BASE CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

The cumulative results for Q2 of the fiscal year ending December 2026 showed declines in both revenue and earnings, with a notable deterioration in profit margins. Revenue was ¥109.6B (¥110.1B in the prior year, YoY -0.5%), Operating Income was ¥27.2B (¥29.2B in the prior year, YoY -6.9%), Ordinary Income was ¥27.4B (¥29.5B in the prior year, YoY -7.3%), and Net Income was ¥18.9B (¥20.5B in the prior year, YoY -7.7%). The primary factor behind the margin contraction was a 10.2% increase in SG&A expenses while revenue remained essentially flat, resulting in a decline in the Operating Income margin from 26.5% to 24.8%.

Factors Affecting Performance

【Revenue】Revenue was ¥109.6B, essentially flat, declining 0.5% year on year. The Company operates in a single segment (Software Contract Development Business), and progress against the full-year company forecast of ¥240.99B was 45.5%, 4.5pt below the standard progress rate of 50%. Revenue momentum was weak in the first half, making a recovery in orders and utilization in the second half a prerequisite for achieving the plan.

【Profit and Loss】Gross profit was ¥34.6B (gross margin of 31.6%), down 100bp from 32.6% in the prior year. SG&A expenses increased 10.2% to ¥7.4B, raising the ratio to revenue from 6.1% to 6.7%. As a result, Operating Income was ¥27.2B (YoY -6.9%), Ordinary Income was ¥27.4B (YoY -7.3%), and Net Income was ¥18.9B (YoY -7.7%). The difference between Ordinary Income and Net Income was attributable to corporate income taxes and other taxes (effective tax rate of 31.0%), with no temporary factors identified. The decline in both revenue and earnings was primarily due to reduced cost absorption capacity amid stagnant revenue.

Key Financial Metrics

【Profitability】The Operating Income margin was 24.8%, down 170bp from 26.5% in the same period of the prior year, but remained high in absolute terms. The Net Income margin was 17.3% (18.5% in the prior year), down approximately 120bp. Annualized ROE was high at 24.3%, supported by the high Net Income margin and an asset-light structure. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥7.9B, representing only approximately 0.41x Net Income of ¥18.9B. The primary factor was a substantial ¥15.7B year-on-year decrease in accrued expenses, and cash conversion from earnings declined significantly from 0.78x OCF in the same period of the prior year. 【Investment Efficiency】Total asset turnover was approximately 1.18x, indicating that efficiency was maintained despite an asset composition with a high cash ratio. Capital expenditures of ¥0.5B exceeded depreciation and amortization of ¥0.1B, indicating an investment-oriented stance. 【Financial Soundness】The Equity Ratio was 83.8%, the current ratio was above 530%, and the ratio of tangible fixed assets to total assets was approximately 0.6%, representing an extremely conservative structure. Cash and deposits of ¥126.5B exceeded four times total liabilities of ¥30.1B, limiting short-term liquidity risk.

Cash Flow Analysis

Operating Cash Flow was ¥7.9B, down 50.7% year on year, with a conversion ratio of approximately 0.41x relative to Net Income of ¥18.9B. The primary factor was a cash outflow resulting from a ¥15.7B decrease in accrued expenses, which could not be offset by the increase in the provision for bonuses (+¥7.1B). Investing Cash Flow was an inflow of ¥0.5B, with proceeds from the sale of investment securities and other items contributing while capital expenditures of ¥0.5B were made. Financing Cash Flow was an outflow of ¥10.9B, primarily due to dividend payments of ¥10.9B. Free Cash Flow was ¥8.4B, and cash and cash equivalents decreased by ¥1.9B year on year. The impact on liquidity is limited due to the ample cash balance (¥126.5B), but the weakness in cash generation relative to earnings remains an area to monitor for the time being.

Earnings Quality

No temporary factors were identified in current-period earnings. Non-operating income and expenses were primarily interest income of ¥0.2B and foreign exchange losses of ¥0.1B, both immaterial relative to revenue. The difference between Ordinary Income and Net Income was attributable to corporate income taxes and other taxes (effective tax rate of 31.0%), with no unusual adjustment items identified. Meanwhile, the OCF/Net Income ratio was 0.41x and the OCF/EBITDA ratio was approximately 0.29x, indicating weak cash generation relative to accounting earnings, which should be considered when assessing earnings quality. In terms of working capital, the substantial decrease in accrued expenses weighed on Operating Cash Flow, while work in process also showed an increasing trend. Comprehensive income was ¥20.2B, exceeding Net Income of ¥18.9B, with foreign currency translation adjustments and valuation differences on securities contributing positively. However, this difference was primarily valuation-related and does not indicate the earnings power of the core business.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥241.0B (YoY +10.6%), Operating Income of ¥63.5B (YoY +10.4%), and Ordinary Income of ¥63.5B (YoY +9.5%), with no revisions made during the quarter. Progress against the full-year forecast was 45.5% for Revenue and 42.8% for Operating Income based on first-half results, with Ordinary Income showing a similar trend; all were below the standard progress rate of 50%. Achieving the full-year forecast will require Operating Income of ¥36.3B in the second half (57.2% of the full-year forecast), predicated on a shift from the first half toward revenue and earnings growth. Forecast EPS is ¥251.59, requiring a substantial accumulation of earnings in the second half compared with first-half results of ¥104.53.

Shareholder Returns

The Q2 dividend was ¥93 per share (ordinary dividend of ¥63 and commemorative dividend of ¥30), resulting in a high Payout Ratio of 92.3% relative to first-half Net Income. Dividend coverage was approximately 0.48x relative to first-half Free Cash Flow of ¥8.4B, indicating that dividends were not fully covered by current-period cash generation alone. The full-year dividend forecast remains unchanged at ¥186 per year (¥93 interim and ¥93 year-end). The forecast Payout Ratio based on forecast full-year Net Income of ¥45.6B is approximately 74%, expected to decline from the interim period’s 92.3%. The ample cash balance (¥126.5B) and low leverage, as indicated by the Equity Ratio of 83.8%, support dividend funding for the time being.

Risk Factors

1. Declining cash conversion from earnings: The OCF/Net Income ratio was 0.41x and the OCF/EBITDA ratio was approximately 0.29x. The primary factor was the ¥15.7B decrease in accrued expenses, and if working capital fluctuations continue, there may be an impact on shareholder returns and investment capacity.

2. Stagnation in revenue growth and increase in SG&A expenses: Revenue declined 0.5% year on year, while SG&A expenses increased 10.2%, resulting in a 170bp decline in the Operating Income margin. Recovery in orders and utilization in the second half is necessary to achieve the full-year plan (Revenue +10.6%).

3. Heavy dividend burden: The Q2 Payout Ratio was 92.3% and FCF coverage was 0.48x, indicating that the dividend level is relatively high compared with current-period earnings and cash generation. A recovery in full-year earnings and improvement in cash flow will be closely watched from the perspective of the sustainability of future shareholder returns.

Industry Benchmark (For Reference; Company Analysis)

Profitability and Returns

The Company maintains profitability well above the industry median and ranks among the top performers within its peer group.

Growth and Capital Efficiency

The Revenue growth rate was significantly below the industry median, indicating that the Company lags its peers in terms of growth.

※Source: Company compilation

Key Points from the Earnings Results

1. The Operating Income margin of 24.8%, Net Income margin of 17.3%, and annualized ROE of 24.3% are high even within the industry, demonstrating the strong profitability of the asset-light contract development model. At the same time, a profit margin contraction of approximately 170bp from the same period of the prior year was observed.

2. The weak cash conversion, with an OCF/Net Income ratio of 0.41x and an OCF/EBITDA ratio of 0.29x, indicates that cash flow support is relatively weak compared with the high level of accounting earnings. Future working capital trends will therefore be a key focus.

3. Progress against the full-year forecast remained in the 42–46% range for the major indicators, making a shift toward revenue and earnings growth in the second half a prerequisite for achieving the plan.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,336–¥1,409 at Cost of Equity ±1%, and ¥1,360–¥1,389 at ω±0.1.

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.

(Valuation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; it 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 discretion and responsibility, after consulting with a professional advisor as necessary.

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