4475.T

Core Mission and Growth Strategy

• The company's management philosophy is "Liberation of Technology," centered on the belief that technology improves society and should be delivered to as many customers as possible. The company has concluded that SaaS is the fairest, most refined, and efficient means to achieve this mission, so it focuses on providing SaaS solutions and supporting customers' digital transformation through SaaS utilization.
• The company's growth strategy targets maximization of Lifetime Value (LTV, the total cumulative value of existing contracts, equal to total cumulative gross profit earned over the contract term). Maximizing LTV builds a robust business model that allows for stable profit growth even as investment in future growth increases.
• With average contract duration and gross profit margin already at high levels, maximizing ARR is the core priority for LTV growth. ARR is decomposed into three factors: number of contracted companies, average contracted users per company, and ARPU. The company currently focuses on increasing the number of contracted companies and raising ARPU to drive ARR growth.

Operational Highlights for the Quarter

• The quarter is on track against the full-year guidance announced on November 7, 2025. In line with the opening policy, the company executed over 65 marketing and branding activities centered on in-person events across domestic and international regions, continuing to drive brand recognition for HENNGE One.
• Hiring for sales roles remains challenging, but the company continues to invest in organizational building and hiring to strengthen sales capabilities.
• The company hit its 10 billion yen ARR target in the 2025 September fiscal year, achieved through repeated iteration of the value-added creation cycle: strengthen new customer acquisition infrastructure, increase service added value, and reliably communicate this value to customers. The 2026 September fiscal year is positioned as the start of a new value-added creation cycle and a preparation period for the 20 billion yen ARR target by the 2029 September fiscal year.
• The company launched the new service HENNGE Endpoint & Managed Security on February 3, 2026, as part of efforts to increase added value for HENNGE One.

• There is no change to the full-year consolidated earnings guidance originally announced on November 7, 2025, and the first quarter is progressing on track against the full-year plan.
• The company continues to prioritize proactive investment in marketing, branding, service added value improvement, and infrastructure building for future new customer acquisition to build a solid foundation for sustainable growth and the 20 billion yen ARR target by 2029 September fiscal year. The company will continue this proactive investment spending through the full 2026 September fiscal year.
• The low 0.2% year-over-year operating income growth in the first quarter was expected, driven by planned increases in personnel and advertising expenses. Operating income is expected to gradually approach the full-year guidance target as the year progresses through subsequent quarters, in line with the original opening plan, with no need for unexpected cost controls.
• First quarter advertising and promotion expense was just under 0.4 billion yen, which is broadly in line with full-year guidance. The company does not expect extreme imbalances in advertising spending across quarters, so spending will remain aligned with plan through the full year.

The company's primary product segment is HENNGE One, which is 100% recurring revenue and has grown sequentially quarter-over-quarter. Key performance metrics for HENNGE One as of the end of the first quarter: 1) Average monthly churn rate remains at a consistently low level, translating to a theoretical average contract duration of over 25 years. 2) Both the number of contracted client companies and contracted users grew steadily: the quarter secured multiple contracts from relatively large enterprises, and maintained stable acquisition of contracts from small and medium-sized enterprises through strengthened collaboration with sales partners, with contracted users growing solidly from new customer acquisition. 3) Annual Recurring Revenue (ARR) grew steadily and stably quarter-over-quarter. 4) Average Revenue Per User (ARPU) saw only a slight increase, driven by continued selection of the top-tier HENNGE One Pro plan by both new and existing customers, offset by selection of single-function plans from relatively large enterprises. As of quarter-end, HENNGE One Pro accounted for approximately 18% of total ARR. Consolidated gross profit margin increased year-over-year driven primarily by ARPU improvements and remained at a high level. The sequential quarter-over-quarter decline in gross profit margin compared to the prior quarter was primarily due to foreign exchange impacts on AWS cloud infrastructure costs. Consolidated revenue grew 20.1% year-over-year, while operating income grew only 0.2% year-over-year due to planned increases in personnel and advertising expenses.

• Hiring for sales roles continues to face a challenging market environment, which could impact the company's efforts to strengthen sales capabilities.
• "SaaS endism" and "SaaS unnecessary" narratives have emerged following recent AI advancements, creating market pressure on SaaS valuations that has impacted HENNGE's share price.
• There is market concern that AI will enable new entrants to easily develop competing security SaaS solutions at low price points, increasing competitive pressure.
• 100% prevention of malware intrusion is not technically possible, which requires the company to provide post-intrusion protection capabilities as part of its service offering.

Q: Can you explain the overview and current demand/inquiry levels for the new service HENNGE Endpoint & Managed Security?

A: HENNGE Endpoint & Managed Security is a combined solution of EDR (Endpoint Detection and Response) and MDR (Managed Detection and Response). Targeted cyberattacks remain common, and demand for cybersecurity solutions continues to rise, so EDR and MDR are a natural fit to meet this market need. Specifically, the solution blocks known malware and detects malware that bypasses initial blocking. Since it is impossible to 100% block all malware intrusions, the service also includes protection protocols for after a breach occurs. Most companies do not have enough in-house specialized cybersecurity staff to monitor and respond to these threats, so HENNGE also provides ongoing risk monitoring and executes appropriate response protocols on behalf of customers after malware is detected. Given the rising overall demand for cybersecurity, the company expects a reasonable level of inbound inquiries for the new service.

Q: The first quarter advertising and promotion spending progress looks high — was the original plan weighted to the first half of the year?

A: The company does not disclose detailed quarterly breakdowns of spending, but does not expect extreme imbalances across quarters. First quarter advertising spending came in at just under 0.4 billion yen, which is broadly aligned with the full-year guidance, so progress is on track.

Q: Revenue grew 20.1% year-over-year in the first quarter, but operating income only grew 0.2% year-over-year. Is this within expectations? What factors caused the low operating income growth, and in which future quarters do you plan to make up the gap to hit full-year guidance?

A: This result is fully within expectations. The limited operating income growth is primarily due to year-over-year increases in personnel expenses and advertising and promotion expenses, all of which were planned. Management expects operating income will gradually move closer to the full-year guidance target as the fiscal year progresses through subsequent quarters.

Q: You noted operating income will approach the full-year guidance as quarters progress — does this mean you plan to control costs going forward, specifically targeting personnel or advertising expenses?

A: Revenue from subscription contracts does not accumulate all at once; for example, a 120 million yen annual contract is recognized as 10 million yen per month over 12 months, so even strong new orders only have a limited impact on reported revenue in the short term. While the company does have some control over discretionary spending, there is no unexpected deviation from plan that requires cost cutting to hit the full-year profit target. The company will continue to execute according to the original opening plan.

Q: Recent AI advances have led to "SaaS endism" narratives in the US, significant selloffs in SaaS stocks, and HENNGE has not been immune to this. Can you reaffirm your strengths against the impact of AI over the medium to long term?

A: We are well aware of the "SaaS is Dead" narrative and see that it has impacted market sentiment. As a starting point, HENNGE provides mission-critical cybersecurity solutions that cannot be easily replaced by AI. Non-critical "nice to have" solutions may be able to be built in-house with AI, but it is very difficult for AI to build and operate a service that requires guaranteed, consistent security standards. Therefore, we do not expect HENNGE One to be replaced by AI-driven alternatives. On the contrary, the spread of AI increases the sophistication of targeted cyberattacks and raises overall cybersecurity risk, which creates new opportunities for HENNGE and will increase demand for our services going forward. We already regularly see AI-powered cyberattacks in our daily operations, and developing new services like HENNGE Endpoint & Managed Security to respond to these evolving threats will ultimately strengthen HENNGE's competitive position.

Q: With the rise of AI agents, there is a narrative that customers can build tools in-house so SaaS is unnecessary. While in-house development barriers are higher for customers, do you see a risk that new startups will use AI to enter the market with low-priced competing services? Do you see any early signs of this today?

A: Even if new startups use AI to develop similar technical services, our cybersecurity products are not easy for new entrants to compete in successfully. These services are heavily valued for stable long-term operation and robust customer support, so even if a new entrant can build the technical core with AI, it will not immediately become a material threat to HENNGE. To date, we have not seen an increase in new competitor services, so we do not see any early signs of this risk materializing.

Q: It is widely understood that AI adoption increases cybersecurity demand — what are HENNGE's unique strengths to capitalize on this trend?

A: One key near-term strength is our flexible approach to adopting AI internally for practical use. While we are considering integrating AI directly into our products, we are not in a position where our competitive position would erode if we do not rush to embed AI immediately. For the foreseeable future, our AI work will focus on internal use cases like product development, which improves overall organizational capability. Additionally, we currently have more than 3,500 contracted customers, which gives us deep insight into customer needs from direct communication with information system teams and CIOs, which we can incorporate directly into service development. Finally, we have 15 years of experience delivering security services, which gives us an established track record and the ability to successfully launch and market new services to our existing customer base, which is a major unique strength.

Q: What specific use cases do you currently use AI for internally, for example in coding, testing, requirements definition?

A: We already use AI for all the areas you mentioned: coding, testing, and requirements definition. For example, this quarter's earnings explanation video was generated using an AI avatar, and we used a new service this quarter that improved video quality compared to prior quarters. Outside of product development, corporate teams are increasingly aware of AI capabilities and are exploring use across many administrative tasks, and we are continuing to expand adoption to drive further productivity improvements.

Q: What is your expectation for the scale of productivity improvements from AI adoption?

A: We expect AI to dramatically amplify the output of high-performing team members. For example, our CEO, who is also a programmer, has said his personal coding productivity increased approximately 100x with AI adoption. We expect a very large impact on software development productivity. For other areas like administrative work, sales, and customer support, it is still too early to tell how much productivity improvement we will get. AI technology has advanced extremely rapidly, and we expect productivity gains will be far larger than we can currently imagine. We believe we are at the very beginning of a long period of technological change that will transform work over the long term, rather than seeing all the gains in the near term.

Q: Gross profit margin improved year-over-year, but declined sequentially quarter-over-quarter compared to the prior quarter — what caused this?

A: This is primarily due to foreign exchange impacts on costs for AWS cloud infrastructure.