HIKARI TSUSHIN,INC. FY2027 Q1 Earnings Report

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Executive Summary

While growth in Operating Income slowed relative to Revenue growth, Net Income increased substantially, driven by higher financial income and equity-method investment gains. Revenue was ¥1925.6B (+15.2% YoY), Operating Income was ¥291.8B (+6.1%), Profit Before Tax was ¥499.5B (+40.5%), and quarterly Net Income attributable to owners of the parent was ¥366.6B (+30.1%). Although the increase in cost of sales exceeded Revenue growth, resulting in a decline in gross margin, the increase in SG&A expenses remained below Revenue growth, indicating some cost absorption. However, the primary driver of the increase in final profit was the expansion of non-operating financial income and equity-method investment gains, making it difficult to characterize the result as an improvement in core business profitability.

Factors Affecting Performance

【Revenue】Revenue was ¥1925.6B (+15.2% YoY), led by Electricity & Gas (¥832.9B, +29.5%) and Financial Services (¥132.7B, +42.3%). Communications (¥329.2B, +3.0%), Beverages (¥217.7B, +5.1%), and Insurance (¥97.9B, +20.6%) also contributed to the increase in Revenue, while Solutions (¥61.6B, -9.2%) and Agency Sales (¥253.7B, -2.3%) posted declines.

【Profit and Loss】Operating Income was limited to ¥291.8B (+6.1%), while gross margin declined to 48.3% from 52.1% in the previous year and Operating Income margin deteriorated to 15.2% from 16.5%. The primary factor was a decline in profit from Electricity & Gas, the largest Revenue segment (¥64.2B, -17.9%, profit margin 7.7%); Insurance also saw its profit margin decline from 24.7% to 17.1%. Meanwhile, Profit Before Tax increased to ¥499.5B (+40.5%) due to the expansion of financial income of ¥241.9B and equity-method investment gains of ¥65.0B. Net Income rose substantially to ¥376.8B (+28.9%), and profit attributable to owners of the parent increased to ¥366.6B (+30.1%). In conclusion, the result can be assessed as an increase in Revenue and profit driven by higher non-operating income, amid a slight deterioration in core business profitability.

Segment Analysis

Financial Services generated Revenue of ¥132.7B (+42.3%), profit of ¥78.1B (+69.3%), and a profit margin of 58.9%, making it the most profitable segment and contributing significantly to the increase in overall profit. Electricity & Gas was the largest segment at ¥832.9B in Revenue, but profit declined to ¥64.2B (-17.9%) and the profit margin fell to 7.7%, making it the primary drag on the company-wide margin. Communications secured higher profit, with Revenue of ¥329.2B (+3.0%), profit of ¥83.4B (+8.2%), and a profit margin of 25.3%. Insurance recorded higher Revenue of ¥97.9B (+20.6%), but profit declined to ¥16.8B (-16.1%) and the profit margin fell to 17.1%. Solutions and Agency Sales both recorded declines in Revenue and profit.

Key Financial Indicators

【Profitability】Operating Income margin declined to 15.2% from 16.5% in the previous year, while the Net Income margin attributable to owners of the parent increased to 19.0% from 16.9%, resulting in divergent trends at the operating and bottom-line levels. Annualized ROE was 11.7%, and the Profit Before Tax margin was 25.9%. 【Cash Flow Quality】Operating Cash Flow (OCF) was negative at ¥180.8B, resulting in a negative ratio to profit attributable to owners of the parent, and cash conversion relative to Profit Before Tax of ¥499.5B was weak. The main factors were a ¥258.7B decrease in operating liabilities and ¥439.9B in income taxes paid. 【Investment Efficiency】Total asset turnover was low at 0.267x, resulting in an earnings structure with relatively high dependence on financial income and equity-method investment gains. Investments in equity-method affiliates amounted to ¥3091.0B, accounting for 10.7% of total assets. 【Financial Soundness】The Equity Ratio improved to 43.5% from 41.5% in the previous year. The current ratio was 211.3%, calculated as current assets of ¥9567.1B divided by current liabilities of ¥4527.9B, representing a robust level. Total interest-bearing debt was ¥1兆1076.7B, with a high proportion of long-term debt, resulting in a stable maturity profile.

Cash Flow Analysis

Operating Cash Flow (OCF) was negative at ¥180.8B, compared with +¥144.3B in the previous year, primarily due to a ¥258.7B decrease in operating liabilities and an increase in income taxes paid of ¥439.9B. Investing Cash Flow was negative at ¥907.5B, as purchases of investment securities of ¥1485.1B exceeded proceeds from sales of ¥607.2B. Capital expenditures were limited to ¥37.3B, and the primary cause of the deterioration in Investing Cash Flow was the net acquisition of financial investments. Financing Cash Flow was negative at ¥16.8B; dividend payments of ¥81.6B and share repurchases of ¥38.8B were partially offset by increased procurement through short-term interest-bearing debt. Free Cash Flow was negative at ¥1088.4B, and cash and cash equivalents at period-end decreased by ¥1062.4B to ¥4336.1B. However, the current ratio remained robust at 211.3%, providing a substantial liquidity buffer.

Earnings Quality

The primary driver of the increase in final profit was not recurring core business profit, but the expansion of net financial income—financial income of ¥241.9B less financial expenses of ¥105.2B—and equity-method investment gains of ¥65.0B (+53.8% YoY). These items are subject to volatility linked to the performance of investees and market conditions, creating a divergence between Operating Income growth (+6.1%) and Net Income growth (+28.9%). Comprehensive income was ¥787.5B, substantially exceeding Net Income of ¥376.8B. The primary factor in the difference was other valuation differences on available-for-sale securities—valuation gains on FVTOCI financial assets of ¥314.1B—representing changes in equity items not recognized in profit or loss. While OCF was negative, Net Income on an accrual basis increased, requiring monitoring from the perspective of cash backing for earnings.

Earnings Forecast and Guidance

Q1 progress against the full-year company forecasts of Revenue of ¥7750B, Operating Income of ¥1300B, and profit attributable to owners of the parent of ¥1200B was 24.8%, 22.4%, and 30.5%, respectively. Revenue was progressing at approximately the standard pace, with 25% as a benchmark, but Operating Income was below that level. This represents a gap between Q1 actual growth of +6.1% and the +11.4% profit growth rate assumed in the full-year plan. Although profit attributable to owners of the parent had a high progress rate, the full-year forecast itself assumes a 20.5% decline in profit from the previous year, making it difficult to regard Q1’s high progress rate simply as an upside surprise. There were no revisions to the earnings forecast for the quarter; only the dividend forecast was revised.

Shareholder Returns

The Q1 dividend was ¥200 per share, an increase of 10.5% from ¥181 in the same period of the previous year. The full-year dividend forecast is ¥800, and the forecast Payout Ratio based on full-year forecast EPS of ¥2742.77 is 29.2%, indicating ample earnings capacity. Q1 dividend payments were ¥81.6B, and total shareholder returns, including share repurchases of ¥38.8B, amounted to ¥120.4B. The Total Return Ratio relative to profit attributable to owners of the parent of ¥366.6B was 32.9%. However, Free Cash Flow for the quarter was negative at ¥1088.4B, and the source of shareholder returns was supported not by cash generated from operating activities during the period, but by cash on hand of ¥4336.1B.

Risk Factors

1. Deterioration in the profitability of the Electricity & Gas Business: Although it was the largest Revenue segment (¥832.9B, +29.5%), segment profit declined 17.9% YoY to ¥64.2B, and the profit margin fell to 7.7%. This was the primary drag on the company-wide Operating Income margin.

2. Weak Operating Cash Flow: OCF was negative at ¥180.8B, representing a significant divergence from Net Income of ¥376.8B. The decrease in operating liabilities of ¥258.7B and the increase in income taxes paid of ¥439.9B were the contributing factors, requiring monitoring of the cash conversion of earnings.

3. Dependence on Financial and Equity-Method Investment Income: The increase in Profit Before Tax was heavily dependent on the expansion of financial income of ¥241.9B and equity-method investment gains of ¥65.0B, creating a structure in which fluctuations in investee performance and market conditions can readily affect consolidated profit.

Industry Benchmark (For Reference; Based on Company Research)

Industry Benchmark (it_telecom)

Profitability and Returns

The company’s profitability is substantially above the industry median.

Growth and Capital Efficiency

Revenue growth also exceeds the industry median, but is not an exceptional level, being close to the upper end of the IQR.

※Source: Based on company research

Key Earnings Highlights

1. Operating Income margin declined 130bp YoY, and the improvement in the SG&A expense ratio was insufficient to offset the decline in gross margin. The profitability trend of the Electricity & Gas Business will be a key focus going forward.

2. The increase in Net Income was heavily dependent on factors outside Operating Income, namely the expansion of net financial income and equity-method investment gains, resulting in a divergence between profit growth at the operating and bottom-line levels.

3. While OCF was negative, Free Cash Flow was also negative due to substantial investment in investment securities. Cash on hand and the high current ratio are providing a buffer for the time being, but the recovery trend in cash generation will be a key focus.

Theoretical Share Price (Reference Value)

Sensitivity: ¥28,441–¥30,127 at ±1% for the Cost of Equity, and ¥29,250–¥29,288 at ±0.1 for ω.

Note:

• Net assets as of the quarter-end are used (there is a timing difference 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 values based solely on publicly disclosed data; these values do not constitute a forecast of market share prices or a recommendation of any specific investment action, and do 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 release 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, with consultation with a professional advisor as necessary.

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