SOLITON SYSTEMS K.K. FY2026 Q2 Earnings Report

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Executive Summary

Both revenue and earnings recorded substantial growth, resulting in strong financial results characterized by higher revenue, higher earnings, and a marked improvement in profitability. Revenue was ¥100.2B (¥87.1B in the previous year, +15.1%), Operating Income was ¥17.8B (¥7.9B in the previous year, +124.0%), Ordinary Income was ¥18.8B (¥7.8B in the previous year, +140.8%), and Net Income was ¥14.4B (¥5.7B in the previous year, +151.7%). The main reasons why the earnings growth rate significantly exceeded the revenue growth rate were balanced growth in products, cloud services, and maintenance within the core ITsecurityCloud BU, as well as positive operating leverage resulting from improved gross margins.

Factors Affecting Financial Performance

【Revenue】Revenue was ¥100.2B (+15.1% year on year). The core ITsecurityCloud BU generated ¥94.5B (+15.4%), accounting for 94.1% of company-wide revenue and driving growth, with each of products, cloud services, maintenance, and professional services showing growth approaching double digits. The EIZOUCommunication BU grew to ¥5.0B (+16.7%), although its scale remains small, while the ECODevice BU declined to ¥0.9B (-16.0%).

【Profit and Loss】Operating Income was ¥17.8B (+124.0% year on year), and the Operating Income margin improved to 17.7% from 9.1% in the previous year, an improvement of +8.6pt. The gross margin also increased to 50.1% (44.3% in the previous year), driven by improved pricing and product mix and scale effects. Net Income was ¥14.4B (+151.7%) and included a gain on the sale of subsidiary shares of ¥0.6B (extraordinary income and a one-time factor), although its scale was limited. The difference between Ordinary Income and Net Income can be explained primarily by income taxes, etc. (an effective tax rate of approximately 25.7%), and the divergence is not substantial. In conclusion, the company achieved higher revenue and higher earnings, with the earnings growth rate significantly exceeding the revenue growth rate as a notable feature.

Segment Analysis

Segment profitability is highly concentrated in the ITsecurityCloud BU, which effectively drives company-wide earnings. The ITsecurityCloud BU maintained high profitability, with revenue of ¥94.5B (+15.4%), Operating Income of ¥23.4B (+85.8%), and a profit margin of 24.7%. The EIZOUCommunication BU recorded revenue of ¥5.0B (+16.7%) but an Operating Loss of ¥1.3B (deterioration rate of -15.9%), and has not yet reached profitability. The ECODevice BU recorded revenue of ¥0.9B (-16.0%) and an Operating Loss of ¥1.1B (deterioration rate of -46.8%), with contraction and widening losses occurring simultaneously. Against the reported-segment total profit of ¥2,091 million, the deduction of company-wide expenses of ¥313 million resulted in consolidated Operating Income of ¥1,777 million. The combined losses of the two new business divisions partially offset the earnings growth effect of the core division.

Key Financial Indicators

【Profitability】Both the Operating Income margin of 17.7% (9.1% in the previous year) and the Net Income margin of 14.4% (6.6% in the previous year) improved substantially, originating from the increase in the gross margin to 50.1% (44.3% in the previous year). 【Cash Quality】Operating Cash Flow (OCF) was ¥18.6B, exceeding Net Income of ¥14.4B, indicating earnings growth supported by cash generation. 【Investment Efficiency】ROE was 10.2%, led by expansion of the Net Income margin, while changes in total asset turnover and financial leverage were limited. 【Financial Soundness】The Equity Ratio increased to 52.8% (50.5% in the previous year). On-hand liquidity was substantial, with cash and deposits of ¥101.4B plus short-term securities of ¥80.0B, while the burden of interest-bearing debt was immaterial.

Cash Flow Analysis

Operating Cash Flow (OCF) was ¥18.6B, up +13.5% year on year, which was more moderate than Net Income growth of +151.7%. This was because an increase in accounts receivable (+¥9.1B) and income tax payments (-¥6.0B) placed pressure on working capital. OCF before changes in working capital was ¥23.9B, indicating substantial underlying cash generation. Investing Cash Flow was positive at ¥19.3B, primarily due to the recovery of funds associated with the replacement of short-term investments (securities), while capital expenditures were kept at a small scale of ¥0.6B. Financing Cash Flow was -¥5.2B, mainly due to dividend payments. Free Cash Flow was ample at ¥38.0B, more than sufficient to cover dividends and limited capital expenditures, indicating strong cash-generation capacity.

Quality of Earnings

The majority of earnings were recurring and generated through operating activities. Non-operating income of ¥1.2B (including dividend income of ¥0.3B and foreign exchange gains of ¥0.3B) accounted for only approximately 1% of revenue, indicating low dependence on such income. The extraordinary gain of ¥0.6B was a gain on the sale of subsidiary shares and should be classified as a one-time factor; even excluding this gain, underlying earnings growth remains substantial. OCF of ¥18.6B exceeded Net Income of ¥14.4B, providing sound cash support for earnings. From an accrual perspective, the quality of earnings can also be assessed as high. The difference between Ordinary Income of ¥18.8B and Net Income of ¥14.4B was primarily attributable to income taxes, etc. of ¥5.0B, with no particularly abnormal divergence observed.

Earnings Forecast and Guidance

The full-year forecast is revenue of ¥223.0B (+12.8%), Operating Income of ¥39.0B (+37.1%), and Ordinary Income of ¥39.5B (+32.7%). The progress rates based on first-half results are 45.0% for revenue, 45.6% for Operating Income, and 47.6% for Ordinary Income. The first-half earnings growth rate (Operating Income +124.0%) significantly exceeded the full-year forecast growth rate (+37.1%), suggesting that the second half may incorporate conservative assumptions reflecting the base effect from the previous year. Contract liabilities accumulated to ¥95.7B (+¥6.4B), serving as a prepaid element supporting revenue recognition in the second half. During the current quarter, revisions were made to the earnings forecast and dividend forecast.

Shareholder Returns

The interim dividend is ¥30, and the full-year forecast is ¥72. Based on the full-year forecast EPS of ¥144.01, the Payout Ratio is approximately 50.0%. The interim dividend increased to ¥30 in the current period from ¥26 as disclosed for the previous year. Relative to Free Cash Flow of ¥38.0B, the assumed annual total dividend amount is sufficiently small, resulting in high cash coverage of dividends. There has been no disclosure regarding share repurchases; accordingly, this report describes the Payout Ratio based solely on dividends.

Risk Factors

1. Business concentration risk: The ITsecurityCloud BU accounts for 94.1% of revenue and the majority of reported-segment profit, creating a structure in which demand fluctuations and price competition in a single business directly affect company-wide performance.

2. Continued losses in new businesses: The EIZOUCommunication BU recorded an Operating Loss of ¥1.3B (deterioration rate of -15.9%), while the ECODevice BU recorded an Operating Loss of ¥1.1B (deterioration rate of -46.8%). Losses have widened in both businesses, and delays in achieving profitability are factors that could dilute company-wide margins.

3. Risks related to working capital and investment pace: The increase in accounts receivable (+¥9.1B) caused OCF growth to be more moderate than Net Income growth. In addition, capital expenditures of ¥0.6B remained below depreciation and amortization expense of ¥1.4B.

Industry Benchmarks (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin exceeded the industry median, indicating relatively high profitability within the industry.

Growth and Capital Efficiency

The revenue growth rate was below the industry median and did not reach the lower bound of the IQR (16.2%), indicating relatively slower growth within the industry.

※Source: Compiled by the company

Key Takeaways from the Financial Results

1. The improvement in the gross margin to 50.1% (44.3% in the previous year) and the Operating Income margin to 17.7% (9.1% in the previous year) reflects an improved pricing and product mix and the expansion of recurring revenue centered on cloud services and maintenance. This should be viewed as a structural improvement in profitability rather than a one-time factor.

2. The accumulation of contract liabilities to ¥95.7B (+¥6.4B) can be interpreted as a factor contributing to the stability of revenue and cash flow from the second half onward through increased prepaid revenue.

3. The concentration of revenue and profit in the ITsecurityCloud BU (94.1% of revenue), together with continued losses in the video communications and ECO device businesses, partially offsets the pace of company-wide earnings growth. The profitability trends of these two divisions are therefore a structural factor that will influence future changes in company-wide margins.

Theoretical Share Price (Reference Value)

Sensitivity: ¥962–¥1,017 at a ±1% change in the cost of equity, and ¥984–¥997 at a change of ±0.1 in ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(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 through analysis of 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 as necessary.

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