ExaWizards Inc. (4259) Earnings Call Transcript & Summary

Thank you very much for taking the time to join ExaWizards financial results briefing for the first quarter of the fiscal year ending March 2027. An AI presenter will now walk you through an overview of our first quarter results and the performance of each business segment. Here is today's agenda. Please note that the sections from Item 4 onward, the full year earnings outlook for FY 2027 are reproduced from previously published materials, so we will omit them from today's presentation. Let us begin with a summary of our financial results. For the first quarter, consolidated net sales were JPY 3,448 million, up 41.0% year-on-year, and operating profit was JPY 200 million, up 39.0%, both record highs for a first quarter. Growth was driven by both of our businesses. The AI Products business posted net sales of JPY 1,585 million, up 50.6% year-on-year, while the AI Solution Services business grew a solid 31.1% to JPY 1,909 million. Beyond the numbers, this was also a quarter of steady progress in our initiatives for business expansion. Highlights include the establishment of MS&AD AX, a joint venture with the MS&AD Group; Exa Frontier Edge, a strategic subsidiary announced in March that began operations in April. ExaForwazrd Kyushu, a Fukuoka-based company dedicated to the real-world deployment of AI agents and the launch of the Exa Interaction Design Lab, which will pioneer next-generation AI technology development. Next, an overview of our performance for the first quarter of FY 2027. To reiterate, net sales for the quarter were JPY 3.448 billion, and operating profit was JPY 200 million, both record highs for a first quarter, marking a very strong start to the fiscal year. Allow me to add some context on the background of this strong start. Historically, our revenue has tended to decline seasonally from the fourth quarter when large year-end projects are concentrated into the first quarter of the new fiscal year. In the first quarter of this fiscal year, however, the decline from the fourth quarter was limited to just 5.3%, a significantly smaller drop than in past trends. This demonstrates that our revenue baseline is steadily rising, driven by growth in the AI Products segment as well as an increase in long-term contracts in the AI Solution Services business. With record high first quarter revenue on a stand-alone basis as well, we are off to a very solid start. While growing the top line, we also made firm strategic investments for future growth, committing a total of JPY 280 million during the first quarter. These investments are aimed at strengthening our business foundation and enhancing corporate value over the medium to long term. Specifically, we reinforced company-wide security and introduced AI coding agents to improve productivity. We are also focusing R&D efforts on optimizing LLM costs. In addition, on the personnel side, we stepped up both new graduate and mid-career hiring and introduced a bonus system as part of our investment in human capital. Finally, we recorded expenses for corporate actions, including preparations for establishing subsidiaries and for our transition to the Prime Market. While these strategic investments increase costs in the short term, they build a strong foundation for sustainable growth. To summarize the overall picture, let me explain the consolidated statement of income and EBITDA for the first quarter. Net sales were, as mentioned earlier. Gross profit rose 18.7% to JPY 1,984 million, and operating profit was JPY 200 million, reflecting steady progress. Furthermore, we secured profitability at every level of the income statement from ordinary profit down to net profit. EBITDA came to JPY 329 million, an increase of JPY 94 million from the same period last year, indicating a growing capacity to generate stable cash flow. That concludes the explanation of our overall results. Next, I will explain our performance by segment. The AI Products business achieved net sales of JPY 1,585 million, up 50.6% year-on-year, growth of more than 1.5x. Meanwhile, profit margins declined temporarily due to increased advertising expenses and development costs in the sales tech area, but we expect improvement from the second quarter onward. The AI Solution Services business grew steadily with net sales of JPY 1,909 million, up 31.1% year-on-year. Gross profit margin temporarily deteriorated due to higher outsourcing costs associated with growing demand for AI development, but we expect it to improve in the second quarter through our ongoing recruitment efforts. Let's look at each segment in turn. The AI Products business recorded net sales of JPY 1,585 million for the quarter, a substantial increase of 50.6% year-on-year. In particular, exaBase AI, renamed in July from exaBase Generative AI, continued its strong performance from the previous year and drove this growth. Operating profit was JPY 518 million, up 9.1% year-on-year. On a quarter-on-quarter basis, however, profit declined slightly due to upfront investments, including active spending on advertising and headcount expansion in the sales tech area. Next, please look at the sales trends by product category in the AI Products business. In the first quarter, the generative AI product portfolio grew 63.0% year-on-year to JPY 1,053 million, powerfully driving the growth of the business as a whole. The sales tech area surged 274.2% year-on-year, reflecting expanded adoption, particularly among financial institutions as well as onetime contracted development fees for a specific customer. The health care area is also making steady progress, including the start of clinical development for a home-based AI diagnostic support app. The HR tech area was down compared with the same period last year, but is on a steady recovery track, which I will explain in more detail shortly. As a result, total AI Products revenue increased 50.6% year-on-year. Next, let me explain the key KPIs related to exaBase AI in the AI Products business. The number of companies adopting exaBase AI increased substantially, reaching 1,626, up 78.9% year-on-year. This is the result of accelerated expansion through sales agents, along with steady adoption by government agencies and municipalities. In particular, we have secured a share of nearly 60% among prefectural governments, demonstrating steady market penetration. Backed by this growth in adopting companies, total revenue from the generative AI product portfolio reached JPY 1,053 million, maintaining high growth of 63.0% year-on-year. exaBase AI remains a key driver of growth for the ExaWizards Group as a whole. Next, I will explain AX talent development in the HR tech area. Our AX talent development services support continuous human resource development and organization transformation through 3 steps: assess, develop and leverage. Revenue from HR-related services has been on a recovery trend since bottoming out in the third quarter of the previous fiscal year, reaching JPY 270 million in the first quarter. Cumulative user numbers and adopting companies continue to expand steadily and new services such as generative AI proficiency assessments and hands-on training have been very well received. We expect record high revenue in the coming second quarter. We will continue to accelerate growth by further strengthening our project pipeline. Next, the quarterly performance trend of the AI Solution Services business. Net sales for the first quarter were JPY 1,909 million, representing strong growth of 31.1% year-on-year. Operating profit reached JPY 450 million, a substantial increase of 44.6% year-on-year. As a result, this business posted record high results for our first quarter. We attribute this to the smooth progress of large-scale projects originated in the second half of the previous fiscal year. While outsourcing costs are trending upward in line with growing demand for AI development, we expect further improvement in profitability going forward through stronger recruitment and business alliances. Now let me explain the key KPIs for the AI Solution Services business. We have been focusing on building relationships with long-term recurring customers. And as a result, the share of revenue from long-term recurring customers has grown to 65%. The deeper the customer relationship, the higher the average project value. Notably, the average project value for customers who have been with us for 5 or more quarters is 2.4x that of customers in their fourth consecutive quarters. This suggests that deepening customer relationships leads to greater business stability and profitability. Alongside top line growth, we continue to focus on 2 drivers of margin improvement. The first is securing resources to reduce our reliance on external partners and build a stable delivery structure. In addition to strengthening recruitment, we will pursue business alliances and M&A to bring new talent up to speed quickly. As part of these efforts, we signed a basic agreement with TechnoPro toward a business alliance in AX talent development. The second is the thorough use of AI across every process from sales through delivery, reducing workloads and freeing up time for value creation, thereby improving profitability. Through these initiatives, we will pursue further growth and contribute to the realization of a better society. This concludes the AI presented overview of our financial results and each business segment. Thank you very much for your kind attention. The business update that follows covering the ExaWizards Group's business strategy and its progress will be presented by our Representative Director, President and CEO, Makoto Haruta, in Japanese only. An English transcript will be made available at a later date on our website as the CEO message, and we encourage you to check it there. Thank you again for joining us today.