BBD Initiative Inc. Q1 FY2025 earnings call

• Financial Performance Overview

• Consolidated revenue reached 1.097 billion yen, up 13.3% YoY; consolidated gross profit was 428 million yen, up 0.3% YoY; consolidated operating profit was 78 million yen, up 39.1% YoY; net profit attributable to parent shareholders was 41 million yen, up 61.8% YoY. Management notes the 7.2% Q1 operating margin appears lower than the full-year target, but full-year results will be lifted by revenue booked in later quarters, as over half of total annual revenue is pre-committed subscription revenue.
• The third-party allotment of share warrants was fully completed, raising over 800 million yen in gross proceeds. With no attractive M&A opportunities identified yet, the company allocated the entire proceeds to repay outstanding bank borrowings: 400 million yen was repaid in Q1, with the remaining 400 million yen scheduled for repayment in Q2. This improved equity ratio from 31% to 43.1%, strengthening the company's financial foundation.

• New Service Launches

• Launched a new end-to-end generative AI service: including PoC feasibility testing, prompt engineering, custom system development, and post-launch support for department-specific enterprise use cases. Also launched a new corporate branding video production service that features talent-led third-party storytelling to improve client company awareness and differentiation.

• Growth Strategy

• The company pursues a "dual-handle" growth strategy combining organic growth of existing services and growth via targeted M&A. M&A focuses on businesses aligned with the three core themes of sales automation, repetitive task automation, and business management automation, with a clear valuation rule of ~5x operating profit plus net cash, and a track record of successful post-acquisition growth: acquired firms have delivered 120.5% to 800% growth in revenue/operating profit post-acquisition.
• The company targets the 800 billion yen addressable market of Japanese SMEs with under 1,000 employees, focusing on sales/marketing verticals rather than back-office functions, and is building out a platform ecosystem around its core Knowledge Suite product to drive cross-selling.

• Capital Strategy

• Successfully met the Tokyo Stock Exchange Growth Market listing requirement for 25%+ tradable share ratio: after the full warrant exercise, the tradable ratio increased to 32.35%, up from 21.53% in September 2024. Introduced a new digital gift shareholder bonus program offering 40,000 yen to 70,000 yen in digital gift benefits for shareholders holding 500+ shares, with benefit values increasing with holding tenure.

1. DX Segment: The segment hosts SaaS/subscription services focused on front-office sales/marketing efficiency. Revenue saw a slight decline in the quarter due to temporary underperformance of one-time implementation consulting service revenue, following a period of business portfolio restructuring. The segment has now shifted to a recovery trend. Key SaaS KPIs: Group subscription ARR stands at 1.605 billion yen; churn rate increased to 1.65% from a historical ~1%, driven by the company's ongoing strategy of shifting low-price unprofitable customers to higher-tier plans. Contracted enterprise count decreased slightly due to low-price customer pruning, while ARPA (average revenue per account) has grown steadily, supported by cross-selling/upselling of high-margin add-ons like RPA and AI OCR. The DX segment contributes roughly 50%+ of total consolidated revenue from recurring subscription sales. 2. BPO Segment: The segment includes System Engineering Service (SES, engineer dispatch). Driven by strong industry demand for IT engineers and successful client portfolio restructuring (exit from low-margin low-price client contracts), revenue grew sharply in the quarter. Total active on-site engineers reached 247, an increase of 2 from the prior quarter, with steady growth supported by business partner partnerships. The segment has strong gross margins supported by the company's proprietary training program for new graduate/inexperienced engineers that enables early deployment to client projects.

• Management maintained its full-year 2025 September fiscal year guidance: targets 4.7 billion yen in consolidated revenue, 355 million yen in operating profit, 215 million yen in net profit attributable to parent shareholders, representing 13.9% revenue growth and 24.6% operating profit growth from FY2024. The full-year target operating margin is 7.6%.

• The company's top strategic priority is improving operating margin, with a stated goal to reach 10%+ operating margin within 2 years through ongoing operational and business portfolio reforms.
• Management targets a 20-25% 5-year CAGR for consolidated segment revenue, with the DX segment targeting CAGR above 25%. For the SES business, the key priority is accelerating engineer hiring and training to scale headcount.
• Dividend guidance for FY2025 remains undecided.
• The company's target ideal equity ratio is ~40%, which it has already achieved after the Q1 debt repayment, with further improvement expected after the remaining 400 million yen debt repayment in Q2.

• Churn rate for the DX subscription segment has risen to 1.65% from a historical 1% level during the customer portfolio pruning process, and management is working to return it to the historical target range.

• The SES business is dependent on continued IT engineer hiring and training: growth is constrained by the availability of skilled engineering talent amid a broad industry-wide labor shortage.
• M&A growth is dependent on finding attractive, mutually beneficial acquisition targets, and there can be no guarantee of suitable opportunities emerging in a given timeframe.
• High-value shareholder benefits create potential for higher than expected shareholder costs if the number of eligible shareholders grows faster than projected.

Q: Why did the company choose to use new warrant proceeds to repay debt rather than hold it for M&A as originally planned? / A: Management confirms M&A remains a core strategic priority, but M&A depends on finding the right opportunity rather than pursuing deals for growth's sake. Holding unneeded cash incurs unnecessary interest costs, so repaying debt to strengthen the balance sheet while waiting for the right acquisition opportunity is a win-win outcome. The remaining 400 million yen in proceeds will be repaid in Q2, leading to further improvement in the equity ratio.

Q: Is the current high-value shareholder dividend program sustainable, or is a sudden cancellation likely as seen at other firms? / A: Management notes that the maximum possible annual cost of the program can be calculated based on the company's current 32.35% tradable share ratio and 500-share minimum holding requirement. Even under the extremely unrealistic scenario that all tradable shares are held in 500-share blocks by separate investors, the total maximum annual cost is manageable given the company's current profit outlook. Management sees no reason to cancel the program, as costs will not become unmanageable even with moderate growth in the shareholder base.

Q: What are the company's 5-year growth targets by segment, and what are the key constraints? / A: While detailed numbers are not disclosed, the company targets a 20-25% 5-year CAGR for total revenue, with the DX segment targeting CAGR above 25%. For the SES business, growth is inherently tied to headcount growth, so the top priorities are accelerating hiring and improving training speed to scale the engineer workforce as fast as possible.

Q: What is the company's stance on the largest shareholder holding more shares than the CEO personally, and what are the expectations for this shareholder? / A: When combining personal holdings and shares held via the CEO's asset management company, the CEO remains the largest beneficial shareholder. Management does not care about formal ranking and notes that many large listed firms do not have the founder/CEO as the largest registered shareholder. The top shareholder is an experienced fund manager that bought the stock based on the company's undervaluation and growth outlook, which is aligned with all other shareholders' expectations, and the CEO is motivated to deliver growth to meet these expectations.