Neural Group Inc. Q1 FY2025 earnings call

Company Milestone & Business Model Evolution

• Neural Group marked 4 years since its 2020 IPO, and has entered a new accelerated growth phase after completing initial business restructuring and service building
• The business model has evolved from the IPO model (AI technology licensing focused on edge AI for large enterprise clients) to a two-wheel model combining ongoing innovation and scalable core services

Evolved Two-Segment Business Structure

• Innovation Segment: Focuses on selective, high-priority advanced AI R&D, shifting research focus from edge AI to secure large language models (LLMs), generative AI, and AI Agents. Mature technologies are moved to the core service segment for commercial scaling, rather than maintaining ongoing open-ended R&D.
• Core Service Segment: Commercializes mature AI technologies (edge AI, image analysis, speech recognition, text generation, content generation) to a broad base of over 12,000 public and private clients across Japan, now representing ~80% of total company revenue with a 20% annual compound growth rate since 2022.

Key Competitive Advantages

• Unique nationwide sales and operational network with over 10 locations across Japan, a rare asset for an AI startup, enabling broad reach to both public and private sector clients
• Leverages long-held edge AI expertise (miniaturization, secure on-device processing, privacy protection) to develop a proprietary 320-billion-parameter standalone NEURAL LLM that can run fully on-premise within a client's closed internal network, addressing major enterprise concerns over confidential data leakage with cloud-based LLMs
• High margin scalable business model: ~55% gross margin, with selling, general and administrative costs not scaling proportionally with revenue growth, allowing profit to expand rapidly as core service revenue grows

NEURAL LLM Development Update

• The 320-billion-parameter model can run on small form-factor hardware (from NVIDIA Jetson to NVIDIA A10) for on-premise deployment, leveraging open-source frameworks combined with proprietary tuning, and keeps all client data within the client's secure closed network
• Development prioritizes real-world client usage over pure R&D, and the company has begun offering LLM-powered AI Agent services to clients

• Core Service Segment: 675 million yen in Q1 FY2025 revenue, 11.9% year-over-year growth, contributing 81.8% of total Q1 revenue. This segment has achieved 9 consecutive quarters of positive year-over-year growth.
• Innovation Segment: 150 million yen in Q1 FY2025 revenue, contributing 18.2% of total Q1 revenue. Overall total Q1 FY2025 revenue is 825 million yen, with 5.7% year-over-year total growth.

• Full-year FY2025 guidance maintains a target of 160 million yen in operating profit and 40 million yen in net profit, which would be the first net profit in 4 years and follow 2024's first operating profit in 3 years
• Overall company revenue is guided for 3.8% year-over-year growth; the conservative overall growth target reflects intentional reallocation of capital and human resources to scale the core service segment and build long-term growth foundation, not weak growth expectations
• Q1 FY2025 operating loss of 9 million yen was better than originally budgeted, with the company reaching its break-even level ahead of plan, putting full-year profit on track to be achieved ahead of schedule
• Mid-term strategy targets continued 20% annual growth for the core service segment, supported by organic new service rollouts, expansion into new industry verticals, and targeted M&A of complementary businesses, in preparation for accelerated growth starting in 2026

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