HONYAKU Center Inc. Q4 FY2025 earnings call

Full Year 2025 Performance Review

• The full year plan was not met, with the primary miss coming from slower-than-expected translation business revenue. Operating profit hit only 84.8% of the planned target, as SG&A costs could not be fully absorbed by lower revenue.
• Gross profit margin improved 0.4 percentage points YoY to 47.4%.
• Retrospective review of the previous medium-term management plan found successful targeted initiatives including co-development of a custom pharmaceutical translation model with NTT Communications, consolidation of patent client work, and collaboration on IR translation projects with Pronexus. However, successful use cases could not be expanded to other business segments, and translator scheduling process improvements were not completed, remaining a key unaddressed challenge. Remote work implementation was deemed a full success and will be retained permanently.

New 6th Medium-Term Management Plan (Target FY2028 March)

• Core vision: Become the most trusted language service partner by leveraging specialized translators/interpreters and accumulated language assets to serve the digital era.
• Key priorities:
  • Strengthen business competitiveness via AI and data utilization:
    • Leverage existing competitive advantages: long-standing trusted relationships with translators enabling widespread post-editing of machine translation output, a custom-built machine translation engine developed with strategic partner Mirai Translate that outperforms general commercial options for Japanese/English specialized translation, and decades of specialized expertise in high-complexity documents that can be applied to machine learning model training. The company will expand from existing machine translation focus to also integrate large language models (LLMs) for further quality, cost, and delivery (QCD) improvements.
    • Implement data-driven targeted marketing to expand the overall customer base, addressing a trend of declining total customer numbers despite steady revenue growth from core clients.
  • Advance operational efficiency:
    • Launch a new business process reengineering (BPR) initiative to improve translator/project management workflows, standardize output quality across teams, automate repetitive tasks, and improve overall productivity to maintain competitiveness against domestic and global competitors.
  • Establish a stable revenue base:
    • Optimize the group business portfolio with a focus on capital efficiency to improve overall profit margins.
    • Pursue selective M&A opportunities: an increasing number of domestic translation firms are available for acquisition due to founder succession issues, and the company will pursue deals that align with its strategic goals. It will also evaluate potential expansion into new synergistic adjacent businesses such as web and document production that share existing client demand pools.
• Medium-term targets for FY2028: 13 billion yen in consolidated revenue, 1.2 billion yen in operating profit, 0.8 billion yen in net profit, and ROE of 10% or higher. Organic growth is the core focus, with M&A used to accelerate growth.

For the full fiscal year ended March 2025, Honyaku Center reported total consolidated revenue of 11.21 billion yen, operating profit of 0.89 billion yen, ordinary profit of 0.905 billion yen, and net profit of 0.723 billion yen. Net profit increased year-over-year due to gains from the sale of subsidiary shares and recognition of relocation compensation, while operating profit declined as overall revenue missed internal plans. Segment results are as follows:

• Translation business: +0.5% YoY revenue growth, reaching an all-time high, with slower-than-planned overall expansion. Broken down by sub-segment:
  • Patent: +0.3% YoY (essentially flat), missed growth plans due to one large corporate client scaling back foreign patent application volumes
  • Pharmaceutical: +3.4% YoY, returned to growth after expanded customer base outreach corrected over-reliance on a small set of core clients
  • Industrial & Localization: -3.7% YoY, driven by lost government tender projects and lower IT sector demand
  • Finance & Legal: +6.4% YoY, supported by continued growth in investor relations (IR) translation projects
• Temporary staffing business: Flat YoY, successfully halted downward revenue momentum, no plans for rapid growth
• Interpretation business: +8.3% YoY revenue growth (all-time high), but missed internal growth plans; management expects future revenue growth to moderate
• Other: -235 million yen YoY decline, driven by the ongoing wind-down of the convention business

All three core segments (Translation, Staffing, Interpretation) achieved revenue growth but recorded lower profit, as lower-than-planned revenue could not absorb increased selling, general and administrative (SG&A) costs. The

• FY2026 (ending March 2026) total revenue: Translation business projected to grow 1.6% YoY. Broken down by sub-segment:
  • Patent: +3.0% YoY growth, driven by a large new contract with a client separate from the firm that cut volumes in FY2025, which is set to go live in FY2026
  • Pharmaceutical: +5.3% YoY growth, with a 2.84 billion yen revenue target to strengthen the ongoing recovery trend
  • Industrial & Localization: -6.1% YoY further decline, driven by expected manufacturing (particularly automotive) slowdown from U.S. tariff policy
  • Finance & Legal: +8.0% YoY growth, based on projected continued IR project volume growth
  • Temporary staffing: +0.3% YoY, targeting flat to slight revenue growth
  • Interpretation: +5.3% YoY growth, a slower pace than FY2025 as growth returns to a normal trajectory after the post-COVID inbound recovery rebound
  • Other: -5.9% YoY decline, a conservative forecast given the small current base size
• FY2026 profitability: Gross profit margin projected to improve another 0.4 percentage points YoY; SG&A costs planned to increase 2.8% YoY; operating profit projected to be nearly flat at 0.9 billion yen; ordinary profit projected at 0.92 billion yen (+1.5% YoY); net profit projected to decline 12.9% YoY as FY2025 included one-time special gains from subsidiary share sales that will not recur, giving a normalized profit level
• Shareholder return: The annual dividend per share is projected to remain flat at 75 yen, for a projected payout ratio of 39.8% if profit targets are met

• Over-concentration of revenue on a small set of core clients, which creates vulnerability to client-side demand shifts such as the large patent client that cut foreign application volumes in FY2025
• Lack of customer base diversification, with a declining total number of active clients that limits long-term growth potential
• Increasing price competition in the translation industry driven by widespread availability of free and low-cost general machine translation tools, which creates downward pressure on pricing and makes industry-wide price increases difficult to implement
• Project management and translator scheduling workflows remain inefficient, limiting overall productivity improvements and threatening long-term competitiveness against larger domestic and global competitors
• Downside risk to industrial and localization sector revenue from U.S. trade policy that is expected to slow automotive and broader manufacturing demand
• Core translation business growth missed internal plans for FY2025, leading to operating profit falling to only 84.8% of the planned target

Q: What is the current status of the company's joint AI project with Alt, and what is the plan for future collaboration? / A: The company previously ran a joint experiment with Alt to test domain-specialized question answering systems by fine-tuning an LLM on company-provided data. The model did not deliver the expected performance, as retrieval-augmented generation (RAG) approaches were found to produce better results for this use case. The project has been formally concluded, with no active future plans for additional collaboration, though the companies left open the possibility of new experiments later if opportunities arise. The △ rating for AI initiatives in the previous plan review referred to delayed BPR implementation, not underperformance of machine translation (MT) work, which management considers very successful globally competitive.