OTSUKA CORPORATION FY2026 Q2 Earnings Report

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Executive Summary

For the second quarter of the fiscal year ending December 2026, Otsuka Corporation posted higher revenue and profits, driven primarily by revenue growth in its System Integration Business. Revenue was ¥757.50B (¥695.13B in the same period last year, YoY +9.0%), Operating Income was ¥53.09B (¥49.17B, YoY +8.0%), Ordinary Income was ¥54.82B (¥50.10B, YoY +9.4%), and Net Income attributable to owners of the parent was ¥36.98B (¥34.13B, YoY +8.4%). Although the gross profit margin declined slightly from the previous year to 18.3%, the 9.0% increase in revenue exceeded the 7.4% growth in selling, general and administrative expenses, securing higher Operating Income. Ordinary Income grew faster than Operating Income, supported by non-operating income including ¥0.79B in foreign exchange gains, while the recording of ¥1.27B in extraordinary losses, including ¥1.07B in impairment losses on investment securities, somewhat restrained growth in profit before tax.

Factors Driving Performance Changes

【Revenue】Revenue increased 9.0% year on year to ¥757.50B. By segment, the core System Integration Business accounted for 70.9% of total revenue and drove company-wide growth with revenue of ¥537.29B (YoY +9.5%). The Service and Support Business generated revenue of ¥221.72B (YoY +7.7%), representing 29.1% of total revenue, with both businesses maintaining a growth trajectory.

【Profit and Loss】Operating Income was ¥53.09B (YoY +8.0%), while the Operating Income margin of 7.0% was nearly unchanged from 7.1% in the previous year. By segment, System Integration secured profit growth commensurate with revenue growth, generating segment profit of ¥43.53B (YoY +9.7%, margin 8.1%). In contrast, Service and Support generated ¥16.54B (YoY +2.6%, margin 7.5%), with profit growth lagging revenue growth and the margin gap widening. Ordinary Income was ¥54.82B (YoY +9.4%), exceeding the growth rate of Operating Income, aided by ¥2.29B in non-operating income, including ¥0.79B in foreign exchange gains. Extraordinary losses totaled ¥1.27B, mainly due to ¥1.07B in impairment losses on investment securities, and temporarily restrained growth in profit before tax (+6.9% approximately). In conclusion, the Company reported higher revenue and profits, with profit growth attributable to top-line expansion and control of selling, general and administrative expenses.

Segment Analysis

The System Integration Business generated revenue of ¥537.29B (YoY +9.5%) and Operating Income of ¥43.53B (YoY +9.7%), with a profit margin of 8.1%. In addition to higher revenue and profits, profit growth slightly exceeded revenue growth, indicating improved profitability. The Service and Support Business generated revenue of ¥221.72B (YoY +7.7%), while Operating Income was limited to ¥16.54B (YoY +2.6%), with the profit margin trending downward from the previous year to 7.5%. Although both businesses maintained revenue growth, the difference in profit growth has slightly increased the Company’s reliance on the System Integration Business, which now accounts for approximately 72% of company-wide Operating Income.

Key Financial Indicators

【Profitability】The Operating Income margin of 7.0%, Ordinary Income margin of 7.2%, and Net Income margin attributable to owners of the parent of 4.9% were all broadly unchanged from the same period last year. The gross profit margin was 18.3%, reflecting the low-margin, high-volume business model of the information and communications equipment sales industry. However, Operating Income increased in line with revenue growth due to the control of the selling, general and administrative expense ratio at 11.3%. 【Cash Quality】Operating Cash Flow (OCF) was ¥42.58B, or 1.15 times Net Income attributable to owners of the parent of ¥36.98B, indicating sound cash backing for earnings. 【Investment Efficiency】ROE was 8.9%, maintaining a generally stable level amid expansion in total assets to ¥823.30B and net assets to ¥419.33B. Basic EPS increased in line with Net Income growth to ¥97.53 (¥90.00 in the previous year, YoY +8.4%). 【Financial Soundness】The Equity Ratio declined from the previous year to 50.9% but remained high. With cash and deposits of ¥257.02B and minimal interest-bearing debt, the financial base remains conservatively structured.

Cash Flow Analysis

Operating Cash Flow was ¥42.58B, a slight decrease of 5.8% year on year, but remained 1.15 times Net Income, indicating generally sound cash backing for earnings. Investing Cash Flow was -¥19.91B, of which capital expenditures were limited to ¥1.21B, approximately 22% of depreciation and amortization of ¥5.52B, indicating a limited level of investment. Financing Cash Flow was -¥17.33B, primarily reflecting outflows related to dividend payments. Free Cash Flow (Operating Cash Flow + Investing Cash Flow) was ¥22.67B, securing a level sufficient to fund shareholder returns, including dividend payments. In terms of working capital, trade receivables increased by ¥51.61B and inventories by ¥15.07B, weighing on cash conversion, while trade payables increased by ¥62.34B and partially offset these effects. This indicates that the accumulation of working capital accompanying business expansion is somewhat slowing cash conversion.

Earnings Quality

The core source of profit was Operating Income from the core business of ¥53.09B. Non-operating income of ¥2.29B, including ¥0.79B in foreign exchange gains and ¥0.28B in dividend income, made only a limited contribution of approximately 0.3% of revenue. Meanwhile, extraordinary losses of ¥1.27B were a temporary item mainly attributable to ¥1.07B in impairment losses on investment securities. The divergence between Ordinary Income and Net Income attributable to owners of the parent was primarily attributable to these extraordinary losses and the effective tax rate, which was approximately 30% based on income taxes of ¥16.12B and profit before tax of ¥53.56B; no structural abnormalities were identified. As Operating Cash Flow exceeded Net Income, cash backing for earnings was generally sound. However, increases in trade receivables and inventories are slowing cash conversion from a working capital perspective, and this warrants monitoring going forward.

Earnings Forecasts and Guidance

The full-year earnings forecasts are revenue of ¥1,379.00B (YoY +4.2%), Operating Income of ¥94.30B (YoY +4.8%), and Ordinary Income of ¥96.10B (YoY +5.0%). The first-half progress rates were 54.9% for revenue, 56.3% for Operating Income, and 57.0% for Ordinary Income, all exceeding the simple 50% benchmark, indicating that first-half progress was ahead of schedule relative to the full-year plan. During the quarter, revisions were made to the earnings and dividend forecasts, reflecting a review based on higher revenue and profits in the first half.

Shareholder Returns

An interim dividend of ¥55 has been paid, and the full-year dividend forecast is ¥105, expected to increase from the previous year’s annual dividend of ¥90. The Payout Ratio against forecast full-year EPS of ¥171.15 is 61.3% (¥105 ÷ ¥171.15). Given first-half Operating Cash Flow of ¥42.58B and Free Cash Flow of ¥22.67B, dividend funding is generally covered by cash flow.

Risk Factors

1. Business concentration risk: The System Integration Business accounts for 70.9% of revenue and approximately 72% of segment profit, meaning that demand trends and the competitive pricing environment in this business have a relatively significant impact on company-wide performance.

2. Working capital expansion risk: Trade receivables and notes receivable increased to ¥271.18B (up 23.5% year on year), while inventories increased to ¥69.14B (up 28.8%). Cash efficiency may fluctuate depending on the timing of project acceptance and collection.

3. Valuation fluctuation risk for investment securities: The Company recorded ¥1.07B in impairment losses on investment securities during the period. Going forward, valuation gains and losses related to market fluctuations may continue to arise with respect to the ¥23.69B balance of investment securities.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

The Company’s Operating Income margin and Net Income margin are both below the median for the IT and telecommunications industry, reflecting its earnings structure centered on the sale of information equipment and systems.

Growth and Capital Efficiency

The Company’s revenue growth rate is also below the industry median, indicating a relatively moderate pace of revenue growth.

※Source: Company analysis

Key Takeaways from the Financial Results

1. Although revenue growth was achieved, the Operating Income margin, Net Income margin, and revenue growth rate were all below the industry median, indicating relatively low levels of profitability and growth within the industry.

2. The pace of increase in trade receivables and inventories exceeded revenue growth, creating a structure in which the accumulation of working capital restrained the growth of Operating Cash Flow. This is an important consideration when assessing earnings quality.

3. First-half progress against the full-year plan exceeded 50% for revenue, Operating Income, and Ordinary Income. The financial results also confirm that revisions were made to the earnings and dividend forecasts during the quarter.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥1,293–¥1,366 at ±1% for the cost of equity, and ¥1,324–¥1,337 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end were used (there is a timing difference from 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: 2026-06 / 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 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 available earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

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