Intelligent Wave : Shared Research report updated.

Strength in credit card transaction processing

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

IWI focuses mainly on software development for client companies in the financial services industry, adding value by integrating hardware and software to create specialized systems, and also providing maintenance services to keep those systems running. The company's information processing technology is mainly used in online systems to provide reliable credit card transaction processing service around the clock and 365 days a year.

In this field, IWI has three core products: NET+1, ACE-Plus, and OnCore. NET+1 is a self-developed packaged software product used for credit card authorization (authorization of a charge by the credit card issuer in response to an inquiry from a member store). NET+1 has the top domestic market share in this field, being used in roughly 70% of credit card authorization systems of Japan's leading credit card companies (according to the company). ACE-Plus is a software system for detecting and preventing fraudulent credit card use. OnCore, also developed in-house, provides the same network connection functions as NET+1 but can also be used for other payment applications as well, including connections for smartphone payments.

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

IWI provides value to customers in the form of cloud services as well as on-premises systems. These services include IOASIS, an application service provider (ASP) service that delivers all features required for credit card merchant acquirer businesses, IFINDs (ASP service with the same features as NET+1), and IGATES (ASP service with the same features as ACE-Plus). IWI's cloud services enable fintech startups and companies that have no experience in the card business to provide their own payments and financial services to expand their trade areas. As well, the company's existing financial institution companies may use its cloud services to launch a new service quickly. In these cases, the financial institutions can start up a new service without making a large upfront investment.

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

Trends and outlook

In FY06/22, the company reported sales of JPY11.5bn (+2.7% YoY), operating profit of JPY1.5bn (+34.4% YoY), recurring profit of JPY1.6bn (+32.9% YoY), and net income of JPY1.1bn (+25.5% YoY). The company posted record sales, while operating profit topped JPY1.5bn for the first time in 20 years after marking a record JPY1.9bn operating profit in FY06/02.

Sales were JPY5.4bn (+1.6% YoY) for system development, JPY1.5bn (+10.7% YoY) for maintenance, JPY354mn (+5.7% YoY) for in-house packaged products, JPY1.2bn (+24.5% YoY) for cloud services, JPY1.8bn (+7.1% YoY) for hardware, JPY350mn (-31.2% YoY) for third-party packaged products, and JPY998mn (-11.8% YoY) for security measure products. Sales increased thanks to growth in the cloud services business and hardware upgrades by existing customers.

Operating profit increased because the cloud services business achieved profitability in FY06/22, efforts were made to improve the quality and productivity of system development and maintenance, and hardware sales rose. The gross profit margin improved by 4.0pp to 32.2%, and the SG&A ratio rose by 0.9pp to 19.0%, resulting in a 3.1pp improvement in the operating profit margin to 13.2%.

For FY06/23, the first year of the new medium-term business plan (FY06/23-FY06/25; see "Management strategy and long-term outlook" below), IWI targets sales of JPY13.5bn (+17.5% YoY), operating profit of JPY1.8bn (+18.4% YoY), recurring profit of JPY1.8bn (+18.2% YoY), net income attributable to owners of the parent of JPY1.3bn (+21.2% YoY), and annual dividend payments of JPY20 per share (JPY17 in FY06/22). It also targets operating profit margin of 13.3% (+0.1pp YoY). The company says that it will reform its business structure and expand its business domain, while making necessary investments to maintain and improve the quality and performance that support critical social infrastructure, as it seeks to achieve sustainable growth.

Regarding the medium-term business plan released on August 4, 2021, the company used a rolling method to review numerical targets for the three-year period from FY06/23 through FY06/25 in light of the progress that had already been made and other factors (announced on August 3, 2022). The company says that from FY06/23, it will continue to release a medium-term business plan as a three-year rolling plan revised every fiscal year so that it can respond flexibly to changes in the business environment.

For FY06/25, the final year of the medium-term business plan, the company targets sales of JPY16.5bn (+43.6% versus FY06/22), operating profit of JPY2.5bn (+64.5% YoY), and OPM of 15.2% (versus 13.2% in FY06/22). IWI referred to its effort to achieve sales of JPY15.0bn and OPM of 15.0% in FY06/24 as "15ALL." With 15ALL as a milestone, the company aimed for even greater growth in the long term. In the latest rolling medium-term business plan, the company targets OPM of 15.2% for FY06/25.

In addition to one-time revenue from its traditional business, the company is building a stable earnings base from recurring revenue (from cloud services and operation and maintenance services, which provide revenue over a long period of time). The cloud services business has grown to become an important business for the company in terms of new client acquisition and business expansion. The business achieved its target of turning profitable in FY06/22. The company expects cloud services to continue growing into a major source of earnings in FY06/23 onward. In addition, the company is taking on the challenge of expanding into new markets, such as using the knowledge and experience it has gained from its development work in the financial industry to create new products for companies outside the financial industry. It aims to expand into new markets and develop new revenue streams by using its technology, which is based on real-time, high-speed processing of large amounts of data, to discover and solve underlying operational issues in different industries.

Strengths and weaknesses