Dream Incubator Inc. Q4 FY2025 earnings call

• Mid-Term Management Plan (March 2023 - March 2025) Review

  • The plan positioned the period as a structural reform phase, focused on scaling the core Business Produce business and winding down the Incubation (venture investment) business.
  • The structural reform reallocated capital and capabilities from the volatile incubation business to human capital expansion for Business Produce, which is now complete. The business achieved its 4 key expansion goals (service line, team size, partnerships, functional capabilities) broadly as planned, with sufficient momentum for medium- to long-term growth.
  • The 100 billion yen total shareholder return promise for the 3-year mid-term period was fully achieved via 72 billion yen in special dividends and 28 billion yen in share buybacks, resulting in a 103% total payout ratio over the 3 years.

• Business Produce Segment Operational Progress

  • Service line expansion added support for strategy implementation and DX/IT projects; DX/IT now accounts for 30% of segment revenue, with growing project volume from strengthened customer commitment.
  • Team expansion was accelerated ahead of plan, growing 3x against the original target of doubling, with significant progress in diversity (more women, foreign employees) and addition of senior experts with deep DX/IT domain knowledge.
  • Partnership expansion strengthened capital and business alliances with the Dentsu Group and YMFG (Yamaguchi Financial Group) steadily.
  • Functional expansion is underway to implement and test multiple non-consulting fee revenue models, with future prioritization to be determined based on early results.

• Incubation Segment Operational Progress

  • Investment harvest progressed as planned, with large portfolio exits (including the sale of Anpet Holdings) significantly reducing future volatility and impairment risk. Venture investment activity will be wound down as a standalone business line.

• Balance Sheet Management

  • Net assets decreased by just over 2 billion yen over the 3-year reform period to 13.1 billion yen at the end of March 2025, from 15.1 billion yen at the end of March 2024, after accounting for 12 billion yen in year-end dividends and 10 billion yen in interim dividends during the fiscal year.

For the 2025 March fiscal year, consolidated total revenue was 6.18 billion yen, consolidated operating profit was 250 million yen, and net income attributable to parent company shareholders was 170 million yen.

1. Business Produce Segment: Revenue more than doubled over the 3-year mid-term management plan period, but it recorded an operating loss this fiscal year. Revenue reached 75% of the revised full-year plan of 7.3 billion yen. The DX/IT sub-segment now accounts for 30% of the segment's total revenue. The number of business producers expanded 3x from 58 at the end of March 2022 to 160 at the end of March 2025, outpacing revenue growth.
2. Incubation Segment: The segment realized a total net gain of 18.5 billion yen from investment harvests over the 3-year mid-term plan, with investment book value reduced from 7.9 billion yen to 2.2 billion yen. The segment recorded an operating profit this fiscal year from capital gains generated by exiting 3 portfolio investments.

• 5-Year Strategic Guidance (Post Mid-Term Plan)

  • Target balanced sustained growth for the Business Produce segment: 2x revenue growth over 5 years (15% CAGR), reaching over 11.0 billion yen in revenue, with an operating profit margin target of 15% or higher by the end of the 5-year period. The target ROE after 5 years is 15% or higher.
  • Expand the Business Produce service domain from primarily new business development to also include existing business transformation, capturing growing market demand for corporate value improvement driven by governance reform and investor activism.

• 2026 March Fiscal Year Guidance

  • The first fiscal year of the new 5-year plan targets 6.2 billion yen in revenue and an operating profit margin of ~4%, maintaining steady sales growth while transitioning to profit growth.
  • The planned year-end dividend for the 2026 March fiscal year is 1.0 billion yen.

• Shareholder Return Guidance

  • Management will maintain the existing policy of continuing shareholder returns to keep the balance sheet streamlined, but will flexibly set annual return amounts based on annual conditions to allow for pursuit of attractive growth opportunities such as M&A. Additional dividends will be actively considered if profits exceed forecasts.

• The Business Produce segment's revenue growth (roughly 2x over 3 years) has not kept pace with the 3x expansion in headcount, resulting in missed profit targets for the segment.
• Compensation for Dream Incubator lags behind unlisted peer consulting firms, creating a competitive weakness in attracting top talent, though the company's mission-driven brand has maintained stable recruitment to date.
• The legacy incubation portfolio had high earnings volatility that made it difficult for investors to forecast the company's overall earnings, which was a core driver of the decision to wind down the standalone business.
• Large standalone venture investing is a capital-heavy business that generates returns only over a 10+ year horizon, which is incompatible with the earnings visibility requirements of a listed company.

Q: The presentation shows incubation being wound down to zero, which conflicts with the company's founding mission of creating 100 companies like Sony and Honda. Why not spin the business out into an independent private PE entity instead of shutting it down? / A: Management already spun out the existing domestic venture fund DIMENSION as an independent entity, which now manages a 10 billion yen fund with Dream Incubator only holding a minority stake as a passive investor. The core reason for winding down in-house incubation is that venture investing creates uncontrollable earnings volatility for a listed company, with unpredictable large gains/losses and long wait periods for returns, which conflicts with the needs of public shareholders for stable, predictable earnings. Management found that growing large new companies is best achieved through the new Business Produce model, which partners with large corporations, uses full commitment investments instead of minority stakes, and builds industry ecosystems first to support new venture growth. This model aligns with the founding mission more effectively than the old standalone incubation model, so management will focus on scaling this approach.

Q: What is Dream Incubator's current average employee salary, and is it competitive enough to attract top talent? / A: The 2024 average annual salary is 12.16 million yen, down from a one-time high of 17 million yen immediately after the sale of Anpet Holdings. Salaries are higher than average for Japanese corporations but still lag behind unlisted peer consulting firms, which can pay out a larger share of profits to employees, creating a competitive weakness. However, the company's mission of creating new businesses to change society attracts talent that aligns with the company's purpose, so recruitment has remained stable to date.