Intelligent Wave (IWI) primarily sells software solutions based on in-house developed packaged software. The main clients are in the financial services industry; core products focus on credit card transaction processing, low-latency secure communications, and data protection. Dai Nippon Printing Co., Ltd. (DNP; TSE1: 7912) holds 50%+ of the company shares.

IWI focuses mainly on software development for client companies in the financial services industry, adding value by integrating hardware and software to create specialized systems, and also providing maintenance services to keep those systems running. The company’s information processing technology is mainly used in online systems to provide reliable credit card transaction processing service around the clock and 365 days a year. In this field, IWI has three core products: NET+1, ACE-Plus, and OnCore. NET+1 is a self-developed packaged software product used for credit card authorization (authorization of a charge by the credit card issuer in response to an inquiry from a member store). NET+1 has the top domestic market share in this field, being used in roughly 70% of credit card authorization systems of Japan’s leading credit card companies. ACE-Plus is a software system for detecting and preventing fraudulent credit card use. OnCore, also developed in-house, provides the same network connection functions as NET+1 but can also be used for other payment applications as well, including connections for smartphone payments.

The company also offers value-added systems and maintenance services for various industries and sectors, with a focus on in-house developed packaged software for information security and third-party packaged software for cybersecurity. The company has a host of products including CWAT, an in-house developed software for information security and Traps, a third-party product for cybersecurity.

Starting in FY06/21, the company merged the two reporting segments it had been using, combining the Financial Systems Solutions segment (which had accounted for roughly 90% of sales and nearly all of its operating profit) with the Product Solutions segment. The merger of the two segments was accompanied by changes in the company’s organizational and management structures aimed at further advancing sales efforts by facilitating the creation of a unified approach to the utilization of the personnel resources and intellectual property that had previously been split between the two segments, as well as accelerating the development of new products and services.

Trends and outlook

In FY06/21, IWI 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). By category, 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.

For FY06/22, IWI forecasts sales of JPY12.0bn (+7.3% YoY), operating profit of JPY1.3bn (+16.8% YoY), recurring profit of JPY1.4bn (+16.1% YoY), and net income attributable to owners of the parent of JPY940mn (+11.8% YoY). On August 4, 2021, the company revised its medium-term business plan and presented a new medium-term business plan (see the Management strategy and long-term outlook section for details). The company was not affected by the COVID-19 pandemic in FY06/21, and there was no material impact on the continuity of its systems development or systems operation activities. Its production activities were on track as of August 2021.

New medium-term business plan: The company decided to revise the medium-term business plan it announced on August 5, 2020 and formulated a new medium-term plan covering the years from FY06/22 through FY06/24. Under the new medium-term plan, the company has set final-year targets for sales of JPY15.0bn (+34.1% versus FY06/21 results), operating profit of JPY2.3bn (+99.1%), and operating profit margin of 15.0% (10.1% in FY06/21).

In addition to its legacy one-time revenue business model, the company is working to expand its stable earnings base by adding recurring-revenue businesses that can sustainably generate profits. Companies outside the financial industry are offering new payment and financial services to their customers in an effort to expand their business areas. Further, some of the company's clients are using cloud services to quickly launch new businesses. IWI has been transitioning its legacy on-premises systems, mainly for its credit card merchant acquiring and credit card fraud detection services, to cloud-based systems. By using the company's cloud services, clients can quickly launch new businesses without the need for large investment. As such, IWI is encouraging companies outside the financial industry and companies that have not been in the credit card business to enter the credit card business.

The cloud services business has grown to become an important business for the company in terms of new client acquisition and business expansion. The company expects this business to turn profitable in FY06/22 and to grow into a major source of earnings by FY06/24. In addition, the company is using the knowledge and experience it has gained from its development work in the financial industry to create new products for companies outside the financial industry, and is taking on the challenge of expanding into new markets. It aims to expand into new markets and develop new revenue streams by using its technology, which is based on real-time, high-speed processing of large amounts of data, to discover and solve underlying operational issues in different industries.

By providing IT and business services that actively utilize the cloud alongside its conventional on-premises products, IWI aims to move from being a "credit settlement system developer" to being an "IT service provider that supports business reliability in the settlement, finance, and security fields." In this context, business reliability means continually enhancing the reliability of both clients' businesses and the company's own businesses.

Strengths and weaknesses

Shared Research thinks the two main strengths of Intelligent Wave are its dominant position in the front-end credit card market and its cooperation with DNP. Weaknesses: its small size in a market where size matters, and a relatively weak sales channel (see Strengths and weaknesses).

Key financial data

Income statement		FY06/11	FY06/12	FY06/13	FY06/14	FY06/15	FY06/16	FY06/17	FY06/18	FY06/19	FY06/20	FY06/21	FY06/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Parent	Parent	Parent	Parent	Parent	Est.
Sales		4,763	5,242	5,871	6,558	6,160	7,207	8,470	10,604	10,443	10,921	11,188	12,000
	YoY	-3.9%	10.1%	12.0%	11.7%	-6.1%	17.0%	17.5%	25.2%	-1.5%	4.6%	2.4%	7.3%
Gross profit		1,642	1,374	473	1,342	1,779	1,993	2,132	2,223	2,807	2,981	3,157
	YoY	-10.6%	-16.3%	-65.6%	183.4%	32.6%	12.0%	7.0%	4.2%	26.3%	6.2%	5.9%
	Gross profit margin	34.5%	26.2%	8.1%	20.5%	28.9%	27.7%	25.2%	21.0%	26.9%	27.3%	28.2%
Operating profit		321	132	-678	146	484	714	703	548	922	1,036	1,131	1,320
	YoY	-10.3%	-59.0%	-	-	232.8%	47.5%	-1.6%	-22.0%	68.3%	12.5%	9.1%	16.8%
	Operating profit margin	6.7%	2.5%	-11.5%	2.2%	7.9%	9.9%	8.3%	5.2%	8.8%	9.5%	10.1%	11.0%
Recurring profit		342	155	-587	184	490	731	766	574	954	1,075	1,171	1,360
	YoY	-11.8%	-54.8%	-	-	166.6%	49.0%	4.9%	-25.1%	66.2%	12.7%	9.0%	16.1%
	Recurring profit margin	7.2%	2.9%	-10.0%	2.8%	8.0%	10.1%	9.0%	5.4%	9.1%	9.8%	10.5%	11.3%
Net income		129	270	-349	87	471	479	547	377	684	762	841	940
	YoY	-38.9%	108.9%	-	-	443.2%	1.6%	14.3%	-31.0%	81.2%	11.4%	10.4%	11.8%
	Net margin	2.7%	5.2%	-5.9%	1.3%	7.6%	6.6%	6.5%	3.6%	6.5%	7.0%	7.5%	7.8%
Per-share data
Shares issued (year-end; '000)		263	263	263	26,340	26,340	26,340	26,340	26,340	26,340	26,340	26,340
EPS		491.5	1,026.9	-1,325.3	3.29	17.89	18.18	20.78	14.36	25.99	29.00	31.98	35.76
Dividend per share		500.0	500.0	500.0	5.0	5.0	6.0	7.0	7.0	9.0	10.0	13.0	14.00
Book value per share		17,866	18,680	16,884	169	184	192	215	217	242	266	288
Balance sheet (JPYmn)
Cash and cash equivalents		2,783	2,808	2,085	2,420	2,957	2,852	2,578	2,840	3,255	3,642	4,308
Total current assets		3,822	4,335	3,560	3,524	4,560	4,682	4,985	5,034	6,054	6,381	6,976
	Tangible fixed assets	388	327	307	290	277	401	420	520	541	538	733
	Investments and other assets	1,375	1,495	1,573	1,459	1,359	1,388	1,682	1,768	2,096	2,167	2,114
	Intangible assets	132	206	315	367	285	557	1,421	1,515	1,341	1,465	1,318
Total fixed assets		1,895	2,028	2,195	2,116	1,921	2,345	3,523	3,803	3,978	4,171	4,164
Total assets		5,717	6,363	5,755	5,640	6,482	7,027	8,508	8,837	10,032	10,552	11,140
	Accounts payable	249	617	377	192	321	363	553	543	332	627	431
	Short-term debt	0	9	10	10	12	34	28	36	35	29	10
Total current liabilities		765	1,147	1,007	881	1,150	1,373	2,252	2,523	3,058	2,951	2,912
	Long-term debt	0	35	29	18	17	102	74	74	39	10	6
Total long-term liabilities		246	296	301	307	497	591	609	599	601	618	661
Total liabilities		1,011	1,443	1,308	1,188	1,647	1,964	2,861	3,122	3,660	3,569	3,572
Total net assets		4,706	4,920	4,447	4,451	4,835	5,063	5,648	5,715	6,373	6,983	7,568
Total interest-bearing debt		0	44	39	28	29	136	102	110	74	39	16
Cash flow statement (JPYmn)
Cash flows from operating activities		795	252	-588	620	839	124	1,172	1,213	1,237	1,547	1,700
Cash flows from investing activities		-61	-25	3	-47	-263	-192	-1,151	-604	-602	-753	-743
Cash flows from financing activities		-132	-138	-142	-143	-143	-34	-198	-349	-220	-408	-292
Financial ratios
ROA (RP-based)		6.1%	2.6%	-	3.2%	8.1%	10.8%	9.9%	6.6%	10.1%	10.4%	10.8%
ROE		2.8%	5.6%	-	1.9%	10.1%	9.7%	10.3%	6.6%	11.3%	11.4%	11.6%
Equity ratio		82.3%	77.3%	77.3%	78.9%	74.6%	72.1%	66.4%	64.7%	63.5%	66.2%	67.9%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company performed a 100-for-1 stock split on January 1, 2014.
Note: On June 28, 2016, the company finished liquidating consolidated subsidiary Intelligent Wave Korea Inc. FY06/17 results apply only to the parent company and are not consolidated (YoY growth rate figures for FY06/17 are for reference).

Trends and outlook

Quarterly trends and results

		FY06/20 (parent)				FY06/21 (parent)				FY06/22 (parent)				FY06/22 (parent)
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	% of Est.	1H Est.
Sales		2,417	2,550	2,838	3,115	2,299	2,949	2,819	3,121	2,252				45.0%	5,000
	YoY	3.4%	-5.6%	7.1%	13.1%	-4.9%	15.7%	-0.7%	0.2%	-2.0%					-4.7%
Gross profit		622	712	689	958	589	801	766	1,001	620
	YoY	18.3%	6.0%	-22.1%	32.2%	-5.2%	12.4%	11.2%	4.5%	5.2%
	Gross profit margin	25.7%	27.9%	24.3%	30.7%	25.6%	27.1%	27.2%	32.1%	27.5%
SG&A expenses		480	485	472	507	455	529	493	549	493
	YoY	5.6%	2.4%	-1.3%	6.0%	-5.3%	9.2%	4.4%	8.2%	8.5%
	SG&A ratio	19.9%	19.0%	16.6%	16.3%	19.8%	18.0%	17.5%	17.6%	21.9%
Operating profit		141	228	217	451	134	271	273	452	127				30.9%	410
	YoY	100.1%	14.6%	-46.6%	83.1%	-4.8%	19.2%	25.9%	0.3%	-5.7%					1.1%
	Operating profit margin	5.8%	8.9%	7.6%	14.5%	5.8%	9.2%	9.7%	14.5%	5.6%					8.2%
Recurring profit		141	219	241	474	129	293	275	475	125				29.0%	430
	YoY	79.3%	7.9%	-40.7%	78.6%	-8.8%	33.5%	14.3%	0.2%	-2.8%					2.1%
	Recurring profit margin	5.8%	8.6%	8.5%	15.2%	5.6%	9.9%	9.8%	15.2%	5.5%					8.6%
Net income		91	146	161	364	84	202	185	370	83				27.6%	300
	YoY	89.6%	-6.9%	-38.4%	67.5%	-8.3%	38.4%	14.7%	1.8%	-0.9%					5.0%
	Net margin	3.8%	5.7%	5.7%	11.7%	3.6%	6.9%	6.6%	11.9%	3.7%					6.0%
Quarterly		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	% of Est.	FY Est.
Sales		2,417	4,967	7,805	10,921	2,299	5,248	8,067	11,188	2,252				18.8%	12,000
	YoY	3.4%	-1.4%	1.5%	4.6%	-4.9%	5.7%	3.4%	2.4%	-2.0%					7.3%
Gross profit		622	1,334	2,023	2,981	589	1,390	2,156	3,157	620
	YoY	18.3%	11.4%	-2.9%	6.2%	-5.2%	4.2%	6.6%	5.9%	5.2%
	Gross profit margin	25.7%	26.9%	25.9%	27.3%	25.6%	26.5%	26.7%	28.2%	27.5%
SG&A expenses		480	965	1,437	1,944	455	984	1,477	2,026	493
	YoY	5.6%	3.9%	2.2%	3.1%	-5.3%	2.0%	2.8%	4.2%	8.5%
	SG&A ratio	19.9%	19.4%	18.4%	17.8%	19.8%	18.8%	18.3%	18.1%	21.9%
Operating profit		141	369	586	1,036	134	406	679	1,131	127				9.6%	1,320
	YoY	100.1%	37.1%	-13.3%	12.5%	-4.8%	10.0%	15.9%	9.1%	-5.7%					16.8%
	Operating profit margin	5.8%	7.4%	7.5%	9.5%	5.8%	7.7%	8.4%	10.1%	5.6%					11.0%
Recurring profit		141	360	601	1,075	129	421	696	1,171	125				9.2%	1,360
	YoY	79.3%	27.8%	-12.7%	12.7%	-8.8%	17.0%	15.9%	9.0%	-2.8%					16.1%
	Recurring profit margin	5.8%	7.2%	7.7%	9.8%	5.6%	8.0%	8.6%	10.5%	5.5%					11.3%
Net income		91	237	398	762	84	286	471	841	83				8.8%	940
	YoY	89.6%	15.8%	-14.7%	11.4%	-8.3%	20.5%	18.1%	10.4%	-0.9%					11.8%
	Net margin	3.8%	4.8%	5.1%	7.0%	3.6%	5.4%	5.8%	7.5%	3.7%					7.8%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Company estimates based on most recent figures

Results by category

Quarterly		FY06/20 (parent)				FY06/21 (parent)				FY06/22 (parent)				FY06/22 (parent)
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	% of Est.	1H Est.
Sales		2,417	2,550	2,838	3,115	2,299	2,949	2,819	3,121	2,252				45.0%	5,000
	System development	1,251	1,323	1,808	1,409	1,113	1,324	1,273	1,562	1,170				43.1%	2,713
	Maintenance	301	305	320	320	315	332	345	365	360				49.7%	725
	In-house packaged products	97	82	28	37	144	65	58	68	131				49.4%	265
	Cloud services	178	212	219	219	224	246	232	240	243				49.7%	489
	Hardware	353	327	189	657	208	664	467	299	79				42.0%	188
	Third party packaged products	61	34	53	72	110	130	191	78	69				57.5%	120
	Security measure products	173	267	221	402	181	188	253	509	198				39.6%	500
	One-time revenue	1,935	2,033	2,299	2,577	1,756	2,371	2,242	2,516	1,055				27.9%	3,786
	Recurring revenue	479	517	539	539	539	578	577	605	1,196				98.5%	1,214
YoY		3.4%	-5.6%	7.1%	13.1%	-4.9%	15.7%	-0.7%	0.2%	-2.0%				-	-4.7%
	System development	-	-	-	-	-11.0%	0.1%	-29.6%	10.9%	5.1%					11.3%
	Maintenance	-	-	-	-	4.7%	8.9%	7.8%	14.1%	14.3%					12.1%
	In-house packaged products	-	-	-	-	48.5%	-20.7%	107.1%	83.8%	-9.0%					26.8%
	Cloud services	-	-	-	-	25.8%	16.0%	5.9%	9.6%	8.5%					4.0%
	Hardware	-	-	-	-	-41.1%	103.1%	147.1%	-54.5%	-62.0%					-78.4%
	Third party packaged products	-	-	-	-	80.3%	282.4%	260.4%	8.3%	-37.3%					-50.0%
	Security measure products	-	-	-	-	4.6%	-29.6%	14.5%	26.6%	9.4%					35.5%
	One-time revenue	-	-	-	-	-9.3%	16.6%	-2.5%	-2.4%	-					-8.3%
	Recurring revenue	-	-	-	-	12.5%	11.8%	7.1%	12.2%	-					8.7%
% of sales		100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%
	System development	51.7%	51.9%	63.7%	45.2%	48.4%	44.9%	45.2%	50.1%	52.0%
	Maintenance	12.5%	12.0%	11.3%	10.3%	13.7%	11.3%	12.2%	11.7%	16.0%
	In-house packaged products	4.0%	3.2%	1.0%	1.2%	6.3%	2.2%	2.1%	2.2%	5.8%
	Cloud services	7.4%	8.3%	7.7%	7.0%	9.7%	8.3%	8.2%	7.7%	10.8%
	Hardware	14.6%	12.8%	6.7%	21.1%	9.0%	22.5%	16.6%	9.6%	3.5%
	Third party packaged products	2.5%	1.3%	1.9%	2.3%	4.8%	4.4%	6.8%	2.5%	3.1%
	Security measure products	7.2%	10.5%	7.8%	12.9%	7.9%	6.4%	9.0%	16.3%	8.8%
	One-time revenue	80.0%	79.7%	81.0%	82.7%	76.4%	80.4%	79.5%	80.6%	46.8%
	Recurring revenue	19.8%	20.3%	19.0%	17.3%	23.4%	19.6%	20.5%	19.4%	53.1%
Old categories
Sales		2,417	2,550	2,838	3,115	-	-	-	-	-
	Financial Systems Solutions	2,243	2,284	2,617	2,713	-	-	-	-	-
	Product Solutions	174	266	221	402	-	-	-	-	-
Operating profit		141	228	217	451	-	-	-	-	-
	Financial Systems Solutions	208	286	239	391	-	-	-	-	-
	Product Solutions	-66	-59	-22	59	-	-	-	-	-
Operating profit margin		5.8%	8.9%	7.6%	14.5%	-	-	-	-	-
	Financial Systems Solutions	9.3%	12.5%	9.1%	14.4%	-	-	-	-	-
	Product Solutions	-	-	-	14.8%	-	-	-	-	-
Sales breakdown
Financial Systems Solutions		2,243	2,284	2,617	2,713	-	-	-	-	-
	System development	1,251	1,323	1,808	1,409	-	-	-	-	-
	Maintenance	301	305	320	320	-	-	-	-	-
	Hardware	353	327	189	657	-	-	-	-	-
	In-house packaged software	98	81	28	37	-	-	-	-	-
	Cloud services	178	212	219	219	-	-	-	-	-
	Third-party packaged software	61	34	53	72	-	-	-	-	-
Product Solutions		174	266	221	402	-	-	-	-	-
	System development	5	23	18	7	-	-	-	-	-
	Maintenance	17	27	80	152	-	-	-	-	-
	Hardware	1	0	0	43	-	-	-	-	-
	In-house packaged software	49	13	7	20	-	-	-	-	-
	Third-party packaged software	100	202	117	181	-	-	-	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: From FY06/21, IWI has combined its old reporting segments, Financial Systems Solutions and Product Solutions, into a single segment.
Note: The company records sales from categories under which agreements regularly generate sales on a measurable scale as “recurring revenue.” In contrast, it records sales obtained through categories under which agreements have unfixed sales values or timing (categories not labeled with “recurring” in the table above) as “one-time revenue.”
Note: Starting Q1 FY06/22, the company has revised its recurring/one-time revenue categories to show a more detailed classification of theses types of sales than before (no continuity vs. FY06/21).

Quarterly		FY06/20 (parent)				FY06/21 (parent)				FY06/22 (parent)				FY06/22 (parent)
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	% of Est.	FY Est.
Sales		2,417	4,967	7,805	10,921	2,299	5,248	8,067	11,188	2,252				18.8%	12,000
	System development	1,251	2,574	4,382	5,791	1,113	2,437	3,710	5,272	1,170				20.0%	5,850
	Maintenance	301	606	926	1,246	315	647	992	1,357	360				25.0%	1,440
	In-house packaged products	97	179	207	244	144	209	267	335	131				32.8%	400
	Cloud services	178	390	609	828	224	470	702	942	243				21.5%	1,130
	Hardware	353	680	869	1,526	208	872	1,339	1,638	79				4.6%	1,730
	Third party packaged products	61	95	148	220	110	240	431	509	69				27.6%	250
	Security measure products	173	440	661	1,063	181	369	622	1,131	198				165.0%	120
	One-time revenue	1,935	3,968	6,267	8,844	1,756	4,127	6,369	8,885	1,055				12.6%	8,350
	Recurring revenue	479	996	1,535	2,074	539	1,117	1,694	2,299	1,196				46.5%	2,570
YoY		3.4%	-1.4%	1.5%	4.6%	-4.9%	5.7%	3.4%	2.4%	-2.0%				-	7.3%
	System development	-	-	-	-	-11.0%	-5.3%	-15.3%	-9.0%	5.1%					11.0%
	Maintenance	-	-	-	-	4.7%	6.8%	7.1%	8.9%	14.3%					6.1%
	In-house packaged products	-	-	-	-	48.5%	16.8%	29.0%	37.3%	-9.0%					19.4%
	Cloud services	-	-	-	-	25.8%	20.5%	15.3%	13.8%	8.5%					20.0%
	Hardware	-	-	-	-	-41.1%	28.2%	54.1%	7.3%	-62.0%					5.6%
	Third party packaged products	-	-	-	-	80.3%	152.6%	191.2%	131.4%	-37.3%					-50.9%
	Security measure products	-	-	-	-	4.6%	-16.1%	-5.9%	6.4%	9.4%					-89.4%
	One-time revenue	-	-	-	2.1%	-9.3%	4.0%	1.6%	0.5%	-					-6.0%
	Recurring revenue	-	-	-	17.8%	12.5%	12.1%	10.4%	10.8%	-					11.8%
% of sales		100%	100%	100%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%				-	100.0%
	System development	51.7%	51.8%	56.1%	53.0%	48.4%	46.4%	46.0%	47.1%	52.0%					48.8%
	Maintenance	12.5%	12.2%	11.9%	11.4%	13.7%	12.3%	12.3%	12.1%	16.0%					12.0%
	In-house packaged products	4.0%	3.6%	2.7%	2.2%	6.3%	4.0%	3.3%	3.0%	5.8%					3.3%
	Cloud services	7.4%	7.9%	7.8%	7.6%	9.7%	9.0%	8.7%	8.4%	10.8%					9.4%
	Hardware	14.6%	13.7%	11.1%	14.0%	9.0%	16.6%	16.6%	14.6%	3.5%					14.4%
	Third party packaged products	2.5%	1.9%	1.9%	2.0%	4.8%	4.6%	5.3%	4.5%	3.1%					2.1%
	Security measure products	7.2%	8.9%	8.5%	9.7%	7.9%	7.0%	7.7%	10.1%	8.8%					1.0%
	One-time revenue	80.0%	79.9%	80.3%	81.0%	76.4%	78.6%	79.0%	79.4%	46.8%					69.6%
	Recurring revenue	19.8%	20.1%	19.7%	19.0%	23.4%	21.3%	21.0%	20.5%	53.1%					21.4%
Quarterly		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales		2,417	4,967	7,805	10,921	-	-	-	-	-
	Financial Systems Solutions	2,243	4,527	7,144	9,858	-	-	-	-	-
	Product Solutions	174	440	661	1,063	-	-	-	-	-
Operating profit		141	369	586	1,036	-	-	-	-	-
	Financial Systems Solutions	208	494	733	1,124	-	-	-	-	-
	Product Solutions	-66	-125	-147	-88	-	-	-	-	-
Operating profit margin		5.8%	7.4%	7.5%	9.5%	-	-	-	-	-
	Financial Systems Solutions	9.3%	10.9%	10.3%	11.4%	-	-	-	-	-
	Product Solutions	-	-	-	-	-	-	-	-	-
Sales breakdown
Financial Systems Solutions		2,243	4,527	7,144	9,858	-	-	-	-	-
	Software development	1,251	2,574	4,382	5,791	-	-	-	-	-
	Maintenance	301	606	926	1,246	-	-	-	-	-
	Hardware	353	680	869	1,526	-	-	-	-	-
	In-house packaged software	98	179	207	244	-	-	-	-	-
	Cloud services	178	390	609	828	-	-	-	-	-
	Third-party packaged software	61	95	148	220	-	-	-	-	-
Product Solutions		174	440	661	1,063	-	-	-	-	-
	Software development	5	28	46	53	-	-	-	-	-
	Maintenance	17	44	124	276	-	-	-	-	-
	Hardware	1	1	1	44	-	-	-	-	-
	In-house packaged software	49	62	69	89	-	-	-	-	-
	Third-party packaged software	100	302	419	600	-	-	-	-	-

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

Summary

Q1 FY06/22 results

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).

Progress versus plan

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 and order backlog

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

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

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.

Cloud services

Summary

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

Performance by service

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.

IGATES (OnCore Switch)

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.

Recurring/one-time revenue (JPYmn)

Category		Q1 FY06/22	% of total
Total one-time revenue		1,055	46.9%
	Software development	888	39.4%
	In-house packaged products	128	5.7%
	System services	8	0.4%
	Third party packaged products	29	1.3%
Total recurring revenue		1,196	53.1%
	Maintenance	624	27.7%
	Maintenance for third party products	142	6.3%
	Services: in-house	308	13.7%
	Services: third party	120	5.3%
Total		2,251	100.0%

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.

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

Full-year company forecast

		FY06/20 (parent)			FY06/21 (parent)			FY06/22(Parent)
(JPYmn)		1H	2H	FY	1H	2H	FY	1H Est.	2H Est.	FY Est.
Sales		4,967	5,954	10,921	5,248	5,940	11,188	5,000	7,000	12,000
	YoY	-1.4%	10.2%	4.6%	5.7%	-0.2%	2.4%	-4.7%	17.9%	7.3%
Cost of sales		3,633	4,307	7,940	3,858	4,173	8,031
Gross profit		1,334	1,647	2,981	1,390	1,767	3,157
	YoY	11.4%	2.3%	6.2%	4.2%	7.3%	5.9%
	Gross profit margin	26.9%	27.7%	27.3%	26.5%	29.7%	28.2%
SG&A expenses		965	979	1,944	455	1,571	2,026
	SG&A ratio	19.4%	16.4%	17.8%	8.7%	26.5%	18.1%
Operating profit		369	668	1,036	406	725	1,131	410	910	1,320
	YoY	37.1%	2.3%	12.5%	10.0%	8.6%	9.1%	1.1%	25.5%	16.8%
	Operating profit margin	7.4%	11.2%	9.5%	7.7%	12.2%	10.1%	8.2%	13.0%	11.0%
Recurring profit		360	715	1,075	421	750	1,171	430	930	1,360
	YoY	27.8%	6.4%	12.7%	17.0%	4.9%	9.0%	2.1%	24.0%	16.1%
	Recurring profit margin	7.2%	12.0%	9.8%	8.0%	12.6%	10.5%	8.6%	13.3%	11.3%
Net income		237	525	762	286	555	841	300	640	940
	YoY	15.8%	9.6%	11.4%	20.5%	5.8%	10.4%	5.0%	15.2%	11.8%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Company estimates based on most recent figures
Note: On June 28, 2016, the company finished liquidating consolidated subsidiary Intelligent Wave Korea Inc. FY06/17 estimates apply only to the parent company and are not consolidated (YoY growth rate figures for FY06/17 are for reference).

Company forecast for FY06/22 (out August 4, 2021)

Overview

For FY06/22, the first year of the medium-term business plan (FY06/22–FY06/24), IWI forecasts sales of JPY12.0bn (+7.3% YoY), operating profit of JPY1.3bn (+16.8% YoY), recurring profit of JPY1.4bn (+16.1% YoY), and net income attributable to owners of the parent of JPY940mn (+11.8% YoY). It also targets operating profit margin of 11.0% (+0.9pp YoY).

On August 4, 2021, the company revised its medium-term business plan and presented a new medium-term business plan (see the Management strategy and long-term outlook section for details). The company was not affected by the COVID-19 pandemic in FY06/21, and there was no material impact on the continuity of its systems development or systems operation activities. Its production activities were on track as of August 2021.

Sales projections by category

System development: JPY5.9bn (+11.0% YoY); JPY2.7bn in 1H (+11.3% YoY), JPY3.1bn in 2H (+10.7% YoY)

Maintenance: JPY1.4bn (+6.1% YoY); JPY725mn in 1H (+12.1% YoY), JPY715mn in 2H (+0.7% YoY)

In-house packaged software: JPY400mn (+19.4% YoY); JPY265mn in 1H (+26.8% YoY), JPY135mn in 2H (+7.1% YoY)

Cloud services: JPY1.1bn (+20.0% YoY); JPY489mn in 1H (+4.0% YoY), JPY641mn in 2H (+35.8% YoY)

Hardware: JPY1.7bn (+5.6% YoY); JPY188mn in 1H (-78.4% YoY), JPY1.5bn (+101.3% YoY)

Third-party packaged software: JPY250mn (-50.9% YoY); JPY120mn in 1H (-50.0% YoY), JPY130mn in 2H (-51.7% YoY)

Security measure products: JPY1.2bn (+6.1% YoY); JPY500mn in 1H (+35.5% YoY), JPY700mn in 2H (-8.1% YoY)

In 1H FY06/22, the company expects sales to fall 4.7% YoY to JPY5.0bn due to slightly weaker orders for new projects, but forecasts a turnaround from 2H, resulting in a 7.3% YoY rise in sales to JPY12.0bn. In July 2021, the company won a relatively large cloud service order (IOASIS) that will contribute to sales from 2H, which will help to boost FY06/22 sales in the cloud services business by 20.0% YoY to JPY1.1bn. As of August 2021, new business negotiations for security measure products were progressing well and, depending on circumstances, the company says it may even exceed its FY06/22 projection for that business. In the hardware business, it expects to post sales from a large project around June 2022.

Cloud services business set to move into the black

IWI expects cloud services to generate profit from Q2 and move solidly into the black for full-year FY06/22. It sees cloud services as a growth driver in the medium term.

Projected sales of JPY1.1bn: JPY240mn in Q1 (+7.1% YoY), JPY248mn in Q2 (+5.5% YoY), JPY296mn in Q3 (+26.0% YoY), and JPY343mn in Q4 (+39.4% YoY)

Projected gross profit of JPY80mn: -JPY18mn in Q1 (loss of JPY37mn in Q1 FY06/21), JPY18mn in Q2 (loss of JPY12mn in Q2 FY06/21), JPY46mn in Q3 (loss of JPY28mn in Q3 FY06/21), and JPY33mn in Q4 (profit of JPY3mn in Q4 FY06/21)

New revenue recognition standards

With adoption of the new revenue recognition standards, whereas it had previously booked revenue using the completed-contract method, IWI will now apply the percentage of completion method for projects that exceed a certain number of contract units. In FY06/22, the company has no large projects lined up that exceed the designated number of contract units, so the impact on sales and profits will be negligible.

Management strategy and long-term outlook

New medium-term business plan (FY06/22--FY06/24) announced on August 4, 2021

Overview

New medium-term business plan: IWI decided to revise the medium-term business plan it announced on August 5, 2020 and formulated a new medium-term plan covering the years from FY06/22 through FY06/24.

Reason for revision

In FY06/21, the company achieved results mostly in line with the previous medium-term business plan. It reviewed the previous plan and formulated a new plan after thoroughly reviewing the business environment with the aim of further expanding its business and boosting profitability.

FY06/24 targets

For FY06/24, the final year of the medium-term plan, the company targets sales of JPY15.0bn (+34.1% versus FY06/21 sales), operating profit of JPY2.3bn (+99.1% YoY), and OPM of 15.0% (versus 10.1% in FY06/21). IWI refers to the effort to achieve sales of JPY15.0bn and OPM of 15.0% as "15ALL." With 15ALL as a milestone, the company aims for even greater growth in the long term.

New and previous medium-term business plans

(New plan)
(JPYmn)			FY06/20	FY06/21	FY06/22	FY06/23	FY06/24	CAGR
			Act.	Act.	Est.	Est.	Est.	FY2006/21 - FY2006/24
Sales			10,921	11,188	12,000	13,500	15,000	10.3%
	System development, Hardware, in-house products, etc.		9,030	9,115	9,670	10,150	11,000	6.5%
	Cloud services		828	942	1,130	2,000	2,500	38.5%
	Security measure products		1,063	1,131	1,200	1,350	1,500	9.9%
Operating profit			1,036	1,131	1,320	1,750	2,250	25.8%
	Operating profit margin		9.5%	10.1%	11.0%	13.0%	15.0%	-
(Old plan)
(JPYmn)		FY06/19	FY06/20	FY06/21	FY06/22	FY06/23		CAGR
		Act.	Act.	Est.	Est.	Est.		FY2006/19 - FY2006/22
Sales		10,443	10,921	11,000	12,000	13,500		4.7%
Operating profit		922	1,036	1,150	1,250	1,500		10.7%
	Operating profit margin	8.8%	9.5%	10.5%	10.4%	11.1%		-

Source: Shared Research based on company data

Expansion of stable earnings sources

In addition to its conventional one-time revenue business model, IWI is working to expand its stable earnings base by adding recurring-revenue businesses that can sustainably generate profits. Companies outside the financial industry are offering new payment and financial services to their customers in an effort to expand their business areas. Furthermore, some of the company's clients are using cloud services to quickly launch new businesses.

The company has been transitioning its legacy on-premises systems, mainly for its credit card merchant acquiring and credit card fraud detection services, to cloud-based systems. By using the company's cloud services, clients can quickly launch new businesses without the need for large investment. This being the case, IWI is encouraging companies outside the financial industry and companies that have not been in the credit card business to enter the credit card business.

The cloud services business (recurring revenue business) has grown to become an important business for the company in terms of new client acquisition and business expansion. IWI expects this business to turn profitable in FY06/22 and grow into a major earnings source by FY06/24.

Of the JPY15.0bn in sales the company is targeting for FY06/24, it estimates that some JPY4.2bn, about 28%, will be recurring revenue. In FY06/21, of JPY11.2bn in sales, JPY2.3bn was recurring revenue (20.6% of the total).

Redefined mission

To achieve further growth, IWI redefined its mission when formulating its new medium-term business plan. The company is using the knowledge and experience cultivated in its development work in the financial industry to develop new products for companies outside the financial industry as part of its efforts to open up new markets. With its technology based on real-time, high-speed processing of large data volumes, the company aims to identify and resolve potential problems in the operations of different industries, thereby opening up new markets and fostering them as new earnings pillars.

By providing IT and business services that actively utilize the cloud alongside its conventional on-premises products, IWI aims to move from being a "credit settlement system developer" to being an "IT service provider that supports business reliability in the settlement, finance, and security fields." In this context, business reliability (a term coined by the company) means continually enhancing the reliability of both customers' businesses and the company's own businesses.

Roadmap for achieving 15ALL

In response to rapidly changing markets, IWI aims to achieve 15ALL (Sales of JPY15.0bn and OPM of 15.0%) through three strategies: 1) development of hybrid IT infrastructure for the settlement market, 2) expansion into areas other than the settlement, finance, and security fields, and 3) synergies among DNP's group companies.

Cloud services: The company aims to expand sales from JPY942mn in FY06/21 to JPY2.5bn in FY06/24 (CAGR of 38.5%). It expects to receive two orders for large multi-year projects in FY06/22 (one was already received in July 2021), which should steadily contribute to earnings from 2H FY06/22 onward.

FY06/22 sales target: JPY1.1bn (+20.0% YoY)
FY06/23 sales target: JPY2.0bn (+77.0% YoY)
FY06/24 sales target: JPY2.5bn (+25% YoY)

New businesses: IWI expects new businesses to contribute sales of JPY1.5bn in FY06/24. The EoM (IP flow monitoring) solution for broadcasting companies has already begun to produce results, and the company has already begun taking on new challenges (developing new businesses) to follow EOM as it aims to create new growth pillars.

Development of hybrid IT infrastructure for the settlement market

The company aims to respond to client needs with a hybrid of on-premises and cloud services while expanding its operations as a whole.

IWI's business opportunities are expanding with promotion of a cashless society and the diversification of payment methods. At the same time, there is growing need for low-cost cloud services, since credit card companies are lowering their merchant fees and cutting costs. Alongside expansion of cloud services, which it has already been working on, the company will promote a cloud first position and develop new services to support consumers and client companies.

IWI will provide hybrid IT infrastructure that combines on-premises services, which have long been the company's forte, and cloud services, which are set to drive growth in the medium term. It will also enhance its existing fraud detection and nighttime monitoring services as it aims to provide one-stop service. The company hopes to develop the next generation of business process outsourcing services utilizing both its own and new technologies.

Expansion into new business areas

IWI intends to create IT infrastructure that supports digital transformation for the benefit of consumers and client companies, and to expand its business domain by leveraging the acceleration (high-speed processing) and analysis technologies it has cultivated in the financial industry.

The promotion of digital transformation and other factors are catalyzing global change that requires the real-time processing of large volumes of data in all industries. Using the acceleration and real-time analysis technologies it has cultivated in the financial industry, the company will create IT infrastructure to support digital transformation in mission-critical social infrastructure such as broadcasting, transportation, and electric power supply, thereby expanding its business domain.

IWI has been working on EoM, an IP flow monitoring solution geared toward the broadcasting industry for some time. EoM has been adopted by Yle (Finland's national public broadcasting company), proving that the company's technology is accepted on the world stage. In addition to developing domestic users such as TV Asahi, JDS, and QVC Japan, IWI will continue to promote an overseas strategy for EoM by enhancing sales efforts in the US and the EU. During FY06/22, it plans to announce a new solution for the broadcasting industry to follow on EoM's heels. In cooperation with overseas vendors, the company is conducting research and development to enter new industries.

*EoM: IP flow monitoring solution developed by IWI. It is geared toward the broadcasting industry and can handle internet protocol-based broadcasting which is essential for the 4K/8K era. With overseas broadcasting companies running ahead of Japanese peers when it comes to their use of IP-based broadcasting systems, the company is focusing its marketing efforts on the overseas market. This solution represents an application of a technology IWI had already been developing in response to demand from financial services companies for high-speed data transmission. IP flow monitoring solution identifies the data type and applies high-speed data analysis through Fast Event Streamer (FES), its self-developed complex event processing (CEP) engine, and processes the data to facilitate overall trend analysis. This solution focuses on stream (IP flow) monitoring and can visualize not only the bit rate or packet drop within every stream, but latency (or “jitter”) within every stream received.

Synergies among DNP's group companies

The company plans to use a combination of DNP assets and IWI technologies to transform its operations so as not to be confined to any specific business area.

With the trend toward cashless transactions, group synergies have so far been mainly in the area of payment settlement, but the company aims to use DNP assets and IWI technologies to transform its operations so as not to be confined to any specific business area (for example, not confining itself to the financial industry). The first step in this new approach is to promote a group synergy strategy in the area of operational technology (control and operation technology for production lines and systems to create smart factories) with a focus on factories owned by the DNP group. Smart factories require network connections, and security measures are essential. DNP's factories already use IWI's cutting-edge security products, which will also be rolled out to DNP's customers hereafter. In addition to fortifying the security environment, the company will support smart factories with infrastructure using its acceleration (high-speed processing) and real-time analysis technologies.

Organizational reform

Human resources are an important element of the company's business model. By respecting varying work styles and diverse personnel, the company hopes both to ensure the stable operation of its existing IT infrastructure, and to create new businesses.

Value: All employees are friends who grow together and teammates who share the same mission and vision, advancing together and taking on new challenges.

Utilizing diverse human resources
Pursuing positive work environment and job satisfaction
Promoting health management

IWI's approach to the Tokyo Stock Exchange prime market

Improve corporate value via implementation of the medium-term business plan

The company has stated that it aims to remain on the prime market and plans to improve its corporate value by executing its medium-term business plan and enhancing shareholder returns. By pursuing its 15ALL plan, it aims to double operating profit (it achieved JPY1.1bn in FY06/21 and projects JPY2.3bn in FY06/24).

Enhancing shareholder returns

Previously, the company targeted a moderate payout ratio of about 30%, but has now changed its shareholder returns policy to target 40% (it plans to pay a dividend of JPY13.0 per share for FY06/21, up JPY3.0 YoY for a payout ratio of 40.6%, and JPY14.0 per share for FY06/22, up JPY1.0 for a projected payout ratio of 39.8%).

Reference: Previous medium-term business plan: FY06/21–FY06/23 (out August 5, 2020)

Overview

In light of the COVID-19 pandemic, IWI decided to revise its previous medium-term business plan (announced on August 7, 2019) and formulate a medium-term plan for the years FY06/21 through FY06/23. Under the new medium-term plan, the company planned to accelerate investments in new businesses while transitioning its business model to one centered around cloud-based services with subscription-type payment models.

Under the medium-term plan, the company set a final-year target for sales of JPY13.5bn (+23.6% versus FY06/20), operating profit of JPY1.5bn (+44.8%), and operating profit margin of 11.1%. It stated that it will aim for a stable operating profit margin of at least 10% in the short term and 15% in the long term.

Reasons for revisions to medium-term business plan and performance targets

On the production side, the company’s systems development business and systems operations business are all doing well, having experienced no major disruptions as a result of the COVID-19 pandemic. On the marketing and sales front, however, opportunities for direct contacts with clients have declined and there are some delays in negotiations for new projects owing to the circumstances at client companies.

The company says it is hard to make precise estimates as to the impact of the pandemic on its businesses. However, it expected the possibility that the pandemic would slow the overall pace of sales growth because of delays in winning new project orders.

As for the operating environment, the company saw no major changes, with prospects still looking good for a continued rise in credit card transaction volumes over the long term, and this in turn promising continued growth opportunities for its own business. The company saw sales running basically flat YoY in FY06/21, then getting back on the growth track in FY06/22 and FY06/23 as it expected to wins orders for development projects from major credit card companies and from new client companies looking to move into the credit card business, as well as for new projects for cloud services. In terms of profitability, the company was looking to keep its operating profit margin consistently above 10% and push it up to around 11% in FY06/23 for operating profit of JPY1.5bn.

Long term, IWI set a target of an operating profit margin of 15%. It set its sights on gaining stable sales growth and improving profit margins by building on its profitable systems development business with various recurring-revenue and subscription-type businesses.

New (out August 5, 2020) and previous (out August 7, 2019) medium-term plans

New plan
(JPYmn)			FY06/20	FY06/21	FY06/22	FY06/23	CAGR
			Act.	Est.	Est.	Est.	FY06/20 - FY06/23
Sales			10,921	11,000	12,000	13,500	7.3%
Operating profit			1,036	1,150	1,250	1,500	13.1%
	Operating profit margin		9.4%	10.5%	10.4%	11.1%	-
Old plan
(JPYmn)		FY06/19	FY06/20	FY06/21	FY06/22		CAGR
		Act.	Est.	Est.	Est.		FY06/19 - FY06/22
Sales		10,443	10,600	11,200	12,000		4.7%
	Financial Systems Solutions	9,337	9,400	9,900	10,600		4.3%
	Product Solutions	1,106	1,200	1,300	1,400		8.2%
Operating profit		922	1,000	1,080	1,200		9.2%
	Operating profit margin	8.8%	9.4%	9.6%	10.0%		-

Source: Shared Research based on company data

Comparison of new and previous medium-term business plans: differences in underlying assumptions

Cloud services: For the cloud services, the new medium-term plan is targeting sales of JPY940mn in FY06/21 and JPY1.3bn in FY06/22; this compares with sales targets of JPY1.1bn for FY06/21 and JPY1.4bn for FY06/22 under the previous medium-term plan.

Systems development: For the systems development, the new medium-term plan is targeting sales of JPY9.0bn in FY06/21 and JPY9.5bn in FY06/22; this compares sales targets of JPY8.8bn for FY06/21 and JPY9.2bn for FY06/22 under the previous plan.

Security measure products (formally Product Solutions business): For security measure products, the new medium-term plan is targeting sales of JPY1.1bn in FY06/21 and JPY1.2bn in FY06/22; this compares sales targets of JPY1.3bn for FY06/21 and JPY1.4bn for FY06/22 under the previous plan.

Evolving in three dimensions

The company is looking to steadily advance in line with its guiding principle calling for expanding its scale of business, cultivating human resources, and improving its corporate culture.

In the process of expanding its scale of business, the company is looking to move away from its traditional contract development model over the medium term, increasing the proportion of total revenues derived from cloud-based service with subscription-type payment models and, with this recurring-revenue stream, bring its operating profit margin up to 15% and increase its enterprise value over the long term.

New sales categories

The company will use the following categories for reporting sales starting in FY06/21:

System development: Revenues from contract systems development work

Maintenance: Revenues from providing maintenance service for systems IWI developed

In-house packaged software: Revenues from sales of proprietary products

Cloud services: Revenues from leasing of IWI systems for specified timeframe

Hardware: Revenues from sales of servers and other hardware

Third-party packaged software: Revenues from sales of third-party products

Security measure products: Revenues from sales of both proprietary and third-party cybersecurity products

Breakdown of sales by new category: Results and initial FY06/21 company forecast

(JPYmn)	FY06/20	% of sales	FY06/21	% of sales	YoY
	Act.		Est.
Sales	10,921	100.0%	11,000	100.0%	0.7%
System development	5,791	53.0%	5,362	48.7%	-7.4%
Maintenance	1,246	11.4%	1,284	11.7%	3.0%
In-house packaged products	244	2.2%	397	3.6%	62.7%
Cloud services	828	7.6%	940	8.5%	13.5%
Hardware	1,526	14.0%	1,494	13.6%	-2.1%
Third party packaged products	220	2.0%	423	3.8%	92.3%
Security measure products	1,063	9.7%	1,100	10.0%	3.5%
Operating profit	1,036	9.5%	1,150	10.5%	11.0%
Operating profit margin	9.5%	-	10.5%	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Business

Business description

Software developer and member of the Dai Nippon Printing group; strength in credit card transaction processing

IWI’s business consists of system development and system product (hardware and software) sales. The company mainly sells software solutions based on in-house developed packaged software.

The main clients are in the financial services industry; core products focus on credit card transaction processing, low-latency secure communications (with quick response), and data protection

Dai Nippon Printing Co., Ltd. (DNP; TSE1: 7912) holds 50%+ of the company.

Main business segments

Starting in FY06/21, the company merged the two reporting segments it had been using, combining the Financial Systems Solutions segment with the Product Solutions segment. The impetus for this switch is outlined below.

IWI has had two reporting segments, the Financial Systems Solutions segment and the Product Solutions segment, and has managed operations accordingly. However, it has recently decided to step up its sales outreach and its product development efforts in both of these businesses to support further growth.

The company will expand its sales efforts by making use of client data that had formally not been shared between the two businesses, and expand its R&D staff in the area of cybersecurity technology to facilitate the development of new products and services.

Effective July 1, 2020, the company changed its organizational structure and made changes in its management organization scheme and, along with this, changed its reporting segmentation scheme.

The merger of the two segments was accompanied by changes in IWI’s organizational and management structures, as detailed below.

The sales department of the former Financial Systems Solutions business and sales team of the security department of the former Product Solutions business were merged to form a single sales department.

The development department of the former Financial Systems Solutions business and development team of the security department of the former Product Solutions business were merged to form a single development department.

The previous business segmentation scheme (the one used through FY06/20) reflected the company’s business activities and organizational structures and had two reporting segments: Financial Systems Solutions and Product Solutions. Prior to that, the company split its businesses into three reporting segments: Retail Banking Online Systems, System Solutions, and Security Systems.

Changes in reporting segments over the years

–FY06/14	FY06/15–FY06/20	FY06/21–
Retail Banking Online Systems	Financial Systems Solutions	Single reporting segment
System Solutions
Security Systems	Product Solutions
Other

Source: Shared Research based on company data

Business overview