| Metric | Current Period | Prior Year Period | YoY |
|---|---|---|---|
| Revenue / Net Sales | ¥720.4B | ¥616.9B | +16.8% |
| Operating Income / Operating Profit | ¥69.1B | ¥80.6B | -14.3% |
| Ordinary Income | ¥66.1B | ¥78.7B | -16.0% |
| Net Income / Net Profit | ¥40.1B | ¥45.6B | -12.1% |
| ROE | 10.4% | 11.1% | - |
For the interim period of FY2026 (Sep 2025–Feb 2026), Revenue was ¥720.4B (YoY +¥103.5B +16.8%), Operating Income was ¥69.1B (YoY -¥11.5B -14.3%), Ordinary Income was ¥66.1B (YoY -¥12.6B -16.0%), and Net Income was ¥40.1B (YoY -¥5.5B -12.1%). The company delivered double-digit revenue growth while reporting profit decline. Operating margin fell to 9.6% from 13.1% a year earlier (down 3.5pp), and net margin declined to 5.6% from 7.4% (down 1.8pp). Core software testing–related services grew robustly with sales up 19.5%, but SG&A expanded to ¥171.9B (YoY +¥30.8B +21.8%), offsetting revenue gains. An impairment loss of ¥5.0B in other adjacent services was recorded as an extraordinary loss, further pressuring profitability. Operating Cash Flow / Net Income stood at 0.28x, indicating weak cash conversion; increases in trade receivables and inventories strained liquidity, and Free Cash Flow was negative at -¥6.8B.
Revenue of ¥720.4B (YoY +16.8%) reflected growth across all segments. By segment, software testing–related services accounted for ¥473.3B (+19.5%), or 65.7% of total, leading growth. Software development–related services were ¥213.1B (+8.0%), showing relatively slower growth, while other adjacent services grew strongly to ¥64.5B (+32.1%). External drivers included continued digital transformation demand and increasing needs for test automation and quality assurance services. Gross profit was ¥241.0B (gross margin 33.5%), down 0.9pp from 34.4% a year ago, with rising cost of sales contributing to profit pressure.
On the profit side, Operating Income was ¥69.1B (YoY -14.3%), with an operating margin of 9.6% down 3.5pp from 13.1% prior year. SG&A rose to ¥171.9B from ¥131.5B (YoY +30.7%), expanding faster than revenue absorption. Main drivers were increased personnel expenses from headcount additions and higher recruitment/training costs, post-M&A integration expenses, and front-loaded corporate administrative spending. Segment profits showed notable margin declines: Testing-related profit ¥97.3B (-7.5%), Development-related profit ¥12.0B (-23.8%), with testing-related margin falling to 20.6% from 26.6% (down 6.0pp). Non-operating expenses included interest expense of ¥1.0B (prior ¥0.4B), reflecting interest on ¥100B short-term borrowings. Ordinary Income of ¥66.1B (-16.0%) declined more than operating income due to increased non-operating expenses of ¥4.9B (prior ¥2.8B). Extraordinary losses of ¥5.0B (impairment loss ¥5.0B, valuation loss on investment securities ¥1.6B) were recorded, reducing profit before tax to ¥61.2B (-14.8%). After income taxes of ¥21.1B, Net Income was ¥40.1B (-12.1%). In summary, revenue up but profit down due to front-loaded growth investments and changes in project mix compressing margins.
Software testing–related services: Revenue ¥473.3B (+19.5%), Operating Income ¥97.3B (-7.5%), operating margin 20.6% (prior 26.6%). Despite high growth, increases in subcontracting costs, personnel expenses, and a change in project pricing mix reduced margin by 6.0pp. This is the primary contributor to consolidated operating income. Software development–related services: Revenue ¥213.1B (+8.0%), Operating Income ¥12.0B (-23.8%), operating margin 5.6% (prior 8.0%). A rising share of low-margin projects and higher personnel costs weighed on margins, which fell 2.4pp, and growth lagged other segments. Other adjacent services: Revenue ¥64.5B (+32.1%), Operating Income ¥5.6B (+127.9%), operating margin 8.6% (prior 5.0%). Achieved large revenue increase and improved margin by 3.6pp, expanding profitability, but an impairment loss of ¥5.0B was recognized in this segment, prompting review of some businesses’ profitability. Corporate costs (mainly G&A outside reporting segments) were -¥45.8B (prior -¥42.8B), increasing by ¥3.0B, resulting in consolidated operating income of ¥69.1B after corporate adjustments.
Profitability: ROE was 10.4%; DuPont decomposition aligns with Net Margin 5.6% × Total Asset Turnover 0.896 × Financial Leverage 2.08x. Operating margin 9.6% fell 3.5pp from 13.1%, largely due to a 6.0pp contraction in the core testing business. Gross margin was 33.5% (down 0.9pp from 34.4%), and SG&A ratio rose to 23.9% from 21.3% (up 2.6pp), highlighting weaker cost absorption. Cash Quality: Operating Cash Flow / Net Income was low at 0.28x, indicating issues in converting profit to cash. Operating CF / EBITDA was 0.14x, and increase in working capital have strained liquidity. Days Sales Outstanding is about 87 days (Accounts receivable ¥172.7B ÷ annualized sales ¥1,440.7B × 365), showing lengthening. Inventories rose to ¥27.3B from ¥16.3B (up 68.1%), a temporary build due to project progress that worsened cash flow. Investment Efficiency: Capex of ¥5.5B was only 0.55x depreciation ¥10.0B, indicating relatively low growth investment intensity. Total Asset Turnover was 0.896x (annualized sales ¥1,440.7B ÷ total assets ¥803.9B), roughly standard efficiency. Financial Soundness: Equity Ratio was 48.0% (prior 52.7%), down 4.7pp but still maintaining soundness. Current Ratio 143.1%, Quick Ratio 134.8% — short-term liquidity secured, though short-term liabilities ratio 60.0% is high, making management of ¥100B short-term borrowings important. Interest-bearing debt ¥166.5B (short-term borrowings ¥100B + long-term borrowings ¥66.5B) versus cash ¥244.4B, Debt/EBITDA (annualized) 2.11x, Interest Coverage 71x, indicating ample financial capacity. Goodwill ¥74.6B is 19.4% of net assets and restrained; impairment this period was limited to ¥5.0B.
Operating Cash Flow was ¥11.3B (prior ¥40.4B, -72.1%), a significant decline. Main causes were increases in trade receivables -¥18.0B (prior -¥3.3B), inventories -¥10.4B (prior -¥6.4B), and income tax payments -¥30.8B (prior -¥21.2B), demonstrating deterioration in working capital. Operating CF subtotal (before working capital changes) was ¥42.1B (prior ¥61.5B), maintaining a baseline level, but decreases in accounts payable -¥0.9B (prior +¥0.4B) and reductions in deposits received and similar liabilities -¥3.6B (prior -¥3.5B) also contributed to cash outflow. Investing CF was -¥18.1B (prior -¥14.7B), with capex -¥5.5B, intangible asset investment -¥1.7B (prior -¥0.8B), and acquisition of subsidiary shares -¥8.2B (prior -¥2.7B) as main items. Free Cash Flow was negative at -¥6.8B (prior +¥25.7B), indicating profit growth has not translated into cash generation. Financing CF was ¥13.7B (prior ¥14.8B); net increase in short-term borrowings ¥100B (prior ¥56B) funded repurchases of treasury stock -¥65.5B (prior -¥10.0B) and long-term borrowings repayments -¥19.8B (prior -¥15.1B). Cash balance increased slightly from ¥243.2B to ¥244.4B (+¥7.2B), but this relied on short-term borrowing, underscoring the need to improve operating CF.
Quality of earnings is high on an ordinary income basis; most of Operating Income ¥69.1B arises from core service operations. Non-operating income ¥1.9B (interest income ¥0.2B, subsidy income ¥0.9B, etc.) is minor, and non-operating expenses ¥4.9B (interest expense ¥1.0B, equity-method investment losses ¥1.2B, etc.) remain below 1% of sales. One-off factors include extraordinary losses of ¥5.0B (impairment loss ¥5.0B, valuation loss on investment securities ¥1.6B), which reduced this period’s Net Income by roughly 12.2%. The impairment relates to operating assets of a consolidated subsidiary in other adjacent services, reflecting revised future revenue expectations. Accrual quality is low, with Operating CF / Net Income 0.28x and Operating CF / EBITDA 0.14x, showing weak cash conversion. Main drivers are trade receivables +¥18.0B and inventories +¥10.4B, requiring improved receivables management and inventory efficiency. Comprehensive Income was ¥38.5B (Net Income ¥40.1B), slightly below Net Income by ¥1.6B due to foreign currency translation adjustment +¥0.1B and valuation difference on securities -¥1.7B. Goodwill amortization ¥6.8B (prior ¥7.1B) reduces Operating Income but is a structural difference versus IFRS peers; EBITDA before goodwill amortization is ¥85.9B (Operating Income ¥69.1B + Depreciation ¥10.0B + Goodwill amortization ¥6.8B), a level that should be used for assessment.
Full Year guidance is unchanged at Revenue ¥1,500B (YoY +15.5%) and EPS ¥43.67. Progress to date is Revenue 48.0% (¥720.4B ÷ ¥1,500B), roughly standard, but EPS progress is lagging at 35.1% (¥15.32 ÷ ¥43.67), implying substantial margin improvement is required in H2. Given first-half operating margin of 9.6%, achieving the full-year target requires margin uplift in the second half through improved utilization, price realization, and SG&A restraint. Management has not revised guidance and assumes recovery in H2, but given the low Operating CF / Net Income of 0.28x in H1, normalization of working capital is also a precondition. Order backlog and contract liabilities data are not disclosed, so quantitative confirmation of order trends is unavailable; assuming continuation of the 16.8% sales growth rate implies some order build-up.
No dividend was paid in H1 (no dividend prior year), so payout ratio is 0%. However, share buybacks of ¥65.5B were executed during the period (prior year ¥10.0B), indicating an active shareholder return stance. Treasury stock increased to ¥121.8B (prior ¥58.3B), compressing equity to enhance capital efficiency. That said, large returns while Operating CF was only ¥11.3B were funded by ¥100B short-term borrowings (starting balance ¥0), so sustainability depends on recovery of Operating CF. Cash balance ¥244.4B provides some cushion against short-term liabilities ratio 60.0%, but resumption or increase of dividends will depend on H2 Operating CF improvements and working capital efficiency. Total return ratio (dividend + buybacks) equals 163% given buybacks ¥65.5B against Net Income ¥40.1B, a high level financed by financing activities and cash on hand.
Margin deterioration risk: Operating margin decreased to 9.6% from 13.1% (down 3.5pp), with testing-related margin down 6.0pp and development-related down 2.4pp. Rising personnel and subcontracting costs and changes in project pricing mix are the main causes. If price pass-through lags or utilization declines persist, there is risk of missing full-year guidance and damaging the earnings base. SG&A ratio rising to 23.9% from 21.3% partly reflects growth investments, but if returns do not match revenue growth, operating leverage may reverse and ROE may decline.
Fragility in cash conversion: Operating CF / Net Income 0.28x and Operating CF / EBITDA 0.14x are very low; trade receivables +¥18.0B and inventories +¥10.4B have strained liquidity. DSO of about 87 days suggests lengthening collections, potentially due to lax credit control or inefficient billing cycles. Free Cash Flow negative -¥6.8B and buybacks ¥65.5B funded by ¥100B short-term borrowings increase reliance on financial leverage. Delays in normalizing working capital could lead to cash depletion or need for additional borrowings, raising interest burden and reducing financial flexibility.
Concentration of short-term liabilities risk: Short-term liabilities ratio is high at 60.0%, with ¥100B short-term borrowings representing most current liabilities. Cash / short-term liabilities ratio is 2.44x, which appears comfortable, but refinancing in a weak operating CF environment could raise costs amid rising interest rates. Although Interest Coverage is 71x currently, continued operating income decline would raise interest burden and tighten finances. Considering ¥66.5B long-term borrowings maturity profile, shifting away from short-term dependence to longer-term funding is necessary for financial stability.
Revenue & Returns
| Metric | Company | Median (IQR) | Delta |
|---|---|---|---|
| Operating Margin | 9.6% | 14.0% (3.8%–18.5%) | -4.4pp |
| Net Margin | 5.6% | 9.2% (1.1%–14.0%) | -3.7pp |
Against industry median, operating margin is -4.4pp and net margin -3.7pp; there is substantial room for profitability improvement within the IT & Communications sector.
Growth & Capital Efficiency
| Metric | Company | Median (IQR) | Delta |
|---|---|---|---|
| Revenue Growth (YoY) | 16.8% | 21.0% (15.5%–26.8%) | -4.2pp |
Revenue growth is 4.2pp below the median, placing the company at the lower bound of the mid-range within the sector. Although high-growth segments (testing +19.5%) drive performance, consolidated growth trails peer group.
※ Source: Company aggregation
The key point is that despite achieving revenue growth of +16.8%, operating margin fell to 9.6% (prior 13.1%), down 3.5pp. Core software testing–related services grew sales +19.5% but saw operating margin decline to 20.6% (prior 26.6%), down 6.0pp, and SG&A expansion of +30.7% offset revenue gains. For H2 to meet full-year guidance (EPS ¥43.67), recovery in operating margin via improved utilization, project price adjustments, and restraint on subcontracting and hiring costs is required. Versus industry, operating margin is 4.4pp below the median, indicating significant scope for profitability improvement.
On cash flow, Operating CF / Net Income 0.28x and Operating CF / EBITDA 0.14x are low, with trade receivables +¥18.0B and inventories +¥10.4B tightening liquidity. DSO of about 87 days suggests prolonged collections, making credit control and billing-cycle efficiency urgent. Free Cash Flow turned negative -¥6.8B while buybacks ¥65.5B were funded by ¥100B short-term borrowings; therefore, normalization of working capital and recovery of Operating CF are key to financial sustainability. Seasonal release of working capital in H2 is expected, but progress on structural improvements (billing/collection process review, inventory management strengthening) will be monitored.
In segment composition, testing-related services account for 65.7% of revenue and are the largest profit contributor but show marked margin compression. Development-related services continue to show slowed growth (+8.0%) and worsening margin (5.6% vs prior 8.0%), making it a challenge to lift overall portfolio profitability. Other adjacent services achieved high growth (+32.1%) and margin improvement but the ¥5.0B impairment indicates some businesses are under review, requiring better post-M&A integration quality and improved PMI. While growth rate is mid-range in the sector, weaker margins and cash conversion warrant investor attention on H2 margin recovery and working capital efficiency.
This report is an earnings analysis document automatically generated by AI analyzing XBRL financial statement data. It is not a recommendation to invest in any particular security. Industry benchmarks are reference information aggregated by the Company based on public financial statements. Investment decisions are your responsibility; consult professionals as necessary before making investment decisions.