BUSINESS BRAIN SHOWA・OTA INC. FY2027 Q1 Earnings Report

Quick View

Executive Summary

This was a decoupling-type earnings result in which profitability deteriorated substantially despite higher revenue, bringing the challenges in the earnings structure—namely rising costs and reliance on non-operating factors—to the fore. Revenue increased to ¥105.2B (up +4.6% YoY), but Operating Income declined substantially to ¥3.0B (down -54.2%) and Net Income to ¥2.2B (down -60.7%). A decline in the gross profit margin and an early increase in SG&A expenses put pressure on Operating Income, while Profit Before Tax was supported by non-operating items such as equity-method investment income and financial income.

Factors Affecting Earnings

【Revenue】Revenue increased to ¥105.2B (up +4.6% YoY), with higher revenue across all 3 segments. BPO Services posted the highest growth at +10.2%, followed by Consulting System Development (53.8% composition ratio, +3.9%) and SES Co-Creation (+0.5%). Growth in the core segments was moderate, with BPO growth driving the overall increase in revenue.

【Profit and Loss】Gross profit was ¥21.7B, a slight decrease from the previous year, and the gross profit margin declined to 20.7%. SG&A expenses increased by +23.1% YoY to ¥19.0B, with costs increasing substantially faster than revenue growth (+4.6%). As a result, Operating Income contracted to ¥3.0B (-54.2%). All segments reported lower profits, and despite higher revenue, BPO Services saw profit decline by -43.5%, indicating negative operating leverage. Profit Before Tax amounted to ¥4.9B, supported by equity-method investment income of ¥1.4B and financial income of ¥0.6B; however, Net Income was compressed to ¥2.2B (-60.7%) due to the high effective tax rate of 54.9%. This was an earnings result characterized by higher revenue but lower profit, with the cost structure and heavy tax burden being the primary causes of the deterioration in profitability.

Segment Analysis

Consulting & System Development, the core business, generated revenue of ¥56.5B (53.8% composition ratio, +3.9%) and business profit of ¥3.5B (-23.6%, profit margin 6.2%), with profitability deteriorating from the previous year. BPO & Managed Services achieved the highest growth, with revenue of ¥26.1B (+10.2%); however, profit declined to ¥1.1B (-43.5%, profit margin 4.3%), indicating lower cost absorption capacity despite higher revenue. The SES Co-Creation Business recorded revenue of ¥22.5B (+0.5%) and profit of ¥1.0B (-17.6%, profit margin 4.3%), with profit declining despite nearly flat revenue. Profit margins declined across all segments despite higher revenue. In addition, company-wide common expenses (segment adjustment amount) increased from -¥1.2B in the previous year to -¥2.6B, placing additional downward pressure on consolidated Operating Income.

Key Financial Metrics

【Profitability】Operating margin declined substantially to 2.8% (6.5% in the previous year), while Net profit margin declined to 2.1% (approximately 5.6% in the previous year), primarily due to deterioration in the gross profit margin to 20.7% and an increase in the SG&A ratio to 18.0%. 【Cash Quality】Cash and cash equivalents were ¥114.0B, a slight decrease from the previous year. Contract assets increased substantially to ¥25.9B (+50.2%), while contract liabilities increased to ¥10.9B (+148.4%), indicating that changes in revenue recognition and billing cycles are affecting working capital. 【Investment Efficiency】ROE declined to 0.7% (approximately 1.8% in the previous year), and the high proportion of non-operating items such as equity-method investment income and financial income in Profit Before Tax is an important consideration when evaluating capital efficiency. 【Financial Soundness】The Equity Ratio remained high at 62.5% (63.4% in the previous year), while the balance sheet remained stable, with total assets of ¥484.2B and net assets of ¥307.5B.

Cash Flow Analysis

Cash and cash equivalents were ¥114.0B, a slight decrease from ¥117.3B at the end of the previous year. Trade and other receivables decreased by 24.6% YoY to ¥42.4B, while contract assets increased to ¥25.9B (+50.2%), suggesting that differences in acceptance and billing timing are causing a delay before revenue growth is converted into cash. Contract liabilities (deferred revenue) also increased substantially to ¥10.9B (+148.4%), providing a source for future revenue recognition while creating a short-term timing difference between revenue and cash flow. Lease liabilities increased on both a current and non-current basis, and the shift toward fixed costs associated with the expansion of right-of-use assets is also a characteristic of the funding structure. Overall, cash generation relative to revenue growth has been relatively moderate due to changes in working capital, and trends in collection management will determine future financial flexibility.

Quality of Earnings

During the current period, Operating Income of ¥3.0B compared with Profit Before Tax of ¥4.9B, with the ¥1.9B difference being covered by equity-method investment income of ¥1.4B and financial income of ¥0.6B. As a result, non-operating items accounted for approximately 39% of Profit Before Tax. Equity-method investment income increased from ¥0.9B in the previous year to ¥1.4B, supporting profit; however, its susceptibility to fluctuations in the performance of investees requires attention. The effective tax rate was high at 54.9% (approximately 42.5% in the previous year), and the higher tax burden substantially compressed Net Income relative to the recurring profit level. From an accrual perspective, changes in the composition of contract assets and accounts receivable are evident, creating variability in the timing of revenue monetization. Accordingly, consistency with cash flow should be monitored continuously when evaluating earnings quality.

Earnings Forecast and Guidance

Progress against the Full-Year forecast was broadly in line with the standard quarterly pace for Revenue at 24.1% (¥105.2B/¥436.0B), while Operating Income at 8.7% (¥3.0B/¥34.3B) and Net Income at 7.6% (¥2.2B/¥28.9B) were substantially behind. Since Full-Year Operating Income is projected to increase by +5.2% YoY, the progress achieved in Q1 assumes a recovery in profit over the remaining 3 quarters in light of the significant decline in Q1 (-54.2%). Given that the earnings forecast was revised during the current quarter, progress in improving the gross profit margin, leveling out costs, and normalizing the tax rate in the second half will be key to achieving the Full-Year forecast.

Shareholder Returns

The company forecasts annual dividends of ¥47 per share (after the stock split), implying a Payout Ratio of approximately 53.6% against the Full-Year EPS forecast of ¥87.76. There was no revision to the dividend forecast during the current quarter, and the dividend policy remains unchanged at this time despite the slow progress in earnings. In addition, a 3-for-1 stock split was implemented effective April 1, 2026, and a simple comparison with the previous year's dividend of ¥66.5 should be made using the effective value adjusted for the split.

Risk Factors

1. Negative operating leverage: SG&A expenses increased by +23.1% YoY, substantially exceeding revenue growth of +4.6%, causing the Operating margin to decline to 2.8% (6.5% in the previous year). The key focus going forward will be determining whether the cost increase is temporary or structural.

2. Changes in the timing of cash collection: Contract assets and contract liabilities both increased substantially, by +50.2% and +148.4%, respectively, creating a timing mismatch between revenue growth and cash generation. Changes in working capital may affect funding efficiency going forward.

3. Reliance on non-operating items and the tax burden: Equity-method investment income and financial income account for approximately 39% of Profit Before Tax, while the effective tax rate remains high at 54.9%. Fluctuations in investee performance and tax rate trends may have a significant impact on Net Income.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

Both the Operating margin and Net profit margin are below the industry median, placing the company in the lower group within the industry.

Growth and Capital Efficiency

The Revenue growth rate is also below the industry median. Although revenue is on an upward trend, the company’s growth rate is relatively moderate within the industry.

※Source: Company analysis

Key Earnings Highlights

1. Revenue increased across all 3 segments, but the increase in SG&A expenses (+23.1%) substantially exceeded revenue growth (+4.6%), causing the Operating margin to decline to 2.8%. Whether the change in the cost structure is temporary or ongoing will be a key area of focus going forward.

2. Full-Year progress was substantially behind, with Revenue at 24.1% compared with Operating Income at 8.7% and Net Income at 7.6%. Achieving the Full-Year profit growth forecast (Operating Income +5.2%) assumes a recovery in profit during the second half.

3. The simultaneous substantial increases in contract assets and contract liabilities indicate changes in revenue recognition and billing cycles and will be a monitoring item when evaluating the quality of cash generation.

Theoretical Share Price (Reference Value)

Sensitivity: ¥909–¥961 at cost of equity ±1%, ¥935–¥935 at ω±0.1.

Notes:

• Net assets as of the end of the quarter 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 using only publicly disclosed data; this does not constitute a forecast of the market share price or a recommendation of any specific investment action, nor does it predict or guarantee future share prices.)

---

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 responsibility, after consulting a professional as necessary.

---End of Report---