ExaWizards Inc

TSE:4259

Earnings Call Analysis

ExaWizards Ups Revenue Forecast, Records EBITDA Growth

ExaWizards sees a promising future, revising its annual revenue forecast to JPY 8.5 billion, a 52% year-on-year growth. The company achieved a 30% growth in its AI Product business and is focusing on the enterprise SaaS model to address productivity issues facing Japanese firms. Although experiencing an operating loss of JPY 348 million this quarter, they expect a positive EBITDA of JPY 600 million for the fiscal year, an 8x increase from the previous year. This growth is bolstered by acquisitions such as STADIUM and the launch of services like exaBase Studio, despite conservative sales projections from partnerships such as Bigmotor. The company continues substantial investment in new and existing products predicting robust enterprise client relationships and product connectivity for future success.

ExaWizards Sees Positive Trends and Raises Revenue Guidance

Kicking off the earnings call with warm greetings, ExaWizards Inc. outlined its achievements and strategies for the first quarter of the fiscal year ending March 2024, indicating a promising future. President Makoto Haruta announced an upward earnings revision for the full fiscal year, expecting JPY 8.5 billion in revenue, which equates to a significant year-over-year growth rate of 52%, and an EBITDA forecast of JPY 600 million. This promising outlook signals ExaWizards' strong position in the AI industry, as it continues to expand both its AI Platform and AI Products segments.

Financial Performance and Strategic Acquisitions

The company reported first-quarter sales of JPY 1.302 billion, marking an 8.9% year-over-year increase. Despite a slight rise in costs leading to an operating loss of JPY 348 million, ExaWizards has made strategic moves, including the acquisition of a profit-making stadium. With the incorporation of this new subsidiary, they expect the company's performance to benefit in the long run through synergistic effects.

Innovating with Generative AI and New Service Launch

Looking ahead, ExaWizards is placing strategic emphasis on generative AI, with the launch of exaBase Studio and several new services poised to redefine business processes and boost enterprise productivity. By executing an aggressive merger and acquisition (M&A) strategy and spinning off a company dedicated to AI products, ExaWizards shows a commitment to innovation and rapid growth.

Segment Insights: AI Platform and Product Businesses

The AI Platform business has shown resilience with a 5.9% year-on-year growth, while the AI Products business demonstrated steady progress despite facing the challenge of sales peaks in the fourth quarter. With the introduction of exaBase Studio, ExaWizards is constantly readjusting its business segments for optimal performance, demonstrating financial acumen and adaptability.

Focus on Enterprise Solutions and Productivity Improvement

ExaWizards is dedicated to solving productivity challenges in Japanese enterprises through its SaaS model and AI assets. The company's societal impact is evident in its efforts to enhance the social and digital experience in various sectors, including nursing care facilities and corporate HR. They aim to provide comprehensive support, from bolstering operational aspects to implementing AI for business transformation.

Partnerships and Expansion via M&A

By forging key partnerships and pursuing acquisitions, such as with STADIUM and Takara Printing, ExaWizards is set to expand its reach and provide cutting-edge IR services to a significant portion of Japanese listed enterprises. Moreover, the spin-off of Exa Enterprise AI as a wholly-owned subsidiary signals focused growth efforts and an intention to cultivate a product-centric culture that can further drive innovation.

Revised Earnings Forecast Highlights Potential

The confidence ExaWizards has in its operations and strategies is reinforced by the raised financial projections. With a predicted 52% revenue growth, operating income of negative JPY 290 million, and a significant 8x EBITDA increase, the revisions underscore the company's robust trajectory amid its continuous investments in new and existing products.

Closing Notes: Commitment to Growth and Social Impact

President Haruta's closing remarks resonated with a commitment to leveraging AI to solve social issues, introducing impactful products/services, and exploring strategic M&A. ExaWizards' mission to grow and scale operations while making meaningful societal contributions was clearly conveyed, appealing to investors interested in both financial returns and corporate responsibility.

Earnings Call Transcript 2024-Q1

[Koichi Kawai, executive]

Good evening from Tokyo, Japan, and good morning to most of the attendees here. Welcome to ExaWizards Earnings Call for the First Quarter of the Fiscal Year Ending March 2024. This is Koichi Kawai, Head of President Office and Deputy Head of Corporate Management of ExaWizards. With me on the call today are Makoto Haruta, Representative Director and President; Tomoaki Maekawa, Head of Corporate Management; and Koyama, Head of Investor Relations.After the market closed today in Japan time, we issued a press release with details regarding our first quarter results, as well as supplemental data sheets and FAQs, to our results, both of which can be accessed on the IR section of our official website. Please note that this meeting is also being recorded and will be posted on our IR website at a later date.During today's call, we will make statements relating to our business that may be considered forward-looking. These statements reflect our views only as of today and should not be considered representative of our views as in any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.With that, I would like to introduce today's schedule. Today, Mr. Haruta and I will begin by explaining the financial results, growth strategy, and revised earning forecast for about 30 minutes, followed by the presentation materials. After the presentation, we will have a Q&A session until 11:00 p.m. Japan time. Finally, at times in our prepared comments and response to your questions, we may discuss metrics that are incremental to our user presentation to give greater insights into dynamics of our business of our quarter results. Please be advised that we may or may not continue to provide this additional detail in the future.With that, let me turn the call over to Mr. Haruta, our Founder and President, for his prepared remarks. Mr. Haruta.

[Makoto Haruta, executive]

Good morning to the U.S. and Europe and good evening to Japan and Asia attendees. I am very excited to meet you again, the investors and analysts globally. This is Makoto Haruta, the Founder and Representative Director of ExaWizards. Today, we will provide you with earning results for the first quarter of March 2024 as well as our strategy with generative AI. Also, I want to mention that we have revised our earning forecast upward with JPY 8.5 billion in revenue, which makes us 52% year-on-year growth rate with JPY 600 million EBITDA for the fiscal year ending March 2024.Looking back this first quarter with regards to the AI Platform business. Social implementation of AI model to large electric power industry such as Kansai Electric and Chugoku Electric, and AI collaboration with major universities in Japan, in software and medical device has been the achievement. Within AI Product business, 30% growth has been achieved. In Japan, solving the social issue of productivity of Japanese enterprise is a huge issue we are facing with tremendous demand. With our accumulated AI assets and positioning to enterprise Japan, along with our product capability, we are seeing a huge opportunity with enterprise SaaS model.I'm very excited with the current environment and looking forward to the upcoming quarter as well. Today, Kawai-san will explain the details of presentation and followed by his presentation, I'm open to answer any questions from you. Thank you very much.

[Koichi Kawai, executive]

Thank you very much, Mr. Haruta. And so for the first quarter, we believe that both sales and profit landed as originally anticipated, and sales were JPY 1.302 billion, increase of 8.9% from the first quarter of previous year, and operating loss was JPY 348 million. This was influenced by slight increase in cost. In the same period of the previous year was a loss of JPY 237 million.In terms of corporate initiative, we have partially accounted for loss associated with liquidation of our subsidiary in India. On the other hand, we have made acquisition of a stadium which was announced in late June. So for the first quarter, we have consolidated them into our balance sheet and the profit and loss will be consolidated from the second quarter and onward. They are a profit-making company and currently goodwill is just about JPY 2.3 billion. And we'll be discussing with our auditors on depreciating this over next 7 to 10 years.There are many points that can be understood from the material that we will follow, but I would like to focus on some key points. Regarding AI Platform business and AI Product business, we have new segment standards. With upcoming launch of exaBase Studio, we will be closely monitoring it in the AI Products business, and as a result, we have moved what was originally in the AI Platform business to the AI Product business. In reality, since sales has not been established yet, this is taking the form of some cost to the AI Product side, but no material change in the numbers yet.Also, as a major revision, as we mentioned earlier, we have made STADIUM as a subsidiary. So, from the second quarter and onwards, we will incorporate STADIUM's performance. In addition, we will launch a new service related to generative AI, and we have revised our earnings forecast to full year sales of JPY 8.5 billion and operating profit of negative JPY 290 million, taking into account other risk factors as well.As we plan to aggressively pursue M&A in the future, we would also like to show how much cash we can generate in the future. So, we are announcing to you, in terms of EBITDA going forward, and we are forecasting EBITDA to be positive of JPY 600 million for this fiscal year-end. In summary of Q1, the AI Platform business has recorded a large client's project loss in the third quarter of previous year, but we believe it is gradually recovering. In addition, we were able to successfully launch a product related to generative AI, so we are looking forward to the numbers from second quarter and onwards. Also, as we mentioned earlier, we will be incorporating the M&A, so we would like to talk later about how we're thinking about the future as well.And skipping to Page 7, now we have summarized the actual sales trend for the consolidated basis. As you can see, the number has steadily increased at about fourth quarter. And it is a character of our company that the first quarter tends to be about 80%, or maybe slightly lesser than 80% of the fourth quarter due to the seasonal factors. However, this time it is slightly over 80%, so we believe that recovery is going well.We will discuss about this point later in the segments, so please turn over to Page 12. The AI Platform business and the AI Product business are divided as 2 separate business, and we will explain their respective business results. But the product business in particular is growing steadily while personnel cost and amortization expense has increased in the course of developing individual products, sales has been increasing steadily. Comparing the previous year to current year, the increase in SG&A expense for the AI Products business is due to the reallocation of expense for exaBase Studio as explained earlier, which had an impact of about JPY 6 million. Other advertising expenses also increased slightly. In spite of this, sales have been growing steadily, and we will continue to work on increasing sales while making good use of advertisement promotion as well.And moving over to segment overview of the AIP trends. As for the AI Platform business, it is gradually recovering. The result was 5.9% year-on-year growth, which may not be as strong as it could have been if we look at the growth alone, but the business is recovering from the impact of the downsizing of some large projects in the previous fiscal year. The current situation is in line with the budget at the beginning of the period and the number of long-term customers was not declined and instead it is steadily increasing. Our future challenge is to increase this long-term customer sales per company which will increase our productivity and this is where we want to promote as well. The number of customer is increasing steadily and accumulation of this customer will result in lower sales costs and higher productivity.Specific projects related to generative AI will be explained in the later section, but as we conduct POC on our feet, we are seeing an increasing number of projects that are based with the premise of AI implementation. And, for instance, as Haruta-san mentioned, these are the examples from the energy industry such as Kansai Electric Power and Chugoku Electric Power, both of them are very major electric company in Japan. And rather than carrying out of single POCs, these are the real example of providing AI model in the actual operation of the business and business is being carried out by our capabilities.And also in the Care & Med business, we're in the business of medical device called SaMD, Software as Medical Devices. This is related to dementia countermeasure in the area of care and nursing care, which we have been working on for a long time, and we're working with Osaka University on various efforts to obtain certification. And we're not talking about the distant world but rather about immediate world in which AI being implemented. We believe that it is important for AI to be implemented to real-world society, and we would like to contribute to better society by accumulating such cases. We believe it is important to promote variety of projects, including these cases, while ensuring that they are reflected in the company's business performance. While carrying out this various project, we would also like to value the relationship with our enterprise clients so that the company's performance will improve and develop as well together.And for AI Products, this page shown here is a quarterly trend for the AI Products business. The reason for the decline in the first quarter is that CareWiz Hanasuto was sold in the fourth quarter and Hanasuto's license sales declined in the first quarter. This negative impact was not significant. In addition, DX assessment and learning related to DX AI Products, which will come out later, tends to inevitably accumulate in fourth quarter and sales to drop in the first quarter. This structure has led to a drop in the first quarter. However, on a comparison with previous first quarters for the past 4 years, the graph looks like this and showing steady accumulation. AI Products can be broadly divided into social and DX, and each of them are performing very well.And for some example, in fact, the DIA, the Digital Innovator Assessment, has been taken by over 1,200 companies and more than 80,000 people steadily accumulating data, and we're also trying to challenge the idea of having them take the assessment to see not only their evaluation but also the level of activity and reflect into HR management as well, or to make it more generalized so that it can be useful in recruiting as well. In order to raise the quality level of our products, we would like to promote the more general usage of this data in DIA, whose content has been revised in full compliance with the Digital Skill Standards of Japan's METI, the Ministry of Economy, Trade, and Industry. Some interesting example of actual use have emerged, and we would like to further promote this DIA by showing this example to incorporate in Japan.And Social AI is also expanding steadily. The company is determined for improving the situation in nursing care facilities and special area in which without management reformation, employees may not be happy and as a result, user of nursing care facilities may not be fully satisfied as well. CareWiz was originally intended to support each of the tasks of running nursing home. When we break this down, we find that these are some other elements that are necessary for insurance business, such as sales support, recruitment, HR support, accounting, and billing, and we would like to provide support for this as well. We would like to provide a solid support for these elements. And since a product will not become a product unless we build them 1 by 1, we are currently discussing how we can commercialize those products together with leading business and nursing care facilities in this field. Some consulting support will be provided together with our partners. And in fact, as described here, we have formed a business alliance with Star Consulting and we're developing better service for users while collaborating with CARE CONNECT JAPAN for recording operations. There are some things that we may not ready to announce yet, but we are steadily preparing various things that will take shape, and we hope to announce them as soon as they are ready to.And we're making good progress in what we're trying to do under the current circumstance. The situation is progressing very well. And on the other hand, I would like to reiterate that our future strategy by taking into account of strengthening products with generative AI. As Haruta-san mentioned at the beginning of this presentation, we have revised our earnings forecast upward due to the consolidation of the STADIUM, and we will explain our future strategy in conjunction with the revision of this earnings forecast.On Page 24, our Director, Mr. Oue, is giving a seminar on the Market Environment for Generative AI, and we would like to first inform everyone for the interesting result of the survey. As you can see, the level of the range from using ChatGPT on daily basis to using in the trial basis to not being interested at all, in aggregate, about 76% of the corporate has advanced level of using generative AI in their business operation. However, only 7% of the corporates are still using AI on their daily operations. The ExaBase generative AI has been launched since June this year and in less than 2 months, the number of users has built out over 10,000 users, mainly from large enterprise in Japan. We would also like to explain the level of these 10,000 users.Since the use of generative AI is on the company-by-company basis, we first developed the system on the company-by-company basis and then invite individual applicants to join our system. And when we consider the total number of employees of these corporates, which is the number of potential users of these corporates, the 10,000 users or the employees represents a mere 8% of the total number of employees. This is an impact in the level to the 7% of the daily users indicated in the early survey result. In this sense, it can be said that only about 8% of the total number of employees in the corporates are using this system. However, when we consider in terms of business expansion, we believe that 10,000 users at this stage means the potential for the future is very large and the whitespace is huge. On the other hand, we have only just begun to understand why we are working on generative AI projects and what we are aiming for. Our goal is to review and reform the business process itself through the use of this generative AI and then to improve the productivity of the enterprise as a whole.And this slide will be actually the most important page of this presentation. We would like to utilize generative AI to strongly promote business reformation and productive improvement in the large enterprise in Japan. To this end, we have accumulated lots of assets here. We have been accumulating business mainly with large enterprise here and as of the end of fiscal year ending March 31, 2023, we had a business with more than 140 enterprises here. In this way, we have accumulated algorithms and assets in process of supporting utilization of AI in large corporates. In addition to these assets, the group companies such as STADIUM, which provides sales support, and Xware, which provides system development support, have been added to the group as well, and we would like to combine these assets as a group to improve productivity from multiple perspectives rather than simply providing products.First of all, we have started offering product called exaBase Generative AI as shown on the page center, and we have already received several challenges from customers as a direction for development of this product. For instance, some companies want to know how individual users are using the system or they want to be able to use single sign-on. In addition, we have begun developing function that allows users to look up company regulation or other internal information by uploading and reading PDF document in the company using generative AI. In addition, to simplify the use of AI, the templates for various tags are being prepared by us and group management function is also planned to be added as different departments within corporate may want to do different things and use AI in different ways. In this way, the use of generative AI will change the way they do their daily work, and we are supporting all of these factors. In the future, we believe that generative AI projects we provide will be used as a [ portal ] service for the client companies.Although we provide such portal-like services as our products, we need our clients to actually use them on daily basis and therefore we provide training program to solve questions about how to use those AI and how to use it in accordance with what they do in daily tasks. And we also offer services called exaBase Sprint, which is designed to promote service development and business innovation together with customers. We would strongly like to eliminate the reason why our clients cannot utilize AI, and we have received comments from clients that they have gained better understanding of AI through our actual implementation support. We'd like to provide services that allows customers experience how to use AI and then move on to the main service as well, which is to work with consultants to identify individual issues and implement business transformation.We also want clients to use AI Products not only to solve individual problems, but also to replace specific tasks such as using products to perform entire business process. Our product exaBase IR Assistant is really a business replacement, something that can simplify investor relation work considerably. The idea was born out of the question, can't we focus more on investor communication or disclosure rather than preparing this over and over? We will continue to develop this offer with Assistant series in the future. And system development is an inevitable part of business in reformation. We have received many inquiries such as, is it possible to combine the generative AI with Azure or is it possible to connect the core system? We believe that combination of our services, exaBase Studio and Generative AI will be more effective.The meaning of in-house system development is that it allow us to respond more quickly by developing system ourselves, and it allows even large corporates to take on challenge tasks as well. Productivity improve and number of people and manhours [ service ] required eliminated, allowing the employees who are in the charge to do more value-added, important and creative works. We want to support this situation. In order to promote such services, we will collaborate with our partners who have strong presence in the market to expand the sales of AI Products. This includes using the capabilities of the newly-acquired company called STADIUM, which was for us to promote sales effort. And the most important thing, however, is what we can produce in order to increase the gear for the development with sales of AI Products, including Assistant series, we will spin out the company as announced this time and conduct it independently with a sense of speed.And also we want to bring attention to exaBase Studio to more customer with our business alliance with NS Solutions. They are the global #1 seller of data robots and they are the #1 not only in Japan but globally. We have been working with NS Solutions to see if we can use Studio to help more enterprise in this area. In addition, we're considering selling our generative AI services to NS Solutions clients as well. Also in exaBase IR Assistant, which is going to be officially introduced to the market in September, we have announced a partnership with Takara Printing last week. Takara Printing is a great partner that provides disclosure support system to 60% of the 4,000 Japanese listed enterprises and are planning to expand the sales through setting IR Assistant together. Their service [ WizLabo ] is a system-based service for disclosure of annual and quarterly documents. We would like to promote disclosure tech together to create a better way for IR with them. We would like to collaborate with various partners not only in IR but also in other areas in the future.And STADIUM is a company we have acquired most recently. STADIUM's greatest strength is the Digital Solution Sales team and they are able to hire young talent and turn them into competitive salesforce at the early stage. And as a result, they are able to manage their organization to achieve high productivity. With this structure in place, they would like to be able to quickly systemize how to sell our service and quickly set up sales team. This is what we find interesting. Also by understanding their business deeper, it seems that they can provide various agency services not limited to sales representation. It will be interesting to support and expand this area with a technology-driven manner. We have originally planned to have them sell our products, but after looking at their business and their potential, we think there may be other areas and growth that we could collaborate further. We would like to continue to do M&A that will not only expand our existing business but also to expand new areas.And certainly the separate company that I mentioned earlier, the Exa Enterprise AI will be spun off as a wholly-owned subsidiary. The date of establishment is October 2. And in addition to expanding sales of the current exaBase Generative AI and IR Assistant, we would like to develop and operate aforementioned Assistant series. For the time being, we will be also using employees as a secondment from our company. But in the future we would like to actively hire the number of employees here. Our main goal is to create product culture in which these products are created and operated. In our cases, the AI Platform business has inevitably become our core business, and we have built our business through joint effort with our clients. [ Such a partner in ] developing an operating services at one's own risk may seem similar, but they are completely different. Although we have always developed this business internally, we think that we can enhance this culture of product by separating 2 at this time. Since we are still in the challenger's position, we decided to announce a spinoff as a possible solutions when considering a framework that would enable us to actively develop such system and culture. In fact, the new company will develop and expand sales and will, of course, continue to work together with our head office as well, including sales cooperation, as it has created many points in contact with customers in the utilization of AI on exaBase, which was originally in place. We will continue to work together with the head office, including sales cooperation efforts, and we will do our best in second half of this year so that we can actively create and sell products.And with the comments mentioned earlier, we have revised earning forecast for the fiscal year ending March 31, 2024. Combining what we have mentioned that we present the revised forecast as net sales of JPY 8.5 billion, which makes us 52% year-over-year revenue growth and operating income of negative JPY 290 million and EBITDA of JPY 600 million, which is 8x larger than last year's. And the factors behind the changes in the earnings forecast for the fiscal year ending March '24 and the scale of business investments, the increase in sales is mainly due to consolidation with STADIUM and the portion of the exaBase Generative AI that was not included in the original forecast and [ sudden ] sales risk during this period, which are expected to increase by JPY 1.5 billion. We have received some inquiries, but we are doing business with Bigmotor, one of the largest car dealer in Japan through our group company Xware. Specifically, we're operating the company's core system. It is not our position to discuss Bigmotor situation here, but we think that it will be risky to include the full amount of potential revenue in our earnings forecast. So we are conservatively projecting an increase in sales of [ JPY 1.0 billion ] here.In addition to this, there's a contribution to profit from the recent result of the Lean system operation. In addition, we will continue to make upfront investment in new products while continuing to invest in existing products. As a result, the final profit is still slightly negative. However, based on the current growth and our current relationship with our enterprise clients, we believe that we must continue to strengthen our investment in products to ensure future product connectivity. The overall number are at the level presented here, but we will keep you informed of any further updates as they occur. Our products are being well accepted by our customers, but as mentioned earlier, we are still far from what we want to achieve with the current level, so we will continue to invest aggressively to give a shape to the goal.And last, but not least, as we continue to work on this enterprise SaaS area, we need to mention that regular SMB SaaS and our enterprise service has huge differentiation with the positions that we have elaborated in Japan, our access to large enterprise that would not allow us to spend huge spending on the promotion and advertisement. We understand the various business area vertical and what they do in the operation. With our knowledge of the consulting, AI implementation with AI engineers and also many domain knowledge specialists here, we think our enterprise SaaS business model will be the interesting 1 for the investors as well.This is our update on the financial results. Thank you very much. This concludes the financial results briefing for the first quarter for the fiscal year ending March '24. We would like to have comments from our President, Mr. Haruta as closing remarks.

[Makoto Haruta, executive]

Thank you very much for attending today's investor call. As you may have realized, there are many AI products and services that we want to introduce to the market and potentially a M&A as well to enhance our scalability. We are on track to achieve our goal for this fiscal year, and I'm very eager to speak with all of global investors. Again, thank you for attending today's call and hope my passion, excitement, and commitment for our growth, business and services with AI to solve social issues is shared with you. Thank you very much.