NOVA SYSTEM CO.,LTD. Q4 FY2024 earnings call

• Core Growth Drivers

  • The company's SI business centers on financial and insurance clients, which continue to see strong, sustained demand that drives consistent order intake. The number of operating projects grew from ~65 at the start of FY2024 to 99 by year-end, with strong demand holding into the start of FY2025, reaching 101 active projects currently.
  • Engineer headcount is the company's core KPI: as of FY2024 end, there were 64 project leaders, 167 systems engineers (SEs), and 240 programmers (PGs), for a total of 471 full-time engineers. The company is working to increase the SE ratio to 60% and reduce the PG ratio to 40% over time to enable higher-value, higher-margin project orders.
  • Contracted fixed-price projects are prioritized over semi-consignment contracts, as contracted projects allow flexible staffing allocation that enables higher profit margins through operational efficiency, unlike time-based semi-consignment/placement contracts where per-employee margins are fixed regardless of effort.

• Strategic Expansion Initiatives

  • Geographic expansion: The company is evaluating entry into the Kitakyushu area, where there is strong local demand and multiple incoming project offers. It will also expand nearshore domestic projects, leveraging the trend of Japanese large companies shifting orders back to Japan from China due to China risk, after starting nearshore project delivery in FY2024.
  • Growth market shift: The company is increasing the share of generative AI projects, which it began taking orders for in FY2023, and plans to enter mobility projects leveraging existing experience developing business applications for automakers, where demand is expected to grow. To support this shift, the company has trained 40 data scientists/DX engineers over the past 5 years and will continue investing in AI technical skill development.
  • Key client strategy: The company will deepen partnerships with its four core clients: expand participation in Nissay Information Technology's (NIT) large-scale R35 system renewal project through 2035; maintain strategic partnership with IBM across all service areas; expand into mobility projects with core partner SCSK; and secure the new Vitality insurance product project with Sumisei Information Systems (SLC).
  • Cloud services: While the company has invested in cloud services and the market opportunity is large, current cloud revenue still lags internal targets. The company will reinvest in cloud product development in FY2025 and actively grow sales of its three existing cloud products.
  • Offline infrastructure: The company is expanding office space, with Tokyo expansion starting in the current month and Osaka expansion planned for next fiscal year, to accommodate growing headcount and the post-pandemic shift back to in-office work at the company's secure on-site facilities.

• Governance and Risk Management Improvements

  • A dedicated project risk management group has been established to prevent unprofitable projects, and the project monitoring system has been rebuilt to implement cross-project monitoring of project progress (in addition to just tracking absolute man-hours, which failed to detect overruns in FY2024's unprofitable project).

• Human Capital Investment

  • The company is improving employee welfare and working environment to compete for talent, implemented a base salary increase in January 2024 to offset inflation, and continues active hiring: FY2024 hiring was 47 new graduates and 29 mid-career hires, with FY2025 planned hiring of 45 new graduates and 50 mid-career hires, and targets 79 project leaders by FY2025 end. The company aims to improve profitability by moving junior PGs up to SE and project leader roles.

Nova System's core business is the system integration (SI) business, which contributed to all revenue growth in FY2024. Total company revenue was 6.461 billion yen, up 19.2% year-over-year and 1.7% above plan. By contract type: 1) Contracted (please note: this refers to fixed-price請負案件, not business segment) projects accounted for 53.7% of total revenue, an 11 percentage point increase from the prior year. 2) Semi-consignment/placement contracts account for the remaining 46.3% of revenue. Overall company operating profit was 528 million yen, up 7.6% year-over-year but 7.9% below plan. Net income was 394 million yen, up 15.3% year-over-year and slightly above plan due to the application of the wage increase promotion tax system.

• For FY2025 (ending December 2025): Revenue and operating profit are both projected to hit new all-time highs, with revenue tracking in line with the original medium-term plan. Operating profit is projected to be ~500 million yen lower than the original medium-term plan due to higher personnel costs, increased recruiting expenses, and unplanned office expansion costs, but the company expects to return to the original medium-term plan targets in FY2026.
• Dividend guidance for FY2025 is 105 yen per share, with a projected payout ratio of 31%, and the long-term target payout ratio is 50%.
• Long-term 2030 vision (nova system VISION 2030) targets 150 billion yen in total revenue, 15% operating margin, double current headcount, and a position in the top 1% of Japan's custom software development industry, with an explicit goal of listing on the Prime Market.
• The 2030 business mix target is 20-25% of revenue from high-skill growth areas (generative AI and mobility), up from the current very low single-digit share, with generative AI alone targeted to reach 30% of total revenue by 2030. The company also targets 60% of the total engineer headcount to be senior/advanced roles (project leaders + SEs) by 2030, up from 50% currently.
• The medium-term plan originally released remains unchanged for FY2026 and beyond.

• Unprofitable project risk: In FY2024, a single unprofitable sub-project within a larger long-term project incurred significant extra costs and extra man-hours/external outsourcing expenses that caused overall operating profit to miss the full-year plan by 7.9%. This was compounded by an approximate 100 million yen negative impact from the adoption of new revenue recognition standards.
• Industry-wide talent shortage: The Japanese IT industry is projected to face a shortage of 800,000 technical workers by 2030, with the largest shortage concentrated in senior SE roles that are critical to Nova System's growth and margin expansion.
• Cloud business underperformance: Cloud service revenue has grown year-over-year but still lags internal targets, as the company's core focus remains on the SI business leading to underinvestment in cloud go-to-market.

Q: What factors explain Nova System's much lower turnover rate compared to the industry average? / A: Management cites two core reasons. First, after experiencing communication gaps during the pandemic remote work era, the company intentionally prioritized creating structured time for managers to connect with direct reports and for junior employees to consult with senior leaders starting in FY2024, which improved engagement. Second, the company implemented a company-wide base salary increase in January 2024 to offset the impact of inflation, which also helped reduce voluntary turnover.

Q: What has driven the large, consistent increase in the share of contracted fixed-price projects over the past several years? / A: The first driver is intentional strategic priority: the company has actively pursued contracted project orders from all clients as part of its explicit strategy to improve overall profit margins. The second key contributor is the significant growth of project volume with IBM, all of which are structured as contracted fixed-price projects, which mechanically lifted the overall contracted share.

Q: What is the breakdown of the 150 billion yen 2030 revenue target by business line? / A: The 150 billion yen 2030 target is roughly double the FY2025 planned revenue of ~7.3 billion yen. Of the 150 billion yen, approximately 135 billion yen will come from organic growth of the existing core SI business. The remaining 15 billion yen will come from the cloud services business and new growth businesses like generative AI and mobility.