created, and we have expanded our business in the form of system construction. As a result, there has been an increasing desire to create application using AI. And we have reached a stage where we ourselves are creating and operating AI applications on behalf of our customers. However, it is easier to do these things within a single platform. Moreover, it is better if customers can create things by themselves. In this context, we developed exaBase Studio, which has finally been understood by our customers. We are seeing an evolution where customer wants to continue developing on their own with exaBase Studio at the center. From our perspective, we're beginning to see a shift from the top 2 projects, which were originally focused on FDE and [indiscernible] rates to a service center business model. And therefore, we want to expand the business of application development and operation plus exaBase Studio projects. And as we enhance this customer will be able to do them to more -- to do more than themselves. Products are being developed rapidly, and we are increasingly able to meet customer demand. As you can see from the exaBase Studio at the bottom, by linking it with various customer data. The possibilities are expanding, and we want to continue doing this diligently. For example, regarding what can be done with the integration of exaBase Generative AI and exaBase Studio, we have expected some customer's feedback. Customers are being to realize the cost and speed benefits when they interact with the [indiscernible] themselves. Furthermore, we are progressing on what can be done if the browser can be used as an agent, especially in large companies where RPA has been advanced. With RPA, you need to design properly from the start. And if there are changes in the system or deviation from the business process, it won't work as intended. However, with an emergence of generative AI, there is a possibility that agents within can automate these processes. Ultimately, we believe that RPA and generative AI have a high affinity, and we are working with RPA providers to solve what can be done together. Once this is established, we can offer it in a more understandable way to customer, and we want to proceed with this. In conclusion, looking at our current segment of AI platform and AI Products, we aim to stabilize revenue with the platform while transitioning to conduct product-centered business focusing on products and service. This shift is already being to emerge. There might be extreme voices expression in whether we will stop the platform business. Our AI platform business allows us to continuously listen to customer feedback. It is a crucial area for developing new product service. Additionally, as customers can develop using the exaBase Studio, there is potential for significant transformation in the exaBase Studio business model. Therefore, we will still have expectations for the extension of the AI platform business, and we aim to add new service in the coming season. Regarding the current numbers, we have not changed our forecast, but we are determined to run through to the end. And we have made significant progress on what we need to be done next season. We aim to welcome the next season in good shape and strive for further expansion. This is the end of presentation. Thank you.

Now we move on to the FAQs. Now we move on to the FAQs. We have 7 questions. Question one, "Could you provide some quantitative insights into the impact of introducing AI products and agents into your company? How do you envision integrating with major U.S. companies like Microsoft, Salesforce and ServiceNow's AI agents in the future. Please share your ideas?" Answer from Haruta.

Thank you. As you pointed out, we are currently trying to qualify and measure the impact of utilizing AI agents within our company. Specifically, as a company like ours, we are creating AI agents for various departments, some for customer-facing purpose and others were internal use. These are being developed in different departments, and we can see them being tested in practice. We are not trying to manage and advance these efforts as an organization. Some people are already using agent extensively for information gathering. By collecting such practical examples, we aim to summarize the benefits of internal utilization and reflect them in proposal to actual customers. In this sense, there are agents created internally, externally or by customers themselves. We may develop similar products to those created externally or they may be entirely different for products that customer wants to use, we aim to connect them. And if we have products that can meet their needs, we want to propose them. if customers create their own product internally, we want to consider what tools we can provide to support them. In other words, we do not -- we do not intend to create everything ourselves, providing an easy-to-use platform is the most important thing. While I cannot discuss the full details of the platform yet, we will inform you once again, we have a clear picture.

Question two, "what is the amount of delay in the AI platform to the fourth quarter? Please share your thoughts on the sales and operating profit margin for the next fiscal year of this business." Answer from Haruta-San.

Regarding the amount of delay itself, I'm not aware of the exact figures. So I cannot provide a specific number right now. However, it is not a very large amount. I would estimate it to be in the range of JPY 10 million to the lower end of the JPY 100 million. For the next fiscal year, based on the number I mentioned, we expect the fourth quarter to be higher than the third quarter. However, as I have been saying, we are strongly committed to transforming our model, focusing on exaBase studio's centered business model. We are currently examining how to implement this in this next fiscal year, and we will determine the numbers of the AI platform business based on that. We will share more information once we are ready.

Question three, "I believe there was some upfront investment in the third quarter. Could you share your plans on upfront investment for the fourth quarter and beyond? The market environment seems favorable. But I -- should we expect upfront investment to increase significantly compared to the previous fiscal year." Answer from Haruta.

Thank you. As I mentioned earlier, the largest investment is in productization. The investment in product development is significantly large. Within that, in the AI platform business, product development around sales, including newly introduced exaBase role playing is planned to continue. There's quite a bit of this area. Another aspect is in the [indiscernible] EAI, exa enterprise AI, which provides exaBase Generative AI where products or service are also progressing rapidly, and I think these 2 areas will result in a considerable amount of upfront investments. At the moment, I can't disclose the actual figure. But as mentioned in the question, there's a strong demand from customers, and we are considering how much we can respond to that. So technically, we can fully cover it with internal resource alone. So we are realizing that we need to borrow some external resources to proceed with development. We need to consider to what extent we will do to do this. As a disciplined overall while achieving revenue growth, we aim to generate profits at the bottom line. So we can't answer yet what the profit level will be, but we will decide investment amount accordingly. In terms of scale, we expect it to exceed this fiscal year, but we want to operate with a clear awareness that we're falling into a deficit again just because we are investing.

Question 4. The question is related to the previous one. "What time frame should we consider for the phase where the operating profit margin improves?" Please provide an answer. Answer from Haruta.

Regarding the operating profit margin, we expect this fiscal year to be the first time we achieved a profit in the midterm. According to the current plan, so even if we take this fiscal year's level as a premise, it's uncertain, but next fiscal year, while continuing development, we will also be in a phase of generating profits. From the perspective of operating profit margin, I think it will be in the single-digit percentage range. However, when considering the AI product business and AI platform business separately, I assume that the AI product business will naturally have a higher profit margin. It's difficult to say when it's -- it will consistently generate stable profit, but I think it will be more stable from the fiscal year after next. Next fiscal year, as mentioned in the previous question, there are many things we want to do, products we should develop. And things we would be good to do. This is not just our own thoughts, but we probably feel this is from our formal interaction with customers. So we want to proceed with that properly. If we can do that, we will work closely with [indiscernible] customers to develop and then expand it generically. The generic expansion will come later. So there will be inevitably the timing shift and the result will appear later. However, next fiscal year, while generating profits in the midterm, we believe that further advancing the visible products and services what we should focus on. And we want to do that without wavering.

Question five. Thank you for time. The question is about the progress of profits in the third quarter, particularly the progress compared to the plan for each segment, AI Platform and AI products.

Regarding the first question about the progress on operating profit. As mentioned believe earlier, I wish the AI Platform business segment had performed a bit better. There was a delay. So in terms of profit, we were expecting it a bit more, but we hope to recover that in the fourth quarter. The product side is progressing smoothly as planned. And since it's the end of the fiscal year in the fourth quarter, we want to capture customer demand and ensure we generate profits. Question Six, "regarding the second point, I would like to confirm that feasibility of achieving the full year plan for this term. It's been about 1.5 months. So I think there are some parts that are becoming clear. Considering the AI platform potential delays, is there a situation where certain level of feasibility for achieving is visible? Or if we subtract the third quarter profit from the full year plan, especially since the profit requires an OP margin of about 15%. Do you recognize that your huddle might be high? I would like to ask about the feasibility of the full year plan." In terms of feasibility of the full year plan, as you mentioned, the biggest factor is whether the AI platform business can achieve the number by the fourth quarter. As you said, there are projects but they need to be completed by the end of the fiscal year. The growth this time was also due to the increase in test to be done in relation to customers. So we're trying to make it in time. The product side is going smoothly. So I'm not too worried about that.

Question 7. Finally, regarding the outlook for the next term and beyond. There was a mention that the number of projects for the exaBase Studio on the platform is increasing. As a basic idea, it is expected that the AI Platform business margin will gradually improve and shift to the product like from an exaBase studio product increases, I would like to ask about the improvement of the exaBase Studio margin. Answer from Haruta.

In terms of improving the exaBase studio margin, as we have been working on since last year and previous term, the profit margin of the platform has improved significantly. We're seeing a form where we could achieve about 30%, although it has slightly decreased due to the various investments, including development, the profit margin is quite visible when focusing on consulting. So we are changing the form now aiming to exceed the original 30%. In exaBase place, studio, as we change the business model, how we can achieve the number will be an important point for the next term, especially in terms of sales, not just FTE, but also sales from license agreements and other considering ongoing. How we can achieve the number with these factors is a major challenge and a big task. On the other hand, speaking only of segment, the mission of the AI platform business is to create product and service. As mentioned earlier, if exaBase role play and exaBase meeting summer grow significantly, we might have to move them to a different business segment as the actual products, which means that while the AI platform business creates new things, they might be taking to unlock their business segment when they seem to be succeeding. In that sense, we want to consider how to position our current business segments for the next term. We would like to disclose or discuss this with everyone as clear as possible when the timing is right. This is the end of the presentation of financial results for the third quarter. Thank you very much for listening today, and have a nice day.