Trend Micro Incorporated

Yes, thank you. I hope you can see the slide. I would like to follow the PowerPoint slide and explain about the performance of Q2. This is a summary of the performance, net sales, 11% increase, and operating income. 15% increase, but ordinary income was only up by 1%. This is mostly due to the equity method affiliates. TX1 for ODA Security, startup company, and they suffered deficit and minus 15% of net income. Well, in overseas business, deferred tax assets have to be taken down and then it has to be built up again. And this is going to be adjusted in the next quarter. And this is why we are seeing a negative number for this particular quarter. Pre-gapped numbers, Forex impact, when this is excluded, the revenue was up by 2%, which was lower than expectation. Our COO, Kevin Simza, will explain about the main factors behind this later on. The purchase cycle for enterprise business is getting longer, and some of the deals did not really materialize in the second quarter. In the macroeconomic level, Fortinet, one of our competitors, also provided a similar explanation of their earnings announcements last week. So security investment environment is maybe getting tougher than before. On the next slide, you can see the gap based sales by region without the foreign impact. And we're seeing growth in all of the regions. EMEA, Europe growing very strongly as expected. And then we have a number by segment after gap. And again, a 13% increase in general for the enterprise business. Now, looking at the pre-gap number, excluding the Forex impact, minus 1% for Japan and minus 3% for Americas. and no longer double digit growth for Europe, only single digit growth this time. Major factors in Japan was a price increase in the previous quarter. There was a lot of front loading of the sales. So we had the double digit growth in Japan because of that, but now we have less renewals and there was a negative double digit growth and then we ended up with a negative 1% growth. In the Americas, as I mentioned before, the cycle is getting longer and these are the two biggest factors. And in the third quarter, we are already seeing recoveries. We will be seeing a recovery in this quarter, current quarter. That is our expectation. And here, again, we have the same gap and pre-gap numbers. And the enterprise is seeing a biggest decline, pre-gap of 2% against 8%. And consumer is at 2% against 3%, which means that pre-gap sales growth is mostly driven down by the enterprise business.

In regard to the subscription business, we have the ARR that is showing healthy growth. And several quarters back, it was about 30%. And this is down slightly. And it's over 20%. Meanwhile, for expenses, in the second quarter, there is an increase in the expenses. And on the upper side, you can see the software expenses and there's also the wages and the cloud expenses. Of course, as noted here, there is the foreign exchange impact, but we have this situation of the expenses. And we have been hiring. And we have stalled the recruitment slightly. We have been more cautious about hiring rather. Consequently, we have been focusing on cost control in this area. And here, the aforementioned situation is reflected. Meanwhile, when it comes to the highlights and lowlights, as for highlights, as already mentioned, we have tighter cost control, and the ARR continues to show healthy growth, and Vision One users are showing strong growth, and this will be explained later on. But for the future of our company, we'll be focusing efforts here. Meanwhile, for the lowlights, the enterprise users are going into a slower buying cycle, and in Japan, because of the front loading due to price increase, there has been a negative impact. And that's all from my side, but we have not made any changes in our annual forecast, and It will be necessary to achieve better results for the first half, but there will be explanation made from here onwards about what we are doing, and we believe that it will be possible for us to achieve this annual forecast. With that, I would like to close off my presentation. Thank you very much.

Konnichiwa. I'd like to use this time to reveal Trend Micro's second phase of the transformation. Trend Micro has been focusing on our transformation in the past two years from our own premise to SaaS platform and also on the business side from the perpetual license to the subscription. But this transformation, mainly we are focusing on attaching and moving our customer to use our SaaS management platform. This is why we believe that customer, by using the SaaS platform, they can gain better protection, better solution. But that is just portion of our product offering that is in SaaS platform. Previously, we revealed two indicators, the SaaS customer growth and commercial ARR. Commercial ARR only includes the SaaS products ARR. The reason that we revealed these two indicators is because we believe we need to excel our operation on the SaaS technology platform. At the same time, we need to make sure we can compete in a pure subscription license model, SaaS ARR. And that was why we reviewed these two type of platform. indicator. Now, we believe after Vision One released, which Kevin already explained the significance of this new Vision One, it redefined the SDR and officially announced the attack service risk management capability and introduced companion AI. All of this is going to bring Trend Micro's business operation and business transformation into a second phase. Why? Because as you can see, originally we only focusing on the 35% SaaS products revenue growth, but with Vision One, After we integrate all the on-prem product, all the appliances product, and a lot more third-party product, we become the best hybrid environment support platform. And also, we can bring all these on-premise product interaction with our customer through Vision One. And therefore, they can all benefit from the overall one platform strategy and one platform experience. So I kept on emphasizing this is for larger enterprise because we believe that is where the possible goal going to be. The recent growth of cybersecurity budget mainly are coming from the larger enterprise where they have compliances and they have a lot of the cybersecurity risk become their business risk. And when they're facing this type of maybe economic downturn, they need to consolidate all their cybersecurity and focusing on reducing the cybersecurity risk. That's where we believe Trend Micro can help customers consolidate all those and provide a one platform experience. So Trend Micro has already actually been in this transformation and large enterprise is now 61% of our business. This large enterprise, I defined it as 500 seats and above. That's where we believe they will have the Security Operations Center. By that, I would want to introduce a new indicator. We call it hybrid ARR as our growth indicator. Hybrid ARR because Trend Micro is actually the only antivirus company that has transformed from antivirus to enterprise cybersecurity risk management company. We were the only one that exists in the AV leader quadrant and now also in the XDR, EDR leader quadrant. That is the transformation and a unique part of being an antivirus company in business. is that actually antivirus has a portion of our revenue is already in subscription, which is called patent subscription. Usually if customer pay $100 for antivirus product, 30% of that is a subscription and next year they need to resubscribe this 30%. So this 30% of the renewal revenue is very profitable and very important for the antivirus company. And we carry those revenues. renewal revenue into our transformation. So if I zoom in into the larger enterprise, which composed a large portion of our ARR, then you can see over the year, this green bar are the pure source PureSus subscription ARR but the blue portion is the perpetual license which is traditional or the old products that they still have a heavy portion that is in subscription that is that is total when you add them together that is the hybrid ARR. So those blow part the perpetual license patent subscription revenue. It's very nice. It's almost like we're collecting check, but there's a drawback of it. That is a lack of the interaction. with customer and therefore it's very hard to expand from there. If you say, oh, I have my gateway and endpoint, they just use the same pattern file, doesn't provide enough reason for customer to use the same, coming from the same vendor because one plus one does not equal three. But after vision one, that game has changed. after Vision One, whenever they add more Trend Micro sensor and have more data that is stored with Trend Micro and analyzed by Vision One platform, they can better have better visibility of a day over or cybersecurity risk and faster response, quicker, earlier detection of the threats. That is why we believe the Vision One platform will actually revitalize our original other 65% of the business and stop the bleeding from this perpetual ARR and accelerate more on the subscription ARR part. That's the total reason that we believe in the future after Vision 1, we will be able to use this, we call it hybrid ARR. It's a bigger number overall, but of course the growth rate will be flatter, not as deep like the pure SaaS part. But I think it's a better indicator of how Trend Micro's business will be growing. So this transformation, of course, will affect our sales process. This whole sales process is going to follow the platform. We call it the platform way of accelerating the growth, which is we use the onboarding, the processes we try to onboard more customers. onto vision one and then increase their assess time and therefore thereby they will expand to buy more functional sensors from Trend Micro. And during this whole process, we have introduced and built several tools to help us more efficient in this platform way of selling. For instance, Cyber Risk Assessment is a tool that can help bring on the new customer without zero friction, zero cost, and zero deployment for customer. They can quickly onboard and see how Vision One works. And after that, we will navigate them through Vision One and let them understand the platform, what the platform can do for them. And during all of this, we also collect all this information and we were able to provide and customize for each of our customer a better script how our salespeople should approach the customer and how to reduce their cyber risk in the most efficient and effective way. That's the sales with generative AI. So you can see now our whole sales process become very data-driven, and we monitor all the way from the adoption to the engagement score and the expansion. the platform adoption metric is what we are going to be focusing on. Just for less than one month, we announced this new version of Vision One. We are already starting to see the attach rate, the consumption, the engagement score is expanding, is increasing, and There is something that I'd like to introduce also is we have something very similar to AWS and Azure's committed consumption that we call Vision One credits. They can buy the credits and then they they decide flexibly they want to deploy this credit either on endpoint, on server, on gateway, on tipping point, or different places. We count all this. credit deployed or allocation as they consumed the Vision One. And the last part you can see here, the green part, the first week when we announced our attack service risk management, we see a lot of customers start to allocate the Vision One credit means they adopt and spend their their credits on this new function. And that will be the way that Trend Micro utilizing the one platform experience to expand our business in cybersecurity. So Vision One is not just a beautiful PowerPoint that we talk about all this functionality. Vision One is a true business innovation and a true business renovation. for Trend Micro. In the future, I hope we can share with all the investors about how we transform our business from traditional AV to hybrid AR growth.