Serverworks Co.,Ltd. Q3 FY2026 earnings call

Overall Quarterly Performance

• Both revenue and profit margin improved significantly in the third quarter, with all three core business segments (Cloud Integration, MSP, Resale) posting sequential quarter-over-quarter revenue growth.
• A weaker yen (yen depreciation) provided a positive tailwind, and some planned SG&A expenses either did not materialize or were pushed to future periods, driving significant improvement in operating and lower profit margins.

New Partnerships & Strategic Wins

• Formed a strategic partnership with CrowdStrike, a leading global cybersecurity firm. This partnership is a core component of the company's strategy to integrate cloud infrastructure provisioning with cloud security and generative AI workloads.
• Reached a basic agreement with Waseda University to build a university-wide unified AWS procurement model. The project will create a shared common foundation to enable more effective and efficient AWS procurement and usage across all departments and research labs, serving as an advanced model for research digital transformation (DX) among Japanese universities.

Product & Customer Success Milestones

• Both Serverworks and G-gen launched new offerings and secured use cases in high-growth security and AI areas: G-gen began offering Google Security Operations (SecOps), while Serverworks deployed a generative AI automatic summarization solution for Daimaru Matsuzakaya Department Stores' contact center, reducing operator workload and improving response rates.

Internal Team & Capability Building

• Group headcount is growing steadily, with 515 total employees as of the earnings call date, and a planned expansion to 547 employees by the end of the calendar year. Engineer hiring has progressed smoothly despite widespread industry hiring challenges.
• The cumulative number of AWS certified qualifications held by the team exceeded 1,500, achieving the company's target ahead of schedule, driven by a positive cycle of skilled new hires upskilling internally to earn AWS credentials.

Capital Returns & Capital Structure Updates

• The company plans to implement a new share repurchase program with an upper limit of 300,000 shares, including the repurchase of 260,000 shares held by NTT Data. The business partnership with NTT Data will continue unchanged regardless of the capital relationship.

Market Outlook

• Per Synergy Research Group data, the cloud infrastructure market is projected to grow 28% year-over-year. Management confirms that customer demand for cloud services is growing rapidly alongside the expansion of generative AI, and expects sustained strong long-term growth for the public cloud market led by AWS.

1. Group overall: The third quarter marked the first time the entire group exceeded 10 billion yen in quarterly revenue. Cumulative revenue through the third quarter on a consolidated basis was 29.069 billion yen, an 11% increase year-over-year. Cumulative consolidated operating profit decreased 55% year-over-year due to the impact of unprofitable projects at both Serverworks and G-gen.
2. Serverworks (standalone): Cumulative revenue through the third quarter was 23.198 billion yen. Cumulative operating profit was 0.726 billion yen, a 21% decrease year-over-year, entirely due to the impact of unprofitable projects. Its Cloud Integration segment saw stable performance in project count and client count despite minor quarterly volatility, and returned to growth in the third quarter after difficult conditions in Q1 and Q2 driven by prior unprofitable projects.
3. G-gen: Cumulative revenue through the third quarter was 5.885 billion yen, a strong 52% increase year-over-year, with 16% year-over-year growth in the third quarter alone. However, impacted by unprofitable projects, cumulative operating loss was 0.292 billion yen.
4. Resale: AWS account count continues to grow steadily, with ARPU controlled to avoid excessive growth, maintaining a high level of around 18,000 USD for the 2026 February fiscal year. USD-based AWS usage fees, a key performance metric sensitive to exchange rates, continued to grow steadily in the third quarter.
5. MSP (Managed Service Provider): Growth appears slower compared to Cloud Integration and Resale, but revenue is building steadily quarter over quarter.
6. Serverworks Smart Operations: This newly established operating subsidiary is still in investment mode.

• Management upwardly revised the full-year consolidated earnings guidance after the prior quarter's downward revision. The revision follows stronger-than-expected performance, with the full-year result now projected to come in well above the prior forecast due to a solid current business environment.
• Key drivers of the upward revision: A 7 JPY weaker yen versus the exchange rate incorporated in the prior forecast increased gross profit by 77 million yen, while SG&A decreased by 81 million yen due to unrecognized planned expenses, deferred expenses, and offset of advertising costs from marketing fund accruals.
• Management expects Q4 operating profit to decline slightly compared to Q3. This is due to seasonal factors (the high cost of participating in AWS' annual re:Invent event and shorter trading days in February that reduce resale revenue) rather than a structural decline in earning power, plus a conservative forecasting approach that accounts for the still-uncompleted resolution of prior unprofitable projects.
• While near-term profit requires continued careful monitoring due to unresolved unprofitable projects, the underlying business environment for cloud, security and AI growth is strong, and management expects stable medium-to-long term growth. The company will continue to prioritize growth investments in hiring and internal capability building rather than focusing solely on short-term quarterly profit.

• Unprofitable projects at both Serverworks and G-gen continue to impact overall profit performance. While the unprofitable projects are moving toward resolution, they are not yet fully complete, and the situation remains unpredictable.
• There is still a non-zero risk of future unprofitable large-scale projects. Management is implementing improvements to estimate work hour accuracy and overhauling internal processes to prevent recurrence, but the risk has not been fully eliminated.
• The company's business is highly sensitive to exchange rate fluctuations, and sudden changes in yen-dollar exchange rates can create unexpected deviations from forecasted earnings.
• Frequent revisions to earnings guidance (a downward revision last quarter followed by an upward revision this quarter) have created uncertainty for shareholders, and improving guidance accuracy remains a key priority to mitigate investor confidence risk.

Q: Will the strong performance of the third quarter continue going forward?

A: The third quarter saw a meaningful tailwind from yen depreciation and improved results driven by cloud business expansion. However, the unprofitable projects in the cloud integration business are not yet complete, so we need to continue monitoring the situation carefully in the short term. That said, generative AI is creating strong demand for growth areas like cloud and security, so the underlying business environment remains solid. We will continue to proactively pursue growth investments in hiring and capability building for the medium and long term, rather than being distracted by short-term quarterly profit movements, and we expect stable growth over the medium to long term.

Q: According to the revised forecast, Q4 revenue is expected to be nearly flat compared to Q3, while operating profit will decline. What explains this?

A: It is correct that we project a slight decline in Q4 operating profit compared to Q3. Every year, Q4 includes the very large AWS re:Invent event, which generates tens of millions of yen in participation costs. In addition, February has far fewer business days, which reduces resale revenue. This pattern means Q4 profit is typically more limited, not just this fiscal year. We also built a conservative forecast based on the fact that unprofitable projects are not yet fully resolved. This should be understood as a result of seasonality and conservative forecasting given unresolved unprofitable projects, rather than a structural decline in earning power.

Q: What impact will the end of the capital alliance with NTT Data have on business performance?

A: We expect the impact on performance to be minimal. While the capital relationship will be terminated, our business partnership will continue, and we plan to continue discussing deeper collaboration moving forward. We prioritize partnerships that contribute to business growth regardless of capital ties, so this change will not reduce our competitiveness.

Q: Why have earnings guidance revisions been frequent (downward last quarter, upward this quarter), and what countermeasures are you implementing?

A: We recognize that repeated guidance revisions are a major issue for our company. The second quarter downward revision was the result of us proactively accounting for risk related to unprofitable projects ahead of time, combined with unexpected events. The current upward revision is driven by external factors that were difficult to reasonably incorporate into forecasts at the start of the fiscal year or at the time of the last revision: exchange rate movements and unexpected receipt of marketing funds from AWS that we could not forecast earlier. We recognize that these unexpected revisions create burden for shareholders and investors, so we believe it is critical to minimize surprises and provide more reliable guidance. We will work to improve guidance accuracy and review how we communicate forecasts to the market going forward.

Q: What are your key priorities for the next fiscal year?

A: The biggest priority is completing the resolution of ongoing unprofitable projects. As large-scale projects (like the Waseda University and Digital Agency projects) become more common, preventing new unprofitable projects is an increasingly important goal. We are building out more precise systems to improve estimating accuracy and strengthen internal governance to build an internal structure that can generate stable profits. In addition, we will work to strengthen our strategic partnership with AWS and advance discussions for the next phase of collaboration. We also view M&A as critical to driving inorganic growth going forward. Even though we had to fully impair an acquisition last quarter, we plan to continue pursuing small, reliable M&A deals to drive incremental inorganic growth.

Q: What is your assessment of the current share price level?

A: We will refrain from directly commenting on the market's valuation of our shares. However, we recognize that it is a concern that our market capitalization is currently near the level of our net assets.

Q: How do you plan to use your cash on hand, and what level of cash do you consider appropriate to hold?

A: We need to hold a certain level of cash for two key reasons. First, our resale business requires constant working capital, and as revenue grows, the required cash balance also increases. Second, we need to hold liquidity to be able to pursue M&A opportunities when they arise. M&A remains a critical tool to drive non-organic growth, so we need to have available cash to capture these opportunities when they appear.

Q: What is your policy for holding marketable securities?

A: We review the purpose and economic rationality of our security holdings every year at the board of directors meeting. For policy holdings specifically, we review business necessity and returns, and our policy is to generally reduce holdings over time from the perspective of improving long-term capital efficiency. We are already progressing with selling some listed holdings, and will continue to regularly review whether continued holding is appropriate. Through these efforts, we aim to improve EPS and PBR, drive share price growth, and increase long-term corporate value.

Q: Is AWS falling behind in the generative AI space?

A: It is true that some in the IT industry hold the view that AWS is behind in generative AI. In the large language model (LLM) space, Google Gemini is currently the clear leader, and it is true that AWS has been slower to develop in this area. However, AWS made major announcements at its recent re:Invent event that highlight two key areas where it has very strong competitive advantages: infrastructure for running AI, and infrastructure for powering the upcoming generation of AI agents. AWS has developed its own custom AI semiconductor called Trainium, which is already a major strength. AWS already provides these chips to Anthropic, and reports indicate it began providing some infrastructure to OpenAI starting last month. The other key area is infrastructure for AI agents. Currently, most AI usage is reactive: users ask questions and receive responses. But going forward, we expect more proactive AI usage: AI agents will exist inside systems, automatically complete work, join Zoom meetings to automatically create meeting minutes, assign follow-up tasks to participants, and even complete some tasks on their behalf. In this future landscape, AWS has already built a very robust foundation and a full toolkit for running AI agent software. While AWS was behind in the early LLM rollout, we expect it to gain meaningful traction as the market expands, particularly in the AI agent space. We also expect growth in opportunities for specialist firms like ours to help customers run AI agents on AWS cloud infrastructure.