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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AI Financial Analysis

Executive Summary

FY2026 Q2 was a strong earnings period, with double-digit sales growth translating into a disproportionate increase in operating and net profit. Revenue rose 15.1% YoY to ¥10.02bn. Operating income more than doubled, increasing 124.0% YoY to ¥1.78bn. Ordinary income increased 140.8% YoY to ¥1.88bn. Net income increased 150.8% YoY to ¥1.45bn. The operating margin expanded to 17.7% from 9.1% in the prior-year period, a substantial 860bp improvement. Gross margin rose to 50.1% from 44.4%, an approximately 570bp expansion, indicating improved sales mix and/or pricing and procurement efficiency. SG&A increased only 5.5% YoY to ¥3.24bn, materially below revenue growth, producing strong operating leverage. The IT Security segment was the clear earnings driver, with segment profit rising 85.8% to ¥2.34bn. Its segment margin expanded to 24.7% from 15.4% despite only a 15.3% increase in segment revenue. Video Communication remained loss-making, while Eco New Business Development also remained in investment-loss territory. Operating cash flow of ¥1.86bn exceeded net income by 29%, supporting the quality of reported earnings. Cash conversion was also strong, with operating cash flow equivalent to 0.97x EBITDA and an accruals ratio of negative 1.6%. Reported free cash flow was ¥3.80bn, although this was significantly supported by net proceeds from short-term securities transactions within investing cash flow rather than solely by operating cash generation. Liquidity remains robust, with a 195.1% current ratio, 186.2% quick ratio, and ¥10.14bn of cash and deposits. Full-year guidance implies second-half revenue of ¥12.28bn and operating income of ¥2.12bn, requiring a higher absolute earnings contribution than in the first half. The company has revised both earnings and dividend forecasts, and full-year execution will depend principally on sustaining the IT Security segment's elevated profitability while controlling continuing investment losses in the smaller businesses.

Profitability Analysis

The reported annualized ROE is 20.4%, an excellent level relative to the 15% benchmark. The three-factor DuPont decomposition is a 14.4% net profit margin, 0.745x annualized asset turnover, and 1.90x financial leverage. The principal source of the strong ROE is profitability: the 14.4% net margin is well above the 10% excellence threshold, while asset turnover is moderate and leverage is not excessive. Margin expansion was the most important YoY change, as the operating margin increased by approximately 860bp to 17.7% and gross margin improved by approximately 570bp to 50.1%. Revenue growth of 15.1% was amplified by SG&A growth of only 5.5%, demonstrating favorable operating leverage. EBITDA was ¥1.92bn and the EBITDA margin was 19.2%, reinforcing that the profit improvement is not solely a non-cash accounting effect. The five-factor DuPont profile is also sound: the 0.744 tax burden is normal, while the 1.095 interest burden reflects net non-operating income rather than a material interest-cost drag. Non-operating income of ¥0.12bn was only 1.2% of revenue and consisted mainly of ¥0.05bn interest income, ¥0.03bn FX gains, and ¥0.03bn dividend income; it is not a major driver of profitability. Profit before tax exceeded ordinary income because of a ¥0.06bn extraordinary gain on the sale of subsidiary shares, which modestly enhanced net income but does not alter the core operating-profit conclusion. The IT Security segment is the core business, accounting for ¥9.44bn of external revenue and ¥2.34bn of segment profit. IT Security revenue rose 15.3% YoY and segment profit rose 85.8% YoY, with its margin improving to 24.7% from 15.4%. Video Communication revenue increased 16.2% to ¥0.50bn, but its segment loss widened to ¥0.13bn from ¥0.11bn. Eco New Business Development revenue declined 6.3% to ¥0.09bn and its segment loss widened to ¥0.11bn from ¥0.08bn. The reclassification of remote-operation platform technology-development costs into Video Communication improves segmental alignment with commercialization activity, but the segment's losses remain a profitability offset. The IT Security margin step-up appears operationally supported by gross-margin and SG&A discipline, but its sustainability should be assessed against second-half product mix and sales-investment requirements.

Growth Assessment

Growth was led by the IT Security business, where product revenue rose to ¥3.53bn from ¥2.74bn, cloud-services revenue rose to ¥1.47bn from ¥1.28bn, and services/other revenue increased to ¥1.67bn from ¥1.45bn. Maintenance revenue in IT Security was stable to modestly higher at ¥2.76bn, supporting a recurring-revenue base. At the consolidated level, maintenance revenue was ¥2.79bn and cloud-services revenue was ¥1.53bn, together representing 43.1% of revenue; this provides a meaningful recurring component alongside product sales. Product revenue grew 30.1% to ¥3.84bn, faster than the consolidated top line, which likely contributed to the strong earnings momentum but may also increase mix sensitivity. The full-year sales forecast is ¥22.30bn, implying first-half progress of 44.9%, slightly below the standard 50% half-year benchmark but not a material deviation. Operating-income progress is 45.6% against the ¥3.90bn full-year forecast. Ordinary-income progress is 47.6% against the ¥3.95bn forecast. Net-income progress is 54.2% against the ¥2.67bn forecast, above the standard half-year run rate, partly reflecting the first-half extraordinary gain. The forecast therefore requires second-half revenue of ¥12.28bn and operating income of ¥2.12bn, versus first-half revenue of ¥10.02bn and operating income of ¥1.78bn. Management's revised outlook indicates improved expectations, but the second half still requires continued top-line expansion and preservation of the first-half margin improvement. The principal growth-quality consideration is whether cloud, maintenance, and services continue to expand sufficiently to support recurring profitability as product sales fluctuate. Video Communication's higher revenue has not yet achieved breakeven, and Eco New Business Development contracted, so these businesses are not currently contributing to consolidated earnings growth.

Financial Health

Financial health is strong. The current ratio is 195.1% and the quick ratio is 186.2%, both comfortably above healthy liquidity thresholds and indicating no short-term maturity mismatch. Current assets were ¥24.69bn against current liabilities of ¥12.65bn, resulting in working capital of ¥12.04bn. Cash and deposits totaled ¥10.14bn, equal to 37.7% of total assets. Short-term investment securities were ¥8.00bn, adding to immediately realizable liquidity. Total equity was ¥14.20bn and the equity ratio was 52.7%, up from 50.5% a year earlier. The reported debt-to-equity ratio was 0.90x, below the 1.0x conservative benchmark and well below the 2.0x warning threshold. Non-current liabilities were only ¥0.06bn, and lease obligations totaled ¥0.08bn, indicating limited long-duration balance-sheet obligations. A notable feature of current liabilities is ¥9.57bn of contract liabilities, which largely represent customer advances rather than conventional interest-bearing funding. This structure is favorable for liquidity but requires continued delivery of contracted products and services. Inventories were ¥1.12bn, representing only 4.2% of assets, and receivables were ¥2.23bn, limiting the balance-sheet concentration in operating working capital. Intangible assets were ¥0.25bn, or 0.9% of assets, and there was no reported goodwill, leaving little acquisition-accounting or goodwill-impairment exposure. Treasury stock was ¥1.30bn, equivalent to 4.8% of total assets, representing a modest reduction in reported equity but not a material solvency concern.

Notable B/S Changes

Electronically recorded monetary claims: -¥4.48bn (-33.2%) to ¥9.01bn - a substantial reduction supported first-half operating cash flow and should be monitored for recurrence. Software in progress: -¥0.06bn (-95.0%) to ¥0.03bn - indicates completion, transfer, or reduced work-in-progress software investment; this is relevant alongside the low CapEx/depreciation ratio. Provision for bonuses: -¥2.51bn (-33.4%) to ¥5.01bn - reflects a lower accrued bonus obligation and contributed to period working-capital dynamics.

Cash Flow Quality

Cash-flow quality was favorable in the first half. Operating cash flow was ¥1.86bn, exceeding net income of ¥1.45bn, for an OCF/net-income ratio of 1.29x. This is above the 1.0x high-quality benchmark and does not indicate an earnings-cash conversion concern. Operating cash flow also represented 0.97x EBITDA, which is strong cash conversion for an IT services and security company. The negative 1.6% accruals ratio further supports that cash realization was at least as strong as accounting earnings. A ¥0.91bn reduction in trade receivables and contract assets supported operating cash flow, while contract liabilities increased by ¥0.64bn, also providing operating cash support. Inventory increased by ¥0.09bn and trade payables declined by ¥0.24bn, partially offsetting these favorable working-capital movements. The working-capital profile should be monitored because the cash-flow benefit from lower receivables and higher contract liabilities may vary with sales timing and contract delivery schedules. Capital expenditure was only ¥0.06bn, compared with depreciation and amortization of ¥0.14bn, producing a CapEx/depreciation ratio of 0.43x. This triggers both reported underinvestment alerts: the root cause is that reinvestment in tangible assets is less than half of the current depreciation charge. For an IT Security business, modest physical capex can be structurally normal because value creation depends more on software, engineering talent, cloud infrastructure, and product development than on heavy fixed assets; nevertheless, a prolonged ratio below 0.7x could constrain infrastructure renewal or capacity investment. The investment impact is therefore mixed: near-term free cash flow benefits from low capex, but investors should monitor whether product development, software investment, and cloud capacity remain sufficient to protect technology competitiveness. Reported free cash flow was ¥3.80bn, but investing cash flow was boosted by net redemptions of short-term investment securities; accordingly, this figure should not be interpreted wholly as recurring operating free cash flow. On an operating basis, ¥1.86bn of OCF still covered the ¥0.06bn of capex by a wide margin.

Dividend Sustainability

The Q2 dividend is ¥30.00 per share. The calculated first-half dividend payout ratio is 40.9%, based on the Q2 dividend and first-half earnings, and is below the 60% sustainability benchmark. The full-year dividend forecast is ¥72.00 per share, implying a ¥42.00 year-end dividend if the interim dividend remains ¥30.00. Based on full-year forecast EPS of ¥144.01, the implied full-year dividend payout ratio is approximately 50.0%. This would remain within a sustainable range provided the revised full-year profit forecast is achieved. First-half reported free-cash-flow coverage of the interim dividend was 6.41x, providing substantial headroom. Operating cash flow alone was also materially greater than the estimated ¥0.56bn interim dividend commitment. The balance sheet provides additional support, with ¥10.14bn in cash and deposits and ¥8.00bn in short-term investment securities. The principal dividend risk is not balance-sheet capacity but earnings normalization if the IT Security segment's first-half margin expansion does not persist or if investment losses in growth businesses increase. No share repurchase activity is identified in the period's financing cash flow, so the analysis is limited to the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include IT Security is the dominant earnings engine; a slowdown in enterprise security spending, stronger competition, pricing pressure, or an adverse product mix could disproportionately affect consolidated profitability., The substantial first-half margin expansion was driven by gross-margin improvement and operating leverage. Reversal of product mix, procurement conditions, or required sales and development investment could compress margins., Video Communication remains loss-making despite 16.2% revenue growth, and Eco New Business Development recorded lower revenue with a wider loss. Continued commercialization delays could dilute group profitability., Cybersecurity companies face rapid technology cycles, evolving attack methods, customer data-security expectations, and the need for continuous software and cloud investment., Contract liabilities of ¥9.57bn create an execution obligation: delayed delivery, customer cancellations, or cost overruns on fulfillment could affect revenue timing and margins..

Financial risks include Cash flow benefited from a ¥0.91bn receivables reduction and a ¥0.64bn increase in contract liabilities; the magnitude of this working-capital support may not recur every period., Reported free cash flow of ¥3.80bn includes positive investing cash flow from short-term securities redemptions net of purchases, so it exceeds the underlying operating free-cash-flow run rate., CapEx/depreciation of 0.43x is below the 0.7x underinvestment threshold. While asset-light operations can justify lower physical capex, persistently low reinvestment could impair future technology and capacity competitiveness., Foreign-exchange gains were ¥0.03bn in non-operating income and foreign-currency translation adjustments were negative ¥0.35bn within equity, indicating some currency sensitivity, though the direct first-half P&L impact was limited..

Key concerns include Highest priority: sustaining IT Security's 24.7% segment margin and converting its revenue growth into the second-half operating income required by guidance., High priority: achieving a path to profitability in Video Communication and limiting losses in Eco New Business Development., Moderate priority: ensuring low capital expenditure does not represent inadequate reinvestment in security technologies, cloud infrastructure, and product development., Moderate priority: distinguishing recurring operating cash generation from cash movements associated with short-term investment securities and working capital..

Investment Implications

Key takeaways include First-half operating income grew 124.0% YoY, materially outpacing the 15.1% revenue increase because of gross-margin expansion and disciplined SG&A growth., The IT Security segment is the core business, generating ¥2.34bn of segment profit at a 24.7% margin., Annualized ROE of 20.4%, a 17.7% operating margin, and a 14.4% net margin indicate high current profitability., Earnings quality is supported by OCF/net income of 1.29x, 0.97x OCF/EBITDA cash conversion, and a negative 1.6% accruals ratio., Liquidity is ample, while the full-year dividend forecast implies an approximately 50% payout ratio and appears supported by earnings and cash resources., Smaller growth businesses remain loss-making, and low CapEx/depreciation requires monitoring despite the company's asset-light profile..

Metrics to watch include IT Security segment revenue growth and segment margin relative to the first-half 24.7% level, Cloud-services and maintenance revenue growth as indicators of recurring-revenue resilience, Video Communication and Eco New Business Development segment losses and progress toward breakeven, Second-half operating-income delivery against the ¥3.90bn full-year forecast, Trade receivables, contract liabilities, and operating cash flow conversion, CapEx/depreciation and software/product-development investment trends, Full-year dividend delivery against the ¥72.00 per-share forecast.

Regarding relative positioning, Relative to the stated benchmarks, Soliton Systems shows excellent profitability, strong annualized ROE, high-quality cash conversion, conservative liquidity, and a sustainable projected dividend payout. Its relative weakness is not capital structure but concentration of profits in IT Security, combined with ongoing losses in the smaller commercialization-oriented segments and a low physical-capex reinvestment ratio.