DIGITAL HOLDINGS,INC. Q2 FY2025 earnings call

• Corporate Strategy & Core Positioning

  • The company maintains its founding purpose of addressing Japan's structural challenges through industrial transformation, with a core value of "Be Honest Ambition" that fosters a culture of proactive change and is a key competitive advantage in the AI era.
  • The group operates a three-segment circular business model: Marketing as the core growth engine, Financial Services as a capital circulation platform supporting growth-stage companies, and Investment as a source of future business opportunities; the three segments operate independently while collaborating to enable flexible adaptation to market changes.
  • The core strategic focus is Marketing-led growth, evolving from a traditional advertising agency to a growth partner focused on maximizing customer lifetime value (LTVM), with three strategic pillars: expanded support scope, AI-driven improvement of proposal quality and outcome reproducibility, and flexible service design tailored to industry and business stage.
  • The company pursues a focused industry strategy, prioritizing resource allocation to high-potential verticals (EC/D2C/cosmetics, finance/insurance, BtoB transformation-stage companies) to build industry-specific success patterns for scalable replication.

• AI Innovation & New Service Launches

  • AI adoption has moved beyond proof of concept to full operational deployment across the group; AI-powered productivity gains have freed up 5,000 man-hours per month (1.7x higher than Q1 2025), with benefits including expanded customer value, optimized resource allocation, increased frontline customer contact capacity, and faster, more accurate decision making.
  • Launched DIGGIN' ZERO, an AI-powered ultra-rapid product validation service that delivers 15x faster validation, 85% lower validation cost, and high-precision AI-driven analysis for new product development.
  • Launched LLMO (Large Language Model Optimization) services in partnership with LANY to adapt to changes in search behavior driven by generative AI, helping companies embed accurate brand/product information in AI-generated answers, currently offering a free diagnostic report for clients.
  • Started collaboration with Ridge-i to develop AI agent solutions that support in-house marketing operations, automating the entire PDCA cycle to free up marketers for high-value creative work; the partnership combines Ridge-i's multimodal AI technology, the group's 30 years of marketing experience, and in-house promotion expertise to build unique, reproducible AI solutions.

• Operational Progress

  • Marketing segment: AI implementation has improved profitability, new client growth and cross-selling of expanded services are progressing well, exiting the bottom phase in Q2 and entering a formal double-digit growth phase.
  • Financial Services segment: Transition to a small-lot diversified client portfolio is progressing as planned, client count has grown sharply, and the foundation for reacceleration of growth is nearly complete, with the deficit already improving significantly.
  • Investment segment: Continues to generate stable profits to support group funding, with solid investment performance and continued realization of gains.

1. Marketing Segment (core business, accounts for nearly all of group revenue in Q2 2025):

• Q2 2025: Revenue 2.836 billion yen, gross profit 2.096 billion yen (+3.2% YoY), operating profit 0.593 billion yen (+17.2% YoY), EBITDA 0.659 billion yen (+17.7% YoY), net sales 14.023 billion yen (+0.3% YoY). Excluding impact from a specific customer, first half net sales grew 10%+ YoY.
• First half 2025 cumulative: Revenue 5.931 billion yen (-3% YoY), gross profit 4.38 billion yen (+2.2% YoY), operating profit 1.419 billion yen (+18.3% YoY), EBITDA 1.647 billion yen (+27.1% YoY), net sales 29.144 billion yen (+0.6% YoY). Management expects Q2 2025 to be the growth bottom, with double-digit net sales growth and over 40% operating profit growth in the second half.

1. Financial Services Segment:

• Q2 2025: Revenue 0.059 billion yen (-50.3% YoY), gross profit 0.05 billion yen (-49.4% YoY), operating loss 0.059 billion yen (deficit narrowed by 0.109 billion yen YoY).
• First half 2025 cumulative: Revenue 0.143 billion yen (-43.4% YoY), gross profit 0.125 billion yen (-40.8% YoY), operating loss 0.089 billion yen (deficit narrowed by 0.27 billion yen YoY).
• Key metrics: Number of client companies grew 400% YoY to 938, GMV hit a bottom of 1.055 billion yen in Q2. Management expects Q3 2025 to be the revenue bottom before returning to growth, as the segment transitions to a small-lot diversified business model, with the revenue decline currently being in line with plan.

1. Investment Segment:

• Q2 2025: Revenue 0.005 billion yen (-95.3% YoY), gross profit 0.002 billion yen (-97.6% YoY), operating loss 0.033 billion yen, EBITDA loss 0.13 billion yen.
• First half 2025 cumulative: Revenue 0.468 billion yen (-58.8% YoY), gross profit 0.319 billion yen (-54.5% YoY), operating profit 0.243 billion yen (-60.6% YoY), EBITDA 2.975 billion yen (+59.5% YoY).
• Cumulative IPO count reached 37 (up 1 from prior period), and the segment is expected to deliver positive full-year profit, acting as a stable source of funding for the group.

• Overall full-year 2025 guidance progress is strong, with a 46.7% revenue completion rate, 76.3% operating profit completion rate, 92% EBITDA completion rate, and 88.5% net profit completion rate, with profit growth outperforming expectations; exceeding the full-year profit target is within reach, driven by AI-driven operational improvements and cost control.
• Marketing segment guidance: Maintained the expectation of double-digit net sales growth and over 40% operating profit growth in the second half, with growth acceleration driven by AI adoption and expanded cross-selling/up-selling.
• Financial Services segment guidance: Revenue is expected to remain on a planned declining path through Q3 before returning to growth; the segment will continue investing for future growth, with profit levels expected to slow temporarily in the near term.
• Investment segment guidance: The segment is expected to continue generating stable profits, but retains high external uncertainty; upside potential comes from unplanned unrealized gains on securities sales, while downside risk comes from client budget cuts due to external market changes.
• Dividend guidance: Maintained the full-year dividend forecast of 46 yen per share, with an approved interim dividend of 23 yen per share, consistent with the company's dividend policy that prioritizes stable, sustained shareholder returns.

• The Investment segment faces high uncertainty from external market volatility, which could lead to lower-than-expected profit realization or investment losses.
• Broader macroeconomic weakness could lead to customer marketing budget cuts, negatively impacting Marketing segment revenue and profit performance.
• The Financial Services segment is still in a transitional phase to its new business model, with growth outcomes dependent on successful scaling of the small-lot diversified portfolio after the Q3 bottom; slower-than-expected growth would impact group overall profit performance.

Q: What is driving the turning point in Marketing segment growth, and how will progress unfold from here? / A: Management confirms the turning point comes from AI implementation, the shift to the LTVM focused growth partner model, and the focused industry strategy. These changes have improved profitability, grown new client counts, and increased cross-selling of expanded services, with Q2 2025 confirmed as the growth bottom, and double-digit second half growth already on track. The company will continue deepening industry-specific solutions and expanding AI-powered service offerings to sustain growth.

Q: How far has AI adoption progressed, and what impact will it have on long-term growth? / A: AI has moved from pilot testing to full daily use across the organization, delivering 1.7x growth in monthly productivity gains in just one quarter. AI is not just a cost-cutting tool—it is transforming the business model by enabling deeper customer value, faster decision making, and scalable reproducible outcomes. New AI services like DIGGIN' ZERO and LLMO also open new revenue streams and deepen client relationships, supporting sustained long-term growth.

Q: What is the outlook for profitability improvement from ongoing structural reform? / A: Structural reform centered on Marketing and AI adoption has already delivered clear profit improvements, with productivity gains allowing reallocation of resources to frontline customer-facing activities. Going forward, continued scaling of AI and the LTVM model will further expand margins, with second half operating profit growth expected to exceed 40% as growth accelerates after the Q2 bottom. Financial Services structural reform is also progressing as planned, with the deficit already narrowing sharply, and profitability will improve once the transition to the new business model is complete.

Q: What is the outlook for gains in the Investment segment, and the quality of profits in Marketing? / A: Investment segment continues to deliver steady realized gains, supporting group cash flow, with 37 cumulative IPOs to date and full-year profit expected to stay positive. Marketing segment profit growth is high-quality, driven by volume growth and productivity improvements from AI, rather than one-time gains; the growth of cross-selling and upselling also increases client stickiness and sustainable recurring profit.