6644.T

2025 3Q Core Financial Performance

• On a operating profit basis, the company achieved year-over-year growth in both revenue and profit.
  • Domestic revenue increased: driven by solid capture of final demand for existing smart meters and on-track 2nd generation smart meter shipments.
  • Overseas overall revenue decreased: growth in the UK was offset by revenue declines from customer inventory adjustments in Oceania.
  • Domestic operating profit increased: driven by higher smart meter revenue and improved margins in the switchboard business, partially offset by higher personnel costs from wage revisions and temporary logistics costs for the national rollout of 2nd generation smart meters.
  • Overseas operating profit increased: driven by UK revenue growth, improved margins, and selling, general and administrative (SG&A) cost reductions from 2024 organizational restructuring, partially offset by the Oceania revenue decline.
• 3Q cumulative progress against full-year guidance: Revenue and operating profit are almost exactly in line with initial forecasts, and the company expects to meet initial full-year targets driven by growth in the domestic smart meter and UK businesses.

Capital Expenditure, Depreciation and R&D

• Capital expenditure increased YoY, focused on production equipment for 2nd generation smart meters, which will begin full-scale shipments in 4Q 2025.
• Depreciation has started ahead of full-scale production increases for 2nd generation smart meters; depreciation will peak through 2026, driven mostly by 1-year depreciation for production molds.
• R&D expenditure decreased 0.54 billion yen YoY, driven by efficiency improvements from overseas organizational restructuring.

Middle East & Africa Business Exit

• As part of ongoing overseas structural restructuring started in 2024, the company decided to exit the Middle East & Africa region to improve overall profitability. The business had posted 3 consecutive years of losses, faced higher geopolitical and collection risks compared to other regions, and turnaround efforts (including folding it into the European business in 3Q 2024) failed to achieve a path to profitability.
• The company recorded approximately 2.0 billion yen in special losses for the exit, consisting of valuation losses for inventory that cannot be resold or repurposed elsewhere. Starting 2026, the overseas measurement and control business will be split into 3 regional segments: Oceania, Europe, and Asia.

Balance Sheet Update

• Compared to the end of the prior fiscal year, total assets decreased by approximately 7.8 billion yen, and total liabilities decreased by approximately 6.4 billion yen. The decline came from cash reduction via debt repayment and inventory reduction from the company's overseas inventory reduction project, as well as lower trade payables and debt.
• Equity ratio at the end of 3Q was 54.3%. The company is evaluating growth and capital investment aligned with its mid-term management plan cash allocation policy, and will flexibly consider external financing if expected cash inflow is insufficient to fund planned investments.

Non-Operating Asset Compression Progress

• Real Estate Sales: The mid-term management plan targets selling 70% (approximately 3.0 billion yen on a book value basis) of non-operating real estate held as of May 2024. Following one sale in 2024, the board approved a second sale in 2025, generating 6.0 billion yen in gain on sale. Total projected gain from completed sales is 6.94 billion yen, and the target has been completed.
• Policy Holding Stock Sales: The mid-term plan targets reducing 30% (approximately 2.0 billion yen value based on March 2024 holdings) of policy-owned stocks. To date, the company has reduced holdings by 1.02 billion yen, realizing 0.92 billion yen in gain, and continues to work on reducing remaining holdings through the end of the mid-term plan period.
• Proceeds from these sales are earmarked for growth investment, profitability improvement projects, and shareholder returns.

Cash Allocation and Shareholder Returns

• The additional ~6.8 billion yen in cash inflow from the 2025 real estate sale will be split 50% to investment and 50% to shareholder returns.
• For 2025, the company raised its DOE (Dividend on Equity) target from 2% to 3%, bringing the expected full-year ordinary dividend to 35 yen per share.
• A special dividend of 10 yen per share will be paid at the end of 2025 and another 10 yen per share at the 2026 mid-term, funded by the real estate sale gain.
• The company will conduct a new share repurchase program (the second consecutive year of repurchases) with an upper limit of 2.5 billion yen, also funded by the real estate sale gain.

• 2025 Full Year Guidance: Sales and operating profit guidance are maintained at initial forecast levels, while net income is upward revised to 5.2 billion yen (from the prior forecast) due to expected special gains from the real estate sale, which more than offset the 2.0 billion yen special loss from the Middle East & Africa exit. The ROE forecast is also upward revised from the 7% target to 9.8%.
  • Domestic sales: Expected to be in line with initial forecast: growth from 2nd generation smart meter shipments is offset by declines from the delayed smart lock launch.
  • Overseas sales: Expected to be in line with initial forecast: USD-based sales decline from continued Oceania inventory adjustment is offset by an upward revision to the weaker yen exchange rate assumption.
  • Domestic operating profit: Expected to increase YoY, driven by smart meter revenue growth and improved profitability in the switchboard business.
  • Overseas operating profit: Expected to decrease YoY, as SG&A reductions are offset by revenue declines from ongoing Oceania inventory adjustments.
• 2026 Full Year Guidance: The existing plan (final year of the current mid-term management plan) is maintained with no revisions. Updated segment structure following the Middle East & Africa exit will be published in the 2026 full-year guidance release scheduled for May 2026.
  • 2026 Segment Sales Outlook:
    • Domestic smart meter business: Full-year revenue growth driven by 2nd generation smart meter sales.
    • Domestic solution business: Revenue growth from expanding commercial meter sales, new smart lock product launches, and expanded GX service sales.
    • Domestic switchboard business: Revenue growth from maintaining the high operating capacity achieved in 2025.
    • Oceania: Revenue growth following the end of inventory adjustments, driven by full-scale launch of the next-generation NEOS smart meter.
    • Europe: Revenue decline due to the peak of the UK government-led smart meter project passing.
    • Asia: Revenue decline as the company strategically cleans up low-profitability businesses.
    • Middle East & Africa: Exits the business at the end of 2025.
  • 2026 Operating Profit Outlook:
    • Domestic smart meter business: Full-year profit growth driven by sales of higher-margin 2nd generation smart meters.
    • Domestic solution business: Profit growth aligned with expanded sales.
    • Domestic switchboard business: Profit will remain at 2025 levels as high operating capacity is maintained.
    • Oceania: Improved profitability driven by full-scale launch of higher-margin NEOS next-generation smart meters.
    • Europe: Management will focus on profitability via selective order taking and cost control for R&D and SG&A.
    • Asia: While sales will decline, management will focus on maintaining overall profitability via the clean-up of low-profit businesses.
    • Middle East & Africa: The profit impact from exit is limited due to the business's already low historical profitability.

Domestic Segments (2025 3Q)

1. Domestic Measurement and Control Business (Smart Meter Sub-segment): Revenue increased year-over-year (YoY), driven by capturing final demand for existing smart meter models and on-schedule initial shipments of 2nd generation smart meters; VCT and other power utility equipment also saw strong orders and revenue growth. No absolute revenue amount or contribution percentage was provided in the transcript.
2. Domestic Solution Business: Revenue decreased YoY overall. While GX energy management services saw revenue growth from expanded sales, this was offset by delayed launch of new smart lock products and a YoY revenue pullback at a subsidiary after a strong prior year period. No absolute revenue amount or contribution percentage was provided.
3. Domestic Switchboard Business: Demand remained solid for both power utility and industrial (including data center) customers, but revenue fell below YoY levels due to the shifting of some projects to 2026. No absolute revenue amount or contribution percentage was provided.

Overseas Segments (2025 3Q)

1. Oceania: Revenue decreased YoY due to customer inventory adjustments. No absolute revenue amount or contribution percentage was provided.
2. Asia: Revenue maintained year-ago levels, despite a YoY pullback after a large one-time project in the prior year period. No absolute revenue amount or contribution percentage was provided.
3. UK (Europe): Revenue increased YoY, supported by steady shipments from the government-led smart meter project. No absolute revenue amount or contribution percentage was provided.
4. Middle East & Africa: Revenue increased YoY due to one-time additional orders from specific existing low credit risk customers, ahead of the planned exit from the region. No absolute revenue amount or contribution percentage was provided.

• The Middle East & Africa business carried higher inherent geopolitical risk and payment collection risk compared to other regions, which contributed to the decision to exit the business after three consecutive years of losses.
• In the medium to long term, the evolution of AI creates security risk for the smart meter business: as demand for data utilization grows with AI adoption, the company will need to invest in enhanced functionality to address all potential security risks.
• Customer inventory adjustments in Oceania have created ongoing near-term revenue and profit pressure for the overseas business.
• Delays in the launch of new smart lock products have created near-term revenue headwinds for the domestic solution business.

Q: I understand that the net change in special profit/loss is the 6.0 billion yen in fixed asset sale gain minus the 2.0 billion yen business exit loss recorded in 3Q, but the upward revision to parent net income is only 1.6 billion yen. What explains this difference?

A: The difference is the result of corporate income tax expenses on the special gain.

Q: What is the effective corporate tax rate applied to the 6.0 billion yen fixed asset sale gain?

A: The effective tax rate is roughly around 30%, and corporate tax expense will be approximately that magnitude.

Q: It states that 2 real estate properties have been sold as of this earnings release. Does this mean that all planned real estate sales under the mid-term management plan are complete, and that 70% of the original book value has been sold as targeted?

A: Your understanding is correct. All planned real estate sales for the mid-term management plan period are complete.

Q: The remaining 30% of real estate holdings are rental properties, correct? Will the real estate business continue going forward?

A: Your understanding is correct. The real estate business will continue, albeit at a smaller scale. The remaining holdings will be evaluated in the next mid-term management plan, including consideration of potential use in the company's core operations.

Q: Could you explain the opportunities and risks that AI presents for the smart meter business, split into short-term and medium-to-long-term?

A: In the short term, we do not expect AI evolution to have a large impact on the smart meter business. In the medium to long term, we recognize that we need to adapt to AI progress: we expect some change in the business model of electric power utilities, even if we cannot forecast exact changes today, and we are actively promoting AI/DX education and investment to integrate AI progress into our business. For opportunities: In the short term, we expect expanded orders for domestic 2nd generation smart meters and overseas next-generation smart meters. In the medium to long term, as customer adoption of AI expands, there is potential for higher functionality and higher added value in our smart meters and headend systems (offered only overseas). For risks: We have already addressed short and medium term foreseeable risks. In the medium to long term, as AI-driven demand for data utilization grows, there may be a requirement for enhanced smart meter functionality to address all potential security risks.