TOHO SYSTEM SCIENCE (4333) FY2026 Q3 Earnings Report

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Executive Summary

Cumulative results for Q3 of the fiscal year ending March 2026 showed increases in both revenue and profit; however, the profit increase was primarily attributable to an improvement in the cost-of-sales ratio, while revenue growth remained limited. Revenue was ¥133.1B (+1.5% YoY), Operating Income was ¥12.6B (+7.5%), Ordinary Income was ¥12.7B (+7.1%), and Net Income was ¥8.6B (+7.0%). Expansion of DX projects in the non-life insurance and non-financial sectors contributed to revenue growth, while a decline in life insurance restrained revenue growth. The Operating Income margin improved to 9.5% from the previous year, as the increase in gross margin absorbed the rise in SG&A expenses.

Factors Affecting Performance

【Revenue】Revenue increased 1.5% YoY to ¥133.1B. In the core Software Development Business (revenue of ¥130.5B, +1.7% YoY), the life insurance sector declined ▲22.8%, while non-life insurance (+9.5%) and the non-financial sector (+10.8%, including communications at +11.9%) offset the decline and supported overall performance. Information Systems Services and other businesses generated ¥2.5B in revenue, a modest decline of ▲5.3% YoY, with a limited impact on overall results.

【Income】Operating Income was ¥12.6B (+7.5% YoY), Ordinary Income was ¥12.7B (+7.1%), and Net Income was ¥8.6B (+7.0%). The primary driver of profit growth was an improvement in the gross margin to 20.0% (+approximately 2.7pt YoY), supported by a decline in the cost-of-sales ratio. Meanwhile, SG&A expenses were ¥13.9B, up +27.1% YoY, substantially outpacing revenue growth, suggesting an impact from expenses related to the management integration and other factors. An impairment loss on retirement of fixed assets of ¥0.05B was recorded as an extraordinary loss, but its impact on Profit Before Tax was immaterial. The difference between Ordinary Income and Net Income was primarily attributable to corporate income taxes and other taxes (¥4.1B), rather than a temporary factor. In conclusion, the Company posted increases in both revenue and profit.

Segment Analysis

Software Development generated revenue of ¥130.5B, accounting for approximately 98% of total revenue, and is the core business. Within this business, non-life insurance (+9.5%) and the non-financial sector (+10.8%, led by communications at +11.9%) expanded, offsetting the decline in life insurance (▲22.8%) and contributing to revenue growth. Information Systems Services and other businesses were small in scale, with revenue of ¥2.5B (▲5.3% YoY), and had a limited impact on overall performance. Although segment-level operating income and loss were not disclosed, the receipt of large-scale migration projects in non-life insurance appears to have contributed to profitability as well.

Key Financial Indicators

Profitability: ROE 12.7% (no comparative data for the same period of the previous year), Operating Income margin 9.5% (9.0% in the previous year)
Cash quality: Operating Cash Flow (OCF) / Net Income ratio not disclosed
Investment efficiency: Tangible fixed assets increased +90.4% YoY (¥1.6B), indicating the possibility that the Company is in an investment phase
Financial soundness: Equity Ratio 69.7% (68.0% in the previous year), Current Ratio 645.1%

Cash Flow Analysis

As detailed data from the cash flow statement has not been disclosed, this section describes the situation to the extent that it can be inferred from the B/S. Cash and deposits were ¥89.5B, a slight decline from ¥91.7B in the same period of the previous year. Treasury stock was ¥17.6B, while retained earnings were ¥90.6B, an increase of ¥0.8B YoY, indicating that the accumulation of retained earnings is continuing. Tangible fixed assets increased +90.4% YoY, suggesting an expansion in capital investment, although the specific breakdown of investing cash flow is unknown.

Earnings Quality

The difference between Operating Income of ¥12.6B and Ordinary Income of ¥12.7B was only ¥0.07B, indicating that the contribution from non-operating income and expenses, primarily dividend income of ¥0.1B, was extremely limited. Non-operating income was less than 0.1% of revenue, and the core of earnings was generated by operating activities. The difference between Ordinary Income and Net Income was ¥4.1B, primarily attributable to corporate income taxes and other taxes, rather than a temporary extraordinary item. The extraordinary loss, consisting of a loss on retirement of fixed assets of ¥0.05B, was small and does not constitute a factor impairing earnings quality.

Earnings Forecast and Guidance

Progress against the full-year forecast (Revenue of ¥190.0B, Operating Income of ¥17.1B, Ordinary Income of ¥17.2B, and Net Income of ¥11.9B) was 70.0% for Revenue, 73.8% for Operating Income, 73.8% for Ordinary Income, and 72.2% for Net Income. Compared with the standard progress rate of 75%, Revenue was 5.0pt below that level, while the profit indicators were broadly in line with the standard. In Q4, the Company needs to accumulate approximately ¥57.0B in revenue and approximately ¥4.5B in Operating Income, implying a required Operating Income margin of approximately 7.9%, which is lower than the 9.5% recorded for cumulative Q3. Order backlog increased to ¥29.6B (+19.0% YoY), driven by non-life insurance (+78.8%) and communications (+19.0%), indicating favorable leading indicators despite the low revenue progress rate. The order backlog is equivalent to approximately 15.6% of annual revenue.

Shareholder Returns

The Q2 dividend was ¥20.00 per share. The full-year forecast dividend is ¥45.00 (the PDF materials also state an interim dividend of ¥20 plus a year-end dividend of ¥25, indicating a discrepancy between disclosures). The Payout Ratio based on cumulative Net Income was 48.2%, while the forecast Payout Ratio based on forecast EPS of ¥68.92 was approximately 65.3%, with the latter at a high level. No actual data for share repurchases during the current period is available, and the Total Return Ratio has not been calculated. The substantial cash and deposits balance of ¥89.5B supports dividend stability.

Catalysts

【Short Term】A holding company, Tranvia, is scheduled to be established on April 1, 2026 through a joint share transfer with Rando Computer. Listing approval was granted on March 2, and an inaugural ceremony is scheduled for March 19. The achievement of the required revenue and profit accumulation in Q4 is also a point of focus.

【Long Term】Under the medium- to long-term target of achieving revenue of ¥500B in the fiscal year ending March 2031, the Company plans to expand its business portfolio and improve cost efficiency through the HOP (integration and quantitative expansion) and STEP (fusion and qualitative improvement) phases.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Profitability is slightly above the industry median.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, positioning the Company as a low-growth company within the IT and communications industry.

※Source: Compiled by the Company

Risk Factors

1. PMI execution risk associated with the management integration: If organizational integration toward the establishment of Tranvia in April 2026 does not proceed as planned, realization of the expected synergies may be delayed. SG&A expenses have already increased +27.1% YoY, outpacing revenue growth, leaving room for integration-related costs to pressure profit margins.

2. Business portfolio concentration: Within Software Development, the life insurance sector declined ▲22.8%. If contraction in the financial sector continues, the key issue will be whether growth in the non-financial sector (+10.8%) can continue to offset the decline.

3. Work-in-progress and project execution risk: Work in progress of ¥0.44B accounts for 100% of inventories, and delays in project acceptance or cost overruns could lead to deteriorating profitability. Reliable project execution is required to achieve the ¥57.0B in revenue needed in Q4.

Key Points in the Earnings Results

1. The gross margin improved to 20.0%, up approximately 2.7pt YoY. The decline in the cost-of-sales ratio supported the increase in Operating Income, while the fact that the SG&A expense growth rate (+27.1%) substantially exceeded the revenue growth rate (+1.5%) is a factor requiring monitoring as it may influence future margin trends.

2. The order backlog increased +19.0% YoY to ¥29.6B, driven by the non-life insurance and communications sectors. Even as the revenue progress rate remained below the standard level, growth in the order backlog can be viewed as a leading indicator of the revenue base from Q4 onward.

3. In connection with the management integration, tangible fixed assets increased +90.4% YoY. This is viewed as an expansion of investment associated with preparations for the integration, and ongoing monitoring of asset utilization and continued contribution to earnings will help in understanding the financial structure.

Theoretical Share Price (Reference Value)

Sensitivity: ¥564–¥596 at ±1% cost of equity, and ¥578–¥582 at ω±0.1.

Notes:

• Net assets as of the quarter-end were used (there is a time lag relative to the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated values based solely on publicly disclosed data; these are not forecasts of the market price or recommendations for specific investment actions, nor do they predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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