TDC SOFT Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥23.34B
• Operating Income: ¥2.65B
• Net Income: ¥1.98B
• EPS: ¥42.04

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid topline and profit growth with modest margin expansion, but cash conversion was weak in the quarter. Revenue rose 9.3% year over year to 233.43 (100M JPY), with operating income up 10.2% to 26.47 and ordinary income up 12.9% to 27.56. Net income advanced 20.1% to 19.84, outpacing revenue growth and lifting the net margin to 8.5%. Operating margin reached approximately 11.3%, implying about a 10 bps expansion versus last year based on inferred prior-period levels. Net margin improved more meaningfully—by roughly 77 bps—supported by both operating leverage and favorable non-operating items. Ordinary margin is estimated to have expanded by about 38 bps. Gross margin is 21.4%, and the SG&A ratio is about 10.1%, indicating disciplined cost control alongside revenue growth. Non-operating income of 1.12 (notably dividend income of 0.61) provided a small additional lift, with a non-operating income ratio of 5.6%. ROE stands at 9.0% on a DuPont basis (NPM 8.5%, asset turnover 0.816x, leverage 1.30x), consistent with the reported 9.0%. Liquidity is very strong with a current ratio of 354.6% and cash of 95.33 against minimal short-term loans of 3.45. However, operating cash flow of 8.74 covered only 44% of net income, flagging weaker cash conversion this quarter. Capex was negligible (0.01), and financing cash outflows of -14.86 suggest distributions and/or capital returns, though the split is unreported. The calculated payout ratio is 68.4%, slightly above typical sustainability thresholds, warranting monitoring if OCF remains soft. Overall, fundamentals remain robust, but near-term focus should be on receivables collection and sustaining margin gains amid wage inflation. If cash conversion normalizes and demand for digital transformation remains healthy, the growth trajectory looks maintainable. Conversely, prolonged OCF shortfall versus earnings could constrain capital returns despite a strong balance sheet.

Profitability Analysis

ROE decomposition (DuPont): ROE ≈ Net Profit Margin (8.5%) × Asset Turnover (0.816) × Financial Leverage (1.30x) = ~9.0%. The component that changed the most versus last year appears to be Net Profit Margin, which we estimate improved by ~77 bps (from ~7.7% to 8.5%), given net income growth (+20.1% YoY) outpaced revenue growth (+9.3%). Operating margin also ticked up by ~10 bps to ~11.3%, suggesting modest operating leverage from revenue growth and controlled SG&A (SG&A ratio ~10.1%). Ordinary margin likely rose ~38 bps, supported by small positive non-operating contributions (dividend and interest income exceeding non-operating expenses). Business drivers: higher utilization and/or better pricing mix in system integration/services likely aided operating margin, while low interest expense and investment income supported below-OP line. Sustainability: Operating margin gains look modest and potentially sustainable if wage inflation is offset by pricing and utilization; non-operating gains (dividends) are recurring but can fluctuate. Watch for wage pressure and hiring costs that could compress gross margin. Concerning trends: We cannot compare SG&A growth vs revenue growth due to missing prior SG&A data, but the weak OCF/NI (0.44x) raises a quality flag despite solid P&L performance.

Growth Assessment

Revenue growth of 9.3% YoY indicates healthy demand, likely stemming from continued digital transformation, cloud and modernization projects. Operating income grew slightly faster than revenue (+10.2% YoY), signaling modest operating leverage and stable cost discipline. Net income growth (+20.1%) outpaced operating income, aided by a small uplift in non-operating income (dividend and interest). Profit quality is mixed: margins improved, but cash conversion lagged, with OCF of 8.74 vs NI of 19.84. EBITDA was 27.16 (11.6% margin), supporting a resilient operating base for an SIer with limited capex intensity. The effective tax rate was 32.1%, broadly in line with domestic benchmarks; no tax one-offs are apparent from disclosed data. Non-operating income (1.12) is supportive but not a dominant profit source, limiting risk of profit volatility from below-OP items. Outlook hinges on sustaining utilization, securing higher value-added projects, and passing through wage increases. If order intake and backlog remain solid (not disclosed), mid- to high-single-digit revenue growth with stable-to-slightly improving margins is plausible. Key watchpoints include client budget trends, pricing power, and any shift toward fixed-price contracts that can affect gross margin.

Financial Health

Liquidity is very strong: current assets 221.05 vs current liabilities 62.34 yield a current ratio of 354.6% and quick ratio of 354.6% (no inventories reported). No warning triggers: Current Ratio >> 1.0 and D/E ~0.30x (total liabilities 66.80 vs equity 219.35). Cash and deposits of 95.33 easily cover short-term loans of 3.45, indicating minimal maturity mismatch risk. Accounts receivable stand at 76.76; while we lack prior-period data, the balance is typical for an SIer with back-half collections. Noncurrent liabilities are modest at 4.46. Interest coverage is exceptionally high at ~1,109x, reflecting low interest expense (0.02). We have no disclosure of off-balance sheet obligations; none identified in the provided data. Overall solvency is robust with ample working capital (158.71).

Cash Flow Quality

OCF/Net Income is 0.44x, below the 0.8 threshold, signaling weak cash conversion this quarter. Potential drivers include receivables build and milestone timing common in IT services; however, we lack working capital movement details to confirm. With capex at 0.01, a proxy for FCF is roughly 8.73 (OCF - capex), but true FCF could differ due to unreported investing CF (e.g., securities, M&A). Financing CF was -14.86, likely reflecting dividends and/or share repurchases (unreported split). There are no apparent signs of aggressive working capital management from the static snapshot, but monitoring DSO and contract assets would be prudent. Given the low capex intensity, normalized OCF should cover routine investments and dividends; sustained OCF shortfall, however, would pressure cash returns over time despite the large cash balance.

Dividend Sustainability

The calculated payout ratio is 68.4%, slightly above the <60% benchmark for comfort, though actual DPS is unreported. With cash and deposits of 95.33 and low capex needs, near-term dividend capacity is supported by balance sheet strength. However, this quarter’s OCF covered only 44% of net income, reducing organic coverage of dividends. If cash conversion normalizes in H2 (typical seasonal collections), dividend sustainability remains reasonable; if not, maintaining a near-70% payout could rely on cash on hand, which is viable short term but not ideal long term. Absent explicit policy guidance or DPS disclosure, we assume a stable-to-progressive dividend stance with careful monitoring of OCF and working capital.

Risk Assessment

Business Risks:

• Project execution risk on fixed-price or large-scale integration projects affecting margins
• Wage inflation and engineering talent scarcity pressuring gross margin and utilization
• Client budget cyclicality and potential deferrals in IT spending
• Pricing pressure in commoditized segments of system integration
• Dependence on timely receivables collection and milestone billing

Financial Risks:

• Weak cash conversion this quarter (OCF/NI 0.44x)
• Potential buildup of accounts receivable increasing working capital needs
• Dividend payout ratio (~68.4%) above comfort threshold if OCF remains soft
• Limited disclosure on investing CF; unknown cash uses could affect liquidity

Key Concerns:

• OCF trailing net income, raising earnings quality questions
• Sustainability of margin improvements amid rising personnel costs
• Non-operating income reliance (dividends/interest) is small but variable
• Data gaps (SG&A breakdown, DPS, investing CF) limit full assessment

Investment Implications

Key Takeaways:

• Healthy top-line growth (+9.3% YoY) with modest operating margin expansion (+10 bps) and stronger net margin gain (+77 bps)
• ROE at ~9.0% supported primarily by improved profitability rather than leverage
• Balance sheet is very strong (current ratio ~355%, D/E ~0.30x) with ample cash
• OCF/NI at 0.44x is the main negative; monitoring cash conversion is critical
• Capex-light model supports FCF, but reported FCF is not available; proxy suggests positive FCF

Metrics to Watch:

• OCF/Net Income and working capital movements (DSO, contract assets)
• Order intake/backlog and utilization rate (not disclosed)
• Gross and operating margin trends versus wage inflation
• SG&A trajectory versus revenue growth when data becomes available
• Dividend policy updates and any share repurchase activity

Relative Positioning: Within domestic IT services/SI peers, TDC Soft exhibits solid growth, modest but improving margins, and a fortress balance sheet. The main differentiator to watch near term is cash conversion; if normalized in H2, the profile aligns favorably with peers emphasizing steady growth and high cash balances.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis