Nihon Knowledge Co,Ltd. Q3 FY2025 earnings call

Overall Financial Performance

• Total third quarter revenue: 3.052 billion yen, down 0.2% year-over-year (a 5 million yen decrease)
• Cost of sales: 2.575 billion yen, up 5.5% year-over-year, leading to gross profit of 476 million yen, down 22.6% year-over-year
• Selling, general and administrative expenses: 452 million yen, up 6.4% year-over-year, including a 15 million yen addition for GRANDIT partner fees
• Operating profit: 24 million yen, down 87.1% year-over-year; ordinary profit: 38 million yen; net profit: 9 million yen, down 137 million yen year-over-year
• The main driver of lower profit was increased personnel costs from aggressive technical engineer hiring and wage/salary increases, which could not be fully absorbed by current revenue

Workforce Update

• Total headcount now exceeds 400, an all-time high, with a 42-person increase from the prior period end; 43 new graduates have been hired this cycle, and total headcount has grown 55% over 4 years when including mid-career hires
• Newly hired engineers received 6 months of structured technical training by business segment, which delayed their contribution to revenue-generating projects
• The number of business partners decreased sharply year-over-year, driven by a push to prioritize internal employee project allocation to raise workforce utilization; the company is currently exploring a return to expanded business partner collaboration starting next fiscal year

Strategic Initiatives

• Sales Enhancement: Added 3 experienced sales personnel to the verification business and 2 to the development business to address staffing gaps. The expanded sales team will deepen relationships with existing customers to grow order volume, and will resume expanding utilization of external business partners now that internal project allocation has progressed
• Talent Enhancement: Securing top talent centered on the Suwa Center is a core priority. While project inquiries are strong, there is a shortage of PMO and project leader-class talent for upstream work, so the company is accelerating targeted recruitment and training. Next fiscal year will continue aggressive new graduate hiring, with 46 new graduates scheduled to join in April 2025. The training program has been revised to accelerate new hire deployment: capable new hires will be placed on projects earlier, while inexperienced hires receive full structured training. The Suwa regional reskilling center, originally scheduled to launch in January, has been delayed to May due to preparation and coordination delays with local administrative agencies
• Business Expansion: The company holds a 20%+ market share across its three ERP product lines (EXPLANNER, SMILE, GRANDIT), and the domestic ERP market is definitively expanding, so the core strategy of growing in this large market remains unchanged. The company has received strong project inquiries from GRANDIT consortium companies after completing a 15 million yen partner agreement this fiscal year. The company is advancing test automation and AI utilization in development via an industry-academia collaboration with the University of Tsukuba launched at the start of the fiscal year, which has already yielded meaningful results. The company is working to commercialize AI utilization for ERP development, and is pursuing commercialization of other AI use cases researched with the university, with more details to be shared once plans are finalized

1. Verification Business: Revenue reached 2.022 billion yen, a 1.6% increase from the prior year period's 1.991 billion yen. It contributed approximately 66.3% of total third quarter revenue. Despite a revenue drag from the completion of a large early-stage project, it achieved year-over-year comparable sales and secured a large order via an SIer partner. 2. Development Business: Revenue decreased 3.4% year-over-year. It contributed approximately 33.7% of total third quarter revenue. While revenue from the Suwa Center increased, the end of prior year special demand for digital invoices drove the overall segment decline. Overall segment operating profit was pressured by delayed revenue generation that did not offset sharp increases in personnel costs, though the third quarter returned to a small positive operating profit after a second quarter operating loss as new hires began contributing to project work.

• The company maintains its original full fiscal year 2025 (ending March 2025) guidance: total revenue of 4.553 billion yen (11.7% year-over-year growth), operating profit of 120 million yen, and net profit of 86 million yen
• Management acknowledges that meeting the full year target is very challenging based on current progress, but the team is aggressively building order backlog in February and March and is working wholeheartedly to achieve the original opening guidance

• Profit is highly sensitive to delays in new hire revenue contribution, as large recent personnel cost increases require matching revenue growth to avoid margin pressure
• Meeting the full year 2025 guidance is currently very challenging based on year-to-date progress
• There is a shortage of senior PMO and project leader talent to support planned business growth, which could limit expansion if not addressed
• The Suwa reskilling center has already experienced a launch delay due to administrative and preparation coordination issues

Q: What is the volume and current status of orders received from GRANDIT consortium companies, given how important business expansion is to current performance? / A: The three ERP lines serve different client segments with differing project sizes. SMILE (from Otsuka Shokai) targets sub-10 billion yen revenue companies, with most customization and development projects in the millions of yen range. EXPLANNER (from NEC) typically has projects between 100 million yen and several hundred million yen per customization engagement. GRANDIT, a leading domestic ERP for large listed and comparable companies, generates 100 million yen+ level projects including customization and version updates. Management targets securing these large-scale GRANDIT projects and associated testing work to drive growth next fiscal year.

Q: What is the vision and purpose behind the Suwa regional reskilling center? / A: The initiative responds to high worker turnover in the Tokyo region, where up to 10% of employees leave annually, as HR industry marketing actively encourages job switching, leading to loss of trained talent. The company launched the reskilling center strategy two years ago as a regional strategy to tap into local talent aligned with regional revitalization trends. Suwa has very low turnover, with almost no voluntary departures outside of exceptional personal circumstances. The center will train inexperienced local hires, who will then stay with the company long-term, supporting stable technical knowledge retention, long-term profitability and business growth. The company is coordinating with local government and employment agencies to advance the project, and remains committed to launching successfully for stable talent sourcing despite the delayed launch date.