E-Guardian (6050) FY2026 Q2 Earnings Report

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Executive Summary

The cumulative results for Q2 represented a decline in both revenue and earnings, as the decline in revenue was compounded by an increase in selling, general and administrative expenses, resulting in a significant decrease in the operating margin. Revenue was ¥54.6B (¥58.7B in the same period of the previous year, YoY -6.9%), Operating Income was ¥5.7B (¥9.3B in the previous year, YoY -39.0%), Ordinary Income was ¥5.9B (down -36.7%), and interim Net Income attributable to owners of the parent was ¥3.7B (down -38.5%). The primary causes of the earnings decline were a contraction in gross profit exceeding the rate of revenue decline and an increase in fixed-cost burden due to a 7.2% increase in selling, general and administrative expenses.

Factors Affecting Performance

【Revenue】Revenue was ¥54.6B, down 6.9% year on year. As the Company operates as a single Internet Security Business without inter-segment complementarity, the delay in demand recovery was directly reflected in overall company performance.

【Profit and Loss】Gross profit was ¥15.3B (¥18.3B in the previous year), a decrease of 16.3%, representing a contraction exceeding the rate of revenue decline. The gross margin was 28.0%, down 3.1pt from 31.1% in the previous year. Meanwhile, selling, general and administrative expenses increased 7.2% to ¥9.6B, and the decline in fixed-cost absorption capacity amid lower revenue reduced the operating margin by 5.4pt to 10.4% (15.8% in the previous year). In non-operating items, interest income and other items contributed, and Ordinary Income remained at ¥5.9B; however, extraordinary losses were minor, and the decline in Net Income primarily reflected lower earnings from core operations. Revenue and earnings declined.

Segment Analysis

As the Company consists of a single Internet Security Business segment, segment-level disclosure has been omitted.

Key Financial Metrics

【Profitability】The operating margin was 10.4%, down 5.4pt from 15.8% in the same period of the previous year, while the net margin was also 6.8%, down 3.5pt from 10.3% in the previous year. The gross margin was 28.0% (31.1% in the previous year), with the background to the deterioration in margins being that cost reductions fell short of the rate of revenue decline.【Cash Quality】Operating Cash Flow (OCF) was ¥1.3B, and the OCF/Net Income ratio was only 0.34x against Net Income of ¥3.7B. Tax payments of ¥2.7B and decreases in accounts payable and bonus provisions were sources of cash outflow.【Investment Efficiency】Annualized ROE was 6.2% and ROA was approximately 5.5%, representing levels achieved under a conservative capital structure with total asset turnover of 0.82x and financial leverage of 1.11x.【Financial Soundness】The Equity Ratio was 89.9% (up from 87.8% in the previous year), the current ratio was approximately 1,010%, and cash and deposits were ¥106.4B, accounting for 79.5% of total assets. The debt-to-equity ratio was an extremely conservative 0.11x.

Cash Flow Analysis

Operating Cash Flow was ¥1.3B, a decrease of 56.6% from ¥3.0B in the same period of the previous year. In addition to the deduction of ¥2.7B in corporate income tax payments from OCF before taxes and other adjustments of ¥3.8B, working capital changes, including decreases in bonus provisions and accounts payable, contributed to cash outflows, resulting in a low cash conversion ratio against Net Income of ¥3.7B. Investing Cash Flow was an outflow of ¥0.7B, primarily reflecting the acquisition of intangible assets of ¥0.6B; capital expenditures of ¥0.3B remained below depreciation and amortization of ¥0.4B. Financing Cash Flow was an outflow of ¥4.1B, mainly due to dividend payments of ¥4.1B. As a result, positive Free Cash Flow of ¥0.6B was secured; however, this was below the dividend payment amount, indicating weak dividend coverage by Free Cash Flow on a standalone interim-period basis. Cash and cash equivalents decreased by ¥3.5B during the interim period, but the period-end balance remained ample at ¥106.4B, limiting the impact on liquidity.

Earnings Quality

Earnings for the interim period reflected deterioration in recurring business activities, while extraordinary losses remained minor, including losses on the disposal of fixed assets; therefore, no earnings enhancement or reduction attributable to temporary factors was observed. Non-operating income was ¥0.3B, mainly consisting of interest income of ¥0.2B, while non-operating expenses were small at ¥0.04B, including foreign exchange losses, and their impact on Ordinary Income was limited. From an accrual perspective, there were no signs of earnings being inflated by increases in accounts receivable or work in process; however, OCF was substantially below Net Income, with tax payments and decreases in provisions and accounts payable suppressing cash conversion. Although the earnings level itself is of high quality in that it directly reflects the decline in core operating earnings, confirmation of normalization from the second half onward is necessary with respect to conversion into cash.

Earnings Forecast and Guidance

The full-year earnings forecast remains unchanged, with Revenue of ¥120.1B (up +6.1% from the previous fiscal year), Operating Income of ¥16.0B (up +6.7%), and Ordinary Income of ¥16.3B (up +6.5%) expected. As of the interim period, progress rates were 45.5% for Revenue, 35.3% for Operating Income, and 36.2% for Ordinary Income, below the standard 50% progress level, with the delay particularly evident on the earnings side. Achievement of the forecast requires second-half Revenue of ¥65.5B and second-half Operating Income of ¥10.4B, implying a required operating margin of approximately 15.8%, approximately 5.4pt above the interim-period result of 10.4%. Although the Company has not revised its forecast, simultaneous improvement in the gross margin and selling, general and administrative expense ratio in the second half is a prerequisite for achieving the plan.

Shareholder Returns

The dividend at the end of Q2 was ¥0 per share, while the Company’s full-year dividend forecast is ¥38.0 per share. Based on the full-year Net Income forecast of ¥10.3B and the average number of shares outstanding during the period, the estimated annual total dividend amount is approximately ¥4.4B, resulting in an estimated Payout Ratio of approximately 42.7%. Dividend payments during the interim period totaled ¥4.1B, exceeding Free Cash Flow of ¥0.6B for the same period. Although cash coverage on a standalone interim-period basis was weak, there is no concern regarding the Company’s ability to make payments given its cash and deposits of ¥106.4B. No share repurchases were identified in financing cash flows for the interim period, and shareholder returns are evaluated solely on the basis of dividends.

Risk Factors

1. Risk of missing revenue and earnings forecasts: The full-year Operating Income progress rate was 35.3%, 14.7pt below the standard 50%, and the operating margin required in the second half is approximately 15.8%, substantially above the interim-period result of 10.4%. Both a recovery in revenue and margin improvement are required.

2. Weak cash conversion: OCF/Net Income was only 0.34x, while OCF/EBITDA was 0.21x. Tax payments and decreases in provisions and accounts payable have been sources of cash outflow, and the structure under which earnings growth is not readily linked to cash generation will remain an issue for the time being.

3. Profitability decline due to increased fixed-cost burden: Selling, general and administrative expenses increased 7.2% while Revenue declined 6.9%, and the gross margin also fell 3.1pt to 28.0%. Given the labor-intensive nature of the business, hiring and utilization trends will determine whether the gross margin can recover.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

Profitability is below the industry median, with both the operating and net margins falling short of industry-average levels.

Growth and Capital Efficiency

The Revenue growth rate was substantially below the industry median, following a trend different from the average growth trajectory of the IT and telecommunications industry.

※Source: Company aggregation

Key Points from the Earnings Results

1. In the interim period, the decline in Revenue was compounded by a lower gross margin and higher selling, general and administrative expenses, causing the operating margin to decline 5.4pt year on year. Although the full-year forecast remains unchanged, approximately 5.4pt of margin improvement is incorporated into the second-half forecast.

2. The decline in cash conversion capacity, including OCF/Net Income remaining at 0.34x, is a key point concerning earnings quality. Normalization of cash conversion from the second half onward will require monitoring.

3. The strength of the financial base, including an Equity Ratio of 89.9% and cash and deposits of ¥106.4B, supports business resilience even during a temporary decline in profitability.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,010–¥1,069 at ±1% in the cost of equity, and ¥1,039–¥1,039 at ±0.1 in ω.

Notes:

• Amortization of goodwill of ¥8.3 per share has been added back to earnings (to account for a non-cash expense and comparability with IFRS companies).
• Net assets as of the quarter-end have been used (there is a timing difference from the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(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; it 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 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 where necessary.

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