SystemSoft (7527) FY2026 Q1 Earnings Report

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Executive Summary

In Q1 of the fiscal year ending September 2026, the combination of declining revenue and a sharp increase in company-wide expenses resulted in a wider operating loss compared with the same period of the previous year. Revenue was ¥3.3B (¥4.0B in the same period of the previous year, -16.6% YoY), while operating income was ¥-0.6B (¥-0.3B in the same period of the previous year, a 65.7% YoY deterioration). Ordinary income was also ¥-0.6B. Net income attributable to owners of the parent was ¥-0.7B, representing a shift into the red from +¥0.9B in the same period of the previous year (-175.3% YoY). Net income in the same period of the previous year included the one-time gain of ¥1.3B on the sale of investment securities, meaning that the deterioration in the underlying earnings structure was even greater. The decline in revenue was primarily attributable to a sharp decrease in the Open Innovation Business. Although the Technology Business recorded revenue growth and turned profitable, increased company-wide expenses pressured consolidated earnings.

Factors Affecting Performance

【Revenue】Revenue was ¥3.3B, a 16.6% YoY decline. By segment, the Technology Business expanded to ¥3.1B (93.9% of consolidated revenue), up 42.8% YoY, while the Open Innovation Business sharply declined to ¥0.1B, down 95.0% YoY, and was the primary cause of the consolidated revenue decline.

【Earnings】Operating income was ¥-0.6B, and the operating margin deteriorated to -17.5% from -8.9% in the same period of the previous year. The gross margin improved significantly to 47.3% from 25.3%, but SG&A expenses increased 58.2% YoY, causing the SG&A ratio to deteriorate to 64.9% from 34.2%. Combined segment income was profitable at ¥0.2B, but company-wide expenses of ¥0.7B offset this amount, resulting in a consolidated operating loss. Ordinary income was at the same level as operating income, and non-operating income and expenses did not contribute to earnings improvement. Net income was ¥-0.7B. Since net income of +¥0.9B in the same period of the previous year included the one-time gain of ¥1.3B on the sale of investment securities, the deterioration in underlying final earnings was greater than the reported rate of change suggests. While the Technology Business provided a source of revenue growth, the company-wide cost structure worsened earnings; in conclusion, the company experienced lower revenue and lower earnings.

Segment Analysis

The Technology Business recorded revenue of ¥3.1B (93.9% composition ratio), segment income of ¥0.05B, and a 1.5% margin, turning profitable from a loss of ¥-0.15B in the same period of the previous year. The consolidation of Wasabi Co., Ltd. and Green&Digital Partners Co., Ltd. as subsidiaries contributed to revenue growth, and goodwill of ¥0.54B was provisionally recognized in connection with this transaction. The Open Innovation Business recorded revenue of ¥0.1B (2.7% composition ratio), segment income of ¥0.01B, and a 7.1% margin, but revenue declined sharply by 95.0% from ¥1.8B in the same period of the previous year. Against combined segment income of ¥0.2B, company-wide expenses amounted to ¥0.7B, expanding approximately 2.9 times from ¥0.25B in the same period of the previous year. These expenses were the primary cause of the consolidated operating loss.

Key Financial Indicators

【Profitability】The operating margin deteriorated to -17.5% from -8.9% in the same period of the previous year, while the net profit margin also declined to approximately -21.6%. The gross margin improved to 47.3% from 25.3%, but the SG&A ratio increased to 64.9% from 34.2%, indicating negative operating leverage. Annualized ROE was -6.7%, and ROIC was also negative, reflecting continued earnings conditions that erode invested capital and shareholders’ equity.【Cash Quality】Cash and deposits were ¥21.5B, accounting for 44.9% of total assets, but declined by ¥10.9B (-33.7%) from ¥32.4B in the same period of the previous year. Accounts receivable were ¥7.0B, and a lengthening collection cycle has been noted.【Investment Efficiency】Intangible assets of ¥2.3B and goodwill of ¥2.2B both increased in connection with M&A. Their ratios to total assets and net assets were limited (intangible assets accounted for 4.7% of total assets, while goodwill accounted for 5.2% of net assets), but the realization of integration benefits will be a focus going forward.【Financial Soundness】The equity ratio was extremely high at 89.7%. Net assets were ¥42.9B against total assets of ¥47.8B, while current assets of ¥36.2B substantially exceeded current liabilities of ¥4.5B. Excluding bonds of ¥0.2B, net cash was positive, indicating a conservative capital structure.

Cash Flow Analysis

Although individual data from the cash flow statement are limited, an analysis of fund movements based on balance sheet trends shows that cash and deposits were ¥21.5B, down ¥10.9B from ¥32.4B in the same period of the previous year (-33.7%). Meanwhile, investments and other assets were ¥9.4B, an increase of ¥6.7B from ¥2.7B in the same period of the previous year, indicating a shift in asset allocation from cash to investments and other assets. Accounts payable were ¥1.2B, down ¥0.8B from ¥2.0B in the same period of the previous year, suggesting that the reduction in trade payables may have been one factor behind the decline in cash. With operating losses continuing, M&A-related investments accompanied by increases in goodwill and intangible assets are consuming cash. Going forward, the balance between improving operating earnings and recovering investments will determine cash movements.

Quality of Earnings

Both operating income and ordinary income for the current period were ¥-0.6B. The impact of temporary extraordinary items—an extraordinary loss of ¥0.05B—was limited, indicating that the loss was attributable to recurring factors inherent in the business structure itself. By contrast, net income of ¥0.9B in the same period of the previous year included the one-time gain of ¥1.3B on the sale of investment securities, suggesting that the underlying business earnings power was already weak at that time. Non-operating income and expenses were each approximately ¥0.1B, and their impact on consolidated earnings was minor. While the improvement in the gross margin to 47.3% indicates the results of cost management, the sharp increase in the SG&A ratio to 64.9% was attributable to higher company-wide expenses. From an accrual perspective, it is necessary to determine whether company-wide expenses are temporary or structural when assessing sustainable earnings power.

Earnings Forecast and Guidance

The full-year company forecast is revenue of ¥18.0B (+31.1% YoY), operating income of ¥0.5B, ordinary income of ¥0.4B, and forecast EPS of ¥0.26. Q1 revenue of ¥3.3B represents a full-year progress rate of 18.4%, below the simple quarterly benchmark of 25%. Both operating income and ordinary income were negative as of Q1, resulting in progress rates against the full-year forecasts of -116.7% for operating income, -145.0% for ordinary income, and -322.7% for net income. Achieving the full-year forecast will require continued revenue growth in the Technology Business, reductions in company-wide expenses, and a recovery in revenue from the Open Innovation Business during the remaining 3 quarters. As of the current quarter, no revisions have been made to the earnings or dividend forecasts.

Shareholder Returns

The dividend for the fiscal year ending September 2026 is currently undetermined. Q1 net loss attributable to owners of the parent was ¥0.71B, leaving limited capacity to pay dividends funded by current-period earnings. The full-year company forecast for net income attributable to owners of the parent is ¥0.22B, and the possibility of paying a dividend will depend on achieving profitability for the full year and the subsequent capital allocation policy. The dividend paid in the same period of the previous year was ¥0, and no record of consecutive dividend increases or similar achievements has been confirmed at this time.

Risk Factors

1. Sharp increase in company-wide expenses: Company-wide expenses increased approximately 2.9 times, from ¥0.25B in the same period of the previous year to ¥0.74B, offsetting combined segment income of ¥0.2B and resulting in a consolidated operating loss. The expense absorption and reduction plan from Q2 onward will be key to earnings recovery.

2. Sharp decline in revenue from the Open Innovation Business: Revenue from this business declined 95.0%, from ¥1.8B in the same period of the previous year to ¥0.1B, making it the primary cause of the consolidated revenue decline. Project progress and fluctuations in the earnings base will influence consolidated revenue going forward.

3. Goodwill integration risk associated with acquisitions: Goodwill of ¥0.54B was provisionally recognized in connection with the consolidation of Wasabi Co., Ltd. and Green&Digital Partners Co., Ltd. as subsidiaries. As the allocation of the acquisition cost has not been completed, failure to achieve the expected integration could result in impairment risk.

Industry Benchmark (For Reference; Prepared by the Company)

Key Points from the Financial Results

1. While the gross margin improved significantly year on year (25.3%→47.3%), the SG&A ratio deteriorated from 34.2% to 64.9%. Accordingly, the key issue for earnings improvement is not the cost structure but the level of company-wide expenses.

2. The Technology Business achieved both revenue growth (+42.8%) and a return to profitability, but its margin remained limited at 1.5% and was insufficient to absorb company-wide expenses. Improving the margin of this business is a prerequisite for recovery in consolidated earnings.

3. The capital structure is conservative, with an equity ratio of 89.7% and current assets substantially exceeding current liabilities, providing a certain degree of resilience in the near-term funding base even as operating losses continue. However, cash and deposits declined 33.7% year on year, making continued cash consumption from expanded investment and integration costs a key monitoring point.

Theoretical Share Price (Reference Value)

Sensitivity: ¥37〜¥39 at cost of equity ±1%, and ¥38〜¥38 at ω±0.1.

Notes:

• Net income is substantially compressed relative to operating income due to tax burden, acquisition-related expenses, non-controlling interests, and other factors (net income ÷ operating income 44%). This value reflects that compression at face value; if the factors are temporary, the underlying intrinsic value may be higher.
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a time lag 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 (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 forecast 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. 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 a professional as necessary.

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