SYSTEMS DESIGN Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥4.93B
• Operating Income: ¥198M
• Net Income: ¥132M
• EPS: ¥38.54

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Q2 FY2026 was a solid beat on profitability with clear operating leverage despite modest topline growth. Revenue rose 6.9% YoY to 49.28, while operating income jumped 48.6% YoY to 1.98 and net income surged 64.2% YoY to 1.31. Gross profit reached 10.49, implying a gross margin of 21.3%. Operating margin expanded to about 4.0% (1.98/49.28). Based on growth rates, we estimate prior-year operating margin at roughly 2.9%, indicating an expansion of approximately 113 bps. Net margin improved to about 2.7% (1.31/49.28) from an estimated 1.7% a year ago, a near 93 bps expansion. Ordinary income of 2.10 (+44.9% YoY) points to broad-based profit improvement beyond core operations. Non-operating income was modest at 0.12 (dividends 0.03, interest 0.04), suggesting earnings were primarily driven by the core business. Cash generation was strong: operating cash flow of 3.57 was 2.73x net income, indicating high earnings quality and healthy collections. The balance sheet is robust with cash and deposits of 30.23, current assets of 47.17, and current liabilities of 11.85, translating to a 398% current ratio and ample liquidity. Leverage appears conservative with a reported D/E of 0.38x and total equity of 46.03 supporting solvency. ROE was 2.9% per DuPont, with ROIC disclosed at 7.9%, in line with a reasonable cost of capital for a small-cap SIer. Capex was light at 0.01, implying limited capital intensity and potential to sustain cash generation, though full investing CF was not disclosed. A reported payout ratio of 120.2% (despite DPS being unreported here) raises a flag on dividend sustainability relative to earnings, although OCF currently covers distributions comfortably. The effective tax rate was elevated at 37.3%, partially capping net margin expansion. Overall, margin improvement, strong OCF conversion, and a net-cash position provide a positive setup into H2, but thin absolute margins and a high payout ratio warrant monitoring.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (≈2.7%) × Asset Turnover (0.775) × Financial Leverage (1.38x) = ROE ≈ 2.9% (matches reported). The biggest YoY contribution to ROE improvement appears to be margin expansion: operating income grew +48.6% vs revenue +6.9%, lifting operating and net margins by an estimated 113 bps and 93 bps, respectively. Business drivers likely include better project mix, improved utilization, and SG&A discipline given operating leverage. This improvement seems operational rather than non-recurring since non-operating income (0.12) was small. Sustainability hinges on maintaining utilization and pricing; SI margins are inherently thin and wage inflation could pressure SG&A. Watch for SG&A growth relative to revenue—data is unreported YoY, but current leverage suggests SG&A was contained in H1.

Growth Assessment

Topline growth of +6.9% YoY is steady for a mid-tier systems integrator. Profit growth was outsized (OP +48.6%, NI +64.2%), implying positive operating leverage and/or improved gross margin mix. Ordinary income also rose sharply (+44.9%), indicating the uplift was not dependent on one-time gains. With non-operating income just 0.12, earnings quality appears driven by core operations. Near-term outlook benefits from a strong cash position enabling talent retention and selective investment. However, sustaining high-teens to mid-20s profit growth will require continued backlog conversion and pricing power amid rising personnel costs. Absence of order backlog data and segment detail limits visibility on H2 momentum.

Financial Health

Liquidity is very strong: current ratio 398% and quick ratio 393% with cash and deposits of 30.23 far exceeding current liabilities of 11.85. No warning on current ratio (<1.0) or D/E (>2.0); reported D/E is a conservative 0.38x. Maturity mismatch risk appears low given cash-rich position and small accounts payable (0.29). Interest-bearing debt details are unreported; however, overall liabilities (17.59) are well covered by current assets (47.17), suggesting net cash. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF/Net Income of 2.73x indicates high-quality earnings with strong cash conversion, likely aided by receivables collections (AR stands at 14.45 against H1 revenue of 49.28). Capex was minimal at 0.01, consistent with a low-capex services model. While full investing CF is unreported, a proxy FCF excluding M&A would be approximately 3.56 (OCF minus capex), comfortably covering typical dividends for a company of this size. No clear signs of working capital manipulation are evident; the cash build and OCF strength align with profit growth. Monitor H2 working capital seasonality and any shift in receivables.

Dividend Sustainability

The calculated payout ratio of 120.2% suggests distributions exceeded H1 earnings on an annualized basis, which is a potential red flag. However, with OCF at 3.57 and negligible capex, cash coverage appears adequate near term. DPS and total dividends paid are unreported, constraining precision. If the elevated payout reflects a one-off timing or a policy to maintain DPS, sustainability will depend on H2 earnings growth and continued strong OCF. Policy outlook: absent formal guidance, expect management to balance stability of DPS with earnings trajectory; a payout ratio below 60% is the healthy benchmark to aim for over time.

Risk Assessment

Business Risks:

• Thin operating margin base (~4%) increases sensitivity to project overruns and utilization swings
• Wage inflation and hiring market tightness for engineers could pressure SG&A and gross margin
• Execution risk on fixed-price projects typical in SI can cause margin volatility
• Customer concentration risk is common in mid-size SI firms (not disclosed here)

Financial Risks:

• High effective tax rate (37.3%) reduces net income leverage
• Dividend payout ratio (120.2% calculated) could exceed sustainable levels if earnings soften
• Limited disclosure on interest-bearing debt and financing cash flows creates visibility gaps

Key Concerns:

• Sustainability of margin gains without corresponding SG&A transparency
• Dependence on timely receivables collection to sustain high OCF/NI conversion
• Data gaps: DPS, full investing CF, and interest expenses are unreported

Investment Implications

Key Takeaways:

• Clear operating leverage: OP +48.6% on revenue +6.9%
• Operating margin expanded by ~113 bps YoY to ~4.0%
• Net margin improved by ~93 bps YoY to ~2.7%
• Strong cash generation: OCF/NI 2.73x; net-cash balance sheet
• ROIC of 7.9% roughly at target range for the sector
• Dividend payout appears high versus earnings; monitor sustainability

Metrics to Watch:

• Order backlog and book-to-bill for H2 revenue visibility
• Utilization rate and billable headcount growth
• SG&A run-rate vs revenue growth to assess operating leverage persistence
• Gross margin by project type (fixed-price vs T&M)
• Receivables days and OCF/NI conversion in H2
• Effective tax rate trajectory and any tax normalization
• Dividend policy updates and actual DPS

Relative Positioning: A net-cash, small-cap SIer with improving margins and solid cash conversion; profitability still trails top-tier peers on absolute margin but trajectory is positive.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis