ARGO GRAPHICS (7595) FY2027 Q1 Earnings Report

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Executive Summary

For Q1 of the fiscal year ending March 2027, revenue increased while earnings declined, as lower profitability in the core PLM Business weighed on company-wide earnings. Revenue was ¥169.4B (+1.1% YoY), Operating Income was ¥22.9B (△6.0% YoY), Ordinary Income was ¥24.1B (△6.7% YoY), and Net Income was ¥15.5B (△10.3% YoY). The primary causes of the earnings decline were a lower gross margin and an increase in SG&A expenses (+5.1%, exceeding the pace of revenue growth).

Factors Affecting Performance

【Revenue】Revenue was ¥169.4B, representing a modest +1.1% increase YoY. The PLM Business, which accounted for 95.9% of total revenue, remained virtually flat at ¥162.4B, up +0.4%, thereby determining the overall growth rate. Meanwhile, the EDA Business maintained strong growth of +19.4% at ¥7.0B, but its contribution to company-wide growth was limited because it accounted for only 4.1% of total revenue.

【Profit and Loss】Operating Income declined to ¥22.9B (△6.0% YoY), Ordinary Income to ¥24.1B (△6.7% YoY), and Net Income to ¥15.5B (△10.3% YoY). Profitability deteriorated at multiple levels, as the gross margin declined to 25.5% from 26.1% in the previous year, while the SG&A ratio increased to 11.9% from 11.5%. By segment, PLM Business segment profit declined substantially to ¥20.4B (△12.6% YoY; margin of 12.5%), whereas EDA Business segment profit increased substantially to ¥2.6B (+130.8% YoY; margin of 36.7%), highlighting a contrast in the direction of the two businesses. The divergence between Ordinary Income and Net Income was attributable to ¥8.6B in corporate income taxes and ¥1.1B in profit attributable to non-controlling interests; no temporary extraordinary income or losses were identified. In conclusion, the company posted higher revenue but lower earnings.

Segment Analysis

The PLM Business reported revenue of ¥162.4B (+0.4% YoY) and segment profit of ¥20.4B (△12.6% YoY), with a margin of 12.5%, approximately 190bp below the previous year’s 14.4%. As the core business accounting for 88.8% of consolidated segment profit, it was the primary driver of the company-wide earnings decline. The EDA Business reported revenue of ¥7.0B (+19.4% YoY) and segment profit of ¥2.6B (+130.8% YoY), with a margin of 36.7%, approximately 1,770bp above the previous year’s 19.0%, suggesting an improvement in project and product mix. However, the EDA Business accounted for only 4.1% of total revenue and has not reached a scale sufficient to offset the decline in PLM Business earnings.

Key Financial Indicators

【Profitability】The Operating Income margin was 13.5%, approximately 1.1pt below 14.6% in the same period of the previous year, while the Net Income margin also declined YoY to 9.1%. Both the gross margin of 25.5% (previous year: 26.1%) and the SG&A ratio of 11.9% (previous year: 11.5%) deteriorated.【Cash Flow Quality】Annualized DSO was 82 days. Accounts receivable decreased 27.3% YoY to ¥152.0B, while inventories increased 67.2% to ¥38.2B, indicating that the asset composition has shifted toward inventory.【Investment Efficiency】Annualized ROE was 12.4%, which remains within a favorable range from the perspectives of profitability and asset efficiency, although it has been trending downward from the previous year.【Financial Soundness】The Equity Ratio was 68.0%, and the current ratio was approximately 274.9%. Cash and deposits amounted to ¥284.4B, while the D/E ratio remained low, indicating a solid financial foundation.

Cash Flow Analysis

As no cash flow statement was disclosed for the quarter, cash flow trends are analyzed based on changes in the balance sheet. Cash and deposits amounted to ¥284.4B, down from ¥325.5B in the same period of the previous year. This appears to primarily reflect a reduction in accounts receivable (down ¥56.96B YoY) and an increase in investment securities (up ¥14.42B YoY). The decrease in accounts receivable contributed to cash generation through the collection of receivables, while inventories increased by ¥15.34B YoY, indicating that a portion of the collected funds was transferred to work-in-progress assets associated with ongoing projects. The substantial capital base, including an Equity Ratio of 68.0% and net assets of ¥499.1B, indicates sufficient capacity to absorb fluctuations in working capital.

Earnings Quality

Other operating income of ¥1.1B in the quarter primarily consisted of recurring income, including dividend income of ¥0.7B and interest income of ¥0.2B. Other operating expenses were negligible, and no extraordinary income or losses were identified. Accordingly, the difference between Ordinary Income and Net Income was primarily attributable to corporate income taxes of ¥8.6B and profit attributable to non-controlling interests of ¥1.1B. Comprehensive income was ¥28.4B, exceeding Net Income of ¥15.5B. Most of the difference was attributable to a ¥13.2B increase in valuation difference on investment securities. This should be assessed separately from Net Income, which reflects earnings power derived from the business. The fact that inventories increased 67.2%, substantially exceeding revenue growth, indicates an accumulation of assets associated with ongoing projects and should be monitored as an accrual factor that could affect future profitability and the timing of cash conversion.

Earnings Forecast and Guidance

The full-year company forecasts are revenue of ¥726.0B (+1.5% YoY), Operating Income of ¥103.0B (△4.1% YoY), and Ordinary Income of ¥106.0B (△7.2% YoY), indicating that the company’s own plan assumes higher revenue but lower earnings. Q1 progress rates were 23.3% for revenue, 22.3% for Operating Income, and 22.7% for Ordinary Income, all slightly below the simple benchmark of 25%. There were no revisions to either the earnings forecast or the dividend forecast. Whether the PLM Business margin recovers toward the second half of the fiscal year will be the key to achieving the full-year plan.

Shareholder Returns

The full-year dividend forecast is ¥65 per share, including a special dividend of ¥20 (¥10 for the interim dividend and ¥10 for the year-end dividend). Based on the full-year EPS forecast of ¥104.76, the Payout Ratio is approximately 62.0%, or approximately 42.9% based on the regular dividend of ¥45 excluding the special dividend. The company’s financial capacity, including cash and deposits of ¥284.4B and an Equity Ratio of 68.0%, is sufficient to support dividend payments. However, profit attributable to owners of the parent in Q1 declined 13.6% YoY, and progress toward the full-year profit plan remained at approximately 2割. Accordingly, maintaining the annual dividend level, including the special dividend, assumes a recovery in earnings during the second half of the fiscal year. It should also be noted that the dividend for the same period of the previous year is not directly comparable due to the impact of the stock split.

Risk Factors

1. Decline in the PLM Business margin: The PLM Business is the core business, accounting for 95.9% of consolidated revenue and 88.8% of segment profit. However, while revenue was virtually flat at +0.4%, segment profit declined △12.6%, and the margin fell by approximately 190bp from 14.4% to 12.5%. Improving the profitability of this business will be the focus of company-wide performance.

2. Inventory growth and cash conversion risk: Inventories increased 67.2% YoY to ¥38.2B, substantially exceeding the +1.1% revenue growth rate. The accumulation of work-in-progress assets related to ongoing projects could affect profitability and the timing of cash conversion due to delays in acceptance inspections or specification changes.

3. Lagging progress against the full-year plan: The Q1 progress rate for Operating Income was 22.3%, below the standard benchmark of 25%. Although the EDA Business performed strongly, with revenue up +19.4% and profit up +130.8%, it accounted for only 4.1% of total revenue and would need to expand in scale to offset the decline in PLM Business earnings.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

The company’s profitability clearly exceeds the industry median, placing it among the higher-performing companies in the IT and telecommunications 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: Company calculations

Key Takeaways from the Earnings

1. The primary causes of higher revenue but lower earnings were the decline in the margin of the core PLM Business, deterioration in the gross margin, and the fact that the SG&A expense growth rate (+5.1%) exceeded the revenue growth rate (+1.1%), creating structural pressure on profitability.

2. Although the EDA Business remains small, accounting for 4.1% of total revenue, its Operating Income margin improved substantially from 19.0% to 36.7%, indicating a change in project and product mix. Whether expansion of this business will contribute to company-wide earnings improvement will be a key area of focus.

3. The full-year dividend forecast of ¥65 includes a special dividend of ¥20, resulting in an expected Payout Ratio of approximately 62.0% (approximately 42.9% based on the regular dividend). The financial foundation is solid, with an Equity Ratio of 68.0% and cash and deposits of ¥284.4B. However, the fact that Q1 profit progress is slightly behind the full-year plan should be monitored together with performance trends during the second half of the fiscal year.

Theoretical Share Price (Reference Value)

Sensitivity: ¥786–¥830 at Cost of Equity ±1%; ¥805–¥812 at ω±0.1.

Notes:

• Net assets as of the quarter-end are used (there is a timing gap relative to the full-year forecast).

(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 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 a professional as necessary.

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