freee K.K. Q3 FY2025 earnings call

• **Strategic Phase Shift

  • The company has entered the scaling phase for the high-growth model established through FY2024, shifting from reliance on new customer acquisition for a single product to driving growth via cross-selling and automatic ARPU growth from expanding user IDs and transaction-based pricing, aiming for simultaneous growth of revenue and profit while expanding the customer base.
  • The company phases investment by business maturity: the established sole proprietor segment generates stable profits to fund growth in upstream corporate segments, targeting steady overall growth.

• **AI Product Development

  • Accelerated AI integration into products to dramatically improve integrated user experience, and launched 6 AI Agent features in closed beta testing, which have received strong positive feedback from early users.
  • Key launched features include AI Year-End Tax Adjustment Assist (reduces filing errors, plus a new low-cost outsourced service), Magic Expense Reimbursement (automates expense requests from internal chat and receipt uploads), AI Chat Invoicing (creates and sends bulk invoices per chat instructions), AI Quick Analysis (provides financial insights), AI Attendance Checker (automatically alerts employees to incomplete data), and AI Manhour Manager (suggests productivity improvements).

• **Sole Proprietor Segment Operations

  • Customer acquisition during the tax filing season was solid, with 65% of users paying annually (up 10pp in 2 years) and 55% on higher-tier plans (up 15pp in 2 years), showing growing customer loyalty and value perception, supporting LTV maximization.
  • Expanded product scope beyond back-office efficiency: launched end-to-end electronic tax filing (the only provider in the industry to offer one-stop service from bookkeeping to tax filing) and freee Reservation, a front-office booking tool for personal service businesses, aiming to become a platform that supports user revenue growth as well as efficiency.

• **Corporate Segment Growth Strategy

  • For the Small segment: continues investment in the accounting firm indirect channel to further expand penetration beyond the current 10% level.
  • For the Mid segment: continues growth investment, using revenue from existing users to fund new customer acquisition, with a focus on strengthening sales structure and improving marketing quality and volume, leveraging tailwinds from the invoicing system reform.

• **Profitability

  • Adjusted operating profit was 659 million yen (7.7% margin), turning profitable from a YoY loss. The quarter-over-quarter decline was expected due to higher tax season advertising investment, and results are broadly in line with plan. Full-year adjusted operating profit remains on track to hit the 1.8 billion to 2.5 billion yen target range.

1. Overall: Total Annual Recurring Revenue (ARR) reached 33.25 billion yen, growing 29% YoY. Total paid user companies hit 624,538, up 14.9% YoY, with overall average revenue per user (ARPU) of 53,200 yen. Total revenue was 8.599 billion yen, growing 29.3% YoY. Subscription revenue accounts for over 90% of total revenue.
2. Sole Proprietor Segment: ARR totaled 8.589 billion yen (25.8% of total ARR), with a record net ARR increase of 1.655 billion yen in the quarter. Paid users exceeded 400,000, growing 12.0% YoY. ARPU grew 6.7% YoY, driven by a rising share of higher-tier plans and prior price adjustments. This segment is fully established with a strong customer base and contributes stable profits.
3. Corporate Segment (Total): ARR totaled 24.6 billion yen (74.0% of total ARR), growing 32.6% YoY. Paid users reached 223,000, growing 20.5% YoY. ARPU grew 10.1% YoY to 110,200 yen, driven by plan revisions and cross-selling. ARR growth accelerated compared to the prior quarter.

• Small Corporate Segment (fewer than 20 employees): In the position-establishment phase, July 2024 plan revisions have progressed smoothly. Direct channel acquisition position is already strong, with penetration just over 10%, so growth remains solid.
• Mid Corporate Segment (20-1000 employees): In the growth investment phase, ARR grew 26.1% YoY, with growth accelerating from the prior quarter, driven primarily by cross-selling to existing users. Growth momentum is improving.

• Full-year FY2025 adjusted operating profit is expected to land within the target range of 1.8 billion yen to 2.5 billion yen, with Q4 expected to land near break-even, in line with prior plans. The Q4 result will absorb some delayed budget execution from Q3 and focus on growth investment for future fiscal years.
• Full-year FY2025 adjusted free cash flow is on track to achieve profitability as previously guided, aligned with seasonal trends of stronger cash inflow in H2 from annual user payments.
• The medium-term target of over 50 billion yen in total revenue by FY2027 is maintained. No updated medium-term financial targets are provided this quarter, with an updated medium-term management plan scheduled for release alongside full-year FY2025 results in August.
• Adjusted operating profit is on track to hit full-year FY2025 profitability targets, and the company expects adjusted free cash flow margin to improve annually starting from FY2025.

No specific material risks or operational failures were discussed in the provided transcript.

Q: The prior 25-30% CAGR target for FY2026-FY2027 faces a higher hurdle this year after recent price increases. How confident are you in achieving this CAGR, and how much ARPU growth can we expect from cross-selling, ID-based pricing, and AI products? / A: The company remains committed to the FY2027 50 billion yen revenue target. Current performance shows solid ARR growth in the Small segment even excluding price adjustment impacts, while the Mid segment has accelerated YoY growth despite a minor miss this quarter. The company will continue adding cross-sell products via in-house development on the integrated platform and M&A, with a focus on delivering seamless integrated experiences to users to drive adoption. After intentionally scaling back marketing investment this year to improve profitability confidence, the company is gradually increasing investment as sales efficiency and conversion rates improve, with AI-powered marketing improvements further boosting sales quality, supporting future top-line growth.

Q: Is it correct to view the new integrated AI features as a baseline extension of existing initiatives, rather than a large driver of near-term ARPU growth? / A: The company expects AI to drive growth primarily through higher customer satisfaction leading to lower churn and improved cross-sell adoption, not through direct ARPU increases from new AI features. AI-related ARPU upside is not yet reflected in current forecasts.