BASE CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

This quarter saw declines in both operating income and net income, as cost increases outpaced largely flat revenue, indicating a gradual deterioration in profitability. Revenue was ¥109.6B (YoY -0.5%), remaining broadly flat, while operating income declined to ¥27.2B (down 6.9%) and net income to ¥18.9B (down 7.7%). The gross profit margin fell to 31.6% (down 1.0pt YoY), while SG&A expenses increased by +10.2%, primarily pressuring margins. Progress against the full-year plan was 45.5% for revenue, 42.8% for operating income, and 41.6% for net income, all below the standard 50% progress rate at the Q2 stage, making recovery in the second half a key challenge.

Factors Affecting Financial Results

【Revenue】Revenue was ¥109.6B, essentially flat at -0.5% YoY. The Company operates as a single-segment business focused on contracted software development, and differences in project acceptance timing appear to have affected revenue growth. Progress against the full-year forecast of ¥241.0B was 45.5%, below the standard progress rate.

【Profit and Loss】Operating income declined to ¥27.2B (down 6.9% YoY), ordinary income to ¥27.4B (down 7.3%), and net income to ¥18.9B (down 7.7%). In addition to the increase in the cost-of-sales ratio (gross profit margin of 31.6%, down 1.0pt YoY), SG&A expenses rose to ¥7.4B (up 10.2%), outpacing revenue growth and reducing the operating margin to 24.8% from the previous year. Non-operating income and expenses were nearly balanced, resulting in only a minor difference between ordinary income and operating income. Given the combination of flat revenue and lower profit, the conclusion is that the results were closer to a decline in revenue and profit rather than a decline in revenue and an increase in profit—in substance, a slight revenue decline and lower profit.

Segment Analysis

The Company operates as a single segment in the contracted software development business and does not disclose results by segment.

Key Financial Indicators

【Profitability】Although the operating margin declined from the previous year to 24.8%, it remains relatively high within the industry. The net profit margin declined by approximately 1.3pt YoY to 17.3%, reflecting the impact of the lower gross profit margin and higher SG&A expenses.【Cash Flow Quality】Operating Cash Flow (OCF) was limited to ¥7.9B, representing approximately 0.4x net income of ¥18.9B, a low level. The decrease in accrued expenses and increase in tax payments constrained cash conversion.【Investment Efficiency】ROE was 12.1%, with total asset turnover and financial leverage offsetting the decline in the net profit margin.【Financial Soundness】The equity ratio was 83.8%, while the current ratio exceeded 530%, both extremely high levels. Supported by cash and deposits of ¥126.5B, the Company’s financial foundation remains robust.

Cash Flow Analysis

Operating Cash Flow was ¥7.9B, a significant decrease of -50.7% from ¥16.0B in the previous year. Investing Cash Flow was ¥0.5B, and Financing Cash Flow was -¥10.9B. Although positive Free Cash Flow of ¥8.4B was secured, it was below cash dividend payments of ¥10.9B, indicating that dividends could not be covered solely by cash generated during the period. The primary causes of the decline in OCF were a substantial decrease in accrued expenses and an increase in corporate income tax payments (-¥9.1B), partly offset by an increase in the provision for bonuses. The increase in trade receivables (-¥0.9B) also pressured working capital. The weakness of cash conversion relative to the level of profit is a point to monitor going forward.

Earnings Quality

Non-operating income was ¥0.2B and non-operating expenses were ¥0.1B, including a foreign exchange loss of ¥0.1B; both were immaterial. Ordinary income of ¥27.4B was therefore nearly at the same level as operating income of ¥27.2B, with no boost from one-time gains or losses. No extraordinary gains or losses were recorded, and the gap between ordinary income and net income (¥18.9B) was almost entirely attributable to corporate income taxes of ¥8.5B (an effective tax rate of approximately 31%), with no structural distortions identified. However, OCF (¥7.9B) was below net income (¥18.9B), indicating a high level of accruals. From the perspective of earnings cash conversion, some concerns remain regarding earnings quality.

Earnings Forecasts and Guidance

The full-year forecasts are revenue of ¥241.0B (up 10.6% YoY), operating income of ¥63.5B (up 10.4%), and ordinary income of ¥63.5B (up 9.5%), with no revisions to the forecasts during the quarter. Progress as of Q2 was 45.5% for revenue, 42.8% for operating income, and 43.1% for ordinary income, below the standard progress rate of 50%. Achieving the second-half revenue and profit plans will require the acceleration of project acceptance and improved cost control.

Shareholder Returns

The Q2 dividend was ¥93, comprising a regular dividend of ¥63 and a commemorative dividend of ¥30, representing an increase from ¥57 in the same period of the previous year. A regular dividend of ¥63 and a commemorative dividend of ¥30 are also forecast for the year-end, resulting in a full-year forecast dividend of ¥186. Based on forecast EPS of ¥251.59, the payout ratio is approximately 74%, a high level. OCF for the first half (¥7.9B) was below dividend payments (¥10.9B), and the sustainability of the high shareholder return policy will depend on cash generation in the second half.

Risk Factors

1. Profitability Pressure: SG&A expenses increased by +10.2% YoY, expanding at a pace substantially faster than the -0.5% change in revenue. The earlier recognition of personnel and bonus-related costs led to declines in the gross profit margin (-1.0pt) and operating margin. Whether the changes in the cost structure will continue is a key focus.

2. Declining Cash Conversion: OCF was ¥7.9B, down -50.7% YoY, and represented only approximately 0.4x net income of ¥18.9B. The decrease in accrued expenses and increase in corporate tax payments were the main factors, widening the divergence between profit and cash flow.

3. Delayed Progress: Progress against the full-year plan was 45.5% for revenue and 42.8% for operating income, below the standard progress rate (50%). As a single-segment business, the Company is highly dependent on project acceptance timing, and the status of project completion in the second half will determine financial performance.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

The Company’s profitability exceeds the industry median and is at a high level close to the upper bound of the IQR.

Growth and Capital Efficiency

The Company’s revenue growth rate is substantially below the industry median and remains below the lower bound of the IQR.

Source: Company analysis

Key Points from the Earnings Results

1. With revenue essentially flat, the +10.2% increase in SG&A expenses pressured earnings, causing the operating margin to decline from the previous year. Whether the impact of personnel cost inflation will continue and whether cost control will improve are key areas of focus.

2. OCF was below net income, confirming weak cash conversion. Dividend payments exceeded Free Cash Flow, and the sustainability of the high shareholder return policy will depend on cash generation in the second half.

3. Progress against the full-year plan was below standard, and, due to the single-segment business structure, project acceptance and operating conditions will determine performance in the second half.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,336–¥1,409 for a ±1% change in the cost of equity, and ¥1,360–¥1,389 for a ±0.1 change in ω.

Notes:

• Net assets as of the end of the quarter 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 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share 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 with a professional as necessary.

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