Segue Group Co.,Ltd. Q4 FY2025 earnings call

Overall 2025 Fiscal Performance

• All-time record highs were achieved for revenue and all profit metrics: total revenue reached 25.07 billion yen (up 134.0% year-over-year), gross profit reached 5.93 billion yen (up 129.2% YoY), operating profit reached 1.85 billion yen (up 257.5% YoY), and ordinary profit reached 2.0 billion yen (up 188.8% YoY).
• The primary driver of strong performance was the award of a large government GSS project, alongside multiple other large projects. Operating profit grew sharply because the 200 million yen increase in SG&A expenses was far smaller than the expansion of gross profit margin. Ordinary profit additionally benefited from gain on sales of investment securities in ZenmuTech, which listed in March 2025.
• Average annual CAGR over the past 5 years has been ~15%, with 2025 seeing far stronger growth, and operating profit margin reached a multi-year high. The company notes this growth is the result of organizational preparation for large project acquisition that began two years ago.
• Total orders for the full year were 32.3 billion yen, with 20.2 billion yen from product orders and 12.1 billion yen from service orders. Product order backlog spiked in Q2 due to the large GSS project and is gradually returning to normal levels as revenue is recognized.

Capital Structure and Shareholder Return

• The balance sheet shows increased accounts receivable from large projects, and increased temporary inventory for future revenue recognition. Advance payments received reached 6.759 billion yen (up ~1.9 billion yen YoY), representing deferred revenue to be recognized from 2026 onward.
• A public offering of 4.6 million new shares was announced in January 2025, with an over-allotment option for up to 783,700 additional shares via third-party allotment. Expected gross proceeds are ~2.27 billion yen from the main offering, plus up to ~0.38 billion yen from the over-allotment.
• The company's basic policy is to maintain 50% payout ratio through 2026, with two dividends per year (interim and year-end). A new tiered shareholder premium program "Segue Group Premium Premium Club" has been introduced, with points awarded based on shareholding (5,000 points for 10-20 units, 20,000 points for 20-30 units). The new program will remain unchanged for at least 4 years to address past shareholder dissatisfaction with prior revisions.

Market Opportunity and Growth Drivers

• The company's addressable network market is over 6 trillion yen, and the cybersecurity market is ~800 billion yen. The cybersecurity market has a 10%+ CAGR in Europe and the US, and 7-10% CAGR in Japan. Japanese government agencies (especially the Ministry of Defense) have increased cybersecurity budgets by 10-20% YoY, with the current administration prioritizing digital and cybersecurity investment.
• Key growth drivers:
  • VAD Business: Imports cutting-edge cybersecurity and IT infrastructure products from global manufacturers, with strengthened alliances with leading Japanese IT firms driving growth. Strong demand comes from GIGA SCHOOL related projects for prefectural education boards, mobile carrier and data center infrastructure/security projects, and Wi-Fi solutions (the company carries products from 4 of the top 10 global enterprise Wi-Fi vendors).
  • In-house Development Products: RevoWorks series holds top market share in local governments, with large new opportunities in central government agencies as many local government systems enter their replacement cycle between April 2026 and March 2027.
  • Cybersecurity Services: Segue Security (in its 4th year of operation) provides 24/7 SOC monitoring, managed security services, consulting, and forensic incident response. Sales to government agencies, local governments, and 14 critical infrastructure sectors are growing rapidly.
  • M&A and Capital Alliances: The company is actively pursuing alliances with innovative AI and cybersecurity startups to accelerate core business growth.

Segue Group operates as a single IT solutions business segment, divided into 4 revenue categories with the following 2025 December period results:

1. VAD (Value Added Distributor) Business: Accounts for 55.0% of total revenue. This business sources high-market-share global products primarily from the US, provides product sales, licensing, and 5-year ongoing support services. The large government GSS (Government Solution Service) order was booked in Q2, with revenue recognition starting in Q3 and Q4 2025. Revenue is expected to see significant additional recognition in 2026. High-end cybersecurity product orders from central government agencies have been strong, and profitability has improved thanks to its stable stock-type revenue model from ongoing maintenance and license renewals.
2. System Integration Business: Accounts for 34.0% of total revenue. This business includes DX development, system construction, and professional services, with major orders from the service industry. Growth rate is slightly lower because projects including VAD products are counted under VAD revenue. Gross profit growth lagged revenue growth due to one low-margin project, and rising personnel costs from inflation-driven base salary increases also temporarily weighed on performance.
3. In-house Development Business: Accounts for 4.5% of total revenue, and makes up approximately 10% of total gross profit. This business includes the RevoWorks series (internet logical separation solutions), subscription revenue from RevoWorks Cloud, and original services from Segue Security. Revenue saw only a slight year-over-year increase in 2025, but large orders have been secured for 2026, with significant revenue expected in Q1 2026.
4. Overseas Business: Accounts for 6.5% of total revenue, and makes up approximately 8% of total gross profit. Composed of two Thai consolidated subsidiaries, growth is driven by First One Systems, which was acquired in June 2024 (only 6 months of revenue were consolidated in 2024, with full 12-month consolidation in 2025). First One Systems achieved growth in both revenue and profit, while ISS Resolution delayed the launch of its new business and recorded goodwill impairment.

• For the 2026 December full fiscal year, management guides: 30.0 billion yen in total revenue, 2.3 billion yen in operating profit, 2.299 billion yen in ordinary profit, 1.403 billion yen in net income attributable to parent shareholders. The full-year dividend is guided at 18 yen per share (up 5 yen from the prior year).
• The 2024 medium-term management plan "Segue300" targeted 30.0 billion yen revenue by its 2026 final year, with 26.0 billion from organic growth and 4.0 billion from M&A. While M&A has only achieved ~25% of the target to date, organic growth is expected to reach ~29.0 billion yen, putting the full 30.0 billion yen target within reach for 2026.
• The first year of the Segue300 plan (2024) missed revenue targets by a few tens of millions of yen, but the second year (2025) exceeded targets, and management now has strong confidence in hitting the 2026 full target. Management is targeting an upward revision to the full year 2026 guidance, similar to 2025.
• Long-term vision "Segue Vision 2030" targets 50.0 billion yen in revenue by the 2030 December fiscal year. Management plans to accelerate growth via strong performance in 2026 and targeted M&A, with the goal of achieving the 2030 target one year early under the next medium-term plan (covering 2027-2029).
• For 2026, management expects strong revenue growth from existing GSS project order backlog, new GSS project awards, GIGA SCHOOL/NEXT GIGA Wi-Fi product demand, growing private sector cybersecurity demand (driven by mandatory compliance with government security guidelines, which enters its 3rd year of a 5-year grace period in 206), full commercial launch of the new RevoWorks ZONE product, and 10%+ market growth in overseas operations.

• System integration business faces intensifying competition, requiring continued investment to strengthen the company's value added via AI-driven solutions.
• One of the two Thai overseas subsidiaries, ISS Resolution, has experienced delayed launch of its new business, leading to a recorded goodwill impairment charge in 2025.
• In-house development business had temporary sluggish growth in 2025 due to the timing of the 5-year replacement cycle and the ramp-up of subscription revenue, though large orders secured for 2026 are expected to drive renewed growth.
• M&A growth under the current medium-term plan has only reached approximately 25% of the original target, creating pressure to complete additional acquisitions to hit the full 300 billion yen revenue target.

Q: Is the strong performance this period just a one-time event?

A: The strong performance was driven by the award of a very large project that exceeded the scale of the company's typical large projects. This was not accidental, but the result of the company's strategic sales initiatives. The large GSS project has remaining order backlog that will be recognized as revenue in 2026, and the company targets winning 2 to 3 large GSS projects annually to sustain continued growth.

Q: What is the reason for the recent sluggish growth in the in-house development business?

A: The sluggish growth is temporary, driven by three factors: 1) the business is in between 5-year replacement cycles for core products; 2) RevoWorks Cloud subscription revenue takes time to ramp up, so revenue growth has been muted in the near term; 3) the large government orders secured in 2025 follow the fiscal year cycle of government agencies, with revenue concentrated in Q1 2026 (January-March). As a result, significant growth is expected starting in Q1 2026.

Q: How is the company positioned to take advantage of growing cybersecurity investment from the Ministry of Defense?

A: While detailed information cannot be shared publicly due to the sensitive nature of Ministry of Defense business, deliveries of the company's in-house developed products and US-made cybersecurity products have already begun. This represents a major business opportunity, and the Ministry of Defense is expected to become the company's largest single end-user.

Q: Can you share specific examples of the organizational preparedness the company mentioned for large project growth?

A: Starting in the 2023-2024 fiscal period, the company added many senior sales and business leaders, and the results of these hires began to materialize in 2025 (the third year after hiring). Over the past 1-2 years, the company has begun receiving direct inquiries for large projects from leading Japanese system integrators, computer manufacturers, and mobile carrier corporate divisions, and has earned a strong reputation as a reliable joint venture partner. The company has also built a track record of successfully delivering large complex projects, which has increased trust from clients and partners. This organizational preparation has raised the company's overall scale and market position, with clear progress in securing larger and more numerous projects.

Q: What are your thoughts on the quality and profile of the GSS project that drove this period's record performance?

A: This large project has allowed the company to confirm that its team can successfully deliver even very large projects that take 6-12 months to complete, working alongside partner firms. While large projects often involve price competition that compresses margins, this project was awarded based on the company's technical strength, so while margin is slightly lower than typical projects, it still delivered solid profitability for its size. It was therefore a successful project that grew both revenue and profit, while building valuable experience for future large projects.

Q: What is the plan for the next medium-term management plan after the current Segue300 plan concludes in 2026?

A: The priority first is to achieve and exceed the current Segue300 2026 target. The company will begin detailed work on the next 3-year medium-term plan between October and November 2026, once full year 2026 performance is clear, and will finalize detailed targets and initiatives at that time.