INTELLIGENT WAVE INC. Q2 FY2025 earnings call

Overall Business Summary

• The core payment segment performed steadily, delivering year-over-year revenue and profit growth, with both top and bottom line results broadly meeting initial期初 plans. Large infrastructure operation projects and multi-year cloud contracts drove strong order growth.

Mid-Term Management Plan (2025 June - 2027 June) Strategic Focus

• The plan focuses on building diversification and sustainable growth foundations for the 2030s, centered on three core transformations: business, technology, and human resources, with deepened collaboration with the DNP Group to leverage DNP's customer base, assets, and capabilities.

Payment Segment Progress

• Existing Business Optimization: The flagship FEP product NET+1 is being updated to a cloud-native version (Ver.2), scheduled for release by December 2025. The new version drastically cuts development lead time and improves scalability to drive productivity gains, with customer upgrade proposals already underway. For fraud detection, the company is collaborating with DNP Group on AI-powered cross-industry anti-fraud solutions centered on the JCB MATTE service, targeting fraud prevention across the cashless payment value chain.
• New Segment Expansion: The company is expanding the acquiring business and enhancing consulting capabilities for card clients to support gradual open architecture migration of legacy mainframe-based core systems. It is also expanding system operation services, having secured a large financial infrastructure operation project that launched in January 2025 and is performing to plan. The company now offers bundled application and system operation services to existing FEP/fraud detection clients.
• Human Resource Transformation: Rotation of personnel from existing to new business areas is underway, alongside targeted training for business planning and consulting roles and expanded reskilling programs.

Security & Data Communication/Infrastructure Segment Progress

• Security Segment: The top priority is expanding business scale. The company is improving product competitiveness via feature updates for in-house product CWAT, and is working with DNP Group to increase market presence in the DLP (data leak prevention) space. It is currently restructuring its security business collaboration framework with DNP, with more details to be shared in the future.
• Data Communication & Analysis Infrastructure Segment: Leveraging core high-speed large-volume data analytics capabilities, the company is expanding from front-end to middle-tier market systems. It is conducting pilot testing of in-house AIMD media analytics platform at DNP manufacturing facilities, targeting workplace accident prevention in operational technology (OT) environments, paired with security offerings. R&D is being strengthened to incorporate AI and other advanced technologies, expand in-house product features, improve productivity, and validate new technologies for long-term growth.

Shareholder Return

• The interim dividend is maintained at 15 yen per share in line with期初 plans, and the year-end dividend is unchanged from initial guidance. The company commits to maintaining a payout ratio above 50%.

For the first half of the 2025 June term, total company revenue was 7.54 billion yen, an 8.6% increase year-over-year, and operating profit was 0.857 billion yen, a 0.6% increase year-over-year. Total orders received were 12.751 billion yen (up 30.5% YoY), and total order backlog was 21.795 billion yen (up 57.9% YoY).

1. Payment Segment: Revenue increased overall, driven by growth in FEP and fraud detection sub-segments from existing customer system renewals and increasing cloud service users. A decline in other sub-segments was seen due to a large prior-year development project and temporary drops in existing customer project volume. This segment was the company's core growth driver in the period.

2. Security Segment: Revenue increased from the deployment of security products to a large enterprise customer. Order backlog grew from multi-year contract awards.

3. Data Communication & Analysis Infrastructure Segment: Revenue increased from a system development project for a securities firm. Expansion into middle-tier market systems is underway, with early positive traction for in-house products EoM and AIMD.

By product category:

• Cloud Services: Revenue grew from rising users of card fraud detection services and feature additions for existing users. Cloud services turned profitable in Q2, though rising infrastructure costs continue to pressure gross margins.
• System Development: Revenue was flat, as a phase shift of a large credit card company project was offset by demand from existing customer renewal and enhancement projects.

• Full-year 2025 June term guidance is unchanged from the initial期初 forecast. The company plans to meet the full-year target through steady execution of mid-term plan initiatives, despite a higher full-year target compared to the prior fiscal year.
• By segment:
  • Payment segment: New infrastructure operation and cloud service projects launched in January 2025 will contribute to full-year results.
  • Security segment: Full-year results expect contributions from growing security product sales and strong demand for threat intelligence among manufacturing clients.
  • Data communication & analysis infrastructure segment: Expansion of market systems and early traction for in-house product expansion are expected to contribute.
• Interim and full-year dividend guidance is maintained unchanged, with a commitment to a payout ratio above 50%.

• Cloud infrastructure migration to public cloud is delayed compared to initial plans due to internal conditions and requirements for customer consent, creating a costly dual on-premise and cloud infrastructure environment that pressures near-term profitability.
• Rising personnel costs from industry-wide wage inflation and talent competition create pressure on margins, though the company is balancing cost competitiveness with talent retention needs.
• Expanding new business areas (security, data communication/analysis infrastructure) has not yet delivered meaningful scale, requiring continued investment before revenue and profit contributions materialize.
• Dual infrastructure costs for cloud services will continue in the near term, though the company expects profitability improvements over time.

Q: The previous 1Q guidance set an April 2025 launch for the cloud-enabled NET+1 update. Will this timeline hold, and what is the difference between the new version and the existing IGATES cloud service? / A: Existing NET+1 is an on-premise product, while IGATES is the company-hosted ASP cloud service. The new NET+1 Ver.2 is built for deployment on customers' own cloud environments. Product development will finish in April 2025, with full commercial launch and customer rollouts scheduled for December 2025, and the company has already secured its first customer.

Q: Why is operating profit nearly flat YoY in the first half, how does management evaluate this period's progress? / A: Results are broadly in line with plan, but the flat profit growth is driven by higher cloud infrastructure costs. Cloud migration to public cloud has been delayed vs. expectations, so the company is currently operating a costly dual on-premise/cloud environment. Management is accelerating migration to cut costs and improve productivity to boost margins going forward.

Q: What initiatives will drive profit growth in the second half? / A: The two core pillars are building a larger pipeline of projects and improving productivity to lift margins. The company will also actively pursue price adjustments aligned with delivered value, which is expected to generate measurable margin improvements in H2. Additionally, the company will leverage DNP Group's customer base to win new projects from new channels.

Q: Can you share the outlook for cloud service profitability in the second half? / A: The dual infrastructure structure will remain in place in the near term, but the whole company is focused on improving productivity and profitability. The company does not expect cloud service profitability to decline from current levels, with all departments aligned on accelerating infrastructure migration and winning new customers to grow profit.

Q: What is the company's approach to wage hikes and talent securing? / A: Management recognizes the need to keep compensation competitive in a tight IT labor market, balancing this against overall cost discipline. The company also focuses on communicating its social value (building critical infrastructure for payments and other essential sectors) to attract candidates, which has resonated with new graduate applicants. New graduate hiring targets 30 graduates this year (up from 26 last year), with roughly 10 acceptances secured so far, paired with ongoing mid-career hiring to scale the team.