SOLITON SYSTEMS K.K. Q3 FY2025 earnings call

• Core Business Progress

  • IT Security Business: Implemented strategic price adjustments including price increases, with full revenue impact expected from next fiscal year as multi-year contracts are excluded. Launched a new durability-improved GIGA School model of its core product NetAttest with cloud remote management for large-scale centralized deployment. Established a new product promotion-focused organization to accelerate expansion in high-growth segments, and significantly strengthened alliances with domestic Japanese security vendors for its flagship products Soliton OneGate and Soliton SecureWorkspace. Public sector sales grew 20% YoY driven by large central government projects in disaster/defense and school administrative DX projects in the education segment. Achieved 46% stock business (cloud + maintenance) revenue penetration as of Q3, up from 40% in FY22, targeting 60% in 3 years. Added SCIM and OpenID Connect support to Soliton OneGate, enabling integration with major cloud services including Palo Alto Networks Prisma Access and AWS Verified Access, and secured multiple large enterprise deployments in the strictly regulated financial sector.
  • Video Communication Business: Demonstrated remote construction technology in Ukraine as part of JUPITeR, successfully demonstrating 25km remote control of construction machinery from Kyiv, which received positive attention from local stakeholders and media. Completed a successful joint demonstration with Tokyu Bus of remote monitoring autonomous driving in the complex urban environment of Shibuya, Tokyo, validating the company's low-latency video transmission and multi-link communication technology.
  • Eco New Business Development: Maintained steady growth in existing low-power semiconductor products while continuing targeted investment in new high-growth technology areas for medium to long-term expansion.

• Corporate Strategy

  • The company aims to expand beyond its niche market position to become a core infrastructure provider for the broader DX market, leveraging its unique core technologies across IT security, stable video transmission, and low-power semiconductors to create cross-sector integrated solutions.
  • Management is currently developing a new 3-year mid-term plan with quantitative growth targets, to be finalized within this fiscal year.

• Management Base Strengthening

  • Increased human capital investment, including office layout improvements (free address, new employee lounge, flexible work environment for hybrid work), expanded training programs, base salary increases (average salary up 13% since 2020), and established a new CEO-led employee satisfaction (ES) promotion department to improve employee engagement and productivity.
  • Established an ESG basic policy, and began using renewable energy at nearly half of the company's business locations.

1. IT Security Business: Total revenue is 13.112 billion yen, up 5% year-over-year. Product sales reached 4.958 billion yen (up 6.6% YoY), maintenance sales reached 4.069 billion yen (slight decrease YoY), cloud service sales reached 1.936 billion yen (up 13.5% YoY). Segment profit is 2.528 billion yen, up 26.7% YoY, accounting for approximately 94% of total consolidated revenue. 2. Video Communication Business: Total 9M revenue decreased year-over-year due to timing of public sector order recognition, with large police, fire, and Ministry of Defense public projects scheduled to be recognized in Q4. Full-year revenue is still expected to exceed the prior year. Segment profit improved YoY, driven by growing stock revenue from cloud services for infrastructure monitoring and construction DX. 3. Eco New Business Development: Product sales increased YoY driven by steady demand for human sensor ICs, and service/other revenue also increased from FPGA contract development for space applications and drone radio orders. Gross profit improved YoY, but segment profit only saw a slight improvement due to ongoing aggressive investment in analog edge AI device development, including expanded human resources and development infrastructure for future mass production.

• The company maintains the full-year consolidated earnings guidance originally announced on February 14, 2025, with no changes as of Q3.
• Cumulative progress through Q3 is 71.3% of full-year revenue target and 84.7% of full-year operating profit target, with performance coming in above original plan.
• Q4 is off to a solid start, and full-year performance is still expected to exceed the prior year. Any future adjustments to guidance will be disclosed promptly if needed.
• The full-year dividend forecast is maintained at 52 yen per share, with the 26 yen per share interim dividend already paid in August.
• Steady incremental demand from public sector policy initiatives (including third phase local government resilience measures, second phase GIGA School, 2027 mandatory multi-factor authentication for medical systems) is expected through 2030.

• Public sector project revenue is concentrated around guideline publication and implementation deadline timelines, leading to potential quarterly revenue volatility.
• The transition from flow-based to stock-based business model is expected to create a temporary transition period impact on revenue and profit around FY2026-FY2027.

Q: What is the outlook for Q4 and full-year 2025 performance, given strong Q3 progress? / A: Q4 progress is tracking on schedule, with both Q4 standalone revenue and full-year full-year performance expected to exceed year-ago levels. The original full-year guidance announced in February 2025 remains unchanged at this time, and any future adjustments will be disclosed immediately if needed.

Q: What are Soliton's strengths and priorities in the cyber security market amid growing policy focus under the new administration? / A: Soliton's core strength is its leading market share position in authentication, the most critical foundational component of cyber security. The company has decades of leading share with core products NetAttest (network authentication) and SmartOn (device authentication), and its cloud authentication product Soliton OneGate is growing steadily. The company will continue to focus on maintaining and expanding share in the authentication space to capture growing cyber security demand. Its subsidiary Cyber Defense Institute is also advancing offerings to enhance cyber resilience for national security and critical infrastructure, including threat intelligence exercises and red team training, aligned with new active cyber defense legislation.

Q: What is the timeline and magnitude of the expected transition period impact from the shift to stock-based business? / A: The transition period impact is expected to occur between FY2026 and FY2027. However, new product sales are tracking better than expected, and the company is implementing countermeasures to minimize or nearly eliminate any material negative impact during this period.

Q: What impact will the second phase of the GIGA School initiative have on Soliton's performance? / A: The second phase of GIGA School includes device renewal, network upgrades, school administrative DX, and AI/cloud integration for personalized learning. NetAttest and Soliton DNS Guard will benefit from device and network upgrades, while Soliton OneGate, SmartOn, and Soliton SecureWorkspace will benefit from DX and cloud adoption. The education segment has already posted strong sales growth this fiscal year, and this growth trend is expected to continue through FY2026 and FY2027.