DENTSU SOKEN INC. Q2 FY2025 earnings call

Overall First Half Performance

• Consolidated first half revenue hit 80.2 billion yen, and operating profit hit 10.66 billion yen, reaching all-time record highs for the first half, with 8.1% YoY revenue growth and 2.9% YoY operating profit growth. Revenue came in 3.3% below initial forecasts, and operating profit came in 7.3% below initial forecasts, as Financial Solutions and Manufacturing Solutions missed plans while Business Solutions and Communication IT outperformed.
• Total orders grew 3.4% YoY cumulative, and order backlog grew 3.3% YoY, driven by strong large project wins in Financial and Business Solutions. Headcount increased 5.6% YoY.
• The standalone April-June second quarter saw 7.7% YoY revenue growth and 6.1% YoY operating profit growth, with strong outperformance from Business Solutions and still recovering Financial Solutions.

Profit Driver Analysis YoY

• Operating profit grew 0.3 billion yen YoY: 2.19 billion yen gain from higher revenue, offset by 0.49 billion yen negative impact from lower gross margin, and 1.4 billion yen negative impact from higher SG&A.
• Gross margin declined 0.6 percentage points YoY, driven by higher costs from a development plan reset for the integrated HR solution POSITIVE (acceleration of next-gen launch led to write-off of some in-development current-generation modules), and lower revenue from high-margin software licenses and add-on development. SG&A increased due to goodwill amortization from M&A, higher personnel costs from headcount growth, and higher sales promotion from expanded sales activities.

Service & Industry Line Highlights

• Consulting, outsourcing/maintenance, and hardware/other sales grew strongly YoY. Software product revenue was flat YoY and significantly missed initial forecasts, due to post-large-project hangover and sluggish new customer acquisition.
• Revenue from the Dentsu Group declined YoY, which reflects a shift from Dentsu Group-billed to direct client-billed projects for collaborative business; both Dentsu Group-focused and collaborative businesses remain solid.
• The transportation equipment industry (led by automotive) saw the strongest growth at 20.2% YoY revenue growth. Declines in electrical/precision machinery and general manufacturing were driven by the completion of large prior-year SAP and POSITIVE projects.
• No material tariff impact on manufacturing business was seen in the first half.

Strategic Priorities

• The company targets growth through three core leadership areas: strengthening global competitiveness for manufacturing, improving corporate productivity, and increasing consumer experience value for companies and society, aligned with its long-term growth strategy.

1. Financial Solutions: Year-over-year (YoY) decrease in both revenue and operating profit. Growth in sales of the Bank of Japan settlement management system Stream-R and software products in customer engagement transformation was offset by a decline in accounting-domain software products. Performance missed initial forecasts. It has seen a more than 20% YoY increase in order backlog as of the end of the first half, with multiple large banking sector projects set to enter the development phase in the second half. 2. Business Solutions: YoY increase in both revenue and operating profit. Growth was driven by expanded adoption of the consolidated accounting solution STRAVIS (led by general trading companies) and the integrated HR solution POSITIVE (for insurance and service industries). Performance exceeded initial forecasts, driven by strong revenue growth in the second quarter. Order backlog increased more than 20% YoY. 3. Manufacturing Solutions: YoY revenue increase, but YoY operating profit decrease. Revenue grew from expanded sales of software-controlled vehicle development, marketing consulting, and PLM solutions (led by transportation equipment clients), but profit declined due to lower revenue from high-margin software products. Performance missed initial forecasts. Order backlog declined due to the hangover from large prior-year SAP projects and revenue recognition timing for subscription contracts, but large multi-year project negotiations with automakers are progressing, with expected launch in the second half. 4. Communication IT: YoY increase in both revenue and operating profit, driven by expanded public sector business and contributions from Mitsue Links, which was added to the consolidated group in the second half of the prior year. Performance exceeded initial forecasts, with stable growth expected for the full year.

• Full-year 2025 revenue guidance is lowered by 2 billion yen to reflect the first half performance miss, despite stronger-than-expected second half order pipeline. Operating profit guidance is maintained: the negative impact from the first half miss will be offset by higher second half revenue compared to initial plans and targeted productivity improvements, including revised hiring plans to control costs. Ordinary profit and net profit guidance are raised to reflect first half results. • By segment, full-year revenue guidance is lowered for Financial Solutions and Manufacturing Solutions, raised for Communication IT, and maintained for Business Solutions. Full-year software product revenue guidance is lowered to reflect the first half post-large-project hangover. • Second half revenue and operating profit guidance are both raised above initial plans. Financial Solutions and Business Solutions have very strong order backlog pipelines, while large project launches are expected for Manufacturing Solutions in the second half. • Segment-specific second half priorities: Financial Solutions will accelerate R&D for regional bank sales support, fund/asset management, and decentralized finance infrastructure. Business Solutions will continue strengthening its competitive position to sustain high growth, with momentum across STRAVIS, POSITIVE, and Ci*X Financials. Manufacturing Solutions will focus on cloud services for SAP, capitalizing on steady demand for software-controlled development and new AI use cases like automated design and knowledge transfer for automakers. Communication IT will participate in the Dentsu Group's AI For Growth strategy to expand collaborative AI development in the marketing domain.

• Uncertainty around global tariff trends, which could impact the manufacturing solutions business, though no material impact was observed in the first half. • Sluggish new customer acquisition for software products and persistent post-large-project revenue hangover, which led to significant first half performance misses and required full-year guidance downgrades for the segment. • Pressure on gross margins from accelerated development timelines for flagship products (POSITIVE) that required asset write-offs and increased near-term costs. • Execution risk from delivering a large volume of ordered projects in the second half to offset the first half performance miss while meeting profitability targets.

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