NS Solutions (2327) FY2026 Q3 Earnings Report

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Executive Summary

Although revenue growth was maintained, the increase in SG&A expenses weighed on the growth of operating income and net income. As a result, the company reported higher revenue and earnings, but lower profit margins. Revenue was ¥275.39B (+14.6% YoY), operating income was ¥30.99B (+4.7%), and net income was ¥22.03B (¥21.12B attributable to owners of the parent, +3.5%). While the increase in cost of sales (+11.8%) was below the increase in revenue, resulting in an improved gross margin, SG&A expenses surged by +41.7%, causing the operating margin to decline from 12.3% in the prior year to 11.3%. Business expansion, including the newly consolidated six subsidiaries, has led to increases in goodwill and intangible assets as well as a substantial outflow of investing cash flow.

Factors Affecting Performance

【Revenue】Revenue increased by +14.6% YoY to ¥275.39B. Cost of sales was limited to ¥202.30B (+11.8%), while gross profit increased by +23.2% to ¥73.09B, exceeding revenue growth. The gross margin improved to 26.5% from 24.7% in the prior year. Business expansion, including the newly consolidated six subsidiaries, appears to have contributed to the revenue increase.

【Profit and Loss】SG&A expenses increased by +41.7% to ¥42.27B, substantially outpacing revenue growth, and operating income was limited to ¥30.99B (+4.7%). The operating margin declined to 11.3% from 12.3% in the prior year. Financial income of ¥0.99B exceeded financial expenses of ¥0.16B, resulting in profit before tax of ¥31.81B. Net income attributable to owners of the parent was ¥21.12B (+3.5%), resulting in higher revenue and earnings but lower profit margins.

Key Financial Metrics

【Profitability】The operating margin was 11.3% and the net profit margin was 8.0%, down from 8.5% in the prior year, while the gross margin improved to 26.5% from 24.7% in the prior year. The SG&A ratio rose to 15.3% from 12.4%, and operating leverage worked in the opposite direction during the current period.【Cash Flow Quality】Operating cash flow (OCF) was an outflow of ¥20.41B, resulting in a negative OCF/net income ratio relative to net income of ¥21.12B, primarily due to income taxes paid of ¥49.26B. The OCF subtotal before tax payments was a positive ¥33.11B.【Investment Efficiency】ROE (annualized) was 10.6%, supported by the combination of total asset turnover and financial leverage of 1.41x. Capital expenditures were ¥3.77B, or 1.4% of revenue, representing a small scale. However, given the substantial increase in goodwill and intangible assets, demonstrating investment returns will be a key focus going forward.【Financial Soundness】The equity ratio improved to 68.4% from 62.0% in the prior year. Current assets of ¥244.77B substantially exceed current liabilities, indicating ample liquidity. The debt-to-equity ratio remains low, reflecting a conservative financial structure.

Cash Flow Analysis

OCF was an outflow of ¥20.41B, primarily because income taxes paid of ¥49.26B exceeded the OCF subtotal before tax payments of ¥33.11B. An increase in contract assets, which resulted in an outflow of ¥13.39B, and a decrease in accounts payable, which resulted in an outflow of ¥5.45B, also placed a burden on working capital. Investing cash flow was an outflow of ¥58.54B. As capital expenditures were limited to ¥3.77B, most of the outflow appears to have been allocated to business acquisitions involving the acquisition of goodwill and intangible assets. Financing cash flow was an outflow of ¥19.82B, including dividend payments of ¥14.18B. Free cash flow, calculated as the sum of OCF and investing cash flow, was negative ¥78.95B, indicating that the current period’s investment activities were not funded by internally generated cash. Cash and cash equivalents decreased to ¥94.08B, but the current ratio remained high, leaving room for short-term liquidity management.

Earnings Quality

Although the company achieved accounting earnings growth during the current period, the divergence from cash generation warrants attention. Against operating income of ¥30.99B and net income of ¥21.12B, OCF was an outflow of ¥20.41B, with the substantial impact of income taxes paid of ¥49.26B, including temporary and timing-related factors. Non-operating income and expenses have a recurring structure in which financial income of ¥0.99B exceeds financial expenses of ¥0.16B, and no notable temporary items equivalent to extraordinary gains or losses were identified. Meanwhile, changes in working capital, including the increase in contract assets and decrease in accounts payable, indicate mismatches in billing and collection timing associated with revenue growth. The extent to which accounting earnings are being converted into cash should therefore be monitored for improvement in future quarters.

Earnings Forecast and Guidance

The full-year company forecast is revenue of ¥377.00B, operating income of ¥43.00B (+11.7% YoY), forecast EPS of ¥159.58, and forecast dividends of ¥80.00. Based on cumulative results of revenue of ¥275.39B and operating income of ¥30.99B, progress rates are approximately 73.0% for revenue and approximately 72.1% for operating income, nearly in line with the standard 75% progress level. To achieve the full-year plan during the remaining period, approximately ¥12.01B in additional operating income will be required, implying the need for profitability slightly above the cumulative operating margin of 11.3%. The key to achieving the plan will be whether the rate of SG&A growth can be brought closer to the revenue growth rate.

Shareholder Returns

The Q2 dividend was ¥40.00 per share, and the full-year forecast is an annual dividend of ¥80.00. Based on forecast profit attributable to owners of the parent and forecast EPS of ¥159.58, the payout ratio is approximately 50%. Cumulative dividend payments were ¥14.18B, up from ¥10.795B in the same period of the prior year. Free cash flow for the current period was negative ¥78.95B, meaning that dividends were supported not by free cash flow but by cash on hand and accounting earnings. Share repurchases were limited, and the analysis for the current period focuses primarily on the payout ratio.

Risk Factors

1. Divergence between operating cash flow and earnings: OCF was an outflow of ¥20.41B, while net income was positive at ¥21.12B, primarily due to income taxes paid of ¥49.26B. The increase in contract assets and decrease in accounts payable also contributed, requiring close monitoring of the conversion of earnings into cash.

2. Recovery of investments in goodwill and intangible assets: Goodwill increased to ¥31.89B and intangible fixed assets increased to ¥32.39B, reflecting business acquisitions involving the six newly consolidated subsidiaries. Although the ratios to net assets and total assets are currently at manageable levels, impairment risk could materialize if the earnings contribution from the acquired businesses falls below expectations.

3. Deterioration in operating leverage due to higher SG&A expenses: SG&A expenses increased by +41.7% YoY, substantially exceeding the revenue growth rate of +14.6% and reducing the operating margin. Controlling the increase in SG&A expenses during the remaining period will be necessary to achieve the full-year plan.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

The company’s profitability is above the industry median.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median but has not reached the IQR upper bound of 19.9%.

※Source: Company compilation

Key Points from the Financial Results

1. Revenue increased by +14.6%, and the gross margin also improved to 26.5%, indicating improved underlying profitability supporting business growth. However, the operating margin declined from the prior year due to higher SG&A expenses, showing that revenue growth has not been sufficiently converted into bottom-line earnings.

2. The primary reason for negative OCF was income taxes paid of ¥49.26B, while the OCF subtotal before tax payments was positive at ¥33.11B. It will be useful to continue monitoring working capital trends, including changes in contract assets and accounts payable, in future quarters.

3. The sharp increase in goodwill and intangible assets reflects the expansion of the business portfolio involving six newly consolidated subsidiaries. Against a conservative financial base with an equity ratio of 68.4%, the monetization and earnings contribution of these assets will be an important focus of future analysis.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,512–¥1,599 at ±1% for the cost of equity, and ¥1,553–¥1,558 at ±0.1 for ω.

Notes:

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

(Calculation model: Residual income model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated values based solely on publicly disclosed data; these are not forecasts of market prices or recommendations for specific investment actions and do 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 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 discretion and responsibility, after consulting with a professional adviser as necessary.

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