INTELLIGENT WAVE INC. Q3 FY2025 earnings call

Overall Financial Performance

• The company achieved year-on-year revenue growth driven by solid performance in its core payment and security business segments, with large order backlog growth concentrated in recurring stock-based projects.
• Gross margin declined due to increased cloud infrastructure costs, a shift in security product sales mix, and the absence of high-margin hardware sales from the prior year period. Operating profit saw a slight year-on-year decline.

Mid-term Management Plan (2025 June - 2027 June) Progress

• Payment domain:
  • Development of the new version of core flagship product NET+1 for the FEP segment is on schedule for completion in Q4, with the first customer already secured and deployment ongoing for a planned year-end release.
  • The AI-powered shared issuer fraud detection solution launched in 2023 is now deployed at 7 card issuers, with strong ongoing inbound inquiry. A new integrated service linking the ACEPlus fraud detection system and MATTE delivery suspension system launched in Q4.
  • Expansion into the acquiring segment is ongoing to capture card issuer demand for core system modernization and open architecture, with large pipeline projects expected to convert to orders starting next fiscal year.
  • A large financial infrastructure operation service launched in January 2025 is running stably; the operations department has been split from the development division to expand FEP and fraud detection system operation services.
• Security domain:
  • Market demand for cybersecurity products, particularly threat intelligence solutions for dark web monitoring, has risen sharply amid increasing sophisticated cyberattacks. The company is accelerating sales efforts for its proprietary CWAT product.
  • Overseas expansion collaborations with partners in Taiwan and Southeast Asia are materializing, with further details expected in a future earnings call.
  • The DNP Group has consolidated scattered security business functions into a unified group security initiative, and Intelligent Wave will take a core role in this new structure, enabling expanded service offerings via access to DNP's operational know-how and customer base.
• Data communication & analytics infrastructure domain:
  • The company's core CEP high-speed real-time data processing technology, currently used for payment fraud detection and the broadcasting industry, is being evaluated for expansion into new verticals including marketing, security, and mobility, with use case development ongoing in partnership with the DNP Group.

Cloud Service Updates

• The company revised its original plan to fully migrate from on-premise data centers to public cloud by 2027. It will now pursue a hybrid infrastructure model, as migration required more engineering hours than initially planned and public cloud costs have spiked. This change will shorten the timeline for cloud service profit improvement, with management targeting gross margins higher than system development by the next mid-term plan period.

By business domain (reorganized this period into 3 segments):

1. Payment domain: Revenue grew year-on-year, driven by existing customer FEP system renewal projects and strong demand for card fraud detection solutions. A temporary decline in projects from some existing customers in sub-segments caused a partial offset to growth.
2. Security domain: Revenue grew year-on-year, driven by the deployment of endpoint security products to large enterprise customers.
3. Data communication & analytics infrastructure domain: Revenue saw a slight year-on-year increase, driven by new development project wins with securities firms outside of the company's traditional front system scope.

By product category:

1. System development: Revenue exceeded the prior year level, despite a decline from large credit card project phase shifts, offset by renewal and fraud detection project wins.
2. Third-party products: Revenue declined year-on-year, due to the absence of large hardware sales from FEP system renewal that occurred in the prior year period.
3. Cloud services: Revenue increased sharply by 709 million yen year-on-year, driven by steady user growth and additional feature adoption by existing users.

Aggregate cumulative results for the 3Q period: Total revenue: 11.53 billion yen, +7.2% YoY Operating profit: 1.445 billion yen, -3.4% YoY Orders received: 16.133 billion yen, +17.1% YoY Order backlog: 21.187 billion yen, +51.4% YoY, with stock-based multi-year contract projects driving the majority of growth

• Full-year 2025 June fiscal year revenue: Payment domain progress is slightly behind plan due to large project release date shifts and customer investment plan revisions, while security and data communication/infrastructure segments are progressing in line with plan.
• Full-year 2025 June fiscal year profit: Cloud services are performing in line with plan, but progress on gross margin improvement initiatives for system development and maintenance is slightly delayed. Security sales have exceeded plan but profitability is temporarily lower than planned. Management will continue executing on margin improvement initiatives over the remaining two months of the fiscal year.
• Long-term growth guidance: The highest growth potential is in acquiring-related payment expansion, group-aligned security business expansion, and new industry expansion via core CEP technology, particularly in digital marketing. Legacy FEP revenue growth is expected to be muted due to already high market share.

• Rising cloud infrastructure costs have temporarily pressured cloud service profitability, with double investment in both on-premise data centers and public cloud during the transition period.
• Security domain profitability is temporarily depressed due to strategic pricing to win new large client accounts, though management expects this to improve in future years as follow-on projects are secured.
• Flow-based system development orders are facing near-term headwinds from project phase shifts and temporary customer investment slowdowns.
• Progress on gross margin improvement initiatives for system development and maintenance is behind the full-year plan.

Q: What is management's outlook for order growth by segment for the next fiscal year? Which areas are expected to grow, and which will stagnate? / A: Management expects muted growth from the legacy FEP segment, as the company already has a very high market share with limited room for further expansion. The key growth area will be acquiring-focused payment expansion: card issuers are facing heavy investment pressure from rising transaction volumes, and are pursuing system modernization via functional split and open architecture, which the company will capture for order growth. There is still significant untapped potential in core and peripheral system development for card issuers, where the company already has strong presence in front-office systems. / A: In the security domain, the DNP Group is building out a unified group-wide security business, and Intelligent Wave will take a core leadership role. The company can leverage DNP Group's existing SOC (Security Operations Center) operational know-how to offer full-spectrum security services that it could not provide independently, enabling significant business expansion. / A: The company's core CEP real-time big data processing technology, already proven in the payment segment, can be expanded to new industries. Management sees particular potential in digital marketing, and will use the DNP Group's customer base to develop viable use cases and create new revenue opportunities.