4704.T

Overall Strategic Direction

• Trend Micro is accelerating its transformation into an AI-native cybersecurity leader to respond to the rapid growth of AI-powered cyber threats and customer demand for AI security.
• Management maintains that current higher costs are intentional, future-focused investments aligned with investor requests to prioritize long-term growth over near-term dividends/income, and that investments are being closely monitored for ROI.
• The 2028 long-term strategy (Road to 2028) remains unchanged, with 2026 confirmed as the planned transformation and acceleration year for AI solutions.

AI Transformation Investment Breakdown (H1 2026)

• Internal AI Transformation: Investment grew 6,000% YoY to $12.6 million (from $0.2 million H1 2025), covering company-wide AI upskilling and tooling. Full employee adoption is complete, with formal governance and productivity tracking in place. Measured improvements include 2x more code updates, 50% faster customer delivery, 3-hour connector development (down from months/years), threat hunting shortened from hours to seconds, and 5x faster issue resolution.
• Infrastructure Expansion and Transition Cost: Total $13.7 million, consisting of $6.5 million for new sovereign data zones (already launched in Japan, India, UAE, Germany, Australia; upcoming 2026 launches in Brazil, South Africa, Indonesia, Canada, U.K. to meet sovereign AI security requirements) and $7.2 million in dual-run costs for rewriting legacy XDR data lake code from CPU to GPU. Transition dual-run costs will end once the migration is complete.
• Customer AI and Cloud Consumption: The largest investment category, supporting growing customer adoption of AI-driven Vision One. Unit cost per $1 of SaaS ARR is $0.14, up slightly from $0.13 but down from $0.19 in H1 2024, with controlled cost optimization ongoing. The near-term slight increase reflects initial infrastructure setup for newly launched AI services (agentic AI, virtual red team, digital twin) that have not yet reached scale.

Commercial Operational Highlights

• 41% of current deals are for security vendor consolidation, demonstrating strong market traction for the unified Vision One platform.
• 325 MSP partners now transact Vision One, with exceptional ARR growth post-adoption; managed services attached to Vision One reached $81 million in ARR (up 27% YoY), with average modules per customer increasing from 4 to 6 post-services attachment.
• Healthcare vertical delivered 94% YoY growth, outperforming other verticals.

• Full year net sales guidance is maintained at the previous level, as top-line performance remains on track.
• Full year operating income, ordinary income, and net income guidance have been revised downward, reflecting the higher than originally planned AI and cloud investments incurred in H1 2026.
• FX guidance is unchanged, maintaining the plan assumption of 157 yen to the U.S. dollar, as the current 160 yen rate is not meaningfully different.
• No major additional temporary or non-operating items are expected in H2 2026, but total investment cost levels will remain elevated compared to prior periods, with lower cost growth than H2.
• Management expects ARR growth momentum to continue accelerating in H2 2026, and unit economics to begin improving starting in the second half. The company's long-term target remains to reach double-digit ARR growth.

Total company annual recurring revenue (ARR) reached $1.7 billion, up 5% year-over-year (YoY), improving from 3% growth in Q1 2026. The performance of each business segment is as follows:

1. TrendAI: ARR grew 6% YoY, improving from 4% growth in Q1. Its core product Vision One reached $615 million in ARR, growing 49% YoY. Vision One contributes 45% of total company ARR, with a net retention rate (NRR) of 122% and gross retention rate (GRR) of 87% (up from 85% in Q1). In the U.S., Vision One ARR grew 39% YoY, accelerating from 38% growth in Q1.
2. TrendLife: ARR grew 4% YoY, a positive reversal from a 1% decline in Q1. Its Digital Life Protection line delivered 52% YoY ARR growth, with 2% YoY growth in average revenue per user (ARPU).
3. Incubation: ARR is not yet material for public disclosure, but early operational indicators are positive. VicOne (automotive/robotics cybersecurity) now serves 45 customers, while Magna (AI systems integration and consulting) has 15 ongoing pilots and an expected first closing deal in H2 2026.

• Legacy product (legacy SaaS cloud security) sales are declining, which creates near-term top-line pressure until growing Vision One sales fully offset this decline.
• North America (U.S.) ARR growth remains slower than other regions, creating near-term pressure on overall net sales growth.
• Recent accelerated AI investment was larger than originally planned in the annual budget, creating unanticipated downward pressure on near-term profitability.
• Rapid industry change in AI cybersecurity requires ongoing innovation, and overly strict cost controls could constrain the product development needed to maintain competitive position.

Q: When will ARR and net sales growth be large enough to absorb current higher AI investment costs, and will this happen next year? Do you still maintain the 2028 long-term performance targets? / A: Management confirmed ARR growth is the leading indicator for net sales growth, with the two converging as Vision One grows. Improvement in unit economics will begin in the second half of 2026, with continued acceleration in Q3 and Q4 as investment growth slows. Legacy product declines will gradually be offset by growing Vision One sales, which already grew 49% YoY with much slower cost growth than revenue growth. The 2028 targets are unchanged, and near-term cost increases are temporary and expected to gradually align with long-term targets.

Q: Is the full-year 15% ARR growth guidance maintained? / A: Management clarified the company does not formally guide ARR, but the internal target of reaching double-digit ARR growth remains unchanged, and growth will continue to accelerate gradually through the second half of the year.

Q: How much higher is second half cost versus original plan, and what is the cloud cost outlook for next fiscal year? Do you have cost control measures in place? / A: The $12 million unplanned internal AI transformation cost was entirely incurred in the first half, so second half cost growth will be lower. The company has automatic employee incentives for cost control: performance bonuses are linked to net income, so engineers already actively optimize token usage by matching model size to task requirements. Next year's cost will scale with SaaS ARR growth, while one-time transition and training costs will decline over time.

Q: How much of the full year 12 billion yen cost increase is Vision One/cloud related, and does management actively oversee token usage controls? / A: 80% of the full year cost increase is cloud related, and most of the cost increase was already incurred in the first half, so second half cost growth will be slower. Management does oversee cost controls, but intentionally avoids overly strict constraints to preserve engineering innovation needed to compete against fast-evolving AI-powered threats.