CHANGE Holdings,Inc. Q3 FY2025 earnings call

Corporate Mission & Strategic Direction

• Mission is "Change People, Change Business, Change Japan", focused on addressing population decline (especially working-age population decline) through digital/AI-driven transformation of business processes, government services, and business models.
• Core operating focus is the intersection of Local, Digital, and Social: solving regional social issues and driving sustainable regional development through the combination of DX and regional revitalization.

Q3 9M Cumulative Financial & Operational Highlights

• All key metrics (sales revenue, operating profit, pre-tax profit) hit all-time record highs for the April-December 9M period. Total sales revenue reached ~35 billion yen, operating profit hit ~13.1 billion yen (meeting and exceeding the full-year target of 13 billion yen), and profit attributable to parent company shareholders was 8.26 billion yen, also a record.
• Operating profit increased 3 billion yen YoY: the two core business segments delivered 4 billion yen in aggregate profit growth, with 1 billion yen offset by M&A costs, new subsidiary corporate overhead, and other investment expenses.
• Completed full acquisition of M&A brokerage firm fundbook, accelerating growth and diversifying profit streams. Established a joint venture with Sumitomo Mitsui Financial Group and Sumitomo Mitsui Insurance to build out cybersecurity sales capabilities, laying the foundation for the next mid-term management plan "DJ3".
• Furusato nozei peak December donation season passed successfully: contrary to market concerns over Amazon's market entry driving margin declines, the downside scenario did not materialize, and results were in line with management plans. The company ran a marketing campaign with celebrity duo Sandwich Man to boost brand awareness.

Key Operational Updates

• Furusato nozei (Furusato Choice) initiatives: Partnered with experience booking platform Asoview! to expand experience-based return gifts, driving regional visitor growth. Launched special Noto Peninsula reconstruction return gifts designed by students from Kanazawa College of Art, with all offerings exclusive to Furusato Choice. Rolled out targeted community marketing campaigns for fan groups centered on sports, idols ("oshi" marketing), following the September 2024 end of point reward rules, where unique content/return gifts are now the key competitive differentiator.
• Local government DX: LoGo series SaaS tools (LoGo Chat, LoGo Form) continue to grow customer base steadily, with a churn rate below 2% and increasing license counts, driving strong adoption and trust among local governments. Launched a new managed WAF service based on the leading domestic SiteGuard WAF series, optimized for easier centralized management.
• New M&A brokerage business (temporary: labor shortage solving segment): Addresses the unmet need for SME business succession in regional Japan: 60,000 profitable SMEs face potential closure with only thousands of M&A transactions completed annually, and M&A volumes drop sharply in more rural prefectures. The business aims to create "Local King" mid-sized regional companies that drive regional economic growth and wage increases, aligning with national government policy to培育 10 billion yen sales regional companies. Leverages the company's existing relationships with regional financial institutions and local governments to overcome negative perceptions of M&A as "hostile takeovers" in regional markets. Offers a new value-added model: provides long-term accompanying support to sellers (to improve enterprise value/exit price) and first-time M&A buyers (support for strategy, hiring and post-merger integration), creating higher-quality, more satisfied matches compared to traditional fast-close brokerage. This acquisition will correct the current profit over-reliance on the Publictech segment and create an additional strong profit pillar.

1. NEW-IT Transformation Business: Two core sub-segments are tracking prior year performance levels. The cybersecurity sub-segment achieved a 73.6% progress rate against its full-year target, with the full segment expected to deliver a full-year profit margin of ~mid-20%, down from 35% in H1 due to one-off valuation gains in Q1. The acquisition of M&A brokerage firm fundbook has been completed, and fundbook will be consolidated into this segment starting from Q4. This segment currently contributes over 30% of group profit, targeting 40% long-term. 2. Publictech Business: Local creation/public DX sub-segment is progressing in line with plan. The segment's total revenue was 21.7 billion yen for the 9M period, almost flat YoY (21.4 billion yen YoY). Within the segment, the local creation sub-segment saw revenue decline from 20.1 billion yen YoY to 19.4 billion yen 9M this year, due to revenue sharing for expanded OEM furusato nozei partnerships, which is within planned expectations. This segment currently contributes the majority of group profit, with management targeting a long-term 50/50 profit split between the two core segments.

• Management maintained the full-year guidance, with no upward revision despite Q3 9M operating profit already exceeding the full-year target. Management is currently conducting a detailed review of full-year results, and will disclose a guidance update in line with Tokyo Stock Exchange rules when the outcome reaches a sufficient level of certainty.
• The next 3-year mid-term management plan "DJ3" will be released alongside full-year results in May, and will include full 3-year financial targets. Management confirmed no large investments that would materially erode profit are planned for the new mid-term period.
• Management is considering disclosing a new shareholder return policy based on DOE (Dividend on Equity) alongside the full-year results in May. A final decision on any special dividend above the initial planned payout will be made after full-year results are finalized.
• fundbook's full-year growth outlook remains unchanged following the revision of the SME M&A Guidelines, as the company already operated in compliance with the guidelines, and management expects to deliver higher growth with group synergies.
• The full-year profit margin for the NEW-IT Transformation segment is guided to mid-20s percent.

• M&A brokerage has inherent quarterly earnings volatility from large deal closing timing, though fundbook is targeting earnings smoothing through systematized lead time standardization and sourcing pipeline management.
• Cybersecurity market has strong demand but also intensifying competition; management is still developing differentiation strategies, with meaningful growth expected from the segment starting from next fiscal year.
• Rising domestic interest rates will increase interest expenses for higher debt levels following the fundbook acquisition, but management confirms it has maintained fiscal discipline, has sufficient remaining borrowing capacity, and can absorb higher interest costs.
• Amazon's entry into the furusato nozei market has increased competition, though market share impact has been lower than initially expected, and the company is focusing on exclusive products and experience-based return gifts to compete with Amazon's strength in daily goods.
• The company's current PER of 13.4x is well below the TSE Prime information industry average of 24x and 10% below the overall TSE average of 15x, which management views as an unjustifiably low valuation driven in part by undercommunication of the strength and growth of non-furusato nozei businesses.

Q: The purchase price for fundbook looks expensive relative to its FY2024 net profit, does this mean you expect very large synergies from the deal? / A: fundbook is still growing its profit in the current period, so valuation relative to FY2024 profit is not an accurate comparison. Management used conservative scenario planning to assess the purchase price, and expects significant synergies from leveraging Change Holdings' existing regional government and financial institution networks and consulting capabilities. The acquisition is viewed as reasonably priced and expected to deliver sufficient value creation.

Q: What is the impact of Amazon's entry into furusato nozei on your business as of the current quarter? / A: Management initially expected a large impact, but actual impact has been much smaller than planned. Competition in the market has increased, but the company's countermeasures have been effective, and current progress is exactly in line with management expectations, with no material downside realized to date. The company will continue to focus on exclusive and experience-based return gifts to compete in Amazon's stronger categories like daily goods and food.

Q: Why did you acquire fundbook as a full subsidiary rather than a capital partnership, what strategic fit does it have with your existing business, and how is post-merger integration progressing? / A: The acquisition aligns with the company's core mission of solving regional business issues: fundbook's M&A brokerage solves the critical regional problem of SME business succession to help build strong local companies, and Change Holdings' digital and consulting capabilities can help accelerate fundbook's growth, delivering higher returns to the group. Synergies are expected with existing consulting business and regional financial institution partnerships. PMI is still in the early stage, with medium to long-term growth strategy and organization structure still under review.

Q: What is the reason for the drop in profit margin for the NEW-IT Transformation segment in Q3, and what is the full-year margin target? / A: The Q3 margin drop is mostly due to a large one-off valuation gain from Digital Growth Academia being recorded in Q1, plus some lower-margin projects and normal seasonality. There was no material change in margin between Q2 and Q3. The full-year margin is still guided to mid-20s percent, in line with previous plans.

Q: Do you have any plans for share buybacks or other share price responses to your currently low valuation, and are you considering changes to your shareholder return policy? / A: Management will announce its shareholder return policy, including any potential changes to payout policy or share repurchase plans, alongside the full-year results in May. Management is actively considering disclosing a DOE-based shareholder return framework at that time.