freee K.K. Q2 FY2025 earnings call

• Strategic Phase Update: The company has entered its third growth phase, scaling the high-growth model established through FY24. Key revenue drivers are now cross-selling to existing users, and organic ARPU growth from increased usage IDs and adoption of usage-based modules. Generated revenue is reinvested into new customer acquisition to maximize the customer base, while balancing growth and profitability focused on small businesses.
  • freee人事労務 Growth and Positioning: It has become the second core business pillar after accounting, and is driving growth in the Mid segment post the 2023 Japan Invoice Regulation demand peak. It contributes to both cross-selling and new customer acquisition: 50% of new ARR acquired in H1 came from HR/payroll products; 50% of users with 5+ years of accounting use have adopted HR/payroll; acquired ARR for HR/payroll has grown 5x over 5 years via organic ID expansion with no added sales investment.
  • Product Synergies: The integrated platform creates meaningful synergies between accounting and HR/payroll: unified employee master data updates reflect across all products automatically; expense data automatically syncs to payroll for combined payments, cutting transfer fees; and payroll data automatically syncs to accounting for real-time department-level profit analysis. These synergies drive high cross-sell adoption.
  • Product Expansion Upside: freee continues expanding its HR product line beyond core back-office functions to include employee empowerment products like benefits and health management, creating significant ARPU upside. Example Mid segment customers achieve ARPU of 5.71 million yen, while small segment customers achieve 280 thousand yen, 3x the corporate average ARPU of 100 thousand yen.
  • Profitability Improvement: Selling, general and administrative (SG&A) revenue share has declined year-over-year, driven by improvements in both sales & marketing (S&M) and R&D productivity. S&M gains came from sales training, AI use in sales operations, active lead recycling, selective high-ROI ad spend, and positive price revision impacts. R&D expense reduction on the P&L comes from resuming capitalization of software assets, not reduced R&D investment; the company continues investing heavily in product improvement and new development.

1. Company-wide ARR: 30.015 billion yen, +29.1% YoY
2. 法人 (Corporation) Segment: ARR grew 31.7% YoY; paid corporate user count grew 22.7% YoY; ARPU grew 7.3% YoY
3. 個人事業主 (Sole Proprietor) Segment: ARR grew 21.1% YoY; paid user count grew 17.7% YoY; ARPU grew 2.9% YoY
4. freee会計 (freee Accounting): Largest core product segment, accounts for ~75% of total company ARR
5. freee人事労務 (freee HR and Payroll): ~25% of total company ARR, 5-year CAGR of 51% for ARR in the Mid segment (20-1000 employees)
6. Reported Second Quarter Total Revenue: 7.874 billion yen, +30.1% YoY; Gross profit 6.53 billion yen, gross margin 82.9%; Adjusted operating profit 0.976 billion yen, adjusted operating margin 12.4%

• The full-year adjusted operating profit forecast was upwardly revised from the initial range of 0.001 billion yen to 1.0 billion yen to 1.8 billion yen to 2.5 billion yen. The corresponding adjusted operating margin forecast was revised from 0-3% to 5.4-7.6%.
• Full-year revenue guidance is maintained, with the company still targeting 30% YoY growth.
• For the full year, the company expects to achieve unadjusted operating profit breakeven/black ink, and adjusted free cash flow (FCF) full-year black ink, which remains on track. The company has added a new target: adjusted FCF will reach black ink this fiscal year and improve annually going forward.
• Q3 is expected to see lower adjusted operating margin due to seasonal increased ad spend for the Japanese tax filing season, while Q4 is expected to be roughly breakeven or marginally profitable, with gradual investment for FY2026.
• The adjusted S&M to revenue ratio has been downwardly revised based on improved productivity trends.
• Medium-term target of over 50 billion yen in revenue by FY2027 is maintained, with 25-30% CAGR for corporate segment revenue and 110% net revenue retention target for the corporate segment.
• Updated long-term financial targets will be shared at full year earnings release, as the model is currently under review.

No explicit material risks or operational failures were discussed in the available transcript.

Q: Why is ARR growing strongly outside of the Mid segment, particularly the Small segment? What is the contribution of indirect channels like accounting firms? / A: The main driver for both the sole proprietor segment and the Small corporate segment is the December price revision for monthly plans, which created the largest impact on this quarter's ARR growth. Customer acquisition trends have not changed meaningfully from prior quarters, but continued steady strong acquisition of Small segment customers at this scale of customer base is also a positive contributing growth driver.

Q: Does the upward guidance revision only reflect upside from the first half, or are there changes to the second half cost outlook? / A: The revision only reflects the better than expected first half performance; the core second half approach aligns with the original plan. The company will continue to only invest in S&M initiatives that meet ROI targets, and commit to balancing bottom-line profit targets while maximizing investment for future growth. It will monitor sales progress closely to deliver both full-year sales and profit targets.

Q: What caused the difference between the Q2 adjusted operating profit outperformance and the prior Q1 forecast? How much of the upward revision comes from sales productivity versus R&D capitalization? / A: The largest driver is the steady accumulation of sales and marketing productivity improvements over prior periods. The second factor is that software capitalization reached nearly 50% of R&D spend in H1, versus the 30-40% planned at the start of the year. For the full year, R&D capitalization contributes roughly 0.8 billion yen of upward impact to adjusted operating profit, with the remainder coming from sales productivity improvements.

Q: Which driver had the largest impact on improved sales productivity in Q2? / A: It varies by segment: for the Small segment, price revisions were the largest driver of improved productivity. For the Mid segment, improvements in revenue per sales person for the direct field sales channel was the biggest driver of productivity gains.