Hi, I am Haruo Amano, Director of HENNGE. Thank you for watching our Financial Results Video. Today, our CFO, Ryo Kobayashi, will explain our financial results of FY 2026 and our forecast for FY 2027. Then, I will explain our growth strategy.
Hi, I'm Ryo, CFO of HENNGE. First, let me explain the consolidated financial results of FY 2026. Our consolidated financial results grew steadily year-on-year. Net sales of the HENNGE One business, which are recurring in nature, grew steadily year-on-year. Gross profit also increased steadily year-on-year, with the gross profit margin maintaining a high level. Next, I will explain the breakdown of operating expenses. During this quarter, ahead of the launch of new HENNGE One services from October onward, we proactively conducted marketing and branding activities to boost awareness. Additionally, continuing from the third quarter, we incurred expenses related to our headquarters relocation planned for April 2027. The full-year results are as presented on the slide. Our quarterly trends for net sales and operating expenses are as presented on the slide. Next, let me explain the headcount trends.
While the hiring environment for sales roles remains challenging, we implemented various initiatives this fiscal year, such as strengthening the recruitment of young talent. As a result, against our full-year target of a net increase of 45, we achieved an overall net increase of 42 employees compared to the end of the previous fiscal year. The status of our cash flow is as presented on the slide. Let me move on to business activities during this quarter. This is an overview of our activity highlights. During this quarter, we were particularly active in collaborating at events hosted by our resellers. Through these events, we created opportunities to showcase the new value of HENNGE One to diverse audiences across various regions and scales. We also launched a new campaign featuring Ultra Heroes across various media to boost HENNGE One's brand awareness.
Next, I would like to explain the results of our KPIs. The progress of HENNGE One KPIs since the end of the previous fiscal year is as presented on the slide. The year-on-year KPI results for HENNGE One are as presented on the slide. We believe the average monthly churn rate remains at a low level. Based on this, the theoretical average contract period is over 25 years. The number of contracted companies increased as we continued to steadily acquire new contracts, mainly from small to mid-sized companies, in line with past trends. This, in turn, drove growth in the number of contracted users. As for ARPU during this quarter, while some relatively large companies opted for single-featured plans, both new and existing customers continued to choose HENNGE One Pro, our top-tier plan, which contributed to the growth in ARPU.
HENNGE One Pro accounted for approximately 23% of total ARR as of the end of this quarter. Next, I will touch upon our full-year outlook for FY 2027. In FY 2027, we will deliver the added value of HENNGE One through new plans with expanded services for companies facing challenges with increasing cyber threats. Through these activities, we aim to achieve annual ARR growth of 25% or more in HENNGE One business. In addition, to expand our organization for sustainable growth, we aim for a net increase of 45 or more in headcount. Furthermore, to accelerate growth beyond JPY 20 billion in ARR, we will build a foundation for future customer acquisition in high-potential regions both in Japan and overseas. Alongside continuing efforts to boost HENNGE's awareness and strengthen the brand value, we will also explore business investments, including M&A, to further enhance the value of HENNGE One.
The consolidated forecast is as presented on the slide. As for HENNGE One net sales, in October 2026, we began offering new plans for new customers. For existing customers, the plan is to phase in the transition at the time of contract renewals starting from April 2027. Turning to operating expenses. In FY 2026, advertising expenses increased by approximately JPY 200 million from the initial plan, resulting in the trend shown here. This was driven by accelerating and expanding marketing and branding activities for new HENNGE One services in response to growing corporate interest in security in recent years. In FY 2027 as well, we plan to continue actively investing in marketing and branding to reach even more customers. Regarding operating expenses excluding advertising expenses, we expect an increase related to our headquarters relocation scheduled for April 2027.
Specifically, one-off expenses of approximately JPY 700 million are expected to be incurred throughout the year, including overlapping office rent, costs associated with terminating our current headquarters lease, and moving expenses. These relocation-related expenses will not recur from FY 2028 onward.
Next, I would like to 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 have come to believe that SaaS is the most fair and sophisticated approach to liberate technologies. This is one of the reasons why we're providing SaaS and why we want to support our customers' transformation through cloud utilization.
The total amount of technology that we provide to customers and the total amount of liberated technology are the measures to prove our progress toward 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. By maximizing LTV, that is, seeking to maximize the total gross profit earned over the future, we would like to build a solid business model that enables us to stably increase profits even if we scale up the investments for further business growth. Currently, our average contract period and gross profit margin are already at high levels. Therefore, to maximize LTV, it is essential to maximize ARR. We will actively engage in initiatives with a high expected return on investment and focus on accumulating as much ARR as possible.
ARR can be broken down into three factors: the number of contracted companies, the average number of users per contracted company, and average revenue per user. Among these, we currently aim to achieve ARR growth by focusing on increasing the number of contracted companies and ARPU. The progress on these KPIs for HENNGE One is as presented on the slide. Our group's business, driven primarily by HENNGE One, is basically a subscription model. Barring any cancellations, the contracts secured this year will continue to generate sales and become the foundational sales from next year onward. The figures on this slide demonstrate HENNGE One's robust and stable growth of ARR. As our next milestone, we aim to achieve a group ARR of JPY 20 billion by FY 2028. Previously, we had been aiming to reach this JPY 20 billion ARR milestone by FY 2029.
However, with the rapid surge in cyber threats in recent times, we strongly sense that security awareness among companies is rising even further. In March and October 2026, we launched new services. Going forward, in addition to our existing services, we will proactively propose new services to our customers. At the same time, we believe the opportunities to support corporate customers will expand even further, and we feel a strong necessity to continuously deliver new added value more than ever. Therefore, while we will continue to prioritize investments for future growth, we are setting our operating margin target for FY 2028 at a range of 20%-25%, up from the 20% target previously announced for FY 2029.
While maintaining our core focus on driving growth within our current business lines, we will be executing various initiatives to generate additional value, including geographical expansion outside Japan and pursuing M&A opportunities to increase the likelihood of achieving our long-term goals. In April 2025, we established HENNGE Inc. to expand into the U.S. market, and we have gradually begun gaining recognition among customers. In October 2026, we established a company called HENNGE AI K.K. Including initiatives to support companies' AI utilization, we will continue pushing ourselves to create new value. By proactively investing in future growth to maximize ARR, we aim to further solidify our business model capable of delivering sustainable profit growth. Furthermore, we will balance profit growth and capital efficiency to aim for maximization of long-term corporate value.
We remain committed to solidifying this robust business model for sustainable growth, and we would sincerely appreciate your continued support from a mid-to-long-term perspective. This concludes our briefing on the full-year financial results for FY 2026. Finally, I'd like to turn it over to our CEO for a few closing remarks.
Hello, everyone. I am Kazuhiro Ogura, CEO of HENNGE. Today, November 5, 2026, we mark the 30th anniversary of our founding. In addition, on October 20, we transitioned our listing from the TSE Growth Market to the TSE Prime Market. This milestone was made possible entirely through the generous support of all our stakeholders over the years, and I would like to extend my deepest gratitude to you all. On this momentous occasion, I would like to take this opportunity to share HENNGE's future outlook and my vision. Now, the environment surrounding companies and IT is reaching a historic turning point. In particular, since September, reports of security incidents have surged, and we feel that the threat level has escalated rapidly. Attackers empowered by AI are continuously exploiting system vulnerabilities on a broad scale and at unprecedented speed.
Regrettably, we see this not as a transient phase, but as an irreversible shift that will not abate anytime soon. Consequently, conventional wisdom and corporate behavior will inevitably have to change significantly. How society will evolve in the future remains largely uncharted territory, even for us. Yet, regardless of the era, what we aim to do is to continually embody our corporate philosophy, liberation of technology. Over the past 30 years, we have assisted companies in addressing various challenges through liberation of technology. Even now, as corporate security paradigms and conventional practices are undergoing major shifts, we will continue our research, development, and innovation to find optimal solutions and deliver the best possible support to our customers. True to our name, HENNGE, we will continue to transform ourselves by embracing new technologies ahead of the times. We would deeply appreciate your warm, continued support from a long-term perspective.
Thank you very much for your time today.