Key Positives From The 1Q Results
Revenue of JPY 1,643M (+8.5% YoY) was accompanied by operating income of JPY 180M (+52.8% YoY), with profit growth far outpacing the top line. Improved utilization at HEROZ BtoB (revenue +101.3% YoY) absorbed cost increases, and cost of goods sold actually declined 2.9% YoY. Gross profit margin improved to 50.0%, making the shift in the earnings structure visible in the numbers.
- COGS ratio improved from 55.9% to 50.0% (our estimate). On the company-disclosed organic basis, it improved 4.1pt from 54.2% to 50.1%
- HEROZ BtoB revenue +101.3% YoY, with the number of active projects +26.8% YoY. Co-creation hands-on support (BEM) is keeping utilization at high levels
- HEROZ ASK revenue rose +25.9% QoQ, with ARR of JPY 230M as of end-July and roughly 470 cumulative contracted customers (company disclosure)
- ARR of JPY 4,969M (+17.6% YoY) and recurring revenue ratio of 72.2% (+1.2pt YoY) point to an expanding stock base
- Equity ratio rose from 58.7% to 68.3%, with net cash of JPY 1,090M (our estimate), strengthening the balance sheet
Key Concerns From The 1Q Results
While operating income grew 52.8%, recurring profit rose only 46.2% and net income progress against guidance stands at just 10.9%. Two factors are at work: non-operating expenses increased to JPY 42M, and the deemed acquisition date set for the full subsidiarization of VarioSecure limited the consolidation of its profit in 1Q to 42.8% (company disclosure). The step-up in that consolidation ratio from 2Q and the extent to which cost synergies materialize are key to hitting the profit plan.
- Non-operating expenses of JPY 42M (vs. JPY 23M a year earlier). New/incremental items include JPY 11M in crypto-asset valuation losses and JPY 8M in losses on investment securities
- SG&A of JPY 641M (+16.7% YoY), driven mainly by M&A-related expenses and a temporary increase in temporary-staff costs at VarioSecure
- AI Security revenue was flat at JPY 708M (+0.3% YoY). M&A-related costs of JPY 29M were also booked in 1Q (company disclosure)
- Goodwill of JPY 1,856M equals 22.0% of total assets (our estimate). Amortization will continue to weigh on operating income on a full-year basis
- AI Sakura-san grew +9.2% YoY, but the impact of reinstallation at some projects is expected to linger into 2Q (company disclosure)
Focus Areas / Items To Monitor Going Forward
- Cost synergies from the full subsidiarization of VarioSecure. Management expects total SG&A to decline from 2Q, and we want to confirm the timing and absolute magnitude of that effect.
- Delivery against the company's guidance for HEROZ BtoB 2Q cumulative revenue of +64.8% YoY (company disclosure). The degree of deceleration from 1Q's +101.3% and the sustainability of utilization and unit pricing are the key issues.
- Earnings contribution from the AI utilization platform incorporating AKM (AI BPO) and Extra (AI training). The read-through to ASK customer count and unit pricing will drive growth rates from next year onward.
- The quarterly recovery path required to reach full-year net income of JPY 300M, given 1Q progress of only 10.9%
- The quantified scale of cost synergies from the full subsidiarization of VarioSecure and the quarter in which they will emerge
- The year-end target level for HEROZ ASK's JPY 230M ARR and the scope to lift ARPA
- Pricing and packaging for AI Security Cowork as the lever to reaccelerate AI Security revenue from +0.3% YoY
- Payback assumptions for the AKM and Extra acquisitions, and future M&A discipline in light of the goodwill amortization burden
Key Financial Highlights
| Item | Value | YoY |
|---|---|---|
| Revenue | JPY 1,643M | +8.5% |
| └ Cost of Goods Sold | JPY 822M | ▲2.9% |
| └ SG&A | JPY 641M | +16.7% |
| Gross Profit | JPY 821M | +23.1% |
| Operating Income Before Goodwill Amortization | JPY 223M | +40.8% |
| Operating Income | JPY 180M | +52.8% |
| EBITDA | JPY 287M | +25.4% |
| Recurring Profit | JPY 138M | +46.2% |
| └ Total Non-Operating Expenses | JPY 42M | +76.7% |
| Quarterly Net Income Attributable to Owners of Parent Company | JPY 32M | Return to profit (vs. ▲JPY 11M a year earlier) |
| └ Quarterly Net Income Attributable to Non-Controlling Interests | JPY 54M | ▲19.3% |
| EPS | JPY 2.03 | Return to profit (vs. ▲JPY 0.76 a year earlier) |
| ARR (Annual Recurring Revenue) | JPY 4,969M | +17.6% |
| Recurring Revenue Ratio | 72.2% | +1.2pt |
The COGS ratio improved from 55.9% to 50.0%, while the SG&A ratio rose from 36.3% to 39.0% (both our estimates). EBITDA, as defined by the company (operating income + depreciation + amortization of lease deposits + goodwill amortization + share-based compensation expenses + inventory write-downs), hit a record high for a first quarter. The company disclosed underlying revenue growth of +14.5% excluding the impact of Strategit's deconsolidation, and +13.8% on a basis excluding AKM.
Performance By Business Segment
In the AIX segment, external revenue reached JPY 934M (+15.7% YoY) and segment profit JPY 234M (+56.3% YoY), a sharp improvement in profitability. AI Security external revenue was flat at JPY 708M (+0.3% YoY), but segment profit rose to JPY 272M (+16.5% YoY). Corporate expenses (adjustments) widened to ▲JPY 326M, primarily on M&A-related costs.
Segment Performance Table
| Segment | Revenue | YoY | Operating Income | YoY | Margin |
|---|---|---|---|---|---|
| AIX | JPY 934M | +15.7% | JPY 234M | +56.3% | 25.1% |
| AI Security | JPY 708M | +0.3% | JPY 272M | +16.5% | 38.4% |
| Adjustments (Corporate Expenses) | - | - | ▲JPY 326M | Cost increase of ▲JPY 60M | - |
| Consolidated Total | JPY 1,643M | +8.5% | JPY 180M | +52.8% | 11.0% |
(Revenue is on an external customer basis. Margins are our estimates.)
- HEROZ BtoB (AI Solutions): revenue +101.3% YoY. The shift to co-creation hands-on support means working alongside clients from the evaluation phase, keeping utilization high. Active project count also rose +26.8% YoY
- HEROZ ASK (AI SaaS): revenue +25.9% QoQ. Automated PII masking has removed an adoption hurdle for large enterprises, while Slide AI extends the category into document creation
- AI Security profit: segment profit +16.5% YoY. Stock-type recurring revenue provides the base, with the recurring churn rate at 0.84%, remaining below 1%
- AI Sakura-san: revenue +9.2% YoY. New deployments are expanding in labor-short areas such as tourist information, elderly monitoring, and government service counters
- AI Security revenue: flat at +0.3% YoY. With a mix that still includes one-time-purchase products, growth is centered on building recurring revenue, leaving the growth rate in the low single digits
- BtoC (shogi business): revenue +0.6% YoY. Quarterly games played were just under 30 million and premium user numbers hit a record high, but already-high network externalities cap the upside
Progress Versus Full-Year Guidance
Revenue progress of 24.2% and operating income progress of 22.5% are in line with the prior-year first-quarter run rate against full-year actuals (revenue 23.6%, operating income 22.4%; our estimates). The low 10.9% net income progress reflects the deemed acquisition date for the full subsidiarization of VarioSecure being set at end-July 2026, which limited consolidation of its profit in 1Q to 42.8% and resulted in JPY 44M of profit attributable to non-controlling interests (company disclosure). Management plans to consolidate 100% of the subsidiary's profit from 2Q, implying a second-half-weighted profit profile.
| Item | Value (1Q) | Full-Year Forecast | Progress Rate |
|---|---|---|---|
| Revenue | JPY 1,643M | JPY 6,800M | 24.2% |
| Operating Income Before Goodwill Amortization | JPY 223M | JPY 960M | 23.3% |
| Operating Income | JPY 180M | JPY 800M | 22.5% |
| Recurring Profit | JPY 138M | JPY 700M | 19.7% |
| Net Income Attributable to Owners of Parent Company | JPY 32M | JPY 300M | 10.9% |
| EBITDA | JPY 287M | JPY 1,300M | 22.1% |
- Company-disclosed quarterly trends show a 4Q-weighted pattern. In FY4/2026, revenue moved from JPY 1,514M in 1Q to JPY 1,738M in 4Q, and EBITDA from JPY 229M in 1Q to JPY 306M in 4Q
- The BtoB business is guided to +64.8% YoY revenue growth on a 2Q cumulative basis (company disclosure)
Changes To Guidance
No changes from the full-year consolidated guidance announced on June 12, 2026 (revenue JPY 6,800M, operating income JPY 800M, recurring profit JPY 700M, net income JPY 300M). Note that from this 1Q the company began disclosing operating income before goodwill amortization as a key accounting metric, adding full-year guidance of JPY 960M.
Commentary On Shareholder Returns
The FY4/2027 dividend forecast is JPY 0.00 per year (JPY 0.00 at both the 2Q-end and year-end), unchanged from the previous forecast. FY4/2026 was also JPY 0.00 per year, so the no-dividend policy continues. A shareholder benefit provision of JPY 16M has been booked as the shareholder benefit program continues, with related costs of JPY 10M in the quarter (non-operating expenses). Treasury shares stood at 2,523 at quarter-end.
Financial Position
A JPY 743M increase in capital surplus from the share exchange lifted the equity ratio from 58.7% to 68.3%, with the company maintaining a net cash position. Cash and deposits increased JPY 677M, partly due to transfers from deposits paid, while interest-bearing debt declined as repayments progressed.
- Key Figures
- Leverage Metrics
| Item | Value | Additional Information |
|---|---|---|
| Cash and Deposits | JPY 2,627M | +34.7% vs. prior period (deposits paid ▲JPY 946M) |
| Shareholders' Equity | JPY 5,762M | +15.5% vs. prior period (capital surplus +JPY 743M) |
| Interest-Bearing Debt | JPY 1,537M | ▲6.8% vs. prior period; net cash of JPY 1,090M (our estimate) |
| └ Short-Term Borrowings | JPY 350M | Flat vs. prior period |
| └ Current Portion of Long-Term Borrowings | JPY 467M | Flat vs. prior period |
| └ Long-Term Borrowings | JPY 720M | ▲JPY 111M vs. prior period |
| Goodwill | JPY 1,856M | +3.7% vs. prior period; 22.0% of total assets (our estimate) |
| Software (Incl. Construction in Progress) | JPY 621M | JPY 607M in prior period; transfers from construction in progress advancing |
| Non-Controlling Interests | JPY 127M | ▲84.1% vs. prior period (JPY 673M decrease from the share exchange) |
| EBITDA | JPY 287M | Company disclosure (operating income + depreciation + amortization of lease deposits + goodwill amortization + share-based compensation expenses + inventory write-downs) |
(No quarterly consolidated statement of cash flows was prepared. Depreciation of JPY 55M and goodwill amortization of JPY 43M were disclosed in the notes.)
Disclosures Released Alongside The Earnings Announcement
Major Announcements During The Quarter
- 2026/06/16Co-hosted an AI agent development contest on Kaggle with Pokémon and Matsuo Institute. The challenge of imperfect-information games is being used to showcase the company's AI capabilities internationally Hosting an AI Agent Development Contest Competing at the Pokémon Trading Card Game! — "Pokémon Trading Card Game AI Battle Challenge" starts Tuesday, June 16
- 2026/06/30Made VarioSecure a wholly owned subsidiary via share exchange. The aim is faster decision-making and synergies from mutual use of AI technology and the 24/365 operations framework Statutory Post-Transaction Disclosure Document (Share Exchange) (VarioSecure)
- 2026/08/03Subsidiary Extra acquired the AI training business of Extra Ltd. The deal brings roughly 450 training content assets and an OEM base of about 100 companies, advancing AIX support with training as the entry point Notice Regarding Business Acquisition by a Subsidiary
- 2026/08/20Resolved to issue new shares as restricted stock compensation, aimed at medium- to long-term corporate value creation and alignment with shareholders Notice Regarding Issuance of New Shares as Restricted Stock Compensation
- 2026/08/26Launched co-creation hands-on support (Business Embedded Model) for Nippon Life to establish in-house AI capabilities and self-sufficient operations. A track record of BEM deployment at a major financial institution HEROZ Launches Co-Creation Hands-On Support (Business Embedded Model) to Establish In-House AI Capabilities and Self-Sufficient Operations at Nippon Life — Advancing In-House AI Support and Business Process Redesign
Large-Shareholding Filings / Material Proposals Over The Past Year
None
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