Neural Group Inc. Q2 FY2025 earnings call

Business Model Transformation and Evolution

• Neural Group was founded in 2018 and listed in 2020, originally operating an AI licensing model with 90%+ gross margins that relied on large enterprise R&D budgets, which had limited scalability due to market cyclicality.
• Completed two acquisitions from 2021 onward: acquired Focus Channel (leading condo digital signage media) and NetTen (outdoor LED signage), consolidated into Neural Marketing, and transformed to a scalable end-to-end AI service model targeting over 10,000 customers nationwide, with current gross margins in the 60% range.
• Current two-wheel operating model: the Innovation Domain (advanced AI R&D, ~100 total customers) incubates new technologies, which are then commercialized and scaled in the Core Service Domain (over 12,000 customers across private, public, and administrative sectors), which drives sustainable profit and growth.

Core Competitive Advantages

• Proprietary AI algorithm capabilities: Neural Group has in-house tuning and customization expertise for edge AI and generative AI. Its 32-billion parameter NEURAL.LLM leverages open-source technology and the company's legacy edge AI miniaturization expertise, with far lower development costs than large tech giant models, and the 1.5-year technology lag relative to leading models is not material for most commercial use cases.
• Unusual nationwide sales and distribution network for an AI company: 12 sales locations across 10 regions, with over 12,000 existing customers, averaging ~1,000 new commercial discussions monthly, and added new external agency partners in Q2 2025 to remove sales capacity bottlenecks.

Recent Operational Milestones

• Successfully developed an AI Agent based on NEURAL.LLM, which gained its first commercial deployment at Okinawa City's Koza Athletic Park, where it autonomously analyzes visitor and vehicle data from on-site AI cameras to generate visitor guidance and operational solutions.
• Launched a partnership with Kaonavi to integrate KizunaNavi with Kaonavi's human resources database, expanding accessible customer base to Kaonavi's 4,000 existing customers.
• Achieved profitable commercial deployment of AI camera and LED vision integration at Mitsui Fudosan's LaLaport Anjo shopping center.

1. Innovation Domain: H1 2025 revenue decreased slightly year-over-year, maintaining flat sales at 2025 levels. This segment focuses on cutting-edge AI R&D rather than rapid sales growth, and contributed ~20% of total 2024 full-year revenue. Key services include NEURAL.LLM, Digipark parking control system, fashion trend analysis, and FOCUS CHANNEL condo signage media. 2. Core Service Domain: H1 2025 revenue was 1.428 billion yen, up 9% year-over-year from 1.311 billion yen, accounting for ~83.5% of total H1 2025 revenue. This segment has achieved 10 consecutive quarters of year-over-year revenue growth, with 6% growth in the most recent quarter. Key services include Neural Vision outdoor LED vision, KizunaNavi 1-on-1 employee support SaaS, and AI-powered web services.

• Maintains full-year 2025 guidance: 160 million yen full-year operating profit, and the first full-year net profit in 4 years of 40 million yen, with 3.8% full-year consolidated revenue growth.
• Core Service Domain targets 15-20% annual organic (excluding M&A) revenue growth over the short-to-medium term (1-2 years), with management confirming this target is fully achievable given current execution.
• The Innovation Domain will maintain stable flat investment and revenue at 2025 levels; no large cuts are planned, but new mature technologies from this segment will be progressively moved to the Core Service Domain for scaling, shifting the overall revenue mix further toward Core Services.
• Neural Group is actively pursuing M&A that can add synergy to the Core Service Domain, and will accelerate growth via acquisitions in addition to organic expansion.

• The original AI licensing business model had high cyclical exposure to large enterprise R&D budget cuts, which was the core driver for the business model transformation.
• The business has significant seasonality: sales and profits are heavily concentrated in the second half (H2) of the fiscal year, particularly Q4, due to the annual peak in corporate marketing spending around the holiday season, so H1 results are naturally lower than H2.

Q: Why did Neural Group decide to develop its own LLM, and will it require massive new investment? / A: LLM development is a natural extension of Neural Group's existing capabilities. The company has decades of experience developing edge-side AI processing and miniaturization, and this expertise translates directly to building small, secure LLM models. Unlike large tech giants that spend trillions of yen on large model development, Neural Group's approach leverages open-source technology and its existing miniaturization expertise, so total development costs are only a few hundred million yen, which is very manageable.

Q: What is the difference between a standard LLM and Neural Group's AI Agent? / A: A standard LLM operates via one question-one answer: users must give explicit prompts for every output. An AI Agent has autonomous capabilities: it can perceive its environment, gather necessary data, reason through solutions, learn from mistakes, and iterate on actions without continuous human instruction. This makes it suitable for real-world operational use cases like park and public space management, which is why Okinawa City deployed the product.

Q: What are the key pillars of Neural Group's Core Service growth strategy? / A: There are four core pillars: 1) Scale: Leverage the existing 12,000+ customer network for cross-selling, plus active new customer acquisition. 2) Product strength: Continuously add new innovations from the R&D segment to existing core services to drive up average customer value and attract new customers. 3) New business creation: Spin out mature R&D innovations into full commercial services, and pursue M&A of businesses that complement the core service network. 4) Sales capacity: Expand via external agencies to eliminate headcount bottlenecks and accelerate growth.

Q: Why was the 3.8% full-year revenue growth guidance relatively low, compared to investor expectations? / A: The overall consolidated growth rate is muted because the Innovation Domain is intentionally kept stable, and growth is concentrated in the Core Service Domain. Core Service is already growing at 9% year-over-year in H1, and targets 15-20% annual growth going forward, which is the real growth driver for the company.