SOFTCREATE HOLDINGS (3371) FY2027 Q1 Earnings Report

Quick View

Executive Summary

Although revenue and operating income increased in Q1 FY2027, the most important point is that Ordinary Income was essentially flat and the rate of profit growth relative to revenue growth was sluggish, as indicated by the decline in the gross profit margin. Revenue was ¥8.58B (+8.8% YoY), Operating Income was ¥1.19B (+7.7%), Ordinary Income was ¥1.32B (-1.1%), and Net Income attributable to owners of the parent was ¥0.85B (+1.4%). The primary drivers of revenue growth were the expansion of both the EcSolution and ItSolution segments; however, the decline in EcSolution’s profit margin restrained the pace of company-wide profit growth, leaving Ordinary Income roughly at the previous year’s level.

Factors Affecting Performance

【Revenue】Revenue increased 8.8% YoY to ¥8.58B. EcSolution remained the core business at ¥4.63B (+7.9%), accounting for 53.9% of total revenue, while ItSolution expanded to ¥3.96B (+9.9%); both segments grew.

【Profit and Loss】Operating Income increased 7.7% to ¥1.19B, securing profit growth; however, the gross profit margin declined to 40.0% from 40.8% in the previous year, indicating a structure in which profit growth is somewhat sluggish relative to revenue growth. The SG&A ratio declined to 26.1% from 26.7% in the previous year, indicating effective control of SG&A expenses, although this was insufficient to offset higher costs. Ordinary Income was ¥1.32B (-1.1%), remaining almost at the previous year’s level, affected by a decrease in non-operating income (from ¥0.22B in the previous year to ¥0.13B in the current period, primarily due to a decline in equity-method investment income). Profit Before Tax increased significantly to ¥1.52B (+14.6%), but this was attributable to the one-time gain on the sale of investment securities of ¥0.20B and does not reflect recurring earnings power. Net Income attributable to owners of the parent remained at ¥0.85B (+1.4%), as the increase in Profit Before Tax was absorbed by the tax burden and profit attributable to non-controlling interests. In conclusion, although revenue and profit increased, the profit growth rate was below revenue growth, making this a period in which profitability deteriorated somewhat.

Segment Analysis

EcSolution maintained its position as the core business with revenue of ¥4.63B (+7.9%); however, segment profit declined 16.9% to ¥0.94B from ¥1.14B in the previous year, and its profit margin fell significantly to 20.4% from 26.5%. Changes in the mix of projects and products and higher outsourcing costs appear to have had an impact. ItSolution achieved higher revenue and profit, with revenue of ¥3.96B (+9.9%) and segment profit of ¥0.66B (+25.8%); its profit margin improved to 16.6% from 14.5%. Higher personnel utilization and unit-price adjustments may have contributed. The contrasting movements in the profit margins of the two segments resulted in company-wide profit growth below revenue growth.

Key Financial Indicators

【Profitability】The Operating Income margin was 13.9%, down approximately 0.15pt YoY, while the gross profit margin also declined to 40.0% from 40.8% in the previous year, indicating somewhat weaker profitability beneath the revenue increase.【Cash Quality】Accounts receivable were ¥6.10B and accounts payable were ¥2.40B. The payment cycle remains shorter than the collection cycle, resulting in a structure in which funds are likely to remain tied up in operating assets. Contract liabilities were ¥2.67B, with advance receipts providing a certain mitigating factor.【Investment Efficiency】ROE was 3.2% (calculated by the Company), a level indicating room for improvement in capital efficiency, as profit growth was small relative to the capital base.【Financial Soundness】The Equity Ratio was 71.9% (62.2% based on total assets and total capital), while cash and deposits were substantial at ¥13.79B, significantly exceeding current liabilities of ¥8.55B; therefore, short-term funding stability is high.

Cash Flow Analysis

Although explicit data from the cash flow statement is unavailable, movements in funds can be inferred from changes in the balance sheet. Cash and deposits were ¥13.79B, an increase of ¥0.56B YoY. Accounts receivable were ¥6.10B, a decrease of ¥1.86B YoY, potentially indicating progress in collections; meanwhile, accounts payable also declined by ¥0.77B to ¥2.40B, indicating that payments were also compressed. Investment securities increased by ¥0.51B to ¥9.04B, suggesting an increase in fair value or additional investments. Income taxes payable and other liabilities declined substantially by ¥0.87B YoY, suggesting that the cash outflow from payment of taxes for the previous period was completed during the period. Overall, operating assets were being reduced while investment assets were being accumulated simultaneously, creating a structure in which cash levels increased gradually.

Quality of Earnings

The Company’s recurring earnings power in the current period was centered on Operating Income of ¥1.19B. Non-operating income was limited to ¥0.13B (1.5% of revenue), primarily consisting of items such as dividends received of ¥0.02B. Meanwhile, a gain on the sale of investment securities of ¥0.20B was recorded as extraordinary income, pushing up Profit Before Tax of ¥1.52B; this should be distinguished as a one-time factor. Excluding this one-time gain, the underlying growth in Profit Before Tax is considered to have remained close to the movement in Ordinary Income from the previous year (-1.1%). The gap between Ordinary Income of ¥1.32B and Net Income attributable to owners of the parent of ¥0.85B was attributable to income taxes and other taxes of ¥0.58B and net income attributable to non-controlling interests of ¥0.09B. This is a structural difference arising from the tax burden and non-controlling interests, with no particular abnormality observed.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year plan were 23.2% for revenue (¥8.58B/¥37.00B), 18.9% for Operating Income (¥1.19B/¥6.30B), and 20.1% for Ordinary Income (¥1.32B/¥6.55B). Against the simple one-quarter benchmark of 25%, progress in Operating Income is somewhat behind schedule, apparently due to the decline in EcSolution’s profit margin. The full-year plan assumes higher revenue and modest profit growth, with revenue of +7.6%, Operating Income of +1.5%, and Ordinary Income of +0.1%; the -1.1% movement in Ordinary Income during Q1 is broadly within the range of the plan. There were no revisions to either the earnings forecast or dividend forecast, and management is maintaining its full-year plan at this time.

Shareholder Returns

The full-year dividend forecast is ¥62 per share, and the Payout Ratio based on forecast EPS of ¥165.75 is approximately 37.4%. As the previous year’s dividend was ¥31 per share, the full-year plan implies a year-on-year increase in the dividend. The Company holds 2,078 thousand treasury shares, and there has been no mention of new share repurchases at this time. Substantial cash and deposits of ¥13.79B and a sound financial base reflected by an Equity Ratio of 71.9% support the stability of funds available for dividends.

Risk Factors

1. Segment concentration risk: EcSolution accounts for 53.9% of revenue, and its profit margin has declined from 26.5% in the previous year to 20.4%; therefore, fluctuations in project mix and outsourcing costs have a significant impact on company-wide earnings.

2. Working capital and collection efficiency risk: Accounts receivable of ¥6.10B significantly exceed accounts payable of ¥2.40B, making the length of the collection cycle a challenge for capital efficiency.

3. Risk of reliance on one-time income: The gain on the sale of investment securities of ¥0.20B contributed to the increase in Profit Before Tax, and recurring earnings growth excluding this one-time gain remains limited.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Both the Operating Income margin and Net Profit margin significantly exceeded the industry median, placing profitability in the upper tier of the industry.

Growth and Capital Efficiency

The revenue growth rate was approximately in line with the industry median, placing the Company’s growth pace in the middle of the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Although revenue and profit increased, EcSolution’s profit margin declined from 26.5% in the previous year to 20.4%. Accordingly, changes in the profitability of the core business are a key focus in assessing earnings quality. The improvement in ItSolution’s profit margin (14.5%→16.6%) partially offset this decline.

2. Full-year progress was 23.2% for revenue and 18.9% for Operating Income, somewhat behind the simple 25% benchmark. No revisions were made to the earnings or dividend forecasts, confirming that management expects to achieve its full-year plan.

3. The increase in Profit Before Tax (+14.6%) depended on the one-time gain on the sale of investment securities. Excluding this one-time gain provides a useful perspective when assessing recurring earnings power.

Theoretical Share Price (Reference Value)

Sensitivity: 1,307円〜1,384円 at ±1% for the cost of equity, and 1,340円〜1,351円 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing gap relative to the full-year forecast).
• As 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 forecast or guarantee future share prices.）

---

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 discretion and, where necessary, after consulting with a professional advisor.

---End of Report---

---

AI Financial Analysis

Executive Summary

FY2027 Q1 performance was solid at the revenue level, but underlying profit conversion softened and reported pre-tax earnings benefited materially from securities-sale gains. Revenue increased 8.8% year on year to ¥8.583bn. Operating income rose 7.7% to ¥1.194bn. Revenue growth therefore modestly outpaced operating-income growth, producing mild operating-margin compression. Gross profit increased 6.8% to ¥3.434bn. The gross margin declined by 78bp year on year to 40.0% from 40.8%. SG&A expense increased 6.2% to ¥2.239bn, slower than revenue growth and supportive of operating leverage below the gross-profit line. Nevertheless, the operating margin declined 14bp to 13.9% from 14.1%. Ordinary income declined 1.1% to ¥1.316bn because non-operating income fell, notably reflecting lower equity-method earnings. Profit before tax rose 14.6% to ¥1.525bn, primarily because the company recorded a ¥0.204bn gain on sale of investment securities within extraordinary income. Profit attributable to owners increased only 1.4% to ¥0.854bn. The attributable net margin was 9.9%, down approximately 73bp from 10.7% in the prior-year quarter. This indicates that the securities gain supported pre-tax profit but did not fully offset tax and minority-interest effects at the owners' profit level. The EC Solution segment remained the largest contributor to segment profit, despite a contraction in its profitability. The IT Solution segment delivered the stronger growth and margin expansion, partially offsetting the EC segment's decline. The balance sheet remains highly liquid, with cash and deposits of ¥13.789bn and a 303.3% current ratio. The full-year operating-income forecast implies a back-half-weighted earnings profile, as Q1 progress is below the standard seasonal benchmark. The principal near-term analytical focus is whether IT Solution growth can sustain group revenue momentum while the EC Solution segment restores margin discipline. The quality alerts warrant attention: the attributable tax burden is low at 0.560, while receivable days of 65 days require disciplined collection monitoring.

Profitability Analysis

The reported annualized ROE is 11.4%, which is in the good 10-15% range but below the >15% level generally associated with excellent capital productivity. The DuPont decomposition is annualized net profit margin of 9.9%, asset turnover of 0.828x, and financial leverage of 1.39x. Profitability is driven principally by a sound margin profile and moderate asset utilization rather than aggressive balance-sheet leverage. Financial leverage is conservative, consistent with D/E of 0.39x and liabilities representing 28.1% of total assets. The largest adverse movement in the available operating metrics is margin quality: gross margin fell to 40.0% and operating margin fell to 13.9%. Revenue rose 8.8% while SG&A rose 6.2%, so overhead discipline was favorable; the pressure originated above SG&A, in gross-profit conversion. Operating income still rose 7.7%, confirming that the company retained positive operating leverage despite the lower gross margin. The EC Solution business is the core business by segment-profit contribution, generating ¥0.944bn of segment profit, or 59.0% of aggregate segment profit before corporate-cost adjustment. EC Solution revenue rose 7.9% to ¥4.626bn, but segment profit fell 16.9% to ¥0.944bn and its segment margin declined to 20.4% from 26.5%. IT Solution revenue increased 9.9% to ¥3.957bn and segment profit increased 25.8% to ¥0.655bn. IT Solution's segment margin expanded to 16.6% from 14.5%, making it the key offset to EC margin pressure. Corporate costs declined to ¥0.244bn from ¥0.284bn, further supporting consolidated earnings. Ordinary income fell despite operating-income growth because non-operating income declined to ¥0.127bn from ¥0.222bn, including a reduction in equity-method earnings to ¥0.052bn from ¥0.172bn. The five-factor tax burden of 0.560 is weak versus the normal >0.70 benchmark for profit attributable to owners, while the interest burden of 1.277 reflects the securities-sale gain below EBIT rather than debt-related stress. Interest coverage of 2,236x confirms that financing costs are immaterial. As a JGAAP reporter, goodwill amortization can reduce operating profit relative to IFRS comparables; however, the available goodwill balance is modest relative to the balance sheet.

Growth Assessment

Group revenue growth of 8.8% was slightly ahead of the 7.6% full-year revenue-growth forecast, but Q1 revenue represents 23.2% of the ¥37.0bn full-year forecast, 1.8 percentage points below the standard 25% Q1 progress rate. Operating income reached 19.0% of the ¥6.3bn annual forecast, 6.0 percentage points below the standard progress rate. Ordinary income reached 20.1% of the ¥6.55bn forecast and attributable profit reached 20.3% of the ¥4.2bn forecast, also below the 25% reference point. The gap between revenue and operating-profit progress suggests that forecast delivery depends on improved margin conversion in subsequent quarters, rather than on revenue growth alone. Management has maintained its full-year forecast, including 1.5% operating-income growth and 0.1% ordinary-income growth. Q1 operating-income growth of 7.7% is above this annual target, but the current Q1 margin is below the prior-year level. EC Solution's revenue mix was 53.9% of consolidated revenue, while IT Solution represented 46.1%, creating relatively balanced exposure between the two businesses. Revenue recognized over time increased to ¥7.242bn from ¥6.522bn and accounted for 84.4% of customer-contract revenue, supporting a meaningful project and service delivery base. Point-in-time revenue declined 6.0% to ¥1.209bn, with the change led by a lower IT Solution contribution. The IT segment's stronger revenue and profit growth is constructive because it improved its segment margin simultaneously. Conversely, EC Solution's lower segment profit despite higher sales is the principal constraint on earnings scalability. Profit before tax is not a clean indicator of recurring growth because it included a ¥0.204bn gain on sale of investment securities. Investment securities nonetheless increased ¥5.130bn year on year to ¥9.044bn, which may continue to affect non-operating and comprehensive-income volatility. The earnings outlook is therefore most dependent on the durability of IT Solution margin expansion and the normalization of EC Solution gross-profit performance.

Financial Health

Financial health is strong. Current assets of ¥25.936bn cover current liabilities of ¥8.551bn by 3.03x, well above the 1.0x warning threshold and the 1.5x healthy benchmark. The quick ratio is also robust at 2.96x, demonstrating that liquidity is not dependent on inventory liquidation. Cash and deposits amount to ¥13.789bn, equivalent to 33.3% of total assets and 1.61x current liabilities. Inventories are limited at ¥0.626bn, or 1.5% of total assets, which reduces inventory-obsolescence and working-capital funding risk. Working capital is ¥17.385bn. The D/E ratio of 0.39x is conservative and far below the 2.0x level that would warrant an explicit leverage warning. Interest expense was only ¥0.005bn and interest coverage was 2,236x, indicating negligible debt-service pressure. Current liabilities declined 14.9% year on year to ¥8.551bn, while current assets declined only 3.6%, improving short-term coverage. Accounts payable declined 24.3% to ¥2.399bn, broadly alongside lower receivables, and does not indicate a short-term maturity mismatch. Contract liabilities increased 22.3% to ¥2.672bn, providing customer-funded working capital and revenue visibility. Total equity increased 2.1% to ¥29.824bn, and the capital adequacy ratio improved to 62.2% from 59.7%. Goodwill is ¥1.794bn, equal to only 6.0% of equity and 4.3% of total assets, leaving the balance sheet relatively insulated from a large goodwill-impairment event. Total intangible assets are 11.4% of total assets, below the 20% balance-sheet concentration benchmark. Investment securities represent 21.8% of total assets, making valuation movements and portfolio realization decisions meaningful contributors to comprehensive income and capital volatility. No material maturity mismatch is evident from the liquid-asset base and conservative liability structure.

Notable B/S Changes

Accounts receivable: -¥1.863bn (-23.4%) year on year to ¥6.101bn - favorable reduction in the receivable balance, although annualized DSO remains elevated at 65 days. Accounts payable: -¥0.771bn (-24.3%) year on year to ¥2.399bn - lower supplier obligations partly offset the cash-flow benefit of reduced receivables. Contract liabilities: +¥0.487bn (+22.3%) year on year to ¥2.672bn - increased customer advances support working capital and indicate a larger committed delivery base. Investment securities: +¥0.513bn (+6.0%) year on year to ¥9.044bn - now 21.8% of assets, increasing exposure to valuation movements and realized securities gains. Deferred tax liabilities: +¥0.406bn (+57.4%) year on year to ¥1.004bn - consistent with higher taxable temporary differences, potentially linked to investment valuation changes. Provision for bonuses: -¥0.453bn (-47.4%) year on year to ¥0.502bn - a material movement that should be monitored in the context of personnel-cost timing. Current liabilities: -¥1.498bn (-14.9%) year on year to ¥8.551bn - combined with the modest decline in current assets, this strengthened the already ample liquidity position.

Cash Flow Quality

Receivables declined 23.4% year on year to ¥6.101bn, a favorable absolute movement for working-capital funding. However, the quality alert identifies annualized DSO of 65 days, above the 60-day monitoring threshold. The root cause is that receivables remain sizeable relative to annualized Q1 revenue, notwithstanding the year-on-year reduction in the receivable balance. For an IT services and EC solutions provider, project acceptance timing, customer billing milestones, and large enterprise payment terms can contribute to elevated DSO, but sustained days above 60 can increase collection and revenue-cutoff risk. The impact on the investment case is modest while liquidity remains abundant, but DSO should decline as revenue converts into cash rather than rise alongside project growth. Inventory increased 6.2% to ¥0.626bn but remains only 1.5% of total assets, limiting inventory-related cash conversion risk. Accounts payable declined 24.3% to ¥2.399bn, meaning the favorable reduction in receivables should be assessed alongside a lower supplier-financing balance. Contract liabilities increased ¥0.487bn to ¥2.672bn, a positive source of operating working capital and an indicator of advance customer commitments. The ¥0.204bn gain on sale of investment securities is non-recurring and should not be treated as operating cash-generation capacity. The movement in comprehensive income to ¥1.337bn exceeded attributable profit because valuation-related items increased, reinforcing that reported equity growth includes market-value effects in addition to operating earnings. Cash and deposits rose 4.3% year on year to ¥13.789bn, supporting financial flexibility. The available balance-sheet evidence therefore points to ample liquidity, while receivable-day discipline is the main cash-conversion metric to monitor.

Dividend Sustainability

The full-year dividend forecast is ¥62.0 per share. Against forecast EPS of ¥165.75, the implied dividend-only payout ratio is 37.4%. This is comfortably below the 60% sustainability benchmark. Forecast attributable profit of ¥4.2bn provides a substantial earnings base relative to the indicated dividend commitment. The company also holds ¥13.789bn of cash and deposits, which strengthens distribution capacity and resilience through periods of uneven quarterly earnings. The balance sheet is conservatively financed, with D/E of 0.39x and a 62.2% capital adequacy ratio. The maintained dividend forecast and absence of a dividend revision are consistent with management confidence in full-year earnings delivery. Dividend sustainability is supported primarily by forecast recurring operating profit rather than the Q1 gain on sale of investment securities. This distinction is important because the securities gain should not be assumed to recur as a dividend funding source. The key condition for maintaining the payout profile is successful conversion of forecast revenue growth into operating income, particularly through EC Solution margin stabilization. No change in the stated dividend outlook is indicated.

Risk Assessment

Business risks include EC Solution profitability risk: segment revenue rose 7.9%, but segment profit declined 16.9% and margin fell 610bp to 20.4%. Continued gross-margin pressure in the core profit contributor would constrain group earnings growth., IT services execution risk: IT Solution produced 9.9% revenue growth and 25.8% segment-profit growth, making it increasingly important to consolidated earnings. Project delivery delays, staffing constraints, implementation cost overruns, or competitive pricing could reverse its 210bp margin expansion., Receivable collection risk: annualized DSO of 65 days exceeds the 60-day alert threshold. Customer billing and acceptance timing are sector-relevant risks for system integration and solution delivery., Technology and cybersecurity risk: the IT and EC solutions businesses require continued technology relevance, service reliability, and protection of customer systems and data..

Financial risks include Tax burden alert: the attributable-profit tax burden is 0.560, below the >0.70 normal benchmark. The root cause is the combination of income taxes and non-controlling interests relative to profit before tax; the directly calculated consolidated effective tax rate is 37.9%. This reduces conversion of pre-tax earnings into profit attributable to owners, although it does not represent a leverage or liquidity risk., Investment-security valuation risk: investment securities increased 6.0% to ¥9.044bn and represent 21.8% of assets. Securities valuation changes can create volatility in comprehensive income, while realized sales gains can affect reported pre-tax profit., Non-recurring earnings risk: Q1 profit before tax included a ¥0.204bn gain on sale of investment securities. This represented 13.4% of pre-tax profit and reduces comparability of reported pre-tax growth with recurring operating performance., Goodwill and intangible-asset risk: goodwill of ¥1.794bn and intangible assets of ¥4.725bn require continuing benefit realization. The exposure is contained at 6.0% of equity for goodwill and 11.4% of assets for total intangibles..

Key concerns include Highest priority: restoration of EC Solution margin, because it remains the largest segment by profit contribution and its earnings decline offset part of IT Solution's improvement., High priority: collection discipline, with DSO at 65 days, even though the receivables balance fell year on year., Moderate priority: achievement of the full-year operating-income forecast, as Q1 operating-income progress of 19.0% is below the 25% standard benchmark., Moderate priority: ordinary-income volatility from lower equity-method earnings and investment-security gains/losses, which can obscure the underlying operating trend..

Investment Implications

Key takeaways include Revenue momentum is positive, with Q1 sales up 8.8% and both reportable segments growing., The earnings mix shifted favorably toward IT Solution, where segment profit grew 25.8% and margin rose to 16.6%., EC Solution remains the core profit engine but its segment margin fell from 26.5% to 20.4%, creating the main operational issue., Reported pre-tax growth was aided by a ¥0.204bn securities-sale gain; operating-income growth is the cleaner indicator of underlying performance., Liquidity and solvency are substantial strengths, supported by ¥13.789bn of cash, a 303.3% current ratio, and D/E of 0.39x., The implied 37.4% forecast dividend payout ratio appears compatible with forecast earnings and the balance-sheet position..

Metrics to watch include EC Solution segment margin and segment-profit growth, IT Solution margin retention and revenue growth, Consolidated gross margin and operating margin, Q2 and first-half progress against the ¥37.0bn revenue and ¥6.3bn operating-income forecasts, Annualized DSO, currently 65 days, Equity-method earnings and gains/losses on investment securities, Investment-security valuation movements and their effect on comprehensive income.

Regarding relative positioning, The company combines a good annualized ROE of 11.4%, a good 13.9% operating margin, conservative leverage, and exceptional liquidity. Its profitability profile is stronger than that of a low-margin IT reseller, but current gross-margin compression and a 9.9% attributable net margin prevent classification as an unequivocally top-tier profitability outcome. The limited goodwill burden compares favorably with M&A-intensive JGAAP IT services peers, while the sizeable investment-securities position introduces more non-operating and capital-market sensitivity than a purely asset-light software-services model.