LTS,Inc. FY2026 Q2 Earnings Report

Quick View

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.)

---

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.

---End of Report---

---

AI Financial Analysis

Executive Summary

FY2026 Q2 performance was operationally strong despite marginal revenue contraction, with profitability and cash generation improving materially. Revenue declined 0.6% year on year to ¥8.519bn. Operating income increased 37.3% to ¥650m, demonstrating substantial margin expansion on a broadly flat sales base. The operating margin rose to 7.6% from 5.5% a year earlier, an improvement of approximately 210 basis points. Gross profit increased 9.7% to ¥2.631bn while the gross margin expanded to 30.9% from 28.0%, or approximately 290 basis points. This gross-margin gain more than absorbed a 2.9% increase in SG&A expenses to ¥1.981bn. Consequently, SG&A rose more slowly than gross profit, supporting favorable operating leverage. Ordinary income grew 34.4% to ¥706m, aided by a net ¥57m contribution from non-operating items. Profit before tax rose 126.4% to ¥745m, also benefiting from a ¥62m gain on sale of securities, partly offset by a ¥22m loss on valuation of investment securities. Net income more than doubled to ¥506m, up 123.2% year on year, and EPS increased to ¥115.02 from ¥49.68. The net margin reached 5.9%, compared with 2.6% in the prior-year period, a 330-basis-point expansion, although the securities-sale gain means the full improvement is not entirely recurring. Operating cash flow was exceptionally strong at ¥1.268bn, 2.51x reported net income, and free cash flow was ¥1.243bn. Cash flow benefited significantly from a ¥507m reduction in trade receivables and a ¥182m increase in accrued taxes, so the cash conversion should be assessed over subsequent periods for normalization. Financial liquidity remains strong, with cash of ¥3.973bn, a current ratio of 215.3%, and working capital of ¥3.676bn. The full-year plan calls for 7.0% revenue growth and 34.9% operating-income growth; Q2 progress is 46.6% for revenue and 40.6% for operating income, modestly below the standard 50% midyear pace. The earnings trajectory therefore requires a stronger second half, particularly for revenue, although first-half margin delivery is broadly consistent with the profitability improvement embedded in management's full-year plan. The business is now reported as a single Transformation Services segment following a management-reporting reorganization, emphasizing an integrated transformation-services operating model.

Profitability Analysis

Annualized DuPont ROE is 19.8%, comprising a 5.9% net profit margin, 1.708x asset turnover, and 1.95x financial leverage. The principal driver of the improvement is margin expansion rather than top-line growth, as revenue declined 0.6% while operating income increased 37.3%. Gross margin expanded approximately 290 basis points to 30.9%, indicating improved project mix, delivery efficiency, pricing, or lower cost intensity. Operating margin expanded approximately 210 basis points to 7.6%, because the ¥232m increase in gross profit exceeded the ¥55m increase in SG&A. This reflects favorable operating leverage: SG&A grew 2.9%, substantially below gross-profit growth of 9.7%. The annualized 19.8% ROE is above the 15% benchmark, but leverage at 1.95x contributes meaningfully to the return profile. Asset turnover of 1.708x supports the return profile and is appropriate for a relatively asset-light IT/transformation-services model, although the balance sheet includes ¥1.300bn of property, plant and equipment, including ¥645m of land. EBITDA was ¥724m, equivalent to an 8.5% EBITDA margin, while EBITDA before JGAAP goodwill amortization was ¥749m. Goodwill amortization was ¥25m, or 3.5% of EBITDA, a minimal JGAAP-versus-IFRS comparability effect. The tax burden was 0.679, slightly below the 0.70 normal benchmark, corresponding to a 32.1% effective tax rate. The interest burden exceeded 1.0x because profit before tax benefited from net non-operating income and extraordinary gains; it should not be interpreted solely as a financing advantage. The ¥62m securities-sale gain and ¥22m securities valuation loss produced a net positive ¥40m extraordinary contribution, accounting for about 7.9% of net income and moderating the recurring quality of bottom-line growth. Excluding this net extraordinary gain, profit before tax would still have been approximately ¥705m, up strongly from ¥329m in the prior-year period.

Growth Assessment

Revenue of ¥8.519bn was 0.6% below the prior-year period, so the first-half earnings improvement was not volume-led. The increase in gross profit despite lower revenue demonstrates that unit economics and/or project composition improved meaningfully. The company has consolidated its former Professional Services and Platform reporting structure into a single Transformation Services segment, reflecting the increasing importance of high-growth service areas within the former professional-services business and reduced relative weight of the platform business. This reorganization limits direct external visibility into the revenue and profit contribution of the underlying service domains, while management's stated rationale indicates a shift toward integrated resource allocation. The full-year revenue forecast is ¥18.300bn, implying second-half revenue of ¥9.781bn and 14.9% year-on-year growth versus the implied prior-year second half. First-half revenue progress is 46.6%, 3.4 percentage points below the standard 50% Q2 progress rate. Full-year operating-income guidance is ¥1.600bn, implying ¥950m in the second half; Q2 progress is 40.6%, 9.4 percentage points below the standard pace but not beyond the 10-percentage-point deviation threshold. Full-year ordinary-income progress is 43.7% against ¥1.615bn guidance, and net-income progress is 48.2% against ¥1.050bn guidance. The implied second-half operating margin is approximately 9.7%, above the first-half 7.6%, so forecast delivery depends on continued gross-margin improvement and/or further SG&A leverage. The full-year plan's 34.9% operating-income growth is supported by first-half operating-income growth of 37.3%, but the second-half revenue acceleration remains an important execution requirement. Capex of ¥105m was 1.42x depreciation and amortization, signaling continuing investment rather than extraction of short-term cash flows. In an IT/transformation-services context, execution capacity, specialist talent availability, project delivery quality, and customer technology-investment appetite are central determinants of whether revenue growth reaccelerates.

Financial Health

Liquidity is strong, with current assets of ¥6.864bn against current liabilities of ¥3.188bn, producing a current ratio and quick ratio of 215.3%. Cash and deposits of ¥3.973bn represent 39.8% of total assets and cover current liabilities by 1.25x. Working capital totals ¥3.676bn, providing a substantial liquidity buffer for operating needs and scheduled debt servicing. Total liabilities declined to ¥4.861bn from ¥5.268bn a year earlier, while total equity increased to ¥5.117bn from ¥4.763bn. The equity ratio improved to 50.1% from 46.3%, reflecting earnings accumulation and liability reduction. Long-term loans were ¥1.476bn and the current portion of long-term loans was ¥948m; the latter is adequately covered by cash and current assets, limiting maturity-mismatch risk. Reported debt-to-equity is 0.95x, below the 2.0x warning threshold, while debt-to-capital is 22.4%, below the 40% investment-grade benchmark. Debt/EBITDA is 2.04x, within the sub-2.5x investment-grade reference range, and EBITDA interest coverage is 36.2x. Interest expense was only ¥20m, with operating-income interest coverage of 32.5x, indicating limited current debt-service pressure. Retained earnings increased by ¥352m, or 10.0%, to ¥3.856bn, strengthening internally generated capital. Goodwill was ¥463m, equal to 9.0% of equity and 0.64x EBITDA, implying limited balance-sheet dependence on acquisition value retention. Intangible assets were 7.0% of total assets, also below concentration-risk benchmarks. Treasury stock was ¥793m, equivalent to 7.9% of total assets and a meaningful deduction from gross equity; its future use or retirement remains relevant to per-share capital allocation.

Notable B/S Changes

Retained earnings: +¥352m (+10.0%) to ¥3.856bn - first-half profitability, net of shareholder distributions, strengthened internally generated capital. Total liabilities: -¥407m (-7.7%) to ¥4.861bn - liability reduction, including lower long-term loans, supported the improvement in the equity ratio to 50.1%. Long-term loans: -¥483m (-24.7%) to ¥1.476bn - debt repayment reduced financial leverage and interest burden; ¥948m remains classified as current portion of long-term loans. Cash and deposits: +¥597m (+17.7%) to ¥3.973bn - strong operating cash flow more than funded debt repayment, dividends, and capital expenditures. Goodwill: -¥25m (-5.1%) to ¥463m - consistent with JGAAP goodwill amortization; goodwill remains modest at 9.0% of equity.

Cash Flow Quality

Cash-flow quality was strong in the reported half, with operating cash flow of ¥1.268bn versus net income of ¥506m, yielding an OCF/net-income ratio of 2.51x. Free cash flow was ¥1.243bn after ¥105m of capital expenditures, substantially exceeding reported net income. Cash conversion was 1.75x OCF/EBITDA, well above the 0.9x benchmark. The accruals ratio was negative 7.6%, consistent with cash realization exceeding accounting earnings during the period. A ¥507m decrease in trade receivables was the largest identifiable working-capital contributor to operating cash flow. An increase of ¥182m in accrued taxes also supported cash generation, while other payables declined by ¥142m and trade payables declined by ¥12m. Accordingly, the OCF strength is favorable but partly working-capital-driven rather than entirely a direct reflection of recurring earnings capacity. There is no evidence in the reported period of receivables build-up being used to support revenue; rather, receivables collection improved. Capital expenditures of ¥105m exceeded depreciation and amortization of ¥74m, with a capex/depreciation ratio of 1.42x, indicating ongoing reinvestment. Investing cash flow was limited to an outflow of ¥25m, including ¥105m of PPE purchases partly offset by ¥91m of investment-securities sales. Financing cash flow was a ¥647m outflow, principally including ¥493m of long-term debt repayment and ¥153m of cash dividends paid. Cash increased by ¥596m to ¥3.973bn despite debt repayment, demonstrating robust near-term funding capacity. Work in process was ¥24m and represented all reported inventory. This HIGH_WIP_RATIO alert reflects a project-based service model in which inventory is entirely work in progress rather than finished goods; the absolute amount is only 0.3% of revenue, but it warrants monitoring because rising unbilled project work can signal delivery delays, cost overruns, or delayed customer acceptance.

Dividend Sustainability

No interim dividend was paid for FY2026 Q2. The full-year dividend forecast is ¥40 per share, compared with forecast EPS of ¥238.47, implying a forecast dividend payout ratio of approximately 16.8%. This is well below the 60% sustainability benchmark and leaves substantial earnings retention capacity. The forecast cash dividend requirement is approximately ¥176m based on average shares of 4.403m, and is covered by reported first-half free cash flow of ¥1.243bn by roughly 7.1x. Even using outstanding shares of 4.725m, the annual dividend cash requirement would be approximately ¥189m and remains well covered by first-half free cash flow. Financing cash flow included ¥153m of dividends paid during the half, consistent with a modest cash-return burden. The company also generated sufficient operating cash flow to fund ¥493m of long-term debt repayment and capital expenditures while increasing cash balances. Retained earnings of ¥3.856bn and total equity of ¥5.117bn provide an additional balance-sheet cushion. Dividend sustainability therefore appears strong under the current forecast, subject to maintaining second-half earnings and cash-collection performance. No dividend forecast revision was disclosed.

Risk Assessment

Business risks include Revenue execution risk: first-half revenue declined 0.6%, while the full-year plan requires implied second-half revenue growth of approximately 14.9%., Margin sustainability risk: first-half operating-margin expansion of approximately 210 basis points is strong, but the full-year plan implies a second-half operating margin near 9.7%, above the reported first-half level., IT services project-delivery risk: work in process represents all reported inventory. Although the absolute balance is small at ¥24m, increases could indicate project acceptance delays, cost overruns, or unbilled work., Talent and capacity risk: transformation-services growth depends on retaining and scaling skilled consulting, digital-transformation, and technology-delivery personnel amid competition for specialized talent., Customer IT-spending risk: enterprise transformation budgets may be deferred in weaker macroeconomic conditions, potentially affecting project starts, utilization, and pricing..

Financial risks include Working-capital normalization risk: operating cash flow was supported by a ¥507m receivables reduction and ¥182m rise in accrued taxes; these favorable movements may not recur at the same scale., Debt refinancing and repayment risk: ¥948m of long-term loans is classified as current, though cash of ¥3.973bn and the 215.3% current ratio provide substantial coverage., Non-recurring earnings risk: the ¥62m gain on sale of securities, partly offset by a ¥22m valuation loss, lifted pre-tax profit by a net ¥40m., Investment-securities valuation risk: a ¥22m securities valuation loss was recorded during the period, showing some exposure to market-value movements..

Key concerns include Highest priority is whether the company can convert first-half margin gains into the required second-half revenue acceleration without sacrificing delivery quality., Cash generation is strong, but investors should distinguish sustainable operating conversion from the period-specific benefit of receivables collection and tax accrual movements., The transition to a single reportable segment reduces external visibility into the performance, profitability, and growth profiles of the former underlying businesses., The HIGH_WIP_RATIO quality alert is relevant principally as a project-execution monitoring indicator rather than as a balance-sheet scale concern, given the ¥24m absolute work-in-process balance..

Investment Implications

Key takeaways include Operating income increased 37.3% despite a 0.6% revenue decline, driven by gross-margin expansion and SG&A discipline., Annualized ROE of 19.8% is strong, supported primarily by a 5.9% net margin and 1.708x asset turnover., Reported cash conversion is excellent: OCF/net income was 2.51x, OCF/EBITDA was 1.75x, and free cash flow was ¥1.243bn., Liquidity and credit metrics are sound, including a 215.3% current ratio, 2.04x debt/EBITDA, and 36.2x EBITDA interest coverage., The full-year forecast requires a stronger second half, especially for revenue, while the implied second-half margin target is more demanding than the first-half result., Goodwill-related balance-sheet risk is limited, with goodwill equal to 9.0% of equity and 0.64x EBITDA..

Metrics to watch include Second-half revenue growth relative to the implied 14.9% requirement for full-year sales guidance, Operating margin progression toward the approximately 9.7% implied second-half level, Gross-margin durability and SG&A growth relative to revenue growth, Trade receivables, work in process, and operating cash flow after normalization of working-capital benefits, Long-term loan repayment or refinancing of the ¥948m current portion, Dividend execution versus the ¥40 full-year DPS forecast, Underlying service-domain growth and profitability disclosures following the shift to one reportable segment.

Regarding relative positioning, The company presents a favorable profitability-and-cash-conversion profile for an IT/transformation-services provider: annualized ROE is above the 15% benchmark, cash conversion is high, and leverage and goodwill exposure are moderate. Its operating margin of 7.6% remains below the 8-15% 'good' benchmark range, but the sharp improvement from the prior-year period is constructive. Relative positioning will depend increasingly on the durability of margin gains, delivery capacity, and the ability to restore revenue growth in the second half.