SOLITON SYSTEMS K.K. Q2 FY2025 earnings call

Consolidated Financial Performance Overview

• Total consolidated first half revenue: 8.71 billion yen, up 2% YoY, offsetting the negative impact of the deconsolidation of the formerly 500 million yen annual revenue Soliton Shanghai through growth of in-house products and services.
• Gross profit: 3.863 billion yen, up 2.6% YoY, with an improved gross margin due to the higher share of high-margin in-house products/services.
• Operating profit: 793 million yen, up 22.5% YoY, driven by higher gross profit and a 1.5% YoY decrease in SG&A (48 million yen reduction) from lower office-related costs after last year's office renovation.
• Net income attributable to parent shareholders: 577 million yen, down 1.5% YoY, due to a 36 million yen foreign exchange loss from rapid yen appreciation against the U.S. dollar, partially offset by tax benefits from prior-year impairment of the disposed Chinese subsidiary investment.
• Balance sheet: Equity ratio remains above 50%, maintaining a sound financial position; portion of cash and deposits has been moved to low-risk financial products amid rising interest rates.

Business Model Transformation

• Revenue stabilization: Shift to stock-based business: The company is transitioning from flow-based to stock-based business by shifting products to cloud service models and growing the share of stock business (including cloud + maintenance). The combined share of stock-based revenue grew from 40% in FY22 to 49% in H1 FY25, with a target of 60% within 3 years. The current period is in a transition phase where temporary revenue and profit dips occur before the shift to stable, growing revenue. The flagship cloud service Soliton OneGate is growing steadily, and the benefit of H2 maintenance price hikes will start to appear going forward.
• Revenue leveling: Increase private-sector (minsei) business: Historically, 30-40% of revenue comes from public-sector projects, which create large revenue volatility due to concentrated project timing. To level revenue, the company is expanding cloud service sales to the private sector. Private-sector cloud revenue grew 6.4% YoY, led by Soliton OneGate, with growing adoption of secure access products among medical and financial clients after successful penetration in public projects. Notable private-sector clients include major construction firm Shimizu Corporation and Toyota Group core firm Aisin, which adopted Soliton OneGate for zero-trust authentication.

Segment Operational Highlights

• IT Security: Growing adoption of secure isolation solutions (including Soliton SecureBrowser and FileZen S) among medical institutions, driven by rising cyberattacks on hospitals, with strong inbound inquiries and orders from multiple medical facilities across Japan.
• Video Communication: The segment has won a contract for remote construction technology verification in Ukraine as part of Ukraine infrastructure reconstruction support, completed preliminary on-site surveys in Kyiv, and plans to conduct live demonstration tests of remote construction equipment operation from a Kyiv-based control center. It also participated in Tokyo Bus's autonomous driving demonstration project, providing remote assist technology, and contributed to the development of the world's first ISO 213846 international standard for low-speed autonomous driving remote support systems, with the company's commercial product already compliant with the standard. Inquiries for remote construction equipment operation are growing steadily, and a large defense sector project is scheduled for Q4. Cloud service revenue for this segment continues to grow steadily.
• Eco New Business Development: The company is developing drone-mounted wireless communication devices that support simultaneous transmit/receive, multi-drone network coverage up to tens of kilometers, with hardware design nearly completed; prototype manufacturing and software development are upcoming. This product will enable wide-area information collection during disasters in areas with no cellular infrastructure. Analog edge AI chip development is progressing, with design work ongoing for prototype manufacturing.

Long-Term Growth Strategy

• The company holds leading niche positions based on unique core technologies: digital certificate authentication for IT security, stable low-latency video transmission under poor network conditions for video communication, and low-power semiconductor design for the eco/AI segment. There is significant room to grow market share across all segments.
• Going forward, the company will deepen its niche leadership to grow market share, and pursue new high-value products by combining core technologies (e.g., real-time video + security, autonomous driving + low-power AI) to position itself as a core technology provider in the broader 4 trillion yen DX market. A new 3-year strategic plan incorporating this strategy will be finalized within the current fiscal year.
• Human Capital Investment: Average employee salary increased 13% from 6.2 million yen in FY20 to 7 million yen in FY24. The company has implemented a free research time program (10% of working hours), launched new initiatives to improve employee satisfaction and welfare, introduced merit-based promotion regardless of age, and renovated office layouts to improve productivity and comfort, with ongoing investment in these areas.

1. IT Security Business (core segment): Segment revenue was 8.187 billion yen, up 2% year-over-year (YoY), contributing 94% of total consolidated revenue. Product sales were 2.741 billion yen, down 4.6% YoY due to the disposal of the Chinese subsidiary. Maintenance sales were 2.711 billion yen, with a slight YoY decrease. Cloud service (stock-based business) revenue was 1.282 billion yen, up 15.7% YoY. Segment profit was 1.257 billion yen, down 2.7% YoY due to temporary costs including PC replacement costs for Windows 10 end-of-support, increased outsourcing personnel expenses, and the shift from one-time to monthly revenue recognition for cloud services. 2. Video Communication Business: Segment revenue decreased YoY as large public sector projects are in an off-season in the first half, but segment profit improved through cost cutting. The segment contributes a small single-digit percentage of total consolidated revenue. 3. Eco New Business Development: Segment revenue increased sharply YoY driven by growth in human sensor product sales and contracted development of transmission equipment for government agencies, leading to improved profit. This is an early-stage development segment contributing a very small share of total revenue.

• Full-year 2025 December fiscal year consolidated earnings guidance is maintained unchanged from the February 2025 announcement, despite uncertainty over the impact of U.S. tariff measures on the Japanese economy.
• First half revenue reached 44.7% of the full-year target, and operating profit reached 36% of the full-year target, which is in line with original company plans.
• The annual dividend per share is maintained at 52 yen, with an interim dividend of 26 yen per share paid starting August 2025.
• For Video Communication Business, full-year revenue is expected to exceed the prior fiscal year, as the large Q4 defense sector project will contribute to full-year results.
• The company targets increasing the share of stock-based business in IT Security to 60% within 3 years, from the current 49% in H1 FY25.

• The ongoing transition to cloud-based stock business creates a temporary period of lower reported revenue and profit as the revenue recognition model shifts from one-time up-front sales to monthly recurring revenue.
• Public-sector projects create inherent revenue volatility due to uneven project timing and large one-time revenue recognition, which the company is addressing but has not fully resolved.
• Uncertainty remains over the impact of U.S. tariff measures on the broader Japanese economy and business conditions.
• Rapid swings in foreign exchange rates can create material foreign exchange gains or losses, as seen in the 36 million yen foreign exchange loss recorded in the first half from rapid yen appreciation.
• The transition requires absorbing one-time additional costs (e.g., PC replacement costs, increased outsourcing personnel expenses) that pressure near-term segment profits.

Q: What is the progress of analog AI chip development in the Eco new business segment? / A: The development program is advancing as scheduled. The team is currently finalizing design work in preparation for prototype manufacturing, with no material delays or issues reported to date. The chip targets low-power edge AI applications, leveraging the segment's unique low-power semiconductor design capabilities.

Q: Can you provide more details on the remote construction verification project in Ukraine? What are the expected commercial outcomes? / A: The project is a verification contract as part of reconstruction support, not a large commercial construction contract at this stage. The company completed on-site preliminary surveys in Kyiv in July 2025, and will test remote operation of construction equipment for hazardous mine-clearing and reconstruction work to support safe rebuilding. Successful validation could open new commercial opportunities for the company's remote operation technology in global infrastructure reconstruction.

Q: What is the product trend within the IT Security business, and what is driving cloud service growth? / A: Growth is led by rising demand for zero-trust security and multi-factor authentication among private-sector clients, with flagship Soliton OneGate seeing accelerating adoption among large Japanese enterprises across construction, manufacturing, medical, and finance. Demand for secure network isolation products for medical institutions is also growing rapidly amid rising cyberattacks on healthcare providers, driving strong order flow.