SYSTEM RESEARCH (3771) FY2026 FY Earnings Report

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Executive Summary

The FY2026 results delivered revenue ¥290.8B (vs. prior year +¥31.5B, +12.1%), Operating Income ¥34.7B (vs. prior year +¥4.7B, +15.7%), Ordinary Income ¥35.5B (vs. prior year +¥4.9B, +15.8%), and Net Income ¥26.0B (vs. prior year +¥4.1B, +18.9%), achieving increases across all stages. Operating margin improved to 11.9% from 11.6% in the prior year (+0.3pt), and net margin improved to 8.9% from 8.4% (+0.5pt), reflecting lower SG&A ratio and operating leverage. ROE was 19.3%, slightly down from 19.6% last year, driven by accumulated equity, while underlying profitability shows an improving trend.

Drivers of Performance

[Revenue] Revenue ¥290.8B represented a +12.1% YoY increase, driven by order expansion and project progress in software-related businesses. Cost of sales was ¥223.2B, with a cost ratio of 76.8%, unchanged from 76.8% last year, maintaining a gross profit margin of 23.3%. Notes receivable and trade receivables increased to ¥57.9B (prior year ¥48.3B), up +19.8%, and days sales outstanding extended by about 5 days to approximately 73 days (prior year 68 days), indicating larger project sizes and lengthening collection terms. Gross profit was ¥67.6B, up +12.2% from ¥60.3B a year earlier, with revenue growth translating directly into gross profit expansion.

[Profitability] Operating Income ¥34.7B rose +15.7% from ¥30.0B a year earlier, outpacing revenue growth of +12.1%. SG&A was ¥32.9B, 11.3% of revenue, improving 0.4pt from 11.7% the prior year, indicating that SG&A growth lagged revenue growth and reflecting operating leverage. Non-operating income was ¥0.9B (including subsidy income ¥0.9B), non-operating expenses were ¥0.1B (interest expense ¥0.1B), resulting in a net positive contribution of ¥0.8B and Ordinary Income reached ¥35.5B. Extraordinary gains included ¥0.1B from fixed asset disposals, and extraordinary losses included impairment losses ¥0.5B (total ¥0.5B), so one-off items were minor. Corporate taxes were ¥8.9B at an effective tax rate of 25.4%, yielding after-tax Net Income ¥26.0B, concluding with year-over-year increases in both revenue and profit.

Key Financial Metrics

[Profitability] Operating margin was 11.9% (up 0.3pt from 11.6% prior year), and net margin was 8.9% (up 0.5pt from 8.4% prior year). Gross margin was 23.3%, roughly unchanged from 23.2% prior year, indicating stable cost control. ROE was 19.3% (slightly down from 19.6% prior year), attributable to accumulated equity (¥134.8B, prior year ¥118.3B), while underlying profitability is improving. ROA improved to 18.2% from 17.5% (+0.7pt), indicating improved total asset efficiency. [Cash Quality] Operating Cash Flow (OCF) was ¥25.0B, 0.96x of Net Income ¥26.0B, generally satisfactory, but OCF to EBITDA (EBITDA ¥36.7B = Operating Income ¥34.7B + D&A ¥2.0B) at 68.1% shows room for improvement. The reduction from operating cash subtotal ¥34.5B to actual OCF ¥25.0B was mainly due to increases in trade receivables -¥9.1B and corporate tax payments -¥9.3B. [Investment Efficiency] CapEx was ¥8.2B, 4.1x D&A ¥2.0B, indicating an active investment stance; construction in progress ¥9.0B represents 25.6% of tangible fixed assets ¥35.0B, suggesting a phase of upfront investment for new sites and equipment expansion. [Financial Soundness] Equity ratio improved to 69.3% from 67.4% (+1.9pt), strengthening the financial base. Current ratio was 264.2% (current assets ¥148.0B / current liabilities ¥56.0B), and quick ratio was 263.3%, indicating ample liquidity. Interest-bearing debt is estimated ¥9.6B (sum of short-term borrowings within current liabilities and long-term borrowings ¥3.8B), against cash and deposits ¥84.3B, resulting in net cash ¥74.7B and very high financial safety. Interest coverage is approximately 250x (OCF ¥25.0B / interest paid ¥0.1B), indicating negligible interest burden.

Cash Flow Analysis

OCF was ¥25.0B, up +21.7% from ¥20.5B prior year, adjusted from an OCF subtotal ¥34.5B by corporate tax payments -¥9.3B and working capital movements to ¥25.0B. Major working capital changes were an increase in trade receivables -¥9.1B, increase in inventories -¥0.5B, and increase in accounts payable +¥4.1B, with extended receivable days delaying cash collection. Investing CF was -¥9.4B, primarily CapEx -¥8.2B and intangible asset investments -¥1.2B, partly offset by proceeds from fixed asset disposals ¥0.5B. Financing CF was -¥13.3B, including dividend payments -¥9.9B, long-term borrowings repayments -¥7.9B, net increase in short-term borrowings +¥4.4B, and long-term borrowings procurement +¥4.5B. FCF was ¥15.6B (OCF ¥25.0B - Investing CF ¥9.4B), covering dividends ¥9.9B by 1.6x, indicating high sustainability of shareholder returns funded by internally generated cash. Cash and deposits were ¥84.3B, up ¥2.3B from ¥82.0B prior year, maintaining abundant liquidity.

Quality of Earnings

Most of Ordinary Income ¥35.5B was derived from Operating Income ¥34.7B, indicating core business profitability as the source of earnings. Non-operating income ¥0.9B was 0.3% of revenue, well below 5%, and primarily composed of subsidy income ¥0.9B, so transitory impacts are limited. Extraordinary items totaled net -¥0.4B (extraordinary gains ¥0.1B from fixed asset sales and extraordinary losses ¥0.5B including impairment loss ¥0.5B, disposal loss ¥0.0B), representing about a 1.5% impact on Net Income ¥26.0B and thus minor. Comprehensive income ¥26.1B is roughly consistent with Net Income ¥26.0B, and changes in valuation difference on available-for-sale securities -¥0.0B are negligible, signaling earnings quality is recurring and stable. OCF ¥25.0B is 0.96x Net Income ¥26.0B and generally solid, but the receivables increase -¥9.1B has partially delayed cash conversion, making collection process strengthening a future priority.

Guidance / Forecast

Full Year guidance is Revenue ¥322.8B (vs. prior year +10.9%), Operating Income ¥38.5B (vs. prior year +10.9%), Ordinary Income ¥39.1B (vs. prior year +10.0%), and Net Income ¥28.3B (vs. prior year +8.9%). Current results vs. full-year guidance progress rates are: Revenue ¥290.8B at 90.1%, Operating Income ¥34.7B at 90.1%, Ordinary Income ¥35.5B at 90.8%, and Net Income ¥26.0B at 91.9%, slightly below standard progress levels. Main causes for the shortfall are timing differences in revenue recognition due to extended days sales outstanding, overruns in personnel and outsourcing costs, and a temporary burden of impairment loss ¥0.5B. Actual EPS ¥157.49 against full-year forecast EPS ¥171.01 shows 92.1% progress, and accumulation of profit in the remaining period will be key to meeting the forecast. Dividend forecast is year-end ¥70, consistent with the actual, with no change in dividend policy.

Shareholder Returns

Year-end dividend is ¥70 with a payout ratio of 45.3% (total dividends ¥11.6B / Net Income ¥26.0B) and DOE (dividend / equity) of 8.9%. No share buybacks were implemented (¥-0.0B in financing CF breakdown), so shareholder returns consist solely of dividends. Dividends ¥9.9B are covered 1.6x by FCF ¥15.6B, supporting sustainability of returns from internally generated cash. With cash and deposits ¥84.3B and net cash ¥74.7B, liquidity supports dividend policy stability. Payout ratio 45.3% is at an appropriate level, balancing growth investment and shareholder returns.

Risk Factors

1. Delay in collection of trade receivables: Days sales outstanding extended to approximately 73 days (worsened 5 days from 68 days prior year). Trade receivables ¥57.9B represent 39.1% of current assets ¥148.0B, and delays in acceptance of large projects or lengthening collection terms could pressure working capital. OCF/EBITDA ratio 68.1% shows room for improvement, requiring stronger credit control and billing processes.

2. Elevated construction in progress risk: Construction in progress ¥9.0B is 25.6% of tangible fixed assets ¥35.0B, indicating continued upfront capitalization for new sites and equipment investments. Delays in operational start or cost overruns could increase depreciation burden or require additional investment, pressuring profitability.

3. Inflationary pressure on personnel and outsourcing costs: SG&A ¥32.9B rose +8.6% from ¥30.3B prior year, with continued upward pressure on personnel and outsourcing costs due to intensified competition for IT talent. Although SG&A growth has been restrained relative to revenue growth +12.1%, recruitment difficulties or rising turnover could compress operating margins.

Industry Benchmark (reference, company analysis)

Profitability & Returns

Both operating margin and net margin exceed industry medians, indicating top-tier profitability within IT & Communications.

Growth & Capital Efficiency

Revenue growth outperforms the industry median by 2.0pt, maintaining a solid growth trend.

※ Source: Company compilation

Key Points of the Results

1. Concurrent improvement in operating margin and double-digit revenue growth: Revenue +12.1% and Operating Income +15.7% show profit growth outpacing revenue growth, with operating margin improving 0.3pt to 11.9%. Lower SG&A ratio and operating leverage effects are apparent, and order expansion plus price adjustments have contributed to improved profitability. Continued price revisions and utilization improvements could further lift operating margin.

2. Aggressive CapEx with future earnings contribution potential: CapEx ¥8.2B is 4.1x D&A ¥2.0B, and construction in progress ¥9.0B accounts for 25.6% of tangible fixed assets, indicating upfront investment for new sites and capacity expansion. If contributions to revenue and EBITDA materialize after operations commence, maintaining ROE in the 20% range and further operating margin improvement are feasible, though risks from start-up delays or cost overruns must be monitored.

3. Room to improve receivables collection: Extension to 73 days DSO and OCF/EBITDA ratio 68.1% indicate potential to improve cash conversion efficiency. Strengthening collection processes and tightening project management to raise OCF/EBITDA toward the ~90% range could expand FCF and enhance shareholder return capacity.

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This report is an AI-generated earnings analysis document automatically produced by analyzing XBRL earnings release data. It is not a recommendation to invest in any specific security. Industry benchmarks are company-compiled reference information based on public financial statements. Investment decisions are your own responsibility; consult a professional advisor as needed.