DIGITAL HEARTS HOLDINGS Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

The first quarter of the fiscal year ending March 2027 resulted in higher revenue but lower earnings, as growth in the core DH Group was offset by AGEST Group’s shift into the red and deterioration in non-operating income and expenses. Revenue was ¥9.85B, securing a 5.0% year-on-year increase, while Operating Income was ¥0.62B, down 11.7%, and Ordinary Income was ¥0.56B, down 20.4%, with the decline widening progressively. Net Income attributable to owners of the parent was ¥0.36B, down 22.7%, while the persistently high effective tax rate of 37.9% also pressured final profit. The driver of revenue growth was the DH Group (revenue +12.1%), but the AGEST Group recorded a 5.8% decline in revenue and fell into an operating loss, putting downward pressure on the Company-wide profit margin.

Factors Affecting Financial Performance

【Revenue】Company-wide revenue was ¥9.85B (up 5.0% year on year), maintaining a trend of revenue growth for the third consecutive period. By segment, the DH Group led Company-wide growth with revenue of ¥6.18B (+12.1%), accounting for 62.6% of total revenue. Meanwhile, the AGEST Group’s revenue declined to ¥3.69B (-5.8%), and the CVC-related business, newly established from Q1, recorded no revenue and an operating loss of ¥0.003B.

【Profit and Loss】Operating Income was ¥0.62B (down 11.7%), and the Operating Income margin contracted to 6.3% from the previous year. Although the gross profit margin was broadly flat at 26.4%, SG&A expenses rose to ¥1.97B, bringing the SG&A ratio to 20.0%; expense growth exceeding revenue growth weakened operating leverage. Ordinary Income was ¥0.56B (down 20.4%), weighed down by non-operating expenses of ¥0.08B, including a foreign exchange loss of ¥0.02B, an equity-method investment loss of ¥0.03B, and increased interest expense. Extraordinary income of ¥0.03B and extraordinary loss of ¥0.01B resulted in a minor net gain of +¥0.02B, indicating that the impact of temporary factors was limited. The decline from income before taxes to Net Income attributable to owners of the parent was largely attributable to the persistently high effective tax rate of 37.9%. In summary, despite the DH Group’s revenue growth trend, the deterioration in the AGEST Group’s earnings and increase in non-operating expenses resulted in a higher-revenue, lower-earnings decision.

Segment Analysis

The DH Group recorded revenue of ¥6.18B (+12.1%), Operating Income of ¥0.69B (+7.4%), and a profit margin of 11.1%, remaining the principal pillar of Company-wide profits following the previous year. The AGEST Group recorded revenue of ¥3.69B (-5.8%) and an operating loss of ¥0.06B (it appears to have recorded Operating Income in the previous year, with a profit margin of -1.6%), falling into the red and suggesting deterioration in project mix and utilization rates. The CVC-related business, newly established from Q1, recorded no revenue and an operating loss of ¥0.003B. The gap in profit margins between segments has widened, and the increased dependence on the DH Group for profits—the DH Group alone recorded ¥0.69B against Company-wide Operating Income of ¥0.62B—has become a defining feature of the Company’s earnings structure.

Key Financial Indicators

【Profitability】ROE was 3.5%, the Operating Income margin was 6.3% (down from approximately 7.5% in the previous year), and the Net Income margin was 3.6% (down from 4.9% in the previous year), indicating an overall softening in profitability. ROE can be decomposed under the DuPont analysis into a Net Income margin of 3.6% × total asset turnover of 0.46x × financial leverage of 2.1x. With leverage and asset turnover broadly flat, the decline in the Net Income margin was the primary cause of the decline in ROE.【Cash Flow Quality】Accounts receivable and notes receivable increased 2.4% year on year to ¥5.55B. Although the pace of increase was below the 5.0% growth in revenue, the balance remains high, requiring monitoring of collection cycle trends. Inventories were ¥0.09B, a small absolute amount but higher year on year, warranting attention as a potential inflection point in inventory turnover.【Investment Efficiency】Total asset turnover improved slightly to 0.46x (from 0.44x in the previous year), indicating a broadly flat to marginally improving trend in asset efficiency. Goodwill was ¥1.74B and intangible assets were ¥2.79B, representing 8.1% and 13.1% of total assets, respectively; dependence on M&A-related assets remains relatively low.【Financial Soundness】The Equity Ratio improved to 47.7% from 44.7% in the previous year, indicating a strengthening financial base. The current ratio was approximately 128.9% and the quick ratio approximately 128.0%, securing short-term payment capacity. Interest-bearing debt was primarily short-term borrowings of ¥5.87B, with no progress toward extending the maturity profile into long-term liabilities. Cash and deposits of ¥6.54B exceeded short-term borrowings, and no major near-term liquidity concerns were apparent.

Cash Flow Analysis

As an individual disclosure of the cash flow statement is unavailable, cash trends are assessed based on changes in the balance sheet. Cash and deposits declined to ¥6.54B from ¥7.13B in the same period of the previous year, suggesting cash outflows from the accumulation of operating receivables and investment activities. Accounts receivable and notes receivable were ¥5.55B, up 2.4% year on year. Although this was a modest increase relative to the 5.0% growth in revenue, the absolute balance is substantial, and the length of the collection period relative to revenue could weigh on working capital. Short-term borrowings increased 3.5% to ¥5.87B from ¥5.67B in the previous year, indicating a slight increase in dependence on short-term financing. Cash of ¥6.54B exceeded short-term borrowings of ¥5.87B, securing on-hand liquidity for the time being; however, the concentration of debt maturities in the short term is a point requiring attention in liquidity management.

Earnings Quality

Recurring earnings power is centered on Operating Income of ¥0.62B. Non-operating income of ¥0.01B and non-operating expenses of ¥0.08B are minor relative to revenue but exert downward pressure on Net Income. Within non-operating expenses, the foreign exchange loss of ¥0.02B and equity-method investment loss of ¥0.03B were notable, while interest expense also increased from the previous year; these items have a relatively high non-recurring nature and are susceptible to market and interest-rate conditions. Extraordinary income of ¥0.03B and extraordinary loss of ¥0.01B resulted in a small net amount of less than +¥0.02B, limiting temporary distortions in current-period profit. The decline from Ordinary Income of ¥0.56B to Net Income attributable to owners of the parent of ¥0.36B was approximately -36%, primarily due to the persistently high effective tax rate of 37.9%. Comprehensive income was ¥0.54B, exceeding Net Income attributable to owners of the parent of ¥0.36B. The difference was largely attributable to foreign currency translation adjustments of +¥0.15B, indicating that factors separate from core earnings power boosted comprehensive income.

Earnings Forecast and Guidance

The full-year plan calls for revenue of ¥41.08B (+5.5%), Operating Income of ¥2.73B (+4.0%), Ordinary Income of ¥2.73B (+5.7%), and Net Income attributable to owners of the parent of ¥1.85B. As of Q1, progress rates were 24.0% for revenue and 22.9% for Operating Income, representing delays that remain broadly within an acceptable range compared with 25% under simple straight-line progression. Meanwhile, progress toward Net Income attributable to owners of the parent was relatively slow at 19.4%, primarily due to the AGEST Group’s loss, increased non-operating expenses, and the persistently high effective tax rate. The full-year plan was not revised as of the time of this earnings announcement.

Shareholder Returns

The dividend forecast for the fiscal year ending March 2027 is ¥0 per share (no dividend). On August 6, 2026, the Company announced a revision to its dividend forecast (no dividend) and the discontinuation of its shareholder benefit program, representing a policy shift from the dividend of ¥11.5 per share paid in the same period of the previous year. Although the disclosed materials do not explicitly state the background to the elimination of the dividend, the policy appears to prioritize preserving cash on hand in light of the Company’s dependence on short-term borrowings and its working capital position. The Payout Ratio and Total Return Ratio are not stated because there is no applicable basis for calculation.

Risk Factors

1. Concentration of segment profitability: The AGEST Group recorded revenue of ¥3.69B (-5.8%) and an operating loss of ¥0.06B, falling into the red. Dependence on the DH Group for Operating Income has increased (the DH Group alone recorded ¥0.69B against Company-wide Operating Income of ¥0.62B), and the disparity in profitability between segments is weighing on the Company-wide profit margin.

2. Bias in financing structure: Interest-bearing debt is primarily short-term borrowings of ¥5.87B, while fixed liabilities remain at only ¥0.39B. Although cash and deposits of ¥6.54B exceed this amount, the concentration of borrowing maturities in the short term is subject to monitoring as part of liquidity management.

3. Volatility in non-operating income and expenses: During the period, the Company incurred a foreign exchange loss of ¥0.02B and an equity-method investment loss of ¥0.03B, while interest expense also increased from the previous year. These items are susceptible to fluctuations in foreign exchange and interest-rate conditions and are factors expanding the decline from Ordinary Income to Net Income attributable to owners of the parent (approximately -36%).

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company’s Operating Income margin and Net Income margin were both below the industry median, placing profitability at a relatively low level within the industry.

Growth and Capital Efficiency

The revenue growth rate was also below the industry median. Although it was close to the lower bound of the IQR, the pace of growth was somewhat slower than the industry level.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. AGEST Group’s shift into the red (revenue -5.8%, operating loss ¥0.06B) offset the Company-wide revenue growth generated by the DH Group’s increase in revenue (+12.1%) and was the primary cause of the contraction in the Operating Income margin from the previous year. The change in the segment earnings structure is a key structural point that will determine the future direction of the Company-wide profit margin.

2. Progress toward full-year Net Income attributable to owners of the parent was only 19.4%, noticeably behind the progress rates for revenue and Operating Income (24.0% and 22.9%, respectively). The persistently high effective tax rate of 37.9% and increased non-operating expenses—foreign exchange losses and equity-method investment losses—further compressed profit from the operating stage at the final profit stage.

3. The full-year dividend forecast was revised to no dividend, and the shareholder benefit program was also discontinued. Together with the financing structure centered on short-term borrowings, the earnings data indicate that the Company prioritized preserving cash on hand during the period.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly available data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥579–¥615 at a ±1% change in the cost of equity, and ¥593–¥603 at a change of ±0.1 in ω.

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 / Interest rate reference month: 2026-07 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings summary data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and after consulting a professional as necessary.

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