BASE CO.,LTD. Q2 FY2025 earnings call

Core Financial and KPI Commitment

• The company sets 20% YoY operating profit growth as its sole core KPI, and achieved 21.6% operating profit growth in Q2, recovering to the 20% growth target range after missing the target last year.
• Long-term operating profit target is 10 billion yen (100亿円 converted to 10 billion yen), with a full-year 2025 target of 6.2 billion yen, which is seen as a realistic, achievable milestone.

Sales and Customer Strategy

• The "Shiba Strategy (Lawn Strategy)" organizes the company into 44 autonomous business units (departments), with each department head responsible for sales. This strategy has taken shape successfully, and the number of departments is expected to grow to 50 next year. A structured annual process trains and selects new department heads from department assistant candidates to support sustained growth.
• Historically centered on 4 core anchor clients, the company has steadily expanded its client base; non-core clients now account for 33.9% of total revenue, up from less than 20% in 2021, with strong performance and positive client feedback from new clients including Hitachi Solutions, NEC, and Itochu Techno Solutions.

Recruitment and Human Resources

• Net headcount grew 92 in the first half, reaching 1,237 total employees in Japan. The company hired 133 new graduates in Japan (a record high) and will hire 50 new graduates from China in autumn 2025, reaching 61% of the full-year net growth target of 150 on schedule.
• Average monthly procurement of business partners (BP) is 670 people, representing a 1:0.5 employee-to-BP ratio (lower than the common industry 1:1 ratio), leaving significant room for BP expansion to support future growth.

Talent Development

• SAP Talent: The SAPEX program trains multi-skilled talent that can handle both open-system development and SAP. There are 180 full-time dedicated SAP employees, plus 120 certified multi-skilled employees available to support SAP projects, and 500 total employees have completed basic SAP training, including training for BP employees, to support future SAP growth.
• Generative AI: The company prioritizes AI talent development, provides company-wide access to secure tools including BASEAssistant, Copilot, and ChatGPT, and runs annual AI contests to encourage spontaneous experimentation and adoption. Younger employees are highly engaged with AI, aligning with the company's focus on growing AI-native talent.
• Leadership Development: The WISEUP program has trained 127 new leaders on track to hit the target of 120 by end of year, to build a pipeline of future department heads. 700 employees use Udemy for self-directed learning, with an average of 18 hours of learning per month.

Operational and Governance Updates

• The company obtained ISO9001 quality management system certification to maintain service quality amid rapid headcount growth and improve customer satisfaction.
• The company announced a 1.2 billion yen (12億円 converted to 1.2 billion yen) upper limit share repurchase program, up from 1 billion yen last year. The company maintains a 50% payout ratio until it hits the 10 billion yen operating profit target, with a current total shareholder return payout ratio of 77%.

1. Base Parent Company (Japan): Total single-entity revenue grew 16.5% year-over-year. Development services account for the majority of revenue, and the SAP segment grew 8.3% year-over-year. The parent company contributes approximately 98% of total consolidated revenue. 2. China Subsidiary: The subsidiary accounts for approximately 2% of total consolidated revenue, with a minimal impact on overall group profit. It originally operated as an offshore development center but has transitioned to 0 offshore business and now operates a local China-focused business model.

• The full-year 2025 financial guidance is maintained unchanged, with no upward or downward revision.
• Progress against the full-year guidance is 47% for revenue and 46% for operating profit, which is considered on track given the company's typical seasonal pattern of stronger second-half performance.
• The company reaffirms its long-term commitment to a 20% annual operating profit growth target, with the 10 billion yen operating profit milestone remaining in place as a realistic near-term goal.

• The Chinese subsidiary has faced headwinds from the weak local economic environment in recent quarters, though its small size limits overall group impact. Management expects a gradual recovery from Q2 to Q3, and notes the business model transition from offshore to local has been successfully completed.
• Sustained 20% annual operating profit growth requires continuous expansion of the client base and department count, and the company notes that sales capabilities are still being strengthened to hit this target consistently.
• While demand for IT services remains strong, AI-driven efficiency gains could eventually change industry demand and staffing needs, though management sees this as a long-term risk and frames it as a larger opportunity for the company.

Q: What impact will the rise of AI and AI engineers have on the IT contract development market and demand for human talent? / A: Management notes that product-focused tech companies have cut headcount related to AI, but contract development in Japan has a different business model. Most Japanese companies still have a large backlog of uncompleted IT projects, and AI-driven efficiency will unlock new demand from small, previously uneconomical projects. The company believes that over the next several years, there will be no large reduction in demand for in-person IT talent in the Japanese contract development market, and Japanese IT engineers remain in short supply. The key success factor is growing the share of AI-native talent internally, and the company is already working to apply AI to customer proposals, internal administrative work, quality improvement, and training. Management views AI as a major growth opportunity, not a threat.

Q: How is SAP talent structured internally, and what is its growth rate? / A: There are 180 full-time dedicated SAP employees, plus an additional 120 multi-skilled employees from other departments who are certified to work on SAP projects, so 300 total SAP-capable employees. This talent pool is growing at a 15% annual rate, in line with the overall 10-20% annual growth rate for all solution-focused talent across the company. This talent pool includes all specialized solution talent beyond SAP, including Salesforce, ServiceNow, and other ERP platforms.

Q: Will 20% annual operating profit growth come from further margin expansion, or from top-line revenue growth? / A: Management states that growing top-line revenue is the clear long-term priority. While the company has benefited from margin expansion to hit the 20% operating profit growth target in the first half, the operating profit margin is already near its sustainable limit, so future growth will need to come from growing revenue while maintaining the current margin level. The company is still strengthening its sales organization to deliver faster top-line growth, and will continue to work toward this long-term goal.

Q: Will AI lead to a shift from traditional person-month based pricing to outcome-based pricing, and will this erode Base's profit margins? / A: Management confirms that customer interest in outcome-based pricing already exists, and this shift has been discussed with clients for years, even before AI adoption. It expects a gradual industry shift from person-month to outcome-based pricing over time, but notes that Japanese business customs change slowly, and it will take significant time for this shift to impact day-to-day operations. Most industry leaders already agree on the direction of this shift, so Base will adapt gradually as the market changes.