Hennge K.K. (4475.T) Earnings Call Transcript & Summary

Hello, everyone. I'm Kazuhiro Ogura, CEO of Hennge. Thank you for taking the time to watch our earnings briefing video. Today, I would first like to share my thoughts on the results for the second quarter. This quarter, we achieved one of our milestones of this fiscal year of surpassing JPY 10 billion in ARR for HENNGE One. I believe this achievement is a result of our consistent efforts built up over time, and we remain committed to taking on challenges toward realizing Liberation of Technology, our corporate philosophy. Next, we announced the establishment of our U.S. subsidiary in March 2025. This is our second base outside of Japan, following the Taiwan subsidiary. We will take on this new challenge to further advance the Liberation Of Technology. Finally, although we have just started the second half of our fiscal year, we will be revising our full year earnings forecast upward. We were unable to fully predict the trends in the acquisition of new contracts and cancellations, which resulted in a discrepancy with our plan. While we recognize that the rapidly changing market environment demands versatile and agile responses, we will capitalize on this situation as an opportunity for further growth. By proactively implementing investments to drive future growth, we will enhance our efforts to achieve our targets of JPY 20 billion in ARR as a group and growing to JPY 100 billion in ARR and beyond. Details will be explained by our CFO, Ryo Kobayashi, and our Director, Haruo Amano. Thank you.

Hi. I'm Ryo Kobayashi, CFO of Hennge. First, let me explain the financial results for the second quarter of FY 2025. Our consolidated financial results are as presented on the slide. We will touch on the revised forecast in detail in the section FY 2025 Full Year Forecast Progress. Our quarterly consolidated net sales are as presented on the slide. Since the net sales of HENNGE One business is recurring in nature, it has been increasing throughout each quarter. We have seen significant growth this quarter, sustaining consistent growth. Our year-on-year consolidated net sales are as presented on the slide. Our quarterly gross profit and gross profit margin are as presented on this slide. Our year-on-year gross profit and gross profit margin are as presented on the slide. Gross profit margin increased mainly due to higher ARPU, maintaining a high level. The quarter-on-quarter breakdown of operating expenses is, as presented on the slide. The year-on-year breakdown of operating expenses is as presented on the slide. As a result of consistent progression in various activities from the previous quarter, we have incurred operating expenses in-line with our initial plan. Our quarterly net sales and operating expenses, are as presented on the slide. The trend in number of employees, is as presented on the slide. Net employee growth resulted in 28 compared with the end of the previous fiscal year and is in-line with our initial plan. The status of our cash flow, is as presented on the slide. Operating cash flow up to the end of this quarter turned positive, driven by the robust financial performance, even with the incurrence of payments related to our cloud infrastructure expenses, which were consistent with previous periods. Investing cash flow was negative, primarily due to the acquisition of investment securities and expenditures associated with our headquarters relocation plan for 2027. Now I will explain our business activities during this quarter. This is an overview of our business highlights. Major advertising activities for the second quarter, are as presented on the slide. We exhibited at Japan IT Week Osaka and hosted an online event, HENNGE ROCKET PITCH 2025. We continue to accelerate advertising activities, engaging in 50-plus events. In April 2025, we established a joint venture in the U.S. with SunBridge Corporation. Given the rise in security incidents globally, the demand for IT security is also increasing worldwide. HENNGE One is a cloud service with 3 categories: Identity, DLP and Cybersecurity and has substantial potential to fulfill security demands in various regions across the globe. While there are many competitors in the U.S., our research indicated sufficient demand for HENNGE One, leading to our decision to establish the joint venture. Having the robust trust and track record over 25 years in the Japanese IT industry, including our delivery of HENNGE One since 2011, we will drive this business with a midterm perspective, initially targeting SMBs through managed service providers, which are local IT operation outsourcing companies. Leveraging the knowledge and experience gained through our U.S. endeavors, we will take on various challenges with the aim of achieving JPY 20 billion in ARR and growing to JPY 100 billion in ARR and beyond, as we strive to establish ourselves, a world-class IT company. Next, I would like to explain the results of our KPIs. The progress of HENNGE One KPIs from the end of the last fiscal year, is as presented on the slide. Year-on-year KPI results for HENNGE One, are as presented on the slide. The churn rate of HENNGE One is as presented on the slide. During this quarter, cancellations triggered by the price revision have occurred in addition to the conventional reasons for cancellations. Although we saw a few cancellations from relatively large companies, the total churn has been lower than expected, leading to a churn rate below expectations. The theoretical average contract period exceeds 15 years. The numbers of contracted companies and users are as presented on this slide. We achieved robust growth in the number of contracted companies through acquiring contracts with small to midsized companies by strengthening partnerships with resellers. On the other hand, the growth of the number of contracted users was moderate compared to the previous quarter, influenced by cancellations from relatively large companies. Our ARR and ARPU are as presented on the slide. This quarter's performance reflected the impact from the price revision commencing April 2024. Moreover, the proportion of new customer acquisitions for our top-tier plan, HENNGA One Pro has increased continuously from the previous quarter. In terms of our recent segmentation by plan, the proportion of HENNGA One Pro within our total ARR has grown to slightly exceed 10%. This growth has been attributed to newly acquired customers selecting our Pro Plan and the increasing plan migration from existing customers. These factors combined resulted in an increase of ARPU for this quarter. Furthermore, the migration to new plans, reflecting the price revision has nearly fully completed on a company basis with regard to the existing customers subject to the price revision. We will continue to promote and deliver the value of HENNGE One and take initiatives toward future growth. Next, I will touch on our full year outlook of FY 2025. By strengthening our corporate branding, we aim to accelerate mid- to long-term ARR growth and improve productivity. This is the policy stated for FY 2025, as shown on the slide. As our CEO mentioned at the beginning, we have revised our full year earnings forecast. The changes from our initial forecast announced on November 8, 2024, are as shown on the slide. We were not able to take into account for several factors within our assumption, which actually occurred during the first half of the year. These factors include stronger-than-expected acquisition of new contracts, including the acquisition of large contracts, and the churn triggered by the price revision being lower than expectations. As a result, although it's still the timing where the second half has just begun, we have decided to revise our full year forecast for net sales, upwards. On the other hand, we intend to actively invest in strengthening our talent acquisition capabilities, which remain a key challenge for us. Furthermore, in light of the recent surge in security incidents worldwide, we believe it is increasingly important for us to enhance the security of our services to ensure our customers, that they can use them safely. Therefore, we will proactively invest in measures necessary to address cybersecurity threats to ourselves. In addition, we are committed to investing in sales activities, including nurturing events with the aim to build our future ARR. As per these measures, we intend to continue exploring investment opportunities for future growth. Although there are areas that have yet to be fully decided at this point, thus, in the revision of our earnings forecast we are disclosing operating expenses as a range, which consequently results in an upward revision of profits at each stage, also being presented as a range. Also, please note that we anticipate an increase in advertising expenses due to a reclassification of some cost items, including the alteration of our recruitment measures to a broader initiative to enhance corporate branding. This slide shows our past financial results, along with our revised forecast.

Hi, I'm Haruo Amano, Director of Hennge. Finally, please let me explain our growth strategy. Our corporate philosophy is Liberation of Technology. We believe in the power of technology. We love technology, and we strongly believe that technology will make our lives better. We want to deliver the power of technology to as many people as we can and to change the world to be a better place. We established Hennge more than 25 years ago. And since then, we set our philosophy as Liberation Of Technology, which we actually have demonstrated in various areas. From the experience we gained, we think that software-as-a-service is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we are providing software-as-a-service, and we want to promote the use of cloud services among our customers as well. The total amount of technology that we provide to the customers and the total amount of liberated technology are the measures to prove our progress on our philosophy, and this is expressed as LTV. LTV or lifetime value, is the total value arising from the current contracts with the customers. Our growth strategy is to maximize this LTV. Maximizing LTV that is, by seeking to maximize the total gross profit and over the future, we would like to build a solid business model that can stably increase profits even if the investments for further business growths are increased. Currently, our average contract period and gross profit margin are already in a high number. Therefore, in order to maximize LTV, we think that it is essential to maximize ARR. We will actively engage in activities with expected high return on investment and then to accumulate ARR as much as possible. ARR can be broken into three factors, the number of contracted companies, average number of users per contracted company and average revenue per user. In these three factors, we aim to increase ARR by focusing on increasing the number of contracted companies and ARPU. The KPIs for our growth strategy of HENNGE One are as presented on the slide. Including our main service HENNGE One, our group mainly operates a subscription model business. Buying any cancellations, the contracts secured this year will continue to generate sales and become the foundational sales from next year onwards. The figures on this slide demonstrate the robust and stable growth of ARR of HENNGE One, especially for the recent years, the number of companies who transferred to cloud-based working style in major cities other than Tokyo is increasing. Capturing these opportunities, we have acquired small to midsize contracts sufficiently through strengthening relationships with resellers. By releasing new services and features which met the expanding market demand, ARPU has also successfully increased. This quarter, we have achieved our recent goal of JPY 10 billion in ARR for HENNGE One and as a new challenge, we announced our expansion into the U.S. While we have also revised our earnings forecast upwards, we will continue to work diligently towards mid- to long-term business growth while carefully responding to changes in the external environment. This concludes our briefing on the second quarter of fiscal year 2025. Thank you for your time.