D.I.System (4421) FY2026 Q1 Earnings Report

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Executive Summary

The first quarter of FY2026 saw higher revenue but lower earnings, with the key issue being that revenue growth did not translate into profit growth. Revenue increased to ¥17.66B (¥16.64B in the same period last year, YoY +6.2%), while Operating Income declined sharply to ¥0.48B (¥0.92B in the same period last year, YoY -47.5%), Ordinary Income also decreased by 47.5% at the same level, and Net Income fell to ¥0.31B (¥0.62B in the same period last year, YoY -49.6%). The primary causes of the earnings decline were the decrease in gross profit margin to 19.8% from 21.1% in the same period last year and SG&A expenses increasing 16.8%, exceeding the revenue growth rate.

Factors Affecting Results

【Revenue】Revenue increased to ¥17.66B, up 6.2% year on year. The core Systems Integration Business generated external revenue of ¥16.61B (up 5.7%), while the Education Services and Security Solutions Business generated ¥1.06B (up 13.5%), with both businesses securing revenue growth. The SI Business accounted for approximately 94% of the business mix, and the contribution of the Education and Security Business, which has a higher growth rate, remains limited.

【Profit and Loss】Operating Income declined to ¥0.48B (YoY -47.5%), Ordinary Income also decreased at the same level, and Net Income fell to ¥0.31B (YoY -49.6%). Gross profit was ¥3.50B, essentially flat year on year (-0.2%), as the increase in revenue was offset by higher costs. The gross profit margin declined to 19.8% from 21.1% in the same period last year. In addition, SG&A expenses increased 16.8% year on year to ¥3.01B, exceeding the revenue growth rate by 10.6pt. The SI Business segment profit margin declined to 20.3% from 21.6% in the same period last year, and deteriorating profitability in the core business put pressure on consolidated earnings. The Education and Security Business improved its segment profit margin to 22.6% from 21.6% in the same period last year, but its contribution to consolidated results remains limited because of its small scale. Accordingly, the current period is concluded to have resulted in higher revenue but lower earnings.

Segment Analysis

The Systems Integration Business generated external revenue of ¥16.61B (up 5.7% year on year) and segment profit of ¥3.40B (down 0.4%), resulting in a profit margin of 20.3%, down from 21.6% in the same period last year. The Education Services and Security Solutions Business generated external revenue of ¥1.06B (up 13.5%) and segment profit of ¥0.25B (up 22.2%), with its profit margin improving to 22.6% from 21.6% in the same period last year. Combined segment profit for the two businesses was ¥3.65B, representing only a 0.9% year-on-year increase. The elimination of intersegment transactions and higher SG&A expenses have put pressure on consolidated Operating Income (¥0.48B, down 47.5%). The Education and Security Business accounted for approximately 6% of the revenue mix and, despite being on a growth trajectory in terms of profit, has not reached a scale sufficient to offset the decline in profitability of the core business.

Key Financial Indicators

【Profitability】The Operating Income margin was 2.7%, down approximately 2.9pt from 5.6% in the same period last year, while the Net Income margin also declined to 1.8% from 3.7%. The gross profit margin declined to 19.8% from 21.1% in the same period last year.【Cash Quality】Accounts receivable were ¥9.01B, down 14.2% year on year. Despite revenue growth, the receivables balance declined, indicating that the working capital burden is being contained. Accounts payable were ¥2.14B, down 10.2%, and trade payables also declined.【Investment Efficiency】Annualized ROE was 7.9%. Although asset turnover and financial leverage remained at their respective levels, the decline in the Net Income margin constrained ROE.【Financial Soundness】The Equity Ratio was 50.6% (52.6% in the same period last year), and the current ratio was calculated at approximately 175%. Cash and deposits of ¥11.49B substantially exceeded short-term borrowings of ¥2.00B. All interest-bearing debt consists of short-term borrowings, and sensitivity to changes in refinancing terms requires monitoring.

Cash Flow Analysis

As direct data from the cash flow statement are unavailable, funding trends are analyzed based on changes in the balance sheet. Cash and deposits increased 12.2% year on year to ¥11.49B from ¥10.24B in the same period last year, securing a liquidity buffer substantially exceeding short-term borrowings of ¥2.00B. Accounts receivable declined 14.2% year on year to ¥9.01B, indicating an improving trend in collections as revenue increased. Meanwhile, accounts payable declined 10.2% year on year to ¥2.14B, and the reduction in trade payables could increase funding requirements. Inventories were small at ¥0.08B, but because the comparative base amount is extremely small, the growth rate itself may appear large; this point requires attention. Overall, despite the decline in the Operating Income margin, cash levels have been maintained and increased, and concerns regarding funding and liquidity are limited.

Earnings Quality

Both non-operating income and expenses for the quarter were immaterial at approximately ¥0.0B, and Profit Before Tax of ¥0.48B was almost identical to Operating Income. From the perspective of distinguishing recurring business earnings from one-time factors, there were no extraordinary gains or losses or impairment losses, and the change in earnings was attributable to recurring factors, namely deteriorating profitability in the core business and higher SG&A expenses. Comprehensive Income was ¥0.30B, nearly in line with Net Income attributable to owners of the parent of ¥0.31B. Excluding the adjustment related to retirement benefits (-¥0.0B), there was no significant discrepancy. From an accrual perspective, the decline in accounts receivable during a period of revenue growth indicates good revenue quality, and no significant divergence was identified between accounting revenue recognition and actual cash generation.

Earnings Forecast and Guidance

The full-year forecast is revenue of ¥79.52B (YoY +10.1%), Operating Income of ¥3.81B (YoY +7.0%), Ordinary Income of ¥3.80B (YoY +5.8%), EPS of ¥88.08, and a dividend of ¥28.00, with no revisions made during the quarter. Q1 progress rates were 22.2% for revenue, 12.8% for Operating Income, and 12.1% for Net Income (based on the company forecast), all below the simple progress benchmark of 25%. The delay in profit progress is particularly significant, and achieving the full-year forecast will require an improvement in profit margins from Q2 onward through a recovery in the gross profit margin and normalization of the SG&A expense growth rate.

Shareholder Returns

The full-year dividend forecast is ¥28.00 per share, implying a forecast Payout Ratio of 31.8% based on the full-year EPS forecast of ¥88.08. The company holds 150 thousand treasury shares (equivalent to ¥1.50B), but no additional acquisitions were disclosed during the quarter. As returns are being provided solely through dividends, the return policy is evaluated based on the Payout Ratio. In addition to retained earnings of ¥11.90B and net assets of ¥15.86B, the company has secured cash and deposits of ¥11.49B, ensuring funds for dividends. However, Q1 Net Income represented only 12.1% of the full-year forecast, and the feasibility of the dividend plan will depend on an improvement in profit margins during the second half.

Risk Factors

1. Deteriorating profitability in the core business: While revenue in the Systems Integration Business increased 5.7% year on year, segment profit decreased 0.4%, and the profit margin declined from 21.6% to 20.3%. Trends in project pricing, outsourcing expenses, and personnel expenses will determine the recovery of consolidated earnings.

2. Higher SG&A expenses and fixed-cost absorption: SG&A expenses increased 16.8% year on year, exceeding the 6.2% revenue growth rate, indicating that fixed-cost absorption has not progressed during the period of revenue growth. If talent acquisition and personnel cost inflation continue, improvement in the 2.7% Operating Income margin may be delayed.

3. Refinancing risk on interest-bearing debt: All ¥2.00B of interest-bearing debt consists of short-term borrowings, resulting in a short-term debt ratio of 100.0%. Although cash and deposits of ¥11.49B secure near-term liquidity, sensitivity to changes in interest rates and terms at the time of refinancing remains.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

Profitability metrics are significantly below the industry median, placing the company toward the lower end of the industry.

Growth and Capital Efficiency

The revenue growth rate is also below the industry median, indicating a relatively modest position within the industry in terms of growth.

※Source: Company compilation

Key Points from the Earnings Results

1. While revenue growth was maintained, Operating Income declined 47.5% year on year due to the lower gross profit margin and front-loaded growth in SG&A expenses. The decline in profitability of the core SI Business (21.6%→20.3%) was the primary cause of the deterioration in consolidated profitability, and the profit growth of the Education and Security Business was insufficient to offset it.

2. The full-year earnings forecast remains unchanged, but Q1 progress rates of 22.2% for revenue, 12.8% for Operating Income, and 12.1% for Net Income are below the standard progress benchmark of 25%. Improvement in profit margins from Q2 onward is therefore a structural prerequisite for achieving the forecast.

3. Financial soundness remains stable, with an Equity Ratio of 50.6% and cash and deposits of ¥11.49B. Liquidity concerns are limited, except that all interest-bearing debt consists of short-term borrowings. The forecast Payout Ratio of 31.8% is conservative, but its sustainability depends on the achievement of the full-year earnings plan.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥626–¥663 at ±1% for the cost of equity, and ¥642–¥648 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market price or a recommendation of any specific investment action, and does not predict or guarantee future stock prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. 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 responsibility, after consulting a professional as necessary.

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