Segue Group Co.,Ltd. Q2 FY2025 earnings call

Core Financial Results

• Total half-year revenue: 10 billion yen, +18.9% year-over-year, a new all-time high
• Gross profit: 2.55 billion yen, +20.3% year-over-year, a new all-time high
• Operating profit: 680 million yen, +97.5% year-over-year, a new all-time high, driven by lower one-time M&A costs and reduced shareholder benefit expenses
• Recurring profit: 670 million yen, -8.4% year-over-year due to the absence of a 400 million yen one-time derivative termination gain from the prior year
• Total order value through the first half exceeded full-year order value from 2024, with product orders up 130.2% year-over-year, driven by a large government digital project

Key Operational Updates

• VAD Business: Secured a ultra-large digital government-related GSS (Government Solution Service) order far exceeding the 1 billion yen threshold for large cases, after establishing a dedicated Digital Government Promotion division in October 2024. 50% of revenue will be recognized this fiscal year, 50% in fiscal 2026. The project supports the Digital Agency of Japan's new inter-ministry network initiative connecting over 20 central government agencies.
• In-house Development: Launched Managed EDR Service (endpoint security + data protection) in January 2025, and announced RevoWorks ZONE (zero-trust network segmentation solution) in April 2025, which is already under evaluation by multiple local governments for upcoming system replacements. Obtained Asia's first MSSP certification from backup software vendor Acronis, with 4 customer contracts secured to date.
• AI Initiative: Started AI solution development in late 2024. The security assessment AI solution already received proof-of-value requests from ~20 companies, with purchase intent expressed. The support AI solution, trained on 20 years of internal service data, is already contracted for 50,000-60,000 support service cases to improve efficiency and quality.
• Portfolio Adjustment: Added Technocreation to the group in July 2025, and sold 95% of shares in J's Telecom Systems to exit the consolidated group, aligning the portfolio with core growth priorities.
• Long-Term Strategy: Segue Vision 2030 targets 50 billion yen in revenue by 2030, built on combining IT infrastructure, security, and AI development capabilities to deliver total security solutions. The mid-term Segue300 plan (FY2024-FY2026) targets 30 billion yen revenue, 7.84 billion yen gross profit, and 2 billion yen operating profit by the end of FY2026, including contributions from acquired firms.

The company operates a single IT solutions overall segment, with four revenue breakdown segments:

1. VAD Business: 5.294 billion yen revenue, +11.6% year-over-year, contributing 52.94% of total 10 billion yen half-year revenue. Gross margin improved due to price pass-through of forex impacts and growing high-margin maintenance service revenue.
2. System Integration Business: 3.473 billion yen revenue, +20.5% year-over-year, contributing 34.73% of total revenue. Revenue grew on large service sector infrastructure and academic/public sector orders, but net profit decreased due to higher partner technician costs from concentrated project demand and underperformance of the SME-focused Kaetec service line, leading to lower gross margin.
3. In-house Development Business: 605 million yen revenue, +10.2% year-over-year, contributing 6.05% of total revenue. The core RevoWorks product line saw steady order growth from local governments, medical institutions, and large financial institutions, with Segue Security's managed security services growing steadily after turning profitable last year.
4. Overseas Business: 632 million yen revenue, +170.1% year-over-year, contributing 6.32% of total revenue. Growth is driven by the addition of Thailand-based First One Systems to the consolidated group, offsetting startup struggles at ISS Resolution.

• Full-year FY2025 guidance was upward revised from the initial 22.5 billion yen to 24.8 billion yen in revenue (a 2.3 billion yen increase, +10%+ from initial guidance), 1.512 billion yen in operating profit (a 252 million yen increase), 1.48 billion yen in recurring profit, and 780 million yen in net income attributable to parent shareholders. The upward revision reflects stronger than expected order momentum, especially the ultra-large government order secured in the first half.
• The planned annual dividend is maintained at 13 yen per share (6 yen for the first half, 7 yen for the second half), unchanged from the initial announcement.
• Management maintains the mid-term Segue300 plan target of 30 billion yen revenue and 2 billion yen operating profit by the end of FY2026, with the upcoming NEXT GIGA school infrastructure replacement program and additional government network modernization projects expected to contribute to growth. The company will review and update targets after the current fiscal year's full-year results are finalized.

• Large ultra-large government contracts are awarded via competitive bidding, so future repeat orders are not guaranteed, and such ultra-large cases only occur 1-2 times per year on average.
• System integration projects with concentrated demand can strain internal technical capacity, requiring reliance on more expensive partner technicians that reduces project margin.
• Overseas business still faces startup challenges at the ISS Resolution subsidiary, which could pressure overall segment profitability in the near term.
• The SME-focused Kaetec service line is currently underperforming, dragging on segment profitability.
• The upward revised full-year guidance is not 100% guaranteed, as there are still over four months remaining in the fiscal year, and project execution could face unforeseen delays.

Q: What is driving the recent increase in large order sizes, and is the growth limited to government clients or also spread to private sector clients? / A: Management notes that orders have been growing larger over the past three years as a result of the company's intentional strategic push to pursue bigger projects, which has now produced results. While the recent ultra-large government order is the biggest contributor to the current half-year growth, private sector and local government/medical client orders are also growing strongly. The company now regularly wins multi-hundred million to over 1 billion yen private sector cases, compared to mostly smaller 10-100 million yen cases in prior years.

Q: What are the details of the recent ultra-large government GSS order, including revenue recognition timing? / A: The order is for a large central ministry project under the Digital Agency-led GSS initiative. 75% of the order value is for hardware/software products, and 25% is for professional services implementation and 5 years of ongoing support services. Around 50% of total revenue will be recognized by the end of December 2025, 25-30% will be recognized in Q1 2026, and the remaining ~20%+ will be recognized over subsequent years as support services are delivered.

Q: What is the likelihood of additional ultra-large government orders in coming years? / A: The GSS inter-ministry network modernization initiative still has many central government agencies left to upgrade, plus 1,800 local governments will also need to upgrade their networks to match the new central government specifications. While the largest ultra-large national cases only occur once every 1-2 years, the much larger number of smaller local government projects offers significant cumulative order potential. Management will continue to bid for projects in partnership with hardware vendors and primary system integrators, though final awards are not guaranteed due to the competitive bidding process.

Q: How will the increase in Japanese defense budget impact the company? / A: The Japanese defense budget is doubling, with around 20 billion yen allocated to cyber security initiatives (including personnel costs). The company works alongside major system integrator partners on defense sector cyber security opportunities, as it does not hold direct bidding qualifications for defense projects. The company already receives frequent requests to partner on defense projects, and the defense sector is already one of the company's largest end markets based on current order data.