Keyware Solutions Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥10.72B
• Operating Income: ¥300M
• Net Income: ¥225M
• EPS: ¥26.88

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

Verdict: A solid rebound quarter with sharp operating profit recovery and strong cash conversion, albeit with still modest margins and low capital efficiency. Revenue rose 8.2% YoY to 107.21, supported by systems integration/services momentum. Operating income surged 534.8% YoY to 3.00, lifting operating margin to 2.8%. Ordinary income increased 35.3% YoY to 3.50, aided modestly by net non-operating gains of about 0.50 (non-op income 0.61 minus non-op expenses 0.11). Net income was 2.24, up 15.2% YoY, with an effective tax rate of 36.5% tempering bottom-line growth. Gross profit was 20.16, implying a gross margin of 18.8%. EBITDA was 4.25 (EBITDA margin 4.0%), indicating improving, yet still thin, profitability for an IT services mix. Operating margin expanded approximately 232 bps YoY (from ~0.48% to 2.8%), while net margin improved by roughly 13 bps to 2.09%. Cash flow quality was strong: operating CF of 9.20 was 4.11x net income, signaling low accruals and favorable working capital dynamics. The balance sheet is conservative with a current ratio of 286.5% and D/E of 0.40x, backed by cash and deposits of 24.57 and sizable accounts receivable of 52.67. ROE stands at 3.0% via DuPont (Net margin 2.1% × Asset turnover 1.014 × Financial leverage 1.40x), reflecting margin constraints and light leverage. ROIC is 3.7%, below the 5% warning threshold, highlighting capital efficiency as the key structural challenge. Non-operating income, chiefly dividends (0.39) and interest (0.02), contributed ~0.50 to ordinary income, a supportive but not dominant factor. SG&A at 17.15 equals 16.0% of sales, leaving a narrow operating spread versus gross margin; better utilization and pricing remain crucial. Dividend data are largely unreported, but a calculated payout ratio of 130.1% looks aggressive against earnings, though near-term cash generation could cover it. Looking ahead, sustaining higher operating margins and improving ROIC will be the main levers for value creation.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.0% = Net profit margin 2.1% × Asset turnover 1.014 × Financial leverage 1.40x. The largest change this quarter was the operating margin recovery, which expanded ~232 bps YoY to 2.8%, driving most of the improvement in profitability. Business drivers include mix/volume recovery in projects, better delivery execution, and lower relative SG&A drag versus last year’s weak base. Sustainability: part of the gain appears structural (utilization normalization), but margin durability hinges on wage inflation pass-through, delivery quality, and avoiding project overruns; thus partially sustainable but not guaranteed. Net margin improved modestly (~13 bps) as a higher tax take and thin non-operating tailwinds limited flow-through. Asset turnover around 1.0x is typical for a people-intensive SI model and likely stable. Financial leverage at 1.40x is conservative, leaving limited ROE uplift from gearing. Watch-outs: SG&A at 16.0% of revenue leaves a narrow buffer against a gross margin of 18.8%; any cost creep or pricing pressure could compress EBIT quickly. No evidence that SG&A growth exceeded revenue growth is available from reported data.

Growth Assessment

Revenue growth of 8.2% YoY indicates healthy demand recovery in core IT services. Operating income growth (+534.8% YoY) is partly a base effect but also reflects improved project profitability. Ordinary income benefited from non-operating gains (~0.50 net), though underlying operating profit is the primary driver. Net income grew 15.2% YoY despite a 36.5% tax rate, suggesting underlying operations improved materially. EBITDA margin at 4.0% remains modest; further scalability depends on utilization, rate increases, and higher value-added mix. With accounts receivable at 52.67 (about 49% of sales), revenue recognition appears in line with milestone-based billing; DSO management will be important to sustain OCF. With ROIC at 3.7% (<5% warning), growth needs to be accompanied by better margin/asset turns to be value-accretive. Outlook: if execution holds and wage cost inflation is passed through, mid-single-digit revenue growth with incremental margin improvement is plausible; however, thin gross-to-operating spread limits upside. Non-operating dividend income (0.39) adds stability but is not a core growth engine. Overall, growth sustainability is moderate, contingent on delivery discipline and pricing power.

Financial Health

Liquidity is strong: current ratio 286.5% and quick ratio 283.6% with cash and deposits of 24.57 versus current liabilities of 29.53. No explicit interest-bearing debt disclosed; reported D/E of 0.40x indicates conservative leverage using total liabilities. No red flags on solvency; total equity is 75.45 (equity ratio implied at ~71% if using liabilities provided). Maturity mismatch risk is low: current assets of 84.62 comfortably exceed current liabilities of 29.53, and cash plus receivables (77.24) cover short-term obligations 2.6x. Accounts payable at 9.39 versus receivables at 52.67 is typical for SI businesses and suggests limited supplier financing risk. Noncurrent liabilities are minimal (0.71). No off-balance sheet obligations were reported in the data provided. Explicit warnings: none triggered (Current Ratio well >1.0, D/E well <2.0).

Cash Flow Quality

OCF of 9.20 is 4.11x net income (2.24), indicating high-quality earnings with favorable working capital contribution and low accruals. Capex was modest at 0.36, suggesting an asset-light model; a capex-only FCF proxy equals ~8.84, though full investing CF was unreported and could differ. Financing CF was -2.66, likely reflecting dividends and/or treasury activities (details unreported). OCF comfortably covers operating needs and, based on available data, would cover capex and typical dividend outlays. No clear signs of working capital manipulation are evident; the high OCF relative to NI suggests collections were strong and/or payables management was favorable. Sustainability: OCF stability will hinge on maintaining DSO and avoiding large milestone timing swings.

Dividend Sustainability

Dividend details are largely unreported, but the calculated payout ratio of 130.1% appears high versus earnings for the period. Given robust OCF, near-term cash coverage looks adequate; however, paying above earnings is not sustainable over a full year without continued strong cash conversion or higher profits. FCF coverage is not fully calculable due to missing investing CF details; using a capex-only proxy, cash coverage would be comfortable this period. Policy outlook likely targets stable or gradually rising dividends, but sustainability requires improving net margins and ROIC to bring payout toward or below 60% over time. Monitoring guidance, full-year earnings, and year-end cash generation will be key.

Risk Assessment

Business Risks:

• Project execution risk leading to cost overruns and margin erosion
• Wage inflation and talent retention pressures impacting SG&A and delivery costs
• Pricing pressure from large enterprise/public-sector clients
• Seasonality and milestone timing causing earnings and OCF volatility
• Customer concentration risk typical in SI engagements (not disclosed but common)

Financial Risks:

• Low ROIC at 3.7% below 5% warning threshold, indicating capital efficiency risk
• Potential cash flow timing risk due to large accounts receivable balance (52.67)
• Dividend payout (130.1% calculated) exceeding earnings if maintained

Key Concerns:

• Thin gross-to-operating margin spread (18.8% vs 16.0% SG&A) leaves limited buffer
• High effective tax rate (36.5%) dampens net profit scalability
• Dependence on modest non-operating income (dividends/interest) to support ordinary income (~0.50 contribution) though not excessive
• Data limitations on debt, detailed SG&A breakdown, and investing cash flows

Investment Implications

Key Takeaways:

• Earnings rebound with operating margin expansion to 2.8% and net income +15.2% YoY
• Very strong cash conversion (OCF/NI 4.11x) indicative of high earnings quality
• Balance sheet conservative with current ratio 286.5% and low leverage (D/E 0.40x)
• Capital efficiency is the main overhang: ROIC 3.7% and ROE 3.0% remain low
• Dividend affordability hinges on sustaining strong OCF given a 130% payout indication

Metrics to Watch:

• Operating margin trajectory and SG&A ratio vs revenue
• DSO and accounts receivable trends; OCF/NI ratio sustainability
• ROIC improvement (targeting >5% first, then 7–8%)
• Order backlog and book-to-bill (unreported) as demand indicators
• Effective tax rate normalization and non-operating income reliance

Relative Positioning: Within Japan IT services/SI peers, the company shows improving profitability and superior cash conversion this quarter with a conservative balance sheet, but it trails best-in-class peers on ROIC and operating margin; execution on utilization and pricing will determine convergence toward sector averages.

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