Digital Arts Inc. FY2027 Q1 Earnings Report

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Executive Summary

Revenue and earnings increased alongside improved cost efficiency, resulting in high-quality results in which the operating income growth rate (+30.2%) exceeded the revenue growth rate (+19.4%). Revenue was ¥27.11B (¥22.70B in the same period of the previous year), operating income was ¥10.35B (¥7.95B), ordinary income was ¥10.60B (¥8.06B), and net income (net income attributable to owners of the parent) was ¥7.18B (¥5.56B), representing double-digit earnings growth across all measures. The significant improvement in the SG&A ratio to 26.7% (32.4% in the same period of the previous year) absorbed the slight decline in the gross margin to 65.0% (67.4%), serving as the primary factor driving the increase in the earnings growth rate.

Factors Affecting Business Performance

【Revenue】Revenue was ¥27.11B, an increase of +19.4% from ¥22.70B in the same period of the previous year. The Company operates as a single Security Business segment and does not disclose a breakdown by business; however, advances received accumulated to ¥97.18B (¥78.00B in the same period of the previous year, +24.6%), suggesting that growth in contract renewals and new contracts supported top-line growth.

【Profit and Loss】Operating income was ¥10.35B (¥7.95B in the same period of the previous year, +30.2%), ordinary income was ¥10.60B (¥8.06B, +31.5%), and net income was ¥7.18B (¥5.56B, +29.1%), all representing increases. The gross margin declined to 65.0% from 67.4% in the same period of the previous year, a decrease of -2.4pt, but the SG&A ratio improved to 26.7% from 32.4%, an improvement of -5.7pt, expanding the operating margin to 38.2% (35.0% in the same period of the previous year, +3.2pt). No extraordinary gains or losses were recorded, and the ¥3.42B difference between ordinary income and net income is almost equivalent to income taxes and other taxes (effective tax rate of 32.3%); no temporary factors were identified. The Company achieved higher revenue and earnings, and the results can be assessed as high-quality earnings growth accompanied by improved cost efficiency.

Key Financial Metrics

【Profitability】The operating margin was 38.2% (35.0% in the same period of the previous year, +3.2pt), while the net margin was 26.5% (24.5%, +2.0pt). Although the gross margin declined slightly to 65.0% (67.4%, -2.4pt), the improvement in the SG&A ratio to 26.7% (32.4%, -5.7pt) contributed to the expansion of the operating margin.【Cash Flow Quality】Comprehensive income of ¥7.18B was almost at the same level as net income of ¥7.18B, indicating that the impact of other comprehensive income, including foreign currency translation adjustments, was extremely limited.【Investment Efficiency】ROE was 3.9%, while quarterly total asset turnover remained at 0.093 times. Cash and deposits, which accounted for 82.1% of total assets (¥239.5B), weighed down the turnover ratio.【Financial Soundness】The equity ratio was 62.4% (66.1% in the same period of the previous year, -3.7pt), and the current ratio was approximately 241% (current assets of ¥263.4B / current liabilities of ¥109.2B). Fixed liabilities were only ¥0.5B, indicating virtually no dependence on long-term interest-bearing debt.

Cash Flow Analysis

Although the Company does not disclose a cash flow statement, its cash movements can be assessed from changes in the balance sheet. Cash and deposits were ¥239.5B, an increase of +¥8.7B (+3.8%) from ¥230.8B in the same period of the previous year. Advances received increased significantly to ¥97.18B (¥78.00B in the same period of the previous year, +¥19.18B, +24.6%), indicating that advance collections from recurring revenue supported cash generation. Accounts receivable declined to ¥13.50B (¥15.48B in the same period of the previous year, -12.8%), and the collection period relative to revenue (approximate DSO) shortened to approximately 45 days from approximately 62 days in the same period of the previous year, indicating an improving collection efficiency trend. Income taxes payable declined to ¥3.60B (¥8.14B in the same period of the previous year, -55.8%), while ample liquidity remained even after tax payments. Increases in property, plant and equipment and intangible assets were limited, with no indication of large-scale investment; free cash flow generation capacity appears strong.

Earnings Quality

Ordinary income was ¥10.60B versus operating income of ¥10.35B, with the difference consisting almost entirely of non-operating income of ¥0.25B (including interest income of ¥0.22B); non-operating expenses remained near zero. No extraordinary gains or extraordinary losses were recorded, and pretax income of ¥10.60B was consistent with ordinary income. Net income of ¥7.18B represents pretax income less income taxes and other taxes of ¥3.42B (effective tax rate of 32.3%), with no divergence attributable to non-recurring items identified. Comprehensive income of ¥7.18B was almost equal to net income, and the impact of other comprehensive income items, including foreign currency translation adjustments, was extremely limited. Accordingly, the current period’s earnings consisted primarily of core business-related factors, and earnings quality can be assessed as high.

Earnings Forecast and Guidance

Progress against the full-year forecast was 22.6% for revenue (¥27.11B / ¥120.0B), 19.2% for operating income (¥10.35B / ¥54.0B), 19.3% for ordinary income (¥10.60B / ¥55.0B), and 19.0% for net income (¥7.18B / ¥37.70B). Although all were below the 25% benchmark for simple quarterly progress, advances received increased by +24.6%, indicating continued accumulation of recurring revenue and the possibility of seasonality weighted toward the second half. Neither the earnings forecast nor the dividend forecast was revised during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥100 per share, with no revision to the dividend forecast as of the current quarter. In Q2 of the previous fiscal year (fiscal year ended March 2026), the dividend at the end of Q2 was ¥45, comprising an ordinary dividend of ¥40 and a 30th anniversary commemorative dividend of ¥5; attention should be paid to the temporary increase attributable to the commemorative dividend. The current fiscal year’s payout ratio, calculated based on the forecast DPS of ¥100 against forecast full-year EPS of ¥280.45, is approximately 35.7%. In light of the ample cash and deposits (¥239.5B) and operating income growth, there appears to be little concern regarding dividend sustainability.

Risk Factors

1. Ample cash holdings that constrain capital efficiency (ROE): ROE remained at 3.9%, while cash and deposits of ¥239.5B accounted for 82.1% of total assets. Quarterly total asset turnover was low at 0.093 times, requiring monitoring from an asset efficiency perspective.

2. Slight downward trend in the gross margin: The gross margin was 65.0%, down -2.4pt from 67.4% in the same period of the previous year. Although the operating margin expanded due to the improvement in the SG&A ratio, cost trends and changes in the product mix require close monitoring.

3. Moderate full-year progress: Revenue progress was 22.6%, operating income progress was 19.2%, and net income progress was 19.0%, all below the 25% benchmark for simple quarterly progress. Although recurring revenue is expected to be weighted toward the second half, progress should continue to be monitored.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Growth and Capital Efficiency

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The improvement in the SG&A ratio of -5.7pt expanded the operating margin to 38.2%, confirming a cost-efficiency-driven growth structure in which the earnings growth rate (+30.2%) exceeded the revenue growth rate (+19.4%).

2. Advances received increased by +24.6%, suggesting the accumulation of recurring revenue and enhanced cash generation capacity; however, the accompanying increase in future performance obligations should be noted.

3. Full-year progress was 22.6% for revenue, 19.2% for operating income, and 19.0% for net income, below the simple 25% benchmark. Neither the earnings forecast nor the dividend forecast was revised, and progress assuming seasonality weighted toward the second half will be an area of focus going forward.

Theoretical Stock Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market stock price or a recommendation of any specific investment action.

Sensitivity: ¥1,811–¥1,919 at cost of equity ±1%, and ¥1,851–¥1,883 at ω±0.1.

Note:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This figure does not forecast or guarantee the future stock price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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 responsibility, after consulting with a professional as necessary.

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