XNET (4762) FY2026 Q3 Earnings Report

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Executive Summary

The results showed simultaneous growth in operating income and a decline in net income. While profitability improved, extraordinary losses weighed on bottom-line profit. Revenue increased 5.5% year on year to ¥4.18B, while operating income rose 15.8% to ¥0.74B, securing profit growth exceeding revenue growth. However, net income declined 17.1% to ¥0.35B, due to the recognition of ¥0.14B in extraordinary losses and a high effective tax rate of 41.0%. Progress toward the full-year forecast was 73–75% for revenue, operating income, and ordinary income, all tracking at standard levels, while progress for net income remained at 67.1%.

Factors Affecting Earnings

【Revenue】Revenue increased 5.5% year on year to ¥4.18B. Demand related to financial systems and IT services appears to have remained firm, although segment-level breakdown data has not been disclosed. Progress toward the full-year forecast of ¥5.60B was 74.6%, a standard level for the cumulative Q3 period.

【Profit and Loss】As cost of sales increased only 1.5% year on year, gross profit rose 15.6% to ¥1.30B, and the gross margin improved by approximately 2.7pt to 31.0%, from 28.3% in the same period of the previous year. Meanwhile, SG&A expenses increased 15.3% to ¥0.56B, exceeding revenue growth, of which salaries and allowances rose 14.8% to ¥0.22B. Nevertheless, the improvement in gross profit exceeded the increase in SG&A expenses, resulting in operating income of ¥0.74B (+15.8%) and ordinary income of ¥0.73B (+16.2%). However, due to the recognition of ¥0.14B in extraordinary losses and the high effective tax rate of 41.0%, net income declined 17.1% to ¥0.35B. In summary, the Company achieved revenue and profit growth through the operating and ordinary income stages, but revenue growth accompanied a decline in net income at the bottom-line stage.

Key Financial Metrics

【Profitability】The operating margin improved by approximately 1.6pt to 17.7%, from 16.2% in the same period of the previous year, while the gross margin also increased by approximately 2.7pt to 31.0%, from 28.3%. Meanwhile, the net profit margin declined by approximately 2.3pt to 8.3%, from 10.6% in the same period of the previous year, as extraordinary losses and the high tax burden weighed on the bottom-line margin. 【Cash Flow Quality】The gap between ordinary income of ¥0.73B and net income of ¥0.35B reached 52.1%, primarily due to extraordinary losses of ¥0.14B and the effective tax rate of 41.0%. Non-operating income was only ¥0.02B, or approximately 0.5% of revenue, indicating that ordinary income was largely generated by the core business. 【Investment Efficiency】Annualized ROE was 15.2%, decomposed into a net profit margin of 8.3%, total asset turnover of 0.93x, and financial leverage of 1.95x. EPS was ¥83.61, down 8.3% from ¥91.17 in the previous year. 【Financial Soundness】The equity ratio improved to 51.4%, from 43.7% in the same period of the previous year, while the current ratio remained below 100% at 79.9%. Current assets were ¥1.70B against current liabilities of ¥2.12B. Short-term borrowings declined 40.0% year on year to ¥1.50B, indicating progress in deleveraging; however, all interest-bearing debt consists of short-term borrowings, leaving the Company with a refinancing-dependent structure.

Cash Flow Analysis

As cash flow statement data has not been disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and deposits declined to ¥1.18B, from ¥1.46B in the same period of the previous year, suggesting that funds were used to repay short-term borrowings, which decreased by ¥1.00B, or 40.0%, year on year. Current assets declined to ¥1.70B, from ¥2.22B, while investment securities also decreased to ¥2.50B, from ¥2.70B in the same period of the previous year. These movements suggest a capital allocation policy that prioritized improving the financial structure through the reduction of borrowings, but they also resulted in lower on-hand liquidity, consistent with the current ratio of 79.9%.

Earnings Quality

Ordinary income of ¥0.73B compared with net income of only ¥0.35B, resulting in a substantial gap ratio of 52.1%. The primary cause of this gap was the recognition of ¥0.14B in extraordinary losses, which should be distinguished as a temporary factor. In addition, income taxes and other taxes of ¥0.24B and the high effective tax rate of 41.0% also compressed net income. Non-operating income was small at ¥0.02B, primarily consisting of interest on securities and representing approximately 0.5% of revenue. Ordinary income was therefore generated at a level close to operating income of ¥0.74B, without reliance on temporary non-operating income. Accordingly, earnings quality through the ordinary income stage was high, but quality at the net income stage declined year on year due to the impact of extraordinary losses and the tax burden.

Earnings Forecast and Guidance

Progress toward the full-year forecasts was 74.6% for revenue (forecast: ¥5.60B), 74.1% for operating income (same: ¥1.00B), and 73.6% for ordinary income (same: ¥0.99B). All were tracking near the standard level of approximately 75% for cumulative Q3 results. The net income progress rate was somewhat lower at 67.1% (forecast: ¥0.52B), reflecting the impact of cumulative extraordinary losses of ¥0.14B; the deviation from the standard level was approximately 8pt and did not constitute a significant shortfall. The full-year forecast anticipates a 10.6% year-on-year decline in net income. Compared with the cumulative decline of 17.1%, the key factor determining progress over the remaining period will be whether extraordinary factors recur.

Shareholder Returns

The Q2 dividend was ¥22.50 per share. The Company’s full-year dividend forecast is ¥47.50 per share, and forecast EPS is ¥124.40, implying a full-year forecast payout ratio of 38.2%. Comparative data against the dividend paid in the same period of the previous year is limited, but based on the full-year forecast, a certain level of dividend capacity relative to earnings has been secured. Treasury shares totaled 4.08 million shares, a significant amount equivalent to approximately 49.4% of the 8.26 million issued shares. Future shareholder returns should therefore be considered within the broader capital allocation policy, including the acquisition and cancellation of treasury shares in addition to dividends.

Risk Factors

1. Short-term liquidity risk: The current ratio was below 100% at 79.9%, with current assets of ¥1.70B against current liabilities of ¥2.12B. All interest-bearing debt of ¥1.50B consists of short-term borrowings, creating a structure in which changes in refinancing terms directly affect cash management.

2. Possibility of recurring extraordinary losses: Net income declined 17.1% year on year due to the recognition of ¥0.14B in extraordinary losses during the current period. The conversion rate from ordinary income to net income remained at only 47.9%, and similar temporary factors could become a source of fluctuation in bottom-line profit if they recur in the future.

3. Continued high tax burden: The effective tax rate remained high at 41.0%, with income taxes and other taxes of ¥0.24B compressing net income. The Company remains in a situation where increases in operating income are not readily converted into net income or sufficient capacity for shareholder returns.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Return

Both the operating margin and net profit 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 a relatively slower growth pace compared with the Company’s high level of profitability.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The gross margin of 31.0% (+2.7pt year on year) and operating margin of 17.7% (+1.6pt) exceeded the industry median, confirming improved profitability in the core business.

2. Despite operating income growth, net income declined 17.1% year on year due to the recognition of ¥0.14B in extraordinary losses. The 52.1% conversion rate from ordinary income to net income reflects temporary factors specific to the current period.

3. Short-term borrowings declined 40.0% year on year, indicating progress in deleveraging, while the equity ratio improved from 43.7% to 51.4%. However, the level of short-term liquidity indicated by the current ratio of 79.9% remains a monitoring point in the financial structure.

Theoretical Share Price (Reference Value)

Sensitivity: ¥859–¥909 at ±1% for the cost of equity, and ¥880–¥888 at ±0.1 for ω.

Notes:

• Net income has been substantially compressed relative to operating income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (net income ÷ operating income: 52%). This value reflects that compression at face value; if the factors are temporary, normalized earnings power may be higher.
• Net assets as of the quarter-end have been used, resulting in a timing difference relative to the full-year forecast.
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Valuation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / Mechanically calculated using only 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, after consulting with professionals as necessary.

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