DENTSU SOKEN INC. Q4 FY2024 earnings call

2024 Full Year Performance Summary

• 9th consecutive year of revenue growth, 7th consecutive year of record operating and net profit; ROE is 17.4%, still well above cost of capital; total headcount increased 20.8% YoY including M&A integration.
• Gross margin hit a record 36.8%, driven by 600 million yen in gains from unprofitable project suppression; higher SG&A (up 4.3 billion yen YoY) came from expanded headcount, base salary increases, business development costs, and goodwill amortization from Mitsue Links acquisition.
• Q4 2024 revenue is 40.4 billion yen, up 8.2% YoY; Q4 operating profit is 6.57 billion yen, up 1.09 billion yen YoY, with Q4 gross margin and operating profit hitting all-time quarterly records. Q4 had no unprofitable projects, and strong license sales drove gains.
• Total orders in the last 3 months increased 12.7% YoY, ending order backlog increased 11.9% YoY, showing accelerating growth momentum.

New Medium-Term Management Plan (2025-2027) "Social Evolution Implementation 2027"

• Basic Policy I: Value Creation from Corporate and Social Transformation
  • Consolidated sales and technology functions into newly formed Sales Headquarters and Technology Headquarters in January 2025.
  • Unified sales enable consistent enterprise client service and specialized solution sales; consolidated engineers improve cross-segment resource sharing, flexible assignment, project quality, and accelerate project manager development.
• Basic Policy II: Solution Strengthening
  • Prioritize generative AI for internal productivity improvement, and develop Trusted Web solutions for online trust social challenges.
  • Continue business expansion via Dentsu Group collaboration and M&A, aiming to scale scalable business from the growing pipeline of Dentsu partnership projects.
  • Expand the partner-led sales model (currently centered on POSITIVE) to other proprietary products, and establish a dedicated new business development team for untested growth areas.
• Basic Policy III: Management Foundation Strengthening
  • Advance management system sophistication and internal DX to improve company-wide productivity; continue aggressive hiring while overhauling talent development, optimal placement, and employee engagement initiatives.

Financial Policy and Capital Allocation

• 2027 target: 210 billion yen revenue, 31.5 billion yen operating profit, 15% operating margin, ROE ≥ 18%, 6,000 total employees; 75 billion yen total growth investment allocation for technology, product, DX, and M&A.
• Plan to allocate 75 billion yen to growth investment and 25 billion yen to shareholder returns over the 3-year period; will consider debt financing for large projects if needed, while maintaining a minimum 50% equity ratio.
• Raised the target payout ratio from 40%+ to 50% by 2027, starting from the 2024 actual 46.5%

After 2024 segment restatement to reflect 2025 reporting changes:

1. Financial Solutions: +2.1 billion yen in restated revenue, achieved revenue and profit growth driven by expanded software product sales to the banking sector. Growth was muted by a large project interruption in H2, but it still absorbed higher personnel costs and improved profit margin.
2. Business Solutions: +30 million yen in restated revenue, saw only slight overall revenue growth despite expanding POSITIVE sales. As the highest growth-potential segment, it increased strategic headcount, leading to a net profit decline from higher personnel costs.
3. Manufacturing Solutions: +13.2 billion yen in restated revenue, achieved strong revenue and profit growth driven by booming consulting and Teamcenter PLM software sales centered on the automotive industry. PLM development business is in a high-growth expansion phase, carrying higher development risk than its historical license-focused model.
4. Communication IT: -15.6 billion yen in restated revenue, achieved revenue growth (including the full consolidation of Mitsue Links) from expanding SAP solutions, but turned to a profit decline due to higher personnel costs and new goodwill amortization from the M&A. Overall, total 2024 consolidated revenue is 152.642 billion yen, 7% YoY growth, with manufacturing solutions as the main growth driver. Consolidated operating profit is 21.039 billion yen, a 0.1% YoY increase.

• 2025 (FY2025 ending December 2025) full year guidance: 170 billion yen revenue (11.4% YoY growth), 23 billion yen operating profit (9% YoY growth), 23 billion yen ordinary profit, 16 billion yen net profit attributable to parent shareholders. The slower profit growth than revenue reflects planned investments in human capital, technology, and M&A.
• 2025 H1 guidance: 83 billion yen revenue, 11.5 billion yen operating profit, in line with historical progress ratios of 48.4% of full year revenue and 50% of full year operating profit.
• 2025 planned headcount growth is 8.8% YoY, maintaining aggressive hiring at a slightly slower pace than 2024.
• 2025 full year dividend guidance: 116 yen per share, an 8 yen increase YoY, with a 47.2% target payout ratio.
• Updated Vision 2030 adds a 20% operating profit target to the existing 300 billion yen revenue target, with significant margin improvement expected after 2027 as current investments mature.
• 2025 segment growth targets set high growth for Business Solutions (recovery from off-peak period) and Communication IT (Dentsu partnership and Smart Society business expansion), with growth led by consulting services and software products across segments.

• Manufacturing Solutions' PLM development business carries higher development risk than its historical license-centered model, as it pursues aggressive market share gains in the fast-growing market.
• Unprofitable projects occurred in Manufacturing Solutions in Q2 and Q3 2024, caused by insufficient resource capacity in high-demand areas, which led to missed 2024 initial full-year operating profit targets by ~1.5 billion yen.
• Technology investment missed the prior medium-term plan target, though planned product enhancement and new product launches were mostly completed with no material negative impact on business growth.
• Business Solutions is in a transitional off-peak period, with many large new contracts still in early phases that have not yet reached the revenue-generating development phase, leading to lower near-term order growth figures.

Q: Why is 2025 H1 revenue and profit growth projected to be higher than H2? / A: The higher H1 growth reflects the full addition of Mitsue Links revenue, which was consolidated in H2 2024. Profit is set equally between H1 and H2 based on historical trends, so the comparison to 2024 (which had profit skewed to H2) results in a lower projected H2 growth rate.

Q: The 2030 target is 20% operating margin, but the 2027 target is only 15% — how will the remaining 5% margin growth be achieved after 2027? / A: The prior medium-term plan successfully expanded headcount, but talent development and conversion to paid utilization were insufficient, which is the core focus of the new medium-term plan. The new plan prioritizes heavy investment in talent and solutions, so it intentionally targets muted margin growth in 2025-2027. Significant margin improvement will come after these investments mature starting in 2028.

Q: What are the segment-level revenue growth drivers for 2025? / A: Financial Solutions has an improving order outlook centered on large projects from government financial institutions. Business Solutions sees growing projects in both HR and accounting domains, with more projects entering development phase from the start of the year, driving high growth. Manufacturing Solutions has a booming market centered on the PLM segment. Communication IT gets full-year M&A contribution from Mitsue Links, plus growth from Dentsu Group-related business and expanding Smart Society initiatives.

Q: Will you ever cut the 50% minimum equity ratio target for large M&A, and would that affect the 50% payout ratio target? / A: 50% equity ratio is the firm minimum benchmark, though we could consider lowering it for highly attractive investments. We prioritize dividend growth as shareholder return since share buybacks are difficult in our operating environment. We have sufficient cash on hand to pursue both growth investment and dividend increases, and will raise shareholder returns in line with business growth.