HENNGE K.K. Q2 FY2025 earnings call

Core Business Milestone Achievement

• HENNGE One hit the near-term target of 10 billion yen in ARR one period ahead of initial expectations, marking a major milestone in the company's domestic growth strategy.
• Gross profit margin remains at a high steady level, with margin expansion driven by ARPU growth from price adjustments and product mix shifts.

New Market Expansion

• HENNGE established a joint venture US subsidiary with SunBridge Corporation in April 2025, marking the company's second overseas hub after Taiwan, as the first step in the company's US market entry.
• Global demand for cybersecurity solutions has risen amid increasing global cyber incidents, and HENNGE One's bundled identity, DLP, and cybersecurity product suite meets unmet demand for the US SME segment via Managed Service Providers (MSPs).
• The company's mid-term US strategy focuses on selling through local MSP partners to SMEs, leveraging HENNGE's 14+ years of HENNGE One operating experience and reputation for reliable security solutions.

Growth Strategy Focus

• HENNGE's long-term growth strategy centers on maximizing Lifetime Value (LTV) of contracted customers, which in the current high-margin, long-contract operating environment requires maximizing ARR growth.
• ARR growth is driven by two core priorities: growing total contracted customer count, and increasing ARPU via premium tier adoption and product expansion.
• The company continues to strengthen partnerships with domestic sales channels to capture growing demand from SMEs shifting to cloud workstyles outside of Tokyo, while regularly releasing new features and products to drive ARPU growth.
• The company targets long-term ARR of 200 billion yen, with an ultimate target of 1,000 billion yen, and aims to become a world-class IT SaaS company.

Marketing and Sales Activities

• HENNGE maintained active marketing outreach, participating in over 50 events including the Japan IT Week Kansai trade show and hosting the online HENNGE ROCKET PITCH 2025 event during the quarter.

HENNGE's only core product segment is HENNGE One, a cloud security SaaS offering. In the second quarter of the 2025 September fiscal year, HENNGE One exceeded its target of 10 billion yen in Annual Recurring Revenue (ARR), hitting the 10 billion yen milestone. All revenue from HENNGE One is recurring, and it contributed 100% of the firm's recurring revenue base. Key metrics for the segment: 1) HENNGE One Pro (the premium tier) now accounts for just over 10% of total ARR, up from prior periods. 2) Average monthly churn remained lower than initial management guidance, even after accounting for several cancellations from larger enterprise clients and cancellations triggered by 2024 price adjustments; the implied average contract term exceeds 15 years. 3) Average Revenue Per User (ARPU) increased 31% year-over-year, driven primarily by 2024 price adjustments and secondarily by the rising share of premium HENNGE One Pro contracts. 4) Contract customer count continues to grow steadily from small and medium enterprise (SME) acquisitions via partner channels, while total contracted user growth moderated quarter-over-quarter due to cancellations from a small number of larger clients. 5) Operating cash flow turned positive for the first half of the fiscal year, driven by strong segment performance, while investment cash flow was negative due to payments for planned 2027 headquarters relocation and investment securities purchases. Total operating expenses remained in line with initial management plans, and total employee count grew by a net 28 people from the prior fiscal year end, also in line with plans.

• Management upwardly revised full-year 2025 September fiscal year guidance, driven by better-than-expected new large order acquisition and lower-than-expected churn following price adjustments, two factors that could not be forecast at the start of the fiscal year.
• Full-year revenue guidance was raised, while operating expenses and all profit line items are disclosed as upwardly revised ranges, to account for unfinalized planned growth investments.
• The revenue outlook for the second half (full-year remaining portion) is approximately 5.67 billion yen, with operating profit guidance set at a range of 0.63 billion to 0.83 billion yen, implying an operating margin range of 11.1% to 14.6%.
• The lower bound of the operating profit range reflects planned increased investment in three priority areas: aggressive talent acquisition investment, enhanced cybersecurity infrastructure investment to counter rising global threat levels, and increased in-person customer nurturing event spending to drive long-term ARR growth.
• Advertising and promotion expenditure guidance was increased, due to a shift from initial pure recruitment advertising to broader full company branding initiatives.
• ARPU is expected to continue increasing in the third quarter, but growth will moderate as the 2024 price adjustment cycle fully completes, with growth coming from organic continued sales of higher-priced new plans.
• Planned future marketing events include US-focused events to build brand recognition among MSP partners, in addition to already scheduled participation in major domestic industry events.

• While the company achieved lower than expected churn after price adjustments, there remains the risk that future price adjustments or economic shifts could lead to higher churn, especially from underutilizing larger clients.
• US market entry carries inherent unproven risk: the US market has many established competitors, and the company has no operating revenue track record in the market, so business success is not guaranteed.
• The company does not build all service components in-house: for example, HENNGE Cloud Protection is an OEM product from a Finnish third-party vendor, so the company is exposed to third-party product vulnerability risk similar to recent major data leakage incidents at other domestic IT firms.
• While the company maintains continuous monitoring of third-party vendor risks and has established internal incident response processes, there is no guarantee that all cyber risks can be prevented, and a major incident would materially damage the company's reputation and business.
• All planned growth investments have not yet been finalized, so there is uncertainty around final full-year expense and profit outcomes.

Q: With ARPU up 31% year-over-year from a combination of price adjustments and a rising share of HENNGE One Pro, what share of the ARPU growth comes from each factor? / A: Management confirmed that the vast majority of the 31% ARPU increase comes from the 2024 price adjustment. While the rising share of the premium HENNGE One Pro tier has contributed some growth, it is not the primary driver of the large current ARPU increase.

Q: With large firms competing for tech talent, why has HENNGE's hiring been much stronger this year, with 28 net new hires vs 10 in the prior year period? / A: A large 0.1 billion yen recruitment advertising investment made in September 2024 has gradually increased applicant volume, but the core driver is clearer articulation of ideal candidate profiles to recruiting agents. Previously, internal alignment on candidate requirements was poor, leading to misaligned submissions; this barrier has been resolved, leading to stronger hiring outcomes.

Q: With many competitors in the US market, does HENNGE believe it can successfully compete by focusing on the SME segment? / A: Management confirms that focusing on SMEs via MSP partners gives HENNGE a clear competitive edge. Large US enterprises have internal IT resources to build their own security infrastructure, but small US SMEs face the same resource constraints as Japanese SMEs. Most US SME security is delivered via MSPs, and there are few providers that offer a bundled one-stop security solution like HENNGE One to MSP partners, so HENNGE sees clear market opportunity and is committed to executing on the entry strategy.

Q: After a recent high-profile cyber leak from a third-party vendor component used by another security firm, does HENNGE face similar third-party product risk, and what is its risk management framework? / A: HENNGE acknowledges that not all service components are in-house; for example, HENNGE Cloud Protection is OEMed from a Finnish firm, so third-party risk exists to some degree. HENNGE conducts continuous pre-OEM and ongoing post-OEM risk monitoring of third-party products, and has built internal processes to rapidly detect and respond to incidents if they occur. Management notes that risk management work is never complete, and the team remains vigilant to prevent incidents.