freee K.K. Q4 FY2025 earnings call

• Company Mission & Market Opportunity

  • Mission is to make small businesses the main engine of the global economy. The target market is businesses with fewer than 1,000 employees, which accounts for over 71% of total Japanese employment, with 6.6 million total potential customers and only ~10% current penetration.
  • Industry tailwinds persist: ongoing labor shortage driving demand for cloud-based automation, generational change in business leadership increasing adoption of modern software, and steady growth in new business formations. Long-term cloud penetration growth is expected to continue.
  • Long-term goal is to become the de facto standard operating platform for small business management, with network effects and a robust ecosystem built around accounting firm partnerships.

• Core Growth Strategy

  • Leverage a unified integration platform to meet small businesses' demand for cross-functional workflow efficiency, and drive growth via cross-selling multiple product modules to existing customers. Multiple-module users have significantly lower churn rates, which aligns with this strategy.
  • Four core growth drivers for 2028 June fiscal year Rule of 40 target:
    1. Expand customer base by accelerating industry-specific feature development for core accounting and payroll products, expanding fit beyond new industries to traditional sectors like retail, manufacturing, construction and healthcare.
    2. Increase revenue contribution from high-potential new business areas, including freee Card, freee Sales, and newly acquired FREENANCE factoring services via M&A.
    3. Become the de facto standard infrastructure for accounting firms, via the only integrated cloud system that connects accounting and tax filing to cut work time by up to 90%, with over 5,000 accounting firms already joining the certified advisor program.
    4. Accelerate AI adoption to boost both product value and internal productivity: already launched popular AI-powered year-end tax adjustment services, and AI is improving efficiency in customer support, sales & marketing, and software development.

• Profitability Structure

  • Continuous cost efficiency improvements have been achieved: productivity improved in both R&D and Sales & Marketing (S&M) in 2025. R&D software capitalization resumed at a 45% rate, with pre-capitalization R&D cost at 26% of revenue, down from prior years.
  • The business model can support over 40% adjusted operating margin long-term, as scale economies and AI efficiency drive down G&A and future S&M ratios.

1. 法人 (Corporation) Segment: Total annual ARR was 26.7 billion yen, growing 36.7% YoY. It accounted for 77.8% of total company ARR. Within this segment: (1) Small (fewer than 20 employees): 2024 July price plan changes for freee Accounting contributed 1.7 billion yen in annualized ARR, driving strong growth; (2) Mid (20-1,000 employees): ARR growth accelerated for two consecutive quarters, reaching 28.1% YoY, driven by successful cross-selling. The corporation segment had 234,000 paid users (18.4% YoY growth), with ARPU growing 15.4% YoY to 114,100 yen, and an average monthly churn rate of 0.5% (improved despite price changes).
2. 個人事業主 (Sole Proprietor) Segment: Total annual ARR grew 17.4% YoY. Paid users grew 11.2% YoY, with ARPU growing 5.6% YoY. This segment serves as a stable revenue base for the company.

Overall company metrics: Total annual ARR was 34.393 billion yen (31.8% YoY growth); total paid users reached 606,000; consolidated revenue was 33.27 billion yen (30.8% YoY growth); Q4 revenue was 9.419 billion yen (34.4% YoY growth); full-year gross profit was 27.361 billion yen (gross margin 82.2%); adjusted operating profit was 1.885 billion yen (adjusted operating margin 5.7%); adjusted free cash flow was 1.381 billion yen (margin 4.2%), marking the first profitable full year since founding.

• 2026 June Fiscal Year (Current Fiscal Year) Guidance:

  • Revenue growth of 23% to 25% YoY, with an adjusted operating margin target of 6%.
  • Added adjusted free cash flow margin as a new guidance metric, targeting 3% to 6%.
  • ARR growth targets by segment: Mid corporate segment at over 25% (driven by ARPU growth from cross-selling and new customer investment), Small corporate segment at over 20% (driven by accounting firm partnership expansion), sole proprietor segment at ~10% (focused on profitability improvement).
  • Total headcount expected to reach ~2,100 by end of fiscal year, reflecting targeted strategic investment for long-term growth whose returns will mostly materialize from 2027 onward.

• Updated Medium-Term and Long-Term Guidance:

  • Maintains prior 2027 June fiscal year targets of over 50 billion yen in revenue and over 110% net revenue retention.
  • Updated commitment to achieve the Rule of 40 (sum of revenue growth rate and adjusted free cash flow margin exceeding 40%) by the 2028 June fiscal year, targeting at least 20% revenue growth and 15%+ adjusted free cash flow margin that year.
  • Clarified timeline for 20-30% adjusted operating margin: moved to 2030 June fiscal year, and confirmed the business model can support over 40% adjusted operating margin long-term. Updated cost forecasts reflect expected software asset depreciation accumulation (moderate 5% gross margin decline), falling R&D and G&A ratios from AI-driven productivity gains, and maintained S&M ratio to support continued high growth.

• The 2025 full-year target of 250,000 paid corporate customers was missed (actual 234,072), due to slower-than-expected ramp-up of customer acquisition via accounting firm channels, though acquisition growth accelerated from Q4 2024.
  • Q4 2025 adjusted operating profit was negative 230 million yen, driven by delayed budget execution from Q3 and increased pre-investment for 2026+ growth focused on S&M, creating short-term margin volatility.
  • Gross margin dipped to 80.9% in Q4 2025 due to one-time accelerated amortization of software assets from year-end asset value revaluation, though this is a temporary impact.

Q: How is 2026 ARR growth split between user count growth and ARPU growth across segments, and what drives the strong projected Mid segment ARPU growth? / A: freee projects 10-15% user count growth for both the Mid and Small corporate segments. For ARPU, Mid segment is projected to grow 10-15%, while Small segment grows 5-10% after the recent price change cycle. This strong Mid segment ARPU growth is based on ongoing positive trends: cross-selling to existing users has already grown over 50% YoY, and the new account manager program (which assigns dedicated sales staff to manage new acquisition and cross-selling for Mid clients) is driving increased customer inquiries for additional products, accelerating ARPU growth.

Q: Why was Q4 2025 a loss after stronger profits in the first three quarters, and what explains the final result landing at the lower end of the guidance range? / A: The Q4 loss came from two one-time or planned factors: Q3 budgeted spending shifted into Q4, and the company pulled forward strategic investments (primarily in S&M) to support growth starting in 2026, leading to the full-year result landing at the lower end of the pre-guided range. This investment is aligned with the company's strategic plan to balance ongoing growth and profitability. The one-time accelerated software amortization from year-end asset review also impacted Q4 margin.

Q: How is AI improving freee's development productivity, and what impact does this have on R&D costs? / A: AI is already driving measurable improvements in development efficiency, enabling the company to deliver more product features with the same level of R&D investment. This productivity gain is incorporated into the medium-term forecast, which projects a falling R&D-to-revenue ratio even as the company continues to invest heavily in product expansion. AI also improves productivity across internal functions beyond development, supporting broader cost efficiency long-term.