CRESCO LTD. FY2027 Q1 Earnings Report

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Executive Summary

In Q1, the Company secured revenue growth in both the IT Services Business and Digital Solutions Business, while substantial profit growth in the Financial segment drove higher revenue and income. Revenue increased to ¥166.8B (+10.6% YoY), Operating Income to ¥11.5B (+13.3%), Ordinary Income to ¥12.5B (+14.5%), and Net Income attributable to owners of the parent to ¥8.6B (+14.6%). Operating Income growth exceeding the revenue growth rate indicates the emergence of operating leverage through improved profitability in the Financial segment and higher utilization rates across the Company. Meanwhile, profit progress toward the full-year plan remained at 14.4% for Operating Income, compared with 23.3% for Revenue, making project execution capabilities the key focus for achieving the back-end-loaded full-year plan.

Factors Affecting Performance

【Revenue】Revenue was ¥166.8B, up +10.6% YoY, with all segments securing revenue growth. The IT Services Business, comprising Enterprise, Financial, and Manufacturing, generated ¥143.0B (+10.6%), while the Digital Solutions Business generated ¥23.8B (+10.7%), with both businesses showing nearly identical growth rates. Within the IT Services Business, Enterprise posted the highest growth rate at ¥61.6B (+13.4%), followed by Manufacturing at ¥36.7B (+8.7%) and Financial at ¥44.7B (+8.5%). During the quarter, Office Mation Co., Ltd. was converted into a consolidated subsidiary, increasing goodwill by approximately ¥3.5B; M&A also contributed to revenue growth.

【Profit and Loss】Operating Income increased 13.3% to ¥11.5B, exceeding the revenue growth rate, and the Operating Income margin improved by +0.2pt from 6.7% in the same period of the previous year to 6.9%. Operating Income in the Financial segment increased significantly to ¥5.4B (+35.8%), improving its margin to 12.1% and driving Company-wide profit growth. Meanwhile, the Digital Solutions Business posted Operating Income of ¥1.3B (-19.5%) and a margin of 5.4%, the lowest among all segments, thereby suppressing the Company-wide profit margin. Company-wide expenses increased to ¥6.7B from ¥5.7B in the previous year. Ordinary Income rose 14.5% to ¥12.5B, supported by non-operating income comprising ¥0.6B in interest income and ¥0.5B in dividend income. Profit Before Tax increased 18.5% to ¥13.6B, but this was boosted by the temporary factor of ¥1.1B in extraordinary income, including a ¥1.1B gain on the sale of investment securities; excluding this item, core earnings growth remained close to the growth rate at the Ordinary Income level. Net Income attributable to owners of the parent was ¥8.6B (+14.6%), after deduction of income taxes and other taxes of ¥5.0B (effective tax rate: 36.4%). Revenue and income both increased.

Segment Analysis

Segment Operating Income totaled ¥18.2B, comprising ¥16.9B from the IT Services Business and ¥1.3B from the Digital Solutions Business. After deducting Company-wide expenses of ¥6.7B, consolidated Operating Income was ¥11.5B. Within the IT Services Business, Enterprise generated Revenue of ¥61.6B (+13.4%), Operating Income of ¥6.7B (+18.8%), and a margin of 10.9%; Financial generated Revenue of ¥44.7B (+8.5%), Operating Income of ¥5.4B (+35.8%), and a margin of 12.1%; and Manufacturing generated Revenue of ¥36.7B (+8.7%), Operating Income of ¥4.7B (+3.0%), and a margin of 12.8%. Although Manufacturing recorded revenue growth, profit growth remained at +3.0%; its margin of 12.8% was higher than those of other segments, but a slowdown in growth was observed. Financial recorded the highest profit growth among all segments at +35.8%, making a significant contribution to Company-wide profit growth. The Digital Solutions Business recorded Revenue of ¥23.8B (+10.7%) but Operating Income of ¥1.3B (-19.5%), representing a decline in profit. Its margin fell to 5.4% from the previous year and was the lowest among all segments.

Key Financial Indicators

【Profitability】The Operating Income margin improved by +0.2pt from 6.7% in the same period of the previous year to 6.9%, while the gross profit margin also improved by +0.4pt to 18.6%. The Net Profit margin, based on income attributable to owners of the parent, improved by +0.2pt to 5.2%, reflecting the absorption of fixed costs accompanying revenue growth and improved profitability in the Financial segment.【Cash Quality】Cash and deposits were ¥150.7B, a slight decrease from ¥154.8B at the end of the same period of the previous year, while investment securities increased to ¥99.5B (+¥9.5B), and work in process increased substantially to ¥5.3B from ¥1.8B in the previous year. The sharp increase in work in process resulted from the recognition of progress on large-scale projects; depending on the timing of acceptance inspections, potential fluctuations in future profit and cash conversion warrant monitoring.【Investment Efficiency】ROE was 2.6% on a quarterly basis, and capital efficiency remained conservative with total assets of ¥474.4B and an Equity Ratio of 70.5%. Basic EPS increased +17.1% to ¥21.46 from ¥18.33 in the same period of the previous year.【Financial Soundness】The Equity Ratio rose +0.6pt from 69.9% in the same period of the previous year to 70.5%, while the current ratio remained high at approximately 316%. Interest-bearing debt, comprising short-term and long-term debt, totaled approximately ¥12.9B, representing a low ratio of approximately 3.9% against equity of ¥334.2B. Interest coverage based on Operating Income was approximately 458 times, indicating exceptionally substantial capacity to bear interest expenses.

Cash Flow Analysis

As a cash flow statement was not disclosed for the quarter, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥150.7B, a decrease of ¥4.1B from ¥154.8B at the end of the same period of the previous year, while investment securities increased by ¥9.5B to ¥99.5B, suggesting that a portion of surplus funds was allocated to securities investments. Retained earnings were ¥253.0B, a decrease of ¥5.5B from ¥258.5B at the end of the same period of the previous year, while treasury stock increased to ¥22.98B from ¥19.18B in the previous year. This is considered to reflect shareholder returns through dividend payments and share repurchases progressing at a pace exceeding profit growth. Work in process increased sharply to ¥5.3B from ¥1.8B in the previous year, and the accumulation of working capital associated with project progress may affect the timing of future cash collection.

Earnings Quality

Of the ¥13.6B in Profit Before Tax for the quarter, the ¥1.1B in extraordinary income, including a ¥1.1B gain on the sale of investment securities, was a temporary item. It is therefore appropriate to regard recurring earnings power as being close to Ordinary Income of ¥12.5B. Non-operating income of ¥1.4B represented only 0.8% of Revenue and consisted primarily of stable items, namely ¥0.6B in interest income and ¥0.5B in dividend income, indicating good quality. Comprehensive income was ¥17.4B, exceeding Net Income attributable to owners of the parent of ¥8.6B by ¥8.8B. The primary reason for the difference was the +¥8.9B valuation difference on securities resulting from an increase in the market value of securities held. This divergence reflects unrealized gains linked to market fluctuations and must be assessed separately from Net Income, which indicates the earning power of the core business. In addition, work in process increased sharply by +194.0% YoY; potential future profit fluctuations depending on the timing of acceptance inspections and revenue recognition should also be noted from an accrual perspective.

Earnings Forecast and Guidance

Progress toward the full-year plan was 23.3% for Revenue (¥715.0B plan), 14.4% for Operating Income (¥80.0B plan), 15.3% for Ordinary Income (¥82.0B plan), and 15.6% for Net Income attributable to owners of the parent (¥55.3B plan). While Revenue was nearly in line with the simple progress benchmark of 25%, profit progress was clearly below that level, indicating that improved profitability will be necessary to achieve the back-end-loaded full-year plan. Possible factors include declining profitability in the Digital Solutions Business and increased Company-wide expenses, which may have constrained profit progress. No revisions were made to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥80 per share, comprising a regular dividend of ¥35 and a commemorative dividend of ¥10, for a forecast year-end dividend of ¥45. Based on the full-year EPS forecast of ¥137.76, the Payout Ratio is approximately 58.1%. No revision was made to the dividend forecast. Given the financial foundation of cash and deposits of ¥150.7B and an Equity Ratio of 70.5%, shareholder returns at this level are considered absorbable from the perspective of financial soundness. Treasury stock increased to ¥22.98B from ¥19.18B in the previous year, indicating progress in shareholder returns through share repurchases.

Risk Factors

1. Project execution risk: Work in process increased to ¥5.3B from ¥1.8B in the same period of the previous year, a rise of +194.0%, indicating an accumulation of progress recognition in fixed-price SI projects. If estimation variances or delays in acceptance inspections occur, gross profit and cash conversion may be affected.

2. Segment mix risk: Operating Income in the Digital Solutions Business was ¥1.3B (-19.5%), with a margin of 5.4%, the lowest among all segments and down from the previous year. If profitability improvement in this business is delayed, it may become a factor weighing down the Company-wide profit margin.

3. Securities price fluctuation risk: Investment securities increased to ¥99.5B (+¥9.5B), while deferred tax liabilities increased to ¥13.9B from ¥8.2B in the previous year. The structure is such that fluctuations in the market value of securities held may affect net assets and profit or loss through valuation differences and tax expenses.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Profit margin are slightly below the industry median, indicating a below-midrange level of profitability within the industry.

Growth and Capital Efficiency

The Revenue growth rate exceeds the industry median, indicating relatively strong growth compared with the challenges on the profitability front.

※Source: Compiled by the Company

Key Points from the Financial Results

1. Profitability improved modestly, with the Operating Income margin at 6.9% (+0.2pt) and the gross profit margin at 18.6% (+0.4pt), while +35.8% growth in Operating Income in the Financial segment drove Company-wide profit growth.

2. Full-year progress was 23.3% for Revenue but only 14.4% for Operating Income, making an acceleration in the pace of profitability improvement the key focus for achieving the back-end-loaded plan.

3. Operating Income in the Digital Solutions Business declined by -19.5%, with its margin falling to 5.4%; from the perspective of segment mix, the profitability trend in this business will be a key area of focus going forward.

Theoretical Stock Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade period). It is not a forecast of the market stock price or a recommendation of any specific investment action.

Sensitivity: ¥985–¥1,041 at ±1% for the cost of equity, and ¥1,008–¥1,018 at ±0.1 for ω.

Notes:

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

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This value does not predict or guarantee the future stock price)

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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. Industry benchmarks are reference information compiled by the Company based on publicly disclosed financial results. Investment decisions should be made at your own responsibility, and professional advice should be sought as necessary.

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