Intelligent Wave / 4847
COVERAGE INITIATED ON: 2010.04.02 LAST UPDATE: 2021.07.28
Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.
Research Coverage Report by Shared Research Inc. Intelligent Wave / 4847 RCoverage LAST UPDATE: 2021.07.28 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.
Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------8 Quarterly trends and results ------8 Full-year company forecast ------15 Management strategy and long-term outlook ------21 Business ------28 Business description ------28 Profitability snapshot, financial ratios ------37 Market and value chain ------38 Strengths and weaknesses ------45 Historical performance and financial statements ------46 Historical performance ------46 Income statement ------65 Balance sheet ------66 Cash flow statement ------67 News and topics ------68 Other information ------69 History ------69 Top management ------69 Employees ------69 Major shareholders (as of June 30, 2020) ------70 Dividends and shareholder benefits ------70 Investor relations ------70 Company profile ------71
02/72 Intelligent Wave / 4847 RCoverage LAST UPDATE: 2021.07.28 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Executive summary
Software developer, and member of the Dai Nippon Printing group; strength in credit card transaction processing
◤ 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 that 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
◤ For FY06/20, IWI reported parent sales of JPY10.9bn (+4.6% YoY), operating profit of JPY1.0bn (+12.5% YoY), recurring profit of JPY1.1bn (+12.7% YoY), and net income of JPY762mn (+11.4% YoY). Profitability improved thanks to solid growth at its software development business (which also benefited from the absence of unprofitable projects) and higher sales at its cloud services business. Increased hardware sales also contributed to a rise in profit.
◤ For FY06/21, the company forecasts parent sales of JPY11.0bn (+0.7% YoY), operating profit of JPY1.2bn (+11.0% YoY), recurring profit of JPY1.2bn (+10.7% YoY), and net income of JPY820mn (+7.6% YoY). The company expects sales from the systems development business to finish down but sees solid growth in its cloud services and sales of proprietary products, hardware, and products from third-party vendors.
◤ New medium-term business plan: In the wake of the novel coronavirus disease (COVID-19) pandemic, the company decided to revise the medium-term business plan it announced on August 7, 2019 and formulate a new medium-term plan covering the years from FY06/21 through FY06/23. Under the new medium-term plan, the company has set a final-year target for sales of JPY13.5bn (+23.6% versus FY06/20), operating profit of JPY1.5bn (+44.8%), and an operating profit margin of 11.1%. IWI sees no major changes in the operating environment, 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 sees sales running basically flat in FY06/21, then getting back on the growth track in FY06/22 and FY06/23, when it expects to win orders for system development projects from major credit card companies and from new client companies that are looking to move into the credit card business, as well as orders for new cloud services. In terms of
03/72 Intelligent Wave / 4847 RCoverage LAST UPDATE: 2021.07.28 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
profitability, the company aims to keep its operating profit margin above 10% and push it up to around 11% in FY06/23 for operating profit of JPY1.5bn. Aided by the changes in its reporting segments, as detailed above, IWI is looking to push its operating profit margin up to 15% in the long term by building on its profitable systems development business with new recurring-revenue and subscription-type businesses, thereby securing both steady growth in sales and higher margins.
Strengths and weaknesses
Shared Research thinks that 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).
04/72 Intelligent Wave / 4847 RCoverage LAST UPDATE: 2021.07.28 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Key financial data
Income statement FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 FY06/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Parent Parent Est. Sales 4,957 4,763 5,242 5,871 6,558 6,160 7,207 8,470 10,604 10,443 10,921 11,000 YoY -10.3% -3.9% 10.1% 12.0% 11.7% -6.1% 17.0% 17.5% 25.2% -1.5% 4.6% 0.7% Gross profit 1,837 1,642 1,374 473 1,342 1,779 1,993 2,132 2,223 2,807 2,981 YoY -9.1% -10.6% -16.3% -65.6% 183.4% 32.6% 12.0% 7.0% 4.2% 26.3% 6.2% Gross profit margin 37.1% 34.5% 26.2% 8.1% 20.5% 28.9% 27.7% 25.2% 21.0% 26.9% 27.3% Operating profit 358 321 132 -678 146 484 714 703 548 922 1,036 1,150 YoY 56.6% -10.3% -59.0% - - 232.8% 47.5% -1.6% -22.0% 68.3% 12.5% 11.0% Operating profit margin 7.2% 6.7% 2.5% -11.5% 2.2% 7.9% 9.9% 8.3% 5.2% 8.8% 9.5% 10.5% Recurring profit 388 342 155 -587 184 490 731 766 574 954 1,075 1,190 YoY 64.9% -11.8% -54.8% - - 166.6% 49.0% 4.9% -25.1% 66.2% 12.7% 10.7% Rercurring profit margin 7.8% 7.2% 2.9% -10.0% 2.8% 8.0% 10.1% 9.0% 5.4% 9.1% 9.8% 10.8% Net income 212 129 270 -349 87 471 479 547 377 684 762 820 YoY 12.6% -38.9% 108.9% - - 443.2% 1.6% 14.3% -31.0% 81.2% 11.4% 7.6% Net margin 4.3% 2.7% 5.2% -5.9% 1.3% 7.6% 6.6% 6.5% 3.6% 6.5% 7.0% 7.5% Per-share data Shares issued (year-end; '000) 263 263 263 263 26,340 26,340 26,340 26,340 26,340 26,340 26,340 EPS 846.0 491.5 1,026.9 -1,325.3 3.29 17.89 18.18 20.78 14.36 25.99 29.00 31.18 Dividend per share 500.0 500.0 500.0 500.0 5.0 5.0 6.0 7.0 7.0 9.0 10.0 13.00 Book value per share 17,626 17,866 18,680 16,884 169 184 192 215 217 242 266 Balance sheet (JPYmn) Cash and cash equivalents 2,090 2,783 2,808 2,085 2,420 2,957 2,852 2,578 2,840 3,255 3,642 Total current assets 3,450 3,822 4,335 3,560 3,524 4,560 4,682 4,985 5,034 6,054 6,381 Tangible fixed assets 403 388 327 307 290 277 401 420 520 541 538 Investments and other assets 1,470 1,375 1,495 1,573 1,459 1,359 1,388 1,682 1,768 2,096 2,167 Intangible assets 128 132 206 315 367 285 557 1,421 1,515 1,341 1,465 Total fixed assets 2,002 1,895 2,028 2,195 2,116 1,921 2,345 3,523 3,803 3,978 4,171 Total assets 5,451 5,717 6,363 5,755 5,640 6,482 7,027 8,508 8,837 10,032 10,552 Accounts payable 104 249 617 377 192 321 363 553 543 332 627 Short-term debt 0 0 9 10 10 12 34 28 36 35 29 Total current liabilities 587 765 1,147 1,007 881 1,150 1,373 2,252 2,523 3,058 2,951 Long-term debt 0 0 35 29 18 17 102 74 74 39 10 Total long-term liabilities 221 246 296 301 307 497 591 609 599 601 618 Total liabilities 808 1,011 1,443 1,308 1,188 1,647 1,964 2,861 3,122 3,660 3,569 Total net assets 4,643 4,706 4,920 4,447 4,451 4,835 5,063 5,648 5,715 6,373 6,983 Total interest-bearing debt 0 0443928291361021107439 Cash flow statement (JPYmn) Cash flows from operating activities 301 795 252 -588 620 839 124 1,172 1,213 1,237 1,547 Cash flows from investing activities -200 -61 -25 3 -47 -263 -192 -1,151 -604 -602 -753 Cash flows from financing activities 310 -132 -138 -142 -143 -143 -34 -198 -349 -220 -408 Financial rat io s ROA (RP-based) 7.4% 6.1% 2.6% - 3.2% 8.1% 10.8% 9.9% 6.6% 10.1% 10.4% ROE 4.8% 2.8% 5.6% - 1.9% 10.1% 9.7% 10.3% 6.6% 11.3% 11.4% Equity ratio 85.2% 82.3% 77.3% 77.3% 78.9% 74.6% 72.1% 66.4% 64.7% 63.5% 66.2% 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).
05/72 Intelligent Wave / 4847 RCoverage LAST UPDATE: 2021.07.28 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Recent updates
Highlights
On July 28, 2021, Intelligent Wave Inc. (IWI) announced the Tokyo Stock Exchange’s determination concerning its application for listing on one of the exchange’s new market segments, and its response to that determination.
▷ In the letter of notification of its determination sent to the company, the Tokyo Stock Exchange said IWI did not meet its requirements in terms of market capitalization of tradable shares (i.e., liquidity) but otherwise met all qualifications for a listing on its Prime Market. ▷ The company said it planned to continue working on the steady execution of its business plan while taking additional steps to strengthen its corporate governance and improve returns to shareholders. As through these efforts the company fully expects to be able to increase its enterprise value and ultimately meet the listing requirements for the Tokyo Stock Exchange’s Prime Market, it intends to follow up in accordance with the exchange’s prescribed procedures and file another application for a listing on the Prime Market in the future. In the meantime, IWI stated that it will keep the public advised of its progress on this front with updates on specific goals and progress toward those goals as appropriate.
On the same day, the company announced its dividend payment plans.
▷ In keeping with its plans to increase returns to shareholders in connection with its goal of listing on the Tokyo Stock Exchange’s Prime Market, as discussed above, the company’s board of directors approved an increase in the company’s planned dividend payment to shareholders for FY06/21. The increase is designed to bring the company’s dividend payout ratio up to 40% compared with its previous payout ratio around 30%. ▷ Having hiked the benchmark for the dividend payout ratio, the board of directors approved a fiscal year-end dividend payment of JPY13.0 per share for FY06/21 versus its previous forecast of JPY10.0 per share. The dividend will be paid out of retained earnings and is subject to approval by shareholders at the regular annual shareholders meeting (scheduled for September 29,
2021).
On June 11, 2021, Shared Research updated the report following interviews with the company.
On May 6, 2021, the company announced earnings results for Q3 FY06/21; see the results section for details.
On March 24, 2021, the company announced the establishment of a sustainability committee.
▷ IWI will establish a sustainability committee as of April 1, 2021 to promote specific initiatives on a company-wide basis to increase the sustainability of its business activities, while contributing to the sustainable development of society. ▷ IWI has made efforts to improve the sustainability of its business and increase corporate value through addressing ESG issues, and has made particular efforts in the development of human capital with respect to its employees. In order to broaden and evolve these activities, the sustainability committee will establish policies for the practice of items stated in the company's code of conduct, including “contributions to society,” “development of a good corporate culture,” “anti-discrimination initiatives,”
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“consideration for the global environment.” From the start, the committee will be a core organization of the company, ensuring that its policies are promoted on a company-wide basis.
For previous releases and developments, please refer to the News and topics section.
07/72 Intelligent Wave / 4847 RCoverage LAST UPDATE: 2021.07.28 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
Trends and outlook
Quarterly trends and results
Quarterly performance FY06/19 (parent) FY06/20 (parent) FY06/21 (parent) FY06/21 (parent) (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 2,337 2,702 2,650 2,754 2,417 2,550 2,838 3,115 2,299 2,949 2,819 YoY 0.7% 14.0% -15.5% -0.8% 3.4% -5.6% 7.1% 13.1% -4.9% 15.7% -0.7% Gross profit 526 672 884 725 622 712 689 958 589 801 766 YoY -4.6% 42.3% 56.9% 14.0% 18.3% 6.0% -22.1% 32.2% -5.2% 12.4% 11.2% Gross profit margin 22.5% 24.9% 33.4% 26.3% 25.7% 27.9% 24.3% 30.7% 25.6% 27.1% 27.2% SG&A expenses 455 474 478 479 480 485 472 507 455 529 493 YoY 7.8% 15.3% 23.4% 5.2% 5.6% 2.4% -1.3% 6.0% -5.3% 9.2% 4.4% SG&A ratio 19.5% 17.5% 18.0% 17.4% 19.9% 19.0% 16.6% 16.3% 19.8% 18.0% 17.5% Operating profit 71 198 406 246 141 228 217 451 134 271 273 YoY -45.1% 222.8% 130.1% 36.0% 100.1% 14.6% -46.6% 83.1% -4.8% 19.2% 25.9% Operating profit margin 3.0% 7.3% 15.3% 8.9% 5.8% 8.9% 7.6% 14.5% 5.8% 9.2% 9.7% Recurring profit 79 203 407 265 141 219 241 474 129 293 275 YoY -38.7% 195.2% 130.9% 32.3% 79.3% 7.9% -40.7% 78.6% -8.8% 33.5% 14.3% Recurring profit margin 3.4% 7.5% 15.3% 9.6% 5.8% 8.6% 8.5% 15.2% 5.6% 9.9% 9.8% Net income 48 157 262 217 91 146 161 364 84 202 185 YoY -42.3% 240.7% 140.1% 56.1% 89.6% -6.9% -38.4% 67.5% -8.3% 38.4% 14.7% Net margin 2.1% 5.8% 9.9% 7.9% 3.8% 5.7% 5.7% 11.7% 3.6% 6.9% 6.6% Cumulative Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of Est. FY Est. Sales 2,337 5,039 7,689 10,443 2,417 4,967 7,805 10,921 2,299 5,248 8,067 73.3% 11,000 YoY 0.7% 7.4% -1.8% -1.5% 3.4% -1.4% 1.5% 4.6% -4.9% 5.7% 3.4% 0.7% Gross profit 526 1,198 2,082 2,807 622 1,334 2,023 2,981 589 1,390 2,156 YoY -4.6% 17.1% 31.2% 26.3% 18.3% 11.4% -2.9% 6.2% -5.2% 4.2% 6.6% Gross profit margin 22.5% 23.8% 27.1% 26.9% 25.7% 26.9% 25.9% 27.3% 25.6% 26.5% 26.7% SG&A expenses 455 929 1,407 1,885 480 965 1,437 1,944 455 984 1,477 YoY 7.8% 11.5% 15.3% 12.5% 5.6% 3.9% 2.2% 3.1% -5.3% 2.0% 2.8% SG&A ratio 19.5% 18.4% 18.3% 18.1% 19.9% 19.4% 18.4% 17.8% 19.8% 18.8% 18.3% Operating profit 71 269 676 922 141 369 586 1,036 134 406 679 59.0% 1,150 YoY -45.1% 41.5% 84.2% 68.3% 100.1% 37.1% -13.3% 12.5% -4.8% 10.0% 15.9% 11.0% Operating profit margin 3.0%5.3%8.8%8.8%5.8%7.4%7.5%9.5%5.8%7.7%8.4% 10.5% Recurring profit 79 282 688 954 141 360 601 1,075 129 421 696 58.5% 1,190 YoY -38.7% 43.0% 84.5% 66.2% 79.3% 27.8% -12.7% 12.7% -8.8% 17.0% 15.9% 10.7% Recurring profit margin 3.4%5.6%9.0%9.1%5.8%7.2%7.7%9.8%5.6%8.0%8.6% 10.8% Net income 48 205 467 684 91 237 398 762 84 286 471 57.4% 820 YoY -42.3% 58.4% 95.8% 81.2% 89.6% 15.8% -14.7% 11.4% -8.3% 20.5% 18.1% 7.6% Net margin 2.1% 4.1% 6.1% 6.5% 3.8% 4.8% 5.1% 7.0% 3.6% 5.4% 5.8% 7.5% 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
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Results by category
Quarterly FY06/19 (parent) FY06/20 (parent) FY06/21 (parent) (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 Sales 2,337 2,702 2,650 2,754 2,417 2,550 2,838 3,115 2,299 2,949 2,819 System development ----1,2511,3231,8081,4091,1131,3241,273 Maintenance ----301305320320315332345 In-house packaged products ----978228371446558 Cloud services ----178212219219224246232 Hardware ----353327189657208664467 Third party packaged products ----61345372110130191 Security measure products ----173267221402181188253 One-time revenue ----1,9352,0332,2992,5771,7562,3712,242 Recurring revenue ----479517539539539578577 YoY 0.7% 14.0% -15.5% -0.8% 3.4% -5.6% 7.1% 13.1% -4.9% 15.7% -0.7% System development ------11.0%0.1%-29.6% Maintenance ------4.7%8.9%7.8% In-house packaged products ------48.5%-20.7%107.1% Cloud services ------25.8%16.0%5.9% Hardware ------41.1%103.1%147.1% Third party packaged products ------80.3%282.4%260.4% Security measure products ------4.6%-29.6%14.5% One-time revenue ------9.3%16.6%-2.5% Recurring revenue ------12.5%11.8%7.1% % of sales ----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% Maintenance - - - 12.5% 12.0% 11.3% 10.3% 13.7% 11.3% 12.2% In-house packaged products ----4.0%3.2%1.0%1.2%6.3%2.2%2.1% Cloud services ----7.4%8.3%7.7%7.0%9.7%8.3%8.2% Hardware ----14.6%12.8%6.7%21.1%9.0%22.5%16.6% Third party packaged products ----2.5%1.3%1.9%2.3%4.8%4.4%6.8% Security measure products ----7.2%10.5%7.8%12.9%7.9%6.4%9.0% One-time revenue ----80.0%79.7%81.0%82.7%76.4%80.4%79.5% Recurring revenue ----19.8%20.3%19.0%17.3%23.4%19.6%20.5% Old categories Sales 2,337 2,702 2,650 2,754 2,417 2,550 2,838 3,115 - - - Financial Systems Solutions 2,140 2,475 2,454 2,269 2,243 2,284 2,617 2,713--- Product Solutions 197 227 196 485 174 266 221 402 - - - Operating profit 71 198 406 246 141 228 217 451 - - - Financial Systems Solutions 105 213 431 142 208 286 239 391 - - - Product Solutions -34 -14 -25 104 -66 -59 -22 59 - - - Operating profit margin 3.0% 7.3% 15.3% 8.9% 5.8% 8.9% 7.6% 14.5% - - - Financial Systems Solutions 4.9% 8.6% 17.6% 6.3% 9.3% 12.5% 9.1% 14.4% - -- Product Solutions ---21.4%---14.8%--- Sales breakdown Financial Systems Solutions 2,140 2,475 2,454 2,269 2,243 2,284 2,6172,713--- Software development 1,311 1,480 1,354 1,523 1,251 1,323 1,808 1,409 - - - Maintenance 268 273 288 295 301 305 320 320 - - - Hardware 265 485 239 151 353 327 189 657 - - - In-house packaged software 10337343798812837- - - Cloud services 126 159 174 178 178 212 219 219 - - - Third-party packaged software 6441569361345372- - - Product Solutions 197 227 196 485 174 266 221 402 - - - Software development 15 14 9 34 5 23 18 7 - - - Maintenance 23 25 84 150 17 27 80 152 - - - Hardware 1108010043- - - In-house packaged software 42712184913720- - - Third-party packaged software 115 115 103 201 100 202 117 181 - - - 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.”
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Quarterly FY06/19 (parent) FY06/20 (parent) FY06/21 (parent) FY06/21 (parent) (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4% of Est. FY Est . Sales 2,337 5,039 7,689 10,443 2,417 4,967 7,805 10,921 2,299 5,248 8,067 73.3% 11,000 System development ----1,2512,5744,3825,7911,1132,4373,710 69.2% 5,362 Maintenance ----3016069261,246315647992 77.3%1,284 In-house packaged products ----97179207244144209267 67.3%397 Cloud services ----178390609828224470702 74.7%940 Hardware ----3536808691,5262088721,339 89.6%1,494 Third party packaged products ----6195148220110240431 101.9% 423 Security measure products ----1734406611,063181369622 56.5%1,100 One-time revenue - - - 8,658 1,935 3,968 6,267 8,844 1,756 4,127 6,369 72.6% 8,776 Recurring revenue - - - 1,761 479 996 1,535 2,074 539 1,117 1,694 76.2% 2,224 YoY 0.7% 7.4% -1.8% -1.5% 3.4% -1.4% 1.5% 4.6% -4.9% 5.7% 3.4% - 0.7% System development ------11.0%-5.3%-15.3% -7.4% Maintenance ------4.7%6.8%7.1% 3.0% In-house packaged products ------48.5%16.8%29.0% 62.7% Cloud services ------25.8%20.5%15.3% 13.5% Hardware ------41.1%28.2%54.1% -2.1% Third party packaged products ------80.3%152.6% 191.2% 92.3% Security measure products ------4.6%-16.1%-5.9% 3.5% One-time revenue - - - -5.4% - - - 2.1% -9.3% 4.0% 1.6% -0.8% Recurring revenue - - - 23.4% - - - 17.8% 12.5% 12.1% 10.4% 7.2% % of sales - - - 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% - 100.0% System development ----51.7%51.8%56.1%53.0%48.4%46.4%46.0% 48.7% Maintenance - - - 12.5% 12.2% 11.9% 11.4% 13.7% 12.3% 12.3% 11.7% In-house packaged products ----4.0%3.6%2.7%2.2%6.3%4.0%3.3% 3.6% Cloud services ----7.4%7.9%7.8%7.6%9.7%9.0%8.7% 8.5% Hardware ----14.6%13.7%11.1%14.0%9.0%16.6%16.6% 13.6% Third party packaged products ----2.5%1.9%1.9%2.0%4.8%4.6%5.3% 3.8% Security measure products ----7.2%8.9%8.5%9.7%7.9%7.0%7.7% 10.0% One-time revenue - - - 82.9% 80.0% 79.9% 80.3% 81.0% 76.4% 78.6% 79.0% 79.8% Recurring revenue - - - 16.9% 19.8% 20.1% 19.7% 19.0% 23.4% 21.3% 21.0% 20.2% Old categories Cumulative Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 2,337 5,039 7,689 10,443 2,417 4,967 7,805 10,921 - - - Financial Syst ems Solut ions 2,140 4,615 7,068 9,337 2,243 4,527 7,144 9,858 - - - Product Solutions 197 425 621 1,106 174 440 661 1,063 - - - Operating profit 71 269 676 922 141 369 586 1,036 - - - Financial Syst ems Solut ions 105 317 748 890 208 494 733 1,124 - - - Product Solutions -34 -48 -73 31 -66 -125 -147 -88 - - - Operating profit margin 3.0% 5.3% 8.8% 8.8% 5.8% 7.4% 7.5% 9.5% - - - Financial Syst ems Solut ions 4.9% 6.9% 10.6% 9.5% 9.3% 10.9% 10.3% 11.4% - - - Product Solutions ---2.8%------Sales breakdown Financial Systems Solutions 2,140 4,615 7,068 9,337 2,243 4,527 7,144 9,858 - - - Software development 1,311 2,791 4,145 5,668 1,251 2,574 4,382 5,791 - - - Maintenance 268 541 829 1,124 301 606 926 1,246 - - - Hardware 265 750 989 1,140 353 680 869 1,526 - - - In-house packaged software 103 140 483 490 98 179 207 244 - - - Cloud services 126 285 459 637 178 390 609 828 - - - Third-party packaged software 64 105 161 254 61 95 148 220 - - - Product Solutions 197 425 621 1,106 174 440 661 1,063 - - - Software development 15 29 38 72 5 28 46 53 - - - Maintenance 23 48 132 282 17 44 124 276 - - - Hardware 1228211144- - - In-house packaged software 42 113 115 133 49 62 69 89 - - - Third-party packaged software 115 230 333 534 100 302 419 600 - - - 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.”
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Q3 FY06/21 results (out May 6, 2021) Summary Cumulative 3Q FY06/21 results In cumulative Q3 FY06/21, the company reported sales of JPY8.1bn (+3.4% YoY), operating profit of JPY679mn (+15.9% YoY), recurring profit of JPY696mn (+15.9% YoY), and net income of JPY471mn (+18.1% YoY). Sales reached a record high in cumulative 3Q. The increasing prevalence of cashless transactions in Japan underpinned robust performance in the financial industry business.
Progress versus plan The cumulative Q3 results gave the company 73.3% of its full-year target for sales (versus 71.5% of full-year FY06/20 results in cumulative Q3 FY06/20), 59.0% for operating profit (56.5%), 58.5% for recurring profit (55.9%), and 57.4% for net income (52.3%).
Full-year company forecast for FY06/21 The company made no changes to its full-year forecast for FY06/21. Sales have grown steadily on the back of the increasing prevalence of cashless transactions and growth in the data security market, and the company is well on its way toward achieving its 10.5% OPM target of the year. In Q4, there is a possibility IWI will have to book some sales later than expected due to client circumstances in light of the COVID-19 pandemic, but it does not expect this to have a substantial impact on its full-year results.
Sales Sales were JPY80.7bn (+3.4% YoY). Sales in the financial industry business were JPY7.4bn (+4.2% YoY). Sales of hardware and third-party packaged products increased YoY, but system development sales declined due to absence of the large-scale projects recorded in the same period of the previous year.
Sales were JPY3.7bn (-15.3% YoY) for system development, JPY992mn (+7.1% YoY) for maintenance, JPY267mn (+29.0%) YoY for in-house packaged products, JPY702mn (+15.3% YoY) for cloud services, JPY1.3bn (+54.1% YoY) for hardware, JPY431mn (+191.2% YoY) for third-party packaged products, and JPY622mn (-5.9% YoY) for security measure products.
The company conducted system development work to update FEP and fraud detection systems for major credit card companies and system vendors and add features to existing systems. It also sold hardware, with sales up 54.1％ YoY due to sales of servers 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 191.2％ YoY. The cloud services business reported 15.3％ higher sales YoY as planned. The increasing prevalence of cashless transactions was a contributing factor. Although system development sales declined YoY, this was offset by sales growth of hardware and other products (+54.1％ YoY). Maintenance services sales are also increasing steadily (+7.1% YoY).
In the data security business, sales of third-party packaged products were weak, but the company expects the steps it is currently taking to advance sales efforts and enhance the functionality of CWAT software will lead to higher YoY sales for full-year FY06/21.
The cumulative Q3 YoY decline in sales in the system development business is in line with initial expectations. Given the rising order backlog for this business discussed below, the company expects the business to contribute to sales in FY06/22.
Operating profit Operating profit rose 15.9% YoY to JPY679mn. Although sales in the system development business were down, higher sales of hardware and third-party packaged products, coupled with higher-quality system development projects owing to the company’s thorough-going task management and greater profitability in the data security business, were behind the increase. The gross profit margin improved 0.8pp YoY to 26.7% and the SG&A ratio fell 0.1pp YoY to 18.3%. The operating profit margin rose 0.9pp YoY to 8.4%.
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Order backlog Order backlog at end-Q3 was JPY5.5bn (+6.3% YoY). The order backlog for the cloud services business declined 26.9% YoY as the company received fewer orders. The order backlog for the data security business also fell below the level of the previous year. On the other hand, the order backlogs for hardware sales, third-party packaged products sales, and system development in the financial industry business increased. (The backlog in the system development business was up 42.5% YoY to JPY1.9bn.) As a result, the overall order backlog rose 6.3% YoY.
Segment consolidation From FY06/21, IWI has combined its two reporting segments, Financial Systems Solutions and Product Solutions, into a single segment.
The aim is to facilitate further growth by strengthening the base to drive marketing and product development in the two businesses. Customer information that was previously managed separately will be shared to improve marketing activities. The company will also improve systems for developing security technology and work to develop new products and services. It changed its organizational structure as of July 1, 2020, and the reporting segment changes came into effect on that date accompanying changes to the business management structure.
Business activities IWI primarily develops front end processing (FEP) systems that provide network connection, card usage authentication, and other functions necessary to complete credit card payment processing for its customers, mainly credit card companies. When it develops a new FEP system, the company may, for example, receive sales revenue under the in-house packaged products category from selling its proprietary product NET+1, which is the core of the system; system development sales as the company’s engineers customize the package to suit the customer’s requirements; hardware sales from selling the servers which have the software the company has developed installed; and sales from maintenance of the systems, which comprise software and hardware. The company also sells products to prevent internal data leaks for companies (in-house packaged products) and third-party cybersecurity products (third-party packaged products).
External operating environment The Japanese economic situation in Q3 remained difficult due to COVID-19. The company says although the economy as a whole appears to be improving, the pace of recovery is sluggish and the outlook for corporate and consumer growth prospects remains uncertain. According to the company, private demand for face-to-face services continues to decline. The volume of credit card shopping transactions for major credit card companies has remained below year-earlier levels since January 2021.
There has been no significant impact on the company’s performance as of end-Q3, but if circumstances in the credit card industry, which is primarily where IWI operates, start to affect the capex plans of individual credit card companies, there might be an impact on the company’s FY06/21 forecast and medium-term plan.
The company is responsible for the development and operation of systems that provide indispensable card-payment functions. It understands its societal duty, and runs its business with the appropriate and necessary equipment and systems in place to maintain operations. To prevent the spread of COVID-19, the company is closely watching the health of its employees, has work-from-home and staggered work hour arrangements, and has limited domestic and international business trips.
Trends by client company (top three) The company’s top-three client companies in terms of sales were: (1) Dai Nippon Printing: JPY1.2bn (-JPY373mn YoY), primarily generated by TSP development, smartphone payment processing, round-the-clock system operations services, and payment processing platforms (2) A systems development company: JPY992mn (+JPY792mn YoY), generated by front-end processing for new entrants to the credit card business and fraud detection services
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(3) A credit card company: JPY836mn (+JPY498mn), generated by system development and hardware services related to front-end processing renewal
Sales to DNP, IWI’s largest client, were down YoY, due to the completion of a large payment processing platform project, 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 company’s top three clients amounted to JPY3.0bn (+43.1% YoY).
Financial industry business Sales from recurring-revenue businesses, consisting of sales from cloud services and maintenance (of in-house developed systems), were up 10.4% YoY to JPY1.7bn in cumulative Q3, accounting for 21.0% of all sales (+1.3pp YoY). At present, the proportion of on-premises systems offering one-time sales is higher, but IWI’s policy of expanding the recurring-revenue stream has yielded the steady growth to more than 20% of sales. The company wants to further expand the recurring-revenue stream.
Cloud Services Overview Reflecting the company’s all-out push to expand in this area, cumulative Q3 sales derived from cloud services came in at JPY702mn, up JPY93mn YoY. At the gross profit level, the cloud service business reported a loss of JPY77mn, larger than both the projected loss of JPY53mn and the year-earlier loss of JPY6.1mn. 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. Another reason for the YoY expansion in loss was an increase in variable costs stemming in part from 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): Projected sales of JPY246mn, projected loss of JPY22mn
Trends by service IOASIS (merchant acquiring service) Having received orders from five large regional banks that operate their own credit card businesses, and services for the fifth started in October 2019 (Q2 FY06/20), IOASIS will make 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 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 said it has received requests for proposals from multiple companies.
The company confirms that it will receive orders from its sixth and seventh clients (both major telecommunications companies) in Q4 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 that 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 that it is seeing greater numbers of new business operators interested in using IOASIS to manage their member stores and generate higher merchant fees from internet-based credit card payments.
IFINDS (credit card fraud detection ASP service) With three client companies onboard, operations holding steady at this time but, 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 and is expecting at least some of
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these to lead to new contracts. The company is set to receive an order from its fourth client, a major consumer finance company, in Q4 FY06/21.
IGATES (OnCore Switch) The company currently has four client companies onboard (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, the company is also 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.
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 a subscription-type services to regional banks looking to give their accountholders loyalty points whenever they use their bank-issued debt cards. The first company to implement this system began contributing to sales in Q2.
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 ecommerce-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.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
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Full-year company forecast
FY06/19 (parent) FY06/20 (parent) FY06/21 (parent) (JPYmn) 1H2HFY1H2HFY1H Act.2H Est.FY Est. Sales 5,039 5,404 10,443 4,967 5,954 10,921 5,248 5,752 11,000 YoY 7.4% -8.6% -1.5% -1.4% 10.2% 4.6% 5.7% -3.4% 0.7% Cost of sales 3,842 2,351 6,193 3,633 4,307 7,940 3,858 Gross profit 1,198 1,609 2,807 1,334 1,647 2,981 1,390 YoY 17.1% 34.1% 26.3% 11.4% 2.3% 6.2% 4.2% GPM 23.8% 29.8% 26.9% 26.9% 27.7% 27.3% 26.5% SG&A expenses 929 956 1,885 965 979 1,944 455 SG&A ratio 18.4% 17.7% 18.1% 19.4% 16.4% 17.8% 8.7% Operating profit 269 653 922 369 668 1,036 406 744 1,150 YoY 41.5% 82.5% 68.3% 37.1% 2.3% 12.5% 10.0% 11.5% 11.0% OPM 5.3% 12.1% 8.8% 7.4% 11.2% 9.5% 7.7% 12.9% 10.5% Recurring profit 282 672 954 360 715 1,075 421 769 1,190 YoY 43.0% 78.4% 66.2% 27.8% 6.4% 12.7% 17.0% 7.6% 10.7% RPM 5.6% 12.4% 9.1% 7.2% 12.0% 9.8% 8.0% 13.4% 10.8% Net income 205 479 684 237 525 762 286 534 820 YoY 58.4% 93.0% 81.2% 15.8% 9.6% 11.4% 20.5% 1.8% 7.6% 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 FY06/21 (out August 5, 2020) Overview
▷ For FY06/21, IWI forecasts sales of JPY11.0bn (+0.7% YoY), operating profit of JPY1.2bn (+11.0% YoY), recurring profit of JPY1.2bn (+10.7% YoY), and net income of JPY820mn (+7.6% YoY). ▷ At its systems development business, the company expects sales to fall 7.4% YoY, but anticipates robust growth in sales of proprietary products, hardware, and products from third-party vendors (as detailed below). It forecasts an 11.0% rise in
operating profit, aided by improved profitability on the back of higher quality development projects. ▷ At its cloud services business, the company received no new orders for merchant acquiring services in FY06/20 but expects an influx of new orders in FY06/21 from a number of customers, including regional banks and new entrants to the credit card
business. The company sees cloud services sales of JPY940mn (+13.5% YoY) in FY06/21, and aims to achieve sales of JPY1.3bn (+38.3% YoY) in FY06/22 and JPY1.6bn (+23.1% YoY) in FY06/23.
Change in reporting segments
▷ 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.
Impact of the COVID-19 pandemic If the pandemic is prolonged, the company thinks that sales might decline temporarily.
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Systems development projects System development
▷ The company forecasts FY06/21 sales of JPY5.4bn (-7.4% YoY). ▷ The decline reflects a lack of large projects and modest cutbacks in investment spending on new systems by companies in the wake of the pandemic. ▷ In the absence of big development projects, the company expects moderate profit growth.
In-house packaged software
▷ The company forecasts FY06/21 sales of JPY397mn (+62.7% YoY). ▷ The increase reflects scheduled replacements of front-end processing (FEP) systems* by a number of client companies.
Hardware
▷ The company forecasts FY06/21 sales of JPY1.5bn (-2.1% YoY). ▷ Although FEP systems are scheduled to be replaced* at multiple client companies during the course of FY06/21, the company expects sales to slightly fall YoY owing to the boost to sales in Q4 FY06/20 from replacements of NET+1 hardware that were completed in advance of the end of manufacturer’s support in 2021.
*Replacement of NET+1 hardware starting in Q4 FY06/20 NET+1 uses Stratus Technologies hardware but manufacturer’s support for the models currently in place will come to an end in 2021, making it necessary for users to replace their hardware. Since the latter half of FY06/20, IWI has been recommending that customers replace their hardware in advance of the end of manufacturer’s support, and the company will continue hardware replacement during FY06/21.
Sales forecast by new category (JPYmn) FY06/20 FY06/21 Act. % of sales Est. % of sales YoY 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 software 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 software 220 2.0% 423 3.8% 92.3% Security measure products 1,063 9.7% 1,100 10.0% 3.5%
Operat ing 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.
Cloud services The company’s forecast for FY06/21 sees the cloud services generating sales of JPY940mn (+13.5% YoY) and a loss of JPY75mn at the gross profit level (versus a loss of JPY24mn in FY06/20).
▷ IWI developed IPRETS reward points management system for debit cards in FY06/20. This system will be up and running at its first client company starting in Q2 FY06/21. Medium-term plans call for marketing this new system to regional banks that are looking to promote greater use of debit cards among their cardholders.
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▷ With respect to its IOASIS system for merchant acquiring services, the company aims to capture demand from regional banks and other companies looking to get into the credit card business. ▷ At its IFINDS credit card fraud detection service, the company is looking to win orders from credit card companies with comprehensive offerings, including operations management services and implementation of AI scoring to FARIS, its next-generation fraud detection system. (For further details, see the Management strategy and long-term outlook section.) ▷ At its IGATES switching service for payment network connections, IWI intends to win over more existing payment processing companies and new entrants. The company expects market growth stemming from the rising number of new entrants into cashless businesses.
With FY06/21 marking the fifth year since the company launched its first cloud-based service in FY06/17, the company anticipates additional spending on personnel and increases in capital spending. Coupled with strategic bidding to win orders from new entrants, in FY06/21 IWI expects the cloud services to finish in the red at the gross profit level, which will mean delaying the cloud services’ move into the black by one year.
Cloud services: overview of past progress and company plans for FY06/21
FY06/17 FY06/18 FY06/19 FY06/20 FY06/21 company plans (JPYmn) Point certificates management system IPRETS: First customer Sales contribution from Q2 Network connection (OnCore Switch) IGATES: Fourth customer Sales contribution from Q2 IGATES: Third customer Sales contribution from Q2 IGATES: Second customer In operation IGATES: First customer In operation Fraud detection IFINDS: Third customer In operation IFINDS: Second customer In operation IFINDS: First customer In operation Acquiring service IOASIS: Fifth customer From Q2 In operation Full-year contribution to sales IOASIS: Fourth customer In operation IOASIS: Third customer In operation IOASIS: Second customer In operation IOASIS: First customer In operation Cloud services sales 179 386 637 828 940
Cloud services gross profit (loss) -166 -296 -105 -24 -75
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
New businesses To support growth over the medium term, the company plans to step up investments in new businesses by focusing on ongoing initiatives and developing new business ideas it plans to roll out during FY06/21. As these new business ideas consist largely of cloud-based services to replace the on-premise services, they are essentially extensions of the company’s current businesses where it already has a stronghold.
Ongoing initiatives
▷ Next-generation NET+1 (open-source network connectivity gateway): Having completed all R&D, the company is currently in the process of doing development work for its first client company. In the past, IWI supplied on-premise NET+1 software to
meet the individual needs of each credit card company. Going forward, the next-generation NET+1 will be offered as a cloud-based service for which IWI will charge usage fees. (For more details, see the New medium-term business plan section.)
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▷ FARIS next-generation credit card fraud detection system: Service with its first client company is scheduled to begin in Q2 FY06/21. In addition, verification trials have been completed at a second company and are currently underway at a third company. (For more details, see the New medium-term business plan section.) ▷ IP flow monitoring solution (EoM) for broadcasting companies: IP flow monitoring solution (EoM) can handle internet protocol-based broadcasting systems essential for 4K/8K broadcasting. The company is marketing the solution mainly to potential customers overseas via online seminars.
New business development planned for FY06/21
▷ Shared-use front-end processing system: The company said that, if possible, it would like to begin offering the system as a cloud service in about five years. ▷ Integrated security platform: The company has been supplying standalone security software products such as CWAT and Traps. However, network endpoint and PC environment have been changing with cybersecurity growing ever more complex and office systems moving to the cloud as more people work from home. To address these changes, in July 2020 IWI began development work on an integrated, cloud-based security platform that will use a subscription-type payment model. ▷ Next-generation fraud detection system: The next-generation fraud detection system will optimize existing fraud detection functionality and incorporate AI, and will be provided as a cloud service. ▷ Media analysis platform: Based on the IP flow monitoring solution (EoM) it developed for broadcasters, IWI is leveraging its knowledge of Field-Programmable Gate Array (FPGA) technology to develop a platform for edge processing, combining FPGA and AI in an IoT-based solution. The platform is currently in the proposal stage. The company plans to position this product
area this as a new driver of sales.
Expanding business domains Cloud First IWI is taking initiatives to develop new markets and expand its business domains under the slogan Cloud First. The company will pursue growth in both public and private cloud services. In particular, the company is building its knowledge base amid growing customer demand for public cloud services, and developing new businesses primarily around such services.
The company’s cloud services currently run on private cloud platforms, but it plans to shift to a public cloud platform if needed. In the future, the company foresees operating a hybrid of private and public cloud services, and says it wants to build its knowledge base.
One of the advantages of the Cloud First model is that it enables co-creation and expandability of scale. IWI will co-create cloud services with third parties. In terms of business expansion as well, the company aims to provide stand-alone solutions and propose larger scale solutions. The company intends to pursue growth in cloud services overseas as well, and is already fielding inquiries.
FEP systems Front end processing (FEP) systems are a strong driver of sales for IWI, and the company has a large share of this market. The company delivers gateway systems, authorization systems, and external systems to clients, with payment data flowing to their core business systems through the gateway and authorization systems. Almost all payment data in Japan flows through the company’s FEP systems.
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Authorization data plays a part in approving whether or not a credit card can be used. The company has begun to explore the development of products and services that make use of such data. For instance, after a transaction, notification of payment could be sent by email based on the authorization data. With many Japanese companies actively exploring digital marketing, IWI is also considering developing a service that utilizes authorization data in compiling marketing data. This would not require credit card companies or member stores to make major changes to their core systems.
Security measure products The company is taking a two-pronged market approach to meet growing demand for security measure products, centered around in-house developed CWAT software and cybersecurity products developed by Israeli companies. From the standpoint of efficiency as well, the company’s policy is to strengthen its sales and product development capabilities targeting fields with the fastest growing market needs.
Publicized cases of internal data leaks have driven demand for CWAT. Developed in-house, CWAT carries a high profit margin; the company will steadily reinforce the software lineup. Although CWAT is being used by many leading infrastructure companies, the company believes there is ample room for growth. Meanwhile, the company will focus on selling Israeli-made Morphisec to meet rising demand for zero-trust approaches to security. Morphisec protects against unknown threats and is highly compatible with Microsoft products. Brisk inquiries and solid orders lead the company to expect growing demand and increasing sales of this product. Since Morphisec shields against threats that are unknown, there is no need to update pattern files. The product is in demand for computer security measures used in manufacturing facilities and aboard ships. IWI says it is receiving inquiries from shipping companies because Morphisec offers protection even if it is not connected to the internet and is secure even when connected to the internet at ports of call.
With the spread of teleworking and proliferation of cloud services, the company will focus on new areas of demand such as the need for sharing password protected files by email. An issue in sending such files is that both encrypted attachments and password information are sent to the same email address. IWI is preparing a product that will allow the removal of potentially malicious code from encrypted files. The company hopes to spark renewed growth in its data protection business by enhancing its sales capabilities and functionality to meet market needs.
Hardware security modules (HSM): A new product for the automotive industry IWI is looking into new IoT applications for hardware security modules (HSMs), a physical computing device it already has knowledge of through use in payment processing systems. The company has already generated sales through its participation in the development of an electronic control unit (ECU) key management system for auto and auto parts manufacturers (JPY67mn in FY06/20, projected JPY94mn in FY06/21). IWI is developing and rolling out the system in collaboration with parent DNP. The company sees HSMs as offering a highly effective solution for enhancing the security not only of cars but also medical devices and other network-connected devices, and expects this market to expand going forward.
IP flow monitoring solution (EoM) The company’s IP flow monitoring solution (EoM) utilizing Arista Network’s 7130 switch is a new platform for internet protocol-based broadcasting systems. EoM is already generating sales, but IWI aims to grow the business to JPY1.0bn in sales. The company will apply its expertise in terms of large amounts of data and high-speed transmission for the securities industry to the broadcasting sector. The company will consider EoM to be a full-fledged business operation when sales of newly developed solutions reach about JPY1.0bn. Sales in the financial industry and data security businesses have already
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passed the JPY1.0bn mark, and the company expects its cloud service business to do so as well. In light of growing inquiries from Northern Europe and North America, the company believes EoM will become another driver of sales.
New business development integrating existing and new technology Drawing on its knowledge and grounding in technologies such as acceleration and analysis, IWI will develop new solutions in fields where the real-time, high-speed processing of large amounts of data is required. The company will make steady inroads into the IoT sector. In addition, the company will draw on its knowledge to anticipate demand and develop and roll out solutions for so-called operational technology environments, such as manufacturing facilities, roadbuilding and other infrastructure, media, and new electric power generation.
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Management strategy and long-term outlook
New medium-term business plan: FY06/21–FY06/23 (out August 5, 2020) Overview In the wake of the COVID-19 pandemic, IWI decided to revise its previous medium-term business plan (announced on August 7, 2019) and formulate a new medium-term plan for the years FY06/21 through FY06/23. Under the new medium-term plan, the company will accelerate investments in new businesses while transitioning its business model to one that is centered around cloud-based services with subscription-type payment models.
Under the new 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 an operating profit margin of 11.1%.
Amid the pandemic, the company has been conservative in its projections for FY06/21, though has indicated that it aims to start accelerating growth in 2020 or following years. It intends to achieve an operating profit margin consistently above 10% with an eye on pushing it up to 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 expects the possibility that the pandemic will slow the overall pace of sales growth because of delays in winning new project orders.
As for the operating environment, the company sees 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 sees sales running basically flat YoY in FY06/21, then getting back on the growth track in FY06/22 and FY06/23 as it expects to wins orders for development projects from major credit card companies and from new client companies that are looking to move into the credit card business, as well as for new projects for cloud services. In terms of profitability, the company is 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 aims to achieve an operating profit margin of 15%. It strives to gain stable sales growth and improve profit margins by building on its profitable systems development business with various recurring-revenue and subscription-type businesses.
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New and previous medium-term business plans (New plan) (JPYmn) FY06/20 FY06/21 FY06/22 FY06/23 CAGR Act. Est. MTP MTP 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% OPM 9.4% 10.5% 10.4% 11.1% - (Old plan) (JPYmn) FY06/19 FY06/20 FY06/21 FY06/22 CAGR Act. MTP MTP Act. 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% OPM 8.8% 9.4% 9.6% 10.0% - Source: Shared Research based on company data
Comparison of new medium-term plan with previous medium-term plan: 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
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Breakdown of sales by new category: Results and company forecast (JPYmn) FY06/20 FY06/21 Act. % of sales Est. % of sales YoY 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 software 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 software 220 2.0% 423 3.8% 92.3% Security measure products 1,063 9.7% 1,100 10.0% 3.5%
Operat ing 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.
Expansion of cloud services and development of new businesses IWI looks to acquire new clients for its cloud services business over the medium term, develop cloud services for credit card acquiring services and credit card fraud detection and other related services, and accordingly bolster its earnings power. The company indicates that, moving forward, it would like to add new services, such as a QR code-based payment system. Additionally, the company aims to functionally enhance its cloud services. IWI is also developing its next-generation NET+1 gateway system and FARIS, its AI-based next-generation fraud detection system. IWI completed R&D for its next-generation NET+1 and is marketing the service to open up new markets with a focus on NET+1. Service with its first client company for FARIS is scheduled to begin in Q2 FY06/21, and verification trials have been completed at a second company and are currently underway at a third company. The company is also stepping up its marketing efforts for its IP flow monitoring system (EoM) for broadcasting companies.
As mentioned previously, in FY06/21 the company will also begin working to develop new services, including a new shared-use front-end processing system using next-generation NET+1 and a cloud-based integrated security platform.
Next-generation NET+1
▷ With its next-generation NET+1 software, IWI plans to create a system that will enable connectivity with existing networks (multi-integrated ATMs, Zengin-Net, etc.) and credit card systems as well as easier network connectivity overall. The company
is developing a next-generation NET+1 package that will make connection to banks (core banking, CRM), consumer financing systems and new payment services (smartphone, QR codes, etc.) possible at a low cost and within a short period of time. IWI has already identified requirements for the next-generation NET+1 software and completed development work in 2019. ▷ The current NET+1 software (network connectivity gateway) can only run on native operating systems and its design is almost 30 years old. For its next-generation NET+1 software, IWI converted the old design into a modern and open-source architecture. With this product, the company is setting its sights on expanding sales into new fields, in addition to the previous financial institutions and credit card companies. For example, when linking smartphone payment and credit card systems, each company involved must construct a gateway from scratch if they do not have a software that functions like NET+1. ▷ With its next-generation NET+1 software (open-source network connectivity gateway), IWI is aiming for simplified and accelerated development processes, reduced cost and expanded versatility. The company is thinking that demand for its next-generation NET+1 system will start to grow once companies start considering upgrading their current NET+1 system so as to establish new network connections that will allow them to handle a wider variety of payment methods, including smartphone payments and QR code-based payment systems. And, because there is a good chance that it will be able to
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deliver its next-generation NET+1 system at a lower cost than its current system, the company is also considering marketing its next-generation NET+1 system overseas. ▷ The next-generation NET+1 system will be able to more than just handle credit card payments; it will serve as a platform for network connections with a wide variety of other payment methods. This is important because no longer is it only credit card companies and financial institutions operating credit card businesses, companies in other industries such as retail and telecommunications are starting their own credit card businesses as well. As for new entrants into the payment processing field, the company believes its expertise in network connections will put its next-generation NET+1 system in a good position to play an active role once data starts being transmitted over these new networks.
Next-generation fraud detection system (FARIS)
▷ In the field of artificial intelligence (AI), the company already has a new product, OpAI. This software uses the company’s proprietary AI technology to properly process natural spoken, conversational language. This processes ambiguous natural language and understands the intent of words and questions. This transforms the content into an easy-to-answer format and delivers it to AI platforms such as IBM Watson and search systems, which enhances the accuracy of searches and information processing. ▷ On March 30, 2017, IWI announced that it had received an order to develop a project using this technology from a major nonlife insurance company. The company said it is considering using AI technology in its credit card fraud detection system, ACE-Plus. IWI is in the process of developing a product (ApAI: next-generation fraud detection system) that will enable an employee with limited experience to detect fraud, which was traditionally only possible by someone with considerable
experience. ▷ The next-generation fraud detection system has undergone proof-of-concept testing by a number of credit card companies that are IWI clients and is still undergoing testing by another. This type of performance verification testing, in which the user
sets specific performance targets for metrics such as detection rates, accuracy rates, loss avoidance numbers, and the system must meet or beat the targets before it will be accepted, was not done in the past. One client company will start using the new fraud detection system in Q2 FY06/21. ▷ With respect to potential demand, the company noted that the growth of e-commerce has increased the need for fraud detection systems to handle transaction where there is no face-to-face contact between the buyer and seller.
IP flow monitoring solution (EoM) IWI developed IP flow monitoring solution (EoM), a system that can handle internet protocol-based broadcasting systems essential for 4K/8K broadcasting. 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 that 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.
Southeast Asia expansion The company’s Southeast Asia expansion is primarily through OnCore Switch. IWI aims to customize it so it can sell it in Thailand. Other than OnCore Switch, the company aims to explore what sort of products are in demand in Southeast Asia, such as ACE-Plus, where it has a track record in the domestic market. As mentioned above, the company is also eyeing overseas expansion for its next-generation NET+1 software.
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System development that realizes secure payment methods amid push toward cashless society IWI sees government moves support the creation of a cashless society (as detailed later in this report under the Market and value chain section) and related calls for safe and secure payment methods driving demand for systems development work over the medium to long term, and intends to take advantage of this opportunity and expand its business by leveraging its expertise and capabilities in system development* to develop a range of systems** to handle the growing array of payment methods.
* System development for key clients—credit card companies, banks, and brokerages—that mainly includes network connection functions to complete online transactions, as well as functions to authenticate credit cards (which are a prerequisite for payments), detect fraudulent credit card use, and manage merchant operations. ** System development related to the growing popularity of prepaid cards and debit cards, IC cards payments, and the use of smartphone payments and electronic money.
The company plans to continue strengthening its management structure for development projects and push ahead with employee education initiatives to ensure timely execution of development projects in a framework that secures sustainable profits and earnings growth. (See discussion below for further details concerning employee training.)
Comprehensive provider of cybersecurity products and services Going forward, the company is looking to establish itself as a comprehensive provider of cybersecurity products and services designed to meet a broad range of cyber-threats. Toward this end, it plans to continue domestic sales of top-class cybersecurity products from overseas companies and further expand its sales efforts in this area. Medium-term plans call for introducing a series of cyber-security products developed by Israeli companies to domestic clients, and continually strengthening its support service structure for third-party products. In addition to introducing new products to counter a broad range of cybersecurity threats, IWI is looking to expand its business in this area by adding additional services for not only its in-house developed CWAT (for preventing internal data leaks) but also third-party cybersecurity products designed to counter external threats.
IWI is already making plans to offer an integrated security platform. The company has been supplying standalone security software products such as CWAT and Traps. However, network endpoint and PC environment have been changing with cybersecurity growing ever more complex and office systems moving to the cloud as more people work from home. To address these changes, in July 2020 IWI began development work on an integrated, cloud-based security platform that will use a subscription-type payment model.
Expansion of product lineup as IWI moves to become a comprehensive cybersecurity provider
Source: Company data
Cultivating human resources IWI thinks it needs to create an environment where hired personnel can make immediate contributions to the workplace and also enjoy a long tenure at the company. In FY06/19, the company established a training team to conduct the type of training that is
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necessary for each level of employee at the company (management, directors, section managers, leaders, junior employees with two to three years at the company, new hires), instead of conducting training on an ad hoc basis.
The training comprises three main pillars: business execution skills (the skills needed in specialized fields), technical skills (technical literacy in the IT field), and interpersonal communications skills. IWI is already implementing more than half of the measures outlined in this training plan and is also developing human resources through systematic training of new hires, which had previously been conducted exclusively through OJT.
Improving corporate culture Every month the company holds a meeting spearheaded by the CEO with representatives from each division to get an accurate picture of individual employees’ overtime work and come up with a response to help employees work effectively and reduce work outside normal hours. The purpose is not to reduce overtime but rather reduce long working hours by increasing productivity, thereby enabling individuals to pursue their own interests and spend time with their families. The company also gives awards for particularly praiseworthy projects (covering not just development, but all departments including personnel systems and those aimed at boosting efficiency). Feedback from client companies on the initiatives also led to increases in motivation among employees. IWI also has a mentoring program where employees can have discussions with the heads of other divisions and a free agent system for those who wish to volunteer for new challenges.
With respect to making use of paid vacation time, in FY06/20 the company encouraged all of its employees to take at least eight vacation days a year (the statutory minimum is five days). According to the company, its employees as a whole made use of 79.8% of their annual paid vacation days in FY06/19 versus the national average of 52.4% (source: Ministry of Health, Labour and Welfare statistics for FY2018). The company’s female employees made use of 100.0% of their paid childcare leave versus the national average of 83.0%, and its male employees made use of 30.0% of their paid childcare leave versus the national average of 7.4%.
As part of its effort to give female employees more opportunities to advance, the company established Intelligent Women’s Wave, a working group on the mentor system for female employees. The company has set a goal of increasing the proportion of managerial or high-level specialists positions filled by women from the current figure of 3.5% to 7.0% by FY06/22.
(For reference) Previous medium-term business plan: FY06/20–FY06/22 (out August 7, 2019) Overview The previous medium-term business plan covered the years from FY06/20 to FY06/22. The final-year target for sales was JPY12.0bn (+14.9% versus FY06/19) and operating profit JPY1.2bn (+30.2% versus FY06/19), representing an operating profit margin of 10.0%.
▷ Operating profit of JPY922mn reported for FY06/19 surpassed the company’s target of JPY880mn and came close to reaching the target of JPY930mn set for FY06/20 under its previous medium-term business plan. The company experienced an unexpected suspension of a large project in FY06/19 but did not see any major changes in its operating environment. ▷ The above-plan results for FY06/19 prompted the company to come out with a revised medium-term plan covering the three-year period from FY06/20 through FY06/22 at the time of its full-year results announcement.
The forecast under the previous plan did not include revenue from any large-scale development projects in the future. This reflected the company’s thinking that the current operating environment is such that it would be able to sustain positive top-line growth over the medium term even without large-scale development projects.
At the mainstay Financial Systems Solutions segment, the previous medium-term plan saw the cloud services business serving as the main growth driver with a CAGR of 30% over the next three years (through FY06/22), and saw this along with growth in sales from miscellaneous development projects (projected CAGR of 1.9%) underpinning overall sales at the segment to produce a CAGR of 4.3% for segment sales as a whole.
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The previous plan assumed increasing contributions to sales of new products such as its next-generation NET+1 software and new products for the broadcasting industry. However, the company did not provide any definitive figures indicating exactly how much growth would be coming from new products, saying that it was working on initiatives to ensure that sales each year come in ahead of plan.
▷ The FY06/20–FY06/22 plan saw the cloud services business as the key growth driver, projecting sales of JPY1.4bn for FY06/22 (versus JPY637mn in FY06/19). For clients in the financial services industry, the company provides cloud-based systems and services including merchant managing services (acquiring) and fraud detection services. ▷ The company moved ahead steadily on the development of its next-generation version of NET+1 software product and the preparation of new products featuring credit card fraud detection functions. ▷ The marketing of new products for the broadcasting industry got fully underway in FY06/20.
Plans by segment Financial Systems Solutions segment Under the previous medium-term plan, the company had set a target for sales at the Financial Systems Solutions segment of JPY10.6bn, representing a CAGR of 4.3% over the three-year period starting in FY06/20.
Most of the sales at the Financial Systems Solutions segment came system development projects, but the company was not counting on any specific large-scale projects to help it reach its sales target. Instead, it was looking to cloud services as the main growth driver, projecting cloud service-related sales of JPY800mn in FY06/20 rising to JPY1.1bn in FY06/21 and JPY1.4bn in FY06/22 (representing a CAGR of 30% over the three-year period starting in FY06/20). The company already had a number of new client companies lined up on this front, including one that will install its IOASIS cloud services for acquiring businesses (merchant systems) and several more lined up to install its IFINS credit card fraud detection ASP service, as well as its IGATES OnCore Switch (network connection) service in FY06/21 and FY06/22.
The company continued expanding its systems development business, enhancing the reliability of its proprietary systems, strengthening project management, and accordingly bolstering its earnings power. The company worked to increase the share of cloud systems projects (increase sales in cloud services business) while simultaneously growing front-end brokerage systems and new business projects, but did not provide any specific figures under its previous medium-term plan for the contributions expected to sales from new products such as its next-generation NET+1 gateway system and next-generation fraud detection system. Similarly, the company saw credit card-related development work to grow steadily due to the spread of cashless payments and the upcoming 2020 Olympics/Paralympics. Looking beyond 2020, the company also expected payment methods to become increasingly card-less, and seeing this was looking to make its next move soon. Product Solutions segment The Product Solutions segment included data security product sales and maintenance and technical services. Under the previous medium-term business plan, the company had set a target for segment sales of JPY1.4bn for FY06/22, representing a CAGR of 8.2% over the three-year period starting in FY06/20.
In addition to its proprietary CWAT system (for preventing internal data leaks), IWI sells five packaged software products from outside vendors, Traps from Palo Alto Networks, Deceptions Everywhere from illusive networks, SecBI from SecBI, ayehu NG from ayehu, and Morphisec from Morphisec. The company had additional plans to expand its service in this area by handling products designed to thwart external cyber-attacks, including products such as the recently released WiFiWall from Israel-based WiFiWall, Cybear from Cyber Networks, RESEC from ReSeC Technologies, and Virtual Security Officer (VSO) from Pullsec Lab. For further details regarding in-house products and third-party products sold by the company, see the Business description section.
At the Product Solutions segment, which mainly engages in sales and maintenance of information security measures and technical services, IWI expected demand for security-related investments to increase going forward against the backdrop of increasing damage from cyberattacks and intended to proactively take advantage of growing business opportunities in this sphere.
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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 that 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
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Business overview
Source: Shared Research based on company materials
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 company forecast (JPYmn) FY06/20 FY06/21 Act. % of sales Est. % of sales YoY 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 software 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 software 220 2.0% 423 3.8% 92.3% Security measure products 1,063 9.7% 1,100 10.0% 3.5%
Operat ing 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.
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(Note: Former reporting segmentation scheme) Financial Systems Solutions (FY06/20 sales: JPY9.9bn [90.3% of sales]; operating profit: JPY1.1bn [108.4% of operating profit]) FY06/19 FY06/20 (JPYmn) 1H Act. 2H Act. FY Act. % of sales 1H Act. 2H Act. FY Act. % of sales Sales 4,615 4,722 9,337 100.0% 4,527 5,330 9,858 100.0% Software development 2,791 2,877 5,668 60.7% 2,574 3,217 5,791 58.7% Maintenance 541 583 1,124 12.0% 606 640 1,246 12.6% Hardware 750 390 1,140 12.2% 680 846 1,526 15.5% In-house packaged software 140 372 512 5.5% 179 65 244 2.5% Cloud services 285 352 637 6.8% 390 438 828 Third-party packaged software 105 149 254 2.7% 95 125 220 2.2% Operating profit 317 573 890 9.5% 494 630 1,124 11.4% Operating profit margin 6.9% 12.1% 9.5% 9.5% 10.9% 11.8% 11.4% 11.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
▷ The Financial Systems Solutions segment combines hardware and software sales, with a focus on software development for clients in the financial industry. The company offers added-value systems and maintenance services. ▷ Current sales in this segment are divided into card business (roughly 80% of segment sales) and securities business (roughly 20% of segment sales). In the card business, the company develops systems such as for authenticating the connection to
credit card networks and systems for detecting fraudulent credit card use. In the securities business, the company is developing a data distribution base as well as network monitoring systems. ▷ Sales in the Financial Systems Solutions fluctuate, due mainly to development of contract-type software. The company is focusing on expanding its business areas. In the card business, in addition to demand for upgrades for existing products, IWI is seeking to acquire various system development orders related to payments, such as credit card brand integration, upgrades to handle branded prepaid cards, branded debit cards, IC cards, and overseas ATM cards. In the securities businesses, the
company had been concentrating on the Information Delivery Distribution System, but now is aiming to expand its business area to operations systems. ▷ Further, in order to expand beyond the financial industry, IWI started to sell a new product OnCore from 2015. OnCore is a simplified version of the NET+1, a software package the company developed that commands the largest domestic market share of credit card payment systems. ▷ In the fall of 2016, IWI also launched its cloud-based, shared-use type system for its merchant acquiring services for credit cards (discussed below). As the expansion of recurring-revenue cloud services proceeded, cloud service sales in FY06/20 rose to JPY828mn from JPY637mn in FY06/19. As of end-FY06/20, five client companies had adopted IWI’s merchant managing services (shared-use system for acquiring services), three had adopted its fraud detection service, and two had adopted its network connection service. IWI expects that the number of companies adopting these services will increase moving forward.
Overview of main products and services NET+1
▷ The company’s main product in this segment is NET+1, a packaged software developed by IWI that holds the top domestic share in the field of credit card processing systems. NET+1 is a solution that is used by credit card companies for transaction authorizations and similar front-end functions. The main clients in this segment are credit card companies and other financial
institutions. IWI estimates that NET+1 is involved in approximately 70% of major credit card firms’ authorization systems in Japan. The business need that NET+1 solves is the creation and maintenance of a special network where credit card companies
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can connect to merchants (either single point of sale terminals or large credit card processing centers) as well as creditworthiness data companies involved in credit card transactions. ▷ Generally speaking, the credit card transaction related systems are divided into front-end (the information from a merchant terminal to the credit card company; authorizations and electronic draft capture) and back-end systems (internal information at a credit card company; settlement, retrieval, client data management etc.). IWI’s Retail Banking Online Systems business is focused on the front-end processing side. The back-end systems are large, which means that development and integration projects are very substantial in scope, last for years, and can normally be only handled by the first-tier system integrators. Front-end solutions, while important, are decided upon after the back-end has been “sorted out”. ▷ NET+1 consists of both hardware and in-house developed packaged software. The system is generally used without major alterations for 4–5 years (sometimes longer) and the company realizes maintenance and support revenue over the life cycle of the systems it installed. ▷ The other main products include products related to data communications (internally developed “Market Information Delivery Distribution System”) and credit card fraud detection (ACE-Plus). ▷ From FY06/12, the company has actively working on entrusted system development projects for DNP’s group companies. ▷ To grow this segment, the company needs to either sell more server licenses to new and existing clients or add new features to sell to existing clients. Overseas sales (as domestic brokers expand overseas) could be a potential growth area. Domestically, IWI looks to increase the number of smaller brokerage clients. This can be done for instance, by linking price feeds with other
services (order processing, algorithmic trading engines) and then marketing those as a single comprehensive solution. Another way of augmenting revenues could be to expand the current product line-up by selling packages developed overseas to clients in Japan.
ACE-Plus
▷ ACE-Plus is a software system that detects and prevents unauthorized credit card usage. The system uses either a “score” based system or predefined “rules” which determine if a transaction could be fraudulent. The scoring algorithm is a flexible solution where IWI provides the logic for generating scores, and users of the system update the data so scores are determined
by recent (and relevant) transaction data. ▷ The company indicated that ACE-Plus is typically sold as a package (software, hardware, and installation) for approximately JPY150mn. The prices for maintenance range from JPY6mn to JPY10mn per year. Gross profit margins for the package exceed
50% and as typical for packaged software would tend to improve with more clients buying the system. At the same time, variable costs associated with installation and customization, mean that the margins are lower than for pure off-the-shelf packages (where they can theoretically reach 100%).
Technical detail
▷ The logic in the ACE-Plus system can be configured to use either “rules” or “scores” to determine if a transaction is potentially fraudulent. The rules system is straight forward: if a transaction meets a set of established criteria (e.g. a rapid succession of purchases), action is taken to either delay and verify, or decline the purchase. The rules system supports up to several tens of thousands of rules. The scores system is more complicated. Internal logic determines if a specific purchase matches previous purchasing behavior and produces an approve/confirm/deny decision for the transaction. The historic purchasing behavior
model is based on accumulated prior purchases (the system ‘learns’ how particular consumers typically buy). ▷ The practical implication for the learning ability of the scoring system is that the database becomes ‘smarter’ about consumer purchasing as the number of transactions for a particular consumer increase. This feature could be considered a competitive
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advantage; Shared Research understands that some competing products are based on data updates from software publisher, which leads to relatively higher prices when compared to ACE-Plus. ▷ Although some companies have opted for internally developed solutions, the company estimates that ACE-Plus is used by approximately 50% of the domestic market. The company indicated that it sees growth potential of overseas markets (mostly in Asia), citing two positive factors – emerging credit card usage in Asian countries, and the flexibility of ACE-Plus in terms of customization possibilities compared to packages offered by the overseas competitors. ▷ At the same time, IWI feels the need to develop package requiring less customization and thus carrying higher margins. Customization means higher additional variable labor costs. Incremental costs per unit of packaged software per se are very low, leading to higher margins.
Face Concierge
▷ Face Concierge is a system to enhance the usefulness and value of corporate and smartphone sites by directing visitors to appropriate pages and providing accurate responses to client questions. It can be applied to websites operated by businesses in various sectors. Under the system, the user speaks to a concierge (an image of a person) on the screen and asks questions. The user is then directed to relevant information and products. The company strengthened its sales activities for the service from FY06/14. ▷ This service can be applied for business-to-consumer websites with many FAQs. The company expected to generate JPY20mn– JPY30mn per client in initial payments, and JPY2mn–JPY3mn a year in maintenance services. However, sales did not rise as much as expected, so the company is considering adopting a new pricing structure that holds down initial payments.
OnCore
▷ Based on the technologies the company cultivated through operations related to securities trading, OnCore serves as a fundamental platform, mounted with NET+1 and ACE-Plus functions, for the development of various systems. The company
plans to sell OnCore to various industries and businesses beyond the financial industry as bundled products (part of a set with hardware). In FY06/16, the product received its first order. IWI plans to expand sales not only in Japan but also in Southeast Asia and is simultaneously carrying out marketing research and system development.
Cloud services (shared-use system for merchant acquiring services, etc.)
▷ As part of new service creation, the company is providing a cloud-based shared-use system for its acquiring services (merchant managing services). IWI stated that installing the shared-use type system reduces the initial investment burden and makes it easier for financial institutions to start subscribing to the company’s acquiring services, so it expects its business opportunities to expand. IWI stated that it had already received enquiries from multiple financial institutions, including regional banks for the development of acquiring services systems. As this system allows for shared cloud use, the previous need for customized system development for individual clients has been minimized (In cases where it is necessary, the company collects the appropriate development costs). ▷ IWI began offering the cloud-based acquiring service (merchant managing services) to three companies in the fall of 2016 and, as of end-FY06/20, five companies had adopted it. Additionally, three other companies have adopted its fraud detection service and two others have adopted its network connection service. IWI is expanding marketing for its cloud services to secure more orders from financial institutions.
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(Note: Former reporting segmentation scheme) Product Solutions segment (FY06/20 sales: JPY1.1bn [9.7% of sales]; operating loss: JPY88mn [-8.4%of operating profit]) FY06/19 FY06/20 (JPYmn) 1H Act. 2H Act. FY Act. % of sales 1H Act. 2H Act. FY Act. % of sales Sales 425 682 1,106 100.0% 440 623 1,063 100.0% Software development 29 43 72 6.5% 28 25 53 5.0% Maintenance 48 234 282 25.5% 44 232 276 26.0% Hardware 2 80 82 7.4% 1 43 44 4.1% In-house packaged software 113 20 133 12.0% 62 27 89 8.4% Third-party packaged software 230 304 534 48.3% 302 298 600 56.4% Operating profit -48 80 31 2.8% -125 38 -88 -8.2% Operating profit margin - 11.7% 2.8% 2.8% - 6.0% - - Source: Shared Research, based on company data Note: Figures may differ from company materials due to differences in rounding methods.
▷ In the Product Solutions segment, IWI provides value-added systems and maintenance services for a range of industries and sectors, with a focus on packaged software for information security and other applications, including software developed both in-house and by other companies. The main in-house packaged software sold in this segment is CWAT (internal data leak detection system); its third-party packaged software offering includes Traps (a cybersecurity product from Palo Alto Networks), Deceptions Everywhere (a targeted-attack solutions product from illusive networks), SecBI (a cybersecurity using a proprietary
machine-learning engine to counter large-scale and/or prolonged cyber-attacks from SecBI), and Ayehu NG (an automated IT operating solution from ayehu). ▷ The Product Solutions segment, which had been stuck in the red for years, finally moved into the black in FY06/16 on the back of increased sales following rising demand for security-related products. The segment remained profitable in FY06/17 but slipped back into the red in FY06/18 on lower sales of CWAT, its very profitable in-house software, then moved back into the black in FY06/19 as sales of CWAT contributed. The segment dropped back into the red in FY06/20, hurt by falling sales of
CWAT and other proprietary products. In FY06/20, client companies cut back on investment spending in the wake of the pandemic, with many either backing away from previous indications that they intended to order CWAT or pushing out orders into the future. ▷ In response to rising demand for cyber-security products, IWI plans to sell superior products, not only in-house packaged software, and to further expand business scale. As part of this effort, IWI conducts surveys for new products every three months in Israel, where cyber security measures are robust. ▷ Security is an area of great interest and high potential growth for IWI, when considering possible product collaborations with DNP. The companies already jointly worked on a security system for Credit Saison Co. (TSE1: 8253), combining DNP’s IC cards with IWI’s security networking technology. In addition to new products, IWI could receive access to DNP clients (potential users of CWAT system).
CWAT
▷ CWAT was developed in 2004 to secure information within a company’s IT infrastructure and detect and neutralize threats in real-time. The system protects internal networks (preventing unauthorized computers from making network connections) and secures data (by detecting and preventing unauthorized use and access to sensitive files). CWAT uses a client/server architecture, which means that the system is installed on employee PCs, as well as a central server that collects system-wide information for monitoring and control.
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Technical detail
▷ CWAT is an extrusion detection system, which is a relatively new area of computer security which has garnered increased awareness since the late 1990s. Prior to that, the security community focused on ensuring intrusion detection and defense–to stop threats “coming in from the outside.” Extrusion detection refers to security problems that originate from within a computer network or system. Examples of information extrusion can include either an employee emailing confidential documents to an outside party, or a virus-infected workstation uploading proprietary information to an outside attacker. ▷ The CWAT system is suitable for local networks (within one facility) and can optionally be configured to provide protection between company sites. Data provided by the company indicates that the software includes multi-language support: English, Japanese, Chinese, and Korean and allows for central management of a mixed-language environment. ▷ The technical challenge in developing an extrusion detection system is that both internal and external network traffic must be analyzed to determine if a threat exists. This contrasts with intrusion detection which can be as simple as blocking all external traffic at a network router or other gateway. For extrusion systems to achieve maximum effectiveness, the systems must examine data being sent out from the network and incoming data and be equipped with logic to determine the type of information being exchanged across the network. An example of the kind of problem that an extrusion system must be able to solve is if an email attachment is a proprietary memo or a personal letter to a friend. ▷ CWAT is a comprehensive information security system; it monitors and controls information accesses by employees and can detect and prevent information removal. ▷ Typically, clients purchase the CWAT system and maintenance as a package; the software is priced on a per-user (employee PC) basis, at approximately 19,800 yen per computer.
Other security-related products
▷ In FY06/12, IWI started selling third-party systems and package products from vendors it deemed to have superior technology. This new undertaking involved the offering of quasi-consulting services by coordinating these systems and products for users. The company now handles products for cybersecurity from a number of different overseas vendors, including Traps from
US-based Palo Alto Networks. ▷ In 2016, IWI began selling Deceptions Everywhere, a security software package designed to neutralize targeted attacks. To counter manual cyber-attacks mounted by technologically sophisticated attackers, Deceptions Everywhere uses lightweight
deceptions at interior network endpoints to create an agent-less system to deceive and detect attackers that have gained entry to a network without detection. ▷ Ayehu NG from US-based ayehu is a vendor-neutral IT automation and orchestration platform that helps companies automate IT and security operations. ▷ In July 2018, the company reached an exclusive domestic sales agreement with SecBI (Israel) for the SecBI technology, which detects targeted attacks with AI (autonomous analytical engines analyze proxy communication logs for hidden threats). This technology is not installed into PCs but instead establishes a proxy through which all logs pass and analyzes the logs that accumulate within the proxy with AI to discover malicious software. ▷ In this manner, IWI is expanding its lineup of in-house and third-party security solutions to meet the market’s growing needs for security measures.
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Security solutions
Source: Company data
Relationship with Dai Nippon Printing (DNP; TSE1: 7912) The relationship between DNP and IWI began in began in roughly 2006. The two companies formed a business alliance in 2007 for the launch of a joint office security service for financial institutions and jointly developed an integrated security system for Credit Saison (completed in 2008). DNP made a tender offer for the company in August 2008, which was unsuccessful due to the inability to secure the minimum number of shares. Following the unsuccessful tender offer, the companies entered into an additional business alliance in November 2008, exchanging personnel in 2009 and entering into a joint marketing effort of IWI’s new software product EUCSecure.
DNP started a security-related industry group, Shared Security Formats Cooperation (SSFC) in 2005, to establish and promote a security format for contactless access cards (so-called “smart cards” with embedded electronic chips). IWI is a member of the SSFC, and support for SSFC is available in the company’s CWAT system.
DNP performed another tender offer for the company in February 2010 through which DNP became the largest shareholder of IWI (holding 50.61% as of April 9, 2010) and IWI became a consolidated subsidiary of DNP. As of June 30, 2020, DNP holds 50.61% of IWI’s shares.
For IWI, the closer relationship with DNP could mean increased opportunities for future growth. For example, the advances in cloud computing should increase demand for more intelligent security for resources and networks. The integration of IWI’s security technologies with DNP’s content and publishing products could be developed to meet the needs of the evolving market and delivered to the clients utilizing DNP’s vast sales and distribution network.
Main facilities
The company has two facilities (Tokyo and Hakodate), with the majority of employees in Tokyo (as of FY06/20).
Earnings structure
The company’s revenues are made up of initial payments for software packages or labor (for maintenance service) and license fees. Existing products and services are sold slightly differently: NET+1 projects are sold on a project basis (meaning that effective project management is needed to boost profitability), the Market Information Delivery Distribution System is sold on a per server basis (revenues are the same to the company if a client has 50 or 1000 dealers using the system), and the CWAT package is sold on a per protected PC basis. On a top-line basis, this means that the following variables are key for segment sales:
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▷ Card business: number of projects, size of those projects, and project management ▷ System solutions business: number of server installations ▷ Security systems business: number of protected end user PCs (licenses)
The majority of the company’s revenues stem from software development related to the company’s in-house developed products (see Main Business Segment discussion). At the margin the cost structure can be described as more variable cost than fixed cost driven, to the extent that the company is operating at or near the full capacity in terms of its engineers.
The company has been investing in R&D to develop packages which can be more easily integrated into client systems. If the efforts to develop more packaged software (or software-as-service) are successful, this would increase incremental margins, increasing the financial attractiveness of the business model (after a software product has been created, it can be resold with minimal incremental costs).
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Profitability snapshot, financial ratios
Profit margins FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Par. Par. Par. Par. Par. Gross profit 2,020 1,837 1,642 1,374 473 1,342 1,779 1,993 2,132 2,223 2,807 2,981 GPM 36.6% 37.1% 34.5% 26.2% 8% 20% 29% 28% 25% 21% 27% 27% Operating profit 229 358 321 132 -678 146 484 714 703 548 922 1,036 OPM 4.1% 7.2% 6.7% 2.5% - 2.2% 7.9% 9.9% 8.3% 5.2% 8.8% 9.5% EBITDA 328 500 470 238 -547 336 740 928 1,040 1,033 1,629 1,642 EBITDA margin 5.9% 10.1% 9.9% 4.5% - 5.1% 12.0% 12.9% 12.3% 9.7% 15.6% 15.0% Financial ratios ROA (RP-based) 4.6% 7.4% 6.1% 2.6% -9.7% 3.2% 8.1% 10.8% 9.9% 6.6% 10.1% 10.4% ROE 4.6% 4.8% 2.8% 5.6% -7.5% 1.9% 10.1% 9.7% 10.3% 6.6% 11.3% 11.4% Total asset turnover 1.1 0.9 0.9 0.9 1.0 1.2 1.0 1.1 1.1 1.2 1.1 1.1 Inventory turnover 13.4 18.3 24.5 12.9 10.2 12.6 22.8 26.2 11.6 12.2 12.9 15.1 Days in inventory 21.8 15.5 14.2 45.3 39.0 17.6 11.1 18.5 47.7 23.8 30.6 19.0 Working capital 1,093 1,218 947 1,249 1,227 882 985 1,420 1,709 1,530 2,022 2,095 Current ratio 449% 587% 500% 378% 353% 400% 397% 341% 221% 200% 198% 216% Quick ratio 369% 541% 472% 316% 275% 350% 334% 302% 158% 156% 154% 182% OCF / Current liabilities 53.9% 46.9% 117.5% 26.3% -54.6% 65.7% 82.6% 9.9% 64.7% 50.8% 44.3% 51.5% Net debt / Equity 21.7% 17.4% 21.5% 29.3% 29.4% 26.7% 34.1% 38.8% 50.7% 54.6% 57.4% 51.1% OCF / Total liabilities 48.3% 37.2% 78.6% 17.4% -45.0% 52.2% 50.9% 6.3% 41.0% 38.9% 33.8% 43.4% Cash conversion cycle (days) 51 84 48 44 56 41 37 58 58 38 66 48 Change in working capital -321 125 -272 302 -22 -345 103 435 289 -179 492 72 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
The company’s gross profit margin was relatively stable between FY06/01 and FY06/11, but took a nosedive in FY06/12 and FY06/13, falling to 26% and 8% under the weight of several large, money-losing projects. However, since FY06/14 the company has maintained a gross profit margin of 20% or more as the impact of unprofitable projects receded. The gross profit margin fell 4.2pp YoY to 21.0% in FY06/18 as another large project turned unprofitable following the discovery of defects in internal integration testing. In FY06/20, the gross profit margin was 27.3%.
Group companies
ODN Solutions is an IWI’s affiliate (in which IWI holds a 33.9% stake). Based in Okinawa, ODN Solutions primarily serves as a software development subcontractor for some of the work done by IWI’s Financial Systems Solution business.
Group strategy
The majority of the company’s business activity is domestic. The company seems keen to increase its presence overseas, however it will likely take time before overseas revenues can make a meaningful contribution.
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Market and value chain
Market overview
The IT services industry market in Japan was approximately JPY16tn (source: Ministry of Internal Affairs and Communication [MIC] and Ministry of Economy, Trade, and Industry [METI] 2019 survey). The industry can be broadly categorized into multiple tiers, from large companies that serve as prime contractors for complex projects spanning multiple years to smaller firms that have specific fields of expertise. Large projects (such as back-end office system integration for a financial institution) are usually taken by “Tier 1” prime contractors (e.g. NTT Data Corp. [TSE1: 9613], Nomura Research Institute, Ltd. [TSE1: 4307[, IBM Japan), who then allocate parts of the project to lower tier subcontractors, with the work then going down the food chain to the lowest level, small software firms with few employees.
IT needs of Japanese banks and other financial companies are relatively unique when seen from outside of Japan. In Japan, the system of “kouza furikae,” or automatic account transfer, is widely used for moving funds both between the accounts of one person (from ordinary to savings etc.) and for outside payments ranging from utility bills to taxes. This system leads to massive amounts of transactions concentrated in a few days of each month (mostly the 27th and 3rd). Banks therefore need to use large-scale batch processing to enable smooth settlement flow. The use of batch processing is one reason why mainframe computers (large machines often occupying dedicated computer centers) remained at the core of Japanese financial IT systems, while global counterparts have migrated to distributed (client/server and increasingly cloud) computing.
Mainframes are big and expensive and represent substantial sunk costs for customized software. Furthermore, until the 1990s, mergers between Japanese corporations and overseas acquisitions were uncommon, as were frequent job changes for managers. That meant lower need for system compatibility and “best practices” sharing. The result was that processes and systems evolved into unique ecosystems requiring proprietary software and large-scale customizations as opposed to buying packaged software and building management practices around it. Systems were updated in an evolutionary rather than revolutionary way. Additionally (although that has been changing in the past years), relatively few M&A meant that needs for standardized plug-and-play systems were less pronounced than in the US or Europe.
The situation has been changing dramatically in the past few years. Waves of consolidation and overseas expansion meant that most Japanese industries shifted to distribute computing models (the banking industry being an exception). The drive to lower costs boosted demand for packaged software. However, in many respects the domestic business packaged software industry never truly took hold while overseas packages often needed so much customization to fit Japanese management practices that in many ways they stopped being “packages”.
The arrival of cloud computing and software-as-a-service (SaaS) brings about new and accelerating wave of change. In Shared Research’s opinion, packages were hard to sell in Japan partially because this needed to be done through system integrators whose real incentives were to customize. SaaS-type solutions, on the other hand, can be provided either directly by developers or through service providers. For instance, a publishing company could integrate its offering of digital document security with a rights management system. Such developments could represent an intriguing opportunity for IWI in light of its relationship with DNP.
Cashless society Japanese government promotes cashless society Aims for 40% of transactions to be cashless by 2025 Under its Revision of Japan Revitalization Strategy put in place in 2014, the Japanese government first raised the issue of increasing the prevalence of cashless payments as a means of increasing payment convenience and efficiency. In its Japan Revitalization Strategy 2016, the government went a step further by actively promoting the spread of cashless payment systems with an eye on facilitating spending by the large number of overseas visitors coming to Japan for the 2020 Summer Olympics and Paralympics. This was followed in May 2017 by the release of the government’s FinTech Vision, a comprehensive set of policy recommendations aimed at promoting the move toward cashless payments, an essential element to the digitalization of settlement accounting that was needed to fully realize the added-value of FinTech services. This was followed in June 2017 by the
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Cabinet’s approval of the government’s Investments for the Future Strategy 2017 in which it established a target for Japan’s cashless transaction ratio of 40% within 10 years (i.e., by 2027).
In April 2018, Japan’s Ministry of Economy, Trade, and Industry then came out with its Cashless Vision policy paper, in which it moved forward the target for a cashless payment ratio of 40% by two years, to 2025, when Japan is slated to host the World Expo in Osaka. METI’s Cashless Vision included the “Declaration of Payment Reform” under which the government set a future goal for Japan’s cashless payment ratio of 80%, which would be among the highest in the world.
METI’s Cashless Vision According to METI’s Cashless Vision policy paper published in Aril 2018, cashless payments were used for only 18.4% of household final consumption expenditures in 2015. (Note: According to figures published in the Cashless Roadmap 2019 by Payments Japan, the cashless payment ratio was up to 21.3% in 2017, with 90% of this accounted for by payments made with credit cards.) As shown in the figure below, Japan’s cashless payment ratio is low compared with many other countries.
Cashless payment ratio: international comparison (2015 data)
90.0% 82.1% 80.0% 70.0% 60.0% 60.0% 55.4% 54.9% 51.0% 48.6% 50.0% 45.0% 39.1% 38.4% 40.0% 30.0% 18.4% 20.0% 14.9% 10.0% 0.0% South China Canada UK Australia Sweden US France India Japan Germany Korea Source: Shared Research, based on data from METI Cashless Vision, which calculated the cashless payment ratio using 2015 household final consumption expenditure data from the World Bank and annual data on noncash payments from the BIS Redbook Statistics (2015). Figures for China drawn from report by Better Than Cash Alliance, and included for reference purposes only
According to the figures in METI’s Cashless Vision policy paper, Japan’s cashless payment ratio has risen steadily from 11.9% in 2008 to 20.0% in 2016. It still remains well below the level seen in other countries, however, a result that is believed to be due in part to the affinity Japanese seem to have for cash transactions. The policy paper listed four factors that contributed to the affinity of Japanese for cash payments:
▷ The high level of public order, in which robberies are few and even lost wallets with cash are said to be returned to their contents intact ▷ The good condition of paper money in circulation, the scarcity of counterfeit bills, and the high level of trust accorded cash payments ▷ The speed and accuracy of cashiers at stores and scarcity of mistake handling cash payments ▷ The ease and convenience with which consumers can withdraw money from ATMs
At the same time, METI’s Cashless Vision policy paper identified a number of issues on the merchant side, including installation, operation and maintenance, and cash flow-related issues, that are impeding the move to cashless payment systems on the side of the store operator.
▷ Cashless payment systems installation: the policy paper noted that in addition to the usual direct costs associated with the installation of payment terminals, there were other costs that the store operators have to bear including the cost of the space needed for the new terminals and the cost of the line connections to the new terminals.
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▷ Operation and maintenance of cashless payment systems: the policy paper noted that stores have to bear usage fees in the case of cashless payments that they do not bear when the payments are made in cash. There are also additional operating costs incurred by stores, such as providing sales receipts, that are not incurred when payments are made in cash. ▷ Cash flow: the policy paper noted that cash payments provide immediate liquidity to store operators while the receipt of payments made by most credit cards comes with delays of two to four weeks.
From the perspective of consumers, METI’s Cashless Vision policy paper noted that the presence of many stores that do not accept cashless payments and the various concerns*¹ consumers have about credit cards and other forms of cashless payments also present a barrier to the more widespread use of cashless payments.
From the perspective of the payment service business operator, the policy paper noted that the added cost and Japan’s unusual multi-acquiring environment*² also present barriers to adopting cashless payment systems.
*¹ These concerns include credit card security, worries about the risk that their rights may be violated with them knowing, and worries about credit card use by the elderly. *² In the US, Europe, and in other countries where banks are involved in the credit card business, each merchant normally uses a single acquiring service. In contrast, in Japan, the way industry practices have developed over the years has merchants choosing from multiple acquiring services. Because under this arrangement, merchants in Japan cannot be locked into a single acquirer through an exclusive contract, the principle of free market competition has worked over the years and large merchants that can be expected to generate large volumes of credit card transactions have been able to drive down their own merchant fees by precipitating price wars among acquiring companies. In contrast, small shops that do not generate many credit card transactions have been stuck paying relatively high merchant fees. As a result of this client mix —very large retailers that have high credit card transaction volumes but pay very low merchant fees, and very small retailers that pay high merchant fees but have very low credit card transaction volumes—the acquiring business as a whole is not very profitable. This low profitability in turn makes acquiring businesses reluctant to actively investing in recruiting new merchant stores for their payment service, leaving the number of merchant stores accepting credit cards largely unchanged, according to the analysis presented in METI’s Cashless Vision policy paper.
METI’s Cashless Vision policy paper set out the following policy recommendations to help promote cashless payments (excerpts):
▷ To eliminate resistance to the installation of cashless payment systems at the store level, make cashless payment acceptance obligatory/recommended, make provisions for small-value purchases, promote digitalization of receipts, provide subsidies to
support cashless payment system installation/operations, provide tax incentive for cashless payment system installation. ▷ To provide more opportunities for consumers to see how cashless payment systems are more convenient, get a better handle on real consumer needs with regard to cashless payments, put in place services that will become the de facto standard,
address consumer concerns about cashless payments systems, put in place reliable consumer protection laws (such as zero
liability*¹), provide more consumer education, provide incentives for using cashless payment systems. ▷ To create an environment that will encourage more payment service businesses to change their business models, reconsider merchant fee structures*², put in place universal identification and identification confirmation system.
*¹ Under a zero liability system, consumer protections (zero liability) put in place by card network would, assuming the conditions set out by the payment service business operators are met, exempt consumers from all liabilities for purchases of goods and services resulting from the unauthorized use of their cards. *² According to METI’s Cashless Vision policy paper, the fees paid by merchant to the card settlement company they are using averages 3.09% per transaction with a median of 3.00%. The fees borne by the merchant must cover all the necessary operating costs of the payment service provider; these feeds are broken down into include the merchant discount rate (MDR), paid to the payment service company whose system is installed, an interchange fee (called an interchange reimbursement fee in the case of Visa), a private license fee, and the bank transfer fee to handle the final transfer of funds into the merchant’s bank account.
In conjunction with the consumption tax rate hike in October 2019, the Japanese government will introduce a “point rebate” system to encourage greater use of cashless payment systems.
▷ The point rebate system will go into effect when the consumption tax rate is hiked on October 1, 2019, and will be in place for a total of nine months after the consumption tax rate is increased. With the point rebate system, the government is looking to
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spread out the impact the tax hike will have on consumer demand while at the same time promoting the use of cashless payment systems with the aim of increasing productivity and consumer convenience. This includes providing support for small
and medium-sized businesses operators that accept cashless payments*¹. The government’s budget for FY2020 includes a total of JPY279.8bn for this and related initiatives, as detailed below. ▷ Rebates to consumers: During the first nine months after the consumption tax rate hike takes place on October 1, 2019, consumers will be rebated a portion of the consumption taxes paid*² when using cashless payment systems to pay for purchases of goods and services from qualified small and medium-sized businesses operating retail shops, restaurants/drinking establishments, and service businesses.
*¹ In the case of retail businesses, small and medium-size businesses are defined as those with capital of less than JPY50mn and fewer than 50 employees. To qualify for the rebate program, the business operator must register with one of the credit cards companies or cashless payment service operators from a government-approved list and must install cashless payment terminals from the cashless payment service provider. The specific types of businesses that qualify for the program will be posted in a list created by the Ministry of Economy, Trade, and Industry. Among small and medium-sized companies, those fitting the following description are not eligible for the program. Those whose average annual income for the three fiscal years prior to applying for the program is more than JPY1.5bn and those that are wholly owned either directly or indirectly by a company with legal capital or capital is JPY500mn or greater. *² As a general rule, consumer will receive a rebate equal to 5% of the amount spent at the qualified business. If the small/medium-sized business is a franchise outlet of a major franchise chain operator, the rebate rate will be only 2%.
▷ Subsidies for installation of cashless payment terminals: For qualified small and medium-sized businesses, the government will provide subsidy payments to cover the cashless payment terminals and their installation equal to two-thirds of the total cost,
provided the payment service provider covers one-third during the nine-month period immediately following the consumption tax hike. ▷ Subsidies for cashless payment fees paid by merchant: For qualified small and medium-sized businesses, the government will provide subsidy payments equal to one-third of the merchant fees (must be less than 3.25%) paid by these businesses during the nine-month period immediately following the consumption tax hike. ▷ According to statistics from Ministry of the Economy, Trade and Industry, there are a total of approximately 1,150,000 registered participating merchant stores in Japan (as of June 11, 2020). This corresponds to roughly 9.1 stores for every thousand people. The top five prefectures with the largest number of registered participating merchant store per thousand population are Tokyo (13.1 stores per thousand population), Ishikawa (13.0 stores), Kyoto (12.2 stores), Okinawa (12.1 stores),
and Fukui (12.1 stores). Between October 1, 2019 and March 16, 2020, these registered participating merchant stores handled a total of roughly JPY7.2tn in cashless payment, of which some JPY298.0bn was rebated.
Breakdown of registered participating merchants: Out of the roughly 1,150,000 registered participating merchant stores,
small and medium-sized store operators account for roughly 1,050,000, franchise store operators about 52,000, and
convenience store operators about 55,000.
Breakdown of cashless payments by method of payment (value basis): Out of the total amount of cashless payments made,
credit cards accounted for roughly 64% (JPY4.6tr), QR codes about 7% (JPY0.5tr), and other digital currencies about 29%
(JPY2.1tr).
Breakdown of cashless payments by method of payment (volume basis): Out of the total number of cashless payment
transactions, credit cards accounted for roughly 29% (999mn transactions), QR codes about 16% (540mn transactions), and
other digital currencies about 55% (1,870mn transactions).
Breakdown of cashless payment use by size: Out of all transactions settled using some form of cashless payment, roughly
37% was accounted for by transactions worth less than JPY500, about 24% by transactions worth more than JPY500 but less
than JPY1,000, about 24% by transactions worth more than JPY1,000 but less than JPY3,000, about 7% by transactions worth
more than JPY3,000 but less than JPY5,000, and about 8% by transactions worth more than JPY5,000.
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Excerpt from the book Denshi manee kakumei ga yattekuru! (The Electronic Money Revolution is Coming!) The following is an excerpt from Denshi manee kakumei ga yattekuru! (The Electronic Money Revolution is Coming!) co-written by the founder and chairman of IWI Kazuhiko Adachi and former senior researcher at Nomura Research Institute Hideo Yamazaki (partially modified by Shared Research).
FinTech such as Apple Pay*1 are drastically affecting core information processing services, causing vast FinTech-related development expenditure to flow into the industry. The information processing industry is fueled by the advent of FinTech such as server-based electronic money*2 including Apple Pay and Android Pay*3 and virtual currencies*4. Realization of FinTech is predicated on abandonment of cash, in other words, the advent of a cashless society owing to smartphone-based payment systems*5 such as Apple Pay and Android Pay, reform of money transfer mechanisms by server-based electronic money and virtual currencies, and employment of NFC chips*6 and a mobile POS method*7 on paying device end. In the cashless society, digitalized money basically travels across barriers irrespective of banking frameworks and categories such as virtual and server-based. Although only a small amount of digitalized money will be handled in the beginning, limitations will be eliminated gradually.
*1 Apple Pay Apple Pay is an electronic payment service based on iPhones and Apple Watches. By using an iPhone 7, iPhone 7 Plus, or Apple Watch Series 2 which were sold in Japan, the electronic payment service can be used at public transportation and stores in Japan and on applications. Some functions are available on iPhones 6. Users can transfer data from a Suica card or credit card to the iPhone to use it in Apple Pay. The service was started on October 25, 2016 in Japan following nine countries including the US, UK, and Australia where the service had been started. Apple Pay is compatible with Suica, iD, and QUICPay.
*2 Server-based electronic money A report on the survey of household economy issued by the Ministry of Internal Affairs and Communications defines electronic money as currency value equivalent to cash transferred into the following cards and devices: IC card-type electronic money including Rakuten Edy, Suica, ICOCA, and PASMO, mobile phone-type electronic money including mobile wallets, and prepaid-type electronic money including Web Money, BitCash, and QUO cards. Electronic money can also be categorized by whether currency value is contained in a card or managed on a server on the Internet. The former method can be called stored value card. The latter method is generally called server-based electronic money, which corresponds to the methods of Web Money and BitCash. Server-based electronic money is spreading in e-commerce and online game payment. In October 2016, Apple Pay became available in Japan. Payment via Apple Pay within Japan is always correlated with server-based electronic money such as Suica, iD, and QUICPay. This is significantly different from overseas payment via Apple Pay as it is credit card payment.
*3 Android Pay Android Pay is an electronic payment service based on Android smartphones (devices with Android OS 4.4 KitKat or later installed). The service was started on December 13, 2016. It is compatible with Rakuten Edy and nanaco.
Shift from conventional electronic money to server-based electronic money JR East’s Suica had been stored value cards, but they were reborn as server-based electronic money to be compatible with Apple Pay. Likewise, Rakuten Edy is transforming itself into server-based electronic money to be compatible with Android Pay. The currency value of server-based electronic money is stored on a cloud server on the Internet.
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Prediction of electronic payment ratio (2015-2020)
2015 2020
Debit card payment Credit card 0.7 Credit card payment 0% payment 47.0 Debit card 64.6 16% Prepaid card 23% payment payment 1.4 8.0 0% 3% Prepaid card Cash Cash payment 204.9 16.0 231.3 71% 81% 6%
(JPYtn) (JPYtn)
Source: Shared Research based on data from Denshi Kessai Soran 2015-2016 issued by CardWave Co., Ltd., ePayments Laboratory Inc., and Yamamoto International Consultants
Ratios of payment methods in Japan’s consumer expenditure
56.0% Cash 49.5%
12.1% Credit card
Debit card 0.2% 0.2%
24.0% Bank transfer 16.9%
2.2% Prepaid and electronic money 5.6%
5.5% Other 8.7%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
2011 2015
Source: Shared Research based on Credit Saison Co.’s financial results
*4 Virtual currency The Payment Services Act revised in 2016 defines virtual currency as property value that can be used in payment for goods and services, trading, and exchange among many and unspecified persons and that can be transferred by an information processing system. Although virtual currencies are not legal currencies, they are understood as one of payment means. Besides, virtual currencies are considered to be one of variations of server-based electronic money. Note, however, that virtual currencies can be traded for speculation purposes as conversion rates fluctuate while electronic money is used for payment purposes.
*5, 6 FeliCa chips incorporated into smartphones Smartphones sold in Japan (Android phones and iPhones 7) are provided with a FeliCa chip using a non-contact IC card technology developed by Sony. Smartphones provided with a FeliCa chip are used as IC transit cards, electronic money, IDs, tickets, membership cards, etc. FeliCa is non-contact IC card technology for performing communication between a reader/writer and a card (chip) by electromagnetic wave (Communication is performed in a 13.56MHz frequency band and at a speed of 212kbps/424kbps; Characterized by asymmetrical transmission without a subcarrier). FeliCa is characterized by: high-speed processing capability that allows processing between a reader/writer and a card and cryptography processing to finish within about 0.1 second; management of multi-purpose data by a single card; and security. FeliCa’s technical specification (NFC-F) is different from Type A and Type B of NFC (Near Field Communication) technology which are standard specifications in Europe and the US. However, FeliCa also supports the wireless communication protocols and command/response protocols of Type A and Type B. FeliCa Networks (capital composition: Sony Imaging Products & Solutions accounts for about 57%; NTT DoCoMo about 38%; and East Japan Railway Company about 5%), which is the FeliCa chip developer, formed business alliances with NXP (currently QUALCOMM in the US; QUALCOMM acquired NXP in October 2016) in the Netherlands which supplies chips of Type A and Type B and with Samsung to jointly develop a chip combining the three types: NFC-F, Type A, and Type B since 2012. The outcome led to the incorporation of FeliCa chips into iPhones 7. Shared Research thinks that the high-speed processing capability (within a processing time of 0.1 second of automatic wickets, which is about 1/50 of processing time of Type A and Type B) of FeliCa (NFC-F) played a crucially important role for deciding to incorporate FeliCa chips into iPhones 7. That is, Type A and Type B do not allow passengers to smoothly pass through Japanese automatic wickets. That said, iPhones 7 sold in Japan allows the electronic payment service only in Japan. FeliCa chips are manufactured by Dai
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Nippon Printing Co., Ltd. (TSE1: 7912) that owns over 50% of IWI shares. In March 2017, besides, DNP started selling cards that allow non-contact IC payment in and outside Japan (i.e. cards compatible with all the transmission methods: NFC-F in Japan and NFC-A and NFC-B outside Japan).
*7 Mobile POS POS systems using tablet terminals and smartphones. Making existing POS terminals work in conjunction with tablet terminals or replacing existing POS terminals with tablet terminals allows reduction in initial investment.
Clients
The company’s main clients are credit card companies and other financial institutions (securities firms, banks, non-bank consumer finance companies). In FY06/18, the company’s top-two clients were Mitsubishi UFJ NICOS (18.3% of sales) followed by Dai Nippon Printing (14.0% of sales). In FY06/19, its top-two clients were Dai Nippon Printing (13.8% of sales) followed by Mitsubishi UFJ NICOS (6.5% of sales).
Suppliers
The company’s main offering is software and services that it develops, however the company does act as an agent for some software packages (see the Business description section).
Barriers to entry
Barriers to entry surrounding the company’s main business (credit card processing network) are relatively high. The largest challenge that a potential entrant would have to overcome would be technological: recreating the company’s 24/7 fault tolerant NET+1 computer system.
Another potential barrier to entry is the existing depth of the market penetration—the NET+1 system is already used by 70% of all major credit card companies and the benefits for existing users should be very significant to justify switching to a new system, something that could be hard for a competitor to offer.
Barriers to entry for the company’s other products types (security and systems-related) are relatively high due to the costs and time required to develop similar technologies.
Competition
In terms of Retail Banking Online Systems, the company’s product offering is relatively unique, and its dominant position in Japan’s credit card transaction network means that there the direct competitors are few. Few companies that offer competing solutions are worth mentioning. In credit card systems, TIS Inc. (TSE1: 3626) developed a large-scale integrated package (both back- and front-end) for JCB Co. In an approach unique for the Japanese back-end systems, the TIS’ system is based on UNIX platform.
Japan Research Institute, Ltd. (Unlisted) has extensive experience in credit card systems. It is 100% owned by the Sumitomo Mitsui Financial Group (TSE1: 8316) and is its official systems purveyor.
Substitutes
There are few substitutes for the company’s core product (NET+1) or the company’s security products. Both the credit card network and security detection and prevention can be considered essential to the company’s clients.
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Strengths and weaknesses
Strengths
◤ Dominant position in the front-end credit card market: The company claims a high market share (70% of the front-end processing of the major credit card companies). This means stable maintenance and repeat order cash flows, allowing IWI to explore new avenues of growth while leveraging its sales network to deliver new products and services to its established client base.
◤ Cooperation with DNP: seems apparent that the relationship with DNP holds significant promise for IWI. The clout of DNP’s financial strength and its vast relationship network could mean substantial growth opportunities if utilized skillfully. Shared Research thinks that a couple conditions need to be met for this strength not to become an Achilles heel. First, IWI must sustain its independent status and develop its own flexible and profitable agenda in the alliance, without succumbing to a large bureaucracy that inevitably characterizes firms the size of DNP. Second, any projects that IWI undertakes with DNP must have a time frame and a cash flow profile optimal for a smaller and younger company such as IWI. In simple terms, this means that joint projects must come in easy-to-digest sizes and have high ROI.
Weaknesses
◤ Small size in the market where size matters: The biggest revenue drivers are currently linked to large projects of which IWI is a small part, the company is unable to provide prime contractor level large-scale system integration. That makes it difficult for IWI to develop a truly independent long-term strategy. At the same time, this is a situation when the weakness can lead to cultivating a new strength as the management is focused on developing packaged software and service solutions for growth.
◤ Relatively weak sales channels when it comes to distributing small scale packaged software to numerous, especially non-financial clients (e.g., security packages): IWI cultivated relationships with a few financial institutions but increasingly needs a more broad-and-shallow distribution network suitable for selling packaged software, software-as-a-service, and distributed service solutions to new client types. To some extent, this weakness might be partially manifesting itself in a fact that the most promising area for the company, the Security Systems, is currently the least profitable. The company’s ability to sell overseas is also an area of weakness. While the company feels that its products could be competitive internationally, particularly in Asia, building the channels is costly, time consuming, and fraught with challenges.
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Historical performance and financial statements
Historical performance
1H FY06/21 results (out February 3, 2021) Summary
▷ In 1H FY06/21, the company reported sales of JPY5.2bn (+5.7% YoY), operating profit of JPY406mn (+10.0% YoY), recurring profit of JPY421mn (+17.0% YoY), and net income of JPY286mn (+20.5% YoY). In terms of 1H results, sales achieved a record high as performance in business categories such as hardware and cloud services was strong. Order backlog at end-1H was JPY5.7bn (-1.7% YoY). Included in this figure is order backlog associated with system development projects amounting to JPY2.1bn (+10.8% YoY). ▷ Progress versus plan: 1H sales and profits all exceeded the company’s initial 1H FY06/21 targets, with progress rates of 105.0% for sales, 106.7% for operating profit, 105.3% for recurring profit, and 102.0% for net income. Q1 results were affected by delays in system development projects, but these projects steadily caught up with the plan in Q2. Although the amount recorded was not large, the company noted that another factor contributing to the strong performance was its early Q2
recording of hardware sales originally anticipated in Q4. The 1H results gave the company 47.7% of its full-year target for sales (versus 45.5% of full-year FY06/20 results in 1H FY06/20), 35.3% for operating profit (35.6%), 35.4% for recurring profit (33.5%), and 34.8% for net income (31.1%). ▷ Full-year company forecast: The company made no changes to its forecast. In 2H, there is a possibility IWI will have to book some sales later than expected due to client circumstances in light of the COVID-19 pandemic, but it does not expect this to have a substantial impact on its full-year results. However, the company expects a greater concentration of results in Q4
FY06/21 than in typical fiscal years and will focus on expanding orders in 2H because it was not able to completely confirm orders to meet the sales target of JPY11.0bn for FY06/21 by end-1H. ▷ Sales rose 5.7% YoY. By category, sales reached JPY2.4bn (-5.3% YoY) for system development, JPY647mn (+6.8% YoY) for maintenance, JPY209mn (+16.8%) YoY for in-house packaged products, JPY470mn (+20.5% YoY) for cloud services, JPY872mn (+28.2% YoY) for hardware, JPY240mn (+152.6% YoY) for third-party packaged products, and JPY369mn (-16.1% YoY) for security measure products. The company conducted system development work to update FEP and fraud detection systems for major credit card companies and system vendors and add features to existing systems. It also sold hardware, with sales up 28.2% YoY due to sales of servers 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 152.6% YoY. As planned, the cloud services business reported sales that were 20.5% higher YoY. Although system development sales declined 5.3% YoY, the progress was essentially in line with the plan laid out at the beginning of FY06/21. In the data security business, sales of third-party packaged products were weak, resulting in a YoY drop in sales of 16.1%. ▷ Operating profit rose 10.0% YoY: System development work is proceeding as planned and no unprofitable projects have arisen thanks to thorough quality management. Sales of hardware and third-party packaged products increased. Sales in the data security business declined, but expenses fell, so the losses narrowed. As a result of these developments, overall operating profit grew 10.0% YoY. The gross profit margin fell 0.4pp YoY to 26.5% and the SG&A ratio fell 0.6pp YoY to 18.8%. As a result, the
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operating profit margin rose 0.3pp YoY to 7.7%. The company indicated that employee awareness regarding the importance of raising profitability was on the rise.
▷ Recurring profit rose 17.0%: Non-operating compensation expenses declined from JPY30mn in 1H FY06/20 to JPY5mn in 1H
FY06/21.
▷ Order volume and backlog: Orders in 1H amounted to JPY5.6bn (+3.7% YoY). In Q2 (October‒December 2020), orders fell 15.1% YoY, but this decline was primarily due to the dropout of the new, large-scale orders recorded within the cloud service business in Q2 FY06/20. The total order backlog (JPY5.7bn) was down 1.7% compared to end-1H FY06/20, but the order backlogs for both system development (+10.8% compared to end-1H FY06/20; see above) and hardware the company expects to record for sales in 2H are steadily growing YoY. ▷ Impact of COVID-19: IWI develops and operates systems that are indispensable for credit card transactions. It understands its duty to society and runs its business with the appropriate and necessary equipment and systems in place to maintain operations. To prevent the spread of COVID-19, the company is closely watching the health of its employees, has work-from-home and staggered work hour arrangements, and has limited domestic and international business trips. The COVID-19 pandemic had no impact on 1H earnings.
Segment consolidation
▷ From FY06/21, IWI has combined its two reporting segments, Financial Systems Solutions and Product Solutions, into a single segment. ▷ The aim is to facilitate further growth by strengthening the base to drive marketing and product development in the two businesses. Customer information that was previously managed separately will be shared to improve marketing activities. The company will also improve systems for developing security technology and work to develop new products and services. It
changed its organizational structure as of July 1, 2020, and the reporting segment changes came into effect on that date accompanying changes to the business management structure.
Business activities
▷ IWI primarily develops front end processing (FEP) systems that provide network connection, card usage authentication, and other functions necessary to complete credit card payment processing for its customers, mainly credit card companies. When it develops a new FEP system, the company may, for example, receive sales revenue under the in-house packaged products category from selling its proprietary product NET+1, which is the core of the system; systems development sales as the company’s engineers customize the package to suit the customer’s requirements; hardware sales from selling the servers which have the software the company has developed installed; and sales from maintenance of the systems, which comprise software and hardware. ▷ The company also sells products to prevent internal data leaks for companies (in-house packaged products) and third-party cybersecurity products (third-party packaged products).
External operating environment
▷ Conditions were tough for the Japanese economy due to the COVID-19 pandemic in 1H FY06/21. Despite languishing consumer spending on services such as restaurants and accommodation, the overall outlook is brightening.
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▷ The volume of credit card shopping transactions for major credit card companies has remained below year-earlier levels since September 2020, but the YoY comparisons are improving on a monthly basis. ▷ There has been no significant impact on the company’s performance as of end-1H, but if circumstances in the credit card industry, which is primarily where IWI operates, start to affect the capex plans of individual credit card companies, there might be an impact on the company’s FY06/21 forecast and medium-term plan. ▷ The company is responsible for the development and operation of systems that provide indispensable credit card payment functions. It understands its societal duty, and runs its business with the appropriate and necessary equipment and systems in place to maintain operations. To prevent the spread of COVID-19, the company is closely watching the health of its employees, has work-from-home and staggered work hour arrangements, and has limited domestic and international business trips.
Trends by client company (top three) ▷ The company’s top-three client companies in terms of sales are led by Dai Nippon Printing (DNP), which accounted for a total of JPY868mn in sales (-JPY246mn versus previous term) generated by the company’s TSP development, smartphone payment processing, round-the-clock system operations services, and payment processing platform. The second largest client was a credit card company that accounted for JPY662mn in sales (+JPY426mn) from network connection services. The third largest client was a systems development company that accounted for JPY551mn in sales (+JPY427mn) from IWI’s front-end
processing and fraud detection services for use in a credit service operated by a telecommunications service provider. ▷ Although IWI saw sales to DNP, its largest client, decline YoY, the shortfall there was effectively offset by increases in sales to the systems development company and major credit card company, and total sales from the company’s top three clients
amounted to JPY2.1bn (+41.2% YoY).
Cloud Services ▷ Reflecting the company’s all-out push to expand in this area, 1H sales derived from cloud services came in at JPY470mn, up JPY80mn YoY. At the gross profit level, the cloud service business reported a loss of JPY49mn, larger than both the projected loss of JPY24mn and the year-earlier loss of JPY8.4mn. 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. Another reason for the YoY expansion in loss was an increase in variable costs stemming in part from higher data center usage fees.
In Q1, the company reported a loss of JPY37mn, larger than its forecast of JPY14mn. In Q2 (October–December 2020),
loss amounted to JPY12mn, versus the company’s JPY10mn forecast.
IOASIS (merchant acquiring service): Having received orders from five large regional banks that operate their own credit
card businesses, and services for the fifth started in October 2019, IOASIS will make 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 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 said it has received requests for proposals from multiple companies and, having
already finalized proposals for a number of these, expects to get to the contract-signing stage for a number of contracts.
At this pace, the company said it might be able to expand its IOASIS client base from five companies at present to as many
as 10 companies within the next one to two years.
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IFINDS (credit card fraud detection ASP service): With three client companies onboard, operations holding steady at this
time but, 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 and is expecting at least some of these to lead to new contracts.
IGATES (OnCore Switch): The company currently has four client companies onboard (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, the company is also 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.
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 a subscription-type
services to regional banks looking to give their accountholders loyalty points whenever they use their bank-issued debt
cards. The first company to implement this system began contributing to sales in Q2.
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 ecommerce-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.
Security products
▷ New threats are being generated on a daily basis as teleworking and the use of cloud technology spread and social environments change substantially. These circumstances have given rise to the need for a zero-trust approach to security,
which involves forming security measures based on the assumption that intrusions from external sources will inevitably happen. ▷ IWI’s solution is a brand-new technology that protects against unknown attacks. Many conventional products that are already on the market guard against known attack threats by consistently updating and reading their pattern files. The solution offered by the company is a product (MORPHISEC; made in Israel) that protects against unknown threats by incorporating logic that renders pattern file updates unnecessary. At present, products such as these are generating an extremely high level of interest due to their scarcity on the market. The company’s solution is highly compatible with Microsoft Defender (standard anti-virus software packaged with the Windows OS), and the company says using the two products in tandem enhances security. ▷ In addition to product sales, the company is considering the possibility of providing security solutions through cloud services. It already provides products for the financial industry through cloud services to address the diverse needs of that industry. The company is also building a security integration platform that will facilitate the provision of security products as services, in addition to delivering them through conventional sales.
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IWI’s perspectives on 2H and the more distant future
▷ The company has made no changes to its FY06/21 forecast. In 2H, there is a possibility IWI will have to book some sales later than expected due to client circumstances in light of the COVID-19 pandemic, but it does not expect this to have a substantial impact on its full-year results. 1H results exceeded the company’s projections, but it nevertheless expects a greater concentration of results in Q4 than in typical financial years. The company said it will focus on expanding orders in 2H because it was not able to completely confirm orders to meet the sales target of JPY11.0bn for FY06/21 by end-1H. ▷ Broadly categorized, corporate orders acquired by system development providers like the company break down into orders related to operating expenses (OPEX) of the purchasing company and orders related to capital investment (CAPEX). Currently, the company is facing the risk that payments associated with CAPEX could be delayed due to deterioration in business results at client companies due to the COVID-19 pandemic. However, orders for small OPEX-related projects are increasing. The company has secured orders that will generate sales in Q3. In Q4, the company will aim to steadily acquire projects (primarily those involving hardware and software sales) that will generate sales quickly following order acquisition. ▷ With regard to cloud services, which are a key growth driver, the company thinks that compensating for a one-off expense of about JPY20mn incurred in Q1 to address system failures will be difficult in 2H (cloud service loss in FY06/21 may exceed the company’s forecast of JPY75mn). Even if the company acquires orders for several projects concerning which it is currently negotiating in 2H, corresponding sales and profit will not be recorded until FY06/22 or later. ▷ With regard to front-end processing (FEP) systems, the company is responding to an increase in customer credit card transactions by proposing on-premise systems that utilize open-source hardware and software, in addition to on-premise systems operated using universal operating systems. The company is also capable of providing new participants in the credit
card business with cloud services that enable them to launch services quickly while maintaining flexibility. In summary, the company fulfills customer needs through three forms of service: development of on-premise systems using universal operating systems, development of on-premise systems using open-source operating systems, and cloud services. Major credit card
companies that handle credit settlement are encountering expansion in capital investment burdens caused by co-branded card systems and other complicated systems. Accordingly, the company thinks that in some cases, these companies may begin outsourcing some operations that have previously been handled internally. IWI indicates that it will attempt to use its cloud
services to take advantage of such opportunities.
Q1 FY06/21 results (out November 4, 2020) Overview
▷ For Q1 FY06/21, the company received orders worth JPY3.1bn (+27.2% YoY) and reported sales of JPY2.3bn (-4.9% YoY), operating profit of JPY134mn (-4.8% YoY), recurring profit of JPY129mn (-8.8% YoY), and net income of JPY84mn (-8.3% YoY). The company left a period-end order backlog of JPY6.1bn (+14.2% YoY).
The steady rise in orders and the order backlog reflects the rapid growth demand (seen since the start of 2020) for the
company’s fraud detection services for digital transaction processing and for systems designed to prevent leaks of
confidential information in a teleworking environment, and was further aided by the rollout of new cybersecurity products
and services.
On the earnings front, IWI continued working to improve its QCD metrics and boost employee consciousness of the
bottom-line.
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The company’s efforts during the quarter reflected its keen awareness of the important part that the creation of new
businesses and establishment of global partnerships play in its overall efforts to accelerate growth in both its top and
bottom line. ▷ Progress versus plan: The company characterized Q1 results as being almost in line with plan. While both sales and operating profit were down, with sales finishing down 4.9% YoY and operating profit down 4.8% YoY, orders received during Q1 were up 27.2% YoY. The company’s strong marketing push brought hardware orders in on plan and system development orders in above year-ago levels. The period-end order backlog was up 14.2% YoY and up 14.3% versus end-FY06/20. Included in the order backlog total are system development orders of JPY2.1bn (up 16.5% YoY and up 19.0% versus end-FY06/20) and hardware/other orders of JPY2.1bn (up 35.6% YoY and up 33.4% versus end-FY6/20).
Compared with its 1H FY06/21 targets, Q1 results gave the company 46.0% of its 1H target for sales (versus 48.7% of 1H
FY06/20 results), 35.4% for operating profit (38.3%), 32.1% for recurring profit (39.1%), and 29.9% for net income
(38.4%).
Compared with its full-year targets, Q1 results gave the company 20.9% of its full-year target for sales (versus 22.1% of 1H
FY06/20 results), 11.7% for operating profit (13.6%), 10.8% for recurring profit (13.1%), and 10.2% for net income
(12.0%). ▷ Sales: The 4.9% YoY decline in Q1 sales was attributed to customer requests to push out the completion of a number of small system development projects. With this moving a total of roughly JPY100mn in sales from Q1 into Q2, Q1 sales from system
development work came in below the company’s initial projection and were down YoY. Sales in other categories were largely on plan; the decline in hardware sales was also as expected.
By category, sales reached JPY1.1bn (-11.0% YoY) for system development, JPY315mn (+4.7% YoY) for maintenance,
JPY144mn (+48.5%) YoY for in-house packaged products, JPY224mn (+25.8% YoY) for cloud services, JPY208mn (-41.1%
YoY) for hardware, JPY110mn (+80.3% YoY) for third-party packaged products, and JPY181mn (+4.6% YoY) for security
measure products. ▷ Operating profit: The 4.8% YoY decline in Q1 operating profit reflected the drop in sales from system development work and a temporary increase in expenses at its cloud services business incurred in connection with systems restoration work necessitated by an unexpected system failure. The systems restoration-related costs put spending roughly JPY20mn over budget but the problems have been fully resolved; if not for this one-time increase in costs, Q1 operating profit would have finished up
roughly 9% YoY. In terms of margins in Q1, OPM was flat at 5.8%, GPM of 25.6% declining 0.1pp YoY but this being offset by a decline in the SG&A ratio, which at 19.8% was also down 0.1pp YoY. ▷ Full-year company forecast: With sales and earnings running comfortably on plan, the company made no changes to its forecasts for 1H and full-year sales and earnings. ▷ Impact of COVID-19: IWI develops and operates systems that are indispensable for card payments. It understands its duty to society and runs its business with the appropriate and necessary equipment and systems in place to maintain operations. To prevent the spread of COVID-19, the company is closely watching the health of its employees, has work-from-home and staggered work hour arrangements, and has limited domestic and international business trips. The coronavirus pandemic had no impact on Q1 earnings.
Segment merger
▷ At the beginning of FY06/21, IWI combined its two reporting segments, Financial Systems Solutions and Product Solutions, merging them into a single segment.
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▷ With this move the company is looking to facilitate further growth by strengthening the base to drive marketing and product development in the two businesses. Customer information that was previously managed separately will be shared to improve marketing activities. The company will also improve systems for developing security technology and work to develop new products and services. The changes in the company’s organizational structure went into effect July 1, 2020, with the changes in reporting segments coming into effect on that date along with the changes to its business management structure.
Business activities
▷ IWI primarily develops front end processing (FEP) systems that provide network connection, card usage authentication, and other functions necessary to complete credit card payment processing for its customers, mainly credit card companies. When it develops a new FEP system, the company may, for example, receive sales revenue under the in-house packaged products category from selling its proprietary product NET+1, which is the core of the system; systems development sales as the company’s engineers customize the package to suit the customer’s requirements; hardware sales from selling the servers which have the software the company has developed installed; and sales from maintenance of the systems, which comprise software and hardware. ▷ The company also sells products to prevent internal data leaks for companies (in-house packaged products) and third-party cybersecurity products (third-party packaged products).
Operating environment
▷ Conditions were tough for the Japanese economy due to COVID-19 in Q1 FY06/21, but the company thinks that they are starting to look up as economic activities gradually resume. Despite languishing consumer spending on services such as
restaurants and accommodation, the overall outlook is brightening. ▷ The volume of credit card shopping transactions for major credit card companies has been below year-earlier levels since March 2020, but the YoY comparisons are improving on a monthly basis. ▷ IWI expects the trend of increasing credit card use to persist due to measures such as the government’s policies to stimulate consumption. However, if circumstances at individual credit card companies start to affect their capex plans, there is a risk that this could impact the company’s forecast for FY06/21 as well as its medium-term business plan. ▷ The company is responsible for the development and operation of systems that provide indispensable card-payment functions. It understands its societal duty, and runs its business with the appropriate and necessary equipment and systems in place to maintain operations. To prevent the spread of COVID-19, the company is closely watching the health of its employees, has work-from-home and staggered work hour arrangements, and has limited domestic and international business trips. The coronavirus pandemic had no impact on Q1 earnings.
Change in senior management
▷ The company made changes in its senior management team in September 2020, moving Tsukasa Iseki out of his position as CEO/representative director to the position of chairman/representative director, and moving Kunimitsu Sato into the position of CEO/representative director, these changes being with the stated aim of increasing the company’s enterprise value. ▷ At the Q1 FY06/21 results presentation meeting held on November 6, 2020, the new CEO introduced himself and talked about his aspirations with respect to the company, as detailed below. (Note: Quotation marks denote remarks from Mr. Sato given in first person voice. Original remarks were given in Japanese.)
“Prior to being appointed a representative director of IWI in September 2019, I was with Dai Nippon Printing, where I was
mainly engaged in the development of new businesses using ICT. After DNP acquired IWI and made it a subsidiary in
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2010, I was put directly in charge of IWI. With DNP being on the receiving end of support from IWI for the launch of
various new businesses I was involved in at DNP, I came to recognize IWI’s outstanding technological capabilities. I am
thus very pleased to assume the position of CEO of IWI at this time and will do my best to live up to the expectations of
shareholders and investors.”
“With respect to my accomplishments at DNP, during the 2000s I was in charge of its IC card business, where we focused
on promoting the use of IC cards in Japan. I was involved with the planning and development of IC cards for a number of
different applications, including cards for commuter passes, electronic money, credit cards, employee ID cards—all of
which were just starting to switch over to IC cards during that timeframe. At the same time, I was involved in the launch
of new businesses in the payment settlement field, such as payment verification services and mobile payment services
using IC card technology. Since then, I have worked on the development of new businesses in other areas, such as
security, IoT, and digital marketing. Outside Japan, I have also been actively working with various partner companies
around the world, visiting a total of 24 different countries in the course of business and traveling abroad regularly for talks
about creating new businesses in Japan. In my current position, I believe I can put this experience to good use here at IWI
and help it grow its businesses.”
“Foremost in my mind at this time is the task of accelerating growth at IWI. Towards this end, I am targeting sales five
years hence of JPY15.0bn along with an operating profit margin of 15%.* To improve profitability, IWI will need to shift its
main source of revenue to services and move away from its current dependence on contract systems development work,
thereby changing its underlying business model from a flow-based business model to a recurring revenue-based model.”
(*Shared Research note: This compares with FY06/20 sales of JPY10.9bn and OPM of 9.5%.)
Specifics of business strategy
▷ Cloud services business: The company is looking to continue expanding in this area with the aim of increasing its stable stream of earnings derived from operating services-type businesses. Since the cloud allows operations in any country, IWI will work to
expand globally. Another benefit of being a cloud service provider is it will lead to the creation of a kind of ecosystem, as in the process of integrating its own services in the cloud with those from other advanced service providers. IWI believes it will be able to further enhance its own service offering, developing more advanced services and thereby creating new value. ▷ New businesses involved in cashless payment systems: Along with the spread of cashless payment systems, the company sees opportunities for not only expanding its existing businesses but also creating the new businesses that will serve as major drivers of growth in the future. In particular, the company will be focusing its efforts on creating new businesses that can use its proprietary high-speed network technology to help open up new markets.
New businesses using Field-Programmable Gate Array (FPGA) technology: FPGA technology is already being put to use in
such applications as 5G telecommunications systems and self-driving vehicles; IWI has developed and has already started
selling FPGA-based solutions for the broadcasting industry. IWI is actively working to establish more FPGA-based services,
not only for applications in the financial services market but in other markets as well.
New businesses using AI technology: As to developing new businesses using AI-based information analytics, the company
is already working with parent DNP. IWI wants to step up its efforts so as to create businesses that combine high-speed
networks and with AI. ▷ Expanding cybersecurity business: IWI has been involved in the cybersecurity business for many years, but it is looking to expand further in this field with its main push being centered on so-called “zero trust” cybersecurity systems.
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▷ Synergy with Dai Nippon Printing (DNP): IWI plans to work further with parent DNP to create new synergies. IWI will provide DNP with its technological expertise in IT infrastructure and help promote DNP’s efforts of digital transformation. Since IWI’s strength is that it has its own technologies and products, the company believes its meaning of existence is to contribute to the society through the development of competitive products. ▷ Support businesses for social infrastructure and systems used in non-competitive fields: IWI has long been involved in businesses that anticipate broader societal and industry needs and provide new value to meet those needs; examples include the infrastructure underlying the high-speed processing networks that support the backbone of settlements and securities companies, systems for detecting/preventing fraud and unauthorized use, and systems to prevent unauthorized access to and leaks of confidential information. IWI believes it is essential to continue anticipating needs and creating new value for customers and, towards this end, is looking to create still more platforms and systems that can make use of its high-speed network processing technology. The company believes it needs to play a role in supporting the functioning of social infrastructure and computer systems used in non-competitive fields, and make this endeavor a driver for further growth.
Trends by client company (top three) ▷ The company’s top-three client companies in terms of sales are led by Dai Nippon Printing (DNP), which accounted for a total of JPY423mn in sales (down JPY180mn versus previous term), including payments for IWI’s round-the-clock system operations services and payment processing platform. The second largest client was a systems development company that accounted for
JPY297mn in sales (up JPY246mn) from IWI’s front-end processing and fraud detection services for use in a credit service operated by a telecommunications service provider. The third largest client was a credit card company that accounted for JPY191mn in sales (up JPY199mn) from network connection services. ▷ Although IWI saw sales to DNP, its largest client, decline YoY, the shortfall there was effectively offset by increases in sales to systems development companies and major credit card companies.
Cloud Services ▷ Reflecting the company’s all-out push to expand in this area, Q1 sales derived from cloud services came in at JPY224mn, up JPY46mn YoY and in line with plan. At the gross profit level, the cloud service business reported a loss of JPY37mn, larger than
both the projected loss of JPY14mn and the year-earlier loss of JPY8mn. The company explained that 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.
IOASIS (merchant acquiring service): Having received orders from five large regional banks that operate their own credit
card businesses, and services for the fifth started in October 2019, IOASIS will make 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 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 said it has received requests for proposals from multiple companies and, having
already finalized proposals for a number of these, expects to get to the contract-signing stage for a number of contracts
during the course of Q2 (October–December 2020). At this pace, the company said it might be able to expand its IOASIS
client base from five companies at present to as many as 10 companies within the next one to two years.
IFINDS (credit card fraud detection ASP service): With three client companies onboard, operations holding steady at this
time but, with the growth in e-commerce and the incidence of fraudulent transactions on the rise because legacy fraud
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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.
IGATES (OnCore Switch): The company currently has two client companies onboard 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. During
the second half, IWI expects to add a third and a fourth client company for IGATES and also sees contributions to sales
from these new clients. In addition, the company is also 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.
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 a subscription-type
services to regional banks looking to give their accountholders loyalty points whenever they use their bank-issued debt
cards.
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 ecommerce-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.
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Joint use of front systems ▷ To grow its business over the long term, IWI must constantly look ahead and develop products and services that will meet client company needs five to 10 years in the future. One such service concept is front systems that can be shared by multiple companies. ▷ In the past, IWI provided credit card issuers with always-on servers and its proprietary NET+1 software as a package for on-premise systems linked to the client company’s own data centers. However, with these systems becoming increasingly costly for individual companies to install and maintain on their own, IWI has taken it upon itself, as the domestic market leader in this field, to provide the more economical alternative of using of its front system and its data center under a subscription-type service contract, thereby allowing client companies to share the use of front systems. After that, IWI plans to push ahead with the development of a network connection system and authorization system for front systems based on open source software (i.e., Linux OS).
Full-year FY06/20 results (out August 5, 2020) Summary
▷ In FY06/20, the company reported parent sales of JPY10.9bn (+4.6% YoY), operating profit of JPY1.0bn (+12.5% YoY), recurring profit of JPY1.1bn (+12.7% YoY), and net income of JPY762mn (+11.4% YoY). ▷ Performance versus plan: Sales achieved 103.0% of the company’s full-year target, operating profit 103.6%, recurring profit 103.3%, and net income 105.8%. ▷ Sales: The 4.6% YoY rise in parent sales reflected a combination of higher sales at the Financial Systems Solutions segment (up 5.6% YoY and 4.9% above plan) and lower sales at the Product Solutions segment (down 3.9% YoY and 11.4% below plan). The sales growth at the Financial Systems Solutions segment was driven by hardware sales and cloud services. Sales of
proprietary packaged software were down but this was due not to changes in business conditions but rather to tough comparisons with elevated sales levels in FY06/19, when the company booked multiple sales of packaged software in conjunction with the progress of its work on systems development projects. The decline in sales at the Product Solutions
segment was attributed in part to delays in booking sales of proprietary products under projects that were pushed out into FY06/21 as a result of disruptions caused by the COVID-19 pandemic. ▷ Operating profit: The 12.5% YoY rise in parent operating profit was driven by the Financial Systems Solutions segment, where operating profit was up 26.2% YoY and 17.1% above plan. Profitability improved thanks to solid growth at its software development business (which further benefited from the absence of unprofitable projects) and higher sales at its cloud services business. Increased hardware sales (as detailed under segment results below) also contributed to higher profit. The Product Solutions segment reported an operating loss of JPY88mn (versus profit of JPY31mn in FY06/19) as its gross profit margin was squeezed by higher percentage of sales of low-margin products from third-party vendors. The gross profit margin rose 0.4pp YoY to 27.3% and the SG&A ratio fell 0.3pp YoY to 17.8%. As a result, the operating profit margin improved 0.7pp YoY to 9.5%. ▷ Dividend forecast: For FY06/20, the company plans to pay an annual dividend of JPY10 per share, an increase of JPY1 over FY06/19.
External operating environment
▷ In FY06/20, the company’s external operating environment took a turn for the worse as what had been a slowly expanding domestic economy turned decidedly down as the COVID-19 pandemic hit the shores of Japan.
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▷ Businesses hit by the pandemic included major credit card companies, which saw their monthly transaction volumes fall sharply below year-ago levels in the months of March, April, and May 2020. ▷ Statistics from Ministry of Economy, Trade and Industry released on April 1, 2020 show credit card transactions totaling JPY1.4tn between October 1, 2019 and December 2, 2019, with this figure rising to JPY4.6tn by March 16, 2020. In October 2019, the Japanese government put in place the “cashless point rebate” to encourage greater use of cashless payment systems. This system ended on June 30, 2020. From October 2019 to April 2020, merchants participating in the program saw the proportion of their sales paid for using some form of cashless payment system rise from roughly 26% to 33%. As in the past, credit cards were the preferred form of cashless payment, accounting for more than 60% of all cashless transactions among merchants participating in the program. ▷ While the pandemic led to fewer credit card transactions at physical stores, credit cards use in online shopping appears to be on the rise, with credit card transaction volume expected to continue to expand as a portion of consumer spending moving forward. ▷ Despite the sudden changes in its external operating environment, the company’s businesses were robust in Q4 and were largely in line with its initial expectations. The pandemic reduced sales only modestly as part of projects that been expected to be finished by end-FY06/20 were pushed out into FY06/21.
Impact of the COVID-19 pandemic
▷ IWI estimates that the pandemic reduced FY06/20 sales by some JPY88mn, pushing these sales into FY06/21. ▷ The company said the pandemic did not materially hinder its production (development) activities, but some of its marketing activities were stalled and the impact drags on into the first part of FY06/21 (causing it to make significant changes to the assumptions underlying its medium-term business plan).
Recent financing activities The company reached an agreement with major financial institutions to supply it with a line of credit totaling JPY4.2bn.
Trends by client (top three companies)
▷ FY06/20 sales to the top three corporate clients (in order) are as follows: Dai Nippon Printing (DNP) accounted for sales of JPY2.3bn (including smartphone payment and payment platforms; +JPY318mn YoY). A credit card company accounted for sales of JPY832mn (network connection; +JPY148mn YoY), and a systems development company accounted for sales of
JPY740mn (network connection; +JPY427mn YoY). ▷ IWI and DNP run a joint payment business and have been winning orders for new projects for credit card payment systems and smartphone payment systems. The sales to a credit card company were for development work on a front-end processing system designed to facilitate QR code-based transaction processing and respond to the consumption tax hike. The sales to a systems development company reflected renewals of access contracts to IWI’s NET+1 network, including equipment sales to major companies in the industry.
Results by segment Financial Systems Solutions segment In FY06/20, the Financial Systems Solutions segment reported full-year sales of JPY9.9bn (+5.6% YoY) and operating profit of JPY1.1bn (+26.2% YoY).
▷ The top-line gains were driven in large part by development projects for existing clients. ▷ Sales from software development were JPY5.8bn (+2.2% YoY).
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▷ Hardware sales were JPY1.5bn (+33.9% YoY). The growth in hardware sales reflected replacement orders in Q4 for servers used in its frond-end processing (FEP) systems, a number of which were approaching the end-date for support by the manufacturer. The company is expecting still more replacement orders of this type in FY06/21. ▷ Sales at the cloud services business were JPY828mn (+30% YoY), aided by the startup of services for new clients, as detailed below. ▷ Sales of proprietary packaged software were JPY226mn (-53.9% YoY). The decline in sales reflected not a change in business conditions but rather tough comparisons with elevated sales levels in FY06/19, when it booked multiple sales of packaged software in conjunction with the progress of its work on systems development projects. NET+1, the company’s flagship internally developed software, is a core product of the company’s front-end processing (FEP) system, and is utilized in new or replacement FEP projects. In FY06/19, the company booked sales of proprietary packaged software for FEP systems made to multiple customers. Normally, sales are recorded based on the progress of their respective projects. ▷ The rise in operating profit was attributed to improved profitability supported by solid growth at its software development business (which also benefited from the absence of unprofitable projects) and rising sales at its cloud services business. The sharp jump in hardware sales also contributed.
Financial Systems Solutions segment: sales and operating profit
Yo Y Rate of FY06/20 Results, FY06/19 FY06/20 (JPYmn) change change Est. % of Est. Sales 9,337 9,858 521 5.6% 9,400 104.9% Software development 5,668 5,791 123 2.2% 5,960 97.2% Maintenance 1,124 1,246 122 10.9% 1,220 102.1% Hardware 1,140 1,526 386 33.9% 870 175.4% In-house packaged software 512 244 -268 -52.3% 240 101.7% Cloud services Third-party packaged software 254 220 -34 -13.4% 310 71.0% Operating profit 890 1,124 233 26.2% 960 117.1% Operating profit margin 9.5% 11.4% - - 10.2% - Source: Shared Research based on company data
Factors driving changes in segment profit margin
▷ At the Financial Systems Solutions segment, order size can vary from one development project to another, costs may come in over-budget at different stages of the project, and the gross profit margin varies from project to project. All these factors contribute to changes in earnings at the segment as a whole. ▷ Since the company sells servers and other equipment when clients order new systems or upgrade existing systems, hardware sales also vary from project to project, and this also contributes to fluctuations in the segment’s overall profit margin.
Product Solutions segment In FY06/20, the Product Solutions segment reported full-year sales of JPY1.1bn (-3.9% YoY) and an operating loss of JPY88mn (versus profit of JPY31mn in FY06/19).
▷ Segment sales are a combination of sales of its own proprietary CWAT system (to prevent internal data leaks) and sales of third-party cybersecurity software products. ▷ Sales of proprietary products finished down, as some sales that had been expected to be finalized in FY06/20 were pushed out into FY06/21, having been delayed by the disruptions caused by the COVID-19 pandemic. Sales of third-party products rose
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YoY, but the segment reported an operating loss due to higher percentage of sales of low-margin products from third-party vendors.
Product Solutions segment: sales and operating profit
Yo Y Rate of FY06/20 Results, FY06/19 FY06/20 (JPYmn) change change Est. % of Est. Sales 1,106 1,063 -43 -3.9% 1,400 76.0% Software development 72 53 -19 -26.4% 45 117.8% Maintenance 282 276 -6 -2.1% 260 106.2% Hardware 82 44 -38 -46.3% 55 80.0% In-house packaged software 133 89 -44 -33.1% 145 61.4% Third-party packaged software 534 600 66 12.4% 895 67.0% Operating profit 31 -88 -119 - 40 -
Operating profit margin 2.8% -8.2% - - 2.9% - Source: Shared Research based on company data
Operating profit by segment
(JPYmn) Product Solutions Financial Systems Solutions Operating profit (cons.) 700
451 500 406 275 180 181 59 210 246 228 217 300 49 129 177 198 46 78 71 141 431 38 61 104 391 304 286 100 -15 225 208 239 164 131 103 213 142 53 164 107 105 -48 -36 -46 -14 -22 -100 -29 -34 -25 -66 -59
-300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY06/17 FY06/18 FY06/19 FY06/20
Source: Shared Research based on company data
Cloud services
▷ The company reported steady growth at all three of its existing cloud services, IOASIS (merchant acquiring service), IFINDS (credit card fraud detection service), and IGATES (OnCore Switch for payment network connections). For further details, see the Full-year company forecast section. ▷ In FY06/20, cloud services generated sales of JPY828mn (+30.0% YoY). Amid the COVID-19 pandemic, regional banks have prioritized the aid of local companies over investment, leaving the credit card business of these regional banks slightly behind schedule. The pandemic has been impeding some of the company’s marketing efforts to win new orders for cloud services.
IOASIS (merchant acquiring service): The company received orders from five large regional banks that operate their own
credit card businesses, and services for the fifth started at the beginning of Q2 (October 2019). Following the adoption of
its IOASIS cloud service by these five major regional banks, IWI is now looking to win contracts from some of the smaller
regional banks that are under their group umbrellas (which could mean a sixth and a seventh client company by the end of
FY06/20). According to the company, it has received inquiries from several regional banks and other institutions.
IFINDS (credit card fraud detection ASP service): Three client companies are fully onboard and operations are stable. So far,
nighttime work has been impossible due to work rules on the user side, but IWI is prepared to operate 24 hours per day
365 days per year, and is actively looking to take on contracts for nighttime work.
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IGATES (OnCore Switch for payment network connections): Two client companies are fully onboard. Additionally, the
company has received inquiries from several other companies. As society becomes increasingly cashless, many companies
in different industries that are expanding new credit card businesses are looking to conduct the front-end processing of
issuing and acquiring operations through economical cloud systems, rather than through on-premises systems.
FARIS (next-generation fraud detection system): By raising processing capacity and detection accuracy through AI (which
assigns scores and flags suspicious transactions), IWI aims to handle fraud detection needs associated with expansion of
e-commerce payments. Service with its first client company for FARIS is scheduled to begin in Q2 FY06/21. In addition,
verification trials have been completed at a second company and are currently underway at a third company. 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. ▷ IWI had expected its cloud services business to finish in the black at the gross profit level in FY06/20, but ended up with a full-year loss of JPY24mn (the loss narrowed from JPY105mn in FY06/19). The loss was attributed to added expenses incurred in Q4 as a result of rate hikes by data center operators and additional spending on personnel in connection with new capex plans. ▷ In addition to its three existing cloud services, during FY06/20 IWI developed a new cloud service. Known as IPRETS, the new cloud service is a member reward points management system for debit card issuers. Service with its first client company for IPRETS is scheduled to begin in Q2 FY06/21. Medium term plans call for marketing this new system to regional banks that are looking to promote greater debit card use among their cardholders. For further details, see the Full-year company forecast
section.
Q3 FY06/20 results (out May 7, 2020) Overview
▷ For cumulative Q3 FY06/20, IWI reported parent sales of JPY7.8bn (+1.5% YoY), operating profit of JPY586mn (-13.3% YoY), recurring profit of JPY601mn (-12.7% YoY), and net income of JPY398mn (-14.7% YoY). The company’s initial FY06/20 forecast called for earnings to be weighted toward Q4. Earnings through Q3 declined
on a YoY basis as projected. However, Financial Systems Solutions profit was greater than expected, so the overall drop in profit ended up being narrower than projected. ▷ IWI has made no changes to its full-year FY06/20 forecast. Business has been strong, and the company expects Q4 performance overall to trend as forecast. By segment, the company now expects Financial Systems Solutions to surpass its sales and profit targets. In Q4, it expects replacement of hardware for its NET+1 network (mentioned later) and higher-than-expected results from cloud services (mentioned later). However, it expects Product Solutions to fall slightly short of sales and profit targets. The company is likely to complete most of its FY06/20 development projects and believes that any earnings impact from the COVID-19 epidemic will be minor. To ensure that employees are safe and systems development and operations are not halted, the company has implemented internal measures in response to the COVID-19 outbreak and allows employees to consult with customers individually. As of May 11, 2020, there was no serious trouble or negative impact on the company’s earnings. IWI recognizes revenue based on the results of client inspections, so if
those inspections are delayed, there is a risk that the booking of revenue could be delayed. However, projects in process are all relatively small, so even if such delays were to occur, the company says the impact on FY06/20 performance would be minor.
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▷ Cumulative Q3 sales achieved 73.6% of the full-year FY06/20 target (cumulative Q3 FY06/19 sales were 73.6% of the FY06/19 sales result), operating profit 58.6% (73.3%), recurring profit 57.8% (72.2%), and net income attributable to owners of the parent 55.3% (68.3%). There is a possibility that the company may be impacted in the short term by the COVID-19 pandemic (if there is a negative impact on orders in the near future, there could be a negative impact on 1H FY06/21 sales and profit). However, IWI believes there is significant potential for a positive impact in the medium term as credit card companies increase capex in step with the shift to a cashless society. ▷ Sales were up 1.5% YoY. Sales were up 1.1% YoY in Financial Systems Solutions, and up 6.5% YoY in Product Solutions. In Financial Systems Solutions, sales growth in the software development business offset a decline in sales of packaged software developed in-house. This decline did not reflect a shift in business conditions; On the contrary, it was a reactionary decline caused by the booking of sales from multiple packaged software projects and favorable progress in system development projects at the same during the previous year. Product Solutions sales were up thanks to a YoY improvement in third-party products, but sales of proprietary CWAT software were down YoY. ▷ Operating profit declined 13.3% YoY. Operating profit in Financial Systems Solutions was down 2.1% YoY as sales of high-margin proprietary development packages declined and earnings from one project for which the company booked sales in Q3 (January–March 2020) fell short of expectations. In Product Solutions, lower sales of relatively high GPM in-house products resulted in an operating loss of JPY147mn (compared with a loss of JPY73mn in cumulative Q3 FY06/19). The GPM declined by 1.2pp YoY to 25.9%, the SG&A ratio rose 0.1pp to 18.4%, and the OPM fell by 1.3pp to 7.5%.
Business environment The company indicated that the domestic economy has undergone a rapid transformation due to the spread of COVID-19, and is now in a weakened condition. Management also noted that it believed the economy could return to moderate expansion should the currently depressed demand recover as the COVID-19 outbreak dies down.
▷ According to the Ministry of Economy, Trade and Industry’s April 1, 2020 announcement, there were about 1.08mn merchants
registered under the cashless point rebate system launched in October 2019. Credit card settlements increased from JPY1.4tn
between October 1, 2019 and December 2, 2019, to JPY3.1tn by January 27, 2020.
▷ Monthly reports from major credit card companies show credit card transaction volume steadily rising YoY through February
2020. While in-store credit card transaction volume is expected to decline from March, online card use appears to be
increasing, with credit card transaction volume expected to continue to expand as a portion of consumer spending moving
forward.
▷ Despite rapid changes in the external environment, the company, which is responsible for the development and operation of
systems that provide essential card-payment functions, recognizes its social commitments, and is promoting the advancement
of its business as it upgrades the equipment and systems necessary to continue operations. Even if it is forced to severely
restrict the movement of its employees, the company’s policy is to maintain the operation of its systems using all organizational
and feasible measures possible.
Trends by client (top three companies)
▷ Cumulative Q3 sales to the top three corporate clients (in order) are as follows: Dai Nippon Printing (DNP) accounted for sales of JPY1.6bn (including smartphone payment and payment platforms; +JPY296mn YoY). A credit card company accounted for sales of JPY732mn (network connection; +JPY199mn YoY), and a systems development company accounted for sales of JPY481mn (network connection; +JPY481mn YoY).
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▷ IWI and DNP run a joint payment business and have been winning orders for new projects not only for credit card payment systems, but also smartphone payment systems. The sales to a credit card company were for development work on a front-end system designed to facilitate QR code-based transaction processing and respond to the consumption tax hike. The sales to a systems development company reflected renewals of access contracts to IWI’s NET+1 network, including equipment sales to major companies in the industry.
Results by segment Financial Systems Solutions segment
▷ In cumulative Q3 FY06/20, this segment reported sales of JPY7.1bn (+1.1% YoY) and operating profit of JPY733mn (-2.1% YoY). The 2.1% YoY decline in operating profit was caused by lower sales of high-margin proprietary development packages YoY and a project for which the company booked sales in Q3 (January–March 2020) that generated less profit than initially expected (temporary factor impacting only Q3). ▷ The company mainly booked sales in this segment from software development and maintenance services and packaged software and hardware primarily sold to credit card companies. ▷ The improvement in sales was due to growth in the software development business more than offsetting the decline in sales of in-house developed packaged software. ▷ Sales in Q3 (January–March 2020) improved 6.7% YoY, but operating profit dropped 44.6% YoY. While sales in the software development business were up 33.5% YoY, sales of high-margin proprietary packaged software were down 93.2% YoY.
The downturn in sales of in-house developed packaged software did not reflect a shift in business conditions. On the
contrary, it was a reactionary decline caused by the booking of sales from multiple packaged software projects and
favorable progress in system development projects in Q3 FY06/19. NET+1, the company’s flagship internally developed
software, is a core product of the company’s front-end processing (FEP) system, and is utilized in new or replacement FEP
projects orders. In Q3 FY06/19, the company booked sales of in-house packaged software for FEP systems made to multiple
customers. Normally, sales are recorded based on the progress of their respective projects. ▷ In cloud services, one of the company’s focus areas, sales were JPY609mn, up JPY150mn YoY (and JPY19mn above the company’s target). Although the company projected a JPY23mn operating loss for the business, it held the loss to just JPY6.1mn (versus an operating loss of JPY101mn in cumulative Q3 FY06/19). In Q3, there was an operating profit of JPY2.3mn,
so the business moved into the black on a quarterly basis even earlier than the company anticipated (it had projected an operating loss of JPY4mn for the quarter). The company improved the profitability of the cloud services business by increasing sales and raising the efficiency of its operating expenses. Sales and operating profit for the business were both above plan as of end-Q3, and for full-year FY06/20, the business looks set to surpass the sales target of JPY800mn and may also achieve an operating profit (versus an operating loss of JPY25mn according to the initial forecast).
IOASIS (merchant acquiring service): The company received orders from five large regional banks that operate their own
credit card businesses, and services for the fifth started at the beginning of Q2 (October 2019). Following the adoption of
its IOASIS cloud service by these five major regional banks, IWI is now looking to win contracts from some of the smaller
regional banks that are under their group umbrellas (which could mean a sixth and a seventh client company by the end of
FY06/20). According to the company, it has received inquiries from several regional banks and other institutions.
IFINDS (credit card fraud detection ASP service): Three client companies onboard, operations stable. One company has
completed proof-of-concept (POC) testing of FARIS, a next-generation fraud detection system that raises processing
capacity and detection accuracy through AI, and the company aims to receive an order from this company in Q3. Two
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other companies are either currently conducting or planning to conduct POC testing, and one other company is currently
considering proposals (matters related to POC have already been resolved at this company). So far, nighttime work has
been impossible due to work rules on the user side, but IWI is prepared to operate 24 hours per day 365 days per year, so it
is looking to take on contracts for nighttime work, and plans to start nighttime operations in Q4.
IGATES (OnCore Switch): Two client companies are onboard. Additionally, the company has received inquiries from several
other companies. As society becomes increasingly cashless, many companies in different industries that are expanding new
credit card businesses are looking to conduct the front-end processing of issuing and acquiring operations through
economical cloud systems, rather than through on-premises systems.
FARIS (next-generation fraud detection system): By raising processing capacity and detection accuracy through AI (which
assigns scores and flags suspicious transactions), IWI aims to handle fraud detection needs associated with expansion of
e-commerce 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. It already has an unofficial
agreement with one credit card company in FY06/20, but various preparations are being conducted, so it will not book
sales until FY06/21. Two companies are conducting verification testing, while a third has made plans to conduct testing.
POC testing typically takes about six months, so if the testing goes smoothly, IWI should conclude one or more contracts by
end-FY06/20.
Fluctuation in profit margin
▷ In the Financial Systems Solutions segment, the order scale varies from one development project to another. Moreover, costs may come out higher than expected in each separate process of the project, and gross profit margin varies from project to
project. All these factors contribute to fluctuation in profits of the segment as a whole. ▷ Furthermore, as the company sells servers and other equipment when clients order new systems or upgrade their existing systems, hardware sales vary depending on the project. Fluctuation in profits from hardware sales also contributes to
fluctuation in profit margin of the entire segment.
Product Solutions segment
▷ The segment reported sales of JPY661mn (+6.5% YoY) and an operating loss of JPY147mn (versus an operating loss of JPY73mn in cumulative Q3 FY06/19). ▷ The company recorded sales generated from the proprietary CWAT system, which prevents internal data leaks for companies, and from selling third-party cybersecurity software products. ▷ Despite an improvement in sales of third-party products, the operating loss widened YoY due to lower sales of in-house products with relatively high GPM (in FY06/19, the company concluded a contract with a large infrastructure company for the installation of a CWAT system, but has concluded no such contract so far in FY06/20). ▷ Sales of third-party products (chiefly from Israel) are steadily growing, and if that trend continues hereafter, profit should also improve.
Impact of COVID-19 pandemic on company earnings
▷ The company will likely complete most of its FY06/20 development projects and believes that any earnings impact from the COVID-19 epidemic will be minor.
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▷ To ensure that employees are safe and systems development and operations are not halted, the company has implemented internal measures in response to the COVID-19 outbreak and allows employees to consult with customers individually. Management has implemented measures allowing systems development and operations employees to consult with customers individually and work from home, giving proper consideration to information security while ensuring the continuation of business. As of May 11, 2020, there was no serious trouble or negative impact on earnings. ▷ IWI has halted overseas travel for all employees, suspended domestic business trips, and placed restrictions on holding and attending non-essential meetings. The company has also implemented a work-from-home system for its personnel. Management has drafted an action plan that will be implemented should an employee become infected and has also prepared response measures that will allow it to properly handle potential employee infections. ▷ IWI recognizes revenue based on the results of client inspections, so if those inspections are delayed, there is a risk that the booking of revenue could be delayed. However, projects in process are all relatively small, so even if such delays were to occur, the company says the impact on FY06/20 performance would be minor. ▷ The company noted that liquidity on hand for the operation of business was not a concern (cash and cash equivalents at end-March 2020 were JPY2.8bn). Management also indicated that it had secured JPY2.9bn in lending commitment contracts and overdraft agreements with major financial institutions.
Conversion of NET+1 hardware in Q4
▷ NET+1 uses Stratus Technologies hardware but manufacturer support for the current hardware will conclude in 2021. Accordingly, it will be necessary to exchange this hardware for new hardware. ▷ Starting in 2H FY06/20, the company proposes that some customers install the new hardware in advance (with actual installation work being performed in FY06/21). The company expects hardware deliveries to begin in Q4. It plans to roll out hardware replacements to the rest of its customers from FY06/21 onward.
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Income statement
Income statement FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Parent Sales 4,957 4,763 5,242 5,871 6,558 6,160 7,207 8,470 10,604 10,443 10,921 YoY -10.3% -3.9% 10.1% 12.0% 11.7% -6.1% 17.0% 17.5% 25.2% -1.5% 4.6% Cost of sales 3,120 3,121 3,867 5,397 5,217 4,381 5,213 6,337 8,381 7,637 7,940 Gross profit 1,837 1,642 1,374 473 1,342 1,779 1,993 2,132 2,223 2,807 2,981 GPM 37.1% 34.5% 26.2% 8.1% 20.5% 28.9% 27.7% 25.2% 21.0% 26.9% 27.3% SG&A expenses 1,479 1,321 1,243 1,151 1,196 1,295 1,279 1,430 1,675 1,885 1,944 SG&A ratio 29.8% 27.7% 23.7% 19.6% 18.2% 21.0% 17.7% 16.9% 15.8% 18.1% 17.8% Operating profit 358 321 132 -678 146 484 714 703 548 922 1,036 YoY 56.6% -10.3% -59.0% - - 232.8% 47.5% -1.6% -22.0% 68.3% 12.5% OPM 7.2% 6.7% 2.5% - 2.2% 7.9% 9.9% 8.3% 5.2% 8.8% 9.5% Recurring profit 388 342 155 -587 184 490 731 766 574 954 1,075 YoY 64.9% -11.8% -54.8% - - 166.6% 49.0% 4.9% -25.1% 66.2% 12.7% RPM 7.8% 7.2% 2.9% - 2.8% 8.0% 10.1% 9.0% 5.4% 9.1% 9.8% Extraordinary gain 1393720671297- - - - - Extraordinary loss 102 119 20 16 0 215 15 0 376 - - Income taxes 212 131 -115 -187 86 63 89 219 196 270 313 Net income 212 129 270 -349 87 471 479 547 377 684 762 YoY 12.6% -38.9% 108.9% - - 443.2% 1.6% 14.3% -31.0% 81.2% 11.4% Net margin 4.3% 2.7% 5.2% - 1.3% 7.6% 6.6% 6.5% 3.6% 6.5% 7.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
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 FY06/20, the company reported record-high sales of JPY10.9bn.
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 an operating loss). However, the company has maintained rigorous project management and gross profit margins of 20% or more since FY06/14. However, 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. FY06/20 operating profit of JPY1.0bn was highest operating profit in the last ten years (the record high has been JPY1.9bn logged in FY06/02).
The company recognized large extraordinary losses three times from FY06/01 through FY06/20: 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.
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Balance sheet
Balance sheet FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Parent ASSETS Cash and cash equivalents 2,090 2,783 2,808 2,085 2,420 2,957 2,852 2,578 2,840 3,255 3,642 Accounts receivable 1,098 826 814 689 660 881 1,292 982 1,093 1,456 1,720 Allowance for doubtful accounts-12-1-100000000 Inventories 133 122 480 577 251 133 264 828 547 641 413 Other 142 93 234 209 193 589 273 596 555 703 606 Total current assets 3,450 3,822 4,335 3,560 3,524 4,560 4,682 4,985 5,034 6,054 6,381 Tangible fixed asset s Buildings and structures 220 223 168 161 158 151 168 175 214 211 204 Tools, furniture, and fixtures 59 41 31 24 20 17 25 67 121 177 214 Lease assets - 0 44 37 27 25 124 93 101 68.3 36.3 Land 124 124 84 84 84 84 84 84 84 84 84 Total tangible fixed assets 403 388 327 307 290 277 401 420 520 541 538 Investments and other assets 1,470 1,375 1,495 1,573 1,459 1,359 1,388 1,682 1,768 2,096 2,167 Int angible fixed asset s Software 112 108 198 279 353 273 262 1,011 1,098 1,189 1,262 Other 17 24 8 36 14 12 295 410 417 152 203 Total intangible assets 128 132 206 315 367 285 557 1,421 1,515 1,341 1,465 Total fixed assets 2,002 1,895 2,028 2,195 2,116 1,921 2,345 3,523 3,803 3,978 4,171 Total assets 5,451 5,717 6,363 5,755 5,640 6,482 7,027 8,508 8,837 10,032 10,552
LIA BILITIES Accounts payable 104 249 617 377 192 321 363 553 543 332 627 Short-term debt - 0 9 10 10 12 34 28 36 35.0 29.3 Other 484 516 521 620 679 817 975 1,671 1,944 2,691 2,294 Total current liabilities 587 765 1,147 1,007 881 1,150 1,373 2,252 2,523 3,058 2,951 Long-term debt - 0 35 29 18 17 102 74 74 39.3 10.0 Other 221 246 261 272 289 481 490 535 525 562 608 Total long-t erm liabilities 221 246 296 301 307 497 591 609 599 601 618 Total interest-bearing debt - 0 44 39 28 29 136 102 110 74.3 39.3 Total liabilities 808 1,011 1,443 1,308 1,188 1,647 1,964 2,861 3,122 3,660 3,569 NET ASSETS (SHAREHOLDERS' EQUITY) Capital stock 844 844 844 844 844 844 844 844 844 844 844 Capital surplus 560 560 560 560 560 560 560 560 561 561 560 Retained earnings 3,251 3,248 3,346 2,865 2,820 3,160 3,507 3,825 4,018 4,518 5,043 Total net assets 4,643 4,706 4,920 4,447 4,451 4,835 5,063 5,648 5,715 6,373 6,983 Working capital 1,126 698 677 889 719 693 1,193 1,257 1,096 1,764 1,507 Total interest-bearing debt - 0 44 39 28 29 136 102 110 74.3 39.3 Net debt -2,090 -2,783 -2,764 -2,046 -2,392 -2,928 -2,716 -2,477 -2,730 -3,181 -3,603 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Assets 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.
Liabilities 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.
Shareholders’ equity There have been no significant changes in shareholders’ equity related to impairment or other charges. Retained earnings has been steadily accumulating since FY06/15.
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Cash flow statement
Cash flow statement FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Parent Parent Parent Parent Cash flows from operating activities (1) 301 795 252 -588 620 839 124 1,172 1,213 1,237 1,547 Cash flows from investing activities (2) -200 -61 -25 3 -47 -263 -192 -1,151 -604 -602 -753 Free cash flow (1+2) 101 734 227 -585 573 576 -68 21 610 635 794 Cash flows from financing activities 310 -132 -138 -142 -143 -143 -34 -198 -349 -220 -408 Depreciation and amortization (A) 142 149 107 131 190 256 214 337 485 708 606 Capital expenditures (B) -120 -117 -93 -207 -233 -151 -512 -1,253 -624 -504 -761 Working capital changes (C) 125 -272 302 -22 -345 103 435 289 -179 492 72 Simple FCF (NI + A + B - C) 109 433 -19 -404 389 473 -254 -657 417 395 534 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
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. IWI received dividends of JPY213mn from an investment partnership in FY06/10 while it acquired investment securities for JPY300mn, and made a time deposit of JPY100mn. Most of the cash flow since FY06/11 has been related to the acquisition of intangible fixed assets. However, the company sold investment securities and earned JPY368mn in FY06/13, resulting in a surplus of JPY3mn. The company acquired intangible fixed assets of JPY215mn in FY03/14. This was offset by a JPY200mn withdrawal from a time deposit. In FY06/15, the company had expenditures of JPY141mn for the acquisition of intangible fixed assets, and JPY202mn for the acquisition of investment securities, resulting in expenditures of JPY262mn. In FY06/16, while the company booked JPY380mn on the sale of investment securities, it had cash outflows of JPY192mn because of the acquisition of tangible and intangible assets. In FY06/17 and FY06/18, there were respective outflows of JPY1.2bn and JPY604mn, primarily for the acquisition of intangible fixed assets. The net cash outflow of JPY602mn reported for FY06/29 stemmed primarily from acquisitions of intangible fixed assets and investment securities (which was partly offset by cash inflow from the redemption of investment securities). In FY06/20, the company reported a total cash outflow of JPY753mn for investments, most of which went toward the purchase of tangible and intangible fixed 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 also sold JPY433mn in treasury shares in FY06/10 and booked JPY114mn from a sale and leaseback arrangement in FY06/16. In FY06/20, the company reported a cash outflow of JPY136mn for share buybacks.
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News and topics August 2020 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.
Details of change Name New position Current position Tsukasa Iseki Chairman and representative director CEO and representative director Kunimitsu Sato CEO and representative director Director
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.
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Other information
History
Chairman Kazuhiko Adachi established Intelligent Wave in 1984. The company was created to meet the needs of Japan’s modernizing credit card companies (NTT Data created the country’s first online credit card network in the same year, prior to which authorizations were done by phone and transactions were recorded on paper). Adachi found his experience with fault-tolerant systems at Tandem Computer could be profitably used to fill the emerging demand for front-end networks.
Demand for increased connectivity led to the creation of the company’s core product, NET+1. During an upgrade project for UC Card in the late 1980s, IWI realized that more than half of the custom-made systems needed to be rewritten to make necessary changes. The company saw a need for a package solution that would provide interconnectivity with different systems for transaction processing and developed the NET+1 package in 1989.
Since the latter half of the 1980s, issuers gradually began issuing dual-brand credit cards under international brands (both Visa and MasterCard credit cards) in the Japanese credit card industry. This spurred demand for credit card companies to connect to international brand networks, increasing orders and thus business for the company.
The next major industry realignment occurred from the early 1990s into 2000s when a wave of consolidation among banks following the economic bubble collapse reshaped the financial industry. The increase in integration demand due to this industry realignment spurred on growth for IWI’s business. While such integration demand has currently subsided, the need to invest in new systems that can handle increasingly diverse payment methods has started to increase.
The company listed on the JASDAQ stock exchange in June 2001. In April 2010, IWI became a subsidiary of Dai Nippon Printing Co., Ltd. following the completion of a public tender offer for IWI shares by Dai Nippon Printing. Since then, the two companies have worked to strengthen their business relations and grow the business. In June 2018, IWI moved its listing to the Second Section of the Tokyo Stock Exchange, and in March 2019, to the First Section of the said Exchange.
Top management
Chairman and representative director Tsukasa Iseki (born 1955) joined Dai Nippon Printing Co., Ltd. in 1978, working in the IPS and information solution business departments, and became director of IWI in September 2013. He became the company’s executive vice president in September 2014, and its CEO and representative director in September 2015. Mr. Iseki assumed the post of chairman and representative director following the annual meeting of shareholders on September 25, 2020.
CEO and representative director Kunimitsu Sato (born 1959) joined Dai Nippon Printing Co., Ltd. in 1983, where he served in various positions including business development chief of the IC card section under the business forms department, head of the digital security section under the information innovation business department, and head of the C&I Center under the information innovation business department, before being appointed a director at IWI in September 2019. In April 2020 he was appointed deputy head of Dai Nippon Printing’s information innovation business department (in which capacity he continues to serve) and in September 2020 was named CEO and representative director of IWI.
Employees
The parent company employed 413 employees (397 employees in FY06/18) in FY06/19.
▷ Average age: 38.1 (37.6 in FY06/18) ▷ Average length of employment with the company: 9.9 years (9.6 years in FY06/18) ▷ Not unionized
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Major shareholders (as of June 30, 2020)
Shareholding Top shareholders Shares held ratio Dai Nippon Print ing Co., Lt d. 13,330,700 50.69% Kazuhiko Adachi 2,382,900 9.06% BNY GCM CLIENT ACCOUNT JPRD AC ISG（FE-AC）(Standing proxy: MUFG Bank, Ltd.) 857,924 3.26% The Master Trust Bank of Japan, Ltd. (Trust account) 549,600 2.09% Int elligent W ave Employee Shareholding A ssociat ion 512,300 1.95% Japan Trustee Services Bank, Ltd. (Trust account) 309,500 1.18% Motoichi Mizota 301,000 1.14% Japan Trustee Services Bank, Ltd. (Trust account 5) 235,900 0.90% Hideki Nishino 209,000 0.79% MUFG Bank, Ltd. 200,000 0.76% SUM 18,888,824 71.83% Source: Shared Research based on company data Note: Shareholding ratio based on shares outstanding (excluding treasury shares)
Dividends and shareholder benefits
The company has paid annual dividends and focuses on maintaining a stable dividend amount (as opposed to a ratio of earnings). The dividend was increased (doubled) to JPY500 per share for FY06/06. This dividend amount has been maintained as of FY06/14. The company executed a 100-for-1 stock split on January 1, 2014, and the dividend payout for FY06/14 was JPY5 per share. Reflecting strong results, the company raised the annual dividend per share to JPY6 in FY06/16, and further to JPY7 in FY06/17 (representing a dividend payout ratio of 33.7%). FY06/18 dividends were JPY7 per share (dividend payout ratio of 48.8%). In FY06/19 the company raised its dividend to JPY9 per share (dividend payout ratio of 34.6%), including a special dividend of JPY1 per share to commemorate its listing on the First Section of the Tokyo Stock Exchange. In FY06/20, the company increased its dividend to JPY10 per share (dividend payout ratio of 34.6%) and plans to pay a dividend of JPY10 per share again in FY06/21 (dividend payout ratio of 32.1%).
Investor relations
The company maintains an IR website with both English and Japanese information available (http://www.iwi.co.jp/en/ir/index.htm). The company holds quarterly results presentation meetings.
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Company profile
Company Name Head Office Kayabacho Tower INTELLIGENT WAVE INC. 1-21-2 Shinkawa Chuo-ku Tokyo, Japan 104-0033 Phone Listed On +81-3-6222-7111 Tokyo Stock Exchange 1st Section Established Exchange Listing December 27, 1984 June 15, 2001 Website Financial Year-End http://www.iwi.co.jp/en/ June IR Contact IR Web Business Planning Department Business Administration Division http://www.iwi.co.jp/en/ir/ IR Mail IR Phone [email protected] +81-3-6222-7015
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