CHANGE Holdings,Inc. FY2027 Q1 Earnings Report

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Executive Summary

The quarter recorded higher revenue but lower earnings, with the key factor being that rising expenses and non-operating factors placed pressure on profit relative to the momentum in revenue growth. Revenue increased to ¥108.9B (¥99.1B in the previous year, +9.9%), approaching double-digit growth; however, Operating Income declined substantially to ¥4.9B (¥6.1B in the previous year, -19.0%), while Net Income attributable to owners of the parent fell sharply to ¥1.0B (¥4.2B in the previous year, -76.7%). Although the gross margin improved to 46.3% from the previous year, SG&A expenses increased at a faster pace than revenue. In addition, the contraction in financial income and the increase in the effective tax rate significantly compressed Net Income.

Factors Affecting Business Performance

【Revenue】Revenue was ¥108.9B, up +9.9% year on year. By segment, Publitech continued to achieve strong growth, with revenue of ¥47.4B (+20.4%), while NEW-IT Transformation slowed to ¥61.1B (+2.3%). The revenue mix was NEW-IT 56.1% and Publitech 43.9%, indicating that Publitech is leading the growth profile.

【Profit and Loss】Operating Income was ¥4.9B, down -19.0% year on year, and the Operating Margin declined by 1.6pt to 4.5% from 6.1% in the previous year. While the gross margin improved to 46.3% (+0.6pt), the SG&A ratio increased to 42.1% (+1.6pt), offsetting the improvement. By segment, Publitech generated ¥9.3B in segment profit (+16.0%, 19.6% margin), serving as the main contributor to company-wide profit, while NEW-IT improved to ¥4.2B (+44.6%, 6.8% margin). However, company-wide expenses not allocated to either segment (adjustments) expanded from ¥4.8B in the previous year to ¥8.5B, placing pressure on the consolidated profit margin. Furthermore, Financial Income contracted to ¥0.7B (¥3.5B in the previous year), while Financial Expenses increased to ¥1.5B, resulting in Profit Before Tax of ¥4.0B (-50.9%). In addition, the effective tax rate rose to a high level (approximately 68%), reducing Net Income to ¥1.0B (-76.7%). Revenue increased while earnings declined.

Segment Analysis

Publitech generated revenue of ¥47.4B (+20.4%) and Operating Income of ¥9.3B (+16.0%), with a 19.6% margin, and is driving company-wide profit as a highly profitable segment. NEW-IT Transformation recorded revenue of ¥61.1B (+2.3%), representing moderate growth, while profitability improved, with Operating Income of ¥4.2B (+44.6%) and a 6.8% margin. There is a difference of nearly 13pt between the margins of the two segments, meaning that the segment mix has a significant impact on the consolidated profit margin. Against combined segment profit of ¥13.4B, company-wide expenses (adjustments) expanded to ¥8.5B (¥4.8B in the previous year), compressing consolidated Operating Income to ¥4.9B.

Key Financial Indicators

【Profitability】The Operating Margin declined to 4.5% from 6.1% in the previous year, while the Net Profit Margin also contracted to 0.9% (4.2% in the previous year). The gross margin improved to 46.3% from 45.7% in the previous year, suggesting an improvement in the project mix; however, this was offset by the increase in the SG&A ratio to 42.1%.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥24.5B, significantly exceeding consolidated Net Income of ¥1.3B, primarily due to progress in the collection of accounts receivable, which generated a ¥52.7B cash inflow. From an accrual perspective, cash generation exceeded earnings, indicating favorable earnings quality.【Investment Efficiency】ROE remained low at 0.2%, reflecting the sharp decline in the Net Profit Margin and the low total asset turnover ratio of 0.11 times. Capital expenditures were small at ¥0.7B, indicating that the investment burden remained at a conservative level.【Financial Soundness】The Equity Ratio improved to 45.6% from 44.3% in the previous year, and liquidity remained ample, with cash and cash equivalents of ¥244.4B against short-term borrowings of ¥60.1B. Meanwhile, goodwill of ¥295.4B represented 55.3% of net assets of ¥534.4B, indicating a high proportion of non-cash assets in the capital structure.

Cash Flow Analysis

Operating Cash Flow was ¥24.5B, a substantial increase of +96.5% year on year. The primary factor was a ¥52.7B cash inflow from progress in collecting accounts receivable, which absorbed a ¥19.2B decrease in trade payables and ¥20.4B in income taxes paid. Investing Cash Flow represented an outflow of ¥8.4B, primarily consisting of ¥4.7B for the acquisition of intangible assets and ¥1.7B for the acquisition of shares in subsidiaries; capital expenditures themselves remained small at ¥0.7B. Financing Cash Flow was an outflow of ¥33.5B, mainly comprising dividend payments of ¥15.8B and repayment of long-term borrowings of ¥15.1B. Free Cash Flow (Operating Cash Flow + Investing Cash Flow) was ¥16.1B, a level that almost covered dividend payments, confirming the company’s ability to generate funds without relying on external financing.

Earnings Quality

Recurring earnings were primarily generated by segment Operating Income (Publitech ¥9.3B and NEW-IT ¥4.2B), while the impact of non-recurring items was limited, with other income of ¥0.2B and other expenses of ¥0.0B. Meanwhile, non-operating income and expenses were affected significantly by the contraction in Financial Income to ¥0.7B from ¥3.5B in the previous year, which made a substantial contribution to the decline in Profit Before Tax. The effective tax rate was high at approximately 68%, serving as the primary factor compressing Net Income and suggesting the possibility of a temporary increase in the tax burden. The fact that Operating Cash Flow substantially exceeded Net Income (Operating Cash Flow of ¥24.5B versus Net Income of ¥1.3B) indicates favorable cash conversion of earnings. Accordingly, the low Net Income for the period can be interpreted as resulting from fluctuations in taxes and financial income and expenses, rather than non-cash factors. Comprehensive Income was ¥1.3B, approximately in line with Net Income of ¥1.3B, indicating limited temporary fluctuations from the valuation of other securities and similar items.

Shareholder Returns

The annual dividend forecast is ¥26.00 per share, with no revisions to either the earnings forecast or dividend forecast as of the current quarter. Dividend payments during the quarter amounted to ¥15.8B, which was almost fully covered by Free Cash Flow of ¥16.1B, indicating that dividends can be paid without relying on external financing. The Payout Ratio is high when calculated based on quarterly Net Income; however, this is a characteristic tendency of the initial quarter, when dividends are determined based on full-year earnings, and it should be evaluated against full-year Net Income. No data on share repurchases was available, and therefore the Total Return Ratio has not been calculated.

Risk Factors

1. High goodwill ratio: Goodwill of ¥295.4B accounts for 55.3% of net assets of ¥534.4B and 29.8% of total assets of ¥991.7B. If an impairment loss is recognized due to future changes in the business environment, the impact on earnings and capital could be significant.

2. Persistently high effective tax rate: The effective tax rate for the quarter was approximately 68% (¥2.7B in income taxes and other taxes / ¥4.0B in Profit Before Tax), representing a substantial increase from the previous year. If this is not a one-time factor, it could become a structural source of pressure on Net Income.

3. Declining interest coverage: Against EBIT of ¥4.9B, Financial Expenses were ¥1.5B, resulting in coverage of approximately 3.2 times. This has declined from the previous year, indicating limited resilience to rising interest rates and widening spreads.

Industry Benchmark (For Reference, Based on Our Research)

Industry Benchmark (it_telecom)

Profitability and Returns

The company’s profitability metrics, both Operating Margin and Net Profit Margin, are below the industry median, placing the company relatively low within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate was slightly above the industry median, placing the company in the middle to slightly upper range of the industry in terms of growth.

※Source: Based on our research

Key Points from the Earnings Results

1. The structure of higher revenue but lower earnings resulted from the combination of three factors: the expansion of company-wide expenses (adjustments), the reversal-related decline in Financial Income, and the high effective tax rate. At the individual business-segment level, both Publitech and NEW-IT improved their profits year on year.

2. Operating Cash Flow of ¥24.5B, substantially exceeding Net Income, was secured. The strong cash-generation capability resulting from progress in collecting accounts receivable is a notable contrast to the low Net Income for the period.

3. Goodwill continues to account for 55.3% of net assets, and the presence or absence of impairment losses and trends in the effective tax rate will remain important points to monitor in future earnings results when assessing earnings quality.

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by our company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and, where necessary, after consulting with a professional advisor.

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