Pacific System Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥5.41B
• Operating Income: ¥328M
• Net Income: ¥223M
• EPS: ¥115.01

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

Pacific System Co., Ltd. (TSE: 38470) reported FY2026 Q2 consolidated results showing steady top-line expansion but softer profit flow-through and a sharp decline in bottom-line YoY. Revenue rose 9.1% YoY to ¥5,413m, while operating income increased 3.5% YoY to ¥328m, indicating margin pressure and/or higher operating costs. Gross profit was ¥1,323m, implying a gross margin of 24.4%, which supports the topline, but operating margin settled at 6.1% (¥328m/¥5,413m), signaling limited operating leverage in the half. Ordinary income was ¥329m, essentially flat vs operating income, suggesting minimal non-operating drag or lift in the period. Net income declined 23.6% YoY to ¥170m despite higher revenue, likely reflecting a normalizing tax burden and absence of prior-year non-recurring benefits; reported income tax was ¥105.7m. DuPont metrics indicate a modest ROE of 2.5%, driven by a 3.14% net margin, 0.564x asset turnover, and 1.41x financial leverage. Cash generation was strong relative to earnings: operating cash flow (OCF) of ¥448m equates to 2.63x net income, indicating solid earnings quality and collection discipline in the half. The balance sheet appears robust: total assets of ¥9,590m and total equity of ¥6,812m imply an equity ratio around 71% (derived), despite the equity ratio field showing 0.0% (likely undisclosed). Liquidity is comfortable with a current ratio of 261.6% and quick ratio of 259.5%, reflecting minimal inventory intensity (inventories ¥54m). Leverage is conservative, with total liabilities of ¥3,069m and an implied debt-to-equity of 0.45x; interest expense was only ¥0.7m, yielding an exceptional interest coverage of ~440x. EBITDA was ¥550m (10.2% margin), supported by ¥222m of D&A, consistent with an asset-light systems integration model with ongoing software and equipment amortization. The downtick in net profit despite revenue growth signals cost inflation (notably personnel) and/or a less favorable project mix, and a higher effective tax rate versus the prior year. Free cash flow and cash balances were not disclosed (reported as zero), limiting conclusions on capital allocation and cash runway, though balance sheet strength mitigates immediate concern. Dividend details (DPS, payout) were shown as zero and should be treated as not disclosed rather than truly nil; policy visibility is thus limited. Overall, the company exhibits resilient topline growth, strong liquidity, and high cash conversion, but faces margin headwinds and lower YoY net profit in the half, with seasonality and tax effects likely influencing the interim profile.

Profitability Analysis

ROE decomposition: Reported ROE is 2.5%, driven by net margin of 3.14%, asset turnover of 0.564x, and financial leverage of 1.41x (Assets/Equity ≈ ¥9,590m/¥6,812m). The operating margin is ~6.1% (¥328m/¥5,413m), with minimal non-operating impact as ordinary income is essentially equal to operating income. Gross margin is 24.4%, implying a cost-of-sales intensity typical of SI and software development, but the conversion to operating margin suggests SG&A pressure (e.g., wage inflation, subcontracting, or sales mix). EBITDA margin at 10.2% and D&A of ¥222m indicate meaningful non-cash charges; EBIT/EBITDA bridge shows depreciation pressure on operating margin. Operating leverage appears modest this half: revenue +9.1% YoY versus operating income +3.5% YoY indicates margin compression and/or higher fixed cost absorption. Net income fell 23.6% YoY despite ordinary income stability, implying tax normalization and/or non-recurring items in the base period rather than core profitability deterioration. Interest burden is negligible (interest expense ¥0.7m, ~440x coverage), so financing costs are not a constraint. Overall, profitability quality is adequate at the gross level but constrained at the operating level by cost structure and mix; the DuPont profile highlights that ROE is primarily limited by low net margin and modest asset turnover, not leverage.

Growth Assessment

Revenue growth of 9.1% YoY to ¥5,413m suggests healthy demand and/or backlog execution in core SI and software projects. However, operating income growth of only 3.5% and the decline in net income (-23.6%) indicate that growth did not translate proportionally into profits due to cost inflation, mix, or project timing. Ordinary income in line with operating income points to growth being driven by core operations rather than financial income. The effective tax charge (income tax ¥105.7m) appears elevated relative to net income, contributing to the YoY net decline. Revenue sustainability is supported by minimal inventory exposure (¥54m) and the nature of service delivery; however, visibility into order backlog and book-to-bill is not provided, limiting forward assessment. EBITDA growth and cash conversion (OCF/NI 2.63x) indicate that realized revenue is translating into cash, supporting the quality of growth. Outlook-wise, if wage pressure persists and fixed-price project share remains high, margins could remain constrained despite sales expansion; conversely, improved pricing and mix (e.g., higher-margin solutions/maintenance) could restore operating leverage in H2, which is typically stronger seasonally for SIers.

Financial Health

Liquidity is strong: current assets ¥6,740m vs current liabilities ¥2,576m yield a current ratio of 261.6% and quick ratio of 259.5%, indicating low working-capital risk. Working capital stands at ¥4,163m, providing operational flexibility. Solvency appears solid with total equity of ¥6,812m and total liabilities of ¥3,069m; the implied equity ratio is ~71% (derived) and debt-to-equity 0.45x. Interest expense is de minimis at ¥0.7m, and interest coverage is ~440x, indicating negligible financial stress. Cash and equivalents were reported as zero (likely undisclosed), so absolute liquidity buffers cannot be quantified from the provided data; however, the overall balance sheet mix and low leverage reduce refinancing risk. No details on long-term debt composition, maturities, or covenants are given; based on low interest expense, borrowings (if any) appear small.

Cash Flow Quality

Earnings quality is strong in this half: OCF of ¥447.7m is 2.63x net income of ¥170m, indicating robust cash conversion and likely favorable collections/unbilled billing progress. EBITDA of ¥550m vs OCF of ¥448m suggests limited working-capital drag and manageable non-cash items. Investing cash flow is shown as zero (likely not disclosed), preventing calculation of free cash flow; the provided FCF figure of zero should be treated as a placeholder, not an actual value. D&A of ¥222m implies ongoing asset and software amortization; without capex disclosure, we cannot assess reinvestment intensity or maintenance versus growth spend. Working capital position is strong with low inventories and sizable receivables/payables base implied by the current asset/liability mix; however, the composition (unbilled receivables, contract assets) is not disclosed, adding uncertainty to durability of cash conversion. Overall, cash flow quality in the period is above earnings, but full-year sustainability depends on H2 collections and capex cadence.

Dividend Sustainability

Dividend per share and payout ratio are shown as 0.00 and 0.0%, which likely reflect undisclosed figures rather than actual zero. With net income of ¥170m and strong interim OCF of ¥448m, the company appears to have capacity for distributions, but the absence of cash balance, historical dividend policy, and capex needs precludes a firm assessment. On a qualitative basis, the robust liquidity (current ratio 262%) and low leverage (D/E 0.45x) would support dividend sustainability if a policy exists. FCF coverage cannot be assessed because investing cash flow is not disclosed; the reported FCF coverage of 0.00x should be treated as not available. Policy outlook remains unclear; investors should look for guidance in the full-year results and shareholder returns policy disclosures.

Risk Assessment

Business Risks:

• Project execution and fixed-price contract risk leading to margin variability
• Engineer wage inflation and subcontractor cost increases pressuring gross and operating margins
• Client IT spending cycles and potential delays in orders or acceptances
• Concentration in key customers or public-sector projects (not disclosed) impacting revenue stability
• Seasonality with back-half weighting potentially amplifying H2 delivery risk
• Talent retention and utilization risk in a tight labor market

Financial Risks:

• Limited disclosure of cash and investing cash flows reduces visibility on FCF and liquidity buffers
• Potential working-capital swings from unbilled receivables and milestone billing
• Tax rate volatility affecting net income and ROE
• Exposure to interest rate changes is likely low given minimal interest expense, but not fully disclosed

Key Concerns:

• Net income declined 23.6% YoY despite 9.1% revenue growth, indicating margin and/or tax pressure
• Operating leverage is muted with operating income up only 3.5% YoY
• Dividend policy and capital allocation remain unclear due to undisclosed items (cash, capex, DPS)

Investment Implications

Key Takeaways:

• Solid topline growth (+9.1% YoY) but weaker flow-through to operating profit (+3.5% YoY)
• ROE modest at 2.5%, constrained mainly by low net margin (3.14%) and moderate asset turnover (0.564x)
• Strong interim cash conversion (OCF/NI 2.63x) supports earnings quality
• Balance sheet appears conservative with implied equity ratio ~71% and D/E 0.45x
• Interest burden negligible (coverage ~440x), leaving room to invest or return capital if policy permits

Metrics to Watch:

• Order backlog and book-to-bill for visibility into H2 and next fiscal year
• Gross margin and SG&A ratio to assess cost inflation and pricing power
• Share of fixed-price projects and project delivery KPIs (rework, acceptance timing)
• Headcount, subcontracting ratio, and personnel cost growth
• Tax rate normalization relative to pre-tax profit
• Capex and investing cash flows to derive true FCF
• Cash and equivalents and net cash position
• Dividend policy updates and payout intentions

Relative Positioning: Appears to be a conservatively financed domestic SI/software player with strong liquidity and cash conversion but modest profitability and ROE relative to leading Japanese IT services peers; performance hinges on cost control, project mix, and securing higher-margin solution and maintenance revenues.

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
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