Segue Group Co.,Ltd. Q4 FY2024 earnings call

• Overall Financial & Investment Summary:
  • Total company revenue hit 18.717 billion yen, marking 8 consecutive periods of record-high revenue, resulting in higher revenue but lower operating profit: operating profit came to 720 million yen, down YoY, while ordinary profit rose slightly to 1.06 billion yen and net profit after tax was 507 million yen.
  • The decline in operating profit stemmed from upfront accelerated investments for the new medium-term management plan "Segue300": total one-time costs including M&A-related expenses, goodwill amortization, shareholder benefit costs, and hiring of 3 senior executive-level talent totaled ~500 million yen in reduced operating profit; excluding these one-time costs, core operating profit was nearly flat with a slight uptick YoY.
  • The company met its revised forecast at ~100% for revenue, with 75% achievement for operating profit and 65.7% for net profit, impacted by an unanticipated valuation loss on investment securities found during final audit.
• M&A & Capital Policy:
  • Completed two acquisitions in 2024: First One Systems (Thailand) in May and Technocreation Co., Ltd. in June; carved out and sold 95% of Jays Telecom System to NSK Co., Ltd. in October as part of business portfolio rationalization.
  • Executed two share buybacks (1.8 million shares for 1.053 billion yen in March, 360,000 shares in November) and canceled 1.5 million treasury shares, successfully meeting the Tokyo Prime Market listing maintenance threshold of over 10 billion yen in circulating market capitalization at the end of 2024.
• Product & Operational Updates:
  • VAD business: Security product sales to central government agencies remained strong, with sales of U.S. products Rapid7 and Darktrace growing 1.6x to 2x YoY; restructured the organization starting January 1 2025 to improve large project win rates after missing some large opportunities in 2024.
  • In-house security development: Launched MSS for Microsoft Cloud users and managed EDR ransomware protection service (currently in proof-of-value testing with multiple institutions); begun development of new product RevoWorks ZONE, scheduled for launch April 1 2025, which incorporates zero-trust architecture aligned with Japan's Digital Agency policy.
  • AI development: Two internal and customer-facing AI solutions are in progress: support AI that reduced internal labor hours by ~1/3 in testing, and security assessment AI that cuts assessment man-hours by over 30% while improving accuracy.
• Long-Term Strategy (Segue Vision 2030):
  • Aims to become the unique one-stop total security solution provider in Japan, combining global leading security products with in-house developed products and services to create customized integrated packages.
  • Plans to invest heavily in security talent development (incident response engineers, evangelists, junior/mid-level engineers), and provide 24/7 remote management services to clients, building market position no other competitor has achieved as a core business focus.

1. VAD (Value Added Distributor) Business: Revenue of 9.574 billion yen, up 6.8% year-over-year; gross profit of 2.206 billion yen, up 25.6% YoY, with improving profit margins. It contributes approximately 51% of total company revenue. 2. System Integration (SI) Business: Both revenue and gross profit saw a slight year-over-year decline, following a large-scale project booked in 2023; the newly acquired Technocreation Co., Ltd. has contributed positively to SI business results starting from July 2024. 3. In-house Development Business: Revenue of 1.084 billion yen, up 20.4% YoY; gross profit declined 14.9% YoY due to upfront development and organizational costs for newly launched high-recurring services including RevoWorks Cloud, MSS, and SOC services. Segue Security achieved slim profitability in its second year of operation, in line with original plans. This segment contributes approximately 5.8% of total company revenue. 4. Overseas Business: Newly created as a separate segment in 2024 after the acquisition of First One Systems (Thailand), bringing combined Thai operations to over 1 billion yen in revenue. Current revenue is 1 billion yen with gross profit of 340 million yen, contributing approximately 5.3% of total company revenue.

• For the 2025 December fiscal year (second year of Segue300), the company guides revenue of 22.5 billion yen and operating profit of 1.26 billion yen, representing 3.783 billion yen (20.2%) revenue growth and 540 million yen (75%) operating profit growth from 2024 results.
• For the 2026 December fiscal year (final year of Segue300), the base target is 26 billion yen in revenue and 1.8 billion yen in operating profit; the stretch M&A-aided target is 30 billion yen in revenue and 20 billion yen in operating profit.
• Shareholder return guidance: The company will maintain a payout ratio of at least 50% (projected at ~60% for 2025). It adjusted shareholder benefits to reduce cost burdens, cutting the annual Quo card benefit from 30,000 yen to 10,000 yen (with an extra 10,000 yen for continuous 6+ month holders), and redirected the savings to a dividend increase: full-year dividend will rise from 11 yen per share to 13 yen per share (6 yen interim, 7 yen end-of-period). The company will keep evaluating opportunistic share buybacks based on stock price and financial conditions.

• The company missed some large VAD project opportunities in 2024 due to insufficient organizational capabilities, addressed via 2025 organizational restructuring.
• Unpredicted high costs from the original shareholder benefit program created a larger than expected impact on operating profit, requiring a mid-course adjustment to the program.
• Foreign exchange rate volatility impacted 2024 gross margins, as dollar-yen movements moved against the company's position during the period between order intake and supplier payment.
• Current share price is below the Prime Market listing maintenance threshold as of after earnings release, requiring active remedial efforts over the next 12 months.
• The original shareholder benefit program attracted an unexpectedly large number of short-term benefit-seeking individual shareholders, reducing institutional investor holdings and disrupting the shareholder base balance.

Q: What regions/industries see growing demand for security products, and are projects growing larger? / A: Both public and private sectors have allocated growing cyber security budgets, and projects are consistently getting larger. Segue is now able to engage directly with end users on large projects, or collaborate with lead system integrators on these deals. Demand comes from all industries handling sensitive information: central and local governments, insurance, securities, banking, and healthcare (electronic medical records) are all key growth areas.

Q: What is the current state of Segue Security and its SOC service, what is its target gross margin, and does it pursue direct end-user deals? / A: Segue Security provides high-end security consulting and services, and targets a gross margin of ~40%. It receives orders from VAD business partners, but also grows its own direct end-user client base via consulting lead generation. The SOC service offering has expanded the company's total solution scope significantly.

Q: Why is operating profit projected to grow strongly in 2025, is it mostly from lower shareholder benefit costs? / A: Cost savings from lower M&A one-time costs (~130 million yen) and reduced shareholder benefit expenses (~70 million yen) are a material factor. 2024 saw aggressive senior talent hiring that drove large SG&A growth, and 2025 will slow new hiring to control SG&A. Additionally, 2024 had unfavorable foreign exchange movements that compressed margins, and a more stable or slightly yen-appreciating exchange rate would support margin expansion in 2025.

Q: Is goodwill amortization from future M&A already accounted for in current guidance, and how does M&A impact profit? / A: It is impossible to pre-guess the size and price of future M&A targets, but the 2024 acquisitions of First One Systems and Technocreation are already contributing to revenue, and generate enough profit to offset their goodwill amortization. Current medium-term targets already account for expected goodwill costs from incremental M&A, and management actively pursues larger M&A to accelerate growth, including potential combinations with other listed firms when appropriate.