sinops Inc. Q4 FY2024 earnings call

Core Company Mission and Mid-Term Direction

• Build on the company's core competitive advantage in demand forecasting to expand the use of demand forecasting data across the entire supply chain
• Target 40% market share in the food supermarket segment, with a medium-term ARR target of 1.7 billion yen

Expansion of New Business Areas Using Core Technology

• DeCM-PF initiative: Began monetizing the special sale lead time extension service in 2024; plans to start phased monetization of three additional services (regular item LT extension and volume control services) in 2025. Over 80 manufacturers have joined the initiative, with a focus on advancing collaboration across retail, wholesale, and manufacturing demand chains.
• Working hour improvement service: Launched the full sinops-WLMS AI human resource optimization service suite (sinops-LOG, sinops-LEARN, sinops-WORK) in 2024. Pilot testing at a regional food supermarket Rocky cut shift creation time by 60%, work schedule creation time by 75%, reduced total working hours by 6.5%, and increased sales per working hour by 4.5%. Rocky plans full rollout across all 25 stores in 2025, and management views this service as a potential future core business pillar.
• Expansion to other industries: Continues product improvement to prepare for long-term cross-industry expansion, but prioritizes solidifying the number one market share position in food supermarkets first; will focus on building food-focused DeCM solutions in 2025.

Sustained Growth of Existing Cloud Services (Target 20-25% Annual Revenue Growth)

• Increase number of services per store: Average accounts per store grew 0.3 YoY to 3.7, with top users already using 8 services, leaving significant room for further expansion. In 2025, will continue pushing cross-selling/up-selling and refine services for fresh food sections (delicatessen, meat) to maintain competitive advantage in demand forecasting.
• Solidify number one market share position: Retained the number one share position in the food loss reduction solution market (covering demand forecasting and automatic ordering tools) according to a 2024 Fuji Keizai report. In 2025, will focus on improving demand forecasting accuracy, rebuilding stable service operation systems, and strengthening management infrastructure including talent development.

1. Package sales: 66.0% YoY decrease, contributing 27.0% of total revenue. 2. Stock (recurring) sales: grew steadily YoY, contributing 73.0% of total revenue. Total company revenue for 2024 was 1.776 billion yen, a 2.8% YoY increase. Total operating costs were 1.621 billion yen, an 11.2% YoY increase. Operating profit was 154 million yen, a 42.8% YoY decrease, with an operating profit margin of 8.7%. Annual Recurring Revenue (ARR) reached 1.335 billion yen, a 17.5% YoY increase, which was nearly in line with the revised target. Cloud paid accounts increased to 12,035 accounts, with an average of 3.7 accounts per store, up 0.3 accounts YoY. Net Revenue Retention (NRR) for cloud services stayed above 100%.

• 2025 full-year revenue guidance: 2.12 billion yen, representing a 19.3% YoY increase, which is a conservative estimate that incorporates a low probability assumption for the closing of the delayed large cloud project from 2024. Management will continue pursuing the project and work toward closing it in 2025.
• 2025 full-year operating profit guidance: 355 million yen, with an operating profit margin target of 16.7%, representing a recovery from the 2024 depressed margin. The guidance is set to be achievable based on prior experience with 2024's downward forecast revision.
• 2025 ARR guidance: 1.7 billion yen, a 27.3% YoY increase, which also incorporates a low probability assumption for the delayed 2024 large cloud project.
• Shareholder return guidance: Maintains the existing policy of targeting a 40% payout ratio for sustainable dividends. Plans a 16 yen annual dividend for 2025, a 1 yen increase from 2024, following a 2 yen increase to 15 yen in 2024 (2024 payout ratio was 86.2% due to lower earnings, but the planned dividend was maintained as originally guided).

• A large planned cloud project scheduled for implementation in 2024 was delayed due to extended KPI achievement review at the client, which caused 2024 revenue growth to slow to just 2.8% YoY and pulled operating profit down 42.8% YoY.
• Difficult labor markets for tech talent have forced increased reliance on outsourcing, driving higher external contracting costs.
• AWS-related cloud communication costs have increased due to the impact of yen depreciation against the US dollar, though product improvement initiatives have kept cost increases contained.
• Demand for AI demand forecasting outside of food supermarkets remains low, and existing simple automatic ordering systems are widely used in adjacent segments, slowing adoption of the company's solutions in these markets for the time being.

Q: The delayed large client implementation was pushed to this period – how is this incorporated into the 2025 guidance? / A: The project work is progressing smoothly, but given its large size, management has intentionally compressed the revenue amount included in the 2025 plan to maintain a conservative forecast. Management still expects the project to be completed and recognized during 2025. (178 characters)

Q: Why is adoption of your system slower in non-supermarket segments like drug stores, even though they have similar product assortments that would fit your demand forecasting models? Is it an issue of model accuracy? / A: This is not an accuracy issue. Most drug stores and home centers already use simple one-in, one-out automatic ordering systems that have been in place for decades. However, as these retailers expand their perishable and short-shelf-life food offerings, the need for more sophisticated demand forecasting will grow. Management already sees increasing inquiries from major drug store chains and expects demand to rise going forward. (352 characters)

Q: What is the status of demand forecasting and AI adoption in the convenience store segment, and why have there not been more major deals here? / A: Five years ago, most major convenience store chains believed their in-house systems were sufficient, but the company still has an ongoing proof of concept with one chain, and some smaller chains are still working with the company. The company has particular strength in forecasting for fresh prepared items (bento, onigiri, sandwiches) which major chains have not yet developed solutions for, and will actively pursue this segment when the timing is right. (354 characters)

Q: What is your 2025 hiring plan? / A: The company plans to hire approximately 20 new employees total in 2025: 10 new graduates (10 have already been hired as of the earnings call) and 10 mid-career hires, to support business expansion. (149 characters)