Quest Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥8.79B
• Operating Income: ¥486M
• Net Income: ¥336M
• EPS: ¥62.60

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid top-line growth but margin compression and negative operating cash flow make FY2026 Q2 a mixed quarter. Revenue rose 21.4% YoY to 87.85, highlighting strong demand, likely in SI and outsourcing, with gross profit of 15.01 and operating income of 4.86 (-2.1% YoY). Operating margin stood at 5.5% (4.86/87.85), ordinary income was 5.11 (-4.5% YoY), and net income was 3.35 (-5.8% YoY), implying a net margin of 3.8%. Based on YoY rates, last year's Q2 revenue was roughly 72.35 and operating income about 4.97, meaning operating margin compressed by about 134 bps (from ~6.9% to ~5.5%). Net margin compressed by roughly 111 bps (from ~4.9% to ~3.8%), and ordinary margin by about 157 bps (from ~7.4% to ~5.8%). Non-operating income contributed modestly (0.28) and was mostly dividend and interest income; non-operating expenses were minimal (0.04). Earnings quality is weak this quarter: operating cash flow was -0.95 versus net income of 3.35, resulting in an OCF/NI of -0.28x, below the 0.8x quality threshold. The balance sheet is strong with total assets of 101.40, equity of 73.08, and a high current ratio of 297%, supported by cash and deposits of 28.13 and accounts receivable of 39.56. Financial leverage is low (calculated leverage 1.39x, D/E reported 0.39x), and interest coverage is extremely high at 271x, implying negligible financing risk. ROE is 4.6% via DuPont (net margin 3.8% × asset turnover 0.866 × leverage 1.39x), which is modest for an IT services company. ROIC is reported at 7.1%, around management target levels but not outstanding. Capex remains very light (-0.03), underscoring an asset-light model but also suggesting limited organic capacity expansion without hiring. The calculated payout ratio is high at 95%, raising sustainability questions given negative OCF, even though cash reserves provide a buffer. Forward-looking, backlog conversion, receivable collections, and cost control (especially labor) in H2 will determine whether margins and cash flow recover to support the dividend. Overall, growth momentum is intact, but margin recovery and cash discipline are the key watchpoints for the remainder of FY2026.

Profitability Analysis

ROE decomposition: ROE 4.6% = Net Profit Margin 3.8% × Asset Turnover 0.866 × Financial Leverage 1.39x. The largest driver of YoY change appears to be margin compression: operating margin fell from ~6.9% to ~5.5% (about -134 bps), and net margin declined from ~4.9% to ~3.8% (about -111 bps). The likely business reasons include staffing and subcontracting cost pressure amid rapid revenue growth, pricing lags on fixed-price projects, and mix shift to lower-margin work. Asset turnover at 0.866 is reasonable for an IT services provider and likely improved with higher sales on a similar asset base; leverage remained conservative at 1.39x, so leverage was not a driver. The margin compression could be partly transitory if due to ramp-up costs and wage inflation timing; however, sustained wage pressure and tight labor markets could make full reversal difficult without pricing power or mix improvement. Watch for any trend of SG&A rising faster than revenue; SG&A details and YoY were not disclosed, limiting firm conclusions. Overall, operating leverage was negative this quarter (revenue +21.4% vs operating income -2.1%), indicating cost growth outpaced gross profit expansion.

Growth Assessment

Revenue growth of +21.4% YoY to 87.85 is strong and suggests healthy demand. However, profits did not keep pace: operating income -2.1% YoY and net income -5.8% YoY, indicating growth quality issues. Gross margin is 17.1% and operating margin 5.5%; both indicate that the company grew via potentially lower-margin projects or incurred higher delivery costs. Non-operating items contributed a small net positive (income 0.28, expenses 0.04), not enough to offset operational pressure. Outlook hinges on H2 seasonality (typically stronger for cash conversion in Japan) and the company’s ability to pass through wage inflation and optimize subcontracting. Given light capex (-0.03), growth is primarily headcount- and execution-driven; recruitment and utilization rates will determine sustainability. Without disclosure on backlog or segment mix, we assume high-single to double-digit revenue growth is plausible, but margin recovery is the swing factor for earnings trajectory.

Financial Health

Liquidity is very strong: current assets 69.96 versus current liabilities 23.55 imply a current ratio of 297% and a quick ratio of 297% (inventories not reported). There is no warning on current ratio (<1.0) or leverage (D/E reported 0.39x; well below 2.0). Cash and deposits of 28.13 provide a cushion; accounts receivable of 39.56 are sizable relative to payables of 6.99, typical for SIers but increase collection risk. Maturity mismatch risk appears low as short-term obligations are well covered by liquid assets. Interest-bearing debt is unreported, but interest expense is minimal (0.02), and interest coverage is very high (271x), suggesting negligible solvency risk. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

Earnings quality is weak this quarter: OCF/Net Income is -0.28x (<0.8 threshold). Negative OCF alongside positive earnings likely reflects working capital outflows, particularly an increase in accounts receivable associated with strong sales and potential seasonal bonus/tax payments in Q2. Free cash flow is not calculable due to missing investing CF, but capex is minimal (-0.03), so FCF should track OCF closely. For sustainability, dividend plus capex coverage by OCF is questionable this quarter; continued negative OCF would be a concern, though the cash balance provides temporary support. There are no clear signs of working capital manipulation, but the AR build and timing effects should normalize if collections improve in H2.

Dividend Sustainability

The calculated payout ratio is high at 95.0%, which is above the <60% benchmark for comfortable sustainability. OCF was negative (-0.95), and FCF is unreported, so cash coverage of dividends cannot be confirmed for the half-year; this raises caution for sustainability if cash conversion does not improve. Nevertheless, the company holds substantial retained earnings (59.14) and cash (28.13), which can bridge near-term payments. Policy outlook depends on H2 earnings and cash generation; maintaining the current payout would likely require margin stabilization and better collections. Absent clearer DPS disclosure, we treat the high payout as a risk flag rather than a definitive policy change.

Risk Assessment

Business Risks:

• Wage inflation and tight IT labor market pressuring delivery margins
• Project execution risk on fixed-price SI engagements
• Pricing power risk if cost increases cannot be passed through
• Client concentration or sector mix risk (not disclosed)
• Demand cyclicality in enterprise IT and DX spending

Financial Risks:

• Negative operating cash flow despite positive earnings (OCF/NI -0.28x)
• High payout ratio (95%) relative to cash generation
• Large accounts receivable balance heightens collection risk
• Potential margin volatility from subcontracting cost swings

Key Concerns:

• Margin compression despite 21% revenue growth
• Ordinary and net income declining YoY
• Limited visibility due to unreported SG&A details, investing CF, and DPS
• Dependence on H2 seasonality for cash conversion

Investment Implications

Key Takeaways:

• Top-line momentum is strong, but operating leverage turned negative
• Margins compressed ~110–160 bps across operating/ordinary/net levels
• OCF was negative; watch AR collection and working capital normalization
• Balance sheet is robust with high liquidity and low leverage
• High payout ratio poses sustainability risk if margins and OCF do not recover

Metrics to Watch:

• Operating margin trajectory and gross margin mix
• OCF/Net Income and AR days outstanding
• Headcount, subcontractor ratio, and wage cost inflation
• Order backlog/book-to-bill (if disclosed) and H2 pipeline
• Dividend guidance and payout policy in light of cash conversion

Relative Positioning: Within Japanese mid-tier IT services, Quest shows above-average revenue growth with below-peer profitability this quarter and superior balance-sheet strength; the near-term story hinges on execution to restore margins and convert growth into cash.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis