FAN Communications (2461) FY2026 Q1 Earnings Report

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Executive Summary

Q1 of FY2026 resulted in a significant decline in earnings, driven by lower revenue from the core business combined with widening losses in the strategic business. Revenue was ¥17.3B (-6.6% YoY), Operating Income was ¥2.7B (-53.9%), Ordinary Income was ¥2.2B (-60.1%), and Net Income was ¥1.1B (-72.2%). The gross margin declined to 78.7% from 89.2% in the same period of the previous year, while an increase in SG&A expenses amid lower revenue accelerated the deterioration in profit margins. In addition to the decline in revenue from the CPA Solutions Business, an investment business partnership operating loss of ¥0.85B and an effective tax rate of 51.0% weakened the conversion from Operating Income to Net Income.

Factors Affecting Performance

【Revenue】Revenue was ¥17.3B, representing a 6.6% YoY decline. External revenue from the core CPA Solutions Business fell significantly to ¥12.8B (-16.8% YoY), becoming the primary driver of the consolidated revenue decline. Meanwhile, external revenue from the strategic business grew to ¥4.5B (+42.8%), but this was insufficient to offset the decline in the core business, which accounts for 73.9% of company-wide revenue.

【Profit and Loss】Operating Income declined to ¥2.7B (-53.9% YoY), Ordinary Income to ¥2.2B (-60.1%), and Net Income to ¥1.1B (-72.2%), with the magnitude of the decline widening progressively. Segment profit in the CPA Solutions Business decreased to ¥0.85B (-19.0% YoY), while the strategic business’s segment loss widened to ¥2.5B from ¥1.5B in the previous year. Company-wide expenses also increased to ¥3.2B (+7.9%), and the fixed-cost burden amid lower revenue weakened operating leverage. Non-operating expenses included an investment business partnership operating loss of ¥0.85B, further reducing Ordinary Income. The high effective tax rate of 51.0% also constrained the conversion to Net Income. In conclusion, the Company reported lower revenue and lower earnings.

Segment Analysis

The CPA Solutions Business recorded external revenue of ¥12.8B (-16.8% YoY) and segment profit of ¥0.85B (-19.0% YoY). Its segment profit margin remained high at 64.5%, although it declined from 65.9% in the previous year. The strategic business grew its external revenue to ¥4.5B (+42.8% YoY), but its segment loss widened to ¥2.5B from ¥1.5B in the previous year, resulting in a deterioration in its margin to negative 51.8% from negative 45.3%. The strategic business’s revenue growth has not yet translated into consolidated earnings growth, and the profitability gap between the two businesses is widening.

Key Financial Indicators

【Profitability】The Operating Income margin was 15.8%, down 1,628bp from 32.0% in the same period of the previous year, while the Net Income margin was 6.2%, down 1,477bp from 21.0%. The gross margin declined to 78.7% from 89.2% in the previous year, indicating that the deterioration in profitability originated from higher cost of sales and a relative increase in SG&A expenses.【Cash Quality】Cash and deposits totaled ¥126.3B, accounting for 59.1% of total assets, indicating high asset liquidity. The effective tax rate was high at 51.0%, constraining the conversion from Profit Before Tax of ¥2.2B to Net Income of ¥1.1B.【Investment Efficiency】ROE (annualized) was 2.7%. Given a Net Income margin of 6.2%, total asset turnover of 0.32, and financial leverage of 1.32x, the decline in the Net Income margin was the primary factor behind the decline in ROE.【Financial Soundness】The Equity Ratio was high at 75.9%, and liquidity was ample, with current assets of ¥161.8B versus current liabilities of ¥50.3B. The debt-to-equity ratio remained at 0.32x, indicating a conservative capital structure.

Cash Flow Analysis

As the cash flow statement is not included in the disclosed data, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥126.3B, down from ¥146.9B in the same period of the previous year, while net assets declined from ¥162.3B to ¥175.8B. Retained earnings were ¥148.0B, down from ¥159.5B in the previous year, suggesting that the low Net Income level for the current period and dividend payments affected the decline in funds. Meanwhile, current assets of ¥161.8B significantly exceeded current liabilities of ¥50.3B, and the quick ratio remained high, ensuring sufficient financial capacity to support business operations.

Earnings Quality

The current period’s earnings showed a qualitative deterioration, as the worsening of recurring operating business results was compounded by the non-business-related factor of an investment business partnership operating loss of ¥0.85B in non-operating expenses. Extraordinary gains and losses were limited to a ¥0.1B loss on retirement of fixed assets, and therefore the primary drivers of earnings volatility were operating and non-operating results rather than extraordinary gains and losses. Non-operating income was ¥0.4B, equivalent to approximately 2.2% of revenue, and consisted primarily of interest income of ¥0.2B and foreign exchange gains of ¥0.1B. The effective tax rate of 51.0% was higher than the level in the same period of the previous year (the tax burden relative to Profit Before Tax), weakening the conversion from Profit Before Tax of ¥2.2B to Net Income of ¥1.1B. Comprehensive income was ¥1.2B, nearly equal to Net Income of ¥1.1B, indicating that changes in valuation differences on securities were small and the divergence between Comprehensive Income and Net Income was limited.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year Company forecasts of Revenue of ¥78.0B, Operating Income of ¥21.8B, and Ordinary Income of ¥22.0B were 22.2%, 12.6%, and 10.2%, respectively, while the progress rate for Net Income was 7.6%. Revenue progress was only 2.8pt below the standard 25%, but profit metrics were 12–17pt below the standard progress rate, indicating a pronounced delay. The Company has not revised its earnings forecasts. Achieving the full-year targets will require a recovery in revenue from the CPA Solutions Business, a reduction in losses in the strategic business, and normalization of non-operating gains and losses and the tax burden.

Shareholder Returns

The Company’s full-year dividend forecast is ¥21.0 per share, and the forecast Payout Ratio based on forecast EPS of ¥21.57 is high at approximately 97.4%. Based on forecast Net Income of ¥1.43B, total annual dividends are estimated at approximately ¥1.39B, representing a significant dividend burden relative to earnings. This figure is the Payout Ratio based solely on dividends and is not the Total Return Ratio, which includes share repurchases. Cash and deposits of ¥126.3B and an Equity Ratio of 75.9% support the balance sheet’s capacity to pay dividends. However, Q1 Net Income was only ¥1.1B, and if full-year earnings fall below plan, the capacity of earnings to cover dividends may decline.

Risk Factors

1. Continued revenue decline in the core business: External revenue from the CPA Solutions Business was ¥12.8B, down 16.8% YoY. A delayed recovery in this core business, which accounts for 73.9% of company-wide revenue, could result in failure to achieve the full-year plan.

2. Widening losses in the strategic business: Although the strategic business’s revenue grew by +42.8% YoY, its segment loss widened to ¥2.5B from ¥1.5B in the previous year. Revenue growth has not translated into improved earnings, and this situation is continuing.

3. High effective tax rate and investment business partnership loss: The effective tax rate of 51.0% is a factor constraining the conversion from Profit Before Tax to Net Income. In addition, the investment business partnership operating loss of ¥0.85B accounted for most of non-operating expenses and reduced Ordinary Income.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

The Operating Income margin exceeds the industry median, but the Net Income margin is below the median, as profit outflows at the non-operating and tax stages have resulted in a relative disadvantage within the industry.

Growth and Capital Efficiency

The Revenue growth rate is significantly below the industry median, placing the Company at a disadvantage in terms of growth among IT and telecommunications companies.

※Source: Compiled by the Company

Key Points from the Earnings Report

1. The Operating Income margin of 15.8% exceeds the industry median of 12.1%, but it declined sharply by 1,628bp YoY and warrants close monitoring as a potential turning point in the trend of profitability.

2. Q1 progress rates against the full-year forecast were significantly below the standard progress rate, at 12.6% for Operating Income and 7.6% for Net Income. Achieving the full-year plan therefore presupposes a recovery in profitability in the second half of the fiscal year.

3. The forecast Payout Ratio of approximately 97.4% represents a significant dividend burden relative to earnings. Although the Company’s strong financial foundation, including cash and deposits of ¥126.3B, provides support, the sustainability of dividends will depend on the trend in full-year earnings.

Theoretical Share Price (Reference Value)

Sensitivity: ¥236–¥249 at Cost of Equity ±1%, and ¥242–¥242 at ω±0.1.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end are used (there is a timing mismatch with the full-year forecast).

(Calculation model: 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 the future share price.)

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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 responsibility, after consulting with a professional as necessary.

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