7378.T

Overall 1Q Assessment

• Despite the year-over-year operating profit decline, management views the quarter as very productive, as it provided key insights that clarified the company's long-term focused strategy.
• The quarter highlighted the risks of unpredictable, volatile performance from non-core and high-volatility lines of business, leading management to reorient around a strategy of selection and concentration to deliver more stable, predictable growth.

Legal Market & AI Impact Assessment

• The Japanese legal market is currently a "20% justice" environment, with approximately 80% of potential demand still latent. The current visible market size is 800 billion yen (80 billion yen), and AI is expected to bring much of this latent demand to the surface.
• AI will dramatically improve efficiency for routine legal work such as document drafting, research and contract review, which will lead to major efficiency gains for lawyers.
• AI can resolve low-complexity general legal inquiries, but cannot replace the core lawyer work of negotiating, processing and resolving actual civil cases (the company's core market focus). AI will increase lawyer productivity, allowing them to handle more cases overall, expanding the total size of the legal market.
• This analysis led management to conclude the legal market will continue growing long-term, and the company should concentrate its resources on this market.

New Business Redefinition & Circular Growth System

• Management reorganized the company's four previously separate business lines into three interconnected core domains aligned with long-term growth:
  1. Legal Media: The core growth engine, with continued room for expansion. The company will continue growing the BenNavi platform and acquire more users.
  2. Legal Protect: This domain focuses on user retention, centered on pre-emptive products for future legal risk, including the attorney fee insurance "bonobo", non-insurance corporate offering "Legal Base", and upcoming personal products. These products lock in users early and improve Legal Media customer acquisition power.
  3. Legal Alliance: After growing user volume and maximizing Legal Media revenue, the company will increase average revenue per user by addressing the multiple interconnected needs legal users typically have (e.g. real estate needs after divorce, career changes after labor disputes, content removal after disclosure claims) through expanded alliances with complementary service providers.
• AI is the core enabler of this strategy: it will be used to analyze user behavior, identify potential users, uncover interconnected user needs, and support alliance partner development to drive user growth, retention and higher average revenue.
• HR business supports this circular system: as law firms grow their case volume with the help of AI and Legal Media, they need more legal and back-office talent, which the HR segment provides. This creates a circular feedback loop that increases demand for Legal Media placements.

Focused Strategy for M&A & New Business

• M&A activity will be strictly limited to targets within the three core Legal Media, Legal Protect and Legal Alliance domains; all other M&A opportunities are excluded from sourcing to maintain extreme focus.
• New business initiatives will prioritize opportunities within the legal domain, though the company will consider attractive high-growth opportunities outside the legal space if they emerge. Clear exit criteria will be applied to all new initiatives to avoid wasting resources on underperforming projects.

Enhanced Shareholder Return

• Management changed the payout ratio target from the prior 30% to 40%+, with a planned 47% payout ratio for the full current fiscal year.
• The company is also implementing share repurchases, distributing cash to shareholders up to the maximum distributable limit from accumulated retained earnings.
• Management believes that for capital-efficient, low-capital internet/IT businesses like Asihiro, hoarding cash is unnecessary: the company can fund growth through existing cash and financing for M&A if needed, so aggressive shareholder return is appropriate while maintaining sustainable growth.

• Management maintained the medium-term target of 10 billion yen (100 billion yen) revenue for the FY2027 October term, with a 20% operating profit margin target; no changes have been made to these targets.
• The long-term 20 billion yen (200 billion yen) revenue growth target remains in place, with insurance business success being a core component of hitting this target.
• Excluding the impact of required statutory liability reserves, management expects the insurance business to reach profitability on a standalone basis within the next two years.
• Management continues to target a 20% operating profit margin in normal operating conditions; while temporary dips below this level may occur during investment phases, the company will avoid entering low-margin business lines to maintain this target over time.

Overall: Revenue grew slightly year-over-year, while operating profit decreased from 405 million yen (4.05 billion yen) in the prior-year 1Q to 284 million yen (2.84 billion yen) in the current 1Q.

1. Legal Media (core founding business): Accounts for over 50% of total revenue and 76% of total operating profit. Both revenue and operating profit grew year-over-year, though high-volatility large high-margin cases that performed strongly in the prior-year period saw performance decline this quarter as market demand for these cases naturally softened after a peak. This performance decline was offset by growth in the core Legal Media business overall.
2. Derivative Media: Revenue increased year-over-year, but operating profit decreased. The decline was driven by two factors: external changes in advertisers' economic conditions, and internal declines in advertising and customer acquisition performance. While it has been difficult to build predictable revenue in this segment, management has clarified the strategic direction for stable growth.
3. HR Business: Operating profit decreased year-over-year. Higher-than-expected post-hire turnover led to more sales refunds than forecast. The segment remains small in scale, and management expects further growth if strategic initiatives are executed steadily.
4. Insurance Business: This segment is in an aggressive growth phase, so the deficit has expanded year-over-year as management invests to reach early profitability. Despite the wider short-term deficit, management reports positive early growth momentum and expects the business to develop into a solid contributor.

• Volatility from large, high-margin one-off legal cases creates unpredictable earnings swings, which management is addressing by shifting focus to stable, predictable core business growth instead of relying on these high-volatility opportunities.
• Derivative media faces both external headwinds from changing advertiser economic conditions and internal challenges of low marketing performance, which the company is working to resolve by clarifying its strategic direction for the segment.
• The insurance business is in a pre-profit investment phase, so it will continue to weigh on near-term earnings as the company builds out its sales and product infrastructure.
• HR business faces unpredictable turnover-related refund risk that is difficult to control, though the small current scale of the business limits its overall impact on companywide performance.
• Changes to Japanese Attorney Act Article 72 could impact the company's operating environment, though management notes that either regulatory relaxation or maintenance/strengthening of existing rules would create business opportunities: relaxation would allow the company to launch new AI legal services leveraging its existing data and lawyer network, while tightening would increase demand for legitimate matching services like BenNavi. The company will continue monitoring regulatory developments.
• The company operates in the public equity market, where broader macro events (such as geopolitical issues) can cause unrelated stock price volatility that is disconnected from core operating performance.

Q: Is insurance business going to be a core business and revenue entry point for the company? Will the company continue prioritizing it, and when do you expect it to reach profitability?

A: Statutory required liability reserves for insurance are recorded as an expense on the profit and loss statement, which makes the business look less profitable than it actually is operationally. Excluding these reserves, we expect the insurance business to reach profitability on a standalone basis within the next two years. In addition to standalone profit, insurance is a core part of our Legal Protect user retention strategy, which will drive more users to our core Legal Media business and create significant synergies. We are rolling out Legal Protect products to both corporate and individual users, and investors should expect meaningful progress in this domain in the second half of the fiscal year. We expect strong cross-synergies between insurance and our core business beyond standalone profit.

Q: What is the relationship between the new capital policy and Asset Value Investors Limited? Did AVI make specific requests for higher shareholder return, and is the new policy a response to their input?

A: Asset Value Investors Limited did not provide any specific requests or opinions on our payout ratio, dividend policy or overall shareholder return policy. While AVI's presence was a trigger for us to reconsider our capital policy, the final decision to increase shareholder return was made entirely based on our own independent judgement. We have long held the view that hoarding large cash reserves is unnecessary for our capital-efficient business: we have a consistent history of profitable operations, do not need large amounts of cash for future growth, and can fund any M&A activity through a mix of existing cash and external financing if needed. We believe that in the current market environment, with inflation and the Tokyo Stock Exchange's push for better capital efficiency, aggressive shareholder return paired with continued growth is the right approach for our company.

Q: AVI holds 33.05% of the company's shares. Has there been any tender offer (TOB) approach from AVI, which is required by law above the one-third threshold?

A: We cannot comment on the existence or content of individual discussions with shareholders. For context, Japanese Financial Instruments and Exchange Act only requires a mandatory tender offer when the holding exceeds one-third through off-market transactions; mandatory tender offer rules do not generally apply to share accumulated through regular on-exchange trading. Please refer to AVI's public large holding report filed on EDINET for updated holding information.

Q: The 200 billion yen revenue target requires the insurance business to succeed, but 1Q insurance sales growth looks very limited. Can you speak honestly about whether this business will succeed?

A: We apologize for causing concern. The insurance business is currently in a pre-profit phase focused on building out our sales infrastructure for our corporate products bonobo and Legal Base. Product development and sales infrastructure buildout costs are upfront, which is why near-term revenue growth looks limited. We cannot guarantee 100% success, as with any new business, but we have clear internal investment criteria and KPI thresholds: if the business does not hit targets within a set timeframe, we will quickly pivot and adjust the strategy. We are developing this business to become a medium-to-long term core revenue pillar with disciplined investment governance.

Q: What is your view on the recent stock price decline related to the Iran issue?

A: We do not comment on individual stock price volatility drivers. Our business is inherently not very sensitive to external macro and geopolitical events, and we will continue to steadily advance our business to grow long-term corporate value through better operating performance.

Q: What is your preparation for potential revisions to Attorney Act Article 72, which is currently being discussed in the legal industry?

A: We are closely watching this discussion as it is an important topic for our operating environment. If regulations are relaxed, we will be able to launch new AI legal services leveraging our large existing body of legal inquiry data and national lawyer network, which will expand our business opportunities. If regulations are maintained or tightened, demand for legitimate matching between users and qualified lawyers will increase, which will strengthen the value of our core BenNavi business. Either scenario creates opportunities for our company, but we will continue monitoring developments and respond appropriately as the regulatory process moves forward.

Q: If you are prioritizing investment in new businesses, operating profit margin will likely fall. Can we still expect you to target 20%+ sales growth next year and beyond?

A: We have not changed our target of 20% operating profit margin in normal operating conditions. It is true that temporary dips below 20% can occur during investment phases, but we will maintain this target as much as possible and avoid entering low-margin lines of business. We have also not changed our medium-term target for high revenue growth through concentration on the legal domain.

Q: Why did you not conduct share repurchases in February?

A: Share repurchases are executed flexibly based on daily stock price movement, market conditions and other factors, within the scope authorized by the board of directors. The repurchase authorization is valid through June 30, 2026, and we will continue to execute repurchases at appropriate times going forward.

Q: Do you still maintain the target of 100 billion yen revenue for next fiscal year (FY2027 October term), and what is your operating profit margin target?

A: We have not changed the existing target of 100 billion yen revenue and 20% operating profit margin for the FY2027 October term. If there are any material changes to our business environment that require adjusting these targets, we will disclose the changes appropriately in a timely manner.