Performance Trend 1. Overview of performance for FY3/2024 Consolidated performance for FY3/2024 of G-7 Holdings <7508> was 192,992 million yen in increased operating income of 9.1% over the previous year, and increased ordinary income of 7.4% to 7,318 million yen, and attributed to the parent company's net income of 5,175 million yen, an increase of 35.3% over the previous year. Sales were driven by the Business Supermarket Business and the Meat Business, and continued to set a new record high, exceeding the company's plan by 4.3%. However, in terms of profits, the automobile-related business was affected by a decrease in profits due to poor sales of winter tires due to a warm winter, and could not reach the company's plan, it turned to a profit increase for the second time due to the growth of other businesses centered on the Business Supermarket business. The sales cost ratio has increased by 0.8 points over the previous year due to changes in the sales composition ratio; however, the selling, general and administrative expense ratio decreased by 0.7 points due to the effect of increased earnings, and the operating margin decreased by 0.1 points to 3.6%. The main reasons for the increase/decrease of selling, general and administrative expenses were a decrease of 600 million yen in energy costs due to subsidies from rising electricity prices, and an increase of 1 billion yen in labor costs due to improvements in employee treatment and increased education costs. In addition to this, depreciation expenses increased by nearly 600 million yen due to rising construction material costs and rising costs of opening stores etc. The EBITDA margin has increased by 0.1 points from the previous year. Also, the reason for the large increase in the net income of the parent company's shareholders attributable to the current period is due to the elimination of 500 million yen in retirement benefits paid to executives that were recorded as special losses in the previous year, a decrease of 455 million yen in impairment losses, and a gain of 127 million yen on the sale of investment securities in FY3/2024.

Performance Trend for the Second Quarter of Fiscal Year 2024 in August.

The performance of Prodearite <5580> for the second quarter of the fiscal year ending in August 2024 was revenue of 1,048 million yen (+9.4% YoY), operating profit of 62 million yen (-0.2% YoY), ordinary profit of 61 million yen (+2.0% YoY), and net profit for the quarter of 36 million yen (-5.1% YoY). Although revenue was 64 million yen, operating profit, ordinary profit, and net income all fell short of the initial performance forecast by 14 million yen, respectively. However, given that the main reason for this shortfall in revenue was due to timing differences, it is believed that this can be corrected in the second half of the year. In addition, special losses were incurred due to damages resulting from malfunctions in the upper-line carrier and firmware defects in the sales terminal.

The Japanese economy is gradually recovering, supported by the normalization of socio-economic activities as Japan shifts to the 5th stage of the new coronavirus infection, an increase in personal consumption due to improvements in employment and income, and a recovery in inbound demand. However, risks continue to exist, such as geopolitical risks, such as the prolonged conflict in Russia and Ukraine and the escalating Middle East situation, the global financial tightening, and concerns about the future of the Chinese economy, leading to a downturn in overseas economic conditions. Additionally, domestic issues such as the depreciation of the yen, price increases, and labor shortages remain challenges, leading to an uncertain outlook. Meanwhile, the market for cloud PBX and IP telephone services continues to perform well, incorporating DX demand related to work-style reforms and changes in office environments, such as telecommuting and free addresses. In such an environment, the company focused on its medium-term business strategy, which includes the continuous evolution of its cloud PBX "INNOVERA," the development of option services utilizing AI technology, strengthening partnerships, and expanding the target audience. Furthermore, the company continues to pursue customer convenience and new customer acquisition in order to achieve further profitability. The company's sales of "INNOVERA" continued to grow smoothly against the backdrop of the growth of the cloud PBX market, with the shift from stationary to cloud-based systems, which can receive phone calls anywhere if there is a smartphone. Its strength lies in the ability to provide a one-stop-shop for systems, circuits and terminals, which has led to increased partner activity and a wider range of customers demanding cloud services via its partners. In addition, the company has begun to be introduced to large companies as a listed company, and its ease of use was evaluated more frequently, leading to more opportunities to add these major companies to its lineup. The target audience includes any industry or customer for business phones, but as the company's services tend to be more advantageous for large companies, the increase in large customers is a natural trend. However, due to the decline in outbound call systems operating on a platform different from the current "INNOVERA" to which it has initially expected in the medium to long term, it was not met. On the profit side, the profit from systems and circuits increased, but the sales gross profit ratio declined due to initial costs and incentives incurred by the company's growing number of major partners. Selling and general administrative expenses increased due to efforts to strengthen its system, hiring and educational expenses, but the selling and general administrative expense ratio improved due to greater control. As a result, operating profit margin decreased slightly and became a small profit. The main reason for the failure to achieve the initial performance forecast was the early contraction of the outbound call system, which was strong in correlation with circuits, beyond initial forecasts. Going forward, the company plans to land this contraction softly in light of accelerating growth with the highly scalable new INNOVERA 2.0 platform and increased account numbers harvested steadily from the third quarter onwards. Sales gross profit margins are already recovering at present.

In terms of revenue, sales of INNOVERA have steadily increased against the backdrop of the growth of the cloud PBX market, as cloud-based services that can receive phone calls anywhere with a smartphone continue to shift from stationary services. The fact that the company can provide systems, circuits, and terminals as a one-stop-shop for partners has led to increased partner activity and an increase in the number of customers demanding cloud services through its partners. Moreover, since listing, there have been more cases in which major companies have been introduced, and it seems that its advantages have been evaluated more and more often and more opportunities to be included in the lineup of such major companies have been emerging. Although targeted to any industry or customer for business phones, as the benefits of its services tend to be greater for larger companies, the increase in larger customers is a natural trend. However, revenue for outbound call systems operating on a platform different from the current "INNOVERA" fell short of its initial expectations.

On the profit side, profits from systems and circuits increased, but due to the growing number of major partners, initial costs and incentives were incurred, leading to a decline in sales gross profit margins. Although selling, general, and administrative expenses increased as the company tried to strengthen its systems and as personnel and training costs increased, selling and administrative expenses have improved due to increased control. As a result, the operating profit margin decreased slightly and resulted in a small profit. The main reason for not meeting the initial forecast was the earlier-than-expected contraction of the outbound call system which had initially been expected to grow for the medium to long term. Furthermore, since this system was strongly correlated with circuits, the revenue of circuits also fell short of its initial forecast. Going forward, the company plans to have a soft landing for this contraction in revenue, given that new INNOVERA 2.0 platform has high scalability and that it continues pursuing larger customer base through the continuous evolution of INNOVERA and development of option services utilizing AI technology, along with strengthening partnerships, expanding the target audience, information dissemination and strengthening brand power through sponsor events. Although revenue has not reached initial forecasts for revenue, it appears that the sales gross profit margin is already trying to recover.

(Author: FISCO guest analyst Nobumitsu Miyata)