■Overview of IR <3854>

(8) High Ratio of In-house Products and Services

The company considers the establishment of a revenue structure that is not dependent on the sales of other company products like hardware, which are easily affected by price fluctuations and have low profit margins, as an important part of its management policy and is promoting the expansion of in-house product and service sales. As a result, the ratio of in-house products and services (software, operation, maintenance, membership fees, etc.) to revenue is approximately 70%, a high level.

(9) Partner Strategy

The company's characteristics include high trust from partners (banks, Sier, IT equipment manufacturers, consultants, accounting firms, etc.), who are partners in introducing new projects and cooperating in sales. The sales channel composition ratio (based on amount) of new orders in the System Solution business for the fiscal year ending July 2024 by partner introduction increased by 2.6 points compared to the previous year to 45.3%. Inquiries through the website decreased by 2.3 points to 35.8%, and inquiries generated by in-house sales decreased by 0.3 points to 18.9%. The increase in the ratio of inquiries through partner introduction, a Pull-type sales method, is leading to sales efficiency. In addition, there is a growing trend in orders from large companies introduced by partners, leading to an overall increase in order unit price.

As a result of industry and business consulting expertise and partner strategy, the competitive win rate in the System Solution business as of the end of July 2024 is 85.7%, and user repeat rate is 98.4%, indicating a high level of competitive advantage for the company.

5. Positive Cycle of Productivity Improvement and Increase in Gross Profit Margin

The company is promoting productivity improvement through an integrated production and sales system and expanding stock sales to enhance profitability. By strengthening collaboration between sales and development at the order stage, the company is working on reducing customization work hours and preventing troubles in advance, forming a strategic positive cycle spiral that leads to overall quality and productivity improvement and an increase in gross profit margin. In addition, the company is enhancing coordination by integrating sales and support (system sales, system support) and promoting improvement in gross profit margin through measures such as expanding orders through the enhancement and customization of package functions, shortening lead times through quality and productivity improvement, while considering individual customization as a basic strategy.

As a result, the revenue is on an expanding trend, and the gross profit margin is on a rising trend. When comparing the fiscal years ending in July 2020 and July 2024, the revenue increased by 38.1%, and the gross profit margin rose by 11.1 points from 44.7% to 55.8%. In particular, the gross profit margin of the System Solution business increased by 12.2 points from 44.3% to 56.5%, leading the overall gross profit margin increase. Within the Web Solution business, the gross profit margin of the CROSS business remained flat at 57.8% to 58.0%, attributed to the increased development expenses related to 'BACKYARDTM,' and a rising trend is expected with the expansion of stock sales.

Stock revenue increased by 72.9%, and the stock gross profit increased by 81.1%. As a result, the expense coverage ratio of the stock gross profit increased from 59.4% to 77.4%, forming a revenue structure where approximately 80% of expenses can be covered by stock gross profit. In the future, the goal is to achieve 100% expense coverage by stock gross profit. Although the composition ratios of stock revenue and stock gross profit decreased in the fiscal year ending in July 2023, this was due to a temporary factor of increased hardware sales resulting from the end of server maintenance by manufacturers in the System Solution business. Initiatives such as excavating demand for software upgrades, cloud migration proposals, are expected to maintain the rising trend of overall gross profit margin. The stock gross profit margin has generally remained in the late 50% range.

6. Strengthening collaboration with business partners

The company is strengthening collaboration with business partners in various fields as part of its measures for sales growth and profit expansion. In the fiscal year ending in July 2024, in October 2023, 'Aladdin Office' collaborated with R & A Sea for debt management and payment clearance system 'V-ONE Cloud'; In November of the same year, 'CROSS MALL' started collaborating with ANA X, operated by ANA (ANA Holdings <9202>), for an Internet shopping mall 'ANA Mall' for order, shipping, and inventory information exchange. In June 2024, 'CROSS MALL' continued its collaboration with the EC platform 'MercuriShops' of Mercari <4385> for order and inventory information, and initiated collaboration for product information; 'CROSS MALL' also started collaborating with the cloud-based POS register 'Power POS Cloud' of Tasunet Corporation for order and inventory information. In July of the same year, 'CROSS MALL' began collaborating with AnyReach Inc.'s e-gift service 'AnyGift' for order information.

Regarding the capital business alliance with Sibylla, to maintain the capital business alliance with Sibylla following the capital business alliance between Sibylla and Dentsu Group <4324>, additional investment was made in June 2021 to maintain the ownership ratio. Through further collaboration, the aim is to pursue new services that balance security and convenience. In June 2023, the company participated as a partner company in 'Mizuho Digital Connect,' a DX support service for corporate customers developed by Mizuho Bank and Mizuho Research & Technologies.

7. Risk Factors and Challenges & Countermeasures

Common risk factors in the information system service industry include competition for orders, prolonged development periods due to project enlargement, unprofitable individual projects, delayed response to technological innovations, and talent acquisition challenges. However, as the company's main business is package software development and sales, the risk of unprofitable individual projects is lower compared to system development companies where commissioned development is the mainstay. On the other hand, by aiming for flexible individual customization according to customer needs, differentiation from competitors is sought. Although factors like increased work hours during customization can lead to a decrease in profit margin, productivity improvement through an integrated production and sales system is being promoted as a countermeasure.

(Authored by FISCO guest analyst Masanobu Mizuta)