NS Solutions (2327) FY2027 Q1 Earnings Report

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Executive Summary

Revenue growth continued; however, profit growth fell below revenue growth due to increases in SG&A expenses and the effective tax rate. Revenue was ¥936.6B (+13.3% YoY), Operating Income was ¥92.3B (+8.8%), Profit Before Tax was ¥95.2B (+8.0%), and Net Income was ¥55.5B (+2.8%, including ¥52.1B attributable to owners of the parent, +1.9%). Although the gross profit margin improved to 26.5% from the previous year, SG&A expenses increased at a faster pace than revenue, causing the Operating Income margin to decline. In addition, the effective tax rate rose to 41.7% from 38.7% in the previous year, which was the primary factor behind the slowdown in Net Income growth.

Factors Affecting Earnings

【Revenue】Revenue was ¥936.6B, representing a +13.3% increase YoY. The Company operates as a single Information Services Business segment and does not disclose a breakdown by business; however, both contract assets (+24.8%) and contract liabilities (+22.1%) increased, indicating that expansion in orders accompanying project progress supported revenue growth.

【Profit and Loss】The gross profit margin improved to 26.5% from 25.4% in the previous year, as the increase in cost of sales was kept below the rate of revenue growth. Meanwhile, SG&A expenses increased by +24.7% YoY to ¥155.5B, exceeding the revenue growth rate by 11.4pt, resulting in a decline in the Operating Income margin to 9.9% from the previous year. As financial income exceeded financial expenses, Profit Before Tax was ¥95.2B (+8.0%); however, income taxes and other taxes were substantial at ¥39.7B (effective tax rate of 41.7%, versus 38.7% in the previous year), leaving Net Income at ¥55.5B (+2.8%). Although the Company achieved increases in both revenue and profit, the profit growth rate was below revenue growth, and the quality of earnings growth declined slightly from the previous year in terms of the expense structure and tax burden.

Key Financial Indicators

【Profitability】The Operating Income margin was 9.9%, down from the equivalent 10.3% in the previous year, while the Net Income margin was 5.9%. The improvement in the gross profit margin to 26.5% was partially offset by higher SG&A expenses and a heavier tax burden. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥145.9B, approximately 2.8 times Net Income, indicating strong cash backing; however, the decrease in accounts receivable, reflecting progress in collections, made a significant contribution, while cash uses also arose from increases in contract assets and inventories. 【Investment Efficiency】Annualized ROE was 7.8%, a level achieved under low financial leverage of approximately 1.5 times total assets to equity. Room for improvement in capital efficiency depends on a recovery in the after-tax profit margin. 【Financial Soundness】The Equity Ratio was 66.8%. Current assets of ¥2741.1B versus current liabilities of ¥930.7B resulted in a current ratio of approximately 295%, indicating a conservative and stable financial foundation.

Cash Flow Analysis

Operating Cash Flow was ¥145.9B, a significant improvement from △¥192.5B in the same period of the previous year, demonstrating cash generation equivalent to approximately 2.6 times Net Income. The ¥208.1B cash inflow from a decrease in trade receivables made a significant contribution to this improvement. Meanwhile, increases in contract assets (-¥77.9B) and inventories (-¥73.6B) acted as cash-use factors. Investing Cash Flow was an inflow of ¥20.9B, including ¥40.3B from the sale and redemption of other financial assets, while capital expenditures were limited to ¥19.2B. Financing Cash Flow was an outflow of ¥105.0B, primarily due to dividend payments of ¥82.3B. As a result, Free Cash Flow was ¥166.8B, a level sufficient to cover dividend payments. However, as the increase in OCF includes the temporary effect of collections, monitoring working capital trends from the next period onward will be necessary to assess sustainable cash generation.

Quality of Earnings

Profit Before Tax was ¥95.2B versus Operating Income of ¥92.3B. Non-operating factors were generally limited, with financial income of ¥4.2B exceeding financial expenses of ¥1.3B, and extraordinary or other one-off items were limited. Meanwhile, income taxes and other taxes were substantial at ¥39.7B, and the effective tax rate rose to 41.7% from 38.7% in the previous year. The decline in the tax burden factor—the ratio of Net Income to Profit Before Tax—was the primary reason that the increase in Operating Income did not sufficiently translate into Net Income. OCF reached approximately 2.6 times Net Income, indicating that accruals—the difference between accounting profit and cash—were small and that earnings quality was sound from the perspective of cash backing. However, the breakdown of OCF shows that the substantial collection of trade receivables made a temporary contribution, while increases in contract assets and inventories have the nature of upfront investment toward future revenue recognition. Progress in acceptance inspections and collections should therefore be monitored.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year Company forecasts—Revenue of ¥419.0B, Operating Income of ¥48.5B, and profit attributable to owners of the parent of ¥32.3B—were 22.4%, 19.0%, and 16.1%, respectively, all below the simple progress benchmark of 25%. In particular, the delay in profit progress was greater than the delay in revenue progress, reflecting the early increase in SG&A expenses and the high effective tax rate. The Company revised its earnings forecasts during the quarter, but made no revision to its dividend forecast. Absorption of expenses and normalization of the tax burden toward the second half of the fiscal year will be challenges for achieving the full-year plan.

Shareholder Returns

Dividend payments during Q1 amounted to ¥82.3B, reflecting the actual payment of dividends based on the previous fiscal year’s results. The full-year dividend forecast is ¥87.0 per share, and the expected Payout Ratio calculated from the average number of shares outstanding during the period of 182,981 thousand shares and the full-year forecast of profit attributable to owners of the parent of ¥323.0B is approximately 49.3%. This Payout Ratio is based solely on dividends, and no share repurchases have been identified in the disclosed data. The financial foundation, including an Equity Ratio of 66.8% and cash and cash equivalents of ¥1,149.5B, is sufficient to support dividend payments for the current period.

Risk Factors

1. Pressure on profit margins from higher SG&A expenses: SG&A expenses increased by +24.7% YoY, outpacing the +13.3% revenue growth rate, and caused the Operating Income margin to decline from the previous year. If the situation in which revenue growth does not translate into margin expansion continues, it could affect achievement of the full-year profit plan.

2. Stagnation in after-tax profit growth due to the higher effective tax rate: The effective tax rate rose to 41.7% from 38.7% in the previous year, contributing to the fact that Net Income growth was limited to +2.8% despite Operating Income growth of +8.8%. The sustainability of the tax rate is an important variable for full-year profit progress.

3. Project execution risk associated with increases in contract assets and inventories: Contract assets increased by +24.8% from the beginning of the period, while inventories increased by +22.4%. The conversion of ongoing projects into acceptance, billing, and collection should be monitored. Because the Company discloses only a single segment, profitability by individual project and customer industry cannot be analyzed separately.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

The Operating Income margin exceeds the industry median, while the Net Income margin is at the same level as the industry median, with the heavy tax burden offsetting the profitability advantage at the Net Income stage.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median and is positioned in the upper range of the IQR.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Revenue increased by +13.3% YoY, and the gross profit margin also improved to 26.5%, confirming growth momentum at both the top-line and gross profit levels. However, SG&A expenses increased at a faster pace, causing the Operating Income margin to decline from the previous year.

2. The increase in the effective tax rate to 41.7% from 38.7% in the previous year was the primary reason that Net Income growth was limited to +2.8%, compared with Operating Income growth of +8.8%. Trends in the tax burden will determine future profit progress.

3. Q1 progress rates against the full-year plan were 22.4% for Revenue, 19.0% for Operating Income, and 16.1% for profit attributable to owners of the parent, all below the simple progress benchmark of 25%. Expense absorption and normalization of the tax burden in the second half of the year will be key points to monitor for achievement of the plan.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,594–¥1,686 at ±1% for the cost of equity, and ¥1,636–¥1,643 at ±0.1 for ω.

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 (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 the market share price 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 responsibility, after consulting professionals as necessary.

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