NOVA SYSTEM CO.,LTD. Q2 FY2025 earnings call

• Overall First Half Financial Performance

  • Reported first half total revenue of 3.294 billion yen, up 6.4% YoY and 99.5% of internal plan
  • Reported operating profit of 87 million yen, down 57.5% YoY and only 40.4% of plan; net profit of 69 million yen, down 52% YoY and 46.7% of plan
  • The entire profit shortfall stems from elevated personnel and outsourcing costs for the unprofitable system integration project, which reduced gross profit by 166 million yen compared to plan

• Talent Acquisition & Workforce Growth

  • On-boarded 44 new graduate hires in April 2025, and had 32 mid-career hires as of the end of July 2025; an additional 20 mid-career hires are planned for the remainder of the fiscal year
  • Engineer headcount growth is tracked as a core KPI; project leader headcount is on track to increase by ~10 year-over-year this fiscal year
  • The company targets increasing the ratio of systems engineers (including project leaders) to total employees from ~50% at end-2025 to 70% by 2030

• Strategic Operational Initiatives

  • Opened the Kokura office in April 2025 to support growing customer demand
  • Completed the acquisition of a Vietnam-based affiliate in June 2025, to secure young, high-quality technical talent for AI R&D and offshore development
  • Actively advancing development of generative AI solutions for financial clients, with an ongoing project to build a system that leverages bank customer data to create new services and improve operational efficiency
  • Has invested in data scientist training for 5 years, and is growing the number of staff holding relevant AI and data science qualifications

• Unprofitable Project Background

  • The project launched in April 2022, with an original planned completion in Q4 2025
  • Through Q1 2024 development proceeded on schedule, but unforeseen requirement changes and scope adjustments after that point forced rework of already completed development, leading to massive cost overruns
  • The project is expected to reach full convergence by September 2025, with all negative costs already fully reflected in the fiscal 2025 guidance, and no expected residual impact on future fiscal periods

1. System Integration Business: The segment generated total first half revenue of 3.294 billion yen, which was 106.4% year-over-year and 99.5% of plan. A single large long-term unprofitable project dragged down gross profit by 195 million yen compared to plan; excluding this project, other projects in the segment performed in line with plan, with a 29 million yen positive variance in gross profit. The unprofitable project accounts for the entirety of the segment's profit shortfall for the half. 2. Cloud Service Business: The segment's first half performance was almost entirely in line with the company's original plan, with no material unprofitable projects or major deviations from targets.

• Full year 2025 (ending December 2025) guidance has been downward revised: new full year targets are 6.666 billion yen in revenue, 298 million yen in operating profit, and 209 million yen in net profit. This represents a 641 million yen reduction to original planned revenue and a 411 million yen reduction to original planned gross profit. The downward revision is driven entirely by costs and opportunity loss from the unprofitable project.
• Dividend guidance is maintained with no changes, matching the company's original planned payout.
• Excluding the impact of the unprofables project, the company estimates full year 2025 revenue would have been 7.333 billion yen, operating profit of 716 million yen, which would have exceeded the original full year plan.
• The company expects the unprofitable project to fully conclude by the end of September 2025, with all project-related costs contained within fiscal 2025. The order and delivery pipeline for other projects is ahead of plan, and management expects to add 10 new projects by the end of the calendar year.
• For fiscal 2026 (the final year of the current mid-term management plan), management expects full normalization of the order pipeline after the unprofitable project concludes, and that strong market demand combined with growing talent capacity will support continued on-plan growth toward long-term 2030 targets.

• The large unprofitable system integration project created a 195 million yen gross profit shortfall in the first half, and is expected to reduce full year 2025 profit and revenue due to elevated personnel and outsourcing costs.
• Resource reallocation to resolve the unprofitable project created opportunity cost: the project required 710 person-months of effort vs the original planned 200 person-months, resulting in an estimated 610 person-months of lost capacity for new projects, and a 154 million yen opportunity loss in full year gross profit.
• Requirement scope changes and unplanned rework on large long-term system integration projects are an inherent industry risk that can create material cost overruns even when projects progress according to plan through early development stages.

Q: Will Nova System maintain its current hiring pace beyond this fiscal year, and what steps is it taking to sustain this level of recruitment?

A: The company views steady engineer headcount growth as core to its long-term expansion strategy, aligned with growing market demand for system integration and AI services. It will continue targeted recruitment efforts to maintain current hiring levels, supported by its new office expansion and offshore talent acquisition in Vietnam.

Q: What is management's outlook for hitting the original targets for the final year of the mid-term management plan, after this year's downward revision?

A: The current year's shortfall is entirely a one-time impact from the single unprofitable project, with no residual impact on future periods. The market environment remains solid, talent recruitment is on track, and the order pipeline will normalize after the project concludes in 2025, so management remains confident in hitting mid-term plan targets.

Q: Is there an opportunity to roll out the completed regional bank generative AI project to other similar financial institutions?

A: The company has already seen growing interest from other regional banks following the completion of the first generative AI development project. This use case aligns with strong market demand for AI-powered operational efficiency, so the company plans to actively pursue horizontal expansion of this solution to other regional bank clients.