WingArc1st Inc. Q3 FY2025 earnings call

• Overall Financial Performance

  • The quarter achieved revenue and profit growth over the prior-year period, marking the highest profit ever for a 3rd quarter, despite the prior year having very strong results from large projects.
  • Strong cost control was maintained: a ~2 billion yen revenue increase was paired with a ~1.5 billion yen expense increase, keeping core profitability stable. EBITDA margin held at 35-36%, and net income margin stayed above 20%; the slight margin decline came from the lower-margin acquired Tri-Serve business, while organic software business maintained high profitability.
  • Recurring revenue achieved double-digit growth, led by cloud and subscription services; cloud services overall grew 24.5% YoY. Maintenance renewal rate recovered gradually from a temporary drop caused by a large SVF maintenance contract expulsion, and is expected to return to prior-year levels by full-year end. The company maintains a strong cash position and continued stable financial improvement after turning net cash positive.

• Strategic Partnerships and Acquisitions

  • Took a 22.7% stake in and formed a capital-business alliance with SimTops, a manufacturing-focused IT solution provider. The alliance will deepen integration between SimTops' manufacturing shop floor electronic document solution i-Reporter and WingArc1st's MotionBoard, to further expand the company's presence in the manufacturing sector, where it already has strong penetration.
  • Acquired Tri-Serve in May 2024, whose revenue has been consolidated into results starting from the 2nd quarter.

• Product and Partnership Development

  • For invoiceAgent: strengthened enterprise-level functionality for large-scale batch operation, improving interactive and efficient management of commercial transaction documents such as orders and delivery notes. Released the enterprise version of invoiceAgent Cloud.
  • For DE cloud: deepened data management collaboration with Saison Technology's HULFT cloud data transfer service (which has over 10,000 customers), and also established integration with ThreeShake's cloud data linkage tool to expand cloud data management ecosystem partnerships.

• Strategic Investment Progress

  • Full-year planned strategic investment is 1.75 billion yen, and 70% of the plan had been completed by 3Q, progressing on schedule.

1. BDS (Business Document Solutions):

   • SVF: ~11.9 billion yen, +8.7% YoY, contributed ~55% of total revenue, with SVF (license/service) recording over 5 billion yen (all-time high for the 3rd quarter) and SVF Cloud growing steadily in customer count and revenue. SVF license demand outperformed initial full-year guidance.
   • invoiceAgent: grew 4.2% YoY, with cloud-only revenue growing over 50% YoY; total contract count reached 869 companies, missing the full-year target of 1,000-1,100 companies.
   • Other: ~0.6 billion yen revenue from Tri-Serve, acquired in May 2024, driving large growth. Total BDS revenue is ~12.5 billion yen, accounting for ~58% of total 3Q revenue.

2. DE (Data Empowerment):

   • Dr.Sum: achieved double-digit growth, with strong demand from large and mid-sized enterprises; Dr.Sum Cloud recorded less than 0.35 billion yen revenue, but customer count grew very rapidly, driven by strong demand for cloud data warehousing.
   • MotionBoard: cloud business (MotionBoard Cloud) was steady, recording ~1.3 billion yen revenue with 15-16% YoY growth; on-premise license revenue was affected by the reversal of a large prior-year deal.
   • Other: consulting and integration services maintained strong demand YoY. Total DE revenue is ~9.11 billion yen, accounting for ~42% of total 3Q revenue.

Aggregate 3Q total sales revenue: 21.61 billion yen, +9.8% YoY; EBITDA: +5.6% YoY; net income: +4.5% YoY.

• Full-year 2025 February term guidance was upward revised: revenue increased from the initial 27.6 billion yen to 28.5 billion yen (+3.3% from initial guidance, +10.7% YoY); EBITDA increased from 9.47 billion yen to 9.56 billion yen (+1.0% from initial guidance, +11.2% YoY).
  • The upward revision is primarily driven by the consolidation of Tri-Serve, but organic business also performed solidly. Management notes that the current guidance is the committed target, and the company is positioned to capture additional upside through the end of the fiscal year.
  • Dividend guidance was revised: to mark the company's 20th anniversary and improve capital efficiency, a 20 yen per share commemorative dividend was added. The revised year-end dividend is 62 yen per share, bringing full-year annual dividend to 104 yen per share, resulting in an expected payout ratio of ~60% against current guidance.
  • The 2027 February term medium-term target of 32 billion yen in revenue and 12 billion yen in EBITDA remains on track, with high confidence in achieving the target.

• invoiceAgent is at risk of missing its full-year contract count target of 1,000-1,100 companies. Key contributing factors include post-legal reform market cooling after last year's electronic bookkeeping and invoice system changes, longer sales cycles for large enterprise core system digitization projects, and slower-than-planned conversion of 400,000 free accounts to paid plans delaying network effect realization.
  • SVF maintenance revenue is taking longer than expected to recover from the loss of a large expired contract, putting some pressure on overall performance.
  • on-premise MotionBoard license revenue continues to be depressed by the reversal of a large prior-year large deal.
  • While generative AI has shifted some corporate investment focus, management notes that this has not caused material impact on demand for the company's core enterprise system solutions.

Q: invoiceAgent's quarterly revenue has been stuck around the mid-500 million yen range this year. Is the slow growth due to market changes, or is the large enterprise-focused strategy delaying growth to future periods? / A: The slow visible growth is primarily due to the post-reform reaction from last year's electronic bookkeeping and invoice system changes, which pulled forward demand. WingArc1st's core strength is serving large enterprise DX and productivity improvement projects, and the company has been prioritizing product development and feature strengthening for this segment after being distracted by legal compliance work last year. Cloud-only revenue for invoiceAgent is still growing 50% YoY, and the recently released enterprise version has strong demand traction, so growth is expected to accelerate in future fiscal years.

Q: What is the main reason invoiceAgent will miss its full-year contract count target, and will the company prioritize growing contract count or pursuing large enterprise deals going forward? / A: Key reasons for the miss include post-reform shift in corporate IT investment focus away from compliance, longer sales cycles for large enterprise core system projects, and slower-than-planned conversion of large numbers of free accounts to paid plans. Going forward, the company will prioritize pursuing large enterprise large deals, which aligns with its core strength. The recently released enterprise version of invoiceAgent Cloud has already seen a gradual increase in proposal volume. Expanding to smaller companies in large enterprises' supply chains will come after establishing a foothold in large clients, and will happen at a slightly delayed pace compared to initial plans.

Q: What progress has been made with major shareholders Itochu and Toshiba, and when will this partnership deliver revenue contribution? / A: Partnership with Itochu Group and its subsidiary CTC has strengthened significantly since the capital alliance. CTC is now the company's top-tier sales partner, actively co-selling products including invoiceAgent with strong collaborative processes already in place. For Toshiba Digital Solutions, which is already a long-standing partner, product integration has deepened: MotionBoard is now embedded in Toshiba's manufacturing solutions and general business offerings. Revenue flows from both partners have increased substantially, and joint product-market fit work with CTC for invoiceAgent has already meaningfully improved product development, so the partnership is progressing fully in line with initial expectations.

Q: How will the company's investment strategy change next year after the 3-year 5.5 billion yen strategic investment plan concludes this year? Will investment slow to improve margins? / A: Most of the current 1.75 billion yen annual strategic investment is for ongoing recurring expenses like development engineer salaries and marketing outsourcing, so the total investment amount will not drop sharply next year. However, the company has completed most of its planned hiring over the past 3 years (hiring ~100 new employees per year in prior two years), so hiring pace will slow starting in the second half of this fiscal year. Going forward, the company will focus on leveraging the expanded team to drive top-line leverage and improve profitability.