Serverworks Co.,Ltd. Q4 FY2025 earnings call

Overall Financial Results

• Full-year FY2025 results exceeded the company's previously upgraded guidance, with consolidated revenue of 35.717 billion yen (+29.8% YoY) and consolidated operating profit of 1.072 billion yen (+19.5% YoY). All core financial metrics outperformed prior-year levels.
• Lower than expected growth in ordinary profit reflected a 143 million yen loss from three equity-method investees, two of which are still in the early investment phase and are expected to become profitable over time.

Key Operational Milestones

• Established Serverworks Smart Operations in Niigata to meet growing customer demand for 24/7/365 cloud security services, leveraging existing cloud operation infrastructure.
• Received 2nd place in the mid-sized company category of the Best Motivation Company Award 2025, which supports strong employer branding for talent recruitment.
• Subsidiary G-gen won Google Cloud's Data Analytics Partner of the Year award, strengthening its market position in the Google Cloud ecosystem.
• Added 80 net new employees across the group, with on-plan hiring at the parent company and minor hiring shortfalls at G-gen that are viewed as easily recoverable.

Mid-Term (FY2026-FY2028) Strategic Direction

• Core Strategic Goals: Target 56 billion yen in revenue and 1.7 billion yen in ordinary profit by FY2028 (over 150% growth from FY2025), with combined operating and ordinary profit exceeding 3 billion yen across FY2027-FY2028. The company has started reviewing a shift to the Tokyo Stock Exchange Prime Market as a key medium-term goal.
• Business Strategy:
  • Prioritize LTV maximization through the core resale business, which is the foundation of the company's growth flywheel: resale creates aligned incentives with customers, enables stable recurring revenue, funds talent investment, and drives higher customer satisfaction that fuels repeat growth. The company will accelerate its strategic collaboration agreement (SCA) with AWS, which is already outperforming plan: the 2-year cumulative target is 239% complete, on track to hit the 4-year 215 million USD new business goal.
  • Expand into high-growth adjacent strategic areas: cybersecurity and generative AI. These areas are complementary to core cloud business: the company can leverage existing infrastructure to deliver affordable 24/7 security that protects customer cloud and generative AI workloads, and can adapt its proven cloud introduction methodology to help enterprises implement well-governed generative AI. The company aims to become a comprehensive strategic partner for integrated Cloud × AI × Security support.
• Financial Strategy: Shift from pure growth-focused investment to a balanced approach that prioritizes growing absolute profit, targeting ROE above cost of equity, and balancing growth investment with increased shareholder returns. In addition to organic growth, the company will allocate capital to M&A and overseas expansion for non-organic, discontinuous growth. The company has announced a new share repurchase program and will begin reviewing dividend distributions for future shareholder returns.
• Non-Financial Strategy: Leverage the company's existing strengths in recruitment, training, and retention to build human capital that drives sustained growth, and advance sustainability initiatives that align social issue resolution with corporate value improvement.

For the full FY2025 February term, consolidated total revenue was 35.717 billion yen, growing 29.8% year-over-year. The company operates three core product/service segments, all of which delivered consistent sequential quarterly growth and full-year expansion:

1. Cloud Integration: Average project value has been intentionally kept stable (not growing larger) to shorten project timelines and accelerate follow-on revenue from Resale and MSP segments, while total project count has grown steadily to drive overall segment revenue growth.
2. Resale: Measured in US dollar terms (to eliminate exchange rate volatility), resale revenue grew steadily year-over-year. The number of AWS customer accounts increased steadily, while ARPU has been intentionally stabilized: the company provides cost optimization consulting to reduce unnecessary cloud usage for customers, which offsets price pressure from yen depreciation and keeps ARPU from spiking. All customer cohorts show gradual increases in usage over time, driving consistent segment growth.
3. MSP (Managed Service Provider): The segment also delivered steady year-over-year revenue growth in line with overall company expansion.

• For FY2026 February term, the company guides consolidated revenue of 40.841 billion yen (+14% YoY), operating profit of 1.14 billion yen, and ordinary profit of 1.171 billion yen. The lower revenue growth rate (compared to past 20%+ growth) reflects a one-time 1.5 billion yen revenue loss from a customer churn event, which is unrelated to service quality and driven by the customer's internal corporate restructuring.
• Excluding the one-time churn impact, underlying business growth momentum remains strong, in line with the continued fast growth of the domestic IaaS market.
• For the 3-year mid-term period ending FY2028 February term, the company maintains a target of 56 billion yen in total revenue and 1.7 billion yen in ordinary profit, representing over 150% growth from FY2025 levels. The company also targets combined operating and ordinary profit of over 3 billion yen across FY2027 and FY2028.

• High volatility in USD/JPY exchange rates creates pricing pressure for AWS resale business, as a weaker yen increases cloud costs for Japanese customers. The company mitigates this by providing cost optimization consulting to reduce unnecessary usage, which stabilizes ARPU.
• A one-time, material 1.5 billion yen revenue loss occurred in FY2025 from churn of a large multi-entity customer, which shifted its contract directly to AWS following internal consolidation. This event is considered exogenous, non-recurring, and unrelated to service quality, but it reduces FY2026 guided growth.
• New joint ventures and recently established subsidiaries are still in the investment phase, leading to near-term losses that weigh on current consolidated profit.
• G-gen missed its FY2025 hiring target, which could near-term slow its growth if not corrected.

Q: What is the current progress of the AWS Strategic Collaboration Agreement (SCA), and is the original target likely to be exceeded? / A: Serverworks and AWS agreed on a 4-year target of 215 million USD in new business under the SCA. After two full years, cumulative progress is 239% of the original plan, meaning the initiative is significantly outperforming initial expectations. Management will continue to prioritize SCA as a core mid-term strategy. The SCA does not impose restrictive binding terms that limit the company's M&A strategy or other expansion initiatives. (301 characters)

Q: How do you view the impact of the large 15 billion yen customer cancellation on long-term sales growth? / A: The cancellation was entirely driven by the customer's internal corporate restructuring, where multiple group entities consolidated and chose to contract directly with AWS. It is not related to any issues with Serverworks' service quality. It is a one-time, non-recurring event, and underlying market growth momentum for the company's core cloud business remains completely unchanged. (297 characters)

Q: What is your outlook for operating margin under the mid-term business plan? / A: While resale has lower margins than other segments, the company's growth flywheel depends on resale as a core driver. Management will focus on improving productivity and cost discipline to grow absolute profit, gradually improving margin over the mid-term period as scale increases and higher-margin security/AI services grow as a share of total revenue. (279 characters)

Q: What steps will you take to improve shareholder returns and support the company's stock price? / A: The company will shift to a balanced capital allocation approach that prioritizes ROE above the cost of equity capital, alongside continuing growth investment. The company has already announced a new share repurchase program, will begin evaluating dividend distributions, and will focus on growing EPS to improve corporate value and PBR. (232 characters)