Business Overview 4. DX Regional Collaboration Project Signpost's DX and Regional Collaboration Project started in March 2022 with the establishment of the DX and Regional Collaboration Division. It aims to provide products and services that contribute to regional collaboration by collaborating with local financial institutions nationwide, utilizing its own DX technology and open innovation. In August 2022, it began working with Oita Made Co., Ltd., which was established with the investment of multiple companies in Oita Prefecture, including Oita Bank, to sell original products made in Oita Prefecture to both domestic and overseas markets and to match local companies and Signpost's products and services in order to promote the revitalization of Oita Prefecture's economy. In addition, in April 2024, it started offering DX support services for medium-sized and small businesses. As the first effort, it supports the creation of DX declaration by (The) Fourth Hokuriku Bank, Ltd. (Niigata City, Niigata Prefecture) to deploy DX declaration support services to the market. Furthermore, it will realize new solutions by commercializing its own technology and open innovation and promote regional collaboration through innovation.

1. Company Overview

Axel<6730> is the top manufacturer of graphics LSI (G-LSI), which projects images on liquid crystal displays mounted on gaming machines (pachinko, pachislot) that holds about 50% market share. The company outsources production, specializing in research and development and sales strategies as a fab-less manufacturer. In recent years, sales of memory modules that stores gaming machine contents have also expanded, becoming the company's main products. AIMRage Co., Ltd., a subsidiary, handles it, and the industry share is almost monopolized at about 80%. For other products, it develops and sells embedded G-LSI for medical equipment, industrial machinery, and other devices, in addition to LED drivers for pachinko and pachislot machines.

Founded as a joint venture with Fujitsu Device Co., Ltd. (currently NV Device Co., Ltd.) in November 2020 to develop and sell next-generation memory products for gaming machines, and has been added as a consolidated subsidiary from the fiscal year ending March 2022 (85% investment ratio).

In addition, leveraging the development power accumulated in the development of gaming machine G-LSI, we established AX Co., Ltd. as a subsidiary in May 2019 to expand into new business areas such as AI solutions. AX fully acquired bitcraft Co., Ltd., which developed software in June of that year, and Motion Portrait Co., Ltd., which developed image recognition and processing technology in August of the same year (bitcraft in October of the same year, Motion Portrait in December 2020) and later merged with the company. (With an 87.7% share.) The total number of employees for the fiscal year ending March 2024 is 128, up two from the previous fiscal year, including 97 for the company alone.

2. Business Segments

(1) LSI Development and Sales-Related

The "LSI development and sales-related" segment develops and sells G-LSI for gaming machines, as well as peripheral devices such as memory modules and LED drivers. It accounts for 96.4% of the revenue composition ratio for the fiscal year ending March 2024. The feature of the company's G-LSI for gaming machines is its ability to achieve high-definition display images even with a relatively low-cost CPU. It also has various effect functions that can display compressed image data stored in the image ROM instantly and enable various expressions. For G-LSI for gaming machines, specialized technology is required for such specific purposes, and research and development costs tend to increase due to the miniaturization of the design process and the enlargement of circuit size, making entry barriers high. Competition includes Yamaha<7951>, Digital Media Professionals<3652>, and others.

Note that reused (reused) products are used in a certain amount for G-LSI for gaming machines and memory modules. It is necessary to note that the number of semiconductor shipments and the demand for these semiconductors do not necessarily correlate. This is because the parts installed in gaming machines are of sufficient quality to withstand repeated use, and gaming machine manufacturers have expanded the use of reused products for cost reduction and environmental measures. Gaming machine manufacturers collect parts from pachinko parlors through recycling companies and reuse them. For G-LSI for gaming machines, it is estimated that about 20% to 40% of the annual demand is reused, and for memory modules, about 1% to 3% is reused, which depends on the cost reduction measures of gaming machine manufacturers and the generational replacement of semiconductors.

As a fab-less manufacturer, the company has outsourced all semiconductor manufacturing. For G-LSI, it outsourced manufacturing to major overseas foundries that can mass-produce leading-edge microcircuit technology at low cost from the domestic semiconductor manufacturer up until "AG5", but has outsourced manufacturing to overseas major foundry manufacturers since "AG6". Therefore, it will be affected by fluctuations in exchange rates with respect to procurement of "AG6". Since 2022, the yen has been in a weak trend, and the rising cost of procurement due to the rise in procurement prices has caused a high-cost factor, but the company is dealing with it by implementing some exchange reservations and adjusting prices. For the fiscal year ending March 2024, the revenue composition ratio for the main customers is 51.2% for Midoriya Electric Co., Ltd., 27.6% for Kaga FEI Co., Ltd., and 12.4% for Kaga Electronics<8154> Co., Ltd., accounting for more than 90% of the total.

Note that this company is a research and development-based fab-less manufacturer, so until the fiscal year ending March 2019, there was a characteristic of a high research and development expense ratio in terms of sales, but since the fiscal year ending March 2020, research and development expenses have settled at a level of around 1.5 billion yen annually, and the sales ratio has also dropped to a level below 10% for the fiscal year ending March 2024. The main reason for this is that since the peak of development expenses for "AG6" in the fiscal year ending March 2019, the development of next-generation G-LSI has not started. The transition from "AG5" to "AG6" has been at a slower pace than before. While "AG6" is high-performance, it seems that its high power consumption and high price are becoming a bottleneck in the market environment. Therefore, the company plans to start selling the successor product of "AG6", which has achieved low power consumption and low system cost, by reexamining the design from the fiscal year ending March 2025. Full-scale sales will begin from the fiscal year ending March 2026, and it is expected that the transition speed will also accelerate with the introduction of the product.

(Written by FISCO guest analyst, Jo Sato)