Management targets HOL revenue of JPY 3-4B next fiscal year, and several deals under its three-year, JPY 20B M&A plan have reached the final stage. Together, these set out a clear path to the Mid-Term Plan targets.

Summary

1H revenue was flat YoY. Operating income still rose on site consolidation benefits and lower depreciation, and net income grew by double digits. Full-year guidance is unchanged, with operating income and net income expected to land in line with plan. Management acknowledged that HOL revenue recognition has slipped from initial expectations. It stressed, however, that no deals have been lost and verbally indicated revenue scale from next fiscal year onward. It also disclosed that several roll-up M&A deals are in the final stage. Management believes that HOL and M&A together put the Mid-Term Plan targets well within reach.

Key Points (Earnings Takeaways and Growth Initiatives)

• Management Strategy and Market View
  • Views AI as an opportunity to upgrade its business and create new domains, not as a threat to the existing contact center business
  • BPO penetration among Japanese companies is about 20%, versus about 50% in Europe and the US, which management sees as significant room for growth
  • Plans to capture growing HR and accounting BPO demand from portfolio companies of overseas funds as a growth opportunity for the SB business
  • Prioritizes growth in underlying business substance over consolidated figures, a stance reflected in the decision to change its Horizon One shareholding
• Current Business Progress and Drivers
  • SC business revenue declined: new contracts did not fully offset lower HR-related work and the absence of prior-year Upper House election work
  • By industry, life and non-life insurance, telecom carriers, new power retailers and real estate grew, while HR-related, manufacturing and wholesale/retail declined
  • Gains from pricing optimization and site consolidation were offset by higher facility costs from inflation, leaving gross profit flat
  • Lower depreciation from site consolidation absorbed higher indirect labor costs from wage increases
• Key Strategic Initiatives and Inflection Points
  • HOL is scheduled to begin live operation of Sherpy with about 500 operators from January 2027. The pipeline comprises 7 confirmed clients (5 at STEP2), 4 with letters of intent and 9 in final negotiations
  • Exploring a partner model linking its knowledge database with external AI and CRM platforms, with talks already under way with several companies
  • AI-BPO in partnership with BA Intelligence has won 4 contracts, with negotiations ongoing with just over 10 companies
  • Horizon One ownership will change to 50:50, making it an equity-method affiliate. Approx. JPY 800M in other income is expected to be booked in 3Q

Outlook and Strategy

• Full-year guidance (revenue JPY 152B, operating income JPY 13B, net income JPY 8.5B) is unchanged. 1H was broadly in line with the internal plan
• HOL revenue this fiscal year will lag initial expectations slightly. Management expects JPY 3-4B in FY2027 and JPY 8-10B in FY2028
• M&A of about JPY 20B is planned over three years. Two deals, of about JPY 1B and JPY 6-7B, are in the final stage, and another JPY 1B deal is expected to close around 4Q this fiscal year
• Management believes the Mid-Term Plan targets of JPY 175B in revenue and JPY 16B in operating income are well within reach through HOL ramp-up and roll-ups
• Plans to deploy HOL and AI-BPO at acquired companies to improve operating efficiency. Deals in specialized areas such as healthcare are also under consideration

Positive Factors

• HOL is delayed but no deals have been lost, and many clients beyond the disclosed figures have expressed interest
• Go-live of the first implementation could prompt clients on the sidelines to follow, accelerating adoption
• Key differentiators include deep understanding of client operations, industry-specific operational know-how, and voice data analytics combined with AI
• An AI voicebot launching in October will capture demand for simple inquiries outside HOL's scope
• Following recent data breach incidents, the company has received multiple call center and BPO inquiries, a revenue opportunity albeit a one-off
• Launched BPX support services in August, targeting JPY 10B in new business by the end of FY2028

Concerns and Risks

• Technical fine-tuning and client negotiations for HOL are taking longer than expected, pushing back revenue recognition from initial assumptions
• Operating income guidance is unchanged despite approx. JPY 800M in expected one-off income, so the focus is on underlying 2H earnings build
• The full-year plan is 2H-weighted, and 1H progress on revenue and operating income fell short of the 50% benchmark
• Rising interest rates increased interest expense on borrowings, with net finance income/costs down JPY 80M YoY
• Net income growth benefited from a one-off reduction in income tax expense (+JPY 220M) from preferential tax treatment in 1Q
• Deconsolidating Horizon One will reduce consolidated SB business revenue, while cost increases from inflation and wage hikes persist

Performance Highlights

1H cumulative revenue was JPY 73.16B (+0.0%), operating income JPY 6.17B (+4.4%), and interim profit attributable to owners of the parent JPY 4.28B (+12.0%). Operating Income Margin improved from 8.1% to 8.4%. The interim dividend was JPY 30 per share, in line with the latest forecast.

Segment Performance

• Gross Profit: JPY 13.58B (+0.1% YoY)
• Gross Profit Margin: 18.6% (+0.1pt YoY)
• SG&A: JPY 7.52B (-2.6% YoY)
• Share of Profit of Equity-Method Investments: JPY 310M (+JPY 110M YoY)
• Full-Year Plan Progress: Revenue 48.1%, Operating Income 47.5%, Net Income 50.4% (YoY ―)

Q&A List

• Q

  Regarding roll-ups, how will you leverage post-acquisition synergies and AI?

  A

  We plan to execute roll-up M&A of about JPY 20B over the next three years. Deals are starting to emerge: one of about JPY 1B and another of about JPY 6-7B are in the final stage. We expect another deal of about JPY 1B to close around 4Q this fiscal year, so we are making steady progress. We are advancing HOL and AI-BPO, and we believe applying them to acquired companies to run them more efficiently will generate growing synergies. Targets include contact center and BPO companies as well as specialized areas such as healthcare. We intend to use AI efficiently as we move forward.

• Q

  Based on results through 2Q, the Mid-Term Plan targets of JPY 175B in revenue and JPY 16B in operating income look challenging. What is your view?

  A

  1H revenue may look somewhat weak against this year's plan, but it is broadly on track against our internal plan. We intend to reach the targets by building HOL-related revenue and executing roll-ups. We are currently evaluating acquisition targets where we can leverage our strengths in both the SC and SB businesses, which will add revenue. HOL is running somewhat behind, but we have not lost any deals, and we expect revenue to accelerate from 2H into next fiscal year. On this basis, we currently believe the Mid-Term Plan is well within reach. (President's comments) Revenue shifted from the SC business to the SB business. In the SC business, we aim to grow revenue by winning new clients, or new work from existing clients, through HOL and AI-BPO. 1H progress was limited, but we have deals in the works and believe we can grow revenue. In the SB business, BPO is growing. About 50% of companies in Europe and the US use BPO, versus only about 20% in Japan, and we expect strong growth ahead. Most notably, companies acquired by overseas funds are increasingly outsourcing HR and accounting functions to BPO providers. We aim to win substantial business from this trend, so please watch this space.

• Q

  HOL final-stage negotiations fell by 3 over the past three months. Even if some advanced to letters of intent or confirmation, around 2 clients may have dropped out. Could you explain any gaps between the company and clients on price, implementation speed or concept?

  A

  No clients have dropped out of HOL. Because this is a first-of-its-kind initiative, some technical issues that need resolving have slowed things down, and we also need to work through various implementation details with clients, which has caused some delays. Many clients remain interested, including a large number beyond the disclosed figures, and we aim to go live as soon as possible. Since this is new, many clients are taking a wait-and-see approach. We believe more will follow once the first client goes live.

• Q

  HOL implementation is approaching. How is client feedback on the service?

  A

  The first HOL implementation shown in the materials provides information via chat to 500 operators, who use it to respond to inquiries, and expectations are very high. The deal is confirmed, and preparations are now in the final stage.

• Q

  Could you describe the pace of revenue contribution, including pipeline conversion from next fiscal year onward?

  A

  Starting with the first implementation, this fiscal year may run slightly behind initial expectations. We expect revenue of JPY 3-4B next fiscal year and JPY 8-10B in FY2028.

• Q

  As you strengthen BPO, what benefits do you expect from moving Horizon One from a consolidated subsidiary to an equity-method affiliate?

  A

  Layers Consulting has historically been responsible for deal origination at Horizon One. Layers Consulting and the company will clearly divide roles between deal origination and our robust operations to drive growth. We are confident this will lift Horizon One's profits beyond previous levels. (President's comments) Layers Consulting originates a wide range of deals. Its president told us that a 49% stake created various obstacles to channeling Layers deals to Horizon One and asked for a 50:50 split. Going from 51% to 50% means we can no longer consolidate its revenue, so we deliberated. However, we concluded that growing the underlying business, and this company's growth in particular, matters more. If a 50:50 structure truly brings in and advances more deals, it is the right move. The aim is to grow the underlying business, and we judged Horizon One's growth more important than keeping it consolidated.

• Q

  What is your direction for strengthening BPO, including any M&A strategies you consider necessary?

  A

  We are evaluating roll-ups targeting healthcare, where we are strong, as well as peers and companies that handle these functions in-house. We plan to first expand our business footprint, then add initiatives such as our partnership with BA Intelligence to further raise service levels and grow revenue. (President's comments) Our commitment to strengthening BPO is unchanged. There are many new M&A opportunities, and successful acquisitions would also drive revenue growth. The Horizon One decision reflects a balance of various factors.

• Q

  Do recent data breaches create opportunities to expand BELLSYSTEM24 HOLDINGS, INC.'s solutions? If so, please explain.

  A

  Customer data breaches have drawn wide public attention, and we have naturally received various inquiries about customer support, including call center and BPO services. The effect is temporary, but we are receiving numerous inquiries, and the situation is boosting our revenue.