HOUSEI Inc.

Newspaper and news agency clients account for 40% of consolidated net sales, but the newspaper industry is on a declining trend in both circulation and advertising revenue due to competition from internet-only media, creating a risk that revenue will decline as the industry contracts over the medium to long term. Although the withdrawal of competitors has led to an increasing trend in the Company's sales to the newspaper industry, if the development of customers in other industries does not proceed as expected, net sales may decline. As a countermeasure, the Company is promoting the reduction of its revenue ratio dependent on the newspaper industry through customer development in other industries.

The Group outsources significant portions of contracted system development work received from customers to its subsidiary in Wuhan, China, which is a source of competitive advantage in terms of quality, delivery time, and cost. If system export restrictions arise from changes in Chinese government policy, or if offshore development outsourcing becomes impossible due to changes in policy by Japanese customers, there is a risk that business operations could be disrupted. While substitution by domestic development partners in Japan is considered possible, there is also a possibility that the development resources of the Chinese subsidiary could become surplus, and therefore the Group has adopted a policy of actively pursuing the acquisition of projects within China.

Since information system construction is mainly undertaken under contract-based agreements, if the estimated work hours are exceeded due to specification changes or troubles, or if defects occur after inspection and acceptance, the Group must bear the excess costs. This can lead to deterioration in project profitability, as well as potential claims for damages from customers or loss of credibility. In addition to contractual risk-avoidance measures, the Group strives to prevent troubles and losses through risk identification prior to contracting and appropriate progress management.

The entry of businesses providing similar information system construction services, including major companies, improvements in competitors' price competitiveness and service development capabilities, and the emergence of new technologies and business models may result in the loss of the Group's advantages in services, pricing, and technology. There is also a risk that, in the newspaper industry, entry by other companies could erode the Group's technological and cost advantages. The Group is addressing this through differentiation in cost, delivery time, and quality by leveraging resources of its Chinese group companies, as well as through the development of new products such as the generative AI low-code development platform "imprai."

In the information systems industry, technological innovation and changes in customer needs progress extremely rapidly, and if the Group is slow to respond to unforeseen technological innovation or rapid changes in needs, or if the technologies and services it provides become obsolete, this could lead to a decline in competitiveness and significantly affect business performance. Technological innovation occurring faster than expected, or the emergence of new technologies, poses similar risks. The Group continuously works on analyzing the latest technology and market trends and on research and development of new technologies and products.

Due to the nature of information system development work, sales and profits tend to be concentrated in the second half of the fiscal year (particularly the fourth quarter), depending on the timing of order receipt and delivery to customers. In the fiscal year under review, 27% of net sales, 144% of operating profit, and 130% of ordinary profit were recorded in the fourth quarter, and the Company posted an operating loss on a cumulative basis through the third quarter. Since fixed costs are also incurred in the first half, if project progress or inspection/acceptance timing in the second half deviates from plans, this could significantly affect annual business performance.

In addition to tangible fixed assets such as office buildings and cloud service infrastructure at the Wuhan subsidiary, the Group holds goodwill related to the system development business and financial industry information systems business transferred in China and Japan in January 2018 and January 2024, as well as goodwill related to the subsidiarization of Founder Global Technology Co., Ltd. If damage occurs to fixed assets or business activities deteriorate, substantial impairment losses may need to be recorded, which could affect business performance and financial condition. The Group states that it continuously conducts appropriate valuations.

If important customer information or personal information is leaked externally or used improperly, this could result in liability for damages or loss of trust, affecting business performance and financial condition. There is also a risk of information leakage due to computer virus infection. The Group has established a multi-layered information management system, including obtaining and operating ISMS certification, establishing internal regulations, conducting internal audits, and installing and periodically checking antivirus software.

Since the Company's founding, Representative Director and President Xianghong Guan has been deeply involved in all aspects of company management, from the determination of management policy and strategy to the promotion of management control and profit planning. If Mr. Guan were to fully step away from management or become unable to perform his duties and could not be replaced by other human resources, this could affect business performance and financial condition. The Company is working to reduce this dependence by delegating authority to younger personnel in their 30s and 40s and establishing an organizational business operation system, but this dependence has not been completely resolved.

As the technologies required for system development become increasingly diverse and complex, competition to acquire advanced engineers is intense in both Japan and China, and there is a possibility that securing the necessary engineers may become difficult. In addition, labor costs for Chinese engineers tend to rise due to increasing order volumes in the Chinese software industry, and if the Group is unable to stably secure high-quality outsourcing partners domestically and internationally, or if labor costs rise, this could affect business performance and financial condition. The Group aims to secure and retain excellent engineers by enhancing compensation and benefits, introducing incentive plans, and fulfilling intellectual satisfaction through the adoption of advanced technologies.