Hi, I am Haruo Amano, director of HENNGE. Thank you for watching our financial results video for the second quarter of fiscal year 2026. Today, our CFO, Ryo Kobayashi, will explain our financial results for the second quarter of FY 2026 and the progress against our full year forecast. I will explain our growth strategy. Following that, our executive officer in charge of product strategy, Takeru Imaizumi, will explain about the future vision of HENNGE One.
Hi, I'm Ryo, CFO of HENNGE. First, let me explain the financial results for the second quarter of FY 2026. This is the summary of our consolidated financial results. Results of the second quarter are progressing well against the full year forecast, which was disclosed on November 7th, 2025. Our quarterly consolidated net sales are as presented on the slide. Since the net sales of HENNGE One business is recurring in nature, it has been increasing throughout each quarter. Our year-over-year consolidated net sales are as presented on the slide. Our quarterly gross profit and gross profit margin are as presented on the slide. Our year-over-year gross profit and gross profit margin are as presented on the slide. Gross profit margin increased mainly due to higher ARPU maintaining a high level. The quarter-over-quarter breakdown of operating expenses is as presented on the slide.
The year-on-year breakdown of operating expenses is as presented on the slide. In accordance with our policy for FY 2026, we have been increasing headcount and taking active advertising initiatives as a preparation for the future business expansion. Our quarterly net sales and operating expenses are as presented on the slide. The trend in the number of employees is as presented on the slide. The recruitment environment for sales personnel remains challenging. We will continue our initiatives to strengthen selling capabilities through organizational development and active recruitment efforts. The status of our cash flow is as presented on the slide. Let's move on to business activities during this quarter. This is an overview of our business highlights. As stated in our policy for FY 2026, we have taken active efforts, including engaging in over 55 events.
In March 2026, we launched a new service, HENNGE Endpoint & Managed Security. By combining device protection with 24/7 fully managed MDR, we offer a full-scale service that consistently monitors and responses to external attacks. We also integrated vulnerability assessment features, which allows us to deliver a holistic solution covering not only endpoint devices, but also web-facing IT assets. Next, I would like to explain the results of our KPIs. The progress of HENNGE One KPIs from the end of the last fiscal year is as presented on the slide. Year-on-year KPI results for HENNGE One are as presented on the slide. The churn rate of HENNGE One is as presented on the slide. We have maintained a low level of churn, and the theoretical average contract period exceeds 25 years. The number of contracted companies and users is as presented on the slide.
During this quarter, we acquired multiple contracts from relatively large companies. In addition, we continued to achieve stable growth in the number of contracts with small to mid-size companies through deepening relationships with resellers. The number of contracted users also increased steadily, supported by robust new contract acquisitions. The quarterly trend of ARR and ARPU is as presented on the slide. During this quarter, several relatively large companies opted for single-featured plans. Nonetheless, both new and existing customers continued to choose HENNGE One Pro, our top-tier plan, which impacted the raise in ARPU. Furthermore, the proportion of HENNGE One Pro within the total ARR is approximately 20% as of the end of this quarter. Next, I will touch on our full year outlook of FY 2026.
In pursuit of JPY 20 billion in ARR, strengthen sales structure, and accelerate new customer acquisition, along with enhancing additional service value. This is the policy stated for FY 2026, as shown on the slide. This slide shows our full year forecast for FY 2026. There is no change from the forecast, which was disclosed on November 7th, 2025. The historical trend and current progress of net sales by business are as presented on the slide. Results of the second quarter are progressing well against our full year forecast. The historical trend and current progress of advertising expenses and operating expenses, excluding advertising expenses, are as presented on the slide. We are carrying out various initiatives in line with our policy for FY 2026.
Specifically, we are putting our resources into two key drivers for mid to long-term growth, which are strengthening our organization and establishing a powerful HENNGE brand. To be more specific, we're prioritizing investments in hiring and recruitment, as well as initiatives that boost HENNGE brand recognition and market presence. Given our business model, even if we were to experience a current shortfall in recruitment, we expect the impact on the short-term business performance to be minor. However, to ensure mid to long-term growth, it is essential for us to continuously recruit the right talent that our company needs. Furthermore, we strongly believe that strengthening the HENNGE brand is essential to expanding the value we generate, whether that's by accelerating our current businesses or taking on new challenges, such as cultivating new markets and M&As.
We are convinced that strengthening our organization through recruitment and establishing our corporate branding will have a cumulative effect over time rather than showing immediate effects. In addition to generating further value through the launch of new services, we are investing in activities to increase our visibility and help people understand us better.
Please let me explain our growth strategy. Our corporate philosophy is liberation of technology. We believe in the power of technology. We love technology, and we strongly believe that technology will make our lives better. We want to deliver the power of technology to as many people as we can and to change the world to be a better place. We established HENNGE more than 25 years ago, and since then, we set our philosophy as liberation of technology, which we actually have demonstrated in various areas.
From the experience we gained, we think that software as a service is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we're providing software as a service and why we want to support our customers' transformation through cloud utilization. The total amount of technology that we provide to the customers and the total amount of liberated technology are the measures to prove our progress on our philosophy, and this is expressed as LTV. LTV, or lifetime value, is the total value arising from the current contracts with the customers. Our growth strategy is to maximize this LTV. Maximizing LTV, that is, by seeking to maximize the total gross profit earned over the future, we would like to build a solid business model that can stably increase profits even if the investments for further business growth are increased.
Currently, our average contract period and gross profit margin are already in a high number. Therefore, in order to maximize LTV, we think that it is essential to maximize ARR. We will actively engage in activities with expected high return on investment and aim to accumulate ARR as much as possible. ARR can be broken into three factors: the number of contracted companies, average number of users per contracted company, and average revenue per user. In these three factors, we aim to increase ARR by focusing on increasing the number of contracted companies and ARPU. The KPIs for our growth strategy of HENNGE One are as presented on the slide. Including our main service, HENNGE One, our group mainly operates a subscription model business. Barring any cancellations, the contract secured this year will continue to generate sales and become the foundational sales from next year onwards.
The figures on this slide demonstrate the robust and stable growth of ARR of HENNGE One. We view FY 2026 as the beginning of a new value generation cycle, a vital preparation period for reaching our target of JPY 20 billion in ARR. Let me take this opportunity to explain the value generation cycle, which is the very foundation of our growth. The cycle consists of three key steps: strengthening our framework for acquiring new customers, enhancing the added value of our services, and ensuring that this value is clearly communicated and delivered to our clients. We have continuously repeated and refined this multi-year cycle. We are evolving this cycle and making solid progress toward the goal of achieving JPY 20 billion in ARR by the end of FY 2029.
Even beyond that, we plan to continue evolving our cycle to establish an even more robust foundation for growth, further realizing our corporate philosophy, liberation of technology. As you can see on the slide, we have introduced various new services to meet the expanding market and customer demands. Most recently, in March, we launched HENNGE Endpoint & Managed Security. We've also announced the plans to roll out several other new services. As Imaizumi will explain in more detail later, these are services within the concept of Zero Trust, which is one of the elements in our roadmap toward realizing the liberation of technology. I believe this demonstrates substantial progress in the enhancing the added value of our services step mentioned in the previous slide.
We will focus on driving growth within our current business lines, while we will take on various challenges to generate additional value, including geographical expansion outside of Japan and pursuing M&A opportunities. By continuously evolving our value generation cycle through these initiatives, we will increase the certainty of achieving the future vision we are striving for. I would like to reemphasize that this fiscal year marks the beginning of our next value generation cycle and a crucial year of preparation to achieve further growth. Rather than focusing too much on short-term operating profit, we will proactively invest in maximizing future ARR to reinforce our business model that can deliver consistent profit growth. We are committed to solidify this robust business model for delivering sustainable growth and would sincerely appreciate your continued support from a mid to long-term perspective. This concludes our briefing on the second quarter of fiscal year 2026.
Next, Imaizumi, our Executive Officer in charge of Product Strategy, will explain about the future vision of HENNGE One.
Hi, I'm Takeru Imaizumi, Executive Officer in charge of Product Strategy at HENNGE. Let me explain the new service of HENNGE One announced on April 16th and the context behind their introduction. Technological innovations, especially in AI, are currently evolving at an incredible pace. We believe innovations have the potential to fundamentally transform the behavior of companies. In reality, however, many companies face significant barriers triggered by these innovations, making it difficult to leverage their benefits. We aim to remove these barriers and create a world where companies can truly enjoy the benefits of technology. New technologies often bring a fear of the unknown. Since our establishment, HENNGE's role has always been to act as a bridge, helping our customers to overcome this fear and securely step into new possibilities. HENNGE is more than just a security provider.
We strive to be an engine for the liberation of technology, untangling the complexities of evolving technology so that everyone can fully utilize it safely, securely, and with confidence. Since our establishment, we have consistently demonstrated the liberation of technology by removing the barriers that emerged through innovations including Linux, emails, and the cloud or software as a service. Today, as the world changes at an astonishing speed, implementing cybersecurity measures has become a critical requirement. Technological innovations, including AI, should ideally act as possibilities that empower companies to accelerate their growth. In reality, however, they have empowered attackers with sophisticated attacking methods, turning those possibilities into serious threats. These threats are no longer limited to large enterprises. Today's cyber-attacks are indiscriminate, targeting organizations regardless of their size. The mindset of "We're too small to be a target" is no longer valid.
Essential security measures have shifted from being a nice-to-have to an absolute prerequisite for business continuity. To address this, our mission is the democratization of Zero Trust. Zero Trust has become synonymous with recent security, we believe very few companies have actually implemented it fully. While this term has become popular, the reality lags behind. We believe the reason behind this gap is its overwhelming complexity. The concept itself is straightforward: trust nothing, verify everything. However, in practice, it requires procuring, integrating, and managing multiple product categories. When the cost and effort of protection begin to compromise the speed of business expansion, it becomes counterproductive. This high barrier has limited Zero Trust to only a handful of large enterprises and advanced adopters. We want to change this. We want to create a world where any company can easily enjoy essential security simply by using HENNGE One.
We are excited to announce our new services, HENNGE Mesh Network, HENNGE Password Manager, and HENNGE Domain Protection. Along with HENNGE Endpoint & Managed Security launched in March 2026, we believe that by integrating these new services into the existing HENNGE o ne, it will have core features to cover the Zero Trust concept. Through this service lineup, we aim to deliver essential security to companies that found Zero Trust out of reach. I will touch on each of the three services as well. HENNGE Mesh Network is a next-generation network service that eliminates vulnerabilities of traditional VPNs and ensures secure remote access by controlling access based on who you are rather than where you are. It shields VPNs, which are frequent targets of attacks, while providing an environment of secure access to only necessary resources without requiring complex infrastructure or system integrations.
HENNGE Password Manager is a service for the secure centralized management of credentials for non-SSO compatible systems and shared IDs. It minimizes the risk of information leaks by providing full visibility into logs of who and when shared passwords were accessed while utilizing an advanced architecture where decryption keys are never stored on the servers. HENNGE Domain Protection is a service designed to protect corporate brands by preventing spoofed emails that exploit a company's domain. It seamlessly enables compliance with the email authentication standard DMARC through visualization and simplification of DMARC's deployment and management. We are planning to roll out these services on and after October 2026. We support our customers' security across three areas with three service editions: the Identity Edition, DLP Edition, and Cybersecurity Edition. All the products introduced today are positioned within this portfolio. HENNGE Mesh Network addresses network access challenges as part of the Identity Edition.
HENNGE Password Manager further reinforces the authentication infrastructure within the Identity Edition. HENNGE Domain Protection tackles email-based threats through the DLP Edition. HENNGE Endpoint & Managed Security protects devices within the cybersecurity domain. Our strength lies in the fact that these are not isolated features, but rather integrated features under the single umbrella of HENNGE One. We are convinced that this allows us to solve a wide range of security challenges for our customers. Through these expansions, our goal is to evolve toward a seamless and holistic defense as shown on the slide. HENNGE One used to be seen as a gatekeeper for cloud access. Today, we are redefining it to embrace the three essential elements of Zero Trust. Identity, the entry point. Devices, the access point, and the network that connects them. This expansion is not about merely adding features.
It's about liberating our customers from the complexity of managing fragmented technologies. We want HENNGE One to be the foundation where anyone can utilize technology safely, securely, and with confidence. On top of that, this expansion is about more than just Zero Trust. Our core lies in removing every barrier that stands in the way of adopting new technology. While security is our current focus, our scope should continue to expand further beyond in the years to come. We believe this expansion of value creates a solid foundation for HENNGE's long-term and sustainable growth, which is resilient to short-term market trends. We will continue to take substantial steps toward becoming an infrastructure that makes the rewards of technology accessible to every company.
Everything I have shared today represents vital steps of our value generation cycle, enhancing the added value of our services and ensuring that this value is clearly communicated and delivered to our clients. We will continue to generate value and liberate technology. Thank you very much for your time and for joining our presentation.