Cross Marketing Group (3675) FY2026 Q2 Earnings Report

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Executive Summary

Revenue increased but profit declined in the first half, with margin deterioration caused by higher costs being the central issue for the period. Revenue increased 2.4% year on year to ¥15.10B, while Operating Income declined significantly by 16.6% to ¥1.12B. As cost of sales increased 5.5%, exceeding revenue growth, the gross margin deteriorated. Supported by non-operating income, Ordinary Income declined by a narrower 8.0% to ¥1.20B, while Net Income declined 6.6% to ¥0.73B.

Factors Affecting Performance

【Revenue】Revenue increased 2.4% year on year to ¥15.10B. Progress against the company’s full-year revenue forecast of ¥32.00B (+10.7% year on year) was 47.2%, meaning that revenue of approximately ¥16.90B, exceeding the first-half level, will be required in the second half. The first-half growth rate of 2.4% compares unfavorably with the full-year forecast and assumes accelerated growth in the second half.

【Profit and Loss】Gross profit was ¥5.55B, representing a gross margin of 36.8%, down approximately 190bp from 38.7% in the same period of the previous year. The primary reason was that cost of sales increased 5.5%, exceeding the revenue growth rate. SG&A expenses were ¥4.43B (+1.7% year on year), controlled roughly in line with revenue growth; however, they could not absorb the deterioration in gross margin. As a result, Operating Income was ¥1.12B (-16.6% year on year), and the Operating Margin was 7.4%, down approximately 169bp from 9.1% in the previous year. Ordinary Income declined by a narrower 8.0% to ¥1.20B, supported by ¥0.13B in non-operating income, including a ¥0.05B foreign exchange gain and a ¥0.03B gain on the sale of securities. As these gains are non-recurring in nature, recovery on an Operating Income basis is important when evaluating sustainable earnings power. Net Income was ¥0.73B (-6.6% year on year). In conclusion, the company posted higher revenue but lower profit, primarily due to margin pressure from the increase in the cost ratio.

Segment Analysis

The total of segment profit is consistent with consolidated Operating Income; however, specific segment revenue and profit disclosures are not provided, and ¥△1.11B in corporate expenses and other items not attributable to reportable segments is included in the adjustment amount. No impairment of fixed assets or other applicable items was reported in the reportable segments.

Key Financial Metrics

【Profitability】The Operating Margin of 7.4% and Net Profit Margin of 4.8% both declined from the same period of the previous year (9.1% and 5.3%, respectively), while annualized ROE remained at a favorable level of 16.6%, indicating solid capital efficiency. The decline in EBIT margin was offset by total asset turnover and financial leverage of 2.00x.【Cash Flow Quality】Operating Cash Flow (OCF) was 0.96x Net Income, indicating cash generation broadly commensurate with earnings. However, the OCF/EBITDA ratio remained at 0.55x, as increases in accounts receivable and work in progress placed pressure on working capital.【Investment Efficiency】Capital expenditures of ¥0.03B were below depreciation and amortization of ¥0.14B, resulting in CapEx/depreciation and amortization of 0.2x and indicating a low level of investment in tangible fixed assets, while a certain level of intangible asset acquisitions was also undertaken.【Financial Soundness】With an Equity Ratio of 50.1%, a current ratio of approximately 223%, and interest-bearing debt/EBITDA of 2.06x, the financial foundation is generally stable.

Cash Flow Analysis

Operating Cash Flow was ¥0.70B, a significant 84.2% increase year on year, and the ratio to Net Income of ¥0.73B was 0.96x, indicating cash generation broadly commensurate with earnings. However, the breakdown shows that a ¥0.56B increase in accounts receivable and a ¥0.41B increase in work in progress absorbed working capital, partially offset by a ¥0.61B increase in accounts payable. Investing Cash Flow was ¥-0.16B, including ¥0.03B in capital expenditures as well as acquisitions of intangible assets such as software. Financing Cash Flow was ¥-0.73B, mainly due to repayments of long-term borrowings and dividend payments. Free Cash Flow was positive at ¥0.54B, leaving a certain degree of capacity for dividend payments.

Earnings Quality

Ordinary Income of ¥1.20B exceeded Operating Income of ¥1.12B by ¥0.07B. This difference was attributable to ¥0.13B in non-operating income, including a ¥0.05B foreign exchange gain and a ¥0.03B gain on the sale of securities, both of which are non-recurring in nature. No extraordinary gains or losses were recorded, and Profit Before Tax and Ordinary Income were equal. OCF/Net Income was 0.96x, indicating generally sound accrual quality; however, the OCF/EBITDA ratio remained at 0.55x, as working-capital factors, namely increases in accounts receivable and work in progress, reduced the cash conversion rate. When evaluating sustainable earnings power, trends in Operating Income independent of non-operating income are important.

Earnings Forecast and Guidance

Progress against the full-year forecast was 47.2% for revenue, 40.2% for Operating Income, 44.4% for Ordinary Income, and 46.9% for Net Income. Compared with a standard Q2 progress rate of 50%, Operating Income is somewhat low. The second half will require revenue of ¥16.90B, Operating Income of ¥1.68B, Ordinary Income of ¥1.50B, and Net Income of ¥0.82B. This implies a second-half Operating Margin of approximately 9.9%, making recovery from the first-half result of 7.4% a prerequisite for achieving the forecast. Unless the gross margin improves or revenue growth accelerates, uncertainty remains regarding achievement of the full-year forecast.

Shareholder Returns

The interim dividend was ¥7.50 per share, representing a conservative Net Income-based Payout Ratio of approximately 20.6%. The coverage ratio of the interim dividend amount against Free Cash Flow of ¥0.54B was approximately 3.6x, indicating ample dividend capacity. The full-year forecast dividend is ¥15.00, and the forecast Payout Ratio calculated from forecast EPS of ¥81.69 is approximately 18.4%. Assuming achievement of the company’s forecast, sustainability is high. However, given the decline in the cash conversion rate, recovery in the second-half profit margin and trends in working capital could affect future dividend capacity.

Risk Factors

1. Margin deterioration due to higher costs: The gross margin declined approximately 190bp year on year, while the Operating Margin declined approximately 169bp. The primary factor was the 5.5% increase in cost of sales, which exceeded the 2.4% growth in revenue. The challenge is to recover the Operating Margin to the 9.9% required in the second half.

2. Increase in work in progress and working-capital burden: Work in progress was ¥1.01B, an increase of approximately ¥0.42B from the same period of the previous year. If delays in project acceptance or deterioration in project profitability occur, this could lead to delays in revenue recognition and cash collection.

3. Decline in the cash conversion rate: The OCF/EBITDA ratio remained at 0.55x. The ¥0.61B increase in accounts payable partially offset increases of ¥0.56B in accounts receivable and ¥0.41B in work in progress; however, if payment terms normalize, OCF could decline correspondingly.

Industry Benchmark (For Reference; Company Analysis)

Profitability and Returns

The company’s profitability is substantially below the industry median and ranks toward the lower end of the IT and communications industry.

Growth and Capital Efficiency

Revenue growth is also substantially below the industry median, placing the company at a disadvantage within the industry in terms of growth.

※Source: Company compilation

Key Points from the Earnings Results

1. While revenue increased 2.4%, Operating Income declined 16.6%. Margin deterioration due to higher costs was the central issue in the current period’s earnings results. The Operating Margin of 7.4% was substantially below the industry median of 17.3%.

2. Annualized ROE of 16.6%, an Equity Ratio of 50.1%, and Debt/EBITDA of 2.06x indicate that capital efficiency and financial soundness remain at favorable levels. OCF/Net Income of 0.96x also supports the quality of accruals.

3. To achieve the full-year forecast, the second-half Operating Margin must be raised to approximately 9.9%, requiring a significant recovery from the first-half result of 7.4%. Progress in converting work in progress into revenue and trends in accounts receivable collections will be key to improving the cash conversion rate going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥600–¥636 at ±1% for the cost of equity, and ¥613–¥624 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥15.0 per share is added back to earnings (due to its non-cash nature and for comparability with IFRS companies).
• Net assets as of the quarter-end are used (there is a timing difference 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 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 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 responsibility, after consulting professionals as necessary.

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