SMS (2175) FY2027 Q1 Earnings Report

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Executive Summary

Although both revenue and operating income increased, a divergence between the rate of profit growth and the direction of net income was a defining feature of the current quarter. Revenue increased to ¥202.1B (+8.2% YoY), operating income to ¥43.1B (+19.1%), and ordinary income to ¥54.3B (+13.5%), with profit growth exceeding revenue growth. Meanwhile, net income declined to ¥37.3B (-5.4% YoY). The primary reason for the increase in operating income was operating leverage, as the increase in selling, general and administrative expenses (+5.8%) remained below revenue growth. The main reason for the decline in net income was the increase in the effective tax rate from approximately 17.6% in the previous year to 30.9%.

Factors Affecting Earnings

【Revenue】Revenue increased to ¥202.1B, representing an 8.2% year-on-year increase. The core Career Business was the largest growth driver, rising to ¥141.1B (+7.9% YoY; 69.8% composition ratio), while Nursing Care and Disability Welfare Management Support increased to ¥34.7B (+9.4%), Overseas increased to ¥15.9B (+3.9%), and Other increased to ¥10.5B (+15.2%), resulting in revenue growth across all segments.

【Profit and Loss】Operating income increased to ¥43.1B (+19.1% YoY), and the operating margin expanded to 21.3% compared with the same period of the previous year. In addition to the high-value-added business model, which generated a gross margin of 91.0%, the increase in selling, general and administrative expenses (+5.8%) remained below the revenue growth rate, contributing to the improvement in the profit margin. Ordinary income increased to ¥54.3B (+13.5% YoY), supported by ¥12.2B in non-operating income, including ¥12.1B in equity-method investment gains. However, income taxes and other taxes increased to ¥16.7B from ¥8.4B in the previous year, and the effective tax rate rose to 30.9%; consequently, net income declined to ¥37.3B (-5.4% YoY). The ¥0.4B in extraordinary losses was immaterial. Overall, the conclusion is that revenue and pre-tax profit increased, while net income declined due to the higher tax burden.

Segment Analysis

The Career Business was the largest source of earnings, with revenue of ¥141.1B (+7.9% YoY), segment profit of ¥50.1B (+10.2%), and a profit margin of 35.5%; profit growth exceeded revenue growth. Nursing Care and Disability Welfare Management Support recorded revenue of ¥34.7B (+9.4% YoY), segment profit of ¥10.3B (+2.5%), and a profit margin of 29.5%; profit growth was sluggish relative to revenue growth, and the profit margin declined slightly from the previous year. Overseas recorded revenue of ¥15.9B (+3.9% YoY) and a segment loss of ¥3.2B, improving from the previous year’s loss of ¥6.9B but remaining in the red. Other recorded revenue of ¥10.5B (+15.2% YoY) and a loss of ¥1.2B. Corporate adjustments amounted to negative ¥12.9B, expanding from negative ¥11.4B in the previous year, confirming an increase in costs for corporate functions.

Key Financial Indicators

【Profitability】The operating margin was 21.3%, the ordinary income margin was 26.9%, and the net profit margin was 18.4%, underpinned by a high-value-added business model with a gross margin of 91.0%. Annualized ROE remained high at 52.8%. 【Cash Flow Quality】The 31.4% difference between ordinary income and net income was primarily attributable to the increase in the effective tax rate to 30.9%, while non-operating income was largely composed of ¥12.1B in equity-method investment gains. 【Investment Efficiency】Intangible fixed assets amounted to ¥73.6B, of which software accounted for ¥73.1B, representing 13.5% of total assets. Goodwill was small at ¥0.5B, indicating limited impairment risk arising from M&A. 【Financial Soundness】The equity ratio was 52.0%, the current ratio was 165.1%, and cash and deposits totaled ¥153.5B. Short-term borrowings declined from ¥46.0B in the previous year to ¥30.4B, indicating lower dependence on short-term financing.

Cash Flow Analysis

Although the disclosed items in the statement of cash flows are limited, cash trends can be inferred from changes in the balance sheet. Cash and deposits increased to ¥153.5B from ¥137.3B in the previous year. Short-term borrowings declined by ¥15.6B, from ¥46.0B to ¥30.4B, indicating progress in reducing interest-bearing debt. Investment securities declined by ¥9.6B, from ¥29.1B to ¥19.5B, suggesting that the reduction or recovery of investment assets may have contributed to the increase in cash holdings. Accounts payable declined from ¥4.1B to ¥3.0B, and no significant increase in working capital burdens was observed. Overall, on-hand liquidity has strengthened through earnings growth and a review of the asset composition.

Earnings Quality

Ordinary income was ¥54.3B compared with operating income of ¥43.1B, and most of the ¥11.2B difference was attributable to ¥12.2B in non-operating income, primarily consisting of ¥12.1B in equity-method investment gains. This non-operating income was equivalent to 6.1% of revenue and does not arise from consolidated operating activities themselves; rather, it depends on the performance of investees. Accordingly, it should be distinguished when evaluating the quality of ordinary income. Non-operating expenses were ¥1.0B, mainly comprising ¥0.4B in interest expenses and ¥0.6B in foreign exchange losses. The divergence between ordinary income of ¥54.3B and net income of ¥37.3B was primarily attributable to the increase in the effective tax rate to 30.9% from approximately 17.6% in the previous year, while pre-tax profit itself remained solid at ¥54.0B. The ¥0.4B in extraordinary losses mainly consisted of losses on the disposal of fixed assets and was immaterial in amount; as a temporary factor, it did not materially impair earnings quality.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year plan were 28.1% for revenue, 63.3% for operating income, 62.2% for ordinary income, and 60.5% for net income, all substantially exceeding the standard progress rate of 25%. In particular, operating income increased 19.1% year on year, whereas the full-year plan calls for an increase of only 0.2% year on year, indicating a significant divergence between the two growth rates. Based on Q1 results, the full-year plan may be based on conservative assumptions. No revisions have been made to either the earnings forecast or the dividend forecast.

Shareholder Returns

The full-year dividend forecast is ¥30.5 per share, and the forecast payout ratio based on forecast EPS of ¥75.1 is 40.6%. Based on the average number of shares outstanding during the period of 82,087 thousand shares, the total annual dividend is estimated at approximately ¥25.0B. The company holds treasury shares valued at ¥96.8B, equivalent to 6.2% of shares issued; however, no additional purchases during the quarter were disclosed, and the Total Return Ratio including share buybacks has not been calculated. There has been no revision to the dividend forecast, and assuming the full-year profit plan, the dividend level is expected to be covered by earnings.

Risk Factors

1. Concentration risk in the core business: The Career Business is the center of consolidated earnings, with revenue of ¥141.1B and segment profit of ¥50.1B; its composition ratio reaches 69.8% of revenue. Changes in hiring market conditions and the competitive environment in this business are likely to have a direct impact on consolidated performance.

2. Profitability of the Overseas Business: The Overseas segment recorded a loss of ¥3.2B. Although this improved from the previous year’s loss of ¥6.9B, the segment remains in the red. The timing and sustainability of a return to profitability will affect the consolidated profit margin going forward.

3. Dependence on the tax burden and equity-method income: The effective tax rate rose from approximately 17.6% in the previous year to 30.9%, weighing on net income. In addition, ordinary income has a high degree of dependence on ¥12.1B in equity-method investment gains, and fluctuations in investee performance may affect non-operating income and expenses.

Industry Benchmark (For Reference; Company Research)

Profitability and Returns

The company’s operating margin and net profit margin both substantially exceed the industry median, placing it among the high-profitability group within the industry.

Growth and Capital Efficiency

The revenue growth rate was slightly below the industry median, remaining at an average level in terms of growth.

※Source: Company research

Key Takeaways from the Earnings Results

1. In addition to the high profitability levels represented by an operating margin of 21.3% and a gross margin of 91.0%, operating income growth of 19.1% exceeded revenue growth of 8.2%, confirming the operation of operating leverage accompanied by improved cost efficiency.

2. The divergence between ordinary income and net income was attributable to the increase in the effective tax rate, while pre-tax profit increased 12.8% year on year. The decline in net income alone was substantially affected by a temporary increase in the tax burden.

3. The reduction in the Overseas Business loss, from ¥6.9B to ¥3.2B, contributed to the improvement in consolidated earnings. Whether further progress toward profitability will lead to an additional improvement in the company-wide profit margin is a key point of focus.

Theoretical Share Price (Reference Value)

Sensitivity: ¥482–¥510 at ±1% for the cost of equity, and ¥492–¥502 at ±0.1 for ω.

Notes:

• Since net income progress against the full-year forecast is 60%, exceeding the standard level of 25%, forecast EPS has been adjusted upward within an upper limit of +10% (because companies with progress ahead of schedule tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the end of the quarter are used (there is a timing gap relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model used: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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