Trend Micro Incorporated

Thank you, this is Negi speaking, and I would like to start the earnings result summary for Q2. 13% growth in net sales, but cost actually grew by 29%, so operating income was minus 54%. At the bottom of the slide, we can see the numbers at constant currency basis, net sales growing at 3%, and AR growing The biggest point is decline in income. What has happened? Well, Eva Chen will be providing a detailed explanation later on, but the biggest focus here is cloud-related expenses. Why has it increased so much? Rather than paying out a lot of dividends, investors have told me in the past many times that we should be investing into the future. And based on that, we have exactly done that, investing into the future. It's not simple capex. Our investment directly affects the P&L. This is one big factor behind this number. But Eva Chen will give you more explanation later on. This is an important point. Rather than mid-sales, we are using AI to explain the future of the company. Enterprise customers. This is improving from 4% from the previous quarter to 6%. In the second half, we expect further improvement in this number. ARR by region denominated in US dollars and therefore no currency impact. America's stands out. It is struggling somewhat, but Europe and EMEA are growing quite well. Japan is growing only at 3%, and Kevin Simzer will be providing you more explanation. Considering the geopolitical situation, There are headwinds and tailwinds. And in North America, we have some headwinds. This is the cash flow. There is no comment. This is connected to the operating income. The number of employees headcounts is basically flat. But in the background, we are requiring new types of skills. So there are some turnovers. But in total, the headcount is basically flat. And we believe the situation will be very similar to this in the second half as well. This is cost. And I'm sure this is something that you're more interested in. Crowd-rated expenses stands out. And as I said before, this is investment for the future. Selling and marketing, the purple portion has also increased quite a lot. For Trend AI and Trend Brand, we launched two new brands. so we have related expenses and related events related expenses and headcount cost is increasing one because of FX and the other reason is we have internal bonus payments and we are looking at both operating income and ARR growth and operating income was negative so there is no bonus related to that but ARR Well, you may think that 6% is not enough, but that actually achieves the internal target. So some bonuses have been paid based on ARR. And this Q2 highlights highest ever quarterly net sales. And also, as I mentioned before, ARR growth continues to improve. Moving on to the four-year guidance. At this level of minus income, What do we do? Well, NIT sales is on track, so there's no change. But in terms of the investment, we don't have any temporary items in the second half. So token cost will continue to be incurred in the second half as well. So we expect that at the same level and non-operating. We don't expect anything major apart from what has already happened in the first half. FX is still volatile but our plan is 157 and the current rate is 160, not that different, so we'll keep it the same as well. And the outlook for the full year, same for net sales basically, Thank you very much.

Thank you for coming to our Q2 financial announcement. I think in my 38 years of IT industry, these few quarters are the most dynamic and the speed of change in the whole industry is the fastest. But as an AI native cybersecurity company, our transformation is also speedy on, and we must. So let's first look at what is the major change happening in the whole IT industry right now. I think the most important thing, of course, is AI. And in the past two months, how many new frontier AI model has been released? There's so many of them. And most interesting thing for the cybersecurity is every new frontier model whenever they release they talk about oh my god our own model we cannot control it it was doing things out of our expectation it was doing all these hackings into into the other infrastructure so cyber security is the center of these problems that's happening but i think also hackers is already realizing that is really happening that the AI-native ransomware already happened and is invading into consumer organizations that is using AI agent and the speed of how this ransomware customize itself into the specific attack It's just fascinating. 31 seconds. 31 seconds, it will change its way dynamically and attach the customers. So with this type of speed of the thread changing, Trend Micro needs to invest in how we transition into a real native AI operation to keep up with the The speed of the transformation. But actually, about four months ago, even before all these frontier models started, we were already thinking about this cybersecurity problem in the AI era. And I described it as like this. The problem on the left hand side is like, If you have thousands, millions of thousands of questions and prompts into a big model, then it's like all the different colors all mixed together. I am a painter. I love painting. So when all the colors mixed together, it becomes what color? Black. It means that all the prompts throw into a black hole. It will be very difficult. No wonder all these frontier models themselves are saying that, oh, our model was out of our expectation. We don't know why we do this, how we do this, all these attacks, because it's a black hole. And therefore, about four months ago, we, Trend Micro, already thinking about, for security, for AI, the better architecture is actually Smaller SLM, which is all tuned to expertise, different expertise, different customer segments, to fit their own needs. And it's like the color is separated and the control is controlling that color. But each of those models will be collaborating with each other. That's what we imagined so long ago. And also, this is actually the chart that when I talked to NVIDIA, I sent to NVIDIA and said, we are going to invest in this type of new model, and we want to use your Nemotron to do all this customized solution for our cybersecurity needs. And immediately, actually, Jason Fong himself immediately replied and said yes. That's the right direction. Let's go. So starting at that time, we accelerated our investment on all the open source and how to tune and perform this type of new architecture. That is the architecture that we draw out and we believe that three layers of AI security stack. Their run is all on board, on all the machines, all the servers, all the AI appliances. Their tool is to protect the AI usage. Those tools need to rely on what we call edge AI model or Local AI model because all this happening in the AI local model. And then the layer three is the trust layer that would dynamically choose the right model to submit if there is a more complicated problem to be solved. Those are the three layer and Trend Micro are investing in this type of architecture. So as you can see, just Last month, when NVIDIA announced their open-weight and open-source project, Tram AI, which is our enterprise division, is one of the inauguration partners in this whole initiative because we believe that future needs will need those close and open frontier AI models. And that is why Trend Micro are investing so much into the future AI infrastructure. If we think about this whole information advantage to decision. Before, IT industry is mainly focused on information. Data is the king. Information is the king. Whoever can get more information is the winner. But now with AI, Information is cheap. It's very easy. You can gather all this information. But what makes the difference is your decision advantage. Because your decision is based on your own priority, your own environment, your own needs for the decision. So the difference is we need to switch to delivering more information to understand customers' problem better, understand customers' priority, and help them solve their cybersecurity, make their better cybersecurity decision. That would be the cybersecurity company's most, understand customer more. So if you look at the security that we call If you look at the red line, that's the vulnerability. That's the information. Nowadays, you can find whatever vulnerability very fast using the frontier model, and those are very cheap. Now, you can find that it's piling up so much of that. However, the customer's decision depends on the yellow line, which is remediation capital. Those not only are there, but for your organization, do you need to patch it now? Where do you need to patch it? How do you want to apply your patches? Those are the real decision quality that will affect the cybersecurity. And that's why Trend Micro believe that we need to invest more, not in just collecting all of those Thank you very much. More and more, they are investing in sovereign AI. They want to make sure that decision and those intelligence, they can own it by themselves. So sovereign AI is the most important part. To enable sovereign AI, you must need sovereign cybersecurity. And that's why Trend Micro is investing on AI-native operation. That is, our platform, our engineer, software development lifecycle process, and our business operation all need to be AI-ready and is AI-age of the speed and implementation. That's why Trend Micro are doing all this investment, I say, Actually, in 2025, when we were talking about our road to 2028, we already indicated 2026 will be our transformation year and we want to accelerate our AI solution. But in the last four months, We actually accelerate our acceleration and invest more into the AI solution because we believe that is the future and that is what Trend Micro needs to do to become the native AI cybersecurity leader. So what do we do and where do we spend all those money? I think this chart is the most telling. You can see we categorize all this spending into three big categories. So first one, internal AI transformation. In 2024, first half, we actually, our cost, I mean, in that time, internal AI transformation, our cost is only $0.2 million. This internal transformation means that we need to invest for our employees to train and use AI. This is the internal transformation. If you remember, Trend Micro used to do our AI contest in 2018. We are already doing this internal AI contest. And every contest, we spend about $2 million or $4 million to make sure we have all these and many other engineers that fall in and learn about how to do AI. But in the past six months, with all this new frontier model and with all this agentic AI, we accelerate those investment in the training. And therefore, there's internal AI transformation. It grow 6,000 more percentage, which is 12 million US dollar. is the preparation of the foundation. It's not going to continue to spend that much. It's just initial boost up and make sure all the employees need to get this AI-ready training. So those are $126 million spent in the first half of 2026. That compared with last year, of course, is a big, huge increase. The second part of the... which is the largest part, customer AI and cloud consumption. I'd like to save that part at the last because this is the most important and the biggest portion. So next one is infrastructure expansion and transition cost. What does that mean? Infrastructure expansion is that because customers are focusing on AI sovereignty and therefore they will require All our data need to be located in their country. And that means our vision one, for instance, our platform and collecting customer data, we need to be stored in the local country's zone. Even if it's in AWS, in cloud, but there's certain zone, country zone or area zone that we need to expand. So establish those zones is costly initially, but we need to establish those sovereignty zones so that we can expand our business for those countries. So this is the infrastructure expansion, 6.5 million U.S. dollars from zero. Last year, there's no such expansion cost, but this year, that's where we spend. But once you set up, you set up. There is just one-time cost for setting it up. The second one is transition. Transition means that we actually are rewriting some of our core modules, such as our XDR data lake. We are rewriting those code onto GPU code. Originally, GPU is much more efficient and faster. However, during this quarter or this half year, we need to run it in dual-site, both in CPU and GPU, so that we make sure the transition and transformation is all complete. But that is the double cost of our data lake. However, those double costs, once we make sure that it's already stable, it will go away. So that's 7.2 million US dollars. Now the rest, the biggest portion, that is customers' AI and cloud consumption, which means customers are using our AI-driven technology or platform, such as Vision One. That's why whenever our customer using more Vision One, of course our cloud consumption and AI consumption will be higher. However, we carefully monitor this cost. We are not just blindly and means that Vision One is not making money. We are investing and cost-consciously monitoring it. So the indicator we use to monitor it is we call it cost-per-sus money, which is the Corey Barr, that you can see in there. Per SaaS ARR money, how much do we need to spend on cloud or AI cost? In first half of 2024, that is 0.19 US dollar. That's how per one dollar of ARR we spend 19 cents of it onto the cloud and AI cost. But in last quarter, The first half of 2025, we actually already consumed and we optimized it. So it reduced down to 0.13 per SAS ARR money. So we control the cost. But this have slightly increased to 0.14 per cost per year. SAS, ARR. Why? Because we recently launched a lot of new services such as agentic AI or virtual red team or digital twin or ID security. All of these are new services that we initially need to set up the infrastructure ready. But our customer number is not that much yet. Great momentum going to increase but currently in the first half because all of these new models, new modules has less customer and therefore per customer's ARR cost to ARR money is not scaled out yet. But we believe in the future it will be. It will be scaled out and then our cost per ARR money will come down. So these are some of the evidence that we are investing for the future but not blindly. We carefully monitor what is the ROI of it. For instance, our internal training, internal deployment of all of this, we already see 2x employees using all this AI. We already get all our employees ready for AI. But most importantly, when they do this, we automated the customer's dashboard delivery in 50% less time. So customer can get all this. We can service our customer much faster. AI simulation also deliver become days versus months. Simulation means that we simulate customer's environment and very easy to get the tabletop cyber simulation for our customers. These are all getting much better customer services and support for our customer. And also our R&D deliver more and faster with the software development lifecycle AMS. We already see two times more call pull requests and also all of this actually, for instance, Jenny, Sim, it required to develop all those different connections before, before AI, before this age, then it would take months, even years to develop those connections. That's why Sim, termites would never enter Sim market. But now we enter it and we improve All of this, not only shortened to days, and now every three hours. We can develop any new connectors adapter within two hours, just three hours. And thread hunting, which is most important for our customer, we shorten those from hours to seconds for customer. And issue reporting and resolution is not. Five times faster than before. All of this is we are providing much better, faster security outcome for our customers. So that's the product and infrastructure. Expansion, as you can see, no matter all these countries, Japan, India, UAE, Germany, Australia, already we set up all of this new zone they are focusing on and we are already seeing the sign of all this sovereign AI security requirement coming and we have deal that is processing now already and there are new that we just starting to set up in 2026 for Brazil, for South Africa, Indonesia, Canada, UK. These are the new areas that we are setting. But this is investing in sovereign AI infrastructure to unlock a future of monetization. So, as you can see, our momentum is already here. Vision One ARR, YOY Growth, 49%, continuing with seeing customers getting on to use more of those modules and the net retention revenue is 122%. Not only that, we have all existing customers that have Vision 1 attached go to 45% and train ARR. Now, already 45% come from Vision 1's ARR. That means that our business and revenue stream is on the new AI-driven model and is much more healthy than those big deals, multiple year deals. It's much more healthy than before. And that's why we believe all this investment is really paying off. We already also see a pipeline, and if we continue for this investment, then our trajectory of the ARR growth will continue to grow. That's why we invest. So in conclusion, I want to say, yes, we are investing, but we are investing with management action in place to drive for economic outcome. We are not just saying, oh, we're investing in AI, we will lay off people. No. We're investing because we believe that's what customers need and it will grow our whole revenue stream. And that's why internal AI transformation, we believe we put in already. They have full adoption and now with governance and measurable productivity threshold, we can make sure that AI efficiency will be much better, and we have the operating leverage. Customer AI and cloud consumption, we will improve our unit economy. And then infrastructure expansion, as I say, once we scale out the setup, then it's unlocking the future monitoring. And then transition cost, it will die down once we move on to the right computing technology. is much more efficient than before. So the transition costs will die down after this quarter. So that's Trend Micro, what we are doing, transforming into an AI-native cybersecurity company. And I believe Trend Micro has the best opportunity and will be the leader in AI-related cybersecurity field. Thank you.

SMBC Nikko Securities.