TDC SOFT Inc. FY2027 Q1 Earnings Report

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Executive Summary

During the quarter, the Company secured revenue growth, but recorded a decline in operating income due to lower gross and operating profit margins, resulting in higher revenue but lower earnings. Revenue was ¥11.81B (+4.0% YoY), operating income was ¥1.20B (-4.3%), ordinary income was ¥1.31B (-1.3%), and net income attributable to owners of the parent was ¥0.89B (-12.0%). The operating margin was 10.2%, down 0.9pt from 11.1% in the previous year, highlighting the decline in profitability despite higher revenue. The larger decline in net income compared with operating and ordinary income was affected by the fact that the gain on the sale of investment securities (¥0.166B) recorded in the previous year did not occur at a similar scale during the current period.

Factors Affecting Results

【Revenue】Revenue was ¥11.81B, representing a 4.0% increase YoY. The Company operates as a single segment, the Systems Development Business, and secured revenue growth against the backdrop of resilient demand for systems integration (SI).

【Profit and Loss】Gross profit was ¥2.62B (¥2.64B in the previous year; gross margin of 22.2%), with the gross margin down 0.6pt from 22.8% in the previous year. SG&A expenses increased by +6.6% to ¥1.42B (¥1.33B in the previous year), expanding at a pace exceeding the 4.0% revenue growth rate. As a result, operating income was ¥1.20B (-4.3% YoY), and the operating margin declined 0.9pt to 10.2%. Ordinary income was ¥1.31B (-1.3% YoY), supported by ¥0.10B in non-operating income (¥0.06B in dividends received and ¥0.01B in interest on securities), which moderated the decline in operating income. Net income was ¥0.89B (-12.0% YoY), with the absence of the ¥0.17B gain on the sale of investment securities recorded in the previous year being the primary reason for the larger decline in net income than in ordinary income. Overall, the results can be characterized as higher revenue but lower earnings, as increased fixed costs coincided with a lower gross margin.

Key Financial Indicators

【Profitability】The operating margin was 10.2%, down 0.9pt from 11.1% in the previous year, while the net profit margin also declined to 7.6%. The gross margin was 22.2% (22.8% in the previous year), and the SG&A ratio rose to 12.0% (11.7% in the previous year), indicating that the decline in profitability arose from both costs and fixed expenses.【Cash Flow Quality】While accounts receivable declined by -25.5% YoY to ¥6.66B, work in process increased by +202% to ¥0.48B, indicating that changes in acceptance and billing timing were reflected in the working capital composition.【Investment Efficiency】ROE was 4.0%, contracting from the previous year mainly due to the lower net profit margin. Total assets declined to ¥29.44B (¥31.50B in the previous year), indicating changes from an asset efficiency perspective as well.【Financial Soundness】The equity ratio was 76.8%, up 2.4pt from 74.4% in the previous year. The Company continues to maintain a strong financial base, holding ¥10.38B in cash and deposits and ¥5.23B in investment securities. Short-term borrowings increased to ¥0.55B (¥0.30B in the previous year), but remained small relative to cash on hand.

Cash Flow Analysis

Because cash flow statement figures have not been disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥10.38B, a slight decrease from ¥10.87B in the previous year, while short-term securities declined to ¥3.80B (¥4.41B in the previous year), with overall liquidity remaining at a high level. In terms of working capital, accounts receivable declined substantially to ¥6.66B (¥8.93B in the previous year), while work in process surged to ¥0.48B (¥0.16B in the previous year), suggesting that changes in billing and acceptance timing may have affected the pace of cash conversion. On the liabilities side, accrued expenses declined significantly to ¥1.50B (¥2.60B in the previous year), and income taxes payable declined to ¥0.46B (¥1.25B in the previous year), indicating that payments for amounts recorded in the previous period progressed. Short-term borrowings increased to ¥0.55B, but this remains minor relative to cash and deposits, and concerns regarding liquidity are limited.

Quality of Earnings

Recurring earnings are primarily generated by operating income from the Systems Development Business. During the current period, however, ¥0.10B in non-operating income (¥0.06B in dividends received and ¥0.01B in interest on securities) supported ordinary income. In the same period of the previous year, a ¥0.17B gain on the sale of investment securities was recorded as extraordinary income, but no temporary gain of a similar scale occurred during the current period, which caused net income to decline more sharply than ordinary income. Non-operating income was limited to 0.9% of revenue, indicating little distortion in the earnings composition. Meanwhile, valuation difference on other securities was +¥0.54B, and comprehensive income expanded to ¥1.43B (¥1.09B in the previous year, +31.2%). The gap between net income of ¥0.89B and comprehensive income of ¥1.43B was primarily attributable to market-driven valuation differences on securities and should be viewed separately from core business earnings.

Earnings Forecast and Guidance

Q1 progress against the full-year plan was 22.3% for revenue (¥11.81B/¥53.00B), 21.5% for operating income (¥1.20B/¥5.60B), 22.5% for ordinary income (¥1.31B/¥5.80B), and 22.8% for net income (¥0.89B/¥3.92B). Each was 2–3.5pt below the 25% benchmark based on a simple quarterly allocation, indicating somewhat gradual progress as of Q1. There were no revisions to the earnings forecast or dividend forecast during the quarter, and the full-year outlook remains unchanged. The increase in work in process indicates an accumulation of projects in hand, and progress in acceptance during the second half will be an important factor affecting the degree to which the full-year plan is achieved.

Shareholder Returns

The full-year dividend forecast is ¥34.00 per share, implying a payout ratio of approximately 41.1% against full-year forecast EPS of ¥82.75. There was no revision to the dividend forecast as of the current quarter, and the initial plan remains in place. Given the financial base of ¥10.38B in cash and deposits and an equity ratio of 76.8%, liquidity available to fund dividends remains ample.

Risk Factors

1. Declining project profitability: The gross margin was 22.2%, down 0.6pt from 22.8% in the previous year, while the operating margin also declined 0.9pt to 10.2%. Potential background factors include cost overruns on fixed-price projects and delays in passing higher labor costs through to prices. Future trends warrant monitoring.

2. Changes in working capital: Work in process increased by +202% YoY to ¥0.48B, while accounts receivable declined by -25.5% to ¥6.66B. Changes in billing and acceptance timing are affecting the cash conversion cycle.

3. Dependence on market conditions for non-operating income and investment securities: Ordinary income was partially supported by ¥0.10B in non-operating income (dividends received and interest on securities). In addition, valuation differences on ¥5.23B in investment securities affected comprehensive income (+¥0.54B contribution), creating earnings and equity volatility due to market fluctuations.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

In terms of profitability, both the operating margin and net profit margin exceed the industry median, placing the Company at a relatively high level within the industry.

Growth and Capital Efficiency

The revenue growth rate was 5.3pt below the industry median, placing the Company in the lower tier of the industry in terms of growth momentum.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Although revenue growth was secured, the operating margin declined 0.9pt YoY. The fact that the SG&A expense growth rate (+6.6%) exceeded the revenue growth rate (+4.0%) is observed as a structural factor behind the decline in profitability.

2. While work in process surged +202% YoY, accounts receivable declined -25.5%, indicating that changes in project acceptance and billing timing were reflected in the working capital composition. Whether progress in acceptance during the second half will lead to an improvement in the full-year plan progress rate is a key focus.

3. The financial base remains strong, with an equity ratio of 76.8% (+2.4pt YoY) and ¥10.38B in cash and deposits. The foundation supporting the approximately 41% payout ratio policy remains intact.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥585–¥619 at cost of equity ±1%, and ¥599–¥606 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because 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 share price)

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This report is an earnings analysis document automatically generated by AI through analysis of 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 professionals as necessary.

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