I'LL (3854) FY2026 Q2 Earnings Report

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Executive Summary

FY2026 Q2 results: Revenue 103.6B yen (YoY +12.1%), Operating Income 28.3B yen (YoY +25.3%), Ordinary Income 28.5B yen (YoY +27.5%), Net Income 19.6B yen (YoY +27.2%). The company demonstrated strong profit growth outpacing revenue expansion, driven by margin improvement with gross profit margin at 57.4% and operating margin at 27.3%. Operating income increased 5.7B yen YoY while SG&A expenses rose only 2.6B yen, indicating effective operating leverage. ROE reached 15.8% with equity ratio of 71.6%, reflecting both profitability and financial stability. However, working capital efficiency shows areas warranting attention, with receivables turnover at 189 days and cash conversion cycle at 148 days suggesting delayed cash realization despite strong profit figures.

Performance Drivers

Revenue grew 11.2B yen YoY to 103.6B yen, representing 12.1% growth. Without segment breakdowns disclosed, revenue growth drivers cannot be specified by business line, though the company operates in a single segment structure. Cost of sales increased 2.9B yen to 44.1B yen, growing at a slower rate than revenue, which contributed to gross profit expansion of 8.3B yen to 59.5B yen. Gross margin improved to 57.4% from 55.4% YoY, gaining 2.0 percentage points. This margin expansion at the gross profit level provided substantial operating leverage.

SG&A expenses rose 2.6B yen to 31.2B yen, but the ratio to revenue declined to 30.1% from 30.9% YoY, indicating improved expense efficiency relative to sales. The combination of higher gross margins and controlled SG&A led to operating income growth of 5.7B yen, reaching 28.3B yen with operating margin of 27.3%, up 2.5 percentage points from 24.5% YoY.

Non-operating income totaled 0.2B yen while non-operating expenses were minimal at 0.3M yen, resulting in a modest net non-operating contribution of 0.2B yen. Interest income of 62M yen and commission fees of 9M yen were the primary non-operating items. The gap between operating income (28.3B yen) and ordinary income (28.5B yen) was marginal at 0.2B yen, confirming profits are predominantly operating-driven.

Income tax expense totaled 8.9B yen (current tax 8.8B yen, deferred tax 0.2B yen), representing an effective tax rate of 31.4% against profit before tax of 28.5B yen. Net income reached 19.6B yen, up 4.2B yen or 27.2% YoY. Extraordinary loss of 6M yen from asset disposal was immaterial. This represents a revenue up/profit up pattern with profit growth significantly exceeding revenue growth due to margin expansion.

Key Metrics

[Profitability] ROE 15.8% demonstrates strong return on shareholder equity, calculated from net profit margin 18.9%, asset turnover 0.600, and financial leverage 1.40x. Operating margin of 27.3% increased 2.5 percentage points from 24.5% YoY, reflecting successful conversion of revenue growth into operating profit. Gross profit margin of 57.4% improved 2.0 percentage points YoY, indicating pricing power or favorable cost structure. EBIT margin at 27.3% aligns with operating margin as no adjustments were required. [Cash Quality] Cash and deposits totaled 88.5B yen, representing 51.2% of total assets and providing strong liquidity coverage. Short-term investment securities of 1.0B yen supplement liquid assets. Combined liquid assets of 89.5B yen provide 30.0x coverage of current liabilities at 29.8B yen. However, receivables turnover reached 189 days, significantly elevated and suggesting extended collection periods. Work in process of 92M yen and merchandise inventory of 0.1B yen are modest relative to revenue scale. [Investment Efficiency] Asset turnover of 0.600 indicates revenue generation of 0.60 yen per yen of assets deployed. Total assets increased to 172.8B yen from 157.7B yen, growing 9.6% compared to revenue growth of 12.1%, showing reasonable asset productivity. Intangible assets totaled 8.7B yen including software of 6.4B yen and software in progress of 2.3B yen, reflecting ongoing technology investments. [Financial Health] Equity ratio of 71.6% remained stable YoY, indicating conservative capital structure. Current ratio of 490.6% and quick ratio of 485.8% demonstrate exceptional short-term solvency. Debt-to-equity ratio of 0.40x reflects minimal leverage with total liabilities of 49.1B yen against equity of 123.7B yen. Net defined benefit liability of 11.7B yen represents the primary non-current obligation. Interest-bearing debt appears negligible with interest expense of only 2M yen. Retained earnings increased to 116.5B yen from 104.4B yen, accumulating 12.1B yen during the period.

Cash Flow Analysis

Cash and deposits increased 14.5B yen YoY to 88.5B yen, representing 19.6% growth and confirming strong cash accumulation. Operating profit growth of 5.7B yen and net income of 19.6B yen contributed to this cash build. Trade receivables increased 1.3B yen to 53.7B yen, growing at a slower rate than revenue, though absolute receivable days remain elevated at 189 days. Inventories decreased 0.5B yen to 0.1B yen, indicating efficient inventory management. Trade payables decreased 1.3B yen to 5.1B yen, suggesting earlier supplier payments or changes in procurement timing. The combination of cash accumulation, rising receivables, and declining payables indicates cash is being generated but conversion from sales remains extended. Working capital composition shows current assets of 146.0B yen against current liabilities of 29.8B yen, providing net working capital of 116.2B yen, up 10.5B yen YoY. Provisions for bonuses increased marginally to 1.3B yen and net defined benefit liability rose to 11.7B yen from 11.2B yen, reflecting normal accrual patterns. The substantial cash position of 30.0x short-term debt coverage indicates robust liquidity to support operations and shareholder returns despite extended receivable collection periods.

Earnings Quality

Ordinary income of 28.5B yen versus operating income of 28.3B yen shows non-operating net contribution of approximately 0.2B yen or 0.2% of revenue. This comprises primarily interest income of 62M yen and commission fee income of 9M yen, offset by minimal interest expense of 2M yen and commission fees paid of 1M yen. Non-operating items represent less than 1% of revenue and ordinary income, confirming the core earnings are predominantly operating-driven with negligible financial or non-core contributions. Comprehensive income totaled 19.2B yen compared to net income of 19.6B yen, with other comprehensive loss of 0.4B yen primarily from remeasurements of defined benefit plans at -39M yen and negligible valuation differences on securities. The minimal gap between comprehensive and net income indicates earnings are not significantly affected by unrealized gains or translation adjustments. Accumulated other comprehensive income stood at 140M yen, down from 179M yen YoY due to remeasurement adjustments. The effective tax rate of 31.4% is within normal corporate tax range. Extraordinary loss of 6M yen from asset disposal represents only 0.03% of profit before tax and is clearly non-recurring. Operating income growth of 25.3% substantially exceeded revenue growth of 12.1%, driven by margin expansion rather than financial engineering or one-time gains. However, the absence of cash flow statement data prevents direct verification of earnings quality through operating cash flow to net income comparison, which would typically confirm cash backing of reported profits.

Guidance Update

Full-year guidance targets revenue of 207.0B yen (YoY +7.3%), operating income of 55.0B yen (YoY +14.1%), and ordinary income of 55.4B yen (YoY +16.2%). At the H1 midpoint, actual revenue of 103.6B yen represents 50.0% progress against full-year target, operating income of 28.3B yen represents 51.5% progress, and ordinary income of 28.5B yen represents 51.4% progress. All metrics track in line with or slightly ahead of standard H1 benchmark of 50%, suggesting guidance is achievable assuming normal H2 seasonality. The company revised both earnings forecast and dividend forecast this quarter as disclosed. Net income guidance of 40.5B yen implies H1 net income of 19.6B yen represents 48.4% progress, slightly below the 50% benchmark but within normal variance. EPS forecast of 161.95 yen for the full year compares to H1 actual of 78.22 yen, tracking proportionally. Operating margin guidance of 26.6% for full year (55.0B yen / 207.0B yen) compares favorably to H1 actual of 27.3%, though H2 margins may normalize lower. The forecast assumes continued revenue growth momentum moderated from H1's 12.1% pace to full-year 7.3%, which may reflect planned investments or seasonal factors in H2. No order backlog data is available to assess forward revenue visibility. Overall progress rates indicate guidance is on track with H1 slightly outperforming, though H2 execution and margin maintenance remain key to achieving full-year targets.

Shareholder Returns

The company paid an interim dividend of 32.00 yen per share for Q2. Full-year dividend forecast is 34.00 yen per share as revised during this quarter. Based on H1 net income of 19.6B yen and shares outstanding of 25,043K (excluding treasury stock of 43K), annualizing the interim dividend of 32.00 yen results in an interim annualized payout ratio of approximately 41.0%. Against the full-year net income guidance of 40.5B yen and dividend forecast of 34.00 yen, the projected payout ratio is 21.0%, indicating conservative distribution policy with substantial earnings retention. The dividend forecast of 34.00 yen per share compares to the prior year's 20.00 yen per share (as reference data shows Q2 dividend of 32.00 yen versus prior comparison of 20.00 yen), representing 70.0% dividend growth if achieved. This substantial dividend increase reflects strong earnings growth and improved cash position. No share buyback activity is disclosed in the available data. Total shareholder return ratio based on forecasted dividends alone would be 21.0% of net income, with the remaining 79.0% retained for reinvestment or balance sheet strengthening. The company's substantial cash reserves of 88.5B yen and strong operating profitability provide ample coverage for the dividend commitment even with the announced increase.

Risk Factors

Revenue concentration risk from single segment operations with limited diversification, exposing the company to sector-specific demand fluctuations and competitive pressures without offsetting business lines. Extended receivables collection period of 189 days creates meaningful working capital risk and potential credit exposure, as 53.7B yen in trade receivables represents 51.8% of revenue and delays cash realization despite strong profit recognition. Elevated work-in-process balances and cash conversion cycle of 148 days indicate project execution and revenue recognition timing risks, particularly if customer acceptance or project completion milestones extend beyond expected timelines, potentially affecting cash flow predictability and requiring working capital financing.

Industry Benchmark (Reference - Proprietary Data)

[Industry Position] (Reference - Proprietary Analysis)

Profitability: ROE 15.8% substantially exceeds industry median of 5.6% for IT/Telecom sector (2025-Q2, n=7), placing the company in the top quartile. Operating margin of 27.3% significantly outperforms industry median of 14.0% (IQR: 3.8%-18.5%), demonstrating superior operational efficiency. Net profit margin of 18.9% is more than double the industry median of 9.2% (IQR: 1.1%-14.0%), confirming strong profitability positioning.

Financial Health: Equity ratio of 71.6% exceeds industry median of 60.2% (IQR: 50.8%-88.4%), indicating conservative capitalization. Current ratio of 490.6% is substantially below industry median of 774% (IQR: 316%-809%), though still represents strong liquidity with nearly 5x coverage of current liabilities. Financial leverage of 1.40x is below industry median of 1.55 (IQR: 1.13-1.76), reflecting lower use of debt financing.

Efficiency: Asset turnover of 0.600 exceeds industry median of 0.35 (IQR: 0.29-0.37), demonstrating more effective asset utilization. However, receivables turnover of 189 days significantly exceeds industry median of 117 days (IQR: 82-168 days), indicating slower collection compared to peers. Operating working capital turnover of 148 days compares to industry median of 115 days (IQR: 66-177 days), showing room for improvement in working capital management.

Growth: Revenue growth of 12.1% YoY is below industry median of 21.0% (IQR: 15.5%-26.8%), suggesting more moderate expansion relative to sector peers. EPS growth of 25.6% YoY is below industry median of 35.0% (IQR: 12%-47%), though still represents strong earnings expansion.

Returns: Return on assets of 11.3% (calculated from net profit margin 18.9% x asset turnover 0.600) significantly exceeds industry median of 1.9% (IQR: 0.4%-5.1%), reflecting superior asset productivity and profitability combination. Return on invested capital positioning is strong relative to industry median of 11% (IQR: 2%-29%).

(Industry: IT/Telecom sector, Comparison: 2025-Q2 benchmarks with 4-7 companies depending on metric, Source: Proprietary analysis)

Key Takeaways from Earnings

Superior profitability metrics with ROE of 15.8% and operating margin of 27.3% position the company in the top tier of IT/Telecom sector performance, driven by sustainable gross margin advantage of 57.4% and effective operating leverage as demonstrated by operating income growth of 25.3% exceeding revenue growth of 12.1%. The 70% dividend increase to forecasted 34.00 yen per share reflects management confidence in earnings sustainability and cash generation capacity, supported by substantial cash reserves of 88.5B yen representing 51% of total assets. Working capital management represents the primary operational challenge, with receivables collection period of 189 days significantly exceeding both prior year and industry median of 117 days, creating extended cash conversion cycle of 148 days that delays realization of strong reported earnings into cash flow and warrants monitoring for potential impact on future investment capacity and shareholder returns sustainability.

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This report was automatically generated by AI analyzing XBRL earnings data as an earnings analysis tool. This is not a recommendation to invest in any specific security. Industry benchmarks are reference information compiled from publicly available earnings data. Please make investment decisions at your own responsibility and consult professionals as needed.

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AI Financial Analysis

Executive Summary

FY2026 Q2 was a strong interim performance, with revenue growth translating into materially faster profit growth and further margin expansion. Revenue increased 12.1% YoY to ¥10.36bn. Operating income increased 25.3% YoY to ¥2.83bn. Ordinary income rose 27.5% to ¥2.85bn. Net income increased 27.2% to ¥1.96bn. Gross profit rose to ¥5.95bn, producing a gross margin of 57.4%. Gross margin expanded by approximately 200bp from 55.4% in the prior-year period. Operating margin improved by approximately 290bp to 27.3% from 24.5%. Net margin expanded by approximately 230bp to 18.9% from 16.6%. SG&A expense growth was approximately 9.0% YoY, below the 12.1% revenue growth rate, demonstrating favorable operating leverage. Ordinary income exceeded operating income by only ¥0.02bn, indicating that earnings were primarily generated by operations rather than non-operating items. The effective tax rate was 31.4%, and the tax burden factor of 0.686 was the main reduction from pre-tax income to net income. The balance sheet remains highly liquid, with cash and deposits of ¥8.85bn and a current ratio of 490.6%. Full-year revenue guidance of ¥20.70bn is 50.0% complete at Q2, while operating-income progress is 51.5%, modestly ahead of the standard 50% interim pace. Full-year net-income progress is 48.3%, broadly consistent with the annual plan. The revised annual DPS forecast of ¥66 implies a dividend payout ratio of approximately 40.8%, consistent with the 41.0% interim payout ratio. The principal operating watchpoint is collection discipline, as the reported DSO of 95 days is elevated for an IT services company. A second execution watchpoint is the quality alert identifying work in process as 100.0% of inventory, which warrants close monitoring of project completion, acceptance, and potential cost overruns. Overall, the interim results support a picture of profitable growth, strong capital generation capacity before cash-flow confirmation, and a conservative liquidity position.

Profitability Analysis

The reported annualized DuPont ROE is 31.6%, composed of a net profit margin of 18.9%, annualized asset turnover of 1.199x, and financial leverage of 1.40x. The dominant driver of return quality is profitability rather than balance-sheet leverage: the 18.9% net margin is well above the 10% excellent benchmark, while leverage remains moderate. Operating margin expanded to 27.3% from approximately 24.5% a year earlier, a roughly 290bp improvement, and gross margin increased by roughly 200bp to 57.4%. This combination indicates that revenue growth was converted efficiently into gross profit and that SG&A growth was contained. SG&A rose by approximately 9.0% YoY to ¥3.12bn, slower than the 12.1% increase in sales, creating favorable operating leverage rather than cost-led profit growth. Operating income therefore increased 25.3% YoY, more than twice the rate of revenue growth. The five-factor DuPont tax burden was 0.686, reflecting a 31.4% effective tax rate. The interest burden was 1.007x, effectively neutral, because interest expense was immaterial relative to EBIT. Non-operating income was only ¥0.02bn, including ¥0.01bn of interest income, so ordinary income and operating income were closely aligned. There were no material extraordinary losses, supporting the recurring nature of reported profit. The annualized ROA, calculated using annualized interim net income and average total assets, is approximately 23.7%, also indicative of highly efficient asset utilization. Sustained margin performance will depend on preserving project delivery efficiency and containing personnel and development costs as the company scales.

Growth Assessment

Sales growth of 12.1% YoY to ¥10.36bn was accompanied by gross-profit growth of approximately 16.2% and operating-income growth of 25.3%, evidencing high incremental profitability. The stronger growth in gross profit than sales indicates improved gross-margin capture, while sub-revenue SG&A growth amplified the benefit at the operating line. Full-year revenue guidance calls for 7.3% growth to ¥20.70bn, below the first-half growth rate, and Q2 progress is exactly 50.0%. Full-year operating-income guidance calls for 14.1% growth to ¥5.50bn, and first-half progress of 51.5% is 1.5 percentage points ahead of the normal 50% pace. Full-year ordinary-income progress is 51.4% against guidance of ¥5.54bn. Net-income progress is 48.3% against the ¥4.05bn forecast, slightly below the standard interim pace but not materially divergent. The guidance profile embeds some moderation in second-half revenue growth, while still anticipating operating-margin expansion for the full year. Revenue quality is supported by operating income representing virtually all ordinary income, rather than by investment gains or other non-operating contributions. Receivables of ¥5.37bn represent 31.1% of total assets and rose 2.6% YoY, while the reported DSO is 95 days. This elevated DSO is a material quality alert because cash collection may lag recognized project revenue; for IT services, it can reflect contract billing schedules, customer acceptance timing, or delayed collections. Its impact is to increase the importance of monitoring receivable aging and conversion of booked sales into cash. The high-WIP-ratio alert, reported at 100.0% of inventory, is relevant to project-based IT delivery because unfinished work can be exposed to specification changes, delayed acceptance, or cost-to-complete revisions. The impact of this alert is potential pressure on future gross margin if project execution deteriorates, despite the currently small absolute inventory balance.

Financial Health

Financial health is strong, led by substantial liquidity and a high equity base. Current assets were ¥14.60bn versus current liabilities of ¥2.98bn, resulting in a current ratio of 490.6% and working capital of ¥11.63bn. The quick ratio was similarly robust at 485.8%, reflecting the limited role of inventories in the asset base. Cash and deposits were ¥8.85bn, equivalent to 51.2% of total assets and almost 3.0x current liabilities. Total equity was ¥12.37bn, representing 71.6% of total assets, while liabilities represented 28.4%. The reported debt-to-equity ratio was 0.40x, comfortably below the 2.0x aggressive-leverage warning threshold. Current liabilities of ¥2.98bn are fully covered by cash alone, indicating no apparent near-term maturity mismatch. Noncurrent liabilities of ¥1.94bn include a net defined-benefit liability of ¥1.17bn and a provision for directors' retirement benefits of ¥0.53bn; these obligations should remain visible in assessment of long-term capital commitments. Retained earnings increased ¥1.21bn YoY to ¥11.65bn, reinforcing internally funded balance-sheet growth. Treasury stock increased in absolute magnitude from negative ¥0.10bn to negative ¥0.97bn, a change of approximately ¥0.87bn. This indicates capital deployment through share repurchases or treasury-share acquisition and reduces reported equity modestly, although the equity ratio remains very strong. Cash and deposits increased ¥1.45bn YoY to ¥8.85bn, supporting financial flexibility. Intangible assets were ¥0.87bn, or 5.0% of total assets, a low concentration that limits balance-sheet dependence on intangible-asset valuation.

Notable B/S Changes

Treasury stock: increased in absolute magnitude by approximately ¥0.87bn, from negative ¥0.10bn to negative ¥0.97bn (-830.7%) - indicates treasury-share acquisition/capital deployment; modestly reduces equity but remains immaterial to the strong 71.6% equity ratio. Retained earnings: +¥1.21bn (+11.5%) to ¥11.65bn - reflects continued earnings accumulation and supports internal funding capacity. Cash and deposits: +¥1.45bn (+19.6%) to ¥8.85bn - reinforces liquidity and provides substantial coverage of current liabilities. Net defined-benefit liability: +¥0.42bn (+3.7%) to ¥1.17bn - a significant absolute noncurrent obligation that remains relevant to long-term liability management.

Cash Flow Quality

Dividend Sustainability

The Q2 dividend was ¥32 per share, equivalent to a calculated interim payout ratio of 41.0% based on interim EPS of ¥78.22. The revised full-year dividend forecast is ¥66 per share, compared with forecast EPS of ¥161.95. This implies a full-year dividend-only payout ratio of approximately 40.8%, below the 60% sustainability benchmark. The forecast distribution level is therefore aligned with the current earnings profile and leaves a majority of forecast earnings available for retained capital. Retained earnings of ¥11.65bn and cash and deposits of ¥8.85bn provide a substantial balance-sheet buffer for the stated shareholder-return policy. The increase in treasury stock suggests that capital allocation also includes share repurchases; this should be assessed using a total return ratio rather than the dividend payout ratio when repurchase amounts are identified. The key practical condition for dividend durability is continued conversion of earnings into collections, given the elevated reported DSO.

Risk Assessment

Business risks include Project execution and acceptance risk: the reported high-WIP-ratio alert points to potential exposure to delayed delivery, scope changes, and cost-to-complete revisions in IT implementation work., Receivable collection risk: reported DSO of 95 days exceeds the 60-day quality-alert threshold, creating a risk that revenue recognition converts into cash more slowly than expected., IT-services industry risk: competition for skilled engineers can raise labor costs and constrain delivery capacity, potentially reversing the current favorable SG&A and operating-leverage trend., Technology and cybersecurity risk: changes in customer IT requirements, software-platform evolution, or security incidents could affect demand, project costs, and customer confidence..

Financial risks include Working-capital concentration risk: accounts receivable of ¥5.37bn account for 31.1% of total assets, making collection timing important despite the large cash balance., Defined-benefit and retirement-obligation risk: net defined-benefit liability of ¥1.17bn and directors' retirement provision of ¥0.53bn are meaningful noncurrent obligations., Capital-allocation risk: the increase in treasury stock indicates use of capital for repurchases; the sustainability of aggregate shareholder returns should be evaluated against future earnings and cash conversion..

Key concerns include Highest priority: sustain the 27.3% operating margin while growing revenue, particularly if personnel, subcontracting, or implementation costs accelerate., High priority: reduce or stabilize the 95-day DSO through disciplined billing, acceptance, and collections management., Moderate priority: monitor WIP completion and project profitability because the quality alert may foreshadow margin volatility if project costs rise., Moderate priority: assess whether second-half results can support the full-year plan, as revenue guidance assumes slower growth than the 12.1% first-half pace..

Investment Implications

Key takeaways include Revenue grew 12.1% YoY, while operating income grew 25.3% YoY, demonstrating strong operating leverage., Operating margin reached 27.3%, up approximately 290bp YoY, and net margin reached 18.9%, up approximately 230bp., Annualized ROE of 31.6% is driven primarily by high profitability and annualized asset turnover rather than aggressive leverage., Q2 progress against full-year guidance is 50.0% for sales, 51.5% for operating income, and 48.3% for net income., Liquidity is exceptionally strong, with ¥8.85bn of cash and a 490.6% current ratio., The principal financial-quality issue is the 95-day reported DSO, while the reported high-WIP-ratio alert adds project-execution sensitivity..

Metrics to watch include Receivable days and accounts-receivable aging, with reported DSO currently at 95 days, Gross margin and operating margin, currently 57.4% and 27.3%, respectively, SG&A growth relative to revenue growth, Project WIP, delivery milestones, acceptance timing, and provisions for loss on orders, Second-half operating-income conversion relative to ¥5.50bn full-year guidance, Dividend payout ratio and any disclosed share-repurchase amount for total-return analysis.

Regarding relative positioning, The company exhibits profitability metrics that are strong for an IT services business, including a 27.3% operating margin, 18.9% net margin, and 31.6% annualized ROE, alongside a notably conservative liquidity profile. Its relative weakness is not leverage or intangible-asset concentration, but working-capital efficiency: the reported 95-day DSO and high-WIP-ratio alert require monitoring to confirm that accounting earnings retain their operational cash-conversion quality.