LTS,Inc. FY2026 Q2 Earnings Report

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Executive Summary

Despite Revenue remaining roughly at the prior-year level, this earnings period delivered a substantial increase in profit due to improved margins, with cost control and gross margin improvement driving profit growth. Revenue was ¥8.52B, essentially flat at -0.6% year on year, while Operating Income increased substantially to ¥0.65B (+37.3%), Ordinary Income to ¥0.71B (+34.4%), and Net Income to ¥0.51B (+123.9%). The improvement in gross margin (30.9%, approximately +2.9pt year on year), together with contributions from equity-method investment gains and gains on the sale of investment securities, supported the results.

Factors Driving Earnings Changes

【Revenue】Revenue was ¥8.52B, representing a -0.6% decrease from ¥8.57B in the same period of the previous year. From the current interim period, the Company changed its reporting structure to a single segment, the “Transformation Services Business,” and does not disclose the factors driving changes by business. The top line has effectively remained within a flat range.

【Profit and Loss】Cost of sales decreased to ¥5.89B from ¥6.17B in the previous year, and the gross margin improved to 30.9%. SG&A expenses increased slightly to ¥1.98B (SG&A ratio: 23.3%, compared with 22.5% in the previous year), but the effect of the improved gross margin more than offset this increase, lifting Operating Income to ¥0.65B (+37.3%). Ordinary Income increased to ¥0.71B (+34.4%), supported by equity-method investment gains of ¥0.05B, among other factors. Special gains and losses included a gain on the sale of investment securities of ¥0.06B and a valuation loss of ¥0.02B, resulting in a net positive one-time contribution of ¥0.04B. Consequently, Net Income increased substantially to ¥0.51B (+123.9%). Overall, the results represent a decrease in Revenue but an increase in profit.

Segment Analysis

Beginning with the current interim consolidated accounting period, the Company changed its reporting structure from the former two segments, the “Professional Services Business” and the “Platform Business,” to a single segment, the “Transformation Services Business.” Segment-level performance breakdowns are not disclosed for either the same period of the previous year or the current period.

Key Financial Indicators

【Profitability】The Operating Income margin improved substantially to 7.6% (approximately 5.5% in the previous year), while the Net Income margin rose to 5.9% (approximately 2.6% in the previous year). ROE was 9.9%, supported by the expansion in the Net Income margin and financial leverage of 1.95x.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥1.27B, approximately 2.5 times Net Income of ¥0.51B, indicating strong actual cash-generation capacity relative to accounting profit.【Investment Efficiency】Capital expenditures were ¥0.11B, while depreciation and amortization was ¥0.07B, indicating a growth-investment stance in which investment exceeded depreciation.【Financial Soundness】The Equity Ratio improved to 51.3% from 46.3% in the previous year. With cash and deposits of ¥3.97B versus current liabilities of ¥3.19B, short-term debt is sufficiently covered by available cash.

Cash Flow Analysis

Operating Cash Flow was ¥1.27B, a substantial increase from ¥0.11B in the same period of the previous year, generating cash on a scale exceeding Net Income of ¥0.51B. The primary factors were progress in collecting trade receivables (+¥0.51B) and the effects of the timing of corporate tax refunds and payments. Investing Cash Flow was -¥0.02B, as capital expenditures of ¥0.11B were largely offset by proceeds from the sale of investment securities and other items. Financing Cash Flow was -¥0.65B, primarily due to repayment of long-term borrowings (-¥0.49B) and dividend payments (-¥0.15B). As a result, free cash flow (Operating Cash Flow + Investing Cash Flow) was ¥1.24B, securing a level sufficient to cover capital expenditures and dividends.

Earnings Quality

Current-period profit included Operating Income of ¥0.65B, as well as non-operating income such as equity-method investment gains of ¥0.05B and subsidy income of ¥0.01B. In addition, special gains and losses included a net positive contribution of ¥0.04B from a gain on the sale of investment securities of ¥0.06B and a valuation loss of ¥0.02B. Special gains and losses are one-time factors, and core earnings power should therefore be assessed primarily based on the levels of Operating Income and Ordinary Income. Meanwhile, Operating Cash Flow reached 2.5 times Net Income. Although this includes the effects of trade receivables collection and tax refunds, the consistency between income statement profit and cash flow is favorable. From an accrual perspective—the divergence between accounting profit and cash—the quality of earnings can generally be considered sound.

Earnings Forecast and Guidance

The full-year earnings forecast calls for Revenue of ¥18.30B (+7.0% year on year), Operating Income of ¥1.60B (+34.9%), Ordinary Income of ¥1.615B (+24.8%), and Net Income of ¥1.05B. No revisions to the forecast have been made as of the current quarter. First-half progress rates were 46.6% for Revenue, 40.6% for Operating Income, 43.7% for Ordinary Income, and 48.2% for Net Income. While Net Income is close to the standard progress rate of 50%, Operating Income is somewhat behind schedule. The first half included contributions from temporary special gains and losses and non-operating income; in the second half, growth in core Operating Income will be key to achieving the full-year targets.

Shareholder Returns

There was no interim dividend for the first half, while the full-year dividend forecast is ¥40 per share. Based on forecast full-year EPS of ¥238.47, the Payout Ratio is calculated at approximately 16.8%, a sustainable level. The first-half dividend payment of ¥0.15B was sufficiently covered by free cash flow of ¥1.24B, indicating a limited distribution burden relative to cash-generation capacity. No disclosure regarding share repurchases has been made, and shareholder returns consist solely of dividends.

Risk Factors

1. Top-line stagnation risk: Revenue decreased by -0.6% year on year, and the reporting structure has been consolidated into a single segment, making business-level demand trends difficult to verify externally. The acquisition of projects and fluctuations in utilization rates will influence future Revenue.

2. Dependence on temporary income: Special gains and losses, including a net positive contribution of ¥0.04B from gains on the sale of investment securities of ¥0.06B and other items, together with equity-method investment gains of ¥0.05B and subsidy income of ¥0.01B, supported first-half profit. If these contributions do not continue in the second half, the pace of profit growth may slow.

3. Increase in SG&A ratio: The SG&A ratio rose to 23.3% from the previous year. If personnel-cost inflation and intensified hiring continue, Operating Leverage may work in the opposite direction during periods of sluggish Revenue growth.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

In terms of profitability, both the Operating Income margin and Net Income margin are below the industry median and relatively low within the industry.

Growth and Capital Efficiency

The Revenue growth rate is substantially below the industry median, placing the Company toward the lower end of the industry in terms of growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. While Revenue was essentially flat at -0.6% year on year, the Operating Income margin rose to 7.6% due to gross margin improvement. This represents profit improvement without top-line growth; profitability quality is improving, but growth remains toward the lower end of the industry.

2. First-half Net Income included contributions from non-operating and temporary factors, such as special gains and losses—a net positive contribution of ¥0.04B from gains on the sale of investment securities and other items—and equity-method investment gains of ¥0.05B. The progress rate of core Operating Income relative to the full-year forecast (40.6%) was lower than the progress rate of Net Income (48.2%), making improvement in core earnings power during the second half key to achieving the full-year forecast.

3. Operating Cash Flow was ¥1.27B, reaching 2.5 times Net Income, while the Equity Ratio also improved to 51.3%. Financial soundness and cash-generation capacity are therefore favorable. This supports the stability of business operations even though profitability remains below the industry average.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,598–¥1,697 at ±1% for the Cost of Equity, and ¥1,633–¥1,667 at ±0.1 for ω.

Notes:

• Amortization of goodwill of ¥11.4 per share has been added back to profit (due to its non-cash nature and for comparability with IFRS companies).
• Net assets as of the quarter-end have been 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 (Ohlson-type, explicit 5-year fade) / Interest-rate reference month: 2026-07 / This is a 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-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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