AI CROSS Inc. Q2 FY2025 earnings call

• Overall Quarterly Results: The firm reported an all-time high quarterly revenue of 991 million yen, driven by strong growth in domestic messaging service revenue. Reported operating profit was lower due to the one-time recording of 78 million yen in shareholder benefit expenses in Q2; adjusted operating profit (excluding shareholder benefit costs) grew nearly 10% year-over-year. Halfway through the full fiscal year, overall revenue reached nearly 45% of the full-year target, operating profit reached 41%, and the firm is broadly on track to meet full-year guidance.
• Strategic Developments for Messaging Service: The core strategy remains expanding SMS delivery volume to grow the core platform business, as enterprise SMS penetration remains below 20% and growing automation of customer operations is increasing demand for enterprise SMS. The firm is also growing ARPU through new AI-powered solution add-ons, such as AI targeting that identifies high-conversion users for SMS campaigns, which creates new recurring monthly revenue separate from the traditional volume-based pricing model. The firm partnered with KDDI to launch its "Zettai Reach! RCS" service, which supports rich media messaging (photos/videos) over SMS, with an initial successful deployment at Ierabu Partners that cut 640 hours of monthly customer operation time by improving response rates over standard SMS. RCS is currently only available on KDDI networks, with plans to expand to other Japanese carriers as they complete preparation.
• Strategic Developments for AI Service: The firm's core AI offering is Deep Predictor, an AI demand forecasting platform primarily serving the manufacturing industry. The firm launched the industry's first no-code AI forecasting service, the Assistant Plan (led by AI chatbot guide Aira), in July 2025. The new low-initial-cost subscription plan was built in response to partner demand, targeting manufacturing clients that currently rely on manual Excel forecasting and want an accessible entry point to AI forecasting. The firm continues to build out custom AI forecasting projects, with completed use cases including seasonal product demand forecasting for food manufacturers, embedded forecasting for automated ordering systems, and AI-powered SMS campaign targeting for financial services clients.

1. Messaging Service: This is AI CROSS's largest core segment, accounting for the majority of total revenue. The segment grew steadily in the quarter, driven by expanding usage of domestic SMS in the financial and human resources industries. After half of the fiscal year, segment revenue and contribution profit were on track in line with full-year plans, and contribution margin exceeded the mid-term plan target. Total transaction clients reached 7,719, with growth led by agency channel clients. SMS delivery volume grew 17% quarter-over-quarter, with growth driven by expanded existing use cases in domestic financial and human resources industries. ARPU decreased slightly year-over-year due to a shift in revenue mix from high-ARPU overseas clients to lower-ARPU domestic clients, which the firm plans to reverse through targeted domestic ARPU growth initiatives. 2. AI Service: The segment is currently in the investment phase, with a plan to reach break-even/black ink in the next fiscal year, moving to a profit collection phase after that. Halfway through the fiscal year, the segment's revenue progress reached 57% of the full-year plan, outperforming target and growing slightly ahead of expectations. By FY2027, AI CROSS expects the entire AI segment to reach 290 million yen in revenue, 100 million yen in contribution profit, and a 34.5% contribution margin, accounting for approximately 4% of total company revenue.

• Full-year FY2025 guidance is maintained, with no upward or downward revision, as half-year progress is broadly in line with original budget expectations.
• For the three-year mid-term AIX2027 plan, the firm expects growth to be driven by three core factors: (1) Expansion of high-margin RCS and AI-powered solutions within the messaging segment to drive ARPU and margin growth alongside core SMS volume growth; (2) The AI segment will move from the current investment phase to break-even in FY2026, and will contribute solid profit from FY2027 onward; (3) Productivity improvements driven by AI and process automation, focused on back-office functions, will reduce corporate overhead and lift overall operating margin over the three-year plan period. Current mid-term plan progress is on track, with per-employee revenue already exceeding plan at 70 million yen per employee.
• The Assistant Plan for Deep Predictor is expected to remain a small share of total AI segment revenue through FY2027, with the AI segment as a whole accounting for ~4% of total firm revenue.

• Phased RCS rollout controlled by Japanese carriers: The widespread adoption of RCS depends on all major Japanese carriers completing network and device enablement, which is outside of AI CROSS's control and could take longer than expected.
• Longer sales cycle for AI services: Japanese enterprise clients typically require 3-6 months for efficacy testing before full deployment of AI solutions, which slows revenue conversion and growth. The firm's new low-cost Assistant Plan is designed to mitigate this bottleneck by reducing entry barriers for clients.
• Large client concentration: While client concentration has improved significantly from the period of high overseas revenue dependency, top clients still account for a disproportionate share of agency channel revenue, and the firm continues to work to diversify its client base.
• SMS phishing risk: Rising phishing attacks over SMS damage consumer trust in enterprise SMS; the firm expects RCS's improved sender authentication capabilities to mitigate this risk over time.
• Shareholder benefit cost uncertainty: The firm's generous shareholder benefit program has weighed on quarterly profit when expenses are recorded, though costs have come in line with budget to date; the firm will review the program over time based on business and earnings conditions.

Q: Why did the quarter show lower profitability even with strong revenue growth? / A: The apparent decline in profit is entirely due to the one-time recording of 78 million yen in shareholder benefit expenses in Q2 (the firm records these expenses in Q2 and Q4 annually). Excluding this one-time cost, core operating profit grew nearly 10% year-over-year, so underlying business profitability remains solid. There is no underlying structural issue driving lower earnings this quarter.

Q: How do you balance growth investment and shareholder returns like the current generous shareholder benefit program? / A: As a growth-stage company on the Tokyo Growth market, the firm's primary priority is continuing growth investment in new messaging solutions and AI services to increase enterprise value. The shareholder benefit program was implemented specifically to increase individual investor awareness of the firm, boost trading volume, and attract future institutional investor participation, which has already succeeded: the program has lifted the share price and brought in new long-term individual investors. The size and structure of the program will be reviewed periodically, but growth investment will remain the top priority for the foreseeable future.

Q: What is the top priority initiative to hit the mid-term plan's 7.3 billion yen revenue target? / A: Over 60% of mid-term growth is expected to come from growth in SMS/RCS messaging revenue and recurring monthly revenue from AI-powered solutions. AI service revenue is already growing faster than the original mid-term plan forecast, particularly for custom AI consulting projects, so AI will contribute a larger share of total growth than initially expected. The firm is focused on penetrating the existing 7,000+ client base with recurring AI subscription and consulting services to drive this upside.

Q: What are the main potential bottlenecks to hitting mid-term growth targets? / A: The key bottlenecks are twofold. First, rising SMS phishing erodes consumer trust in enterprise messaging, which the firm expects to mitigate through the improved sender authentication of RCS. Second, enterprise AI adoption in Japan has a long lead time, as clients require 3+ months of efficacy testing before full deployment, slowing sales. The new no-code Assistant Plan addresses this by lowering entry costs and shortening implementation timelines, which should speed up adoption.