SIOS Corporation Q4 FY2024 earnings call

Overall 2024 Consolidated Performance

• Consolidated revenue: 20.561 billion yen, up 29.4% year-over-year.
• Operating profit turned profitable with a 243 million yen improvement year-over-year; EBITDA also turned profitable with a 234 million yen improvement year-over-year.
• As of end-December 2024: Total assets 8.085 billion yen, total liabilities 6.547 billion yen, cash and cash equivalents 3.677 billion yen. Key balance sheet changes: +1.073 billion yen increase in cash/deposits, +638 million yen increase in contract liabilities (customer advance payments).
• Cash flow: Operating cash flow increased by 865 million yen, investing cash flow increased by 298 million yen, financing cash flow decreased by 127 million yen, ending cash and cash equivalents at 3.677 billion yen after adding 38 million yen in translation adjustments.

Operational Initiatives

• Open System Infrastructure: Launched generative AI-related project creation via a partnership with Elastic, becoming a strategic partner offering end-to-end support for RAG implementation using Elastic technology.
• Application Business (SaaS focus): Combined ARR for Gluegent Flow and Gluegent Gate grew 13% year-over-year, with Gluegent Flow up 34% and Gluegent Gate up 4.6%. Added new generative AI user assistance and admin functionality to Gluegent Flow, greatly improving usability. Added AI-OCR to MFP software Quick Scan, drastically improving recognition accuracy for handwritten text, italic text, and white text on black backgrounds.

New Reporting Segment & Mid-Term Growth Strategies

Restructured reporting segments into 3 business model-aligned segments to clarify growth strategy, with the following strategic priorities:

• Product & Service: Further differentiate products via continuous feature/performance improvements and generative AI integration. Expand customer acquisition via expanded sales channels and strengthened digital marketing, boost customer engagement via customer success to drive segment revenue and profit growth over the mid-term. Core products include LifeKeeper/DataKeeper (system outage protection), Gluegent Flow (cloud workflow SaaS), Gluegent Gate (cloud unified ID management), and Quick Scan/Speedoc (document management for MFPs).
• Consulting & Integration: Strengthen competitive advantage via expanded open source software development capability, and prioritize generative AI enhancement: expand client generative AI implementation support projects, and drive dramatic internal productivity improvement via expanded internal generative AI use. Target long-term client relationships via strong planning/development capability and stable operation support. Core areas of operation include financial services, education integrated authentication solutions, medical system development, and API-focused consulting/development support.
• Software Sales & Solution: Expand partnerships with key vendors led by Red Hat, Inc. (where Saios is Japan's largest distribution partner with 25+ years of operation), continue creating new generative AI-related projects via the Elastic partnership, and strengthen long-term client engagement via high-quality technical support.

Under the old reporting segment structure:

1. Open System Infrastructure Business: Revenue of 14.573 billion yen, up 47.1% year-over-year, contributing 70.9% of total consolidated revenue. Segment profit was 238 million yen, up 164.8% year-over-year. Growth was driven by strong sales of Red Hat, Inc. related products and solid growth from LifeKeeper (both on-premise and cloud offerings); profit growth primarily came from LifeKeeper, as large Red Hat orders had low gross margin and minimal profit impact.
2. Application Business: Revenue of 5.986 billion yen, up 0.3% year-over-year, contributing 29.1% of total consolidated revenue. Segment loss was 205 million yen, an improvement from a 311 million yen loss in the prior year, driven by selective focusing of R&D spending and reduced upfront investment. API solutions, SaaS products Gluegent Flow/Gluegent Gate, and MFP software all grew, offset by a sales decline from the financial institution business support system business that was divested at end-2024.

Under the new 3-segment reporting structure (2024 actual restated):

1. Product & Service: Segment revenue of 6.2 billion yen, segment profit of 488 million yen.
2. Consulting & Integration: No full 2024 revenue/profit breakdown provided in the transcript.
3. Software Sales & Solution: Segment revenue is the largest of the three segments, while segment profit is smaller than Product & Service.

• 2025 December Full Year Guidance: Forecasts revenue of 19 billion yen, operating profit of 70 million yen, and ordinary profit of 160 million yen. The projected decline in ordinary profit compared to 2024's 189 million yen is due to the exclusion of uncertain derivative valuation gains/losses from guidance: 53 million yen of 2024's ordinary profit came from derivative valuation, which is not included in the 2025 forecast. Excluding this effect, operating profit is projected to double year-over-year, reflecting steady profit growth from core operations.
• 3-Year Mid-Term Plan (rolling): Targets for 2027 December fiscal year are: revenue of 22.5 billion yen, operating profit of 310 million yen, EBITDA of 362 million yen, and ROIC of 10.9%, focused on profit growth and improved return on invested capital.

• The U.S. subsidiary, which handles sales of core products LifeKeeper and DataKeeper in all regions outside Japan, has failed to deliver expected sales growth despite several years of expansion of engineering headcount and development capability.
• Uncertainty around derivative valuation gains/losses leads to high unpredictability for this line item, so management excludes it from forward guidance.
• Generative AI related business is still in an early stage of development, with unproven long-term revenue and profit contribution.

Q: What is the impact of the divestment of the financial institution business support system business on 2025 full year revenue and profit, and which segment would this business have belonged to under the new structure?

A: The divestment will reduce 2025 revenue by approximately 800 million yen. Because this business was unprofitable in prior periods, the divestment will improve 2025 operating profit compared to keeping the business. The business would have been classified under the Product & Service segment in the new reporting structure.

Q: What were 2024 R&D spending, what is the 2025 R&D plan, and what is the strategy for the underperforming U.S. subsidiary?

A: 2024 R&D spending totaled approximately 650 million yen, and 2025 R&D is projected to be roughly flat with a slight increase. For the U.S. subsidiary, while development capability has been built up via prior headcount growth, non-Japan sales have not grown as expected. Going forward, the company will pause hiring, refocus on sales and marketing, and work to grow non-Japan revenue to improve the subsidiary's performance.