sinops Inc. Q2 FY2025 earnings call

Mid to Long-Term Growth: Business Expansion Using Core Demand Forecasting Technology

• Food Value Chain Optimization Service (DeCM-PF): Partner companies supporting the initiative exceeded 100, far outperforming the original target of 30 major manufacturers. The company will actively pursue further customer growth, and continue phased service expansion and monetization alongside the already profitable special sale lead time extension service.
• Human Resource Maximization AI Service (WLMS): Three core WLMS products (LOG, WORK, LEARN) launched in 2024, with ongoing sales promotion. The service addresses deepening labor shortages and rising labor cost pressure in the food supermarket industry, and is expected to become a key high-demand solution for customers.

Existing Cloud Service Growth Target: Maintain 20-25% Annual Revenue Growth

• Expand Services Per Store to Boost ARR: The company prioritizes increasing the number of services per store to drive ARR growth. A recently completed pilot for fresh produce demand forecasting achieved 50% lower ordering work time, 25% lower food waste, and a 46% projected reduction in intermediary wholesale logistics labor. The company will continue expanding services into challenging categories like fresh produce to maintain its demand forecasting technical advantage.

Key Operational Updates

• Paid cloud accounts increased to 13,405, with a 922 account increase from Q1, driven by upselling and cross-selling to existing customers (exemplified by the 6-service additional rollout across all 136 Baisia stores). Average accounts per store now reach 4.0, with significant remaining expansion room.
• Net Revenue Retention (NRR) remains above 100%, confirming stable existing business growth, as NRR calculation excludes new customers and only measures net changes from existing accounts.
• Total operating costs were held to a 2% year-over-year increase at 817 million yen: personnel costs were flat due to headcount growth controls, and product improvements limited communication cost increases to 5.4% despite growing cloud usage. Strategic outsourcing continues to improve employee productivity.
• Shareholder return policy remains unchanged, targeting a 40% payout ratio. Full-year dividend is planned at 16 yen per share (8 yen interim, 8 yen final), a 1 yen increase year-over-year, with no changes to this plan.

1. Package sales: Increased 1,677.2% year-over-year, with a 97 million yen increase to 103 million yen in the first half of the fiscal year, driven by additional license purchases from existing users. This segment contributed approximately 27.8% of total cumulative H1 revenue.
2. Stock (recurring cloud) sales: Grew steadily year-over-year, accounting for 72.2% of total revenue, exceeding the company's 70% target. Total Q2 revenue was 995 million yen, up 20.7% year-over-year. Operating profit reached 178 million yen, up 647.5% year-over-year. Annual Recurring Revenue (ARR) hit 1.447 billion yen, up 9.5% year-over-year, in line with plan.

• Full-year 2025 fiscal guidance is maintained unchanged at: 2.12 billion yen total revenue, 355 million yen operating profit, and 1.7 billion yen ARR (27.3% year-over-year growth). Management built the plan based on prior year overstatement lessons to ensure achievability, and uses conservative probability estimates for large delayed projects from last year while continuing to pursue execution.
• No material additional cost increases are expected for the remainder of the fiscal year, and management remains focused on hitting the full-year operating profit target.

• Contracted customer count decreased 1 year-over-year to 119, due to Q1 corporate consolidation and a Q2 customer churn from the wholesale industry. Management states this has no material impact on overall sales or growth, but is continuing to review and improve customer follow-up processes.
• Food retail industry adoption of new systems is split: high-performing companies have higher-than-expected demand for system implementations amid rising labor costs, while struggling firms face budget constraints that delay purchasing. This bipolar trend is more pronounced than originally anticipated, though it remains within overall management expectations.

Q: Why has package sales unexpectedly outperformed the full-year guidance this half, and what is the company's ongoing strategy for package vs cloud going forward? / A: The upside came from unexpected requests for on-premise expiration date checking solution packages from existing customers, which were not planned at the end of last year. The core strategic priority remains cloud as the company's main offering, given package sales have high revenue volatility. The company will continue recommending cloud to all customers, but will still fulfill package requests when customers insist, and remains focused on growing through cloud offerings.

Q: Is the cloud transition progressing slower than planned, given cloud sales growth is 19% H1 vs the full-year target of 27.1%? / A: Management confirms the cloud transition is progressing steadily, not materially behind plan, and expects to grow cloud sales in the second half of the fiscal year as planned.

Q: What is the long-term target for stock sales mix, and will package sales eventually fall to near zero? / A: The company's formal target is to get package sales to near zero, but even after full cloud adoption, one-time implementation support revenue from systems engineers will remain. Even at full cloud penetration, this means stock sales will not reach 90% of total revenue, as implementation support will continue to make up a persistent portion of non-stock revenue.

Q: What drives the remaining ARR increase from Q2 to full year, and what share comes from upsell/cross-sell vs new customers? / A: Management did not share exact percentages, but confirmed that upsell and cross-sell to existing customers account for a much larger share of ARR growth than new customers. This structural dynamic exists because new cloud customers typically start with small pilot deployments at a limited number of stores, so their initial ARR contribution is low, while existing customers expand to more stores and add more services to drive most incremental growth.