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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