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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