ExaWizards Inc

TSE:4259

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Koichi Kawai, executive]

Good evening to Tokyo, Japan, and good morning to most of attendees here. Welcome to ExaWizard's Earnings Call for the second quarter of fiscal year ending March 2024. This is Koichi Kawai, 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 Hikaru Koyama, Head of Investor Relations.

After the market closed today in Japan time, we issued a press release with details regarding our second quarter results as well as supplemental data sheets and FAQs to our results, also which can be accessed on the IR section of our official website. Please note that this meeting is being also re-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. This statement reflects our views only as of today and should not be considered to represent our views on 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 strategies and earnings forecast for about 30 minutes, followed by presentation materials. After the presentation, we will have a Q&A session until 11 PM Japan Time.

Finally, at times, in our prepared comments and response to your questions, we may discuss metrics that are incremental to our usual presentation to give greater insights and dynamics of our business for 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 comments. Mr. Haruta?

[Makoto Haruta, executive]

Good morning, everyone. This is Makoto Haruta speaking. Today, we will provide you with the earnings results for the second quarter of March 2024, as well as our strategy with generative AI. There are a lot of things that I want to share with you such as: one, strong growth in generative AI products; two, our strength to tie up with larger corporates to increase their productivity, for instance, with Dai-ichi on exaBase study; and three, updates in business with generative AI.

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 the positioning, 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 the presentation. And followed by his presentation, I'm open to answer any questions from you. Thank you very much.

[Koichi Kawai, executive]

So this is executive summary for this quarter. From this quarter, we have included STADIUM in our consolidated financial results and looking at the total, both sales and profit are progressing as expected, and sales totaled JPY 2,085 million, which is a record high in the sales for this quarter, and operating losses improved compared to the first quarter to negative JPY 186 million, indicated trend of a narrowing down deficit.

As we'll mention later, we believe that this quarter is proceeding smoothly towards second half. And we had said that we would strengthen our project this year and product sales are particularly increasing. In addition, to the successful growth of exaBase Studio and our exaBase DX Assessment Learning, the launch of exaBase Gen AI has also gone well, registering sales of JPY 317 million, increase of 74.7% year-on-year, and operating loss was negative JPY 64 million.

Although we started offering these new products, operating loss was improved by JPY 95 million compared to the fourth quarter, and the deficit has significantly decreased. As a result, sales for the cumulative second quarter amounted to JPY 500 million, increase of 56.1% year-on-year, achieving high growth, and segment loss was negative JPY 224 million. And for the AI platform business, as we even explained, we have been recovering from a substantial drop in the sales in the third quarter last year. And sales for the second quarter were JPY 1,272 million, up 2.3% year-on-year.

While this is comparable to the previous year, we have recovered numerically from the dip in the third quarter last year. The operating profit was also JPY 379 million, and it is gradually returning to normal and including profitability. As a result, sales for this cumulative spend quarter were JPY 2,392 million, up 3.9% year-on-year and segment profit was JPY 599 million. That operating profit margin was 25%.

And also importantly, long-term continuing customers continue to account for nearly 70%. And at the same time, the number of new customers also encouraging. In addition, there's an increasing number of digital transformation projects and projects involving Gen AI and projects connecting that Gen AI and exaBase Studio.

We, as a company, have seen significant progress in the second quarter as we have started to link our development with Gen AI. And moreover, we believe that this average sales of top 10 customers are showing steady trend as well. And from this second quarter, we have consolidated the business figure of STADIUM and created a new other segment, other service segments. The name of the segment is Other at this point, and we are considering the possibility of doing various new things in the future. The sales were JPY 495 million, and the segment profit was JPY 26 million, including the goodwill amortization, indicating profit-based movement.

Now moving over to Page 6. With the addition of STADIUM, there has been a significant jump from the first quarter to the second quarter. One of our characteristics is a decrease in number from the fourth quarter to the following first quarter, but this time, the reduction was less than that in the previous years. And based on that, we're steadily building up the numbers in the second quarter.

And moving on to Page 7. Regarding the timing of returning profit, which we often get asked by investors and shareholders, I think we can make more clear statements after observing the situation in the second half of this year. For the first half, we evaluate that we're making steady progress towards that.

And now moving over to Page 8. With our consolidated profit and loss statement, the impairment of software assets as a special loss and due to the fact that we expect to fully amortize not only the unused items in our vision business, such as camera manufacturing, but also the software as an asset of our Indian subsidiary. As for the Other part, they are moving in the direction that we had originally expected.

And now moving over to Page 11, which explains our segment overview and progress of the business segment. The key point here is that the new segment includes STADIUM performance in the newly established Other Service segment. This is the only segment change disclosed in this report, and the detail will be explained later.

And Page 12, please. So if you see the very bottom in the Other Service segment that includes amortization of goodwill and customer-related assets. Even after taking this amortization expense into account, the Other Service segment is still profitable.

And moving on to Page 13. The figures are showing the steady growth and in comparison with the previous quarter and previous year showed that the company is on track to achieve its goals. We believe the sales are steadily increasing, and that sales growth is offsetting the cost increases that would normally be incurred for new products. We expect sales to increase in the third and fourth quarter of the current fiscal years as well. And we consider encouraging or decreasing this advertisement expenditure while keeping an eye on overall balance of income and expenditures.

And now moving over to Page 14. This is the first slide which we take introduction to the investors. The left-hand side shows exaBase Gen AI and the right side shows DX Assessment and Learning. And number of companies that has adopted our exaBase Gen AI exceed 200 companies and the number of subscribing account exceeds 23,000 and current sales are around JPY 26 million, but the annual recurring revenue is estimated to be around JPY 200 million, in this past several months only.

If this accumulates well, there will be a significant impact for the next fiscal year. And DX Assessment and Learning on the right-hand side, the demand for re-skilling is rising was once again due in part to improvement in product quality and booming popularity of exaBase Gen AI. And the number of companies and users of annual recurring revenue is also growing steadily, exceeding 1,300 companies and 130,000 users, respectively.

And now skipping Page 15 and moving over to Page 16. So the sales of JPY 500 million at the current second quarter. And if you break down, you see JPY 369 million figure on the right-hand side which is composed by DX Assessment Learning and others with social AI products. And social AI is mainly serviced for Nanjing Care facilities, which will be discussed later and we expect DX Assessment Learning and Gen AI to be positioned to lead the care-based performance in the future.

And moving to Page 17. This is an AI platform business at quarterly performance. The sales that has dropped in the third quarter last year had finally recovered and reaching an all-time high. We've rebounded from our troublesome period in third quarter last year, and we recognize the necessity to demonstrate potential for the future growth.

And moving to Page 19. This is showing our long-term clients in the AI platform business. Specifically, as you can see, the long-term customers continued accounting for about 70% of our customer base. And meanwhile, we're receiving inquiries related to gen AI a lot, increasing new transactions and this is showing up in the figures. Our engagement with customers in the AI platform business is leading to the sales growth in product sector as well.

Conversely, the customer with transactions in the AI product business also contributed a lot in sales in this AI platform business. This mutual relationship in cross-selling is one of our strengths, and we're keen on innovatively representing the strength in our figures.

And Page 20, please. The focus here has gradually shifted from just AI project targeted management issues to the actual usage and implementation of AI. This implies a progression to our system development and operations. As these efforts progress, we get approached by different departments and we can accept orders for AI developments for different things as well. This pattern continued with AI development for other things advancing to the implementation phase leading to the accumulation of those projects. This flows from significant framework of the platform business.

And since we have been working on the AI platform business, our customers can ask us for way to utilize AI for their business, like introducing gen AI for instance, such multilayer structures our strengths. And the development of generative AI and its integration with our services, such as exaBase Studio, has gradually enabled us to support a diverse range of customers. And from second quarter of this fiscal year, we are consciously making a combination of Gen AI and Studio, easier to understand for customers and beginning to standardize this as an offering, promoting it more widely.

And moving be over to Page 21. So this figure represents the consolidated figure of STADIUM. And originally, STADIUM's main activity was sales outsourcing supporting part of sales activities of venture companies and big corporates.

At present, when clients are launching new businesses, there's often shortage of sales personnel. For these causes, STADIUM proposed a wide way of organizing the sales team and supporting the formation of mixed team that includes STADIUM main members.

In addition to this, STADIUM has been creating an operating lift, that lift potential customers for single product from [indiscernible] less of supporting the sales activities and targeting high probable customers sequentially. By teaming up with the STADIUM, as an AI company, we're pushing forward the evolution of this initiative utilizing AI.

And now let's move over to our business update to '23. As we've pointed out last time, our greatest strength lies in our ties with large corporates in Japan and our direct sales approach to these organizations. We want to utilize our gen AI as an entrance point to make connections. For example, we will support training, business reformations and system development using our AI assets. And for instance, in talent development, we employ the exaBase Assessment & Learning for education and support productivity enhancement in the large corporate of Japan.

And Page 24. The situation on the left represents the current situation. When we consider the kind of work that managers are engaged in, we can see that various tasks are currently being dispersed. And point and tools for the data acquisition are scattered. When it comes to integration, it must be done manually.

From the perspective of those involved in management, they would also like to compile information on the business state. In these cases, they need to inquire about business management to all the employees. As we are seeking with the recent development of Gen AI, it is now possible to quickly compile the necessary data without modifying the original database or replacing it with necessary data. This presents a significant challenge. We can achieve the function that provides results as procurement instruction by using our corporate development tool, exaBase Studio, as we are explaining today. The IR assistant, which we were able to realize with this kind of idea, was created out of the possibility of applying this to IR operations.

In the future, not only the IR, but also infill such accounting and HR, we believe that will be the -- that will become the agent that OpenAI talks about. If the Gen AI is command center and we provide instructions, the agent in each accounting and HR department will coordinate and communicate to provide desired output. We believe that this business operation will progress in the manner with AI in the future. And ultimately, the task of compiling and reporting that humans currently do will be significantly reduced. If data is directly obtained from those database, transcription error will be eliminated, and we believe that this will be -- this will improve the quality as well.

And 25, please. And there's a project with Dai-ichi Life Insurance as an initiative of Gen AI and exaBase Studio, which has been also released recently. This is a project to efficiently create reports to the government using exaBase Studio while referring to the guidelines and laws and regulations that are scattered throughout the country. We found that what we originally wanted to do could not be done with existing systems but with exaBase Studio, we can do this. And the clients was interested in actively utilizing the system. We are working on the projects as one of the various projects.

While in many cases, they use their own models and exaBase Studio may also bring an AI model from them or the other companies. There's no one-size-fits-all approach in AI modeling, but rather flexibility is important. Also exaBase Studio can be extended beyond their own data, and this is what our clients appreciate the most. We're not just distributing exaBase Studio, but also we're working together with our clients to determine how exaBase Studio should be used. We have received inquiries and so we would like to accumulate actual examples going forward as well.

And 26, please. And this is an example of batch implementation in Fukui Prefecture, which is the government agency in Japan. And in addition, on the right-hand side, their request for a wide variety of contents to be read by Gen AI, such as rulebooks and PDFs accumulated within the corporate, to be read smoothly.

And 27, please. While the number of companies has increased in recent years at more than 20,000 users while the number of active users is still only about 5% of the number of employees in the corporates, we believe that by planning things that leads the business innovation and accumulating customer example, there's a big white space here. We can expand from 5% and grow business-wise.

And next page, please. And we are developing the IR assistant and other products as individual products as well. And we are working together with Takara Printing and Mizuho Trust who are intended -- interested in these products and have similar awareness of these issues and planning to introduce more products a year later to come.

And 29, please. We've also seen a big wave of AI applications in the care sector as well, where we have been working since our founding and we are receiving inquiries from care facilities about how they can make the best use of Gen AI. In particular, we are receiving many inquiries about how to improve the efficiency of paperwork in the back office. As the care industry is closely related to the insurance system, there's a strong demand for efficient processing of documents, reports and invoices related to care insurances. We had idea of using gen AI for these operations, but we thought it was important to understand the actual situation on the ground to make the best use of the technology. And we found that Good Time Living, a Daiwa Securities group company engaged in the caregiving business was as aware and were aware of the challenge that they face in improving the efficiency of back-office operation in the caregiving business.

Therefore, we decided to work with Good Time Living to improve the efficiency of the caregiving business, and also to turn the know-how we gained in this process into an AI products through collaboration with them.

Japan's long-term care insurance system is reviewed every 3 years, and the timing is right here, and Nanjing facilities are faced with issues such as changes in revenue and staffing and the need to manage complex rules in accordance with the new system. They have handbooks and consulting services that explain how to respond to system challenges. But we thought it will be more easier and more understandable if we use Gen AI. So we developed a service called CareWiz TAYORUTO. This service will also include content related to the recent insurance system revisions.

Since the development of this service requires a lot of knowledge here, and we will work with Star Consulting Group, which provides consulting services to care facilities to develop the content and provide it to our customers. With more than 250,000 care facilities and more than 2 million caregivers in Japan, the care industry is a very large sector in Japan. And there are many inefficiencies in this large sector, and we want to provide services that address these inefficiencies.

And now moving over to Page 30, the last slide of the presentation. As we continue to develop these services, our earnings forecast remains unchanged. With total sales of JPY 8.5 billion, operating income of negative JPY 290 million and EBITDA of approximately JPY 600 million for the fiscal year ending March 31, 2024. We hope to formally achieve this plan and make a big leap in the next fiscal year and beyond.

And now I'm going back to Haruta-san for his final comments.

[Makoto Haruta, executive]

Thank you very much for attending today, we are on track to achieve our goals for this fiscal year, and I'm very eager to speak with all of the global investors. Again, thank you for attending today's call, and I hope my passion, excitement and commitment for our growth to solve social issues with AI is shared with you. Thank you very much.