SYSTEM RESEARCH CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

This quarter saw higher revenue but lower earnings, as the “reverse operating leverage” caused by SG&A expenses growing faster than revenue weighed on net income. While revenue expanded to ¥74.3B (¥69.4B in the same period last year, YoY +7.0%), Operating Income declined to ¥5.4B (¥6.0B, YoY -10.1%), Ordinary Income to ¥5.4B (¥6.1B, YoY -11.6%), and Net Income attributable to owners of the parent (hereinafter the same) to ¥3.9B (¥4.4B, YoY -11.6%). Although gross profit increased by +5.6%, SG&A expenses grew significantly faster, by +16.3%, which was the primary cause of the decline in the Operating Income margin to 7.3% from 8.7% in the same period last year.

Factors Affecting Performance

【Revenue】Revenue amounted to ¥74.3B, representing a +7.0% increase year on year. The Company operates as a single segment, the Software-Related Business, and does not disclose a breakdown by segment; however, solid demand for existing businesses such as contracted development and maintenance and operations services appears to have driven revenue growth.

【Profit and Loss】Gross profit was ¥15.6B (+5.6%), with the gross margin essentially flat at 21.0% versus 21.3% in the same period last year. Meanwhile, SG&A expenses increased to ¥10.2B (+16.3%), growing faster than revenue, and Operating Income declined to ¥5.4B (YoY -10.1%), with the Operating Income margin falling to 7.3% from 8.7% in the same period last year, a decline of -1.4pt. Non-operating income and expenses were minor, comprising non-operating income of ¥0.03B and non-operating expenses of ¥0.03B (interest expenses). Accordingly, Ordinary Income of ¥5.4B (YoY -11.6%) was largely in line with Operating Income. No extraordinary gains or losses were recorded, and after deducting income taxes and other taxes of ¥1.5B (effective tax rate: 27.6%), Net Income amounted to ¥3.9B (YoY -11.6%). Despite revenue growth, earnings declined due to the front-loaded increase in SG&A expenses, making this a quarter of higher revenue but lower earnings.

Segment Analysis

The Group operates as a single segment, the Software-Related Business, and disclosure of performance by segment has been omitted.

Key Financial Indicators

【Profitability】The Operating Income margin was 7.3%, narrowing by -1.4pt from 8.7% in the same period last year, while the Net Income margin also declined by -1.1pt to 5.2% from 6.3%. Although the gross margin remained essentially flat at 21.0% versus 21.3% in the same period last year, the SG&A ratio increased to 13.8% from 12.7%. Thus, the primary cause of the decline in profitability was SG&A expenses rather than the cost of sales.【Earnings Quality】The difference between Ordinary Income and Net Income was equivalent to income taxes and other taxes of ¥1.5B (effective tax rate: 27.6%). The impact of non-operating and extraordinary gains and losses was negligible, indicating a structure in which operating profit and loss is directly reflected in Net Income.【Investment Efficiency】ROE was 3.1%, and can be decomposed using the DuPont framework as a 5.2% Net Income margin × 0.43 total asset turnover × 1.37x financial leverage. The primary factor behind the decline was the contraction in the profit margin. Basic EPS was ¥23.52, down YoY -11.8% from ¥26.66.【Financial Soundness】The Equity Ratio was 73.1%, up +4.0pt from 69.1% in the same period last year, further strengthening the conservativeness of the financial base. Interest-bearing debt consisted solely of ¥3.0B in long-term borrowings, an extremely small amount relative to cash and deposits of ¥74.5B, while the current ratio remained high at 291%.

Cash Flow Analysis

As the statement of cash flows is not disclosed, cash flow trends are reviewed based on changes in the balance sheet. Cash and deposits amounted to ¥74.5B, down from ¥84.3B at the end of the same period last year, while total assets also contracted to ¥173.8B from ¥194.6B at the end of the same period last year. Current liabilities declined significantly to ¥43.7B from ¥55.97B at the end of the same period last year. This was apparently mainly attributable to decreases in income taxes payable (¥1.9B versus ¥6.6B in the same period last year) and the provision for bonuses (¥4.9B versus ¥14.9B in the same period last year), reflecting tax payments and bonus payments associated with the previous fiscal year-end settlement. Long-term borrowings stood at ¥3.0B, steadily decreasing from ¥3.8B at the end of the same period last year, and dependence on interest-bearing debt remained low. Overall, the conservative funding structure, combining debt reduction with high on-hand liquidity, has continued.

Earnings Quality

The difference between Ordinary Income and Net Income for the current period was almost equivalent to income taxes and other taxes of ¥1.5B (effective tax rate: 27.6%), and distortion from non-recurring gains and losses was limited. Non-operating income was ¥0.03B, while non-operating expenses (interest expenses) were also ¥0.03B, both negligible as a percentage of revenue, indicating a highly recurring earnings structure. No extraordinary gains or losses were recorded, and current-period earnings can be viewed as directly reflecting operating profit and loss. Comprehensive income was ¥3.9B, substantially in line with Net Income attributable to owners of the parent of ¥3.9B. The impact of other comprehensive income items, such as valuation differences on securities, was limited, and the gap between Net Income and comprehensive income was small.

Earnings Forecasts and Guidance

Progress against the full-year Company forecasts (Revenue: ¥322.8B, Operating Income: ¥38.5B, Ordinary Income: ¥39.1B) was 23.0% for Revenue, 14.0% for Operating Income, and 13.8% for Ordinary Income. While revenue progress was generally within the range of quarterly seasonality, progress for Operating Income and Ordinary Income was below revenue progress, making improvement in profitability toward the second half of the fiscal year a prerequisite for achieving the full-year plan. No revision to the earnings forecasts themselves was made during Q1, although a revision to the dividend forecast was announced.

Shareholder Returns

During the quarter, the Company announced a change in its dividend policy, including a review of the target Payout Ratio and the introduction of progressive dividends, as well as a revision to the dividend forecast for the fiscal year ending March 2027. Although the specific amount of the dividend forecast could not be confirmed from the disclosed data, the introduction of progressive dividends indicates the adoption of a policy of not reducing dividends and demonstrates a stance of stable and gradually increasing shareholder returns. From a financial perspective, the Company has an Equity Ratio of 73.1% and a net cash position, with cash and deposits of ¥74.5B, suggesting sufficient capacity to secure funds for dividends. As the Payout Ratio cannot be calculated from this report, no specific figure is provided.

Risk Factors

1. Margin pressure from front-loaded SG&A expenses: SG&A expenses increased +16.3% year on year, exceeding the +7.0% revenue growth rate. As a result, the Operating Income margin narrowed to 7.3% from 8.7% in the same period last year, a decline of -1.4pt. If expenses continue to grow faster than revenue, this could lead to a structural decline in profitability.

2. Back-half weighting of full-year progress: The full-year progress rate for Operating Income was 14.0%, significantly below the 23.0% progress rate for Revenue. Achieving the Company’s forecast of +10.9% growth in Operating Income will require a decline in the SG&A ratio and a recovery in profitability during the second half of the fiscal year.

3. Seasonal fluctuations in working capital items: The provision for bonuses (¥4.9B versus ¥14.9B in the same period last year) and income taxes payable (¥1.9B versus ¥6.6B in the same period last year) declined significantly from the same period last year. The impact of changes in these liability items on cash management should continue to be monitored.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin were slightly below the industry median, placing profitability around the middle to slightly lower end of the industry.

Growth and Capital Efficiency

Although the revenue growth rate was below the industry median, it remained within the industry IQR (0.2%–16.9%) and was not extremely underperforming.

※Source: Compiled by the Company

Key Takeaways from the Earnings Report

1. Despite revenue growth of +7.0%, SG&A expenses grew ahead of revenue, increasing +16.3%, and the Operating Income margin declined to 7.3% from 8.7% in the same period last year. Whether this reverse operating leverage phenomenon is resolved will be a key point to monitor in assessing a recovery in profitability.

2. The full-year progress rate for Operating Income was 14.0%, below the 23.0% progress rate for Revenue. The degree to which profitability improves in the second half of the fiscal year will be critical to achieving the full-year plan.

3. The financial base is robust, with an Equity Ratio of 73.1% (up +4.0pt from 69.1% in the same period last year) and interest-bearing debt consisting solely of ¥3.0B in long-term borrowings, supporting the Company’s capacity to implement its revised dividend policy, including the introduction of progressive dividends.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed 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: ¥1,099–¥1,170 at ±1% for the cost of equity, and ¥1,123–¥1,150 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing discrepancy 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: 2026-06 / 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 based on XBRL earnings release 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, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a mixed start: revenue expanded, but profitability weakened materially as cost growth and SG&A investment outpaced sales. Revenue increased 7.0% YoY to ¥7.43bn. Gross profit rose 5.6% YoY to ¥1.56bn. Operating income declined 10.1% YoY to ¥0.54bn. Ordinary income fell 11.6% YoY to ¥0.54bn. Net income attributable to owners decreased 11.6% YoY to ¥0.39bn. The gross margin contracted by approximately 30bp YoY to 21.0%. The operating margin contracted by approximately 139bp to 7.3%. The net margin declined by approximately 111bp to 5.2%. Cost of sales increased 7.5% YoY, slightly faster than revenue. SG&A expenses increased 16.3% YoY to ¥1.02bn, equivalent to 13.8% of revenue versus 12.7% a year earlier. This SG&A deleverage was the principal source of the operating-margin decline. Non-operating items were immaterial, leaving ordinary income essentially equal to operating income. The effective tax rate was 27.6%, producing a normal tax burden of 0.722 in the five-factor DuPont framework. The annualized ROE was 12.3%, within the good 10-15% benchmark range, supported by a 5.2% net margin, 1.710x asset turnover and 1.37x financial leverage. The balance sheet remains highly liquid, with cash and deposits of ¥7.45bn, a 291.2% current ratio and only ¥0.40bn of interest-bearing debt. Q1 revenue represented 23.0% of the full-year forecast, close to the standard 25% pace. In contrast, operating-income progress was only 14.0% and net-income progress was 13.8%, both more than 10 percentage points below a linear quarterly run rate. Achieving the full-year plan therefore requires a substantial recovery in the operating margin through the remaining quarters, alongside the forecast 10.9% full-year sales growth.

Profitability Analysis

The annualized DuPont ROE of 12.3% is decomposed into a 5.2% net profit margin, 1.710x asset turnover and 1.37x financial leverage. This profile indicates that returns are primarily generated by solid revenue productivity rather than balance-sheet leverage. Financial leverage is conservative, so there is little dependence on debt to support shareholder returns. Margin performance weakened in Q1: gross margin fell to 21.0% from approximately 21.3%, while operating margin fell to 7.3% from approximately 8.7%. The larger change occurred below gross profit, where SG&A rose 16.3% against 7.0% sales growth. SG&A as a percentage of revenue rose about 109bp YoY to 13.8%, evidencing negative operating leverage in the quarter. The 7.3% EBIT margin is below the stated 8-15% good benchmark for operating profitability, although the 5.2% net margin remains within the 5-10% good range. Interest burden was effectively neutral at 1.001, and interest coverage of 184.93x confirms that financing costs do not constrain earnings. The tax burden of 0.722 is normal and does not indicate an unusually high tax drag. For the full year, management forecasts operating income of ¥3.85bn on revenue of ¥32.28bn, implying an 11.9% operating margin; this is materially above Q1's 7.3%, making cost discipline and utilization improvement central to margin normalization.

Growth Assessment

Q1 revenue growth of 7.0% demonstrates continued demand expansion in the software-related business, which is reported as a single segment. However, growth quality was diluted by lower operating and net income, indicating that the incremental revenue carried a weaker near-term contribution margin after SG&A. Gross profit growth of 5.6% also lagged sales growth, consistent with the modest gross-margin compression. The full-year sales forecast calls for 10.9% growth to ¥32.28bn, requiring faster growth in the remaining quarters than achieved in Q1. Q1 sales progress of 23.0% is only modestly below a standard 25% first-quarter run rate. The greater issue is profit conversion: Q1 operating income reached only 14.0% of the annual target of ¥3.85bn, while ordinary and net income each reached 13.8% of their respective annual targets. The gap implies that the company must restore operating leverage as revenue scales. The forecast requires operating income growth of 10.9%, matching forecast revenue growth, and therefore assumes preservation of the implied 11.9% full-year operating margin. In IT services, delivery capacity, employee utilization, wage costs and project mix are key determinants of whether that margin recovery can be achieved. The modest goodwill balance also indicates that the current earnings outlook is principally dependent on organic execution rather than a material acquisition-driven earnings contribution.

Financial Health

Financial health is strong. Current assets of ¥12.73bn exceeded current liabilities of ¥4.37bn by ¥8.36bn, producing working capital of ¥8.36bn. The current ratio of 291.2% and quick ratio of 289.8% are well above healthy benchmarks and indicate ample near-term liquidity. Cash and deposits totaled ¥7.45bn, representing 42.9% of total assets and substantially exceeding total interest-bearing debt of ¥0.40bn. Cash covered short-term debt by 70.96x. Debt/capital was only 3.1%, while the reported debt-to-equity ratio was 0.37x, both consistent with a conservative capital structure. Short-term loans were only ¥0.11bn and long-term loans ¥0.30bn, so maturity mismatch risk is limited given the cash position and current-asset base. Interest coverage of 184.93x further supports substantial debt-servicing capacity. Equity totaled ¥12.71bn, financing 73.1% of assets. Goodwill declined ¥0.16bn, or 33.3% YoY, to ¥0.33bn; at 0.3% of equity and 0.2% of assets, it is immaterial to balance-sheet resilience and creates limited impairment sensitivity. Total assets declined ¥2.07bn YoY to ¥17.39bn, while total liabilities decreased ¥1.30bn to ¥4.67bn and equity declined ¥0.77bn to ¥12.71bn. The liability reduction was concentrated in current liabilities, which fell ¥1.22bn YoY, including a ¥1.00bn reduction in the bonus provision. Property, plant and equipment remained substantial at ¥3.52bn, or 20.2% of assets, with buildings and land comprising the bulk of the balance.

Notable B/S Changes

Total assets: -¥2.07bn (-10.7%) to ¥17.39bn - balance-sheet scale declined, led by lower current-asset balances. Total liabilities: -¥1.30bn (-21.8%) to ¥4.67bn - reduced obligations strengthened the already conservative capital structure. Current liabilities: -¥1.22bn (-21.9%) to ¥4.37bn - liquidity improved further as current assets remained ¥12.73bn. Provision for bonuses: -¥1.00bn (-67.2%) to ¥0.49bn - a substantial reduction in the operating-liability balance that should be monitored alongside personnel-cost and utilization trends. Goodwill: -¥0.16bn (-33.3%) to ¥0.33bn - the decrease further limits acquisition-accounting and impairment exposure. Total equity: -¥0.77bn (-5.7%) to ¥12.71bn - equity remains the dominant funding source at 73.1% of total assets.

Cash Flow Quality

Dividend Sustainability

The revised FY2027 dividend forecast is ¥80.00 per share, and management has announced a change in policy introducing progressive dividends together with a revised target payout ratio. Based on forecast EPS of ¥171.01, the implied dividend payout ratio is approximately 46.8%. This is below the 60% sustainability benchmark and leaves a meaningful earnings retention buffer. The forecast dividend equates to approximately ¥1.34bn based on 16.72 million issued shares, before considering treasury shares. The company's ¥7.45bn cash balance and low ¥0.40bn interest-bearing debt provide substantial balance-sheet support for the planned distribution. Dividend sustainability nevertheless remains linked to delivery of the ¥2.84bn full-year net-income forecast, as Q1 net income represented only 13.8% of that target. The adoption of a progressive-dividend policy increases the importance of maintaining margin recovery and earnings durability through the remainder of the fiscal year.

Risk Assessment

Business risks include Profitability risk is elevated because SG&A grew 16.3% YoY, materially faster than 7.0% revenue growth, reducing operating margin by approximately 139bp., The company operates in a single software-related segment, concentrating performance exposure in IT-services demand, project delivery execution and customer spending trends., Industry-specific IT-services risk includes shortages of skilled engineers, wage inflation and lower utilization rates, each of which can pressure project margins and delay the forecast margin recovery., Competitive pricing and unfavorable project mix could prolong the gross-margin compression, with Q1 gross margin already down approximately 30bp YoY..

Financial risks include Near-term liquidity and refinancing risk are low, given the 291.2% current ratio, ¥7.45bn cash balance, 70.96x cash-to-short-term-debt coverage and 3.1% debt/capital ratio., The main financial execution risk is forecast absorption: operating income must accelerate materially from Q1's 14.0% progress rate to achieve the ¥3.85bn annual target., A progressive-dividend framework raises the sensitivity of future capital allocation to any sustained earnings shortfall, although the forecast payout ratio of 46.8% remains moderate..

Key concerns include Highest priority: whether SG&A growth moderates and operating margin recovers from 7.3% toward the 11.9% margin implied by full-year guidance., High priority: whether sales growth accelerates from 7.0% in Q1 to support the 10.9% full-year revenue-growth forecast., Moderate priority: monitoring the conversion of the large Q1 bonus provision reduction and other operating-balance movements into sustainable operating performance., Low priority: goodwill impairment risk, because goodwill is only ¥0.33bn and represents 0.3% of equity..

Investment Implications

Key takeaways include Revenue growth remained positive at 7.0% YoY, but Q1 earnings declined as the cost base expanded faster than sales., Operating margin of 7.3% is below the full-year implied 11.9%, placing substantial weight on second-half operating leverage., The annualized ROE of 12.3% is respectable and is supported by efficient asset utilization rather than aggressive leverage., The balance sheet is a major strength, with net cash, strong liquidity and low debt/capital of 3.1%., The revised ¥80.00 dividend forecast implies a moderate 46.8% forecast payout ratio under the new progressive-dividend policy..

Metrics to watch include Quarterly revenue growth relative to the 10.9% full-year forecast, Operating margin and SG&A-to-sales ratio, Gross margin, project mix and delivery utilization, Operating-income progress versus the ¥3.85bn full-year target, Net-income progress versus the ¥2.84bn full-year target, Dividend coverage relative to forecast EPS and retained earnings.

Regarding relative positioning, The company combines good annualized ROE and unusually conservative liquidity and leverage characteristics with Q1 operating profitability that is currently below the stated good-margin benchmark. Relative performance through FY2027 will depend less on financing capacity and more on the pace at which IT-services revenue growth converts into improved utilization and SG&A leverage.