DreamArts Corporation Q2 FY2025 earnings call

• Core Strategic Framework

  • The company's mid-term management plan centers on "Democratization of Digital", defined as enabling business departments to independently lead in-house DX, problem-solving and value creation in response to Japan's structural shortage of IT talent at enterprise user side.
  • Positioned as a blue ocean market opportunity, with five critical success factors: 1) MCSA: supporting front-end and back-end processing for core ERP systems; 2) Global Connect: supporting Japanese enterprises' global business operations; 3) DAPA: DreamArts Practical AI; 4) Product-led Growth (PLG); 5) EC2: acquiring external capabilities and expanding the SmartDB certified user base to 10,000 by the end of next year.
  • Mid-term target (2028 December fiscal year): 380 new customers (equal to 10% market share in the target large enterprise segment), 8.7 billion yen revenue (organic growth target, includes potential M&A upside beyond this), and 2.0 billion yen operating profit.

• Product and Customer Milestones

  • Secured large landmark customer wins: KDDI replaced its 10,000+ person internal approval system with SmartDB; Tsuruha Holdings built a full store information management database on SmartDB in 2 weeks to resolve prior data management issues; J-Power Generation Service rolled out SmartDB to 1,500 staff across 6 power plants, with on-site enablement training from DreamArts.
  • Launched new product capabilities: Added My Number authentication for SmartDB to enable secure access for external users; Launched AI translation for Shop-ran to support foreign staff; Announced the DAPA practical AI framework for embedding AI into existing business processes.

• Growth Investment and Marketing

  • Held the "Sumadebi Jamboree" user event with 620 attendees (70% non-IT staff), 99% satisfaction rate, to be repeated next year.
  • Launched targeted marketing including elevator ads in large office buildings along the JR Yamanote Line, in-train digital ads on the Yamanote Line, and a popular 150,000 view program on PIVOT business media.
  • As of the 2nd quarter, 19 net new hires out of the full-year 30 target (63% achievement); advertising and promotion budget reached 43.1% utilization, with full-scale expansion planned from Q3 onwards.

1. Horizontal SaaS (SmartDB): Grew 19% year-over-year, the company's core growth driver. The overall cloud business, which SmartDB belongs to, grew 16.7% year-over-year, with its revenue contribution share decreasing 0.6 percentage points year-over-year (within margin of error). 2. Professional Services: Revenue contribution share increased slightly year-over-year. 3. On-premises business: Revenue contribution share decreased as expected due to the company's "pruning strategy" to refocus resources on high-growth areas. Key financial KPIs: Gross profit margin reached 64.2%, up 7.0 percentage points year-over-year; Operating cash flow grew 11.0% year-over-year; Net dollar retention for horizontal SaaS was 111.1%, down slightly year-over-year due to the pruning strategy.

• Full-year 2025 December fiscal year guidance is maintained unchanged from the original announcement at the start of the year.
• The company expects the slight decline in horizontal SaaS net dollar retention caused by the pruning strategy to improve and return to growth trajectory from 2026 onwards.
• Horizontal SaaS revenue growth is expected to accelerate with increasing large deal volume going forward.
• Growth investment progress is on track: hiring targets are expected to be met, and planned marketing spend will be deployed in the second half of the year.

• Japan's structural shortage of IT talent on the enterprise user side creates dependency on external vendors and waterfall development, leading to delays and cost overruns for DX projects, though this is also the core driver of the company's democratization of digital strategy.
• Slight near-term downward pressure on net dollar retention from the pruning strategy, though the company expects this to reverse next year.
• M&A activity depends on the availability of suitable targets, and no M&A is reflected in the mid-term organic growth targets.

Q: Could generative AI replace SmartDB, and what capabilities does the newly announced DAPA AI framework provide? / A: Management does not believe generative AI will replace SmartDB, as autonomous AI agents struggle to handle the implicit knowledge and internal politics inherent to enterprise business processes. DAPA embeds AI into existing SmartDB workflows to assist with tasks like automated data entry, compliance suggestions, and process checks. It leverages SmartDB's existing database and process engine to integrate AI into decision-making, with a centralized AI prompt database to prevent inconsistency and security issues, reducing decision-making burden for users rather than replacing the platform.

Q: What is the key difference between your no-code SmartDB product and competing foreign low-code tools? / A: Low-code tools are built exclusively for professional IT engineers to improve their development productivity, while no-code tools are built for non-IT business staff (citizen developers) to build and improve their own business applications, enabling in-house DX led by business departments. When clients aim for democratization of digital and future self-sufficiency, they choose no-code; when they outsource all development to vendors, they typically choose low-code, but in that case only the vendor benefits from low-code's productivity gains, not the client.

Q: What business verticals or domains is SmartDB currently prioritizing? / A: The company is prioritizing two core domains: first, MCSA, the area surrounding core ERP systems from SAP/Oracle that handles pre- and post-ERP processing. Demand for this area is growing rapidly, as connecting legacy on-premise ERPs to frontline business processes is extremely labor-intensive with traditional methods, and enterprises increasingly see this as a critical bottleneck for agile operations. Second, Global Connect, supporting Japanese enterprises' overseas operations. All DreamArts products have built-in multi-timezone and multi-language support dating back 20 years, and SmartDB is already used in 28 countries. The company aims to expand this footprint to more clients, adding support for 10+ languages and fully non-stop operation for global use cases.

Q: What are the criteria and target areas for the company's M&A strategy? / A: The primary goal of M&A is to add capacity to support more customers, to ensure clients achieve successful early adoption of SmartDB, which drives future upsell and cross-sell growth. Demand for SmartDB is growing, and the company currently lacks sufficient in-house capacity to deliver full support for all potential new business. The company is targeting Tier 2/Tier 3 system and solution vendors that can complement its service delivery capacity.