ExaWizards Inc

TSE:4259

Earnings Call Transcript 2023-Q3

[Koichi Kawai, executive]

Good evening from Tokyo, Japan, and good morning to most of the attendees here. Welcome to ExaWizards' earnings call for the third quarter of the fiscal year ending March 2023. This is Koichi Kawai, Executive Officer, Head of President Office and Deputy General Manager of Corporate Management at ExaWizards. With me on the call today are Ko Ishiyama, Representative Director and President, Hirotsuna Fujiwara, Executive Officer in charge of Corporate Management; and Hikaru Koyama, Head of IR Department.

After the market closed today in Japan time, we issued a press release and presentation with details regarding our third quarter results as well as supplemental data sheets and FAQs, both of which can be accessed on the IR section of our official website. Please note that this meeting is also being recorded and will be posted on IR website at a later date. During today's call, we will make statements related to our business that may be considered forward-looking, and this statement reflects our views only as of today and should not be considered representative of our views as any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. With that, I would like to introduce today's schedule. Today, Mr. Ishiyama and I will begin by explaining the executive summary of the third quarter, overview and progress of the business segment and revised forecast of consolidated financial results for the fiscal year ending this year followed in the presentation material. After the presentation, we will have a Q&A session until 11 p.m. Japan time.

With that, let me turn the call over to Mr. Ishiyama. Mr. Ishiyama, please.

[Ko Ishiyama, executive]

Thank you, Kawai-san, and hello everybody. Thank you for joining us today, and this is Ko Ishiyama, Representative Director and President of ExaWizards. I'm pleased to give you a briefing on the results of third quarter of the fiscal year ending March 2023. And before I start the presentation, let me strongly articulate that. Although, some individual companies have been reducing the size of their projects, the AI market as a whole is still huge with strong demand. We continue to see strong overall demand for AI and digital transformation utilization with an increased attention on large run rate model like ChatGPT, which I will comment more in the later part of the presentation. Well, this is a table of content for today's presentation. First, I will provide a summary of third quarter financial results and our overview of consolidated results followed by an overview of the AI platform and AI product segments and their performance. Finally, I will explain our revised forecast for the fiscal year ending March 2023. Now let me start with the executive summary of the third quarter of the fiscal year ending March 2023. Third quarter cumulative sales were JPY 4,008 million, plus 21.9% year-on-year while the third quarter 3 months basis sales were starting JPY 1,385 million, plus 5.3% year-on-year maintaining the growth. Third quarter 3 months basis, operating profit was minus JPY 138 million, minus JPY 110 million year-on-year. Revised full year forecast due to lower than expected third quarter sales and operating profit results for the AI platform. And the prospect of difficulty in covering up from the current progress in fourth quarter as well as the expected extraordinary income from the transfer of the CareWiz Hanasuto business. And for AI platform segment, third quarter cumulative sales were JPY 3,460 million, plus 20.8% year-on-year. Third quarter 3 most basis sales were JPY 1,159 million, plus 2.8% year-on-year, lower than expected due to project downsizing at some large clients in the current period. Third quarter cumulative sales to long-term clients remained high at JPY 2,583 million, 74.7% of sales. Our third quarter cumulative operating margin was 6.4%, 14.0% in the same period last year, with cumulative sales are being below expectations, while the profit margin declined due to higher personnel costs resulting from the increase in head count compared to last year, 8.1% in second quarter. Third quarter cumulative sales were JPY 547 million, plus 29.1% year-on-year. And third quarter 3 months basis sales were JPY 226 million, plus 20.5% year-on-year, in line with expectations. Third quarter cumulative sales were 46.8% for the total of AI Products, excluding Physical Nursing Care Training. The company, ExaWizards, consider investing in CARE CONNECT JAPAN with which it has business alliance and resolves to transfer the business of CareWiz Hanasuto. ExaWizards develops new areas of care, deepens cooperation with CARE CONNECT JAPAN, which has strengths in the care documentation and support the management of care facilities together. Next is the summary of the financial results page. This section contains key figures for the current fiscal year. We will explain them individually later. Next page is the summary of financial results of third quarter of the fiscal year ending March 2023. I will explain consolidated sales and operating income for the cumulative third quarter period. Cumulative sales for the period continued to grow plus 21.9% year-on-year, and operating loss was JPY 425 million due to year-on-year increases in personnel costs. Next, I will discuss our consolidated sales and operating income on the third quarter 3 months basis. Sales for the period on a quarterly basis grew up approximately 5.3%. There was an operating loss of JPY 138 million, mainly due to the AI platform segment's performance. This page shows the entire consolidated P&L. In this fiscal year, we recovered extraordinary income from the sale of some of our business in the first quarter. In addition, from the fiscal year, we have started to apply the Japanese group relief system. This is consolidated balance sheet. In the current period, there will be no significant change from the end of the fiscal year ending March 2023. Now I'd like to -- now I direct on to Mr. Kawai for the segment overview. Mr. Kawai?

[Koichi Kawai, executive]

Thank you very much, Mr. Ishiyama. Then we would like to continue with an explanation and overview and progress of the business segments. Our mission is solving social issues through artificial intelligence for future generations and we're solving social issues by providing AI machine-learning based platform into industrial issues while accumulating algorithms to measure scalability. We have 2 business segments called AI Platform for enterprises and AI Products for various SMBs, enterprise and individuals. And the core strength being accumulation of this innovative algorithms and data sets from various vertical and domains. Currently, the AI Platform business accounts for 86% of our revenue through solving the problems of CxO in large enterprises, our scale of the project is becoming larger and larger. Please understand that AI Platform will be the driver of the growth for the short to midterm and AI Products to be a long-term driver for the future. The following is a summary of sales and earnings by segments for the third quarter. On the top right-hand side, the cumulative sales in the AI Platform business totaled JPY 3,460 million up approximately 21%, while making around 60% GP margin. On the bottom right-hand side, cumulative sales in the AI Product's segment totaled JPY 547 million, up about 29% and also continue to grow. As the revenue scale, the GP margin gradually is improving to 36.1%. Now we will go over to our AI platform business overview. And here's an overview of our AI Platform business, as explained from below 42% of our employees are currently strategic consultants, and they work as an in-house consultants to solve client CxO issues. Specifically, they work on high-level management issues such as how to improve KPIs set out in the medium to long-term plan by when and by what extent. In the middle part is a mechanism that increase our gross profit margin. We have already applied for more than 191 patents, and we are able to offer high pricing through an algorithms that only we can provide, and our GP margin to be increased. And in addition, 45% of the company's engineers who participate from 19 countries maintain exaBase in highly reusable form. This makes it possible to work on similar projects while keeping the utilization rate of the engineering low and increasing productivity. The third part is the mechanism that promotes continuous usage. We are not only providing AI algorithms, but we also have strong UI and UX team, so we can provide AI with UI and UX as software that is easy to use in the field. Also in 2021, we acquired a company called Xware to provide machine-learning operation, which is a foundation for updated machine learning on a daily basis while embedding to client systems. In combination with our ongoing development of exaBase Studio, we can promote continuous use by providing an environment where the enterprise users can run their own AI applications. In this way, we are able to achieve high GP margin while maintaining a retention rate. One of the reasons why we are able to gain market share is that each vendor provides a specific function to solve CxOs issues while we have all the capabilities to tackle their issues in integrated manner and improving KPIs in the performance-oriented manner. The key points of the differentiation is that while other companies use functional delivery, we focus on the results delivery. And it is also important to note that our company's clients are multi-sector and we are capable of multimodal technology as we are growing horizontally. We assume that we're the only multi-model multi-sector AI company in Japan, and believe that, that way, we create our business is differentiated from the other companies. We have applied for 191 patents and have been granted 85 patents already with a large number of potential libraries in-house. And this slide that we have been showing you every time just explain the current status of our AI Platform business and what we are aiming in the future. We have achieved, the left-hand side, the accumulation of the technological assets in exaBase through data-made projects. And now we are transforming the business model by leveraging the technology assets accumulated in the exaBase. In the third stage, in addition to the horizontal development of AI components, the use of exaBase Studio will spread and clients will be able to self-develop and maybe charged for the use of the platform. Through the exaBase and exaBase Studio and platform as a service model, this does not depend on personal utilization and hybrid model will pass and FTE will expand.

And I will explain the performance of the AI Platform business. Here are the results for the third quarter cumulative period. First, sales totaled JPY 3,460 million while maintaining the growth rate of approximately 21% year-on-year, and operating income was JPY 221 million and below expectation. Let me explain our quarterly performance here. First of all, the sales totaled JPY 1,159 million, a growth of about 2.8% year-on-year. In comparison with the internal plan, the sales and operating income are lower than the expectation due to a reduction in project as some large clients and an increase in personnel expense. And I would like to explain about the long-term clients in the AI Platform business. In the third quarter of this fiscal year, the sales from the long-term clients totaled JPY 3,460 million or about 75% of total sales, a significant increase in both value and percentage compared to the same period last year. On the other hand, the gross amount of other clients with a similar to new client sales are secured stably, we are making good progress in developing the segment for the future growth. And from now on, let me introduce the case of the AI Platform business with some updates. First, we have announced a business alliance with Idemitsu, one of the largest energy and petroleum company that has 6,200 gas stations all over Japan to join the Smart Yorozuya, the one-stop shop concept and business productivity improvement through digital transformation and their human resource development as part of Idemitsu's midterm management plan for [ 2050 ]. As shown in the lower right-hand corner with the slide, they've also acquired our shares in connection with the business alliance. And this type of scheme has now begun with Idemitsu. And next is the health care sector with the pharmaceutical companies such as AstraZeneca, Astellas and Daiichi Sankyo were not only providing AI algorithms, but also working together on one of their huge projects by literally implementing large applications with our AI algorithm built in, as shown in the case study. On the bottom left, these efforts are expanding beyond the pharmaceutical industry into other areas such as Zen Place, Japan's #1 Pilates studio by expanding our capability into B2B2C area as well.

And next is the financial domain. We are expanding the use of exaBase corporate search, which has been used by security form M&A boutique companies to regional banks. As shown on the left, the use case of exaBase by regional banks is progressing as well. And in addition, Mr. Kiyotaka Sasaki, a former member of the financial service agency of the Japanese government and now visiting professor at Hitotsubashi University Graduate School of Business Administration has been appointed as our adviser to our company. We are beginning to enter new areas to further expand the FinTech and RegTech area with Mr. Sasaki has his domain knowledge. And here's an example of robotics. We are working together with JAXA, Japan Aerospace Exploration Agency which is very similar to the NASA in the U.S. The idea is that robots will automate the space cruise workload at real space crew base has seen in the movie and stuff. And this is proving an example of our uniqueness in robotics. We are also working with Kawada Robotics, shown on the right side of the slide, to reduce the time for the entire weighing process by as much as 30%. Also in our recruitment strategy centered on AI platform business, we are currently making considerable progress in hiring new graduates. In this context, we are holding an event called ExaWizards Academia. Actually, we've been hosting these events from October to December last year, and approximately 800 students all over Japan and young professionals attended these events. And this time, by tailoring Gen-Z Entrepreneurs challenge to solve social issues with technology. We're proud to invite CEO, Mr. Ogawa of Timee, Mr. Yamauchi of Yamauchi-No.10 Family Office and Mr. Watanabe, CEO of Startale Labs to the event. They're one of the most famous young business professionals leading Japanese business theme. Through events such as this, we will continue to strengthen our recruitment of young talent and especially new graduates. And now I will move on to the AI Products segment. First, let me talk about the business environment of the AI products business. In the AI products business as Japan's is facing a demographic turning point ahead of the rest of the world, we're providing our own AI Products to enhance efficiency for senior managing care and workplaces. And we will jump into the details of the product next page. We have launched several DX and Social AI products. On the left-hand side, the exaBase DX assessment and learning is a flagship products like MVTI in the U.S. And it is said Japan needs another 430,000 IT professionals and our economic growth will be huge. And this product is helpful to address these social issues with its assessment and learning services, and we are now serving to more than 800 companies in Japan.

And right-hand side care with CareWiz Hanasuto, which means just by talking is a flagship social AI product is a voice input app, which caregiver keep a record nursing care just by talking and this enables them to show that they're working time by 40 minutes per day, which we will discuss later again. And I will now explain the performance of the AI Products segment. Here are the results for the third quarter cumulative period as sales totaled JPY 547 million, a year-on-year growth of 29%. On the other hand, operating loss improved by JPY 111 million, and we're making efforts to optimize operating expense at the same time as promoting business, resulting in a steady improvement. And the following is a quarterly trend. The sales grew by approximately 20%, which is a steady development. and operating income improved by JPY 47 million due not only to sales growth, but also efforts to optimize costs as explained in the previous sections. And the following is the explanation of a breakdown of sales in the AI Products segment. Since we have transferred the business, Physical Nursing Care Training, of the other part in the first quarter. Looking at the growth of just 2 areas that we're currently focusing on the Social AI and DX AI, the sales growth rate is high as 46.8%.

And let me mention a couple of the case study in the DX AI products. The exaBase DX Assessment & Learning, one of the fastest-growing AI product is increasingly being implemented in the all company-wide at large Japanese corporates. We have begun to provide the case with entire process of defining human resource requirements, also visualizing skill levels and training is implemented in a single step, such as company-wide implementation for left-hand side, 6,500 employees at SBI Shinsei Bank Group and also right-hand side, implementation for 1,000 all group companies at Chubu International Airport.

And we are also accelerating this company-wide implementation of system. And as we've hosted ExaWizards' collaboration day end of last year, and we have received a very positive feedback from Sapporo Holdings, which already has implemented a system for all the 4,000 employees into their corporates such as sharing internal risk case studies.

Also, I would like to talk about the collaboration with Udemy business which Benesse Corporation to Japan's one of the largest education service company works as a distributor in the Japanese market, which I mentioned at the last financial results meeting. We have started a recommendation -- recommend appropriate content from more than 8,000 contents that Udemy provides based on the results of our assessments taken at exaBase DX Assessment & Learning. And the test has been very well received with 70% of the users requesting to continue taking the course and active user rate is very high here as well. So the collaboration between Udemy and Benesse together with ExaWizards is progressing rapidly. And I would like to also explain the progress in the Nursing Care field. Hanasuto is a service that records speech into nursing care team by voice recognition automatically. For example, when a staff member at the nursing care home says, Mr. Kawai has finished his breakfast, the service record her or his words directly into the nursing care by voice recognition. And CARE CONNECT JAPAN, which has already installed care records in 12,000 care facilities all over Japan has been our strong business partner in a while, but we are now planning to transfer Hanasuto's business and make a minority investment to them by April 2023. Separately, we have been working together with Yamashita which has the largest share of the Japanese welfare equipment market in the care domain for some time already, which has been helping our business to grow tremendously. And now our partnership with CARE CONNECT JAPAN, which has a network to 12,000 facilities and the data sets of care records will take our strategy a step further. And we're very excited to announce this collaboration with them.

And this business transfer is expected to result in the posting of extraordinary income of JPY 280 million in the fourth quarter. And specifically with this partnership, Hanasuto will be transferred to CARE CONNECT JAPAN. However, the partnership between the company, between us and CARE CONNECT JAPAN will be strengthened and we will continue to develop CareWiz series. We'll be enhancing the functionality of the CareWiz series in the future as there is still a need for a variety of AI-related services in the nursing care area. Now let me turn the slides back to Mr. Ishiyama.

[Ko Ishiyama, executive]

Thank you, Mr. Kawai. Let me now explain the vision of the earnings forecast for the full year ending March 2023. This page explains the factors behind the revision of the earnings forecast. As for sales, in the AI Platform segment, the forecast has been revised due to a reduction in the number of projects for some existing large clients. The continued lack of sales from these clients in the current outlook for fourth quarter and has a difficulty in acquiring additional new projects to offset the reduction in the number of projects. On the other hand, AI Products segment is performing as planned. And as for operating profit, in the AI Platform segment, the sales plan is expected short of the target, while the main expenses such as personnel costs increased due to the headcount rise during the period. Although cost control efforts were made, it is not expected to be enough to compensate for the decline in sales, resulting in a revision of the forecast. On the other hand, AI Products segment is on track to meet the plan. And as for ordinary profit, we have revised forecast as operating profit is expected to be lower than originally forecast. And as for net profit attributable to owners of the parent company, extraordinary income of JPY 280 million is expected to be recorded as a result of the transfer of the CareWiz Hanasuto business. For this reason, with revised forecast taking into account revised plans and the gain from this transfer. This page is a table explaining the factors and the differences in the earnings forecast revision. On this page, we will provide information on our full year financial results. Full year results for the year ending March 2023 to be announced on May 11. Also, we regrettably fell short of our forecast due to the downsizing of project at large clients. We are steadily implementing our basic strategy of evolving the model from our focus on FTE billing to focus on PaaS billing. The following businesses -- the following business strategies and the other matters will be explained at the full year result briefing. First, exaBase Studio, a key product that will drive the evolution from FTE-based billing to a PaaS-based billing model. As shown, development is currently progressing as planned with a commercial version to be released in the fiscal year ending March 2024. Second, the strategies and initiatives of each businesses are including exaBase Assessment & Learning, which has been expanding its business. And third, earnings forecast for the fiscal year ending March 2024 and the image on revenue growth, profit and business investments in subsequent years. And finally, I'd like to explain the relationship of large language model, such as ChatGPT to our company's business as they are growing in the market, and we received many inquiries from that in the start. In conclusion, the improvement of services utilizing large language model such as ChatGPT will ultimately improve the value of utilizing the exaBase Studio, which are promoting our growth strategy. By utilizing the API of large language models such as ChatGPT within exaBase Studio, we are beginning to see a positive impact on the construction of AI application for our clients. For example, you can see in the first and second bullets on the page, it is possible to combine several of the ExaWizards machine-learning APIs with large language model APIs. In this case, the large language model also needs to be adjusted in various ways such as fine tuning and the prompt design. ExaWizards' strength in natural language processing technology has made it possible for us to perform many of these tuning tasks. We will build AI applications by combining other APIs, including user interface, user experience and the infrastructure construction. And since exaBase Studio works in a way that integrates all of these things, we believe that the appearance of large language models itself will have a very positive impact on our company, ExaWizards. I'd like to explain some specific examples within our company. We are currently researching the possibility of providing services that combines exaBase machine-learning APIs, large language models and the image generation AI, which is also an active market, as well as developing services that compare and combine multiple large language models. We also -- we have also received various inquiries about whether it is possible to develop services that compare and combined generative and extractive approaches to summarization tasks. By holding workshops in risk response to these inquiries from clients, we have been also to obtain these in terms of both of clients and recruits. As you can see, although some individual companies have reducing the size of their projects, the market as a whole is still huge with strong demand. We will continue to see strong overall demand for AI and the digital transformation utilization, and we aim to contribute to expand sales. Okay. So there, the end of my presentation of our fiscal -- financial results of third quarter. I will continue to take questions as time permits.

[Koichi Kawai, executive]

Thank you very much, Mr. Ishiyama. [Operator Instructions] And while waiting to have a question, we have a question based on chat. Let me read some of them. So in relation to the AI Platform business, could you give me more detail on why clients are pulling back on their spending plan with ExaWizards? Could you please mention which clients or sector, what is the reason? Is the company specific or broader issues?

So I think there are 3 questions combined in the single question. Mr. Ishiyama, could you please comment from the first one? The detail on why clients are pulling back on their spending plan with you?

[Ko Ishiyama, executive]

Okay. So actually, we are analyzing the -- why this happened. And actually, for the second question, you asked us that which clients or sectors. But because of our analysis, there exists no kind of tendency of the special sectors or special project types. So I mean that it is just individual client issues and their internal issues due to their business progress. They had to restrict investment this fiscal year. And this does not mean we lost our clients. This decreases and there are certain investments in the specific area project this fiscal year.

[Koichi Kawai, executive]

And also, the person is asking this is a broader issue for our industry or the company's specific issues. But I think your answer was on company-specific issues. Also the 2 more questions related to this. Is it related to the service ExaWizards provide or at their internal reason? Also, I would really appreciate some more insight into the real issues driving the sudden clients ratings and how long the term an issue you think it is? If Ishiyama-san could mention to the comment, I would appreciate it.

[Ko Ishiyama, executive]

Yes. For the first question, the answer is no. This is still internal issues. And the -- so the -- for this fiscal year, we have already disclosed our guidance. The further guidance for next year, we will guide it in May. So I mean that for this fiscal year, there exists no more this type of programs. And the -- for next year, we run sometimes this phenomenon happen. So that's why for the next guidance we will try to running the more upgraded target for the next fiscal year. So Kawai-san, if you have a kind of the complement please answer that.

[Koichi Kawai, executive]

Thank you, Ishiyama-san. Yes. So we would like to strongly comment that this is a single -- a few clients that had a large budget into us and their investment policy due to their business operation hasn't -- has been changed. And we have been conducting a lot of analysis, whether the market for AI or the DX has been changed or is it because of the specific industry issues or specific client issue or whether that would be our quality issue. We haven't analyzed those cases while conducting interviews with clients. But for this case, for this year, we have figured that this is due to one specific issue they declare internal investment policy. So we're not concerned for the later part of next year investment plan. Rather, we would like to be [indiscernible].

Also, it's also the momentum for business which in terms of number of clients we see and also the large potential figure we incurred from the top clients or I would say top 10, top 20 all those clients' revenue portion is gradually increasing compared to last year. That is the expectation that we see at this moment. So overall momentum and business trend for the AI market, we still see the strong momentum here. So we're not worried as the overall environment. That's the thing we have to supplement in addition to Ishiyama-san has mentioned. [Operator Instructions] Also one more question from the chat. This is related to the hiring status of our employees. The questioner is asking about whether -- how do you see the competition in the hiring market, especially for AI engineers and also business development side? Do you still see a strong momentum of hiring? Or do you see any difficulty of hiring given the increase in the recent pay rate of the employees? Ishiyama-san, could you please mention our argument here?

[Ko Ishiyama, executive]

Okay. So this year, we are transforming our recruiting model. So before this year, the ratio of the recruiting agencies' fee was very high. But we'd like to make it more efficient. So that's why we are hiring more young, fresh engineers and the young fresh business, increasing freshmen. And now we are holding the event. The name is ExaWizards Academia and this is one of the representatives. And Mr. Kawai has already shared the information.

But this and the -- with the Academia is very good. We are having a very good feedback for the freshmen candidates. And the -- so that's why now we are enhancing this kind of the events. And the -- because -- then also, we are increasing our different recruiting ratio. So some of the freshmen also sharing this kind of the information the other candidate of the [indiscernible] something like that.

So the target is changing from the middle or senior consultants or engineers. But although the more junior candidates, including freshmen and the -- we are trying to increase the referral recruiting ratio. So Mr. Kawai, if you have any complements, please support me.

[Koichi Kawai, executive]

Thank you, Ishiyama-san. Also, I would like to articulate that we are very much cost sensitive of hiring the talented pool of engineers and business development team, so that when we're hosting this type of events, mainly we're utilizing our internal advisers or our executive members who is very experienced in the field with very few or no fees to host these type of events. And last year, we successfully invited 800 students to come to our events. And those are turning out to maybe good hiring forecast that we're seeing for next year and the year to come. So I want to articulate and that we're being very cost sensitive to hire talented pool of the people. And given the strong momentum of the AI and digital transformation market, we see a good pool of those candidates to work together with here. That's the only thing I want to supplement to Ishiyama-san. Thank you so much.

And it seems like there is no more question. [Operator Instructions]

So this concludes the financial results briefing for the third quarter of the fiscal year ending March 2023. And thank you very much for joining us and we would like to conclude the call today. Thank you very much.

[Ko Ishiyama, executive]

Thank you very much.