SHOWA SYSTEM ENGINEERING (4752) FY2026 Q3 Earnings Report

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Executive Summary

In addition to higher revenue, profitability improved, resulting in increases in Operating Income, Ordinary Income, and Net Income that all exceeded the rate of revenue growth. Revenue was ¥6.43B (+3.9% YoY), Operating Income was ¥0.84B (+9.6%), Ordinary Income was ¥0.87B (+10.5%), and Net Income was ¥0.60B (+11.7%). The primary driver of profit growth was the improvement in the gross margin to 19.3% from 18.5% in the previous year, which absorbed the increase in SG&A expenses.

Factors Affecting Performance

【Revenue】Revenue increased 3.9% YoY to ¥6.43B. By segment, Software Development was ¥6.37B, accounting for 99% of revenue and representing the core business, while Business Process Outsourcing remained at ¥0.06B. Overall growth was driven by the expansion of the core Software Development Business.

【Profit and Loss】Gross profit was ¥1.24B (+8.8% YoY), exceeding revenue growth, and the gross margin improved by 86bp to 19.3%. SG&A expenses were ¥0.40B, up 7.1% YoY and exceeding the revenue growth rate; however, because the increase in gross profit exceeded the increase in SG&A expenses, Operating Income rose to ¥0.84B (+9.6%). Non-operating income and expenses remained limited, with dividends received and other items totaling ¥0.02B, indicating a high dependence on the core business. Ordinary Income increased to ¥0.87B (+10.5%), and Net Income continued to grow to ¥0.60B (+11.7%). This was a high-quality earnings result, characterized by both revenue and profit growth, with the rate of profit growth exceeding the rate of revenue growth.

Segment Analysis

The Software Development segment generated revenue of ¥6.37B and Operating Income of ¥1.23B (margin of 19.4%), driving the overall business. Business Process Outsourcing was small in scale, with revenue of ¥0.06B and Operating Income of ¥0.01B (margin of 14.2%), but remained profitable. Company-wide Operating Income of ¥0.84B represents the amount after deducting company-wide common expenses (an adjustment of △¥0.37B and SG&A expenses not attributable to reportable segments) from total segment profits.

Key Financial Metrics

【Profitability】Operating margin of 13.1% (12.5% in the previous year), Ordinary Income margin of 13.5% (12.7%), and Net Income margin of 9.3% (8.7%) all improved. Annualized ROE was 13.8%, while annualized ROA was approximately 9.1%, both representing favorable levels.【Cash Quality】Cash and deposits were ¥5.92B, accounting for 67.0% of total assets, while accounts receivable of ¥0.99B remained broadly consistent with revenue growth.【Investment Efficiency】The conversion rate from Profit Before Tax to Net Income was 69.1%, and the effective tax rate was stable at 30.8%. Intangible assets accounted for 0.4% of total assets, indicating an asset composition that is not dependent on intangible assets.【Financial Soundness】The Equity Ratio improved to 65.4% from 61.6% in the previous year. The current ratio was 689.7%, short-term borrowings were only ¥0.01B, and interest coverage was extremely high. Financial leverage was a conservative 1.53x.

Cash Flow Analysis

Although the Company does not disclose a statement of cash flows, its funding trends can be assessed from changes in the balance sheet. Cash and deposits were ¥5.92B, up 2.5% from ¥5.78B in the same period of the previous year, while retained earnings accumulated to ¥4.86B, suggesting that Net Income is being accumulated as internal reserves. Accounts receivable were ¥0.99B, up 4.2% YoY, broadly consistent with revenue growth of +3.9%, and no deterioration in working capital due to a rapid expansion in trade receivables was observed. Accounts payable were ¥0.37B, up 10.6% YoY, with the increase in procurement and outsourcing liabilities providing a certain degree of support to working capital. Work in process was ¥0.02B and small in absolute terms, but increased significantly from the same period of the previous year; project progress and the timing of acceptance remain matters requiring continued monitoring.

Quality of Earnings

The expansion in Ordinary Income was primarily attributable to the increase in Operating Income from the core business. Non-operating income was limited to ¥0.02B, or 0.3% of revenue, and consisted mainly of dividends received and interest received. A loss on disposal of fixed assets of less than ¥0.01B was recorded as an extraordinary loss item, but its impact was immaterial, and there was no situation in which temporary factors significantly distorted the profit level. The conversion rate from Profit Before Tax to Net Income was 69.1%, and the effective tax rate of 30.8% remained broadly stable compared with 31.6% in the same period of the previous year. The provision for bonuses declined from ¥0.48B in the same period of the previous year to ¥0.24B, and the impact of recognition timing was reflected in changes in current liabilities; however, this did not impair the underlying quality of earnings. Overall, the profit increase can be assessed as high quality and originating from the core business, supported by improved operating leverage.

Earnings Forecast and Guidance

Progress toward the Full-Year plan was 75.6% for Revenue, 87.1% for Operating Income, 88.0% for Ordinary Income, and 89.5% for Net Income. Progress on the profit side was more than 10pt above the standard progress rate of 75%. The Full-Year forecast is Revenue of ¥8.50B (+2.2% YoY), Operating Income of ¥0.97B (+2.1%), and Net Income of ¥0.67B (-6.5%), implying expectations for Q4 Revenue of ¥2.07B and Operating Income of approximately ¥0.13B. Based on this reverse calculation, the implied Q4 Operating margin is approximately 6.0%, substantially below the 13.1% for the Q3 cumulative period, suggesting seasonality in which personnel expenses, bonuses, and project costs are concentrated toward the fiscal year-end. The fact that the Full-Year Net Income forecast is -6.5% YoY, compared with +11.7% growth in the Q3 cumulative period, may reflect cost concentration in Q4 or a conservative estimate.

Shareholder Returns

The Q2 dividend was ¥0 per share, while the Company’s Full-Year forecast for annual dividends is ¥55 per share. The forecast Payout Ratio against forecast EPS of ¥156.03 is 35.3%, below the general sustainability benchmark of 60%. Given the absence of an interim dividend, the annual dividend of ¥55 may be structured to be concentrated in the year-end dividend. The financial structure of cash and deposits of ¥5.92B and short-term borrowings of ¥0.01B supports the resilience of the Company’s dividend funding capacity.

Risk Factors

1. Cost pressure from rising personnel and outsourcing expenses: SG&A expenses increased 7.1% YoY, exceeding the revenue growth rate of +3.9%. If increases in personnel expenses associated with the recruitment and retention of IT talent exceed the improvement in the gross margin, operating leverage could reverse.

2. Profitability fluctuations associated with project progress and the timing of acceptance: Although work in process was small at ¥0.02B, it increased significantly from the same period of the previous year. Changes in specifications, delivery delays, and the failure to recover additional labor hours could affect the cost ratio and the timing of revenue recognition.

3. Decline in Q4 profitability: The Q4 Operating margin implied by the Full-Year plan is approximately 6.0%, substantially below the 13.1% for the Q3 cumulative period. Accordingly, the concentration of costs at the fiscal year-end and project profitability trends will determine the Full-Year outcome.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Both the Operating margin and Net Income margin exceeded the industry median, indicating that profitability was relatively high within the industry.

Growth and Capital Efficiency

The Revenue growth rate was below the industry median, indicating relatively moderate growth within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Against revenue growth of +3.9%, Operating Income increased +9.6% and Net Income increased +11.7%, with profit growth exceeding revenue growth. The Company is in a high-quality profit growth phase accompanied by an improvement in the gross margin (19.3%, +86bp YoY).

2. Financial soundness is extremely high, with an Equity Ratio of 65.4%, a current ratio of 689.7%, and short-term borrowings of ¥0.01B. Cash and deposits of ¥5.92B account for 67.0% of total assets.

3. Although Full-Year progress is high, at 87.1% for Operating Income and 89.5% for Net Income, the implied Q4 Operating margin is approximately 6.0%, substantially below the Q3 cumulative level. Year-end costs and project profitability trends will be the focus in determining the Full-Year outcome.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,386–¥1,465 for ±1% in the Cost of Equity, and ¥1,423–¥1,427 for ±0.1 in ω.

Notes:

• Because Net Income progress against the Full-Year forecast (90%) exceeds the standard level (75%), Forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of forecast tend to exceed their forecasts. For businesses with strong seasonality, the adjustment may be excessive).
• Net assets as of the quarter-end have been 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 at a somewhat higher level.

(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 future share prices.)

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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 responsibility, and you should consult a professional as necessary.

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