Intelligent Wave : Shared Research report updated.

Cumulative Q3 FY06/22 results (out May 6, 2022)

Cumulative Q3 FY06/22 results

In cumulative Q3 FY06/22, the company reported sales of JPY7.8bn (-2.9% YoY), operating profit of JPY944mn (+39.1% YoY), recurring profit of JPY965mn (+38.5% YoY), and net income of JPY659mn (+39.9% YoY).

Progress versus plan: Versus the company's full-year FY06/22 forecast, cumulative Q3 sales reached 65.3% (72.1% of full-year result in Q3 FY06/21), operating profit 71.5% (60.0%), recurring profit 70.9% (59.5%), and net income 70.1% (56.0%). The company noted that although sales fell slightly short of plan target, profit at all levels was ahead of target. Gross profit of cloud services, a focus business expected to drive medium-term growth, has trended above target (see below).

The OPM was 12.0% in cumulative Q3 FY06/22, up 3.6pp YoY, showing solid improvement toward the 15.0% target in the final year of the medium-term business plan. The company commented that it was positive about this development, indicating that the effects of productivity improvement measures ongoing since FY06/21 were beginning to materialize.

The FY06/22 company forecast is unchanged.

• In cumulative Q3 FY06/22, orders totaled JPY11.8bn (+42.1% YoY) on strong growth of cloud services orders.
• The order backlog at end-Q3 (March 31, 2022) was JPY9.3bn, up sharply from JPY5.5bn at end-Q3 FY06/21 and JPY8.0bn at end-Q2 FY06/22 (December 31, 2021).
  

Cumulative Q3 FY06/22 sales were JPY7.8bn (-2.9% YoY). Sales declined YoY due to the absence of upgrades to major projects such as NET+1 and ACE-Plus a year earlier. The company forecasts 7.3% YoY sales growth for the full year, however, because most of its system upgrade projects fall in Q4.

Sales by category were as follows.

• System development: JPY3.9bn (+4.0% YoY)
• Maintenance: JPY1.1bn (+12.0% YoY)
• In-house packaged products: JPY319mn (+19.5% YoY)
• Cloud services: JPY793mn (+13.0% YoY)
• Hardware: JPY829mn (-38.1% YoY)
• Third-party packaged products: JPY237mn (-45.0% YoY)
  
• Security measure products: JPY683mn (+9.8% YoY)

Sales of system development, maintenance, and cloud services were up YoY, but sales of hardware and third-party packaged products turned down from a year earlier. Hardware sales declined YoY, because projects entailing sales of servers and other hardware were slow through Q3 FY06/22. However, the company plans to book sales for new small to mid-scale upgrade projects in Q4. System development sales were up YoY thanks to projects for existing and new customers. Sales grew for cloud services due to starting services for new clients.

In cumulative Q3 FY06/22, operating profit was JPY944mn (versus JPY265mn in Q3 FY06/21, +39.1% YoY) and the operating profit margin was 12.0% (+3.6pp YoY).

• Main positive factors: Improved profitability of system development and maintenance, improved profitability of cloud services
• Main negative factors: Lower hardware sales, higher SG&A expenses
  

Improved profitability of system development and maintenance work, as well as the cloud services business turning profitable at gross profit level contributed to YoY operating profit growth and higher OPM. Employee awareness reform regarding profitability improvement led to changes in behavior, resulting in steady improvement of profit margins in system development and maintenance. The company commented that for maintenance, talks around raising unit prices were progressing well for contracts being renewed. Despite many profitable projects, hardware sales were down YoY as expected, making a negative impact on profit.

The GPM improved 5.4pp YoY to 32.1% and the SG&A ratio went up 1.7pp YoY to 20.0%, resulting in a 3.6pp YoY improvement in OPM to 12.0%. Operating profit in Q3 (three months) was up 70.3% YoY.

Strong progress in first year of medium-term business plan

FY06/22 will be the first year of the current medium-term business plan. For the final year of the plan, FY06/24, the company is targeting sales of JPY15.0bn (+34.1% vs. FY06/21), operating profit of JPY2.2bn (+99.1% vs. FY06/21), and an operating profit margin of 15.0% (vs. 10.1% in FY06/21). IWI refers to the effort to achieve sales of JPY15.0bn and OPM of 15.0% as "15ALL." After achieving 15ALL, the company aims to achieve further growth in the long term.

In the cloud services business, which is the principal driver of the medium-term plan, profits are trending up as a result of sales growth and streamlining. IWI commented that its cloud services offer a useful option to companies launching credit card or payment businesses as well as established financial services companies. Cloud services received approximately JPY1bn worth of new orders in Q1, JPY1.9bn in Q2, and JPY273mn in Q3. Orders grew sharply in 1H due to multiple big projects. In cumulative Q3, orders for cloud services totaled JPY3.2bn (+718.2% YoY) and the order backlog was JPY4.2bn (+JPY2.6bn YoY). These orders are expected to contribute to sales in FY06/23 or later, and based on this, the company targets cloud services sales of approximately JPY2.0bn for FY06/23 and JPY2.5bn for FY06/24.

IWI believes that the credit card industry, which is one of its main business areas, is steadily recovering from the impact of COVID-19, as major card companies continue to record higher YoY card shopping transactions. As well as major financial institutions and credit card companies, fintech services are also becoming more common, such as companies offering financial services to individuals and SMEs and payment services, and services for these companies. These changes in the operating environment are providing business opportunities to IWI.

Trends by client company (top three)

Cumulative Q3 sales to the company's top three client companies were as follows.

• Dai Nippon Printing (DNP): JPY1.1bn (-JPY136mn YoY). Projects included TSP development (smartphone payment processing), round-the-clock system operation services, and payment processing platforms^*1. Sales fell YoY, because upfront investment in card payment processing platforms ran its course, but smartphone-related system development orders increased. The company commented that DNP is beginning a cycle of increasing investment again in response to market changes.
• A systems development company: JPY696mn (-JPY295mn YoY). Projects included front-end processor^*2 and building of a disaster recovery system for fraud detection^*3. Sales vary according to the number of projects, but the overall trend was stable.
• A systems development company: JPY505mn (+JPY370mn YoY). Projects included IOASIS construction. Sales vary according to the number of projects, but the overall trend was stable.

^*1 Payment processing platforms: Umbrella term for system services operated by DNP that enable cashless payment
^*2 Front-end processor (FEP): A subsystem that provides connectivity between the network and host system to process large volumes of transaction data
^*3 Disaster recovery (DR): Disaster recovery and back-up systems for IT systems

Strengthening synergies with Dai Nippon Printing (DNP)

In addition to payment processing, security and IoT are priority areas for collaboration with Dai Nippon Printing (DNP). The two companies previously collaborated on individual projects, but have decided to approach customers' problems by clarifying each company's role, identifying three core areas in DNP's many business strategies for collaboration with IWI, and combining their areas of strength. In terms of sales activities, the two companies will adopt a systematic, collaborative approach to making proposals to customers, whereas previously they acted independently and referred projects to each other.

In the security business, DNP undertakes marketing and planning, while IWI develops cybersecurity products in-house and installs overseas companies' products. The two companies address customers' security issues by offering a one-stop solution, investing resources in the security business in earnest and combining their respective strengths. As a first step, the two companies have begun to collaborate on demand generation, including for websites, events and seminars, marketing, social media, emails, and advertising.

Cumulative Q3 orders of cloud services, which the company focuses on as a medium-term growth driver, grew 718.2% YoY to JPY3.2bn (to be booked as sales in or after April 2022). The cumulative Q3 order backlog was JPY4.2bn (+JPY2.6bn YoY). In cumulative Q3 FY06/22, the company received orders for five new IOASIS projects (including three large projects) and two new IGATES projects. It also received orders for follow-on/renewal projects (four IOASIS projects and one IFINDS and IGATES project each). The company expects more new project orders from Q4.

Cloud services are becoming a valid option not only for established financial services companies, but also business corporations launching new card and payment businesses. Shared Research assumes that the number of foreign visitors to Japan will resume as the pandemic subsides and expects talks to increase with payment service companies anticipating a recovery of inbound demand thanks to yen depreciation. A recovery of inbound demand is positive for the company.

IOASIS was launched in 2016. As of Q3 FY06/22, the company regards IOASIS as a service that matches the fast-changing business of its customers. The company aims to grow its three main cloud services (IOASIS, IFINDS, and IGATES; see below) to grow them into a second earnings pillar after FEP.

Quarterly cloud services sales and gross profit

• Q1 FY06/21 results (July-September 2020): Sales of JPY224mn (company forecast: JPY224mn), loss of JPY37mn (company forecast: JPY14mn loss)
  
• Q2 FY06/21 results (October-December 2020): Sales of JPY246mn (JPY235mn), loss of JPY12mn (JPY10mn loss)
• Q3 FY06/21 results (January-March 2021): Sales of JPY232mn (JPY235mn), loss of JPY28mn (JPY29mn loss)
• Q4 FY06/21 results (April-June 2021): Sales of JPY239mn (JPY246mn), loss of JPY3mn (JPY22mn loss)
• Q1 FY06/22 results: (July-September 2021): Sales of JPY243mn (JPY240mn), loss of JPY19mn (JPY18mn loss)
• Q2 FY06/22 results (October-December 2021): Sales of JPY250mn (JPY248mn), profit of JPY31mn (JPY18mn profit)
• Q3 FY06/22 results (January-March 2022): Sales of JPY299mn (JPY296mn), profit of JPY84mn (JPY46mn profit)
• Q4 FY06/22 company forecast (April-June 2022): Sales of JPY343mn, profit of JPY33mn
  

Cloud services sales in Q2 and Q3 FY06/22 were mostly in line with the company forecast, whereas gross profit was ahead of forecast, because variable expenses were lower than expected. The company reduced the number of engineer contractors, with its own permanent employees taking over their work, which lowered expenses. Having operated IOASIS and IGATES internally for over two years, employees' operational efficiency has improved.

Quarterly cloud service orders and order backlog

• Q1 FY06/21 results (July-September 2020): Orders JPY133mn, order backlog JPY1.9bn
• Q2 FY06/21 results (October-December 2020): Orders JPY73mn, order backlog JPY1.8bn
• Q3 FY06/21 results (January-March 2021): Orders JPY79mn, order backlog JPY1.6bn
• Q4 FY06/21 results (April-June 2021): Orders JPY483mn, order backlog JPY1.9bn
• Q1 FY06/22 results: (July-September 2021): Orders JPY1.0bn, order backlog JPY2.6bn
• Q2 FY06/22 results (October-December 2021): Orders JPY1.9bn, order backlog JPY4.2bn
• Q3 FY06/22 results (January-March 2022): Orders JPY273mn, order backlog JPY4.2bn

Orders were brisk on an increase in cloud services inquiries. As of end-Q3, the cloud services order backlog was JPY4.2bn (+JPY2.6bn YoY, -JPY26mn QoQ). Q3 FY06/22 orders were down to JPY273mn from JPY1.0bn in Q1 and JPY1.9bn in Q2, because most of the orders were small projects for fintech startups. Orders received in FY06/22 will be booked as sales from Q4 (April-June 2022) onward.

IOASIS (merchant acquiring services)

In cumulative Q3 FY06/22, the company received five orders (including three large projects) for IOASIS, an ASP service that provides all functions required for merchant acquiring operations. The orders were from major credit card, telecommunications, and retail companies. The company also received four orders for follow-on/renewal projects from existing customers. Seven companies had adopted IOASIS as of end-Q3. The company provides round-the-clock operation service (started in 2016). Main user companies are Bank of the Ryukyus, Limited (TSE Prime: 8399) and other regional banks, online banks, small and mid-size credit card companies, and major corporations including telecommunications and retail companies.

IFINDS (credit card fraud detection ASP service)

IFINDS is a card fraud detection ASP service. The company received one order for follow-on/renewal projects in cumulative Q3. IFINDS deploys a joint scoring model that integrates credit card companies' fraud detection data. Although inquiries from credit card companies were brisk, the company received no new orders in cumulative Q3. Three companies had adopted the service as of end-Q3.

IGATES is an ASP service that continues the features of NET+1, a popular IWI product with a large market share in Japan. The company received two new orders in cumulative Q3. It also received one order for follow-on/renewal projects. Five companies had adopted the service as of end-Q3. Main users include major credit card companies, small and mid-size credit card companies, and fintech startups such as SmartBank, Inc.

Recurring/one-time revenue

From FY6/22, the company has subdivided its category classifications and redefined its sales categories to show a more detailed classification of recurring and one-time revenue. Based on the type of contract and the status of the business concerned, projects that can generate a specified level of sales on a regular basis are classified as recurring revenue businesses, while those that cannot are classified as one-time revenue business. Typical recurring revenues are system usage fees and system operation fees related to the cloud services business, and maintenance fees for the company's and other companies' products. Cloud service usage fees are categorized as "Services: in-house." Typical one-time revenues include include fees for contracted development work and sales of the company's own products and products of other companies.

Under the new category classifications, the recurring/one-time revenue weighting is roughly equal. The share of recurring revenue in cumulative Q3 was 48.0% of total. The company is steadily increasing recurring revenue as well as one-time revenue, which fluctuates based on large-scale projects, while taking steps to stabilize it. The company adopts a hybrid strategy of strengthening both on-premises and cloud businesses.

New initiatives for business expansion

IWI strengthened its organizational structure for medium- to long-term growth as of April 1, 2022. The company established two new divisions (Business Development Office and Global Business Promotion Office). It also launched an internal project with employee participation on post-pandemic work styles.

• Business Development Office
  On April 1, 2022, IWI established the Business Development Office to strengthen its payment services business further and develop new payment service businesses with the ultimate goal of attaining its 15ALL targets. The organization will develop new businesses with an eye on the future of payment services. Although the company previously had sales planning teams as part of the sales department, it established an organization devoted to business development to create new businesses, in some cases with the help of development personnel.

  The share of cashless payments in Japan is roughly 30%, but is forecast to reach 40% in 2025 and increase to 80% in the longer term. The company considers cashless payment-related markets to be attractive, with various other changes likely to occur in 2022 onward. The range of payments has been increasing so far in 2022, such as embedded finance and BaaS. The company has worked on payments from the system platform side, and will continue to engage in system platform evolution, but will also put aggressive as well as defensive initiatives into action.

  For example, with regard to smartphone apps, IWI will move into aggressive system models by utilizing its technologies, human resources, mechanisms, and quality that has helped the company win the trust of its customers. Although open to new businesses other than payment services, the company will refocus on payments and grow its business in response to market evolution. The Business Development Office started off with a small team, which will identify challenges and create new technologies. Despite its name, the purpose of the Business Development Office is to create new businesses in the longer term.

• Global Business Promotion Office
  IWI established the Global Business Promotion Office on April 1, 2022 to expand its business overseas. As the first step, the company plans to move into payment systems in Southeast Asia. Having launched some projects in the past, IWI plans to pursue them in earnest. The company has suffered setbacks in its overseas business in the past. First, overseas expansion of CWAT was not successful due to the lack of a support structure. It also struggled to expand its on-premises FEP service overseas because of problems with the primary vendor of mainframes. As a third attempt, the company plans to expand its fast-growing cloud services overseas. Unlike on-premises systems, the company will not have any conflicts with established vendors. It plans to work with local vendors in the overseas cloud services business.

  IWI promotes programs to facilitate human resource development. It has reviewed programs such as publicly advertising job vacancies, multiple job roles (in addition to their main jobs, workers have different, secondary jobs accounting for 20% of their total work hours), performance self-appraisal and declaration of career plans, transfer requests, etc., and mentoring system. The Global Business Promotion Office will enable employees wishing to work overseas to apply for positions by making use of public job advertisements and declaring their career plans, specifically assisting human resource mobility. By establishing a section that anticipates the future, IWI aims to present diverse work styles and life options to employees.

• "The IWI way" work style project
  The company launched a project to enhance the happiness and improvement of each employee in the post-pandemic years. It plans to establish an autonomous work style that harnesses diversity. IWI's vision is to create initiatives that tackle SDGs and ESG, train human resources to encourage their improvement and thereby grow as a company.
  

New products and services

The company released new services in security and broadcasting.

• Resec
  Resec is a cybersecurity platform developed by an Isreal-based company that protects against file-based malware threats. It creates threat-free replicas of files brought in from environments with different security levels and eliminates known and unknown (zero-day) malware contained in these files. IWI has sold Resec for some time, but added a new feature to create file replicas free from macrovirus threats at the request of customers in the financial services business. Files with macro features are often blocked by security platforms, which consider them to be viruses, but the company added a new feature that creates threat-free files with macro features. IWI communicated Japanese customers' needs to its Israeli partner and has seen sales of Resec grow as a product that fulfills Japanese companies' needs. IWI values its Israeli partner for its superior, cutting-edge technologies and ability to customize the platforms to adapt to user needs in Japan.
• Recorded Future
  IWI began selling Recorded Future, a security intelligence service developed in the US and used by more than 1,000 companies worldwide. With natural language processing capability in 13 languages and patented machine learning, Recorded Future gathers and analyzes data from more than one million sources for easy searching of results. IWI collaborates with Recorded Future to provide its own reporting service that gathers threat information from around the world and produces reports that are of value to each customer by utilizing the security intelligence service. Within a month or so of launching its service, IWI received an order from a pharmaceutical-related company.
• EoM
  IWI added a software version of EoM. It previously provided monitoring that used Field Programmable Gate Arrays (FPGA), which is hardware, but the software version enables monitoring without FPGAs. It complies with communication protocols for online distribution and can be used in a cloud environment. Target customers are game and video distribution companies rather than TV broadcasters.
  

For details on previous quarterly and annual results, please refer to the Historical performance and financial statements section.

1H FY06/22 results (out February 2, 2022)

In 1H FY06/22, the company reported sales of JPY4.9bn (-6.9% YoY), operating profit of JPY479mn (+18.0% YoY), recurring profit of JPY500mn (+18.7% YoY), and net income of JPY338mn (+18.3% YoY).

Versus the company's 1H FY06/22 forecast, sales reached 97.7%, operating profit 116.8%, recurring profit 116.2%, and net income 112.6%. Sales were slightly below plan due to a slightly aggressive target for system development projects, but all profit categories exceeded the forecast. Versus the full-year FY06/22 forecast, sales were 40.7% (43.8% in 1H FY06/21 versus full-year results), operating profit 36.3% (33.1%), recurring profit 36.7% (30.5%), and net income 35.9% (29.3%).

In 1H, profitability in systems development operations was stable, with no loss-making projects. The company expects steady performance in 2H as well and anticipates no significant impact from the COVID-19 pandemic on its full-year earnings performance. No change has been made to the full-year FY06/22 forecast.

• Orders received in 1H FY06/22 were JPY7.5bn (+ 33.7% YoY). This was due to growth in orders in the cloud services business. The order backlog as of the end of Q2 FY06/22 (December 31, 2021) was JPY8.0bn, significantly higher than the JPY5.7bn figure at the end of Q2 FY06/21 (December 31, 2020).

Sales for 1H FY06/22 were JPY4.9bn (-6.9% YoY). There were no large renewal projects in 1H FY06/22, whereas in 1H FY06/21 there were large renewal projects for NET+1, ACE-Plus, and other systems. The company expects small and medium-sized projects to be concentrated in 2H, and forecasts 7.3% YoY increase in sales for the full year.

By category, 1H sales were JPY2.5bn (+3.4% YoY) for system development, JPY728mn (+12.5% YoY) for maintenance, JPY268mn (+28.2% YoY) for in-house packaged products, JPY493mn (+4.9% YoY) for cloud services, JPY272mn (-68.8% YoY) for hardware, JPY168mn (-30.0% YoY) for third-party packaged products, and JPY438mn (+18.7% YoY) for security measure products. Sales fell YoY due to the falloff of sales booked a year ago for relatively large-scale hardware in connection with server sales. However, system development and in-house packaged product sales to new customer grew YoY, as did sales in other categories.

Sales for system development and security measure products in 1H fell short of the company forecasts. System development sales came in below plan due to a slightly aggressive target. Sales for security measure products underperformed the company forecast due to longer-than-expected lead times for proof-of-concept testing at the request of customers. Sales growth of new products such as MORPHISEC was not enough to offset the decline in sales for Traps and other existing products. As of end-Q2, 30 companies were using MORPHISEC.

1H operating profit rose 18.0% YoY to JPY479mn. The company turned a profit in the cloud services business, posting profit of JPY11mn (versus a loss of JPY49mn in 1H FY06/21), owing to higher sales as it began providing services to new customers, reduced fixed costs, and cuts to operating expenses. Increased sales of in-house packaged products to new customers and enhanced profitability of system development operations more than offset a profit decline stemming from lower hardware sales, driving overall operating profit growth. Operating profit in 1H FY06/22 exceeded the company plan by 16.8%. Employee awareness of profitability resulted in a steady improvement in profit margins, especially for system development and maintenance. The return to profitability in cloud services also contributed to the increase in profit margins. In the maintenance category, negotiations to increase unit prices at the timing of contract renewals were progressing steadily.

The gross profit margin improved by 4.1pp to 30.6%, and the SG&A ratio rose by 2.0pp to 20.8%, resulting in a 2.1pp improvement in the operating profit margin to 9.8%.

Strong start in first year of the medium-term business plan

FY06/22 will be the first year of the current medium-term business plan. For the final year of the plan, FY06/24, the company is targeting sales of JPY15.0bn (+34.1% vs. FY06/21), operating profit of JPY2.2bn (+99.1% vs. FY06/21), and an operating profit margin of 15.0% (vs. 10.1% in FY06/21). IWI refers to the effort to achieve sales of JPY15.0bn and OPM of 15.0% as "15ALL." After achieving 15ALL, the company aims to achieve further growth in the long term.

In the cloud services business, which is the principal driver of the medium-term plan, orders have been growing as a result of active business negotiations with new customers. In Q1 (July-September 2021), the company acquired approximately JPY1.0bn worth of new orders, and in Q2 (October-December), it acquired even greater JPY1.9bn worth of new orders. As a result, the order backlog in the cloud services business grew sharply from JPY1.9bn at end-FY06/21 to JPY4.2bn at end-Q2 FY06/22. The company expects to receive additional new orders in 2H from companies outside the financial industry and credit card companies. These orders are expected to contribute to sales in FY06/23 or later, and based on this, the company targets sales of approximately JPY2.0bn for FY06/23 and JPY2.5bn for FY06/24.

For FY06/22, IWI plans sales of JPY1.1bn (+20.0% YoY) in the cloud services business. The company expects full-year profit for the first time since the cloud services business was established. The business was in profit (at the gross profit level) in 1H FY06/22, and the company believes that it will contribute to earnings over the medium term.

Trends by client company (top three)

Sales to the top three client companies in 1H FY06/22 were as follows.

• Dai Nippon Printing: JPY691mn (TSP development, smartphone payment processing, round-the-clock system operations services, and payment processing platforms; -JPY176mn YoY)
• A systems development company: JPY497mn (front-end processing, building of a disaster recovery system for fraud detection; -JPY53mn YoY)
• A systems development company: JPY261mn (initial IOASIS construction, license fees, etc.; +JPY151mn YoY)
  

Sales to Dai Nippon Printing (DNP) were down YoY due to the completion of a large payment processing platform project. However, DNP is planning to invest in a new smartphone settlement project and other projects, and the company expects orders to increase as a result. The company is also focusing on collaboration with DNP in non-payment DX fields (security and IoT) over the medium term, and has already started a related project. Total sales for the top three client companies were JPY1.4bn (-5.1% YoY).

Strengthening synergies with Dai Nippon Printing

In addition to payment processing, security and IoT are priority areas for collaboration with Dai Nippon Printing (DNP). In the past, the two companies worked together on a case-by-case basis, but now they will clarify their individual roles, identify three core pillars of DNP's business strategy where they will collaborate, and collectively utilize their strengths to meet customer needs. In terms of sales activities, the two companies worked individually in the past, cross-referring projects to each other. They now plan to systematically work together and market new proposals to customers.

In the security business, DNP will be in charge of marketing and planning, while IWI will be in charge of in-house development of cyber-security products and introduction of overseas products. DNP and IWI will begin full-scale investment of resources in the security business, and by leveraging the strengths of the two companies on a combined basis, they will take a one-stop approach to providing customers with security solutions. As a first step, the two companies have begun to collaborate on demand generation, including for websites, events and seminars, marketing, social media, emails, and advertising.

1H orders for cloud services, the company's medium-term growth driver, increased by JPY2.6bn YoY to JPY2.9bn (sales are expected to be booked from April 2022). The company received three new large IOASIS projects from three major card companies. It also received three follow-on/renewal projects for IOASIS, one for IFINDS, and one for IGATES. The company believes that cloud services are becoming a viable option not only for existing financial services companies, but also for new companies starting up their own card and payment businesses. It expects to continue to receive new orders from companies outside the financial industry and from credit card companies in 2H FY06/22 and beyond.

1H sales for cloud services were up JPY23mn YoY to JPY493mn (JPY4mn above company estimate). Gross profit improved from a loss of JPY19mn in Q1 FY06/22 (July-September 2021) to profit of JPY31mn in Q2 (October-December). In addition to the benefits of higher sales, decreases in depreciation and amortization and other fixed costs also contributed to this increase. The company also said that it was able to control operational expenses. The order backlog at the end of Q2 was JPY4.2bn, up JPY2.5bn YoY.

The company believes that it can achieve its sales forecast of JPY1.1bn in cloud services in FY06/22, as well as JPY2.0bn in FY06/23 and JPY2.5bn in FY06/24. Gross profit from cloud services, which moved into profit in Q2, is expected to be in profit for the full-year (FY06/22) for the first time since the business started. The company believes that this business will contribute to earnings over the medium term. It forecasts lower gross profit in Q4 than in Q3 FY06/22 (JPY33mn and JPY46mn, respectively) due to new depreciation and amortization expenses.

Quarterly cloud services sales and gross profit (results and forecasts)

• Q1 FY06/21 (July-September 2020): Sales of JPY224mn (projected: JPY224mn), loss of JPY37mn (projected loss: JPY14mn}
• Q2 FY06/21 (October-December 2020): Sales of JPY246mn (projected: JPY235mn), loss of JPY12mn (projected loss: JPY10mn)
• Q3 FY06/21 (January-March 2021): Sales of JPY232mn (projected: JPY235mn), loss of JPY28mn (projected loss: JPY29mn)
• Q4 FY06/21 (April-June 2021): Sales of JPY239mn (projected: JPY246mn), loss of JPY3mn (projected loss: JPY22mn)
• Q1 FY06/22 (July-September 2021): Sales of JPY243mn (projected: JPY240mn), loss of JPY19mn (projected loss: JPY18mn)
• Q2 FY06/22 (October-December 2021): Sales of JPY250mn (projected: JPY248mn), profit of JPY31mn (projected: JPY18mn)
• Q3 FY06/22 (January-March 2022): Projected sales of JPY296mn, projected profit of JPY46mn
• Q4 FY06/22 (April-June 2022): Projected sales of JPY343mn, projected profit of JPY33mn
  

Quarterly cloud services orders and order backlog (results)

• Q1 FY06/21 (July-September 2020): Orders of JPY133mn, order backlog of JPY1.9bn
• Q2 FY06/21 (October-December 2020): Orders of JPY73mn, order backlog of JPY1.8bn
• Q3 FY06/21 (January-March 2021): Orders of JPY79mn, order backlog of JPY1.6bn
• Q4 FY06/21 (April-June 2021): Orders of JPY483mn, order backlog of JPY1.9bn
• Q1 FY06/22 (July-September 2021): Orders of JPY1.0bn, order backlog of JPY2.6bn
• Q2 FY06/22 (October-December 2021): Orders of JPY1.9bn, order backlog of JPY4.2bn

IOASIS (merchant acquiring services)

In 1H FY06/22, the company received three large orders for IOASIS, an ASP service that provides all the functions necessary for merchant acquiring operations (orders received in 1H and orders to be received from 2H will be booked from April 2022). In addition, the company received three orders for follow-on/renewal projects from existing customers in 1H. The company provides round-the-clock services (started in 2016). Major customers include Bank of The Ryukyus, Limited (TSE Prime: 8399) and other major regional banks.

Initially, regional banks adopted IOASIS based on the assumption that inbound demand would drive an expansion of electronic payments at physical stores. At present, the service is increasingly adopted by the distribution industry, which is seeing expansion in electronic payments both in online and physical operations. A number of card companies that are already engaged in acquiring operations have also adopted IOASIS to reduce costs when updating their systems. The company initially expected that growing inbound demand would drive an increase in the number of merchant stores, leading to the service expansion. While this was impacted by the COVID-19 pandemic, the company is seeing unexpected demand in other areas. The company intends to secure access to the growing electronic payments market on a consistent basis. It believes that there will be demand for its services even if the characteristics of the market change to some degree.

IGATES is an ASP service that takes over the capabilities of the company's NET+1 product, which has a high market share in Japan. It provides a round-the-clock connection system for various domestic and overseas settlement networks. Four companies had adopted the system as of the end of 1H FY06/22. The company received an order from an existing customer for follow-on/renewal projects in 1H. The main customers are major credit card companies and SmartBank, Inc., and the company has received inquiries from a range of potential customers. Along with the increase in cashless transactions, more companies in a variety of industries are moving to establish new credit card businesses and looking at cloud-based systems as a more economical way of carrying out the front-end processing of issuing and acquiring operations compared with traditional on-premises systems. In addition, IWI offer companies already in the credit card business the option of switching over to IGATES when they upgrade their existing front-end processing systems.

IFINDS (credit card fraud detection ASP service)

With growth in e-commerce, the incidence of fraudulent transactions is on the rise as legacy fraud detection systems are not well-suited to detecting and stopping fraudulent transactions in the absence of face-to-face interaction between the transaction parties. As a result, the company is seeing more requests for proof-of-concept testing for its IFINDS credit card fraud detection service. In 1H, the company received one order for follow-on/renewal projects. Based on its industry-leading track record and know-how in the fraud detection system field, the company offers a cloud service version of IFINDS (according to the company, IWI's on-premises fraud detection system ACE-Plus has more than a 50% share of the market for fraud detection in face-to-face payments; its competitors are overseas products from the US and other countries). Because of the low initial investment cost, challenger banks, neo-banks, and start-ups are beginning to use this service as they start their businesses.

In addition, the company has developed a scoring service called FARIS, which uses an advanced AI-based algorithm to improve the accuracy of the scoring function. As of end-Q2, two companies had placed orders, with several others conducting proof-of-concept testing. As part of tuning efforts to improve the AI and increase fraud detection accuracy, the company adopted the RIME AI engine from AI security venture firm Robust Intelligence (a US company headquartered in California) in September 2021. IWI stated that using RIME in AI tuning operations resulted in enhanced system performance. The RIME AI engine automatically detects fraud patters that are registered in advance. The AI scoring system uses past data to prevent fraudulent transactions. As a result, fraud detection accuracy increased.

The company plans to first deploy this function in FARIS, followed by ACE-Plus and IFINDS. The company believes that it is a global leader in detection accuracy, and is currently preparing to expand its business overseas, with a focus in particular on Asia.

Recurring/one-time revenue

From FY06/22, the company has subdivided its category classifications and redefined its sales categories to show a more detailed classification of recurring and one-time revenue. Based on the type of contract and the status of the business concerned, projects that can generate a specified level of sales on a regular basis are classified as recurring revenue businesses, while those that cannot are classified as one-time revenue business. Typical recurring revenues are system usage fees and system operation fees related to the cloud services business, and maintenance fees for the company's and other companies' products. Cloud service usage fees are categorized as "Services: in-house." Typical one-time revenues include include fees for contracted development work and sales of the company's own products and products of other companies.

Under the new classification, the breakdown of recurring and one-time revenue is broadly similar. In 1H FY06/22, recurring revenue accounted for 50.1% of total revenue. In addition to steadily increasing recurring revenue, the company is working to stabilize and expand its one-time revenue, which tends to fluctuate depending on the availability of large-scale projects. The company is steadily improving its business structure, and has adopted a hybrid strategy to strengthen both on-premises and cloud-based services.

Health management initiatives

The company is promoting measures to improve the health of its employees and to reform the way they work.

Measures to promote employee health

• Full company subsidy for physical examinations (for employees over 35) and gynecological examinations (for all employees)
• Introduction of a long-term disability income compensation program
• Implementation of mental health self-care training and line-care training
• Introduction of a vaccination leave system for infectious diseases

• Initiatives to create time for employees (reduction of overtime work)
• Breakfast service to encourage morning work
• Encouragement of utilization of vacations (8 days of paid vacation per year for all employees)

For past quarterly and full-year results, please refer to the Historical financial statements section.

Q1 FY06/22 results (out November 4, 2021)

In Q1 FY06/22, the company reported sales of JPY2.3bn (-2.0% YoY), operating profit of JPY127mn (-5.7% YoY), recurring profit of JPY125mn (-2.8% YoY), and net income of JPY83mn (-0.9% YoY).

Sales were 45.0% of the 1H company plan (43.8% in Q1 FY06/21 vs. 1H results), operating profit was 30.9% (33.1%), recurring profit was 29.0%(30.5%), and net income was 27.6% (29.3%). Compared to the full-year plan, sales, operating profit, recurring profit, and net income were 18.8% (20.5% in Q1 FY06/21 vs. full-year results), 9.6% (11.9%), 9.2% (11.0%), and 8.8% (9.9%), respectively.

With earnings progressing in line with the company's expectations, the company made no change to its 1H and full-year forecasts. Noting that large-scale renewal projects in FY06/22 are concentrated in 2H, the company forecasts 1H FY06/22 sales declining 4.7% YoY to JPY5.0bn and operating profit rising 1.1% YoY to JPY410mn. It expects enhanced Q2 profitability on an improved sales mix. The company noted favorable progress in Q2 toward meeting these forecasts.

• Orders were JPY2.8bn (-7.4% YoY), with the downturn largely attributable to a JPY610mn YoY decline in hardware orders (large-scale system renewal projects in FY06/22 are concentrated in 2H). Despite the lack of large-scale system development projects for some time, system development orders improved JPY80mn QoQ. Cloud services orders were up JPY867mn YoY.

• Order backlog was JPY5.9bn (-2.7% YoY)

Sales declined 2.0% YoY to JPY2.3bn. Sales fell YoY as the company benefitted from large-scale system renewal demand in Q1 FY06/21, but had no large-scale renewal projects in Q1 FY06/22. Nearly 30 client companies update their front-end processing systems once every five years, though the company has no control over when during the year those systems are renewed. There were no system renewal projects in Q1 FY06/22.

Sales were JPY1.2bn (+5.1% YoY) for system development, JPY360mn (+14.3% YoY) for maintenance, JPY131mn (-9.0% YoY) for in-house packaged products, JPY243mn (+8.5% YoY) for cloud services, JPY79mn (-62.0% YoY) for hardware, JPY69mn (-37.3% YoY) for third-party packaged products, and JPY198mn (+9.4% YoY) for security measure products.

Operating profit decreased 5.7% YoY to JPY127mn. Despite a positive contribution from the system development, maintenance, and cloud services businesses, operating profit was adversely impacted by the downturn in high-margin hardware sales amid an absence of renewal projects. Gross profit improved 5.2% YoY, but higher SG&A expenses served to push operating profit lower.

GPM improved 1.9pp YoY to 27.5%, thanks largely to ongoing efforts from FY06/21 to standardize quotes, improve quality, and advance automation in order to improve productivity.

SG&A expenses rose in line with the company's forecast. In particular, outsourcing costs (consultant fees) increased as the company invested to ensure future growth. The company also sought outside expertise in the implementation of new initiatives, including to strengthen its planning capabilities and pursue health management. In August 2021, the company revamped its website and increased its advertising and other expenses to actively disseminate information. Accordingly, the SG&A ratio increased 2.1pp to 21.9%, resulting in OPM dropping 0.2pp YoY to 5.6%.

FY06/22 the first year of the medium-term business plan

FY06/22 is the first year of the current medium-term business plan. For the final year of the plan, FY06/24, the company targets sales of JPY15.0bn (+34.1% vs. FY06/21), operating profit of JPY2.2bn (+99.1% vs. FY06/21), and an operating profit margin of 15.0% (vs. 10.1% in FY06/21). IWI refers to the effort to achieve sales of JPY15.0bn and OPM of 15.0% as "15ALL." After achieving 15ALL, the company aims to achieve further growth in the long term.

The cloud services business, which is the principal driver of the medium-term plan, is forecast to make a profit in FY06/22 for the first time since its inception. Orders have been growing as a result of active business negotiations with new customers, and in Q1 FY06/22, the company acquired approximately JPY1bn worth of new orders. The order backlog in the cloud services business grew from JPY1.9bn at the end of FY06/21 to JPY2.6bn at the end of Q1 FY06/22. The company plans to receive additional new orders in Q2, and these orders are expected to contribute to sales in FY06/23. It expects strong growth to drive sales to JPY2.0bn in FY06/23 and JPY2.5bn in FY06/24.

In Q1, orders in the cloud services business grew due to orders from companies outside the financial industry that are newly entering the card acquiring business. In Q2, the company expects to benefit from new orders from non-financial industry companies and credit card companies. IWI's cloud services have become one of the leading options not only for existing financial services companies but also for new companies starting up their own credit card and payment businesses.

In addition to cloud services, the company expects new businesses to act as another growth driver, with related sales reaching JPY1.5bn in FY06/24. In terms of core settlement systems, the company for FY06/24 forecasts system development, hardware, and in-house packaged product sales of JPY11.0bn, including new business sales of JPY1.5bn. Moreover, as an IT infrastructure provider supporting digital transformation (DX), the company has been consulting with credit card companies with which it has long maintained business relationships regarding related DX and embedded finance options. The company believes demand in this area is likely to bolster the system development in settlement systems. While the company has been perceived to date primarily as a credit settlement system developer based on its NET+1 and ACE-Plus products, it has already moved beyond that limited realm. It aims to ensure business reliability (a term coined by the company to reflect its aim to continually improve customer confidence) in non-payment operations and expects to continue to expand its involvement in these areas, including EoM and security. The company targets security-related sales in FY06/24 of JPY1.5bn.

Trends by client company (top three)

The company's top three client companies in terms of sales were (1) Dai Nippon Printing: JPY346mn (-JPY77mn YoY), primarily generated by TSP development, smartphone payment processing, round-the-clock system operations services, and payment processing platforms; (2) a systems development company: JPY309mn (+JPY12mn YoY), generated by front-end processing, building of a disaster recovery system for fraud detection; and (3) a credit card company: JPY110mn (-71mn YoY), generated by system development and hardware services related to front-end processing renewal. Sales to Dai Nippon Printing declined YoY in line with the near total completion of a large-scale payment processing platform project. The company is focusing over the medium term on collaborative efforts with Dai Nippon Printing in non-payment DX fields and has already launched a related project. Combined sales to the company's top three clients dropped 15.1% YoY to JPY765mn.

Building a disaster recovery system for fraud detection

The company is constructing a disaster recovery (DR) system for fraud detection for the aforementioned systems development company. This essentially means building a backup site for disaster recovery. The credit card company has been investing in disaster recovery systems for some time now. While action by one company does not mean that the entire industry will invest as one, it is important to note that disaster recovery is included in the investment plans of credit card companies across the board. Moreover, once developed, disaster recovery systems, like front-end processing, can be repurposed for other projects. Recent years have seen system failures become increasingly common, which has contributed to a growing focus on disaster recovery. This works to the company's benefit as this is an area in which it is actively working to capture demand.

Disaster recovery refers to measures and procedures aimed at minimizing losses due to system shutdowns brought on by natural disasters such as earthquakes, windstorms, and floods, accidents, power outages, fires, terrorist attacks, cyberattacks, or other events that might threaten the normal operation of a given system.

Reflecting the company's focus in the area, Q1 cloud services orders were up JPY867mn YoY to JPY1.0bn (sales on these orders are expected to be booked from April 2022). The company received two large IOASIS orders, giving it three such orders in the past year. Sales expanded JPY19mn YoY to JPY243mn, exceeding the company's forecast by JPY3mn. Order backlog increased JPY677mn YoY to JPY2.6bn and the company expects to continue winning new orders from Q2. IWI forecasts cloud services sales of JPY1.1bn for FY06/22, and based on orders as of end-Q1 (orders received as of that point and orders the company believes to be highly likely), the company at end-Q1 projected sales for the year at about the same level. While the medium-term plan calls for cloud services sales in FY06/23 of JPY2.0bn, the company at end-Q1 projected sales of more than JPY1.6bn.

Against a gross profit forecast of -JPY18mn, actual gross profit in Q1 was -JPY19mn (versus -JPY37mn in Q1 FY06/21). In Q1 FY06/22, there were no defects discovered as in Q1 FY06/21, and performance was in line with the company's forecast. Given that depreciation and amortization are expected to drop off, the company forecasts gross profit turning positive in Q2 and reaching JPY18mn (see below). On the other hand, the company expects gross profit to decline from JPY46mn in Q3 to JPY33mn in Q4 due to new depreciation and amortization costs.

Quarterly cloud services sales and gross profit (results and forecasts)

• Q1 FY06/21 (July-September 2020): Sales of JPY224mn (projected: JPY224mn), loss of JPY37mn (projected loss: JPY14mn)
• Q2 FY06/21 (October-December 2020): Sales of JPY246mn (projected: JPY235mn), loss of JPY12mn (projected loss: JPY10mn)
  
• Q3 FY06/21 (January-March 2021): Sales of JPY232mn (projected: JPY235mn), loss of JPY28mn (projected loss: JPY29mn)
  
• Q4 FY06/21 (April-June 2021): Sales of JPY239mn (projected: JPY246mn), loss of JPY3mn (projected loss: JPY22mn)
  
• Q1 FY06/22 (July-September 2021): Sales of JPY243mn (projected: JPY240mn), loss of JPY19mn (projected loss: JPY18mn)
  
• Q2 FY06/22 (October-December 2021): Projected sales of JPY248mn, projected profit: JPY18mn
  
• Q3 FY06/22 (January-March 2022): Projected sales of JPY296mn, projected profit: JPY46mn
• Q4 FY06/22 (April-June 2022): Projected sales of JPY343mn, projected profit: JPY33mn

Quarterly cloud services orders and order backlog (results)

• Q1 FY06/21 (July-September 2020): Orders of JPY133mn, order backlog of JPY1.9bn
• Q2 FY06/21 (October-December 2020): Orders of JPY73mn, order backlog of JPY1.8bn
• Q3 FY06/21 (January-March 2021): Orders of JPY79mn, order backlog of JPY1.6bn
• Q4 FY06/21 (April-June 2021): Orders of JPY483mn, order backlog of JPY1.9bn
• Q1 FY06/22 (July-September 2021): Orders of JPY1.0bn, order backlog of JPY2.6bn

IOASIS (merchant acquiring service)

Five companies had adopted the service as of end-Q1 FY06/22. The company received two large orders in Q1, making three orders in the past year. The company expects to continue to acquire orders from Q2 (Q1 orders and those acquired thereafter are expected to contribute to sales from April 2022.).

Orders remained firm in Q1 as existing cloud services users upgraded their systems and introduced new functions. Amid the growing trend toward cashless operations, there is a growing need of cloud-based IOASIS services as client companies seek to manage their member stores, and the scale of individual projects is also expanding. On the back of cashless payments enabled at physical stores, and online credit card transactions increasing among consumers in Japan, the company says an increasing number of its existing customers are making inquiries about shifting to IOASIS cloud service as they overhaul their systems. This would enable service providers with a large number of members and stores to reduce their fees. The company also says it is seeing greater numbers of new business operators interested in using IOASIS to manage their member stores and generate higher merchant fees from online credit card payments.

IFINDS (credit card fraud detection ASP service)

Three companies had adopted the service as of end-Q1, with IWI noting that the system was operating stably. With the growth in e-commerce and the incidence of fraudulent transactions on the rise because legacy fraud detection systems are not well-suited to detecting and stopping fraudulent transactions in the absence of face-to-face interaction between the transacting parties, IWI is seeing more and more requests for proof-of-concept testing for its IFINDS credit card fraud detection service. Based on its industry-leading track record and know-how in the fraud detection system field, the company offers a cloud service version of IFINDS (according to the company, IWI's on-premises fraud detection system ACE-Plus has more than a 50% share of the market for fraud detection in face-to-face payments; its competitors are overseas products from the US and other countries). Because of the low initial investment cost, challenger banks, neo-banks, and start-ups are beginning to use this service as they start their businesses.

In addition, the company has developed a scoring service called FARIS, which uses an advanced AI-based algorithm to improve the accuracy of the scoring function. As of end-Q1, two companies had placed orders, with three conducting proof-of-concept testing. As part of tuning efforts to improve the AI and increase fraud detection accuracy, the company adopted the RIME AI engine from AI security venture firm Robust Intelligence (a US company headquartered in California) in September 2021. IWI stated that using RIME in AI tuning operations resulted in enhanced system performance. The company is rushing to commercialize FARIS with this function embedded and is proposing its use to customers that have either already placed an order or are in the proof-of-concept phase. The company believes that it is a global leader in detection accuracy, and is currently preparing to expand its business overseas, with a focus in particular on Asia.

Four companies had adopted the service as of end-Q1, though the company indicated inquiries from several more. Along with the increase in cashless transactions, more and more companies in a variety of industries are moving to establish new credit card businesses and looking at cloud-based systems as a more economical way of carrying out the front-end processing of issuing and acquiring operations compared with traditional on-premises systems. In addition, IWI is offering client companies already in the credit card business the option of switching over to IGATES when it comes time to upgrade their existing front-end processing systems.

IPRETS (reward points management system)

One company had adopted the system as of end-Q1. The company's cloud-based version of IPRETS has been fully operational since October 2020. With this new cloud-based system, IWI will be in a better position to offer subscription-type services to regional banks looking to give their accountholders loyalty points whenever they use their bank-issued debit cards.

Recurring/one-time revenue

From FY06/22, the company has subdivided its category classifications and redefined its sales categories to show a more detailed classification of recurring and one-time revenue. Based on the type of contract and the status of the business concerned, projects that can generate a specified level of sales on a regular basis are classified as recurring revenue businesses, while those that cannot are classified as one-time revenue business. Typical recurring revenues are system usage fees and system operation fees related to the cloud services business, and maintenance fees for the company's and other companies' products. Cloud service usage fees are categorized as "Services: in-house." Typical one-time revenues include include fees for contracted development work and sales of the company's own products and products of other companies.

Under the new classification system, the ratios for recurring and one-time revenue are about the same. As shown below, the recurring revenue ratio in Q1 was 53.1%. Under the previous classification system, the recurring revenue ratio in Q1 would be 26.8%, with the subdividing of the previous sales categories resulting in that ratio increasing. Under the previous system, recurring revenue ratios were 13.0% in FY06/17, 13.5% in FY06/18, 16.9% in FY06/19, 19.0% in FY06/20, and 20.6% in FY06/21.

Progress in new businesses

Broadcasting business: Expanding sales of IP flow monitoring solution EoM

EoM is a solution that monitors the quality and leakage of large amounts of 4K and 8K IP data (broadcast data) moving through a network and makes repairs to that data where possible. The service offers real-time visualization and monitoring of communications in IP flow between sites. It utilizes Field-Programmable Gate Array (FPGA; an integrated circuit whose configuration can be set by the purchaser or designer after it is manufactured) hardware to achieve high-speed processing of large amounts of data. Companies already using EoM include TV Asahi, Japan Digital Serve (JDS), QVC Japan, and Yleisradio Oy (Yle), Finland's national public broadcasting company. Yle placed its order in June 2021, with the company not once having to travel overseas in pursuit of that order. The company stated that it believed technology to be a universal language.

Developing the tentatively titled SmartOrchestrator

The company is currently developing SmartOrchestrator (tentative name), which will monitor and control the network of an entire broadcast master system. While the exhibition scheduled for Las Vegas was cancelled and sales opportunities were lost, the company was able to participate in the Inter BEE exhibition in Japan in November 2021. The company expects sales activities in Japan to continue moving forward, and plans to participate in the exhibition in the Netherlands in December. With Yleisradio Oy signing on, it appears that IWI's technologies, functions, and quality have been favorably received overseas. The company accordingly aims to expand its business in overseas markets.

Financial business/security business

Integrated ID management product Evidian

Matsui Securities adopted the integrated ID management product named Evidian in August 2021. Evidian is used by 900 companies and more than 5mn users worldwide. With the increase in the number of systems and cloud services used by companies to promote telework and DX, IDs and passwords are becoming increasingly complicated. Their integrated management reduces a company's ID management burden as well as the workload on individual workers. Evidian is a new service that addresses issues such as the burden of managing IDs, passwords, and privileges for users and administrators, as well as security measures. The company will provide support for the introduction of the service at Matsui Securities.

Security diagnosis service utilizing the knowledge of white hackers

The company in October 2021 launched a security diagnosis service utilizing the knowledge of lerae Security (headquartered in Tokyo) white hackers that specialize in protecting companies from cyberattacks. This security diagnosis is conducted from the attacker's point of view, and allows the discovery of security holes that might not be discoverable using conventional security techniques. The service then proposes additional security measures.

As with Robust Intelligence AI engine in the FARIS cloud service, the company will continue to build its business ecosystem by collaborating with cutting-edge startup technologies, both in Japan and overseas, that match well with its own strengths. The company is also working to expand the scope of what it can do to address the issues of its customers. Through the pursuit of specialization (division of labor), IWI aims to work together with startups and better understand their identities.

Listing on the Prime Market

The company aims to list on the Prime Market. While notified by the Tokyo Stock Exchange on July 9, 2021 that market capitalization of tradeable shares (JPY8.3bn) at the company was still somewhat short of the required threshold (JPY10.0bn), the company aims to complete the application process in December 2021 and list on the Prime Market from April 4, 2022, thereafter entering the transitional measures period, which Shared Research estimates at three years. The company plans to increase its market capitalization by improving enterprise value through the advancement of its medium-term management plan. FY06/24 earnings and the company's share price will be particularly important given market capitalization requirements at the end of the transitions measures period. In light of its earnings targets for the final year in the medium-term plan, the company believes valuations at present to be too low.

FY06/21 results (out August 4, 2021)

In FY06/21, the company reported sales of JPY11.2bn (+2.4% YoY), operating profit of JPY1.1bn (+9.1% YoY), recurring profit of JPY1.2bn (+9.0% YoY), and net income attributable to owners of the parent of JPY841mn (+10.4% YoY). This was a record high for sales.

The FY06/21 results gave the company 101.7% of its full-year target for sales, 98.3% for operating
profit, 98.4% for recurring profit, and 102.6% for net income. Results were solid and mostly in line with the initial plan, bearing no impact from the COVID-19 pandemic. The company, which is involved in the development and operation of systems providing essential functions for the processing of credit card transactions, correctly recognized its social mission and promoted its business while maintaining the necessary facilities and systems to achieve smooth operation.

Sales came to JPY11.2bn (+2.4% YoY). This was 1.7% above plan.

Sales were JPY5.3bn (-9.0% YoY) for system development, JPY1.4bn (+8.9% YoY) for maintenance, JPY335mn (+37.3% YoY) for in-house packaged products, JPY942mn (+13.8% YoY) for cloud services, JPY1.6bn (+7.3% YoY) for hardware, JPY509mn (+131.4% YoY) for third-party packaged products, and JPY1.1bn (+6.4% YoY) for security measure products. The company had not anticipated any particularly large development projects in FY06/21, so the YoY decline in system development sales was in line with plan. Sales rose YoY in all other categories.

The company sold hardware and conducted development work to update and enhance the functionality of credit card payment-related systems and build fraud detection systems for major credit card companies and system vendors. Hardware sales were up 7.3% YoY due to sales of hardware and other equipment used in system development projects and the replacement of certain types of servers. Sales of third-party packaged products used in development projects for new customers also rose (+131.4% YoY). The cloud services business reported higher sales (+13.8% YoY) as planned. Although system development sales declined 9.0% YoY, this was offset by sales growth of hardware and other products. Sales of security measure products rose 6.4% YoY on contributions from customization of the company's own CWAT for large customers and additional licenses.

Operating profit was JPY1.1bn (+9.1% YoY). This was 1.7% below plan, but still represented YoY growth. Although there was a temporary increase in expenses in the cloud services business in Q1, operating profit rose 9.1% YoY on the back of improved efficiency in system development, higher sales in other categories, and improved profitability in the data security business. Gross profit margin improved 0.9pp YoY to 28.2% and the SG&A ratio rose 0.3pp YoY to 18.1%. Operating profit margin rose 0.6pp YoY to 10.1% as a result.

Operating profit margin, which IWI deems its most important KPI, exceeded 10%. Although expenses temporarily rose in the cloud services business, increased sales, thorough quality control for development projects, and improved profitability in the data security business (which moved from operating loss in FY06/20 to operating profit in FY06/21) helped improve operating profit margin.

External operating environment

In the credit card industry, which is primarily where IWI operates, monthly transaction volume has been increasing*, and monthly credit card shopping transaction volumes for major credit card companies have also been on the rise (in cumulative terms as well) compared to the previous year. Business performance is improving for the company's clients, and there is no major change in capital investment trends, especially among major credit card companies. In particular, major corporate groups are not only addressing the increasing variety of payment methods, but are also aiming to expand their business areas by providing customers with a combination of other financial services. This trend is also a business opportunity for the company. For example, companies outside the financial industry are offering new payment and financial services to their clients to expand their business domains. In addition, some of the company's clients are moving away from the on-premises model (where specific system development work is done individually) to cloud services in order to develop new services at a faster pace.

*Based on "Survey of Selected Service Industries: Credit Card Industry," by the Ministry of Economy, Trade and Industry.

Trends by client company (top three)

The company's top three client companies in terms of sales were:
(1) Dai Nippon Printing: JPY1.6bn (-JPY623mn YoY), primarily generated by TSP development, smartphone payment processing, round-the-clock system operations services, and payment processing platforms
(2) A systems development company: JPY1.2bn (+JPY682mn YoY), generated by front-end processing for new entrants to the credit card business and fraud detection services
(3) A credit card company: JPY1.2bn (+JPY497mn YoY), generated by system development and hardware services related to front-end processing renewal

Sales to DNP were down YoY due to a large payment processing platform project being nearly completed, but the shortfall was effectively offset by increases in sales to the systems development company and major credit card company, and total sales from the top three clients amounted to JPY4.1bn (+15.9% YoY).

Reflecting the company's push to expand in this area, sales derived from cloud services came in at JPY942mn, up JPY114mn YoY. At the gross profit level, the business reported a loss of JPY81mn, larger than both the projected loss of JPY75mn and the year-earlier loss of JPY24mn. The company explained that during Q1 (July-September 2020), it saw a temporary increase in expenses as a result of systems restoration work following a systems failure. The company further noted that the increase in personnel costs stemming from the added work to debug and restore systems put spending roughly JPY20mn over budget, but that the problems had now been fully resolved. In Q4 (April-June 2021), profitability improved more than expected (detail follows), and FY06/21 gross loss was just JPY6mn wider than plan. One of the reasons loss widened by JPY57mn YoY was growth in variable costs, including higher data center usage fees.

Quarterly cloud services sales and gross profit for FY06/21

• Q1 (July-September 2020): Sales of JPY224mn (projected: JPY224mn), loss of JPY37mn (projected loss: JPY14mn)

• Q2 (October-December 2020): Sales of JPY246mn (projected: JPY235mn), loss of JPY12mn (projected loss: JPY10mn)

• Q3 (January-March 2021): Sales of JPY232mn (projected: JPY235mn), loss of JPY28mn (projected loss: JPY29mn)

• Q4 (April-June 2021): Sales of JPY239mn (projected: JPY246mn), loss of JPY3mn (projected loss: JPY22mn)

IOASIS (merchant acquiring service)

Having received orders from five large regional banks that operate their own credit card businesses, and services for the fifth having started in October 2019 (Q2 FY06/20), IOASIS made a full-year contribution to sales in FY06/21. The performance of IOASIS thus far has won rave reviews from users and led to inquiries from a wide range of other potential users. In addition to continued interest on the part of regional banks, the company said it is also fielding a growing number of inquiries from companies that have been issuing co-branded cards but are now interested in issuing credit cards on their own.

The company has confirmed receipt of an order from its sixth client, a major telecommunications company (originally this order was to be received in FY06/21). Demand for IOASIS is increasing, and the scale of IOASIS projects is expanding. On the back of cashless payments enabled at physical stores, and online credit card transactions increasing among consumers in Japan, the company says an increasing number of its existing customers are making inquiries about shifting to IOASIS cloud service as they overhaul their systems. The company also says it is seeing greater numbers of new business operators interested in using IOASIS to manage their member stores and generate higher merchant fees from online credit card payments. In addition to the order just mentioned, the company expects to receive another large order in June 2022. With adoption by a total of four new clients, IWI plans to have nine IOASIS clients in total by end-FY06/22.

IFINDS (credit card fraud detection ASP service)

With three client companies onboard as of end-FY06/21, operations are holding steady at this time but, with growth in e-commerce and the incidence of fraudulent transactions on the rise because legacy fraud detection systems are not well-suited to detecting and stopping fraudulent transactions in the absence of face-to-face interaction between the transacting parties, IWI is seeing more and more requests for proof-of-concept testing for its IFINDS credit card fraud detection service and is expecting at least some of these to lead to new contracts. However, it still expects its IFINDS client count to be three at end-FY06/22 (flat YoY).

The company has four client companies onboard as of end-FY06/21 (the third and fourth began contributing to sales in Q2) but has received inquiries from several more. Along with the increase in cashless transactions, more and more companies in a variety of industries are moving to establish new credit card businesses and looking at cloud-based systems as a more economical way of carrying out the front-end processing of issuing and acquiring operations compared with traditional on-premises systems. In addition, IWI is offering companies already in the credit card business the option of switching over to IGATES when it comes time to upgrade their existing front-end processing systems. The company expects its IGATES client count to be five at end-FY06/22 (+1 YoY).

IPRETS (reward points management system)

The company's cloud-based version of IPRETS has been fully operational since October 2020. With this new cloud-based system, IWI will be in a better position to offer subscription-type services to regional banks looking to give their accountholders loyalty points whenever they use their bank-issued debit cards. The first company to adopt this system began contributing to sales in Q2 FY06/21. IWI expects the IPRETS client count to be one at end-FY06/22 (flat YoY).

FARIS (next-generation fraud detection system)

By raising processing capacity and detection accuracy with the help of AI-generated algorithms (which score and flag suspicious transactions), IWI aims to tackle the fraud detection problems associated with growth in e-commerce-related payments. Rather than a standard maintenance agreement, the company aims to use a multiyear subscription agreement to provide operational support for the maintenance of fraud detection accuracy. As of September 2020, one client company had FARIS up and running, one more company is getting ready to sign on, and two more companies are running proof-of-concept tests.

Sales have been volatile. Sales are affected by orders from credit card companies and securities brokers, and hardware sales trends. For this reason, IWI is working on expanding target industries and broadening its security-related product offerings. Since June 2012, the company has continuously recorded year-on-year sales increases, with the exception of FY06/15 and FY06/19. Company sales are on an upward trend due to increasing new investment proposals and system updates in the credit card industry, the company's main business area. In FY06/22, the company reported record-high sales of JPY11.5bn.

In terms of profit and loss, projects will occasionally become unprofitable due to defects that occur in development processes. Profit plunged in FY06/13 as a result of unprofitable projects, and the effects of these unprofitable projects remained until Q1 FY06/14. Gross profit margin has been in decline, falling from its highest point in the past 15 years of 41.2% in FY06/06 to 8.1% in FY06/13 (recording operating loss). However, the company has maintained rigorous project management and gross profit margins of 20% or more since FY06/14 (32.2% in FY06/22). IFY06/22, the company posted operating profit of JPY1.5bn, a 10-year high (the record high is JPY1.9bn logged in FY06/02). However, the gross profit margin fell 4.2 pp YoY in FY06/18 as large-scale projects became unprofitable due to defects that occurred in internal integration testing.

The company recognized large extraordinary losses three times from FY06/01 through FY06/22: in FY06/07, FY06/08 and FY06/15. The FY06/07 expense was JPY466mn, mostly due to software amortization (JPY146mn), litigation costs (JPY114mn), and a valuation allowance related to investments (JPY156mn). The FY06/08 expense was JPY398mn, mostly due to impairment losses (JPY145mn) and software amortization (JPY137mn). In FY06/15, IWI booked an extraordinary loss of JPY208mn on retirement benefit expenses, as it has changed its method of calculating retirement benefit liabilities from the simplified method to the principle method. The extraordinary loss booked in FY06/18 was due in large part to valuation losses on investment security holdings.

The company's asset base has been defined by a greater portion of current than fixed assets, not unusual for an IT company.

The company's current assets have effectively been cash and cash equivalents, and accounts receivable.

The company has been debt free since FY06/06 but has used debt financing in the past.

Since FY06/12, interest-bearing debt (both short and long term) reflects lease obligations. The company's liabilities are mostly accounts payable and advances received.

There have been no significant changes in shareholders' equity related to impairment or other charges.

Retained earnings has been steadily accumulating since FY06/15.

Cash flows from operating activities

Excluding FY06/13 outflow resulting from unprofitable projects, IWI's cash flows from operating activities are continuing to maintain stable inflow.

Cash flows from investing activities

The company's cash flows from investing activities mainly consist of investment securities and the acquisition of intangible fixed assets. Cash used in investing activities exceeded JPY1.0bn in FY06/17 and FY06/22, mainly for the acquisition of intangible assets.

Cash flows from financing activities

For the past five years, most of the cash flows from financing activities have been related to dividend payments. The company recorded an inflow of JPY114mn from a sales and leaseback transaction in FY06/16. In FY06/20, the company recorded a JPY136mn outflow due to a share buyback.

On August 19, 2020, the company announced changes to its representative directors.

The company announced that at a meeting of the Board of Directors held on August 19, 2020, it had resolved to change its representative directors. The changes will be formally decided and the directors will assume their new positions at a meeting of the Board of Directors to be held on September 25, 2020, following election of directors at the Annual General Meeting of Shareholders to be held on the same date.

On the same day, the company announced the introduction of executive officers.

The company resolved, at a meeting of the Board of Directors held on August 19, 2020, to introduce executive officers. Introduction of the new system is scheduled for September 25, 2020.

The introduction of executive officers is one of the company's measures to allow the Board of Directors to carry out its duties more faithfully, by creating a greater distinction between executive and supervisory functions within the Board of Directors and clarifying responsibilities.

In February 2020, the company conducted a questionnaire survey of directors and auditors in order to evaluate the effectiveness of the Board of Directors. The results of the survey indicated that the promotion of more substantial discussions is an issue of significant importance in enhancing board effectiveness.

The company considers that it is necessary to review the composition of the Board of Directors and introduce executive officers in order to effectuate more substantial discussions so that the board fulfils its responsibility to perform a highly effective supervisory function, discussing major directions such as business strategy and examining important issues from an objective position.

Overview of the executive officer system

The appointment, dismissal, and duties of executive officers shall be determined by resolution of the Board of Directors.

The term of office shall be one year, and reappointment is not precluded.

Directors may also serve as executive officers.