INTELLIGENT WAVE INC. Q4 FY2025 earnings call

Overall Financial Performance

• Revenue grew 7.4% year-over-year, supported by strong performance in the core payment segment and deployment of security products to large clients, hitting near-plan levels. Operating profit missed the initial plan due to temporary one-off factors including quality enhancement costs for select projects, shifts in security product sales mix, and lump-sum depreciation of certain non-viable proprietary products. All profit headwinds are one-time impacts limited to the 2025 June fiscal year.
• Stock-based recurring revenue (cloud services, security, financial infrastructure operation) has grown steadily, creating a more stable revenue base. Order backlog exceeds 20 billion yen, driven by large multi-year 3- to 5-year contracts.

Mid-Term Management Plan (2025 June – 2027 June) Progress

• The first year (2025 June fiscal year) delivered revenue in line with plan, while profit missed plan due to the one-time factors noted above. Management will implement targeted initiatives to hit plan targets by the final 2027 June fiscal year.
• Core strategic priorities: Strengthen the company's existing proprietary products and core technologies, conduct a full inventory of product technologies, expand the security business, and enter new industries to grow the overall business footprint. The company will leverage DNP Group assets to accelerate execution.

Segment-Specific Strategic Initiatives

• Payment segment: Strengthen consulting capabilities to build relationships closer to end market and user needs, moving beyond existing relationships limited to customer internal system development departments. Advance version migration for FEP products, diversify fraud detection solutions and pursue cross-industry initiatives. Split acquiring cloud service functions by use case to expand addressable market. Standardize and automate development processes, and consolidate/standardize infrastructure and operation functions to balance quality improvement and productivity growth.
• Security segment: Rebuild the product functionality and market positioning of the proprietary CWAT product this fiscal year, including adding new features and removing over-specified functions. Accelerate partner-led expansion focused on Taiwan and the Philippines in overseas markets. Serve as the core player for DNP Group's security business, and will proactively leverage the DNP Group customer base to drive growth, moving beyond DNP's existing limited sales agency role.
• Data communication & analytics infrastructure segment: Continue exploring industry challenges and developing solutions for the core securities client base, while evaluating opportunities to deploy the company's core high-speed, large-volume real-time data processing technology to other industries. Improve productivity across existing segments to free up human resources for new business development, with R&D leading exploration of use cases outside the company's traditional business scope in collaboration with DNP Group and other external partners.

Intelligent Wave reorganized its business segments into three functional areas starting from the 2025 June fiscal year:

1. Payment segment: Overall saw a declining trend, driven by a phase shift of a large acquiring project and temporary decreases in existing customer project volumes, though core card fraud detection demand from card companies remained high at steady levels. No absolute segment revenue was provided.
2. Security segment: Revenue increased year-over-year, driven by the deployment of endpoint security products to large enterprise clients. Gross margin temporarily decreased due to a strategic shift toward accepting third-party product orders to support business expansion, which lowered near-term profitability.
3. Data communication & analytics infrastructure segment: Revenue grew year-over-year, driven by system development projects for securities firms.

By product category: System development revenue declined overall due to the phase shift of large projects, which offset growth in other payment development projects. Proprietary products and services revenue increased, driven by the launch of infrastructure operation services for financial institutions.

Cloud service revenue grew across all offerings from increased user numbers and feature additions. Q4 gross margin for cloud services temporarily decreased due to quality enhancement work on a client project; this impact will persist into Q1 2026 June fiscal year before returning to normal levels. Dual cost structure from ongoing data center infrastructure renewal and public cloud adoption continues, pushing up infrastructure costs.

Overall company aggregate figures: Total revenue was 15.596 billion yen, up 7.4% year-over-year. Operating profit was 1.848 billion yen, down 9.0% year-over-year. Total orders received were 19.322 billion yen, down 4.0% year-over-year, while order backlog grew 22.5% year-over-year to 20.311 billion yen, led by growth in recurring stock-based projects.

• 2026 June fiscal year revenue will be raised above the original mid-term plan, driven by larger-than-expected system renewal demand from major card companies. Revenue is guided to be 11.6% higher than the prior year.
• Profit will continue to be impacted by the current product mix in the security segment in 2026 June; the company will pursue value-aligned pricing and negotiations to improve profitability. The company will target margin improvement through standardization, quality enhancement, and productivity improvements across system development, maintenance, infrastructure, and operation.
• Cloud service gross margin is expected to rise to match the gross margin level of standard system development by the end of the current mid-term plan.
• Dividends: 2025 June fiscal year full-year dividend is set at 35 yen per share (a 5 yen increase from the prior year excluding a 2024 special commemorative dividend). 2026 June fiscal year full-year dividend is planned at 37 yen per share, marking continued dividend growth.

• Temporary quality enhancement costs for select cloud and system development projects reduced 2025 fiscal year gross profit, with the impact extending into the first quarter of the 2026 June fiscal year.
• The security segment's near-term profitability is depressed by strategic investments to expand market share, including the intentional use of third-party product orders to build market experience.
• Cloud services continue to face increased costs from a dual infrastructure cost structure during the ongoing transition from on-premise data centers to public cloud, though this cost increase was already incorporated into the mid-term plan.
• The company faces constrained human resources, limiting the capacity to pursue new business expansion outside of core existing segments.
• The payment segment's current engagement is limited to customer system development departments, creating a gap from end market needs that limits growth potential.

Q: Does the recent lump-sum asset write-down signal a strategic reset for the security segment's mid-term plan, or is the original strategy still on track? What is the background for the write-down? / A: The lump-sum depreciation was not applied to security segment products. It only applied to discontinued products in other business segments that the company determined would no longer contribute to future earnings amid changing market conditions. There are no major changes to the existing security segment strategy. The current temporary gross margin decline in the segment comes from strategic orders that the company accepted to build future operational experience and expand the business beyond just product sales into end-to-end services, which aligns with the original long-term plan. The company will focus on rebuilding its CWAT product this fiscal year, adding new functionality, streamlining over-specified features, and targeting a broader market beyond large enterprise clients to expand access. 2025 is focused on laying the foundation for growth in the 2027 final year of the mid-term plan, with the company prioritizing proactive access to the DNP Group customer base to drive scale.