Summary: RIZAP Group<2928>The comprehensive enterprise, which is committed to proving that "people can change" as its unique management philosophy, develops a variety of businesses in the three areas of health creation, health care / beauty, lifestyle, and investment. Under the vision of "Global No.1 in the self-investment industry", it has achieved remarkable growth by actively utilizing M&A under the holding company structure and has grown to include 68 group companies, including 5 listed subsidiaries, and 4,606 consolidated employees. Listed on the Sapporo Stock Exchange's Ambitious Market in 2006, it formulated a medium-term management plan in September 2022, but revised it in February 2024 to achieve an operating profit of ¥400 million (fiscal year ending March 2027) by aggressively expanding the new business "chocoZAP". The fiscal 2024 performance was sales revenue of ¥16,629.8 million (+7.6% YoY), operating loss of ¥594 million (compared to a loss of ¥4948 million in the same period of the previous year), pre-tax loss of ¥4524 million (compared to a loss of ¥7,031 million in the same period of the previous year), and net loss attributable to the owners of the parent of ¥4,300 million (compared to a loss of ¥12,673 million in the same period of the previous year). Due to the black ink conversion of the chocoZAP business, it achieved a black ink of ¥417.5 million on an operating profit basis in the fourth quarter alone. As for sales revenue, the RIZAP-related business (including the chocoZAP business) significantly increased its revenue (+¥201 million) by focusing on expanding the convenience gym "chocoZAP". In existing businesses, there was an increase in revenue, including Antiroza Co., Ltd. (+¥419.8 million), while there was a decrease in revenue due to store structure reform in REXT Co., Ltd., etc. (-¥599.8 million) and the impact of selling the Sikata business under the subsidiary BRUNO<3140>at the end of the previous year (-¥511.1 million). As for operating loss, the group as a whole improved due to the transition of the chocoZAP business to the investment recovery period and the success of business portfolio reform such as REXT.

Dream Arts <4811> has a mission of promoting the development of people, organizations, and society full of the joy of co-creation, and is a cloud service vendor that provides SaaS products such as the no-code tool for large enterprises, SmartDB(R) (SmartDB). With the concept of "digital democratization", they drive the digitalization of business in the cloud era involving business-oriented personnel in field departments who do not have IT expertise. They have a dual headquarters system in Tokyo and Hiroshima.

No-code development: Refers to the development using tools that allow developers to visually configure source code parts that were previously essential in application development through programming languages, and intuitively place desired parts.

SaaS: Abbreviation for Software as a Service. It is a service that enables the use of software applications built on the cloud via the internet. Unlike traditional purchasing and installation of packaged software on hardware, it can be accessed over the internet without the need for installation.

1. Overview of Performance for the 2nd Quarter of the Fiscal Year Ending December 2024

For the cumulative consolidated performance for the second quarter of the fiscal year ending December 2024, the revenue was 24.15 billion yen (an increase of 9.7% from the same period last year), operating profit was 3.61 billion yen (a decrease of 2.4%), ordinary profit was 3.57 billion yen (a decrease of 2.7%), and net income attributable to the parent company shareholders was 2.5 billion yen (a decrease of 3.0%). The company focused on proposing transitions to the cloud for existing customers as part of completing the business model transition to cloud, which temporarily slowed down the overall company's growth. However, the progress rate towards the initial full-year performance forecast was smooth, with revenue at 50.3% and operating profit at 62.4%. On the other hand, the main Horizontal SaaS (SmartDB and InsuiteX) continued to grow steadily with a sales increase of 33.4% due to the increasing number of adopting companies. SmartDB was adopted for systems used company-wide like ERP front systems, leading to large-scale new projects, along with good progress in upselling to existing customers. The extensibility of SmartDB, high interoperability with core systems and other SaaS providers, and the accurate capture of the needs of listed companies updating core systems were also highly praised. The sales of the Vertical SaaS (Shoplan) also steadily increased by 8.1%. The ratio of revenue from On-premises business and Cloud business to total revenue was 88.2% (an increase of 8.4 points) and 76.7% (an increase of 9.7 points) respectively, establishing a stable revenue base. On the profit and loss side, infrastructure costs increased with the growth of the cloud business, but the cumulative stock-type revenue led to a gross profit margin of 57.2% (a 2.2-point increase). However, due to increased personnel costs, including salary increases for young employees, additional staff for new acquisitions, and increased sales promotion expenses, various profits such as operating profit decreased.

Horizontal SaaS: SaaS specialized in specific departments or functions regardless of the industry. It is used to solve common business issues within corporate organizations.

Vertical SaaS: SaaS specialized in a specific industry. It is used to solve industry-specific business issues.

※3 On-premises (on-premises): Premises refer to "on-site" or "in-store". It means installing and operating information systems such as servers and software in a facility managed by the users.

Performance outlook for the fiscal year ending December 2024.

For the consolidated performance in the fiscal year ending December 2024, it is expected to see an increase in revenue by 13.7% to 50.5 billion yen compared to the previous period, an increase in operating profit by 32.1% to 762 million yen, an increase in ordinary profit by 34.6% to 758 million yen, and a growth in net income attributable to the parent company's shareholders by 24.4% to 527 million yen. The Horizontal SaaS business is performing well, and maintenance contracts for on-premises business are not experiencing cancellations at the anticipated level at the beginning of the period, resulting in an upward revision of the full-year forecast in August 2024 for revenue by 5.2% and operating profit by 31.5%. The cloud business is expected to increase revenue by 24.8% compared to the previous period. On-premises business revenue is expected to decrease by 6.5%, and professional services business revenue is expected to decrease by 17.9%. The professional services business is promoting a "pruning strategy" (pruning = promoting migration to the latest platforms, reducing functionalities that can become technical liabilities to reduce future system loads) to some customers, resulting in an increase in pro bono operations in the second quarter, but it is hoped that the realization of various SaaS implementation support projects by the end of the year is progressing.

Regarding the medium- to long-term growth strategy, the company aims to achieve business expansion and enterprise value improvement based on a growth strategy centered on data utilization, under the slogan 'From an Ad Tech Company to a Comprehensive Data Company'. Specifically, they aim to achieve business expansion and enterprise values by three basic strategies: 'Expanding Data Products,' 'Response to PostCookie,' and 'Data Utilization for New Fields'. Regarding 'Expanding Data Products,' they focus on the 'Data Products,' which are self-developed products that can expect increased harvesting and high profit. They aim to increase the operating account of 'UNIVERSE' by strengthening the sales system and continuously introducing new products. They also aim to build a high-quality human resource pool that can continuously produce high-value-added products by investing in human resources. Regarding 'Response to PostCookie,' considering that support for 3rd party cookies will be discontinued in the Chrome browser provided by Google, the company aims to gain a first-mover advantage by quickly responding to it. Furthermore, they are actively exploring new fields by utilizing vast amounts of data and analysis technology that they have, not just staying in the frame of the advertising service. New services related to inbound and cross-border EC are also expanding successfully. Most recently, they established a joint venture to handle inbound and outbound support to Chinese active senior citizens as a new business in April 2024.

As a future growth strategy, the main product "SmartDB" aims to expand its customer base by increasing sales, achieve organic growth through upselling and cross-selling, expand strategic partnerships, and foster personnel capable of handling "SmartDB". Regarding upselling and cross-selling, the continuous development and addition of product options are essential for the steady progress. In terms of expanding strategic partnerships, the company has started the "DreamArts Partner Program (DAP)" and "SmartDB Certified Specialist System" since February 2024, dividing it into three layers: human resource development, use promotion as a development foundation, and industry-specific solution development. The circle of strategic partners such as consulting companies and system integrators utilizing "SmartDB" has been expanding, and partnerships have been formed, such as with Computer Management <4491>, which provides DX-related system development and implementation support services in July 2024. In addition, in September of the same year, the independent major system integrator Fuji Soft <9749> became the company's official partner. Being a running partner with specialized knowledge to support large companies, they are participating in DAP, jointly expanding the adoption of "SmartDB". The number of "SmartDB" Specialist Certified System (SCS) has surpassed 1,300, and the wave of "digital democratization" with "SmartDB" has started to spread widely.

■Key Points

- The growth of "SmartDB" is driving the business model towards a transition to the cloud business.

- In the second quarter of the fiscal year ending December 2024, there is a strong focus on cloud migration proposals, with increased investments in growth while also experiencing a decrease in profits.

For the fiscal year ending December 2024, double-digit revenue and profit growth is expected to be driven by the growth of cloud business.

(Author: FISCO Guest Analyst Shuji Matsumoto)