INTELLIGENT WAVE INC. Q1 FY2026 earnings call

Core Financial Results Overview

• The core payment domain performed solidly driving top-line growth, but lower gross margins from quality response work and strategic product mix shifts, plus planned higher selling, general and administrative (SG&A) costs, led to a year-over-year decline in operating profit.
• SG&A increased due to corporate function expansion to add headcount for human capital initiatives and governance compliance for a listed company; the increase was planned and only slightly exceeded budget.

1Q Strategic Initiatives

• Anti-Fraud Payment Collaboration with DNP: Completed a proof-of-concept for automatic sharing of fraud data between DNP's 3D Secure 2.0 authentication service and Intelligent Wave's card fraud detection system. The test achieved 86.4% successful unique transaction matching, confirming the feasibility of cross-system data sharing. The company has received collaboration inquiries from other non-issuer fraud detection providers, and will continue developing this industry-wide cross-organizational anti-fraud initiative, exploring commercialization.
• Quantum Computing R&D Participation: The company built and provided free quantum computer development environments for NEDO's bounty-based quantum computing technology R&D program, to prepare for future quantum encryption needs in the payment and other industries.

Company-Wide Structural Reform Initiatives

• Payment Domain Reforms: (1) Cost structure reform via product line consolidation, including consolidating legacy FEP systems to the new NET+1 v2 version; (2) Productivity improvement via generative AI adoption and development standardization; (3) Optimal resource allocation via employee reskilling; (4) Cloud service cost structure reform, cutting infrastructure costs and streamlining operation/maintenance expenses; (5) Quality improvement via strengthening the quality assurance department function; (6) New value creation via combining FEP and acquiring capabilities to develop new service offerings.
• Security Domain Reforms: Accelerate collaboration with the DNP Group to expand revenue opportunities via customer-centric end-to-end service delivery. Revise the product positioning of the in-house internal information leak prevention solution CWAT, expand its market scope, enhance functionality via partnerships with AI startups, and improve mid-term profitability.

By Business Domain:

1. Payment Domain: Total performance was solid. FEP sub-domain sales fell year-over-year due to a large hardware sales from a system renewal project in the prior year period. Fraud detection sub-domain sales grew, led by cloud services driven by steady industry demand for card fraud detection. Other payment sub-domain sales grew, led by the new financial institution infrastructure operation service launched last fiscal year. Gross margin for the entire payment domain fell due to quality response costs for a cloud service client and lower-than-expected profitability of current fiscal year system development projects, but excluding quality response costs, gross profit was in line with plan.
2. Security Domain: Sales grew year-over-year driven by rollout of a large client security product project secured last fiscal year. Gross margin fell due to a shift in product mix: the company strategically pursued lower-margin resale business to expand orders for maintenance and operation services.

By Product Category:

1. Flow-type System Development: Sales fell year-over-year, as the company could not offset the prior year large one-time project with new project wins. This sales decline was already incorporated into the company's plan.
2. Stock-type Cloud and In-house Services: Sales grew steadily year-over-year, driven by new clients that launched services in the prior fiscal year and additional development for existing clients.

Overall 1Q Results: Total net sales were 3.746 billion yen, up 5.7% YoY. Operating profit was 0.205 billion yen, down 32.4% YoY. Total orders received were 3.673 billion yen, down 34.3% YoY due to the impact of large multi-year contracts secured in the prior year. Order backlog was 20.238 billion yen, up 8.6% YoY and remaining above 20 billion yen.

• Management maintains the full-year 2026 June fiscal year earnings guidance announced at the start of the period, with no changes from the initial forecast. Excluding the impact of quality response work, year-to-date performance is in line with prior expectations.
• First half sales are tracking almost exactly to plan, while profit has been impacted by the quality issue. Management aims to resolve the quality issue by the end of the second quarter, then recover lost ground via securing new flow-type system development projects in the second half.
• Multiple large card company system renewal projects are already scheduled for the second quarter and beyond in the payment domain, and inquiries for IGATES (the company's cloud FEP service) with added acquiring functionality have started to emerge.
• Management expects continued order growth in the security domain through the rest of the fiscal year, supported by favorable industry tailwinds.

• The quality issue on a single client's customized cloud service project disrupted development department capacity in the first quarter, leading to lost revenue and proposal opportunities.
• Ongoing risks include strained internal resources from recent business expansion, inflated cost structures for infrastructure and development environments due to expanded product/service lines, and suboptimal resource allocation within the development department.
• In the security domain, CWAT and other security products have stagnated scale because they are currently only sold as standalone offerings, and CWAT's product positioning needs improvement to drive growth.
• Flow-type system development revenue and profit are inherently volatile depending on the size and timing of project wins, which can create quarterly performance deviations.

Q: The main driver of lower profit this quarter is a cloud service quality issue. What kind of project is this, and could this problem spread to the entire cloud service business?

A: This is an isolated issue tied to custom development for one specific client, not a problem with the company's standard cloud service functionality. It only impacts this single client, and there is no risk of it spreading to other cloud clients or the broader service portfolio. The project is tied to a new high-priority business model for the company's payment segment, so management is proceeding cautiously with the client to resolve the issue. The team is on track to wrap up all remediation work within the second quarter.

Q: Management noted the security domain has favorable industry tailwinds. What are the company's specific strategic initiatives in this area?

A: Rising security incident frequency has increased customer awareness of cyber risk, shifting customer spending from a cost center to a strategic investment, which is a strong tailwind for the company's product portfolio. Attack patterns are shifting from targeting system vulnerabilities to targeting human vulnerabilities, so the company is adjusting its product roadmap to focus on this threat vector. The DNP Group can offer end-to-end one-stop security services from risk assessment through ongoing monitoring, and Intelligent Wave plays a core role in this offering to expand the scope of customer value. For the high-margin in-house product CWAT, the company is revising its product positioning, expanding market reach, and enhancing functionality via partnerships with AI startups to boost growth.