Co-Creation Hands-On Support Model Doubles BtoB Revenue; "Learn, Use, Delegate" AI Utilization Platform Goes Live

Summary

FY27 1Q revenue came in at JPY 1,643M (+8.5% YoY; +14.5% on a like-for-like basis excluding Strategit), with operating income of JPY 180M (+52.8% YoY) — top-line growth with margin expansion. HEROZ BtoB revenue doubled, up +101.3% YoY, driven by higher utilization under the co-creation hands-on support (BEM) model, while the Cost of Goods Sold ratio improved 4.1pt to 50.1%. HEROZ ASK grew +25.9% QoQ, with ARR of JPY 230M and cumulative contracted customers of approximately 470 companies. With AKM (AI BPO) and Extra (AI training) now consolidated into the group, an integrated "learn → use → delegate" offering built on HEROZ ASK as the common platform has just gone live.

Key Points (Results Highlights and Growth Initiatives)

• Management Strategy and Market View
  • Management sees limited impact from simply supplying generative AI tools, as customers struggle to use them effectively; the strategic pivot is toward an AI BPO model that takes over the work itself.
  • The shift to AI agents extends the offering to autonomous judgment and execution, targeting a broad user base that does not depend on individual skill levels.
  • Premised on the view that domestic generative AI adoption remains underdeveloped, the company is using training programs as a door-knock strategy to broaden the base of AI deployment.
  • From this 1Q, operating income before goodwill amortization is disclosed as a key accounting metric, with additional full-year guidance of JPY 960M.
• Current Business Progress and Drivers
  • In BtoB, the shift from a traditional solutions model to continuous hands-on engagement is lengthening project duration and lifting unit prices, with utilization running above 1Q levels.
  • Active project count rose +26.8% YoY, and engaging with customers jointly from the consideration phase has curbed project timing slippage.
  • Labor costs within Cost of Goods Sold were flat at JPY 252M, with a reclassification effect as headcount losses from attrition were backfilled with external resources.
  • Advertising expenses increased as the flagship AI EXPO exhibition was concentrated in 1Q; spend is allocated primarily to high-ROI trade shows.
• Key Strategic Initiatives and Inflection Points
  • AKM (AI BPO) joined the group in May 2026 and Extra (AI training) in August 2026, establishing an integrated offering with HEROZ ASK as the common platform.
  • Leveraging Extra's 450 content titles and OEM supply base covering roughly 100 companies, the company is widening its entry point to new customers via training budgets.
  • The deemed acquisition date for the full consolidation of VarioSecure is set at end-July 2026, with 100% profit consolidation from 2Q onward.
  • During the quarter, the company announced the launch of co-creation hands-on support (BEM) at Nippon Life to establish in-house AI capability and self-sufficiency.
  • An AI agent development contest co-hosted with The Pokémon Company and Matsuo Institute was held on Kaggle, aimed at raising international brand recognition.

Outlook and Strategy

• Full-year guidance is unchanged at revenue of JPY 6,800M and operating income before goodwill amortization of JPY 960M; 1Q progress of 24.2% and 23.3% respectively is viewed as on track.
• BtoB is expected to grow +64.8% YoY on a 1H cumulative basis, driven by higher utilization.
• From 2Q, total SG&A is expected to step down on cost synergies from the full consolidation of VarioSecure.
• The AI utilization platform follows a three-phase roadmap: Phase 1 bundled sales of training materials and ASK, Phase 2 higher revenue per corporate customer, and Phase 3 a transition from OEM to a monthly-subscription training SaaS.
• M&A targets are narrowed to three domains — BPO × AI, AI SaaS, and AI security — with discipline enforced through proprietary valuation criteria requiring recurring revenue streams and profitability.
• The company aims to expand revenue per customer by cross-selling into other departments within existing accounts.

Positive Factors

• EBITDA of JPY 287M (+25.4% YoY) marked a record high for a first quarter.
• A 4.1pt improvement in the Cost of Goods Sold ratio and a flat SG&A ratio delivered a 3.9pt improvement in the combined cost-plus-SG&A ratio.
• ARR of JPY 4,969M (+17.6% YoY) and a recurring revenue ratio of 72.2% (+1.2pt) point to an expanding recurring revenue base.
• Churn remained below 1% for both AI Security at 0.84% and HEROZ ASK at 0.96%, with ASK improving from the temporary uptick in 4Q of the prior year.
• AIX segment profit was JPY 234M (+56.3% YoY), while AI Security delivered profit of JPY 272M (+16.5% YoY) despite flat revenue.
• HEROZ ASK continues to expand functionality with automated PII masking, Slide AI, the addition of the latest models, and MCP integration; cumulative major feature releases now total 182.

Concerns and Risks

• Quarterly Net Income Attributable to Owners of Parent Company was JPY 32M, just 10.9% of full-year guidance of JPY 300M; note that only 42.8% of VarioSecure's profit was consolidated in 1Q.
• AI Security revenue growth was essentially flat at +0.3%, and JPY 29M of M&A-related costs were booked in 1Q.
• AI Sakura-san will continue to be affected by reinstallation work on certain projects through 2Q, with recovery in AI recurring revenue pushed to 2H.
• The goodwill balance stands at approximately JPY 1.8B, and ongoing amortization will continue to weigh on operating income.
• Headcount losses from attrition are being backfilled with external resources, leaving talent acquisition and the rebuilding of internal staffing a challenge.
• LLM costs for HEROZ ASK are driving up communications and server expenses, requiring management of cost inflation as usage scales.

Performance Highlights

Revenue of JPY 1,643M (+8.5% YoY), operating income before goodwill amortization of JPY 223M (+40.8% YoY), and operating income of JPY 180M (+52.8% YoY) — top-line growth with margin expansion. Excluding the impact of Strategit's deconsolidation at the end of the prior year, like-for-like growth was +14.5%; excluding newly consolidated AKM as well, growth was +13.8%. Quarterly Net Income Attributable to Owners of Parent Company was JPY 32M, turning profitable from a loss of JPY 11M a year earlier.

Segment Results

• ARR (Annual Recurring Revenue): JPY 4,969M (+17.6% YoY)
• Recurring revenue ratio: 72.2% (+1.2pt YoY)
• Recurring revenue: AIX Business JPY 528M (+14.8% YoY), AI Security Business JPY 658M (+7.2% YoY)
• Recurring churn rate: AI Security 0.8% (±0.0pt vs. year-ago quarter-end), HEROZ ASK 1.0% (-0.3pt vs. year-ago quarter-end)
• HEROZ BtoB revenue: +101.3% YoY; active project count +26.8% YoY
• HEROZ ASK: revenue +25.9% QoQ, ARR of JPY 230M, cumulative contracted customers of approximately 470 companies (as of end-July 2026)
• Cost of Goods Sold ratio: 50.1% (-4.1pt YoY) / SG&A-to-revenue ratio: 37.0% (+0.2pt YoY)
• Shogi Wars quarterly games played: just under 30 million; cumulative games played approaching 1.2 billion

Q&A List

• Q: How will the BtoB (AI solutions) business drive growth and improve profitability going forward?
  A: We are transitioning from the traditional model of taking on highly complex projects as an external contractor to a hands-on support model embedded within the customer's organization. By working alongside the customer from the consideration phase, we curb project timing slippage and create a structure in which higher utilization translates directly into revenue and profit growth. We also aim to expand revenue per customer by cross-selling into other departments within the account.
• Q: What policies and discipline will govern M&A, which is a pillar of growth?
  A: We have designated three priority investment domains — BPO × AI, AI SaaS, and AI security — with a policy of acquiring companies that have established customer bases and re-accelerating their growth by converting them to an AI-based model. In addition, we apply proprietary valuation criteria that require recurring revenue streams and profitability, ensuring disciplined M&A and rigorous post-deal synergy realization.