ZUKEN INC. FY2027 Q1 Earnings Report

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Executive Summary

The first quarter posted increases in both revenue and earnings, with improved operating leverage, accompanied by greater efficiency in selling, general and administrative expenses, driving profit growth. Revenue was ¥11.69B (+28.2% year on year), Operating Income was ¥1.58B (+90.4%), Ordinary Income was ¥1.93B (+73.2%), and Net Income attributable to owners of the parent was ¥1.33B (+89.5%). The gross profit margin declined to 65.8% from 69.8% in the previous year, but the improvement in the SG&A ratio to 52.4% from 60.8% contributed to the increase in the operating margin. Equity-method investment gain of ¥0.25B also supported Ordinary Income.

Factors Affecting Performance

【Revenue】Revenue increased 28.2% year on year to ¥11.69B. By business, Solutions revenue was ¥6.83B (58.4% of total revenue), up 42.5% year on year, while Client Services revenue was ¥4.86B (41.6% of total revenue), up 12.3%; both contributed to revenue growth. By region, Japan expanded to ¥8.06B (69.0% of total revenue), up 32.5%; Europe to ¥2.20B (18.8%), up 22.6%; and the United States to ¥0.90B (7.7%), up 40.2%. Asia, however, declined to ¥0.53B (4.5%), down 11.7%.

【Profit and Loss】Operating Income was ¥1.58B, up 90.4% year on year, and the operating margin improved to 13.5% from 9.1% in the previous year. Although the gross profit margin declined to 65.8% from 69.8%, the SG&A ratio improved substantially to 52.4% from 60.8%, and operating leverage took effect together with the benefits of higher revenue. Ordinary Income was ¥1.93B (+73.2%), further supported by an equity-method investment gain of ¥0.25B (¥0.23B in the previous year). Extraordinary income and losses were virtually nonexistent, limiting the impact of temporary factors, and Net Income attributable to owners of the parent was ¥1.33B (+89.5%). The Company delivered increases in both revenue and earnings.

Segment Analysis

Segment profit (before adjustments) was ¥1.598B, with Japan serving as the largest growth driver at ¥1.240B (77.6% of total segment profit, up ¥0.430B year on year). Europe grew substantially to ¥0.248B (15.5% of total segment profit), up ¥0.230B from ¥0.018B in the previous year, establishing sustained profitability. The United States remained loss-making at -¥0.058B (compared with -¥0.220B in the previous year), although the loss narrowed by ¥0.161B. Asia generated ¥0.169B (10.6% of total segment profit), down ¥0.036B year on year, with profit declining alongside the 11.7% decrease in revenue. While improved profitability in Japan and Europe drove overall earnings growth, a return to profitability in the United States remains a future challenge.

Key Financial Indicators

【Profitability】The operating margin was 13.5%, improving by +4.4pt from 9.1% in the previous year, while the net profit margin was 11.4%, improving by +3.7pt from 7.7%. ROE (current quarter, before annualization) was 3.2%; the improvement in the net profit margin partially offset the low total asset turnover.【Cash Quality】The Company held cash and deposits of ¥28.63B and short-term securities of ¥6.70B. The current ratio was 222.1% and the quick ratio was 218.6%, indicating ample liquidity.【Investment Efficiency】Total asset turnover (quarterly basis) was 0.172. Asset efficiency increased only gradually relative to revenue growth, and changes in trade receivables and inventories will affect future efficiency.【Financial Soundness】The equity ratio was 60.1% (61.0% in the previous year), and the debt-to-equity ratio was 0.66x, indicating a stable financial foundation.

Cash Flow Analysis

Cash and deposits were ¥28.63B, down 2.6% from ¥29.38B in the previous year. Inventories were ¥0.81B, up 59.9% from ¥0.51B in the previous year, indicating an accumulation of work-in-process and finished goods inventories. Trade receivables were ¥6.20B, down 24.1% from ¥8.16B in the previous year, reflecting progress in collections. Advances received were ¥17.42B, up 9.7% from ¥15.89B in the previous year, with customer advances from project-based businesses supporting short-term liquidity. Working capital was broadly flat as the increase in inventories was offset by the decline in receivables; however, if inventory growth continues, it may affect the pace of cash generation.

Earnings Quality

Non-operating income was ¥0.36B, equivalent to 3.1% of revenue, and consisted of an equity-method investment gain of ¥0.25B (¥0.23B in the previous year), dividend income of ¥0.03B, and interest income of ¥0.03B, all of which are recurring in nature. Extraordinary income was ¥0.002B, while extraordinary losses were virtually zero, resulting in only a minor impact from temporary factors on Net Income. The effective tax rate was 31.1% (¥0.60B in income taxes / ¥1.93B in profit before tax), down from 37.0% in the previous year, and the change in the tax burden contributed to an increase in the Net Income growth rate (+89.5%). Comprehensive income was ¥2.77B, exceeding Net Income attributable to owners of the parent of ¥1.33B by ¥1.44B, mainly due to a ¥1.39B increase in the valuation difference on other securities. Market-value fluctuations in held shares created a divergence from Net Income.

Earnings Forecast and Guidance

Progress against the full-year Company forecast was 25.4% for revenue, 23.6% for Operating Income, 24.7% for Ordinary Income, and 23.3% for Net Income, broadly in line with the 25% benchmark for evenly distributed quarterly progress. The slightly slower progress of Operating Income and Net Income relative to the leading indicator is likely attributable to the decline in the gross profit margin and continued losses in the U.S. segment. As of Q1, no revisions had been made to the earnings forecast or dividend forecast.

Shareholder Returns

The full-year dividend forecast is ¥150 per share, implying a Payout Ratio of approximately 55.5% against forecast EPS of ¥270.45. The prior fiscal year (FY ended March 2026) year-end dividend included a commemorative dividend of ¥100, and the current-year forecast dividend of ¥150 appears to exclude this special factor. Given cash and deposits of ¥28.63B, the Company is considered to retain ample capacity to fund dividends. As of Q1, no revision had been made to the dividend forecast.

Risk Factors

1. Continued losses in the U.S. segment: The U.S. segment posted a loss of ¥0.058B (loss of ¥0.220B in the previous year), with the loss narrowing but the segment not yet reaching profitability. Revenue increased to ¥0.898B, up 40.2% year on year, but the profit margin remained negative; progress toward monetization needs to be monitored.

2. Decline in the gross profit margin: The gross profit margin was 65.8%, approximately 4.0pt below 69.8% in the previous year. Rising costs and changes in the product mix are considered likely factors. The decline is being offset by improvement in the SG&A ratio (52.4%, compared with 60.8% in the previous year), making the trend in the gross profit margin an important determinant of future profitability.

3. Working capital fluctuations: While inventories increased 59.9% year on year, trade receivables declined 24.1%. If inventory accumulation continues, it could delay cash generation.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability exceeds the industry median and is positioned near the upper bound of the IQR.

Growth and Capital Efficiency

The revenue growth rate is substantially above both the industry median and the upper bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Earnings

1. Amid revenue growth, the SG&A ratio improved by 8.4pt from 60.8% in the previous year to 52.4%, and the operating margin rose to 13.5% from 9.1%. Economies of scale and cost efficiencies generated operating leverage.

2. By region, Japan (segment profit of ¥1.24B, 77.6% of total segment profit) remained the primary growth driver, while Europe also established sustained profitability (¥0.248B). The U.S. loss narrowed (-¥0.058B), making a return to full-year profitability a key focus going forward.

3. Inventories increased 59.9% year on year, while trade receivables declined 24.1%, indicating a change in the composition of working capital. Advances received increased 9.7%, reflecting the characteristics of the project-based revenue model.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade period). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥2,175–¥2,299 at ±1% for the cost of equity, and ¥2,229–¥2,245 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end were used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee the future share price)

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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 discretion and responsibility, after consulting a professional advisor as necessary.

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