Mitsubishi Research Institute (3636) FY2026 Q1 Earnings Report

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Executive Summary

Operating income and net income increased substantially relative to the increase in revenue, resulting in higher revenue and earnings accompanied by a marked improvement in profit margins. Revenue was ¥30.90B (up +11.5% YoY), operating income was ¥3.45B (up +133.5%), ordinary income was ¥3.86B (up +99.0%), and net income was ¥2.91B (up +152.8%). The primary drivers of earnings growth were the realization of operating leverage through improved gross margins and restrained SG&A expenses. In addition, a ¥0.45B gain on the sale of investment securities was recorded as extraordinary income, temporarily boosting net income.

Factors Affecting Results

【Revenue】Revenue increased to ¥30.90B, representing a +11.5% YoY increase. By segment, IT Services increased to ¥19.80B (64.1% of total revenue, YoY +9.1%), while Think Tank and Consulting Services increased to ¥11.10B (35.9% of total revenue, YoY +16.2%). Both segments recorded revenue growth, with the latter posting the higher growth rate.

【Profit and Loss】Operating income was ¥3.45B (YoY +133.5%), and the operating margin improved significantly to 11.2% from 5.3% in the same period of the previous year. The gross margin improved to 27.3% (23.2% in the previous year), while the SG&A ratio declined to 16.1% (17.9% in the previous year), indicating simultaneous progress in fixed-cost absorption from higher revenue and improved profitability. Ordinary income was ¥3.86B (up +99.0%), supported by ¥0.28B in equity-method investment income. A ¥0.45B gain on the sale of investment securities was recorded as extraordinary income, representing a temporary factor. Net income attributable to owners of the parent was ¥2.63B (YoY +165.6%), although part of this result depended on the aforementioned gain on sale. In conclusion, the Company achieved higher revenue and earnings, primarily driven by improved profitability in its core business.

Segment Analysis

IT Services generated revenue of ¥19.80B (YoY +9.1%) and segment income of ¥1.57B (YoY +79.7%, 7.9% margin). It is the largest business, accounting for 64.1% of total revenue, although its margin is relatively low. Think Tank and Consulting Services generated revenue of ¥11.10B (YoY +16.2%) and segment income of ¥2.29B (YoY +113.8%, 20.6% margin), with high growth and profitability, making it the primary contributor to company-wide earnings. It should be noted that segment income is calculated on an ordinary income basis and therefore has a different definition from consolidated operating income.

Key Financial Indicators

【Profitability】The operating margin was 11.2%, improving by 584bp from 5.3% in the same period of the previous year. The gross margin also increased to 27.3% from 23.2% in the previous year. The SG&A ratio declined to 16.1% from 17.9% in the previous year, indicating that expense growth was contained relative to revenue growth.【Cash Flow Quality】Cash and deposits decreased by 32.7% YoY to ¥20.41B, while accounts receivable increased by 10.9% YoY to ¥47.60B, indicating that earnings growth was accompanied by an increase in working capital.【Investment Efficiency】ROE was 3.5% (based on quarterly results), while EPS increased substantially to ¥167.27 from ¥63.01 in the previous year.【Financial Soundness】The equity ratio remained high at 66.6%. With total assets of ¥124.19B and net assets of ¥82.65B, the Company has a solid capital base. The debt ratio is low, and financial leverage is limited.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is not available, changes in the balance sheet provide insight into cash flows. Cash and deposits decreased by ¥9.90B, from ¥30.41B in the same period of the previous year to ¥20.41B, while accounts receivable increased by ¥4.69B, from ¥42.92B to ¥47.60B. The accumulation of receivables accompanying revenue growth appears to have contributed to the decline in cash balances. Current assets were ¥75.45B and current liabilities were ¥28.54B, resulting in a high current ratio of approximately 264% and providing sufficient short-term liquidity. Investment securities stood at ¥19.32B, and the recording of a ¥0.45B gain on the sale of a portion of these securities during the current period also affected cash and earnings.

Earnings Quality

Although earnings growth during the period was supported by improved profitability in the core business, it should be noted that the growth rate of net income also included temporary factors. Non-operating income was ¥0.41B, primarily consisting of ¥0.07B in dividend income, and was largely offset by ¥0.01B in non-operating expenses, resulting in a small recurring non-operating contribution. A ¥0.45B gain on the sale of investment securities was recorded as extraordinary income, accounting for approximately 10.6% of pretax income of ¥4.29B; this represents a non-recurring earnings boost. Accordingly, the high +152.8% YoY growth in net income should be evaluated together with the substantial improvement in operating income (+133.5%) and the contribution from this gain on sale. Comprehensive income was ¥2.99B, of which ¥2.75B was attributable to owners of the parent. The divergence from net income of ¥2.63B was limited, with valuation items such as valuation differences on available-for-sale securities making a modest positive contribution.

Earnings Forecast and Guidance

The progress rates against the full-year company forecasts were 25.3% for revenue, 46.1% for operating income, and 42.9% for ordinary income, substantially exceeding the standard 25% progress level on the earnings side. The full-year forecasts call for revenue of ¥122.00B (YoY +0.4%), operating income of ¥7.50B (YoY -6.4%), and ordinary income of ¥9.00B (YoY -7.5%), indicating that earnings declines are expected for the full year. Whether the high Q1 profit margins can be maintained throughout the full year will therefore be a key focus. No revisions to the earnings forecasts were made during the current quarter.

Shareholder Returns

The full-year dividend forecast is ¥165, implying a payout ratio of approximately 44.8% based on forecast full-year EPS of ¥368.26. Compared with the previous year's actual dividend of ¥80 (on a half-year basis), the Company remains on an upward dividend trajectory. No revision to the dividend forecast was made during the current quarter. Retained earnings have accumulated to ¥60.24B, and together with the financial foundation represented by an equity ratio of 66.6%, the Company has sufficient capital to support dividend payments.

Risk Factors

1. Increase in Accounts Receivable and Collection Efficiency: Accounts receivable increased by +10.9% YoY to ¥47.60B, accounting for 38.3% of total assets. Cash and deposits decreased by 32.7% YoY, requiring continued monitoring of whether earnings growth is being adequately converted into cash.

2. Concentration of Business Segments: IT Services accounts for 64.1% of total revenue, creating a business structure in which the order environment, engineer billing rates, and outsourcing costs in this business can have a significant impact on company-wide results.

3. Dependence on Temporary Income: Net income includes a ¥0.45B gain on the sale of investment securities (10.6% of pretax income), and fluctuations in securities markets and the repeatability of gains on sales could become factors affecting future earnings volatility.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Return

Both the operating margin and net margin are slightly below the industry median.

Growth and Capital Efficiency

The revenue growth rate is approximately in line with the industry median and is positioned above the lower bound of the IQR.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Operating income increased by 133.5% against an 11.5% increase in revenue, confirming improved core-business profitability accompanied by an increase in the gross margin (+407bp) and a decline in the SG&A ratio (-176bp).

2. Think Tank and Consulting Services is the primary contributor to company-wide earnings, with a margin of 20.6%. Meanwhile, IT Services, which accounts for 64.1% of total revenue, has a margin of only 7.9%, indicating a profitability gap between the businesses.

3. The substantial increase in net income was supported by a ¥0.45B gain on the sale of investment securities. With the full-year plan projecting a decline in operating income, the trend in recurring earnings levels will be a key focus in the earnings data.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,815–¥5,091 for a ±1% change in the cost of equity, and ¥4,940–¥4,956 for a ±0.1 change in ω.

Notes:

• Because the progress of net income against the full-year forecast (45%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies ahead of forecast progress tend to outperform their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used (there is a timing gap relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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 professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q1 was a very strong start, with broad-based revenue growth and sharply improved operating profitability, although reported net income was additionally lifted by a securities-sale gain. Revenue rose 11.5% year on year to JPY30.90bn. Operating income increased 133.5% to JPY3.46bn, materially outpacing top-line growth. Ordinary income rose 99.0% to JPY3.86bn. Profit attributable to owners of parent increased 165.6% to JPY2.63bn. The gross margin expanded to 27.3% from 23.2%, an improvement of approximately 410bp. The operating margin expanded to 11.2% from 5.3%, an improvement of approximately 590bp. This indicates substantial positive operating leverage, as SG&A rose only 0.5% to JPY4.98bn while revenue increased 11.5%. The Think Tank & Consulting Services segment delivered particularly strong profit growth, while IT Services also improved materially. The IT Services segment remained the largest business by revenue and ordinary-income contribution, making it the core business. Reported net margin was 8.5%, up approximately 490bp from 3.6% a year earlier. However, pretax income included a JPY455m extraordinary gain on the sale of investment securities, which accounted for 10.6% of profit before tax and enhanced reported earnings. Excluding the net JPY432m extraordinary gain after the JPY23m extraordinary loss, the underlying improvement in operating and ordinary income nevertheless remains substantial. The Q1 revenue progress rate was 25.3% of the FY2026 forecast, broadly consistent with the standard 25% quarterly run rate. In contrast, Q1 operating-income and owner-attributable-profit progress were already 46.1% and 45.4%, respectively, well above the standard pace and setting a high near-term earnings base. Management maintained both its full-year earnings forecast and dividend plan, suggesting that it views the Q1 strength as not yet sufficient to warrant a forecast revision. Balance-sheet liquidity remains very strong, but high receivable days and a 125-day cash conversion cycle require continued monitoring.

Profitability Analysis

The reported annualized DuPont ROE is 12.8%, comprising an 8.5% net profit margin, 0.995x asset turnover, and 1.50x financial leverage. The principal driver of the earnings improvement is margin expansion rather than a more aggressive balance-sheet structure, as financial leverage remains moderate and the debt-to-equity ratio is only 0.50x. Gross profit increased 31.1% to JPY8.43bn, versus 11.5% revenue growth, lifting gross margin by about 410bp to 27.3%. SG&A was almost flat year on year at JPY4.98bn, resulting in a strong operating-leverage effect and a roughly 590bp expansion in operating margin to 11.2%. The operating margin now falls within the stated 8-15% “good” benchmark range, compared with a much weaker 5.3% in the prior-year quarter. Ordinary income margin improved to 12.5% from 7.0%, aided by non-operating income including JPY281m of equity-method earnings and JPY74m of dividend income. Interest expense was only JPY4m and interest coverage was an exceptionally high 863.75x, confirming that financing costs are immaterial to profitability. The 1.241 interest-burden ratio reflects net non-operating and extraordinary gains lifting pretax income above EBIT, rather than leverage-driven risk. The tax burden was 0.614, equivalent to a 32.1% effective tax rate, which is broadly consistent with a normal Japanese corporate tax burden. Profit attributable to owners included a JPY455m gain on sale of investment securities; therefore, the 8.5% net margin contains a non-recurring element. Segment data show Think Tank & Consulting Services revenue grew 16.2% to JPY11.10bn and segment profit rose 113.8% to JPY2.29bn, implying a segment-profit margin of 20.6% versus 11.2% a year earlier. IT Services, the core business by JPY19.80bn of revenue and JPY1.57bn of segment profit, grew revenue 9.1% and segment profit 79.7%; its segment-profit margin improved to 7.9% from 4.8%. The higher-margin consulting segment was the largest contributor to aggregate margin expansion, while the core IT business also demonstrated meaningful productivity improvement. Sustainability will depend on whether the group can preserve these improved gross margins and cost discipline after the exceptionally strong Q1.

Growth Assessment

Revenue growth of 11.5% was supported by both reporting segments, indicating a broad-based rather than single-business expansion. Think Tank & Consulting Services added JPY1.55bn of revenue year on year, while IT Services added JPY1.64bn. The faster 16.2% growth in consulting, combined with its 20.6% segment-profit margin, improved the business mix. IT Services grew at a slower but still solid 9.1% pace and remains central to growth because it accounts for 64.1% of consolidated external revenue. The increase in total segment profit to JPY3.86bn from JPY1.94bn substantially exceeded the JPY3.19bn revenue increase, demonstrating improved project profitability and cost absorption. The absence of material current-period segment impairment charges is also favorable relative to prior-year Q1 impairment charges of JPY29m. Q1 revenue represents 25.3% of the JPY122.0bn full-year sales forecast, closely matching the standard 25% progress rate. Q1 operating income represents 46.1% of the JPY7.50bn full-year forecast, 21.1 percentage points ahead of the standard Q1 progress rate. Q1 ordinary income represents 42.9% of the JPY9.0bn full-year forecast, also substantially ahead of the standard pace. Owner-attributable profit is 45.4% of the JPY5.80bn full-year target, although this progress includes the securities-sale gain. The maintained FY2026 forecast calls for only 0.4% revenue growth and 6.4% operating-income decline for the full year, implying management expects a more normalized profit trajectory beyond Q1. Accordingly, the principal issue for the outlook is the durability of Q1 gross-margin gains and consulting-led mix improvement, rather than near-term demand momentum alone.

Financial Health

Financial health is strong, with a current ratio of 264.4% and a quick ratio of 262.6%, both well above healthy liquidity benchmarks. Current assets of JPY75.45bn exceed current liabilities of JPY28.54bn by JPY46.91bn, providing substantial working-capital coverage. Cash and deposits were JPY20.41bn, equivalent to 71.5% of current liabilities. Trade receivables were JPY47.60bn, representing 38.3% of total assets and 63.1% of current assets, making collections a more important liquidity variable than inventory management. Inventories were modest at JPY494m, consistent with a service- and IT-oriented business model. The debt-to-equity ratio of 0.50x is conservative and materially below the 2.0x risk threshold. Total liabilities accounted for 33.4% of total assets, while total equity accounted for 66.6%, indicating a well-capitalized balance sheet. Financial leverage in the DuPont analysis was a moderate 1.50x. There is no evident short-term funding mismatch: current assets are 2.64x current liabilities and liquid assets excluding inventories are 2.63x current liabilities. Noncurrent liabilities include a JPY9.72bn net defined-benefit liability and JPY1.03bn of noncurrent lease obligations, which should remain part of long-term funding and liability monitoring. Investment securities of JPY19.32bn equal 15.6% of total assets, providing financial-asset value but also exposing equity to market-value movements. Cash and deposits declined 32.7% year on year to JPY20.41bn from JPY30.31bn; despite the lower cash balance, the liquidity ratios remain robust. The decline in cash should be assessed alongside the large receivables balance and the company’s cash-conversion discipline.

Notable B/S Changes

Cash and deposits: -JPY9.90bn (-32.7%) year on year to JPY20.41bn - liquidity remains strong, but the reduction heightens the importance of collections from the JPY47.60bn receivables balance. Provision for bonuses: -JPY5.12bn (-69.1%) year on year to JPY2.29bn - a substantial movement in employee-related accruals that contributed to lower current liabilities. Other current liabilities: +JPY2.74bn (+39.6%) year on year to JPY9.65bn - increased short-term obligations should be monitored alongside working-capital settlement timing. Noncurrent lease obligations: +JPY0.20bn (+24.1%) year on year to JPY1.03bn - modest increase in lease-related fixed commitments, remaining manageable relative to equity and liquidity.

Cash Flow Quality

Working-capital quality is the principal cash-flow monitoring issue. The quality alert for days sales outstanding of 141 days is material because trade receivables reached JPY47.60bn, up 10.0% year on year, and account for 38.3% of total assets. A DSO materially above the 60-day benchmark can delay conversion of recognized revenue into cash and increases exposure to billing timing, customer acceptance, and collection execution. For an IT services and consulting provider, project-based milestone billing and customer payment terms can structurally extend receivable days, but the magnitude remains a risk to monitor rather than a benign metric in isolation. The cash conversion cycle of 125 days is also above the 120-day warning threshold. The long cycle is driven principally by receivables rather than inventory, since inventories are only JPY494m. Cash and deposits declined by JPY9.90bn year on year, or 32.7%, reinforcing the importance of receivable collections despite the strong reported earnings. The combination of high DSO and long cash conversion cycle means that operating-profit growth should be tested against subsequent receivable settlement trends. There is no indication of inventory build-up, reducing the risk that earnings are being supported by stock accumulation. The modest JPY24m provision for loss on orders received is also not large relative to quarterly revenue. The JPY455m gain on sale of investment securities is non-recurring and does not represent operating cash generation. Consequently, the strongest indicator of earnings quality in subsequent periods will be whether receivables decline relative to revenue and whether the cash balance stabilizes or recovers.

Dividend Sustainability

The FY2026 planned dividend is JPY165 per share, unchanged from the disclosed plan. Based on forecast EPS of JPY368.26, the implied dividend payout ratio is approximately 44.8%. This is below the 60% sustainability benchmark and leaves a reasonable earnings retention buffer. Q1 EPS was JPY167.27, representing 45.4% of full-year forecast EPS, broadly aligned with the 44.8% full-year payout ratio when measured against the current earnings run rate. Retained earnings totaled JPY60.24bn, providing substantial accumulated capital support for distributions. The balance sheet is also conservatively financed, with a 0.50x debt-to-equity ratio and strong current and quick ratios. The maintenance of dividend guidance alongside an unchanged earnings forecast signals continuity in shareholder-return policy. The key sensitivity is cash conversion: the high receivables balance and 125-day cash conversion cycle make timely collections important for distribution flexibility. Nonetheless, the planned dividend appears covered by forecast earnings and supported by the company’s liquid balance-sheet position.

Risk Assessment

Business risks include Project execution and pricing risk: IT Services is the core business, contributing JPY19.80bn of revenue and JPY1.57bn of segment profit; deterioration in project margins, delivery utilization, or customer IT spending would have the largest group impact., Consulting-mix sustainability risk: Think Tank & Consulting Services generated a high 20.6% segment-profit margin and led margin expansion; a reversal in high-margin project mix could pressure consolidated profitability., Receivable collection risk: DSO of 141 days is above the 60-day alert threshold, exposing the group to delayed collections, milestone-acceptance timing, and counterparty-credit risk., Technology, cybersecurity, and talent risk: as an IT services and consulting provider, the group is exposed to technology obsolescence, information-security incidents, and competition for skilled digital and consulting personnel., Investment-income volatility: JPY281m of equity-method earnings, JPY74m of dividend income, and investment securities equal to 15.6% of assets, leaving earnings and equity partly exposed to investee performance and market movements..

Financial risks include Cash-conversion risk: the 125-day cash conversion cycle exceeds the 120-day warning threshold, while cash and deposits declined 32.7% year on year., Non-recurring profit risk: the JPY455m gain on sale of investment securities represented 10.6% of pretax profit, so reported net-income growth overstates recurring operating momentum., Defined-benefit obligation risk: the JPY9.72bn net defined-benefit liability is a significant long-term obligation that can be affected by discount rates and investment returns., Market-value risk: JPY19.32bn of investment securities and JPY2.82bn of valuation difference on securities create exposure to capital-market movements..

Key concerns include Highest priority: conversion of the JPY47.60bn receivables balance into cash, given 141-day DSO and the 125-day cash conversion cycle., High priority: whether the approximately 590bp operating-margin expansion can persist as the full-year plan still assumes a 6.4% decline in operating income., Moderate priority: separation of recurring earnings growth from the JPY455m securities-sale gain when assessing profit progress against annual guidance., Moderate priority: IT Services margin recovery, because the segment is the largest revenue and profit contributor despite its lower 7.9% segment-profit margin relative to consulting..

Investment Implications

Key takeaways include Q1 operating performance was materially stronger than revenue growth alone suggests, with operating income up 133.5% and operating margin improving to 11.2%., The core IT Services business improved profit by 79.7%, while higher-margin Think Tank & Consulting Services was the largest contributor to margin expansion., Q1 operating-income progress reached 46.1% of the full-year forecast, substantially ahead of the standard 25% pace, but management retained its existing forecast., The balance sheet is resilient, with 264.4% current ratio, 262.6% quick ratio, and 0.50x debt-to-equity., Reported earnings include a material JPY455m gain on sale of investment securities, and working-capital discipline is constrained by 141-day DSO and a 125-day cash conversion cycle., The planned JPY165 per-share dividend implies a forecast payout ratio of approximately 44.8%, which appears sustainable on earnings and balance-sheet measures..

Metrics to watch include IT Services revenue growth and segment-profit margin, currently 9.1% growth and 7.9% margin, Think Tank & Consulting Services margin sustainability, currently 20.6%, Consolidated gross margin and operating margin, currently 27.3% and 11.2%, Trade receivables, DSO of 141 days, and cash conversion cycle of 125 days, Cash and deposits following the 32.7% year-on-year decline, Recurring ordinary-income performance excluding gains on sales of investment securities, Progress against the JPY122.0bn revenue, JPY7.50bn operating-income, and JPY5.80bn owner-attributable-profit forecasts.

Regarding relative positioning, The company combines a capital-light service and IT profile with strong liquidity, conservative leverage, and an annualized ROE of 12.8%, which is within the stated good 10-15% range. Its Q1 operating margin of 11.2% is also in the good benchmark range, with the consulting business providing a notably higher-margin complement to the larger IT Services core. Relative positioning is strengthened by balance-sheet resilience, but tempered by slower cash conversion and a reported-profit contribution from investment-security sales.