ExaWizards Inc

TSE:4259

Earnings Call Analysis

Record Sales and Steady Growth

The company has achieved a record high in quarterly sales at JPY 2,344 million, a 68.4% increase from the previous year, and turned a positive operating profit of JPY 6 million for the first time in a third quarter. Its AI Products, particularly Generative AI, are key growth drivers, with adoption reaching 353 companies and annual recurring revenue surpassing JPY 500 million. The AI platform business, after a slight concern, has been recovering with improving profit margins. The market for Generative AI is projected to grow by 50% internationally and potentially toward JPY 2 trillion domestically by 2030. The company maintains its earnings forecast for the fiscal year ending March 31, 2024, aiming to meet yearly targets while managing fourth-quarter recruitment costs and organizational changes.

Earnings Results and Key Updates

ExaWizards reported significant achievements in the third quarter of March 2024, including the first-ever positive operating income on a consolidated basis, driven by strong demand in Generative AI. The AI Products segment saw remarkable growth, with third-quarter revenue doubling year-on-year. The AI Platform business demonstrated a solid 35% operating margin with a 23% year-on-year growth, marking a full recovery from the previous year. Collaborations with large financial institutions and ties with platforms like Box are driving future growth opportunities. The company is optimistic about the Enterprise Generative AI Saas model and the overall business environment.

Financial Performance Highlights

Sales in the third quarter reached a record high of JPY 2,344 million, representing a 68.4% increase from the previous year. The operating profit also showed positive results, landing at JPY 6 million, marking an increase of JPY 144 million from the same period last year.

Business Growth and Expansion

ExaWizards focused on accumulating AI models and insights to cater to a wide range of customers, aiming for practical usage rather than just asset accumulation. The company is enhancing the multi-faceted nature of Generative AI, particularly in improving enterprise productivity and corporate transformation. Initiatives like the Box integration are expected to revolutionize workflow efficiency and data utilization.

Future Outlook and Strategy

The market for Generative AI is projected to grow by about 50% domestically and internationally, with a market size close to JPY 2 trillion expected by 2030. ExaWizards emphasizes the importance of integrating Generative AI into various company tasks for optimal utilization. The company plans to maintain its earnings forecast for the fiscal year, with efforts focused on enhancing business expansion and client engagement.

Earnings Call Transcript 2024-Q3

[Koichi Kawai, executive]

Good evening from Tokyo, Japan, and good morning to most of the attendees here. Welcome to ExaWizards earnings call for third 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: Tomoaki Maekawa, Head of Corporate Management; and Hikaru Koyama, Head of Investor Relations; and [ Mr. Ishizawa ], member of Investor Relations. After the market-close day in Japan time, we issued a press release with details regarding our third 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 we will post at our 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 in any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

I'd like now to introduce today's schedule. Today, you will first watch a video message from our Founder and Representative Director, Mr. Haruta, followed by a 30-minute presentation on financial results, growth strategies, and forecast followed by presentation material. After the presentation, we will have a Q&A session until 11:00 pm Japan time. Finally, at times in our prepared comments or response to questions, we may discuss metrics that are incremental to our usual presentations to give greater insights and dynamics of our business or our quarterly results. Please be advised that we may not continue to provide this additional metric in detail in the future.

First of all, I would like to now play a video message from Mr. Haruta regarding the third quarter financial results.

[Makoto Haruta, executive]

Good morning to the US and Europe and good evening to Japan and Asia attendees. This is a Makoto Haruta, your Founder and Representative Director of ExaWizards. Today, we will provide you with the earnings results for third quarter of March 2024 with our recent key updates. First of all, we have made first ever positive operating income on a consolidated basis for the third quarter, supported by strong growth in Generative AI demand.

Second, our AI Products segment continued to drive our growth with third quarter revenue doubling with 100% YoY growth.

Third, our AI Platform business makes solid 35% operating margin with decent 23% YoY growth, which shows full recovery from last third quarter.

Last but not least, our recent collaboration with various large financial institutions on exaBase platform and the tie-up with Content Cloud like Box, are driving our next moment for further growth. 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 asset and positioning, we are seeing a huge opportunity with Enterprise Generative AI Saas model. I'm very excited with the current environment and looking forward to the updating quarter as well. Today, Kawai-san will explain the details of the presentation, and followed by his presentation, we are happy to take Q&A for one-on-one meeting already. Thank you very much.

[Koichi Kawai, executive]

Thank you, and let's move over to the executive summary for this quarter. Overall, we evaluate that things have been generally progressing well as mentioned by Haruta-san. And sales have reached all-time high and made steady progress. It was a busy quarter with historical high sales but also for updates to new service and features as well.

Our sales reached a record high for single quarter at JPY 2,344 million, which is an increase of 68.4% from the same period last year. The operating profit landed at positive JPY 6 million, which is an increase of JPY 144 million from the same period last year. While we have seen a positive operating income in the fourth quarter in the past, this is the first time ever we have achieved a positive operating income in the third quarter, and our numbers have been growing steadily.

Next, we will look at the numbers by business units. For our AI Products business, in addition to exaBase DX Assessment & Learning, which you -- has been driving our numbers. ExaBase Generative AI, which started in June of this fiscal year, is expanding steadily.

The third quarter sales were JPY 455 million, which is year-on-year growth of 100.7% from the same period last year, expanding at twice the pace. We started offering exaBase Generative AI this term, but despite the introduction of a new service, the segment loss for Q3 was minus JPY 34 million, which is an increase of JPY 30 million from the second quarter, reducing our deficit.

Our AI Platform business is also progressing smoothly, with third quarter sales growing to JPY 1,428 million, an increase of 23.2% from the same quarter last year. In particular, the segment profit exceeded JPY 500 million, and the profit margin has significantly improved. Therefore, we evaluate that our sales expanded, our profitability is also improving. We are also seeing an increase in long-term customers and new customers who are expected to become large-scale, so we're evaluating this as a successful development.

For our other service businesses, the numbers are mainly from STADIUM, which we made a group company through M&A. They're running the business with little seasonal fluctuation and the third quarter sales landed slightly down from the second quarter, which we will explain more about this later.

This is the quarterly trend of the financial results. The overall situation is as shown in the graph. As I mentioned earlier, our sales have reached a record high for a single quarter at JPY 2,334 million, and profits are at positive of JPY 6 million, showing steady progress and please check the material later for more detailed information.

Now let's move to Page 11. The AI Products business is growing at twice the rate of the same period last year. We believe that the Company is improving steadily and that profitability is in sight as well. In addition to the original product, the remarkable growth of Generative AI is a key driving factor.

On Page 12, the left side shows the growth of Generative AI. As of January 2024, the number of companies that had adopted the service is 353 companies, and the number of users has reached 41,000. As a SaaS service, it is still in the process of growing, but the current monthly sales has exceeded JPY 40 million. So the annual recurring revenue is now over JPY 500 million. If it continues to grow steadily through March, it can serve as a good foundation for growth in the next fiscal year and beyond.

ExaBase Assessment & Learning, which is so called DIA numbers also growing, which is shown on the right-hand side.

With the growth of Generative AI, there's a renewed focus and interest on DX training and education among our clients. Therefore, we're receiving an increasing number of requests from new clients who want to introduce our DIA services, also from the clients who want to expand the use of DIA to all employees as well in the company wide. As a result, the number of companies that have adopted the service is approaching 1,400 and the number of users is 178,000 and the system is steadily expanding.

On Page 13, the social AI Product that we have been developing since the past, especially nursing care-related services are performing well in total. While DX products, including Generative AI, are performing well at the moment, we have a high expectation for how far we can expand these products in the next fiscal year.

On Page 14, the AI platform business dropped a bit in third quarter of last fiscal year causing concerns among many investors and shareholders but we acknowledge that it has been steadily recovering. Sales has been progressing smoothly and finally, the profit margins are also improving as well.

On Page 15, the AI platform sales with long-term clients. Sales from these long-term clients, which we value greatly are increasing but we are seeing significant increase in new clients here recently. This reflects the global focus on Generative AI, and in this context, we are proposing what we can do by listening to our customers.

As a result, we're currently in a situation where we are understaffed. Fortunately, we're getting more opportunities to be invited by various customers and to have them listen to our stories. We need to do well in this area as we continue to receive inquiries from our customers. As we have mentioned in previous quarter, there have many initiatives to try PoC first but with advent of this Generative AI, there is a lot of interest in how we can promote DX within the customers, or how to do project using generative AI, and there are many cases that assume actual use beyond PoC.

Even within our company, we have been building up our assets by accumulating AI models in exaBase and various insights while providing service to wide range of customers. Now that there are more projects that are conscious about actual usage rather than just accumulation of assets. When we think about the fact that the numbers are growing in this trend, we want to consider what form would be the best for the movement after next term, considering the current situation, and change in accordance with our review.

Finally, let's touch on STADIUM. We're working to accelerate sales tech services that have high affinity with existing sales representation. As part of so-called PMI, we're changing the members inside and system, while at the same time considering what the business portfolio should be. [indiscernible] performance here is slightly down compared to the second quarter, but one of the factors that we are not -- we were not able to conduct sufficient sales activities while changing the system as part of the PMI. Basically, that's all for the financial performance for third quarter. And now let's move over to our business updates.

The market size of Generative AI. We have been receiving an increasing number of inquiries from our customers about Generative AI. The market for the Generative AI is expected to grow by about 50%, both domestically and internationally. Even domestically, the market is close to JPY 2 trillion is expected by 2030.

On Page 19 for the third quarter trends of Generative AI products. In the Generative AI services, we have announced the use of major -- used by major enterprise and are also developing services for local governments to encourage their usage. We also offer a product called IR Assistant to help achieve better investor relations by focusing on AGM meetings and investor briefings.

Next, we would like to discuss how we view the use of Generative AI as we receive many inquiries from customers about this.

On Page 20, which shows our positioning, we believe that generative AI truly makes sense when it is used to improve enterprise productivity and corporate transformation, and currently, its usage is increasing in large enterprises. Although we have annual cases with over 350 customers, the number of users we acquire with generative AI is only the small percentage of that. Most of the adoption is partial, centered around DX Department rather than an entire company at the moment.

Many people using and unsure about how to use Generative AI, but in order for it to be actually used, it needs to be incorporated into each task, in addition to human support. This is shown in the diagram. For instance, engineers are using Generative AI to streamline their tasks, but white-collar workers are not fully utilizing it. It's only begin to use for certain document creation, meeting minutes, summaries, emails, [ write stories ].

If it's limited to those areas, it's not truly harnessing the power of Generative AI. They would claim that Generative AI is somewhat deceptive, but it's simply collecting and using data that is already in the public. This data doesn't reflect internal company information and sometimes it's scattered across different services. It's necessary to connect such data with technology called a RAG, the Retrieval-Augmented Generation, whilst can be read and utilized by Generative AI.

And furthermore, you can cross reference different databases like sales accounting and collect necessary data by extracting necessary information from Generative AI. Traditionally, the use of large enterprise resource planning system, the ERP system, or development of a new system was necessary, but by utilizing Generative AI, existing resources can be leveraged. It allows for the extraordinary necessary data from each, making it accessible and usable to those who would need it.

Our developed software development environment, which is exaBase Studio, which is shown on the left-hand side, make it possible to utilize that in appropriate form. It allows for the use of existing assets without the need for individual new development.

We see Generative AI as an interface that connects these databases. This is the [ multi-faceted ] nature of Generative AI. We believe it has the ability to read data from various places within the company and can be effectively utilized. As one of the means to that, we have announced the Box integration. The Box integration is another example of utilization. Although it is a service that has been provided to 16,000 companies in Japan, which has adopted already. Various information is organized there, but is in a state where information cannot be drawn from as it desires.

Part of this collaboration is to make it possible to pull out this data efficiently by linking with the company's services. If we can cooperate with Box, but not only with Box, but also with various other companies, where we'll be able to create many databases that we can draw from. Furthermore, if we are able to produce such output we intend from these databases, we believe it will drastically change the way we have been working so far.

On Page 22, this is showing our update on exaBase Studio with the case of this exaBase Generative AI. The number of business transformation projects using RAG is also increasing. Example of projects that have been implemented including the creation of the documents and reporting as necessary for the company by mixing data from internal documents and regulations with various data from legal system and other sources.

What is shown in the slide are only some examples that we can show to the public investors. We have templates for Generative AI that are easy for customers to use and we also provide GUI that is easy to pull out. As you can see on the right side of the slide, we have received many inquiries from large financial institutions in Japan. The financial industry is subject to many regulations and paperworks, and we have received inquiries about the possibility of using this type of service to [indiscernible] their operations. And we are currently running [ various ] projects in parallel, not only with these large financial institutions, but with many others as well.

On Page 23, which is showing our service lineup to support AI-driven management, originally, our AI platform business started with the development of individual projects, but it has since expanded to other things and from the completion of PoC alone, it has taken on implementation and operations as well creating new business opportunities.

In the process, new same centering on Generative AI has been developed as well. In addition, the scale of projects as a single company within the particular large clients is growing as additional project and requests from other departments are increasing as well, rather than just a stand-alone project with a single client.

As a result, we sometimes take on projects that we have never done before by working in a multi-layered manner, including projects that can be executed efficiently while utilizing our past knowledge. The company's business will expand and clients will be able to enjoy our services more quickly. We believe that this complementary relationship is gradually developing. The company's various services can now be organically combined in this environment, and we will make solid progress to our next fiscal year.

On Page 24, earnings forecast for the fiscal year ending March 31, 2024. Currently, there are no change to our earnings forecast. While we are able to record an operating profit in the third quarter, we are now making efforts in the fourth quarter to achieve our earnings forecast for the fiscal year.

On the other hand, there is a solid level of recruitment costs in the fourth quarter, and we are now -- we're examining the organizational form from the viewpoint on how we cannot only expand our business but also dig deeper into the client base for the next fiscal year as well. At present, the AI platform and AI products are separated, but we would like to make them more organically connected, with the AI products accelerating growth even further.

The office will be moved in the fourth quarter, and we are also making change to the way employees work so that they come to our office once in a week. [indiscernible] plan this into discussions. And we also want to create culture where employees who come to the work are not only productive on the work basis, but are encouraged to take on new challenges while exercising their creativity. We will continue to challenge ourselves and present not only business performance, but also new values to the societies.

Thank you very much. And let us conclude the presentation right here. And now let us move over to the Q&A session.