Trend Micro Incorporated Q2 FY2026 earnings call

Industry & Strategic Shift to AI-Native Cybersecurity

• The rise of frontier large language models and agentic AI has created new, rapidly evolving cybersecurity risks, including AI-native ransomware that can dynamically adjust attack strategies in as little as 31 seconds.
• Trend Micro believes the optimal AI security architecture relies on specialized small language models (SLMs) tuned for cybersecurity expertise, rather than large uncontrolled general models, aligned with a three-layer AI security stack that enables customer control and secure AI usage.
• The company is accelerating its planned 2026 AI transformation, moving up investment timelines to capture leadership in the AI cybersecurity space.
• Sovereign AI (where customers retain ownership of their AI data and decisioning) is a growing customer requirement, which demands sovereign cybersecurity infrastructure with data hosted locally per region.

Breakdown of Increased Investment

• Internal AI transformation: One-time accelerated training to get all employees AI-ready, with investment growing to $12 million USD in the first half of 2024 (a 6,000% increase year-over-year), this initial boost is not expected to continue at this level.
• Infrastructure expansion and transition: $6.5 million USD to establish local sovereign cloud data zones for customer data in Japan, India, UAE, Germany, and Australia, with new zones planned for Brazil, South Africa, Indonesia, Canada, and the UK in 2026; $7.2 million USD in dual running costs for rewriting core modules like the XDR data lake from CPU to GPU architecture, these one-time transition costs will disappear once the move is complete.
• Customer AI and cloud consumption: The largest spending category, supporting customer usage of AI-driven offerings like Vision One. Management monitors unit economics via cloud/AI cost per dollar of SaaS ARR, which was $0.14 in the latest quarter, up slightly from $0.13 due to un-scaled new AI services (agentic AI, virtual red team, digital twin, ID security) that will see unit costs fall as adoption scales.

Operational Improvements from AI Investment

• Internal productivity gains include 50% faster customer dashboard delivery, AI simulation delivery reduced from months to days, 2x more code pull requests for R&D, new connector development reduced from months/years to 2-3 hours, threat hunting reduced from hours to seconds, and issue resolution 5x faster than pre-AI levels.

Financial Context

• Q2 saw 13% net sales growth, but costs grew 29%, leading to a 54% drop in operating income. At constant currency, net sales grew 3%. Enterprise customer ARR growth improved from 4% last quarter to 6% this quarter, meeting internal targets that triggered bonus payments. Total headcount remains flat, with turnover focused on upskilling for AI-focused roles.
• Regions: North America faces geopolitical headwinds and slower growth, Europe/EMEA are growing strongly, and Japan has 3% growth.

The transcript does not report separate financial performance metrics for individual product segments with absolute revenue values and contribution percentages. It notes that Vision One (Trend Micro's core AI cybersecurity platform) accounts for approximately 45% of total company ARR, with 49% year-over-year ARR growth for Vision One, and a net retention rate of 122% for the platform. Legacy SaaS products (older cloud security offerings) are experiencing slowing growth and are gradually being phased out in favor of Vision One.

• Full-year net sales guidance is maintained with no changes, as net sales remains on track to meet targets.
• There are no expected new temporary cost items in the second half, but cloud/AI investment costs will continue at roughly the same level as the first half, with no overall downward revision to full-year profitability forecasts.
• Foreign exchange guidance is maintained at the original plan of 157 JPY/USD, as the current rate of 160 JPY/USD is not materially different, so no adjustment is needed.
• The long-term "Road to 2028" strategic plan, which targets 8-10% annual net sales growth, remains unchanged and is still the company's North Star. Further details on the long-term outlook will be shared at the upcoming Aira Day event.
• Management expects ARR growth to continue improving through Q3 and Q4, with investment starting to pay off in the second half of the current fiscal year. The company maintains an internal target of double-digit ARR growth, but does not provide official public guidance for a specific 15% figure.

• Slower-than-expected ARR and net sales growth in the North American market, driven by geopolitical headwinds, creates near-term pressure on profitability while investment in AI continues.
• Un-scaled new AI services lead to temporarily higher unit costs, which could pressure profitability until customer adoption scales to drive lower per-ARR costs.
• Volatile foreign exchange rates create uncertainty for cost and revenue projections.
• Balancing cost control with innovation: Overly strict token usage controls could stifle engineering innovation needed to keep up with rapidly evolving AI-driven cyber threats, while unconstrained spending could keep profitability lower for longer than expected.

Q: When will net sales growth increase enough to absorb current AI investment, particularly in the slow-growing US market, and is a return to breakeven expected in the first or second half of next year? Also, are the 2028 long-term targets still intact, and can controllable AI costs be reduced as planned? / A: ARR is the leading indicator for future net sales growth, with growth expected to continue improving through Q3 and Q4. Vision One, now close to half of total ARR, is the core growth priority, especially in the US, and slowing legacy SaaS will gradually be phased out to accelerate Vision One's contribution. Management expects investment to start paying off in the second half of the current fiscal year. The 2028 targets remain unchanged, and one-time internal training and transition costs will fall over time, while Vision One's 49% top-line growth far outpaces its cloud cost increases, putting the plan on track. More details will be shared at the upcoming Aira Day event.

Q: Is the previously mentioned 15% full-year ARR growth target still unchanged, and is the expectation of gradual ARR growth improvement through the second half still intact? / A: The company does not formally provide public guidance for ARR, only for net sales and net income. Internally, the company still targets double-digit ARR growth, and expects gradual improvement in ARR growth through the second half of the fiscal year, with no change to that outlook.

Q: How much has second half cost increased against the original plan, and will cloud and AI costs be higher than originally planned for next fiscal year and beyond? Also, how is token usage cost being controlled beyond employee incentives tied to bonuses? / A: The $12 billion yen full-year cost increase is 80% cloud-related, with most of the increase already incurred in the first half, so second half cost levels will be lower than the first half. One-time internal transformation costs were unplanned, but employee incentives tied to net income create automatic cost control, as engineers already optimize token usage by matching model size to task, and the company has implemented management oversight. Management does not share next fiscal year's cost outlook at this time, but notes cloud costs scale with sales, and one-time costs will fall over time.

Q: Total headcount has been flat after earlier increases, does this mean the company is underinvesting in sales capabilities to acquire new customers and grow partnerships? / A: The company is undergoing go-to-market transformation to become AI-native, with turnover focused on upskilling rather than net headcount growth. Investments are being made in sales and marketing for both Trend AI and Trend Life brands, including branding, vertical marketing, and channel ecosystem expansion, with the right people being placed in key roles. Sales and marketing spending has increased this quarter, and the company will not pass up opportunities to invest in ARR and revenue growth.