ORO Co.,Ltd. Q4 FY2024 earnings call

• Business Model Transition:

  • Completed full transition from buy-out license contracts to SaaS-only subscription contracts in January 2023, building a more stable recurring revenue base. The transition has not resulted in material customer dissatisfaction or increased churn, with negative expectations disproven.
  • Monthly churn rate has remained stable at ~0.3%, and net revenue retention (NRR) for core product ZAC already exceeds 100%, with Reforma PSA targeted to exceed 100% NRR.

• Cloud Solutions Segment Operations:

  • Core vertical SaaS offering centers on ZAC (industry-specific ERP for project-based white-collar industries such as software/IT services, advertising and content production), alongside Reforma PSA and ZAC Enterprise, with new products Hayasub and dxeco in development.
  • Total contracted licenses reached 323,000 at end-2024, with steady growth driven by larger client sizes and expansion at existing clients. The slight MRR growth slowdown in 2024 is attributed to completed revenue recognition for legacy buy-out licenses, not increased churn.
  • Increased advertising spend by 24.5% YoY in 2024 to drive new lead generation, and strengthened partnerships with sales agencies including under-tapped channels like financial institutions. Launched new high-demand integration options (QuickSight, HubSpot) to drive upselling and grow monthly revenue.

• Marketing Solutions Segment Operations:

  • Provides end-to-end marketing support (not limited to digital marketing) for large enterprise clients including AEON Group and Nissan Motor Group, with operations in China and ASEAN, and strengthened overseas subsidiary capabilities in 2024.
  • Overseas revenue returned to growth in 2024 after a decline in 2023. Quarterly revenue volatility is typical for the custom project-based business, with no material changes to long-term growth trends, and operating margins maintained at 10-20%.

• Shareholder Return:

  • Shifted dividend policy from stable dividends to progressive dividends. proposes a 35 yen per share dividend for FY2024, with a planned 50 yen per share dividend for FY2025.

1. Cloud Solutions (CS) Segment: Revenue of 4.929 billion yen, +10.1% YoY; operating profit of 2.162 billion yen, +7.0% YoY. Revenue contribution to total consolidated revenue is 62.4%. 2. Marketing Solutions (MS) Segment: Revenue of 2.969 billion yen, +16.2% YoY; operating profit of 0.557 billion yen, +5.9% YoY. Revenue contribution to total consolidated revenue is 37.6%. Total consolidated revenue for 2024 December period was 7.899 billion yen, +12.3% YoY, with total operating profit of 2.72 billion yen, +6.8% YoY.

• FY2025 (December 2025) guidance:
  • Total consolidated revenue: 9.142 billion yen, split 5.959 billion yen for Cloud Solutions and 3.182 billion yen for Marketing Solutions. Total operating profit is guided at 2.985 billion yen, split 2.569 billion yen for Cloud Solutions and 0.415 billion yen for Marketing Solutions. Marketing Solutions guidance is conservative due to expected temporary advertising budget cuts from major clients.
• Mid-term (through FY2027 December) guidance:
  • Cloud Solutions: Target 9.59 billion yen in revenue and 4.538 billion yen in operating profit by FY2027, with 2026 and beyond guidance upwardly revised from prior estimates due to stronger-than-expected recurring revenue growth from the SaaS transition.
  • Marketing Solutions: Target 4.135 billion yen in revenue and 0.73 billion yen in operating profit by FY2027.
• Key mid-term strategic targets:
  • Cloud Solutions: Maximize new and existing MRR growth, expand into large enterprise clients with ZAC Enterprise, and launch commercial operations in Vietnam (Oro's first overseas market) by 2026.
  • Marketing Solutions: Build out an end-to-end execution-focused support model from strategy to implementation, establish brand recognition for this value proposition, and invest in talent development to improve proposal capabilities.

• Customization projects for Cloud Solutions are volatile: 2024 saw 341 million yen lower customization revenue than expected, leading to a slight downside miss on profit, after a 2023 surge driven by the Invoicing System regulatory change.
• Marketing Solutions revenue and profit are exposed to client advertising budget fluctuations, with major client budget cuts expected to weigh on FY2025 performance, despite declining revenue concentration on top 2 clients over time.
• The Marketing Solutions business model faces potential mid-term disruption from generative AI, which could automate core creative production work and change industry cost structures.
• International expansion into Vietnam carries unproven market demand and operational risk, even with existing local infrastructure.

Q: Why was the 3-year Cloud Solutions outlook revised (lower 2025, higher 2026+) and what changed from prior expectations? / A: The primary driver of the revision is the full shift from buy-out to SaaS-only contracts completed in 2023. Management previously held cautious views on customer acceptance of the new model, but now confirms there has been almost no customer dissatisfaction, increased churn, or margin compression from the shift. Starting 2026, recurring revenue from new SaaS customers will fully flow through, plus upsell from new features and options for existing clients will drive growth, leading to the upward revision for 2026 and beyond.

Q: How will Oro offset major client advertising budget cuts in Marketing Solutions, and what is the new client development strategy? / A: Management confirms the revenue share of the two largest clients has declined steadily year-over-year, so the overall impact of budget cuts will be limited. While budget timing in the second half of 2025 is hard to predict, Oro will not rely only on recovery from existing clients; it will actively pursue new client acquisition, leveraging improved internal capabilities from growing headcount to win new business and offset any weakness from existing accounts.

Q: What is Oro's target for payout ratio and total shareholder return? / A: Oro shifted to a progressive dividend policy, which is not compatible with a fixed payout ratio target. Management will maintain the progressive dividend framework, adjusting dividends based on the company's financial position rather than adhering to a set payout percentage. Share repurchases will continue to be evaluated and implemented as appropriate based on financial conditions, alongside progressive dividends.

Q: How does Oro view the impact of generative AI on its two business segments? / A: For Cloud Solutions, generative AI is seen as an opportunity rather than a threat. Oro has dedicated resources starting FY2025 to develop new generative AI-powered features to add more value for clients, with commercial rollout expected over time. For Marketing Solutions, generative AI could reshape the business model in the medium term, shifting creative production from human-led to AI-led with human support. Oro is already implementing generative AI internally to boost employee productivity and will offer AI-enabled services to clients, building capabilities to adapt to the industry shift.