Financial Summary

Recent Updates

Highlights

On May 7, 2012, Intelligent Wave released Q3 FY06/12 results: click here to go direct to the Q3 FY06/12 results section.

(For original PDF announcement in Japanese-language only please click here.)

For corporate releases and developments more than three months old please refer to the News & Topics section.

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Trends & Outlook

Quarterly Trends

Q3 FY06/12 Results (Announced on May 7, 2012; please refer to the tables above)

The company maintained its FY06/12 forecast.

Cumulative Q3 sales were up 13.6% YoY at 3.9 billion yen and operating profit was up 14.4% at 99 million yen. Net income came in at 228 million yen vs. a 17 million yen net income a year earlier.

The company pointed out that it is likely to meet the full year sales target but unlikely to meet the operating profit target.

Cumulative Q3 sales were 72.9% (71.4% a year earlier) of the full year company forecast on a top-line basis. By segment, Retail Banking Online Systems sales were 64.6% (77.0%) of the forecast; Systems Solutions sales 90.4% (67.8%); and Security Systems sales 50.7% (52.1%). According to the company, the Systems Solutions segment is steady and likely to post better-than-forecast results. On the other hand, Retail Banking Online Systems and Security Systems are falling short of plan and their full year results may be below forecast.

Cumulative Q3 operating profit was 24.8% (26.8% a year earlier) of the full year company forecast on a top-line basis. By segment, Retail Banking Online Systems operating profit was 46.6% (76.1%) of the forecast; and Systems Solutions operating profit 87.8% (51.4%). According to the company, the Systems Solutions segment is steady and likely to post better-than-forecast results. On the other hand, Retail Banking Online Systems is falling short of plan and its full year results may be below forecast. The company commented that, on a top-line basis, an upswing in Systems Solutions performance may not cover a downswing in Retail Banking Online Systems performance. Thus, the company thinks it may be difficult to meet the full year targets.

Behind the strong performance of System Solutions are greater-than-expected contributions from synergies of working with Dai Nippon Printing Co. (TSE 7912). As of the beginning of FY06/12, the company estimated sales associated with DNP synergies at 700 million yen for full year. However, such sales were approximately 800 million yen as of end-Q3 FY06/12, already higher than company estimate. Meanwhile, Retail Banking Online Systems performance is falling short of company estimate due to the following factors decreasing the operating profit margin.

Performance of the company’s business segments was as follows:

• Retail Banking Online Systems: Sales of 1.7 billion yen (-21.8% YoY); Operating profit of 227 million yen (-57.8% YoY)

Trends in entrusted system development projects and hardware sales related to system maintenance led to the above results for this segment.

Segment sales were down 463 million yen YoY. Sales of products centered on system development were down 81 million yen to 1.3 billion yen, and sales of merchandise centered on hardware were down 383 million yen to 373 million yen.

Segment operating profit dropped significantly due to lower sales and deterioration of OPM to 13.7% from 25.3% a year earlier.

1) Lower GPM due to lower prices of merchandise (hardware)

2) Higher-than-expected management costs for new Linux NET+1 software development (product development started in FY06/11 and the sale of Linux NET+1 started in FY06/12)

3) Higher-than-expected management costs due to higher requirements (e.g. quality assurance) for customers’ systems

The company originally planned to offset downside pressure on hardware and other existing products by sales promotion for Linux NET+1. The plan, however, did not advanced as expected due to FY06/12 falling in a “pre-harvest period” caused by switching of mainstay products, and the impact of this was greater than expected, according to the company. Linux NET+1 sales promotion is advancing steadily. The company thinks better cost controls will diminish such impact from FY06/13.

Regarding item 3) above, financial institutions and other customers have increasingly demanded stricter system requirements for quality assurance and other areas on the back of system troubles at certain financial institutions in recent years. This movement led to higher management costs. The company intends to counter the situation through more effective management structure and engineer capability enhancements from FY06/13.

• Systems Solutions: Sales of 1.8 billion yen (+78.8% YoY); Operating profit of 97 million yen (vs. 96 million yen operating loss in cumulative Q3 FY06/11)

Performance was driven by entrusted system development projects related to trading and information delivery systems for brokerage firms, as we well as group companies under its parent, DNP.

Sales in the securities and brokerage firm-related business were 561 million yen (vs. 513 million yen a year earlier) amid poor financial performance at brokerages, as indicated by low levels of trading volume. While performance came in above the previous year, this was due to the booking of projects postponed from FY06/11. Accordingly, SR Inc. sees situations are not as good as the company hoped for.

In contrast, sales in the credit card and other businesses were 1.2 billion yen, a significant YoY rise from 495 million yen. The company attributed this to synergies of working with Dai Nippon Printing. Sales associated with DNP synergies during cumulative Q3 FY06/12 included entrusted development of the Hybrid Bookstore System (scheduled to begin offering services in spring 2012). In addition, in Q3, customers are accelerating moves to utilize Business Process Outsourcing (BPO) for printing and other businesses. Favorable segment performance was thanks to joint undertaking of these operations with DNP, the company commented.

• Security Systems: Sales of 294 million yen (+11.4% YoY); Operating loss of 127 million yen (vs. 355 million yen operating loss in cumulative Q3 FY06/11)

CWAT information security software platform sales and maintenance services underpinned the top-line figure for this segment. According to the company, the operating environment for the business was severe, but restructuring – such as overhauling the organizational set-up – should put figures in the black (before allocation of common costs) for the full year.

In FY06/12, the company launched such new products as WebSanitizer (diagnostic services for website vulnerability) and CxSuite (diagnostic services for source code vulnerability), in addition to existing CWAT (internal information leakage detection system) and EUCSecure (document security software). Sales of these new products are steady, and the company expects a certain level of their contributions to performance from FY06/13 onward.

• Others (New Business): Sales of 102 million yen; Operating loss of 98 million yen)

This segment includes third party systems’ sales that are not included in the other business segments. The area the company sees as having potential is the web concierge service, FACE Concierge. Talks are progressing with several pilot-user candidate companies for the FACE Concierge service. The company is expected to move on to next steps once pilot users have committed and specific details of the service are made available.

1H/Q2 FY06/12 Results (Announced on February 3, 2012; please refer to the tables above)

The company already upwardly revised its FY03/12 forecast on January 25, 2012, and thus maintained its current forecast.

1H sales were up 22.1% YoY at 2.5 billion yen and the company recorded a 29 million yen operating profit vs. a 62 million yen operating loss a year earlier. Net income came in at 175 million yen vs. a 68 million yen net loss a year earlier.

Actual performance exceeded the initial forecast of 2.4 billion yen in sales and 10 million yen of operating profit. As the company announced in its January 25, 2012, earnings forecast revision, the dissolution and liquidation of its subsidiary Intelligent Wave USA Inc. resulted in the posting of 173 million yen in deferred tax assets and corporate tax adjustments, which accounted for the large net income figure for the period.

Sales figures by segment showed the front-end credit card business and Security Systems business posting lower sales YoY and failing short of company forecasts. However, the System Solutions business showed greatly improved YoY performance that widely outstripped company forecasts. A contract with parent company Dai Nippon Printing to handle system development for group companies contributed to the positive sales figure.

The company was targeting 700 million yen in sales in FY06/12 from synergies related to DNP; total DNP-linked sales in 1H came to 460 million yen.

Operating profit figures by segment indicated the front-end credit card business fell short of forecasts, whereas figures for both the System Solutions, and Security Systems businesses came in well above expectations. One reason the front-end credit card business fell short of sales forecasts was development costs for the company’s new Linux NET+1 product were higher than NET+1. (Linux NET+1 is a version of NET+1 compatible with the Linux OS, and which requires lower initial capex and has lower running costs.) The company was anticipating costs related to the development of this new product would level out in 2H. The company noted that System Solutions’ operating profit outperformance was due to higher sales and more efficient development at the segment.

Performance of the company’s business segments was as follows:

• Retail Banking Online Systems: Sales of 1.1 billion yen (-15.8% YoY); Operating profit of 155 million yen (-46.8% YoY)

Trends in entrusted system development projects and hardware sales related to system maintenance drove the performance for this segment.

In addition to entrusted system development contracts for credit card companies (the company’s core customers) and system maintenance, hardware sales and other factors also contributed to sales. Credit card transaction volumes took a hit during March and April 2011 due to the earthquake and Tsunami in the Tohoku region, but volume has since recovered. This ongoing increase in transaction volume since June 2011 has led to continued capex demand to boost capacity at credit card companies, and the company pointed out that this has been partially responsible for increased hardware sales. A further tailwind has been increased Internet transaction volumes, which has encouraged more companies to become involved in the credit card space.

In addition to its front-end credit card business (e.g. authorization services etc.), the company expanded into the back-end credit card business with a chargeback service. (‘Chargebacks’ enable card owners to request credit card companies repay fraudulent transactions. Credit card companies are legally obliged to carry out chargebacks.) The company has begun a business consulting service for credit card companies as part of efforts to generate new business.

• Systems Solutions: Sales of 1.3 billion yen (+98.0% YoY); Operating profit of 97 million yen (vs. an operating loss of 76 million YoY)

Sales were driven by entrusted system development projects related to trading and information delivery systems for brokerage firms, as we well as group companies under its parent, DNP.

Securities and brokerage firm-related business had been going through a rough period due to poor financial performance at brokerages, as indicated by low levels of trading volume. Sales were 433 million yen vs. 335 million yen YoY. While performance came in above the previous year, this was due to the booking of projects postponed from FY06/11. The credit card business and Others businesses posted substantially higher YoY sales of 856 million yen (vs. 433 million yen in the previous year). DNP’s entrusted development of the Hybrid Bookstore System (scheduled to begin offering services in spring 2012) is included in the Others segment.

The company will leverage synergies with DNP to expand its business. This is partially due to recent moves by customers to utilize BPO for printing and other businesses. As for the securities and brokerage sector, investment projects had been on hold since September 2011, however, the company plans to jump start things in 2H via cooperative ventures with DNP.

• Security Systems: Sales of 149 million yen (-3.5% YoY); Operating loss of 127 million yen (vs. an operating loss of 278 million YoY)

Software development and in-house development packages sales came in around the same levels YoY, but maintenance sales related to CWAT, the company’s information security protection system, increased. According to the company, the operating environment for the business was severe, but restructuring– such as overhauling the organizational set-up – should put figures in the black (before allocation of common costs) for the entire period.

• Others (New Business): Sales of 24 million yen; Operating loss of 96 million yen

This segment includes third party systems’ sales that are not included in the other business segments. The area the company sees as having potential is the Web Concierge Service. A web concierge service is a service that handles website navigation and recommendations. The company has stated that using the technology owned by Saltlux, its South Korean business partner, this service can make it easier to attract customers with its natural language interactivity in an age when the information available on the Internet is becoming increasingly complicated and FAQs answers/lists are becoming less useful. One example of how the service will work is a pop-up window that will appear on a computer screen and give the user the location of information he or she is looking for. The Web Concierge Service is currently under development and talks are progressing with several pilot-user candidate companies. The company is expected to move on to next steps once pilot users have committed and specific details of the service are made available.

Q1 FY06/12 Results (Announced on November 4, 2011; please refer to the table above)

Sales were up 56.7% YoY at 1.1 billion yen and the company posted an operating loss of 58 million yen vs. a 172 million yen operating loss a year earlier. The net loss for the quarter was 38 million yen vs. a 139 million yen net loss a year earlier.The company commented that a steady improvement in performance had resulted in in better YoY Q1 figures. In FY06/12, it is aiming to hit 700 million yen in sales by leveraging synergies with Dai Nippon Printing Co. (TSE 7912); it achieved Q1 sales of 200 million yen.

Retail Banking Online Systems: Sales for the period were 496 million yen and the business recorded an operating profit of 63 million yen. Revenue was underpinned by entrusted system development projects and hardware sales related to system maintenance at its core credit-card company clients. Total credit card transaction value declined in March and April 2011 following the earthquake in the Tohoku region in March, but then recovered. The increase in total card transaction value continued into June 2011 resulting in capex demand from credit card companies to strengthen their capabilities. The company indicated this was a factor behind its strong hardware sales for the period. Moreover, an increase in online card transactions has resulted in some new companies entering the credit-card market, which has helped the company’s business.

Going forwards, the company has said that in addition to the front-end credit card business it has been engaged in, it aims to expand the scope of its operations by launching a back-end credit card systems business, such as for chargebacks.

Systems Solutions: Sales were 518 million yen and the segment posted an operating profit of 4 million yen. Sales were driven by entrusted system development projects for credit card and brokerage firms, as we well as group companies under its parent, Dai Nippon Printing Co. (TSE 7912). Against a backdrop of sluggish performance at securities brokerages (as flagged by a slump in equity trading value), the company cited the tough conditions in its securities-related business as the cause for it recording Q1 sales of just 71 million yen (vs. 166 million yen in Q1 FY06/11). On the other hand, it recorded significantly improved results in its Credit-Card-Related and Others sub-segments, with sales reaching 447 million yen (vs. 92 million yen a year earlier). The Others sub-segment includes the entrusted development of Dai Nippon Printing Group’s Hybrid Bookstore System.

Security Systems: Sales came in at 73 million yen and the segment booked an operating loss of 70 million yen. The top-line figure included sales of the company’s CWAT security software platform and other security products. The company remarked that despite the tough operating environment for this segment, it was aiming to achieve a profit for the full financial year by pursuing restructuring, such as reviewing the segment’s organizational structure.

Third Party Product Sales (New Business)

This is the sale of third party systems that are not included in the other business segments. This segment posted 4 million yen in sales for Q1.

For details on previous quarterly and annual results please refer to the Historical Financial Statements section.

Full Year (FY06/12) Outlook

Note: Segment-level operating profit numbers exclude parent-level SG&A costs.

The overall trends in the FY06/12 forecast were as follows:

1) The company is aiming to improve its quarterly P&Ls (it posted an operating loss in Q1 of both FY06/10 and FY06/11).

2) The company expects the effects of March’s earthquake to persist into 1H and consequently was forecasting a comparative improvement in performance for 2H.

3) Regarding new businesses, the company is focusing efforts on promoting and selling information systems and operational systems that utilize third-party products.

4) In its System Solutions segment, underpinned by entrusted development projects, the company is aiming for sales of 700 million yen (vs. FY06/11 sales of 100 million yen) by leveraging synergies from its relationship with Dai Nippon Printing Co. (TSE 7912).

Regarding point one, the company stated that it is aiming to move away from lump sum payment and implement more milestone payments from clients. Specifically, the company's goal is to promote milestone-linked contracts from the negotiation stage, and to secure the kind of large-scale orders that usually allow for these.

Regarding point two, the company forecasts some projects originally slated for 1H will be pushed back to 2H, especially those in the Security Systems segment.

Retail Banking Online Systems

Sales in the segment are expected to decrease YoY due to a drop in hardware sales from the fairly robust levels seen in FY06/11. Operating profit is also expected to fall YoY. Workforce productivity is expected to temporarily decline due to the release and promotion of new products, such as the Linux version of NET+1.

The company's credit-card firm clients are slowly recovering due to cost-cutting measures and a reduction in requests for excess interest rate payment refunds. Yet, the company believes it is likely credit-card companies will continue to hold off on large-scale capex investments. However, the company commented demand is building up for a system that can curtail capex and operating costs, and it hopes to respond to such demand.

The company is making efforts to develop and release the Linux-based version of NET+1 in FY06/12. The company stated it has received an increasing number of inquires regarding the Linux version given its appeals to companies due to the small initial investment required and reduced operating costs. Rather than existing credit card company clients, inquires have largely come from new participating stores' account settlement companies and "acquiring businesses" (companies that gather and manage participating stores for credit card companies).

System Solutions

The breakdown of the sales forecast was as follows: 850 million yen in sales for the securities-related business (vs. FY06/11’s 639 million yen). Sales at the credit-card-related and others business were forecast at 1.1 billion yen (vs. FY06/11’s 850 million yen). Securities-related business’ sales were expected to increase primarily due to postponed projects getting underway.

At the credit card-related and others business the main reason behind the forecasted increase in sales was expectations for leveraging of synergies with Dai Nippon Printing Co. (TSE 7912), such as the entrusted development for Dai Nippon Printing’s Hybrid Bookstore system (for original English-language announcement, please click here). The operating profit margin in the segment was forecast to fall, but the company explained a temporary fall in worker productivity was expected due to the challenges of introducing new products and undertaking new product development.

In the securities-related business, the company stated it planned to promote high-speed trading systems, including its self-developed Market Information Delivery Distribution System and its RIX communication middleware, as well as third-party products. In the credit-card-related business, the company planned to strengthen overseas deployment of its ACE Plus (a credit card fraud detection system) in South Korea, China, and Southeast Asia.

Security Systems

The company said that it is aiming to increase revenue and make an operating profit by securing new customers on the back of its CWAT and EUCSecure software products.

In the past, the company has had to work hard to cultivate new business for EUCSecure. However, the company is continuing development of the software for smartphone (Android) handsets, and with the increase in Android business users, the company may be poised to capture a significant amount of new customers.

New Business

The company is aiming to boost sales and expand into new business areas. It was planning to begin full-scale sales during FY06/12 of third-party systems and packages that it has judged to have best-in-class technology. Rather than simply selling these third-party products, the company also plans to offer consulting services to users as well. While FY06/12 sales are expected to be only 150 million yen and generate no operating profit, the company commented that it wants to grow the area in the medium-term.

The company’s plan calls for the greater use of third-party products under the two themes of "strengthening security" and "enhancing business efficiency".

SR Inc. believes the company is very interested in a product called IN2 - a semantic search technology. IN2 was developed by Saltlux Inc., a South Korean company that IWI entered into a strategic business partnership with in February 2011. Semantic technology enables computers to interpret the meaning and associations of information and then process the information in a variety of ways. The company is anticipating its use in the following enterprise solutions:

• Utilizing enterprise storage data that cannot be effectively used in its present state.

• Data analysis and utilization of email, document files, digital memos, etc.

• Utilizing information published on social networking services (SNS) and blogs.

The company said that with conventional solutions it is only possible to perform simple searches of documents (e.g. keyword searches), but that semantic solutions enable automated interpretation of a document's meaning (e.g. finding identical or similar meanings in documents and analyzing the information for associations and trends).

Medium and Longer Term Outlook

On August 12, 2010, the company released its three-year medium-term plan from FY06/11 through FY06/13.

The two essential elements in the plan are pursuing synergy with DNP and expanding the company's existing businesses. The anticipated synergy with DNP includes the following components:

• Cross Selling: Each company aims to offer the other's products to its customers. The companies have already collaborated on products such as EUCSecure since 2008, and they anticipate a healthy revenue outlook. As the table above shows, the medium-term plan anticipates 150 million yen in sales in FY06/11 and 200 million yen during FY06/12-FY06/13. However according to both companies, the expected impact of cross selling is limited by the subdued demand environment for security.

Given the difference in the relative size of IWI and DNP, SR Inc. sees room for further expansion. For financial industry and banking customers, the two companies operate in some shared areas; however, DNP has stronger connections with banks. For that reason, cross selling to financial industry customers will help expand IWI's Retail Banking Online Systems segment. Furthermore, DNP has developed extensive business relationships in fields other than finance, so IWI will be able to acquire new customers from the DNP customer base. Depending, again, on customer demands for security, this could lead to new business for IWI.

• Customized Software development: DNP will offers customers peripheral devices for printing systems, and IWI will help in development. According to IWI, the company shipped orders worth about 100 million yen in FY06/10, and orders received for the system are approaching targeted levels. However, the company must draw from its limited human resources for this project, and consequently system maintenance and human resource support must come from partner companies. Although this will require time, but the company plans to expand sales in FY06/12.

• New initiatives in the security field: Both companies will cooperatively develop new business initiatives through BPO (business process outsourcing) and SaaS (software as a service) in the security field, with anticipated increases in profitability. These plans will be realized as follows:

IWI’s existing ACE Plus customers have been asking for BPO to help them reduce costs. Together with DNP, IWI is evaluating ways to offer such services.

With SaaS, the company is exploring new security services combined with products from Nexantis, a wholly owned subsidiary of DNP.

SR Inc. thinks it will be natural for a synergy to develop from combining IWI's core competence in network security and DNP's publication (paper-based and electronic) and Internet (content management, payment systems) components. SR Inc. speculates that there may be significant room for expansion of new business initiatives (See Relationship with Dai Nippon Printing and Market Overview).

Other important measures from the medium-term plan on a segment-by-segment basis are as follows:

Retail Banking Online Systems: Development of Linux version of NET+1 to meet growing demand from credit card companies.

The development of the Linux-based version of NET+1 will help customers of the Retail Banking Online systems reduce investment and maintenance costs, while boosting NET+1 sales. Furthermore, the business environment surrounding the company's main customers, credit card companies, could change further. Possibilities include: changes in the profit structure (less reliance on cash loans), increased product collaboration (for example, combining credit cards and debit cards), and development of newer credit card systems. The company is exploring how these potential changes could become opportunities in the future.

System Solutions: Global sales expansion of major in-house developed products like ‘ACE Plus’ (credit card fraud detection system) and operational systems for securities companies.

In System Solutions, ACE Plus, which has typically been sold only to credit card companies, will also be launched for banks through joint operations with DNP. The company hopes to use DNP’s connections with regional and internet banks to grow the business. Japanese banks have been slow to respond to credit card fraud, and individual banks are trying to find solutions to the problem. The company hopes to capture this demand.

Security Systems: Capture demand for personal information security through its CWAT and EUCSecure software, and cooperation with DNP in marketing and new business development.

One possible limiting factor for CWAT sales has been that IWI’s sales channels had been underdeveloped while it was a standalone company. If DNP can help open some doors for IWI selling to large companies with significant overseas operations, CWAT sales growth could recover vs. the sideways trajectory which began in 2008.

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Business

Business Description

IWI sells mostly sells software solutions based on in-house developed package software. The main customers are in the financial services industry; core products focus on credit card transaction processing, low-latency secure communications, and data protection.

Main Business Segments

The company is organized in three segments: Retail Banking Online Systems, System Solutions, and Security Systems. The relative importance of the segments could be summarized as follows: Retail Banking Online Systems is responsible for IWI becoming what it is today (the company’s core competence); System Solutions and Security Systems represent how the company could grow in the future.

Retail Banking Online Systems (2.41 billion yen FY06/10 sales; 887 million yen operating profit)

The Retail Banking Online Systems segment is IWI’s core business, centering on for the company’s main product, NET+1. NET+1 is a solution that is used by credit card companies for transaction authorizations and similar front-end functions. 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 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, customer data management etc.). IWI’s Retail Banking Online Systems business is focused on the front-end processing side. The back-end-end systems are large scale, 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 software and hardware. 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.

Although the company has other business activities in the segment (maintenance and reselling other software packages), the majority of segment sales are related to internal software development for the NET+1 package (see table above for the segment sales breakdown).

Core customers for this segment (credit card and non-bank consumer finance companies) have contended with a difficult operating environment from changes in laws and challenging economic conditions (negatively impacting segment sales from FY06/06 through FY06/10). As client businesses recover, so should the segment revenues and earnings.

System Solution Business (1.5 billion yen FY06/11 sales; 56 million yen operating loss)

Products sold in the System Solution Business are related to data communications (internally-developed Market Information Delivery Distribution System) and credit card fraud detection (ACE Plus). The core product in the segment is the Market Information Delivery Distribution System, which connects securities dealers with price and news feeds.

Other products and services sold in the segment include systems maintenance, the internally-developed RIX communication platform, and WebSequencer (in-house product designed to streamline software development and maintenance). The company also sells third party software packages (described below):

• RIX – in-house developed messaging middleware. Well recognized domestically in Japan for its speed and reliability.
• Latency Buster Messaging (LBM)– a messaging middleware package developed by 29West which is used on several international exchanges.
• WebLogic Server – a web application server developed by Oracle Corporation.
• Tuxedo – a middleware package developed by Oracle Corporation (formerly BEA Systems); distributed computing platform that enables efficient processing of large volumes of data across a network.

Market Information Delivery Distribution System

The Market Information Delivery Distribution System collects information from multiple sources for distribution to user (typically a dealer) terminals. Example types of information carried on the system include: pricing data from an exchange or trading platform (TSE, Jasdaq etc.) and news feeds (QUICK Corp., Thomson Reuters etc.) The business need that the system solves is for a fault-tolerant, low-latency information retrieval and storage system that gives users up-to-date information, efficiently and at a reasonable cost.

In terms of market share, the company estimates that approximately 20% of securities firms who receive data directly from exchanges are using the Market Information Delivery Distribution System. The system is the main information access system for Daiwa Securities Group Inc (TSE 8601), a key customer for this segment. Most other customers are domestic banks/brokers (most foreign firms use overseas developed packages).

Technical Detail

The Market Information Delivery Distribution System is based on Sun Solaris (a server software and hardware system sold by Sun Microsystems), which the company selected due to the system’s superior TCP/IP (the data communication protocol used to transmit data) processing ability. SR Inc. understands that two key metrics in evaluating trading systems are lag (how long it takes for data to travel from one point to another) and throughput (the maximum amount of data that can successfully be sent across a connection). Minor delays in processing or transmission can be amplified as data loads increase; every microsecond of data processing means more delay before data is available to the user.

The company claims that it possesses know-how regarding what and when to send certain kinds of data that allow for optimal throughput while minimizing network lag (the most information gets to its destination in the shortest time possible).

The system includes in-house designed software and Sun Solaris hardware. Networking software is either RIX (internally developed low-latency packages), or LBM (Latency Busters Messaging, a third-party product).

The system is sold as a server licensed product (as opposed to licensing for each dealer/trader’s terminal).

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 150 million yen. The prices for maintenance range from 6 to 10 million yen per year. Gross profit margins for the package exceed 50% and as typical for package software would tend to improve with more customers 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. 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 advantage; SR Inc. 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, 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 package software per se are very low, leading to higher margins.

Security Systems (507 million yen sales in FY06/11; 318 million yen operating loss)

The main product sold in the Security Systems segment is CWAT (internal information leakage detection system); other products include Virus Chaser (an anti virus program), and EUCSecure (a document security software), both minor contributors to FY06/09 segment sales.

The 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, 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.

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. Data provided by the company indicated that there were 534,027 licenses in use at the end of FY06/10. The company suggested that maintenance costs are approximately 15% of the original selling price.

The product was launched in 2004, and the company began delivery of CWAT Ver. 4 in 2008. It says that the new version provides increased system stability and lower maintenance costs.

EUCSecure

EUCSecure (End User Computer Secure) – a software package that provides document security on desktop PCs. The software can encrypt files (making them unreadable by unprivileged users), restrict document access (preventing viewing, changing, printing, or deleting), and log all document access. An interesting feature of the software is that it provides security and access controls when the document is internally accessed, as well as when the document is used by outside parties.

Potential users of EUCSecure could include any companies with compliance regulations or those with intellectual property control requirements. EUCSecure is offered for approximately 300,000 yen per year (50 client installations and the server license).

EUCSecure is the company’s first “client side” security application, and represents collaboration between DNP and IWI (DNP contribution includes marketing support).

Relationship with Dai Nippon Printing (DNP; TSE 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 amount 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.

For IWI, the relationship with DNP could mean increased access to a network of overseas clients for future growth. The company has attempted to grow overseas operations, however has produced mixed results (overseas operations contributed less than 1% to consolidated FY06/10 sales).

However, another side of the relationship appears more important. IWI believes that the market is rapidly changing away from the traditional software solution models. The advances in cloud computing are redefining how the software is delivered to the customer, and what the software is (cloud computing refers to a situation where users are disconnected from the resources that provide programs and data reside, hence their needs are met from behind the ‘cloud’). In one dimension that is highly relevant for IWI, the advances in cloud computing should increase demand for more intelligent security for resources and networks. The integration of Intelligent Wave’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 customers utilizing DNP’s vast sales and distribution network.

Main Facilities

The company has two facilities (in Tokyo and Hakodate), with the majority of employees in Tokyo (as of FY06/11).

Business Model

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:

• Retail Banking Online Systems: number of projects, size of those projects, and project management
• System Solutions: number of server installations
• Security Systems: 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. That is, to grow sales, particularly in the Retail Banking Online Systems, the company needs to increase costs.

The company has been investing in R&D (see see Cost Structure below) 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. This is obviously because after a software product has been created, it can be resold with minimal incremental costs.

Cost Structure

Profitability Snapshot, Financial Ratios

The company’s gross profit margins have been relatively stable from FY06/01 through FY06/11.

Strengths, 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. While still in early stages, it 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. SR Inc. believes 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 package software and service solutions for growth.
• Relatively weak sales channels when it comes to distributing small scale package 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 customer 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.

Group Companies

The company is made of the parent company and 2 subsidiaries (100% ownership):

Intelligent Wave USA, Inc. – created to sell CWAT into the US market

Intelligent Wave Korea Inc. – created to sell CWAT into the Korean market

Group Strategy

Although the company has overseas subsidiaries, 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 & Value Chain

Market Overview

The IT services industry in Japan is approximately 15 trillion yen (source: Ministry of Economy, Trade, and Industry, METI, 2008 survey), and is dominated by larger companies with over 300 employees (62.8% of 2008 industry sales according to METI). 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, Nomura Research Institute, 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 the 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 concentrating in 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 distributed computing models (the banking industry being an exception). The drive to lower costs boosted demand for package software. However, in many respects the domestic business package 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 SR Inc.’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.

Customers

The company’s main customers are credit card companies and securities firms.

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 Business Description).

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 the 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, IT Holdings group (TSE 3626) developed a large scale integrated package (both back- and front-end) for JCB. In an approach unique for the Japanese back-end systems, the IT Holdings’ system is based on UNIX platform.

Japan Research Institute (Unlisted) has extensive experience in credit card systems. It is 100% owned by the Sumitomo Mitsui Financial Group (TSE 8316) and is its official systems purveyor.

A detailed discussion of the competition in other segments is omitted as individual products are still relatively small, and the future shape of the business is uncertain.

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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Strategy

The company’s competitive strategy has historically combined a differentiation strategy (focusing on a unique competence, secure networking) and a segmentation strategy (financial service companies are the main customer group). From a practical perspective, the company’s technological expertise (networking, systems integration, etc.), is relevant to a broader scope of industries than the company’s historic focus (financial services). IWI has indicated a medium term goal of growth through a broadened customer base (in terms of industry). Information security is an area of prime strategic focus. The company also looks to sell its core offerings (NET+1, ACE Plus) to emerging market participants (e.g. internet banking and brokerage companies) as well as overseas. Obviously, the relationship with DNP is one of the key developments that will likely shape, or at least affect, the managerial strategy in the near future.

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

FY06/11 Results

IWI released FY06/11 results on August 10, 2011. The company revised its FY06/11 forecast on August 03, 2011, and results met the revised figures.

Sales were down 3.9% YoY at 4.8 billion yen affected by the company’s core credit card company clients holding off on systems investments due to the tough operating environment stemming from requests for excess interest rate payment refunds from customers and revisions to the Money Lending Business Law. Brokerage companies also remained selective about systems investment, resulting in a decline in sales for software development and packaged software solutions.

Operating profit declined 10.4 % YoY to 321 million yen. Nonetheless, this exceeded initial forecasts as improved project management and execution at the software development business, cost-controls for hardware sales, and company-wide cost savings initiatives all took effect. However, these efforts could not offset the impact of the decline in sales and profitability declined.

Performance of the company’s business segments is outlined below:

Retail Banking Online Systems: Sales increased 14.9% YoY to 2.8 billion yen and operating profit rose 15.2% YoY to 695 million yen. Sales came in higher than expected at 2.4 billion yen. According to the company, hardware sales increased as some of its main credit-card company clients renewed systems-related investments. Growth in hardware sales was also driven by credit card companies investing in strengthening their existing systems rather than make large-scale investments in next-generation systems.

Systems Solutions: Sales were 1.5 billion yen (-20.5% YoY) and the segment posted an operating loss of 56 million yen (vs. an operating profit of 167 million yen for FY06/10). The sales breakdown was as follows: sales at the credit-card-related and others business decreased to 850 million yen from 1.1 billion yen YoY. Sales at the securities-related business also dropped to 639 million yen from 823 million yen YoY. At end-Q3 FY06/11, the company noted the continued difficult environment for customized software development in the credit-card-related and others businesses sub-segment. It commented that it would like to offset this with strong sales in the securities-related business, but sales there also fell short of the forecast. The company stated that sales were lower than expected because client companies decided to postpone projects, but the delayed sales would likely occur in FY06/12.

Security Systems: Sales were 507 million yen, down 24.9% YoY, and the segment posted an operating loss of 318 million yen (vs. an operating loss of 413 million yen for FY06/10). Manufacturing companies continued to hold off on capex investment despite the company’s sales efforts and acquisition of new customers proved difficult with some negotiations having to be postponed due to the impact from the Great East Japan Earthquake. The company had hoped to make a profit in the Security Systems segment in FY06/11, but this goal has now been pushed out to FY06/12.

Q3 FY06/11 Results

IWI released Q3 FY06/11 results on May 6, 2011 (see table above).

There was no change to the FY06/11 forecasts.

The company noted actual cumulative results for Q3 FY06/11 exceeded its forecast. However, concerns lingered over whether the impact from March 2011’s Tohoku Earthquake would deteriorate going into Q4 FY06/11, and the company said they were monitoring the situation carefully to see whether or not they could meet their forecasts.

Cumulative Q3 FY06/11 performance of the company’s business segments is outlined below:

(Segment operating profit below reflects segment level operating profit before SG&A at the parent level is taken into account.)

Retail Banking Online Systems: Cumulative Q3 FY06/11 sales were 2.1 billion yen and operating profit 851 million yen. Cumulative Q3 FY06/11 operating profit exceeded the company’s full year forecast: full FY06/11 forecast for the segment was 2.4 billion yen in sales and 763 million yen in operating profit. The company attributed the superior performance to the conservatism of its forecast as well as a gradual increase in investment spending by card companies – the segment’s main customer base. Transaction volumes at the main card companies remained strong, suggesting further investment demand for systems upgrades of which IWI would be a beneficiary.

The local media had widely reported some card companies were freezing plans to install next-generation systems (specifically, system-unification projects) during Q4 FY06/11 and FY06/12. However, all of the projects that IWI were engaged in were front-end systems projects (data processing for information transmitted from store-located card terminals to the credit card companies) and would not be affected by these freezes, which were mainly related to backbone/trunk systems. Indeed, IWI said it viewed this as a potential business opportunity given that some investment funds that were not earmarked for efficiency promotion projects by card companies may instead be redirected now into front-end system overhauls.

Systems Solutions: Sales were 1 billion yen and operating profit 126 million yen. The sales breakdown was as follows:

• Sales at the securities-related business dropped to 513 million yen from 593 million yen YoY.
• Sales at the credit card-related and others business dropped to 495 million yen from 659 million yen YoY.

FY06/11 segment forecast was for sales of 2.1 billion yen and operating profit of 405 million yen. Thus, in order to meet the full year projection the segment will have to achieve sales of 1.1 billion yen in sales and operating profit of 279 million yen in Q4 FY06/11. The company however noted the difficult environment for customized software development for the card-related and others business persisted through Q3. The company said it anticipated Q4 sales for the securities segment within System Solutions to be fine but meeting the overall segment forecasts for FY06/11 year was likely to prove difficult given difficulties for the credit-card related side of the business.

Security Systems: Sales were 264 million yen and the segment posted an operating loss of 223 million yen. The company’s FY06/11 forecast for the segment were for sales of 830 million yen and operating profit of 53 million yen, meaning the unit will have to generate 566 million yen in sales and 276 million yen in operating profit during Q4 alone to hit the target. The company conceded it would be difficult to meet forecasts for the segment despite its intention to cut SG&A and any lift in the top-line from maintenance sales.

Effects of Tohoku Earthquake: The company believed the direct impact from March 2011’s Tohoku Earthquake for the Security Systems segment in FY06/11 was likely to be no more than around 30-40 million yen in postponed deals that were under negotiation. However, one concern voiced by the company was that going forwards manufacturers and other corporations might prioritize budgets for restructuring supply chains and thus reduce spending on security during FY06/12. It noted, however, from a long-term perspective reconstruction demand may yield positive economic benefits for the business.

Q2 (1H) FY06/11 Results

IWI released Q2 (1H) FY06/11 results on February 4, 2011 (see table above).

1H FY06/11 results by segment were as follows:

Sales in the Retail Banking Online Systems segment were 1.3 billion yen. Operating profit was 293 million yen, with OPM at 23.2%.

Sales in the System Solutions segment were 652 million yen, with an operating loss of 76 million yen.

Sales in the Security Systems segment were 155 million yen, with an operating loss of 278 million yen.

The original plan forecast sales of 1.7 billion yen and an operating loss of 330 million yen in Q2 (1H) FY06/11. Actual results were better than the company’s plan: sales were 350 million yen higher and an operating profit was 269 million yen above the plan. Considering per-segment performance, results were better than forecast in Retail Banking Online Systems; roughly in line with forecasts in Systems Solutions; but significantly below forecasts in Security Systems, where operating conditions became challenging. There was no change to the full year forecast.

Retail Banking Online Systems: sales were 1.3 billion yen (vs. a 1H forecast of 783 million yen), operating profit was 93 million yen (vs. a 1H forecast of 85 million yen), and OPM was 23.2% (vs. 35.3% in 1H FY06/09). The company said that the main reasons why results exceeded expectations were that forecasts had been conservative and that investment by its main customers, credit card companies, had been steadily recovering. The environment for credit card companies has improved gradually and the negative impact of the Revised Lending Law (placing restrictions on the total amount of combined borrowing per individual; revised June 2010) and Takefuji Corporation’s bankruptcy filing were not as pronounced as initially feared. Furthermore, credit card companies’ responses thus far to the Revised Lending Law and the Installment Sales Law have focused on ‘backward looking’ investments, while ‘forward looking’ demand, such as for replacing equipment, has started to improve. According to the company, five to six years have passed since the credit card companies invested in systems that have already reached the end of their lifespan, and these companies are now planning new investments in systems to help them streamline their workflow.

For 2H, the company indicated that some of the credit card companies intend to update their banking systems and is aiming to capture this demand and possibly push sales above forecasts. The development of the Linux-based version of NET+1 will help customers reduce their investment and maintenance costs, while boosting NET+1 sales. Development as well as sales and marketing of this version are proceeding smoothly and the company expects it to start contributing to sales either in 2H FY06/11 or 1H FY06/12.

Systems Solutions: sales were 652 million yen (vs. a 1H forecast of 690 million yen) and the operating loss was 77 million yen (vs. a 1H forecast of an operating loss of 20 million yen). Sales to securities companies were 335 million yen, down from 392 million yen in 1H FY06/10, while sales to credit card and other businesses were 316 million yen, also down from 400 million yen in 1H FY06/10.

The company’s current focus in the segment is the overseas deployment of ACE Plus, promoting the ACE Plus for BANK version of its software with DNP (ACE Plus for BANK is aimed at detecting illegal transactions like money laundering), and expanding its lineup of securities solutions-related products. In the company’s securities-related business, major securities companies are strengthening their overseas offices, which is creating increased demand for systems, while small and medium-sized securities companies are investing in rationalization measures. When combined with the company’s enhanced product line up, the company expects these factors to result in an increase in sales in 2H. However, competition remains fierce and the company is uncertain to what extent these factors will contribute to profits.

Security Systems: sales were 155 million yen (vs. a 1H forecast of 246 million yen) and the operating loss was 278 million yen (vs. a 1H forecast of an operating loss of 120 million yen). Although results were below forecasts, the company said that the pace of recovery in software investments by manufacturers has been slow and, compared to investment in other segments, customers have been tending to defer investments in security products.

The company commented that its performance in 2H will depend on manufacturers’ budgets for FY03/12. In addition, it hopes that a potential increase in government and municipal office budgets for spending on security systems will have a positive effect on results.

Q1 FY06/11 Results

IWI released Q1 FY06/11 results on November 10, 2010 (see the table above). As a percentage of the 1H company forecast, Q1 numbers were as follows:

• Sales: 40.6% (vs. 1H forecast of 1.7 billion yen)
• Operating loss: 173 million yen (vs. 1H forecast: operating loss of 330 million yen)
• Recurring loss: 175 million yen (vs. 1H forecast: recurring loss of 330 million yen)
• Net loss: 139 million yen (vs. 1H forecast: net loss of 210 million yen)

Sales in the Retail Banking Online Systems segment were 372 million yen (47.5% of the 1H forecast of 783 million yen). Operating profit was 26 million yen (31.8% of the 1H forecast of 85 million yen) with OPM at 7.0% (vs. 23.3% for Q1 FY06/10). The company said that results for this segment exceeded the original plan. The environment for IWI’s main customers, credit card companies, has improved gradually compared to a year ago. Meanwhile, the negative impact of the Revised Lending Law (revised in June 2010 placing restrictions on the total amount of combined borrowing per individual), were not as pronounced as initially feared.

Looking ahead, development of the Linux-based version of NET+1 has progressed (see "Medium and Longer Term Outlook" for further discussion), and the company is working to secure orders for FY06/11.

Sales in the System Solutions segment were 258 million yen (37.4% of the 1H forecast of 690 million yen). Operating loss was 47 million yen (vs. 1H operating loss forecast of 20 million yen). The company mentioned that results for the segment were in line with the original plan. Securities related business revenues increased from 155 million yen in Q1 FY06/10 to 166 million yen in Q1 FY06/11 while card related/other business saw a decline from 99 million yen to 92 million yen over the same period.

The company’s current focus in the segment is the overseas deployment of ACE Plus and promoting ACE Plus for BANK version of its software solution with DNP (ACE Plus for BANK is aimed at detecting illegal transactions, such as related to money laundering). Subsidiary Intelligent Wave Korea and Sinsegae I&C (system vendor for Shinsegae Group) tied up in September 2010 to offer ACE Plus in South Korea. The company commented credit card use in South Korea reached 53% of personal consumption in 2009, and the company expects greater demand for fraud detection accuracy as credit card usage continues to grow.

Sales in the Security Systems segment were 68 million yen (27.8% of the 1H forecast of 246 million yen). Operating loss was 152 million yen (vs. the 1H forecast of 120 million yen loss). The company said that results for the segment were below the original plan. According to the company, software investments by manufacturers have been recovering, and product inquiries were on the rise. However, due to the slow pace of the recovery, the company felt that it could not estimate exactly how much it could book in FY06/11 sales until it knew the manufacturers’ spending plans, something that would not happen until well into Q3 (as most Japanese companies have a March year-end and finalize their budgets in February-March).

There was no change to the company’s full year estimate as strength in the Retail Banking Online Systems segment was offset by weaker than expected results in the Security Systems segment.

Full Year FY06/10 Results

The company announced FY06/10 full year results on August 11, 2010. Results were as follows:

Sales: 5.0 billion yen (-10.3% YoY)

Operating profit: 358 million yen (+56.6% YoY)

Recurring profit 3.9 million yen (+64.9% YoY)

Net income 212 million yen (+12.8%).

The company revised its FY06/10 forecast on August 4, 2010 and results were roughly in line with the revised forecast.

Retail Banking Online Systems continues to face a tough environment. Although sales of 2.4 billion yen exceeded the initial forecast of 2.3 billion yen (+6.8% YoY), credit card companies’ investment in IT infrastructure remained subdued. However, new efficiency measures in project management (such as cutting outsourcing costs and enforcing cuts in fixed costs) brought a 17.6 percent YoY gain in operating profit.

In the Systems Solutions business, sales decreased 9.1 percent YoY, but were still higher than the initial forecast (1.9 vs. 1.7 billion yen). Sales related to the operation of TSE (Tokyo Stock Exchange) arrowhead were a contributing factor. Furthermore, a 5.4% YoY gain in operating profit resulted from more efficient project management in software development, similar to Retail Banking Online Systems.

Results in Security Systems reflected the trend of restrained IT infrastructure investment (mainly from manufacturers) and a scarcity of new clients, resulting in an operating loss of 267 million yen. Sales, however, improved by 23.6 percent YoY.

Q3 Results

IWI released Q3 FY06/10 results on May 12, 2010 (see the table above). As a percentage of the full year company forecast, the cumulative Q3 numbers are as follows:

• Sales: 66.3% (3.3 billion yen vs. full year forecast of 5.0 billion yen)
• Operating profit: 77.5% (116 million yen vs. full year forecast of 150 million yen)
• Recurring profit: 74.3% (121 million yen vs. full year forecast of 163 million yen)
• Net income: 65.3% (115 million yen vs. full year forecast of 176 million yen)

According to the company, cumulative Q3 performance was largely in line with expectations, and at the current pace earnings for the full year should be somewhat better than expected.

Q3 standalone sales were flat YoY (see table above); cumulative 9-month sales were down 15.6% YoY. Cumulative operating profit was up +234.7% YoY; operating margin increased (3.5% vs. 0.9% in the same period of FY06/09) due to gross margin improvement in the Retail Banking Online Systems and System Solutions businesses (increasing 8.6% YoY, and 5.7% YoY, respectively).

In Retail Banking Online Systems business conditions remained challenging; cumulative Q3 sales fell 13.4% YoY. The clients continued to face extremely tough business environment and IWI commented that in order to see real improvement, the legislative changes reversing some of the harsh rules (such as limits on total amount lent) would be needed. Meanwhile, credit companies should continue to run very tight budgets, investing only in areas that allow them to cut costs and streamline operations. IWI noted to SR Inc. that despite harsh environment it continued to be optimistic about FY06/12 when a number of large credit card firms seem likely to initiate large projects to streamline the cost base and improve efficiencies. At the same time, smaller credit card issuers should see consolidation and a wave of outsourcing of operations to data centers already operated by some system integrators.

Systems Solutions – cumulative sales through Q3 were slightly lower YoY (-3.5%) and OPM improved (19.4% vs. 10.7%). Sales of both IWI’s software packages and TSE arrowhead-related sales were the main contributors. According to the company, while the orders directly related to arrowhead are past the peak, the introduction of the system should drive further demand, as new services and applications emerge (spread of algorithmic trading being one example), enabled by higher transaction speed and throughput. IWI is keen to expand its offering to securities firms. However, one of critical pieces of the “puzzle” is ordering systems which IWI would not be able to offer by itself (if only because mission-critical nature of ordering systems makes track record a prerequisite for sales). Therefore, unless IWI finds a tie-up partner (or DNP buys it one – an unlikely event at this stage), opportunities to aggressively expand in the space would likely to be limited.

Security Systems – cumulative sales through Q3 dropped significantly YoY (-49.0%). It appears that a large contract that was delayed in Q3 should materialize in Q4. In total, SR Inc. estimates that the segment is likely to be somewhat behind the forecast for the full year.

There was no new discussion regarding details of the relationship with DNP. Two companies were still working on outlaying the main issues and opportunities in the security business (likely the main focus of any joint initiatives). SR Inc. notes however that as a first step, both firms would need to gain insights into why their respective standalone efforts in the area were not as successful as they would like them to be. Perhaps, in order to sell security, the product must be packaged as something entirely different?

Q2 (1H) Results

IWI released Q2(1H) FY06/10 results on February 10, 2010 (see the table above). As a percentage of the full year company forecast, the cumulative Q2(1H) numbers are as follows:

• Sales: 43.5% (2.2 billion yen vs. full year forecast of 5.0 billion yen)
• Operating profit: -4 million yen vs. full year forecast of 150 million yen
• Recurring profit: -1 million yen vs. full year forecast of 163 million yen
• Net income: 31.3% (55 million yen vs. full year forecast of 176 million yen)

Q2 sales were 1.5 billion yen (-8.6%YoY). Cumulative Q2 sales exceeded initial company forecasts by approximately 32.8% (537 million yen); the company indicated execution of earlier contracts contributed 350 million yen and new orders contributed approximately 187 million yen.

Q2 gross profit was 505 million yen (+5.0% YoY). Gross profit margin increased approximately 4.3% YoY (GPM was 28.8% in Q2 FY06/09 vs. 33.1% in Q2 FY06/10).

Q2 consolidated operating profit was 159 million yen (+809.0 YoY). SG&A expenses declined 25.4% YoY. The SG&A / sales ratio declined approximately 5.1% (from 27.8% in Q2 FY06/09 to 22.7% in Q2 FYH06/10). Cumulative 1H operating profit was a negative 5 million yen, exceeding the company’s initial estimate of a loss of 389 million yen.

Q2 recurring profit was 165 million yen, from a 9 million yen loss during Q2 FY06/09. Cumulative recurring profit was approximately -1 million yen, exceeding the company’s initial estimate of a loss of 389 million yen.

Q2 net income was 147 million yen (+825.3% YoY). 1H net income was 55 million yen, exceeding the company’s initial 1H net loss of 124 million yen. The company indicated that the difference between the initial estimate and the 1H result was due to extraordinary gains of 179 million yen, related to investments.

Cumulative 1H sales in the Retail Banking Online Systems segment were 1.2 billion yen (52.9% of full year forecast shown above). The company indicated that continued difficult conditions for credit card companies (caused by the Revised Lending Law) had impacted their spending on IT infrastructure, and thus sales. Q2 sales in the segment were flat YoY (see quarterly Sales by Segment table above). The order backlog for the segment rose 3.8% YoY (see table above). Cumulative 1H operating profit in the Retail Banking Online Systems segment was 421 million yen (61.4% of the full year forecast shown above). 1H OPM rose approximately 3% YoY (32.5% in 1H FY06/09, 35.2% in 1H FY06/10), in part due to internal cost cutting and a higher focus on sales of in-house software sales (which do not have per-unit royalty costs).

Cumulative 1H sales in the System Solutions segment were 793 million yen (45.5% of full year forecast shown above). The segment performance was helped in part by the projects related to the new trading system for the Tokyo Stock Exchange (“arrowhead”, officially launched on January 4, 2010). The order backlog declined 11.1% YoY (see table above). Cumulative 1H operating profit in the System Solutions segment was 122 million yen (39.2% of the full year forecast shown above). 1H OPM for the segment rose approximately 10% (from 4.9% in 1H FY06/09 to 15.4% in 1H FY 06/10). The company indicated that improved project management was a key reason for improved profitability in the segment.

Cumulative 1H sales in the Security Systems segment were 189 million yen (18.7% of full year forecast shown above). Current conditions in the segment were described by the company succinctly: “tough”. Sales for both services and licenses remain challenging. The company suggested that going forward, the CWAT data leakage prevention software could see renewed interest as manufacturers move processes and production offshore. Cumulative 1H operating profit in the Security Systems segment was -281 million yen. The full year forecast is 102 million yen, which suggests 382 million yen of operating profit for 2H.

There was no change to the FY06/10 earnings forecasts.

Update on Full Year Outlook

The company suggested that sales in Security Systems could potentially be behind internal estimates. SR Inc. notes that in order to achieve the full year forecast, the company needs 815 million yen of sales in 2H and 382 million yen operating profit. During the 1H results meeting, the company indicated that additional CWAT contracts could be signed during April, suggesting that full year segment results are weighted in Q4. The downside risk is that segment costs are largely fixed; delays in winning additional contracts could push operating profit lower and negatively impact overall results.

The company seemed cautiously optimistic with respect to Retail Banking Online Systems and System Solutions, with the effect that overall FY06/10 results should be in-line. The company indicated that it expects an improvement in spending by core customers (financial institutions), and that related package sales in Retail Banking Online Systems and System Solutions appear to be improving.

Q1 Results

IWI released Q1 FY06/10 results on November 11, 2009 (see the table above). As a percentage of the 1H company forecast, Q1 numbers are as follows:

• Sales: 39.6% (650 million yen vs. 1H forecast of 1.6 billion yen)
• Operating profit: -164 million yen vs. 1H forecast of -389 million yen
• Recurring profit: -165 million yen vs. 1H forecast of -389 million yen
• Net income: -92 million yen vs. 1H forecast of -124 million yen

Key Q1 data is as follows:

Sales: 650 million yen (-40.8% YoY).

Operating profit: -164 million yen (vs. 15 million yen for Q1 FY06/09)

Recurring profit: -166 million yen (vs. 28 million yen for Q1 FY06/09)

Net income was: -92 million yen (vs. 23 million yen for Q1 FY06/09)

Sales in the Retail Banking Online segment were 281 million yen (40.3% of the 1H forecast of 698 million yen). Operating profit was 65 million yen (31.8% of the 1H forecast of 206 million yen); OPM was 23.3% (vs. 41.7% for Q1 FY06/09).

Sales in the System Solutions segment were 255 million yen (38.8% of the 1H forecast of 658 million yen). Operating profit was 24 million yen (50.8% of the 1H forecast of 47 million yen); OPM was 9.4% (vs. 0.9% for Q1 FY06/09).

Sales in the Security Systems segment were 114million yen (40.4% of the 1H forecast of 282 million yen). Operating profit was -128 million yen (vs. the 1H forecast of -170 million yen).

There was no change to the full year forecast.

Income Statement

Sales have been volatile. The mix in the company’s business is largely driven by the dynamics of the Retail Banking Online System orders. The largest increase in sales from FY06/01 through FY06/11 was in FY06/06 (+37.9% YoY). FY06/06 sales growth was mostly due to strong orders from credit card companies and hardware sales. Positive sales growth during the year was recorded in both the System Solutions and Security Systems segments: the company released new versions of ACE (credit card fraud detection program) and CWAT (information extrusion security program) software during the year, boosting sales.

Gross profit margins have been relatively stable on a top-line basis (a median GPM of 37.0% from FY06/01 through FY06/10).

OPM has been in decline, from 31.5% in FY06/01 to 6.7% in FY06/11. The largest components of the company’s SG&A expense has historically been salaries (see breakdown below), however the company has been aggressively investing in further development of in-house software packages beginning in FY06/08. Expenditures related to Research & Development are typically expensed in the period incurred; from a pure accounting perspective this is reasonable due to difficulties related to assigning “value” to R&D expenses, but this approach ignores the reality that there is some economic value from R&D activities. For IWI, money spent on R&D is an important part of the company’s growth into new product areas.

Recurring profit has largely reflected operating profit.

The company recognized noteworthy extraordinary losses twice from FY06/01 through FY06/11: in FY06/07 and FY06/08. The FY06/07 expense was 466 million yen, mostly due to software amortization (146 million yen), litigation costs (114 million yen), and a valuation allowance related to investments (156 million yen). The FY06/08 expense was 398 million yen, mostly due to impairment losses (145 million yen) and software amortization (137 million yen).

Historical Performance vs. Estimates

The company’s sales forecasting accuracy has been relatively accurate, unsurprising due to the long lasting nature of the company’s main products: large software projects and revenues for NET+1 systems.

Considering net profit, the company’s initial forecast in FY06/04 was substantially higher than final results. The company revised its forecast during Q3 FY06/04, however lower sales than expected in security systems (which had been expected to contribute to overall gross profit) impacted overall results.

Results in FY06/05 were impacted by a change in accounting treatment for sales of CWAT, the company’s security product. FY06/05 results (if the original accounting methods were used) vs. plan are below:

Sales: +2.8%

Operating profit: +66.7%

Recurring profit: +69.3%

Net profit: +48.13%

Accounting detail: sales were initially recognized when the package was shipped to a reselling agent, the new accounting method delayed revenue recognition until the end user was assigned a license key (and could actually use the product).

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Balance Sheet

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 accounts receivable.

Liabilities

The company has been debt free since FY06/06, but has used debt financing in the past. The company’s liabilities are mostly accounts payable.

Shareholders’ Equity

There have been no significant changes in shareholders’ equity related to valuation or other charges. The company had no convertible bonds or stock options outstanding as of end-FY06/11.

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Cash Flow Statement

Operating Cash Flow

Operating cash flows have typically been driven by net income, but have also been impacted by changes in working capital levels. The difference between OCF and net income in FY06/09 was largely the result of a decline in accounts receivable (221 million yen). The difference between OCF and net income in FY06/08 was the result of a decline in inventories (685 million yen). The end result in both years was to boost the OCF compared to NI substantially.

Investment Cash Flow

The cash outflows related to investment activities in FY06/02 and FY06/03 were largely the result of purchases of investment securities (883 million yen in FY06/02 and 425 million yen in FY06/03).

Financial Cash Flow

Financial cash flows have typically been the result of treasury stock purchases (an average of 237 million yen per year from FY06/03 through FY06/07) and dividend payments.

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Other Information

History

Chairman Kazuhiko Adachi established Intelligent Wave (referred to as IWI throughout this report) 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 system 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.

The first wave of change in the industry began when MasterCard changed its branding policy in the early 1990s to allow credit card companies to co-brand with MasterCard. This branding decision eventually led to multi-branding (when issuers could issue both Visa and MasterCard credit cards), spurring connectivity demand and resulted in increased order flow for IWI.

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. This led to integration demand that continued to exist as of 2010.

The company listed on the Jasdaq stock exchange in June 2001.

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News & Topics

February 2012

On February 3, 2012, Intelligent Wave released Q2/1H FY06/12 results.

January 2011

On January 25, 2011, the company announced an upward revision to its 1H and full year FY06/12 forecast as well as the recognition of deferred tax assets. The revised full year forecast was as follows:

1H FY06/12 forecast

• Sales: 2.5 billion yen (vs. previous forecast of 2.4 billion yen)
• Operating profit: 29 million yen (vs. previous forecast of 10 million yen)
• Recurring profit: 33 million yen (vs. previous forecast of 12 million yen)
• Net income: 174 million yen (vs. previous forecast of 5 million yen)

FY06/12 forecast

• Sales: 5.3 billion yen (unchanged vs. previous forecast)
• Operating profit: 400 million yen (unchanged vs. previous forecast)
• Recurring profit: 410 million yen (unchanged vs. previous forecast)
• Net income: 393 million yen (vs. previous forecast of 220 million yen)

The company cited the following two factors behind the upward revision to its 1H forecast:

• Parent company Dai Nippon Printing Co.’s (TSE 7912) orders for entrusted system development projects for group companies exceeded IWI’s initial sales forecast.
• Efficiency gains at the front-end credit card, and systems solutions software development businesses.

In addition, the company also announced that at a board meeting it was also decided to wind down and liquidate its subsidiary Intelligent Wave USA as of June 2012. The company will book a deferred tax asset (DTA) related to prior losses (of 497 million yen) at this subsidiary in 1H FY06/12. The amount of DTAs and deferred corporate taxes is expected to come in at 173 million yen – significantly above initial forecast net income for the period.

November 2011

On November 4, 2011, the company released Q1 FY06/12 results.

August 2011

On August 10, 2011, the company released FY06/11 results.

On August 3, 2011, the company announced a revision to its FY06/11 forecast.

The consolidated full-year revision was as follows:

• Sales: 4.8 billion yen (vs. previous forecast of 5.3 billion yen)
• Operating Profit: 321 million (vs. previous forecast of 230 million yen)
• Recurring Profit: 341 million (vs. previous forecast of 250 million yen)
• Net Income: 129 million (vs. previous forecast of 120 million yen)

The company cited the following factors behind its revision:

• Sales were downwardly revised due to scaling back of capex investment in the credit card and brokerage industries - both key industries for the company. This affected the company’s software development sales. Within the brokerage business a client postponed a decision on a large-scale project resulting in lower sales for related software and package development sales.
• Operating profit was revised higher due to improved project management and execution at the software development business, cost controls for hardware sales, company-wide cost savings initiatives and 77 million yen in software depreciation costs being instead recorded as an extraordinary loss.
• Net income was revised slightly higher even after the posting of the 77 million extraordinary loss due to the impact from the other contributors to higher operating profitability.
• With regards to the software depreciation costs the company decided after reviewing its sales plans and actual results to write-down the value of its intangible assets and thus record an extraordinary loss.

May 2011

On May 6, 2011, the company released Q3 FY06/11 results.

February 2011

On February 21, 2011, the company announced that it created a business partnership with Saltlux Inc. on February 10, 2011 regarding Saltlux Inc.’s Semantic Search technology. According to the company, Saltlux Inc. provides its Semantic Search solution to over 400 key customers in Korea, Europe, the United States, and Asia. The company commented that it would sell Saltlux Inc.’s service in Japan and would develop new products and services combined with Saltlux Inc.’s technology.

On February 4, 2011, the company released 1H FY06/11 results.

January 2011

On January 28, 2011, the company released an upward revision of 1H FY 06/11 forecasts. Details of the revision were as follows:

• Sales: 2.1 billion yen (vs. previous forecast: 1.7 billion yen)
• Operating loss: 61 million yen (vs. previous forecast: operating loss of 330 million yen)
• Recurring loss: 61 million yen (vs. previous forecast: recurring loss of 330 million yen)
• Net loss: 67 million yen (vs. previous forecast: net loss of 210 million yen)

According to the company, the upward revision was due to two factors: 1) hardware sales based on the replacement demand from credit card companies, 2) improved performance in software development in the Retail Banking Online Systems segment.

There was no change in the full year forecast.

November 2010

On November 10, 2010, the company released Q1 FY 06/11 results.

September 2010

On September 28, 2010, the company announced that DTS (TSE 9682), the company’s enterprise partner, would begin selling “EAGISCORP” (a SaaS based on CWAT) starting October 1, 2010.

On September 17, 2010, the company announced that Intelligent Wave Korea Inc., the company’s Korean subsidiary, and Shinsegae I&C Co., Ltd. concluded a sales agreement on September 15. The announcement indicated that the two companies will collaborate to sell ACE Plus in the Korean credit card market.

On September 9, 2010, the company and Dai Nippon Printing co-announced that they developed “ACE Plus for Banks” (it detects fraudulent bank account transactions) and would start selling the system on September 10, 2010. IWI is responsible for system architecture and DNP provides sales promotions to regional banks, credit unions, and credit associations across Japan. The company commented that they hope “ACE Plus for Banks” will reach about 1 billion yen of total sales over the next three years.

August 2010

On August 30, 2010, the company and Serisys Solutions Limited announced a strategic partnership to offer an integrated solution including broking, trading, and risk management solutions based on the DECIDE platform to clients in Japan.

The company released its three-year medium-term plan (FY06/11-FY06/13) on August 12, 2010.

The company released FY06/10 full year results on August 11, 2010.

The company announced a revision to its FY06/10 forecast on August 4, 2010.

May 2010

IWI released Q3 results on May 12, 2010.

April 2010

On April 3, 2010 the company released the results of Dai Nippon Printing’s tender offer (announced in February 2010). Key data is as follows:

• Number of shares purchased by DNP: 133,306 shares
• Settlement Date: April 9, 2010
• DNP ownership as of settlement date: 50.61%

DNP will become IWI’s main shareholder and parent company. There will be no impact on IWI’s FY06/10 results.

March 2010

On March 8, 2010 the company announced that its Market Data Distribution system had been implemented by Daiwa Securities Capital Markets Co. Ltd.

February 2010

On February 10, 2010, the company announced its support for a tender offer made by Dai Nippon Printing (TSE 7912; referred in this report as DNP). Details of the offer are as follows:

• Offer price: 26,100 yen per share (78.1% premium to the average price for the preceding three months)
• Number of shares: no minimum or maximum limit
• Period of offer: February 12, 2010 until April 2, 2010

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Top Management

Kazuhiko Adachi, Chairman and founder of the company. Adachi’s career in IT began at Nippon Univac Sogo Kenkyusho, Inc. (Japanese subsidiary of Sperry Univac USA, a manufacturer of mainframe computers) in 1967. He was a manager of software development and general manager of the Technical Service Division at CDC Japan (subsidiary of Control Data Corp USA, a manufacturer of supercomputers) from 1970 until 1974, when he founded Japan Mark Corp (which was the exclusive Japanese distributor for Prime Computer, a manufacturer of minicomputers). In 1979 Adachi became the President of Tandem Computer Japan (subsidiary of Tandem Computers Inc., an early manufacturer of large fault-tolerant computers). He founded IWI in 1984.

Yoshiyuki Yamamoto is the President of IWI. Yamamoto joined the company in 1985, and has held multiple leadership positions in the company throughout his career (including sales and product divisions). He became President in 2005.

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Employees

The parent company employed 261 employees as of FY06/11:

• Average age: 36.7
• Average length of employment with the company: 9.9 years
• Average salary: 7.1 million yen
• Not unionized

The consolidated group had 273 employees as of FY06/11.

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Major Shareholders

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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 500 yen per share for FY06/06. This dividend amount has been maintained as of FY06/11.

Shareholders as of December 31, 2011, were able to receive free trial versions of the Virus Chaser anti-virus software (for up to five users) per year. However, registered shareholders from June 30, 2012, will receive its Dr. Web anti-virus program instead.

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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.

Quiet Period – the company maintains a quiet period of approximately three weeks before earnings are released.

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By the Way

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Latest Q&A

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