ITFOR (4743) FY2026 Q3 Earnings Report

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Executive Summary

Cumulative Q3 results were characterized by higher revenue but lower profit, with the key issue being the company’s inability to convert revenue growth into profit growth. Revenue was ¥150.8B (¥143.6B in the same period last year, +5.0%), Operating Income was ¥21.3B (¥23.7B last year, -10.4%), Ordinary Income was ¥23.1B (¥25.0B last year, -7.4%), and Net Income attributable to owners of the parent was ¥17.3B (¥16.9B last year, +2.8%). The primary cause of the decline in Operating Income was SG&A expenses increasing 19.6%, substantially exceeding the revenue growth rate and absorbing most of the revenue increase. The increase in Net Income resulted from ¥1.5B in extraordinary income, including a ¥0.11B gain on the sale of investment securities, which offset the slowdown in the core business.

Factors Affecting Performance

【Revenue】Revenue was ¥150.8B, up +5.0% year on year. By segment, Systems Development and Sales generated ¥80.9B (+6.0% year on year), while Recurring generated ¥69.9B (+3.8%), securing revenue growth in both segments. Systems Development and Sales may have benefited from the acquisition of Aisel Co., Ltd. and two subsidiaries.

【Profit and Loss】Gross profit was ¥58.4B, and the gross margin of 38.7% improved from 38.1% in the previous year. However, SG&A expenses increased 19.6% year on year to ¥37.1B, absorbing most of the ¥7.2B increase in revenue. As a result, the Operating Income margin declined to 14.1% from 16.5% in the previous year, and Operating Income fell to ¥21.3B (-10.4%). Ordinary Income was ¥23.1B (-7.4%), with non-operating income, including ¥0.8B in dividend income, providing partial support. Net Income increased to ¥17.3B (+2.8%) due to ¥1.5B in extraordinary income, including a ¥0.11B gain on the sale of investment securities, but this was not attributable to an improvement in the core business. In conclusion, the company achieved higher revenue but lower profit.

Segment Analysis

Systems Development and Sales recorded revenue of ¥80.9B (+6.0% year on year), while segment profit declined to ¥1.03B (¥1.11B in the previous year, -7.2%). Recurring recorded revenue of ¥69.9B (+3.8%), while segment profit declined to ¥1.10B (¥1.27B in the previous year, -13.1%), representing a larger decline. The Recurring segment’s profit margin decreased from approximately 18.8% to approximately 15.7%, and deteriorating profitability in the recurring-revenue business has become a major factor pressuring company-wide profits. Although both segments achieved revenue growth, both experienced profit declines, indicating that the impact of higher expenses is not limited to a specific business.

Key Financial Indicators

【Profitability】The Operating Income margin of 14.1% declined from 16.5% in the same period last year, while the Net Income margin remained in double digits at 11.5%. Although the gross margin improved to 38.7% from 38.1% in the previous year, the SG&A ratio rose from 21.6% to 24.6%, becoming the primary cause of the deterioration in the Operating Income margin.【Cash Flow Quality】The increase in Net Income depended on extraordinary income, including a ¥0.11B gain on the sale of investment securities, which offset the decline in Operating Income; consequently, earnings quality is somewhat low.【Investment Efficiency】ROE was 11.5% on an annualized basis, supported by the double-digit Net Income margin and asset efficiency.【Financial Soundness】The Equity Ratio was extremely high at 81.5%. The company held ¥58.3B in cash and deposits and ¥65.9B in current securities, while interest-bearing debt was limited, indicating a conservative financial foundation.

Cash Flow Analysis

Although the cash flow statement has not been disclosed, changes in the balance sheet suggest a shift in the working capital structure. Accounts receivable decreased to ¥38.3B from ¥47.4B in the same period last year, while annualized DSO remained at approximately 70 days, a level at which project acceptance and billing timing may affect cash conversion. Accounts payable decreased 60.7% year on year, suggesting changes in the payment timing of purchases and outsourcing expenses. Contract liabilities (advances received) increased to ¥0.96B from ¥0.83B in the previous year, providing some financial support. Cash and deposits increased to ¥58.3B from ¥53.8B in the previous year, and together with the allocation to investment securities (¥40.3B, +34.4% year on year), indicate a certain degree of financial flexibility.

Earnings Quality

The increase in profit during the period was not attributable to an improvement in recurring earnings power; rather, it was primarily driven by the temporary factor of ¥1.5B in extraordinary income, including a ¥0.11B gain on the sale of investment securities. Non-operating income consisted mainly of ¥0.8B in dividend income and ¥0.4B in interest income, while non-operating expenses, including interest expenses, were very small, meaning that interest costs are not currently constraining profitability. Comprehensive Income was ¥2.06B, exceeding Net Income of ¥1.73B, with a ¥0.32B increase in valuation difference on securities contributing to the improvement. However, this factor depends on market fluctuations and does not indicate recurring earnings power. The structure of offsetting deterioration in Operating Income with extraordinary income requires monitoring from an earnings-quality perspective.

Earnings Forecast and Guidance

The company’s full-year forecast is revenue of ¥234.0B (+13.9% year on year), Operating Income of ¥41.0B (+16.1%), and Ordinary Income of ¥42.0B (+14.5%). The Q3 cumulative progress rates were 64.4% for revenue and 51.9% for Operating Income, below the standard 75% progress level, with the delay in Operating Income particularly notable. Achieving the full-year plan will require standalone Q4 revenue of ¥83.2B and Operating Income of ¥19.7B, indicating a high concentration of performance in the second half and Q4. The key to achieving the plan will be whether revenue can expand at a rate exceeding the increase in SG&A expenses.

Shareholder Returns

The Q2 dividend was ¥30.00 per share, and the company’s full-year dividend forecast is ¥80.00 (forecast EPS of ¥113.36). The forecast Payout Ratio based solely on dividends is approximately 70.6%, indicating an increase from the previous year’s annual dividend of ¥25. The conservative financial structure—cash and deposits of ¥58.3B, very limited interest-bearing debt, and an Equity Ratio of 81.5%—supports the stability of dividend payments. However, achieving the ¥80 dividend assumes that the company will meet its full-year Net Income plan of ¥30.0B, making profit recovery in Q4 a prerequisite.

Risk Factors

1. Deterioration in operating leverage due to higher SG&A expenses: SG&A expenses increased +19.6% year on year, substantially exceeding the 5.0% revenue growth rate, causing the Operating Income margin to decline by 242bp. If revenue growth and productivity improvements do not outpace the increase in expenses, achieving the full-year Operating Income plan will become more difficult.

2. Deteriorating profitability in the Recurring business: Segment profit declined -13.1% against revenue growth of +3.8%, and the profit margin declined by approximately 305bp. If profitability in this recurring-revenue business deteriorates over an extended period, it may affect the stability of company-wide profits.

3. Q4 concentration risk in achieving the full-year plan: Progress rates were 64.4% for revenue and 51.9% for Operating Income, below standard progress levels, requiring a substantial contribution in Q4 of ¥83.2B in revenue and ¥19.7B in Operating Income. Delays in project acceptance timing and the realization of integration synergies from acquisitions such as Aisel increase the uncertainty surrounding achievement of the plan.

Industry Benchmark (For Reference; Based on Company Research)

Profitability and Returns

Profitability is substantially above the industry median, placing the company among the upper tier of the IT and telecommunications industry.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, placing the company in the middle or lower tier of the industry in terms of growth.

※Source: Based on company research

Key Points from the Financial Results

1. The higher-revenue, lower-profit structure resulted from the gross margin improvement (+60bp) being offset by the increase in the SG&A ratio (+308bp). The key focus going forward will be determining whether this reflects front-loaded costs associated with an investment phase or a permanent increase in fixed costs.

2. The increase in Net Income depended on extraordinary income, including a gain on the sale of investment securities. The degree of recovery in the core business (Operating Income) will be the central point of confirmation when evaluating earnings sustainability.

3. The full-year plan progress rates (64.4% for revenue and 51.9% for Operating Income) indicate a high degree of dependence on Q4. Key areas to monitor in the second-half results will be the recovery of profitability in the Recurring business and the emergence of integration synergies from acquisitions such as Aisel.

Theoretical Share Price (Reference Value)

Sensitivity: ¥847–¥894 at ±1% in the cost of equity, and ¥867–¥874 at ω±0.1.

Note:

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

(Calculation 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; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee the future share 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. 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 professionals as necessary.

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