Serverworks Co.,Ltd. Q1 FY2026 earnings call

Core Financial Performance Summary

• The 55% year-over-year operating profit decline was within management expectations, driven by two main factors: a ~10 yen yen appreciation (145 JPY/USD average this quarter vs 155 JPY/USD in the prior year quarter) and the absence of a one-off special revenue that was recorded in the prior year quarter. The full-year guidance progress is broadly on track.
• Shareholder return: The company completed a 500 million yen share repurchase, achieving a total payout ratio of approximately 60% based on full-year guidance.

Strategic Operational Updates

• Exhibited as a top-tier Diamond Sponsor at AWS Summit JAPAN 2025, the largest independent IT vendor event in Japan with over 40,000 attendees, and successfully acquired a large volume of new customer leads; revenue contribution from these leads is expected starting from FY2027, reflecting sustained strong momentum in AWS-related business.
• Expanded partnership with IIJ Group: Launched services in Thailand in April following an earlier launch in Vietnam, with plans to expand to other ASEAN markets going forward.
• Launched officially licensed AWS generative AI training programs to address growing demand for enterprise generative AI talent development, expanding new business opportunities in the generative AI space.
• Co-invested in Alter Design Consulting, a firm specializing in Siemens' Mendix low-code/no-code solutions, to expand business scope; Mendix solutions will run on AWS infrastructure, creating new AWS-related revenue opportunities for Serverworks.

Organizational and Talent Development

• Engineer hiring has progressed smoothly despite industry-wide hiring challenges; the company plans to add 107 total employees group-wide this year, which management expects to achieve on track.
• The company employs over 200 engineers holding nearly 1,400 AWS certifications, an average of ~7 certifications per engineer, a ratio much higher than peer AWS partners, and this high engineer quality is core to the company's sustained growth.

Generative AI Business Impact Assessment

• Positive impacts: Generative AI development will increase enterprise demand for AWS storage and database services to host proprietary training data; easier application development via generative AI will drive more in-house workload development, which will run on AWS infrastructure, further increasing AWS adoption.
• Long-term opportunity: The RAG technique required for enterprise generative AI competitiveness will drive accelerated consolidation of enterprise data on reliable, established cloud platforms like AWS, increasing overall AWS usage and demand for Serverworks' partner services. Serverworks' extensive experience rolling out new cloud technologies to enterprise clients also positions it to win more generative AI cloud integration projects in the enterprise market.

IR Improvements

• After releasing the new mid-term management plan, the company will increase investor explanation activities, upgrade the IR website, and accelerate information disclosure to improve market understanding of the company's growth potential.

1. サーバーワークス (Parent entity): Revenue of 7.4 billion yen, operating profit of 237 million yen, accounting for 80.3% of total consolidated revenue. 2. G-gen (Consolidated subsidiary): Revenue of 1.8 billion yen, operating profit of -5 million yen, 19.5% of total consolidated revenue, maintaining 17% year-over-year revenue growth. 3. サーバーワークス・スマートオペレーションズ (New consolidated subsidiary): Operating profit of -3 million yen, with startup costs recorded as expected. 4. Cloud Integration: Unit pricing increased slightly due to a small number of high-value projects, with overall project volume in a steady growth phase. 5. Resale (AWS): AWS account count continues to grow steadily; ARPU remains stable as the company proactively provides cost optimization services. Measured in USD, AWS usage fees and resale revenue maintain steady growth, with the yen-based revenue decline entirely driven by yen appreciation. Total consolidated revenue for the quarter: 9.219 billion yen, up 6.8% year-over-year; total consolidated operating profit: 199 million yen, down 55% year-over-year.

• Management maintains the full-year FY2026 February term consolidated guidance: 40.841 billion yen in total consolidated revenue, and 1.171 billion yen in ordinary profit. The 1st quarter revenue decline from large contract cancellation and yen appreciation are expected to be offset over the remainder of the fiscal year, and management remains on track to hit full-year targets.
• Current 1st quarter progress against full-year guidance: 23% for revenue and 21% for operating profit based on the initial guidance exchange rate. If the current 145 JPY/USD average rate holds for the full year, progress would be 22% for revenue and 17% for operating profit. Management notes that profit historically increases sequentially through the year, so this lower first quarter progress is still within expected ranges and does not signal a full-year miss.
• The company's mid-term management plan prioritizes three core growth pillars: generative AI, security, and overseas expansion, with a stated target of 56 billion yen in revenue by the end of the plan period.

• The market perception that AWS' native generative AI capabilities are currently inferior to offerings from Google and OpenAI creates moderate risk that enterprise generative AI workloads will shift to non-AWS cloud platforms.
• A stronger yen than assumed in the full-year guidance will continue to put downward pressure on yen-denominated revenue and profit for AWS-resale business, which is priced in USD.
• Higher-than-expected engineer hiring and training costs may continue to pressure gross margins in the near term, as the company invests in talent to support future growth.

Q: Is AWS itself prioritizing investment in generative AI, and what is AWS' core generative AI strategy? / A: As an AWS partner, Serverworks management observes AWS is investing heavily in generative AI, with a core strategy of controlling an intermediary layer that supports multiple third-party large language models (LLMs) via its Amazon Bedrock service. Amazon Bedrock allows clients to use models from Anthropic (Claude), Meta (Llama), and other providers directly on AWS infrastructure. While AWS' native Amazon Nova LLM is not currently seen as competitive with OpenAI's ChatGPT or Google's Gemini, the intermediary strategy is well-aligned with the emerging market landscape. / A: Management expects the future will bring a wider range of LLMs, with clients using different models for different use cases — similar to the growth of multi-cloud adoption. This makes AWS' multi-LLM intermediary strategy logically sound and poised for growth, which benefits Serverworks as a leading AWS partner.

Q: What are the key factors driving the 1st quarter sales and profit downward, and when will performance recover? / A: The main drags are the nearly 10 yen yen appreciation versus the prior year, the absence of the large one-off special revenue recorded in last year's 1st quarter, and the impact of a large client contract cancellation. All these factors were anticipated in advance, so the current performance is within planned ranges. Management expects sequential profit growth through the remaining quarters of the fiscal year, and the full-year target remains on track, with underlying USD-based business growth remaining solid.

Q: What is the current progress of Serverworks' overseas expansion, and when will it contribute to profit? / A: The company just launched services in Thailand following an earlier launch in Vietnam in partnership with IIJ Group, and will continue expanding to other ASEAN markets. As the expansion is in very early stages, profit contribution is not expected in the near term, as the company prioritizes building out the regional business footprint first.