EM SYSTEMS CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

Consolidated results for 1H FY2026 fell short of the previous year in both revenue and profit, as a slowdown in the core Pharmacy Systems Business and deteriorating profitability in the Medical and Nursing Care/Welfare Systems Businesses weighed on company-wide performance. Revenue was ¥10.43B (-14.1% YoY), Operating Income was ¥0.92B (-55.7%), Ordinary Income was ¥1.28B (-46.7%), and Net Income was ¥0.66B (-59.0%). The gross margin declined by approximately 3.0pt from the previous year to 48.0%, while SG&A expenses remained broadly flat despite the decline in revenue. This was the primary factor behind the significant contraction in the operating margin to 8.8% (approximately 17.1% in the previous year).

Factors Affecting Performance

【Revenue】Revenue was ¥10.43B, representing a 14.1% YoY decline. Revenue from the core Pharmacy Systems Business fell to ¥8.34B (-15.6%), affected by a decline in initial sales, while the Medical Systems Business also contracted to ¥1.22B (-18.2%). Meanwhile, the Nursing Care/Welfare IT Systems Business expanded to ¥0.41B (+56.9%), partly due to the impact of its conversion into a consolidated subsidiary. Company-wide recurring revenue remained resilient but was insufficient to offset the decline in initial sales.

【Profit and Loss】Operating Income declined significantly to ¥0.92B (-55.7%), Ordinary Income to ¥1.28B (-46.7%), and Net Income to ¥0.66B (-59.0%). Operating Income from the Pharmacy Systems Business contracted to ¥1.28B (-39.9%), while the Medical Systems Business posted an Operating Loss of ¥0.25B, deteriorating from Operating Income of +¥0.08B in the previous year. The Nursing Care/Welfare Systems Business also recorded an Operating Loss of ¥0.13B, resulting in a structure in which losses from non-core businesses offset earnings from the core business. Ordinary Income was supported by ¥0.59B in non-operating income, including equity-method investment gains, but the Company recorded ¥0.19B in extraordinary losses, including ¥0.19B in impairment losses, further pressuring Net Income. In conclusion, the Company experienced declines in both revenue and profit.

Segment Analysis

Segment operating results diverged significantly across businesses. The Pharmacy Systems Business generated revenue of ¥8.34B (-15.6%) and Operating Income of ¥1.28B (-39.9%), with a 15.3% operating margin. It remains the main pillar of company-wide earnings, although its growth has slowed. The Medical Systems Business generated revenue of ¥1.22B (-18.2%) but posted an Operating Loss of ¥0.25B, falling into the red from Operating Income of +¥0.08B in the previous year, with its margin deteriorating significantly to -20.7%. The Nursing Care/Welfare IT Systems Business generated revenue of ¥0.41B (+56.9%, including the impact of becoming a consolidated subsidiary) and posted an Operating Loss of ¥0.13B, with a margin of -31.6%. Although it remained loss-making, its performance improved from the previous year. Other Businesses generated revenue of ¥0.54B (-5.8%) and Operating Income of ¥0.01B, representing a 2.0% margin, and remained small in scale. The losses in both the Medical and Nursing Care/Welfare segments are significantly diluting the earnings power of the Pharmacy Systems Business and constitute a structural factor behind the deterioration in the company-wide margin.

Key Financial Indicators

【Profitability】The operating margin contracted significantly to 8.8% from approximately 17.1% in the previous year, while the net profit margin also declined to 6.3% from approximately 13.2%. ROE was 3.3%, indicating low capital efficiency. The primary factors were the decline in the gross margin to 48.0% from approximately 51.0% in the previous year and negative operating leverage, with SG&A expenses remaining broadly flat against a 14.1% decline in revenue.【Cash Quality】Cash and deposits of ¥6.58B exceeded current liabilities of ¥5.25B, indicating sufficient near-term payment capacity. Meanwhile, the accumulation of contract liabilities of ¥0.92B indicates cash-flow support from deferred revenue.【Investment Efficiency】Net assets were ¥20.00B against total assets of ¥26.78B, while asset efficiency, measured by total asset turnover, has been trending downward due to the decline in revenue.【Financial Soundness】The Equity Ratio was extremely high at 74.7%, while long-term borrowings of ¥0.25B and other interest-bearing liabilities were minimal, indicating a conservative and stable financial foundation.

Cash Flow Analysis

As this report does not include detailed disclosure of the cash flow statement, the Company’s funding position is analyzed based on balance sheet trends. Cash and deposits declined to ¥6.58B from ¥7.85B in the previous year. Together with the decline in net assets from ¥20.43B to ¥20.00B, this suggests that reduced profit, increased investment securities from ¥1.04B to ¥1.54B, and an increase in goodwill of ¥2.34B, provisionally recorded in connection with the conversion of a subsidiary into a consolidated subsidiary, placed pressure on cash. Accounts receivable and notes receivable amounted to ¥2.97B and declined YoY; however, compared with the rate of revenue decline, the collection cycle may instead have lengthened. This point warrants attention from the perspective of working capital efficiency. The increase in contract liabilities to ¥0.92B indicates the accumulation of advance receipts associated with maintenance and subscription-based revenue and represents a stabilizing factor in cash generation.

Earnings Quality

The quality of earnings for the period was affected by temporary factors. Of Ordinary Income of ¥1.28B, non-operating income of ¥0.59B accounted for a high 5.7% of revenue and substantially exceeded Operating Income of ¥0.92B, materially boosting income at the ordinary income level. In addition to interest income of ¥0.01B, this non-operating income appears to include non-operating items such as equity-method investment gains. The increased reliance on sources outside the core business warrants attention when assessing earnings quality. Meanwhile, extraordinary losses of ¥0.19B, including ¥0.19B in impairment losses, related to fixed assets associated with the Medical and Nursing Care/Welfare Systems Businesses and are clearly classified as temporary factors. As a result, the gap between Ordinary Income of ¥1.28B and Net Income of ¥0.66B reached approximately 48%, primarily due to extraordinary losses and corporate income taxes and other charges, with an effective tax rate of approximately 39%. Comprehensive Income was ¥1.05B, exceeding Net Income of ¥0.66B, with valuation differences such as ¥0.34B in valuation difference on securities contributing to the result. However, it should be noted that these items are subject to market fluctuations.

Earnings Forecast and Guidance

Progress in 1H against the full-year plan was approximately 45.8% for revenue, a generally solid level against the ¥22.76B plan. However, progress was only 27.8% for Operating Income against the ¥3.32B plan, 32.5% for Ordinary Income against the ¥3.94B plan, and 30.2% for Net Income against the ¥2.19B plan, all substantially below the 50% benchmark generally expected at the halfway point of the fiscal year. The shortfall in profit progress was primarily attributable to the decline in the gross margin, continued losses in the Medical and Nursing Care/Welfare Systems Businesses, and the recognition of extraordinary losses. The Company has not revised either its earnings forecast or dividend forecast, and its plan appears to assume a recovery in orders for the core business and improved profitability in the loss-making segments during 2H.

Shareholder Returns

The Company paid an interim dividend of ¥5 per share, while its full-year dividend forecast is ¥23, representing a planned increase from ¥17 in the previous year. Based on interim Net Income attributable to owners of the parent of ¥0.66B and total interim dividends of approximately ¥0.35B, calculated as ¥5 per share × an average number of shares outstanding during the period of 69.2 million shares, the interim payout ratio was approximately 53%, a relatively high level. However, given the Company’s cash and deposits of ¥6.58B and its strong financial foundation with minimal interest-bearing debt, there is little concern regarding its ability to pay dividends. No disclosure was made regarding share repurchases on this occasion, and shareholder returns consist solely of dividends.

Risk Factors

1. Risk of continued segment losses: The Medical Systems Business has continued to report an Operating Loss of ¥0.25B, with a margin of -20.7%, while the Nursing Care/Welfare IT Systems Business has also continued to report an Operating Loss of ¥0.13B, with a margin of -31.6%. The two businesses are diluting the earnings generated by the core Pharmacy Systems Business, which has a margin of 15.3%.

2. Earnings quality risk: Non-operating income accounts for a high 5.7% of revenue relative to Ordinary Income, and reliance on non-operating items such as equity-method investment gains is increasing. In addition, extraordinary losses of ¥0.19B, including ¥0.19B in impairment losses, were recognized during the period. Continued monitoring is therefore required regarding the future recoverability of intangible assets and goodwill of ¥2.34B, equivalent to 8.7% of total assets.

3. Revenue concentration risk: The Pharmacy Systems Business accounts for 79.9% of revenue (¥8.34B/¥10.43B), indicating a high degree of dependence on a single business. The business itself has experienced double-digit declines in both revenue and profit from the previous year and is structurally susceptible to the impact of regulatory revisions and demand trends.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

Compared with the median for the IT and telecommunications industry, both the operating margin and net profit margin are below the industry median.

Growth and Capital Efficiency

While many peer companies are experiencing revenue growth, the Company recorded a decline in revenue and ranks low within the industry in terms of growth.

Source: Compiled by the Company

Key Points in the Financial Results

1. The widening gap in profit progress is noteworthy. Progress in 1H against the full-year plan was 45.8% for revenue compared with only 27.8% for Operating Income, a significant disparity. Recovery in orders for the core business and the degree of improvement in the loss-making segments during 2H will be prerequisites for achieving the full-year plan.

2. An increased reliance on non-operating income in the earnings structure has been confirmed. Non-operating income made a significant contribution to boosting Ordinary Income, and recovery in operating-level earnings power will be a key issue in assessing the quality of earnings going forward.

3. The stability of the financial foundation contrasts with the vulnerability of business profitability. Against a conservative balance sheet featuring an Equity Ratio of 74.7% and cash and deposits of ¥6.58B, the continued losses in the Medical and Nursing Care/Welfare Systems Businesses and the decline in the gross margin represent structural challenges in the income statement.

Theoretical Share Price (For Reference)

Sensitivity: ¥293–¥310 at ±1% for the cost of equity, and ¥301–¥302 at ±0.1 for ω.

Notes:

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

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / Mechanically calculated using only publicly disclosed data; this does not constitute a forecast of the market share price or a recommendation of any specific investment action, nor does it 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 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 a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q2 performance was weak, with a sharp decline in initial system sales and a material deterioration in operating profitability despite continued growth in billing revenue. Revenue fell 14.1% year on year to ¥10.43bn. Operating income declined 55.7% to ¥0.92bn, substantially underperforming the revenue trend. Net income attributable to owners fell 58.6% to ¥0.66bn, or ¥9.58 per share. The gross profit margin contracted by 301bp year on year to 48.0%, from 51.0%. Operating margin contracted by 828bp to 8.8%, from 17.1%, moving the company to the low end of the stated “good” profitability range. Net margin declined by approximately 685bp to 6.3%, from 13.2%. SG&A expenses decreased only 0.7% to ¥4.09bn while revenue fell 14.1%, lifting the SG&A-to-sales ratio to 39.2% from 33.9% and demonstrating adverse operating leverage. The core pharmacy systems business remained profitable, but its revenue fell 15.7% and segment profit declined 39.9%. The medical systems business swung from a ¥0.08bn segment profit to a ¥0.25bn loss. The care/welfare systems business expanded revenue by 56.9%, partly reflecting consolidation activity, but remained loss-making. Revenue mix became relatively more recurring: billing revenue increased 6.9% to ¥4.45bn while initial sales declined 30.8% to ¥4.13bn. Ordinary income of ¥1.28bn exceeded operating income because non-operating income was ¥0.59bn, equivalent to 5.7% of revenue, making below-operating items meaningful to reported earnings. Net income also includes ¥0.19bn of extraordinary losses, principally ¥0.19bn of impairment losses, which represents 29.1% of net income and is a material one-time earnings-quality factor. The balance sheet remains financially conservative, with a 224.5% current ratio, ¥6.58bn of cash and deposits, and interest-bearing debt of only ¥0.25bn. Management retained its full-year forecast, but H2 delivery must improve substantially, particularly in initial sales, to meet the operating-income target.

Profitability Analysis

The reported annualized ROE is 6.6%, below the 8% caution threshold, and is decomposed into a 6.3% net profit margin, 0.779x asset turnover, and 1.34x financial leverage. Financial leverage is modest, so returns are primarily determined by operating profitability and asset utilization rather than balance-sheet gearing. The largest adverse movement is profitability: operating income fell 55.7%, much faster than the 14.1% revenue decline, and operating margin fell 828bp to 8.8%. Gross margin also declined 301bp to 48.0%, indicating that the earnings pressure was not solely attributable to fixed SG&A absorption. SG&A was effectively flat year on year, creating negative operating leverage as sales contracted; SG&A grew materially faster than revenue on a relative basis. The pharmacy systems segment is the core business by operating-income contribution, generating ¥1.28bn of segment profit and a 15.3% margin, but this margin declined from 21.5% in the prior-year period. Medical systems recorded a ¥0.25bn loss on revenue of ¥1.23bn, while care/welfare systems recorded a ¥0.13bn loss on ¥0.41bn of revenue. The care/welfare segment’s loss narrowed from ¥0.17bn despite strong sales growth, whereas medical systems deteriorated from a profit in the prior year. The 6.3% net margin benefits from non-operating income, as ordinary income exceeded operating income by ¥0.36bn. The tax burden was 0.611, equivalent to a 39.1% effective tax rate, which further constrained conversion of pre-tax profit to net income. Interest burden of 1.177 and interest coverage of 461.0x confirm that financing cost is not a material profitability constraint. Recovery in initial sales and a return to profitability in medical and care/welfare systems are the principal requirements for a sustained ROE improvement.

Growth Assessment

Revenue contracted 14.1% to ¥10.43bn, led by a ¥1.84bn decline in initial sales to ¥4.13bn. Initial sales fell 30.8% year on year, which was the principal driver of the consolidated revenue decline. In contrast, billing revenue rose 6.9% to ¥4.45bn and became the largest revenue category, supporting the recurring component of the revenue base. Supply revenue declined 2.0% to ¥1.04bn, while maintenance revenue declined 23.3% to ¥0.34bn. Pharmacy systems revenue declined 15.7% to ¥8.33bn, showing that the largest business remains exposed to volatility in upfront installations and related initial revenue. Medical systems revenue declined 18.2% to ¥1.23bn. Care/welfare systems revenue increased 56.9% to ¥0.41bn, including the effect of consolidating Conduct Co., Ltd., but the segment remained loss-making. The newly recognized provisional goodwill of ¥0.41bn from the Conduct acquisition underscores the strategic growth emphasis in care/welfare systems. The full-year revenue forecast is ¥22.76bn, meaning H1 progress is 45.8% versus the standard 50% midpoint pace. The full-year operating-income forecast is ¥3.32bn, with H1 progress of only 27.8%, 22.2 percentage points below the standard pace. Ordinary-income progress is 32.5% against the full-year forecast of ¥3.94bn, also materially below the standard midpoint pace. Achieving guidance requires H2 revenue of ¥12.33bn, up 18.1% versus H1, and H2 operating income of ¥2.39bn, approximately 2.6 times H1 operating income. This implies a substantial second-half recovery in sales mix and operating margin. Management has not revised its earnings forecast, so quarterly evidence of initial-sales normalization and loss reduction in non-core system businesses will be central to evaluating forecast credibility.

Financial Health

Liquidity is strong, with current assets of ¥11.79bn against current liabilities of ¥5.25bn, producing working capital of ¥6.54bn and a current ratio of 224.5%. The quick ratio is also robust at 214.1%, indicating that liquidity does not depend on inventory realization. Cash and deposits of ¥6.58bn exceed total interest-bearing debt of ¥0.25bn by a wide margin. Debt-to-capital is only 1.2%, and interest coverage is 461.0x, demonstrating very limited debt-service risk. Current liabilities include ¥0.16bn of current portions of long-term loans, which are readily covered by liquid current assets. Total liabilities represent 25.3% of total assets, while equity represents a substantial 74.7% capital adequacy ratio. Long-term loans increased from ¥0.01bn to ¥2.46bn, a 4,820% increase from a very low base; however, the absolute debt burden remains immaterial relative to the company’s cash holdings and ¥20.00bn equity base. Investment securities increased ¥0.49bn, or 47.3%, to ¥1.54bn, increasing exposure to valuation movements; accumulated other comprehensive income increased to ¥0.86bn. Goodwill stands at ¥2.34bn, equal to 11.7% of equity and 8.7% of assets, which is below the stated warning thresholds. Intangible assets represent 15.8% of total assets, remaining within the balanced benchmark range. The acquisition-related provisional goodwill and impairment charges make post-acquisition asset performance and future impairment testing relevant balance-sheet monitoring items.

Notable B/S Changes

Long-term loans: +¥2.41bn (+4,820.0%) to ¥2.46bn - a large percentage increase from a negligible prior base, but debt remains modest relative to ¥6.58bn cash and ¥20.00bn equity. Investment securities: +¥0.49bn (+47.3%) to ¥1.54bn - increases exposure to market-value movements and contributed to higher accumulated other comprehensive income. Goodwill: +¥0.27bn to ¥2.34bn - the care/welfare acquisition generated provisional goodwill of ¥0.41bn; future performance and impairment testing of acquired assets require monitoring.

Cash Flow Quality

Reported earnings quality is affected by non-recurring charges rather than by a disclosed operating-cash-flow measure. Extraordinary losses were ¥0.19bn, comprising ¥0.19bn of impairment losses and ¥0.01bn of fixed-asset disposal losses. The impairment charge equals 29.1% of net income, triggering the HIGH_ONE_TIME_ITEMS alert because it exceeds the 20% threshold. The root cause is impairment in the medical systems and care/welfare systems businesses: ¥0.08bn and ¥0.10bn, respectively. This is particularly relevant because both businesses were operating at segment losses in the current period, linking the accounting charge to weaker asset-level earnings expectations. The impact is that reported net income understates pre-impairment profitability, but the impairment simultaneously signals reduced expected future cash generation from the affected assets. Ordinary income exceeded operating income by ¥0.36bn due to net non-operating income, so operating profit remains the cleaner indicator of underlying period performance. Interest income was only ¥0.01bn, while the remainder of non-operating income supported ordinary earnings. Cash and deposits decreased to ¥6.58bn from ¥7.85bn year on year, while contract liabilities increased to ¥0.92bn from ¥0.82bn, modestly increasing customer prepayments. The enlarged contract-liability balance provides some revenue visibility, although conversion into recognized revenue and profitability depends on project execution and service delivery.

Dividend Sustainability

The Q2 dividend is ¥5.00 per share, corresponding to a calculated interim payout ratio of 53.2% based on current-period earnings. This interim payout ratio is within the stated sub-60% sustainability benchmark. The full-year dividend forecast is ¥23.00 per share against forecast EPS of ¥31.69, implying a forecast dividend payout ratio of approximately 72.6%. That prospective payout ratio is above the stated 60% benchmark and leaves a narrower earnings cushion than the interim calculation suggests. The company’s strong liquidity, net-cash position, and low financial leverage support its capacity to maintain dividends through near-term profit volatility. However, H1 net income represents only 30.2% of the full-year forecast attributable profit of ¥2.19bn. Consequently, dividend sustainability is linked to the required second-half earnings recovery, rather than to balance-sheet capacity. The absence of a dividend forecast revision indicates that management currently expects the H2 recovery to support the ¥23.00 annual dividend.

Risk Assessment

Business risks include Initial-sales cyclicality: initial sales declined 30.8% year on year to ¥4.13bn, creating a large drag on consolidated revenue and fixed-cost absorption., Core pharmacy systems slowdown: revenue declined 15.7% to ¥8.33bn and segment profit declined 39.9% to ¥1.28bn, reducing the earnings contribution from the core business., Medical systems execution risk: the segment moved from a ¥0.08bn profit to a ¥0.25bn loss as revenue declined 18.2%., Care/welfare integration and profitability risk: revenue rose 56.9%, including a newly consolidated subsidiary, but the segment remained loss-making and incurred ¥0.10bn of impairment., Healthcare IT industry risk: changes in medical/pharmacy reimbursement, digitalization requirements, customer IT-investment timing, and system migration demand can affect installation volumes and upfront revenue recognition., Goodwill valuation risk: Conduct acquisition goodwill was provisionally measured at ¥0.41bn, and the care/welfare business must improve earnings to support acquired-asset value..

Financial risks include Forecast execution risk is elevated: operating-income progress of 27.8% is 22.2 percentage points below the normal H1 50% pace., Non-operating-income reliance: ¥0.59bn of non-operating income, equal to 5.7% of revenue, materially supported ordinary income relative to operating income., Impairment risk: current-period impairment losses of ¥0.19bn arose in loss-making medical and care/welfare segments., Investment-security valuation exposure increased as investment securities rose 47.3% to ¥1.54bn., Long-term loans increased to ¥2.46bn from ¥0.01bn, although absolute leverage and debt-servicing burden remain low..

Key concerns include The primary near-term concern is margin recovery: operating margin fell 828bp to 8.8% as gross margin contracted and SG&A absorption worsened., The HIGH_ONE_TIME_ITEMS alert is material: impairment and disposal losses totaled ¥0.19bn, or 29.1% of net income, indicating pressure on the expected returns of affected assets., The full-year operating-income target requires H2 operating income of ¥2.39bn, 2.6 times the H1 result., The forecast dividend payout ratio of approximately 72.6% depends on achievement of the second-half earnings recovery..

Investment Implications

Key takeaways include The recurring billing revenue base expanded 6.9% to ¥4.45bn, partially offsetting the sharp decline in upfront initial sales., Profitability weakened materially: operating income fell 55.7%, operating margin fell to 8.8%, and annualized ROE was 6.6%., Pharmacy systems remains the core earnings engine, but its lower revenue and margin were the largest determinant of consolidated earnings pressure., The balance sheet provides resilience, with ¥6.58bn of cash, a 224.5% current ratio, and only ¥0.25bn of interest-bearing debt., The unchanged forecast embeds a pronounced H2 improvement and therefore raises the importance of order conversion, initial sales, and segment-loss reduction..

Metrics to watch include Initial-sales revenue and its share of pharmacy systems revenue, Billing revenue growth and retention of recurring customer payments, Pharmacy systems segment margin, Medical systems path back to segment profitability, Care/welfare systems loss reduction and performance of the Conduct acquisition, H2 operating-income delivery against the ¥3.32bn full-year forecast, Additional impairment charges and goodwill carrying value, Full-year dividend coverage relative to forecast earnings.

Regarding relative positioning, The company combines a recurring healthcare-system revenue component and a very strong net-cash balance sheet with currently subdued earnings momentum. Its 48.0% gross margin remains supportive for a software and healthcare IT model, but the 8.8% operating margin and 6.6% annualized ROE indicate weaker current returns than high-performing IT services peers. Relative resilience is derived from low leverage and liquidity, while relative risk is concentrated in upfront-sales volatility, loss-making adjacent segments, and the scale of the implied second-half recovery.