SECOM CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Although SECOM secured higher revenue and operating income, led by its core security services, net income declined due to a decrease in non-operating income and a higher tax burden. Revenue was ¥2984.5B (+3.6% YoY), while operating income was ¥334.7B (+3.9% YoY), both showing solid performance. Meanwhile, ordinary income was ¥390.8B (-0.7% YoY), and consolidated net income was ¥260.1B (-4.2% YoY), indicating a shift from higher revenue and operating income to lower earnings at subsequent profit levels. The gross profit margin improved to 31.6%, but the SG&A ratio also rose to 20.4%, leaving the operating margin essentially flat at 11.2%. The increase in operating income was therefore primarily driven by top-line growth.

Factors Affecting Performance

【Revenue】Revenue was ¥2984.5B, representing a 3.6% YoY increase. By segment, the core Security Services segment generated ¥1673.1B (+2.0%), accounting for 56.1% of total revenue. Fire Protection Services at ¥404.7B (+12.2%), Insurance Services at ¥156.8B (+7.4%), and Geospatial Information Services at ¥99.9B (+7.1%) drove overall growth, while Other Businesses declined slightly to ¥148.2B (-2.0%).

【Profit and Loss】Operating income was ¥334.7B (+3.9%), supported by an improvement in the gross profit margin to 31.6% from 31.3% a year earlier. By segment, Fire Protection Services posted a significant increase in segment profit to ¥12.8B (+410.8%), while BPO ICT also grew to ¥23.1B (+21.2%). In contrast, Insurance Services declined to ¥23.0B (-24.4%), and Geospatial Information Services continued to report a loss of ¥-15.7B. Ordinary income was ¥390.8B (-0.7%), pressured by declines in gains from investment partnership management and equity-method income. Net income was ¥260.1B (-4.2%), with income taxes and other taxes of ¥129.2B (an effective tax rate of approximately 33.2%, higher YoY) further weighing on bottom-line earnings. Overall, the results represent a pattern of higher revenue and operating income but lower earnings from the ordinary income stage onward.

Segment Analysis

Profitability differences among segments are clear. Security Services is the core business, generating operating income of ¥319.4B at a margin of 19.1% and accounting for the majority of company-wide profit. It continues to deliver stable growth, with revenue up 2.0% and profit up 2.6%. Fire Protection Services posted a sharp recovery, with revenue up 12.2% and operating income up 410.8%, apparently supported by improved project progress, although its profit margin remains low at 3.2%. BPO ICT recorded a high rate of profit growth, with operating income up 21.2%, reflecting ongoing efficiency improvements. By contrast, Insurance Services reported lower operating income of 24.4% despite higher revenue, while Geospatial Information Services continued to post an operating loss of ¥-15.7B. Structural profitability disparities within the portfolio therefore remain an issue.

Key Financial Indicators

【Profitability】The operating margin was 11.2%, essentially unchanged from 11.2% a year earlier, while the net profit margin declined from the previous year to approximately 8.7%. The gross profit margin improved to 31.6% from 31.3% a year earlier, but this benefit was offset by an increase in the SG&A ratio to 20.4% from 20.1%.【Cash Flow Quality】Accounts receivable and notes receivable declined significantly to ¥1177.2B from ¥1809.3B a year earlier, while accounts payable and notes payable also decreased to ¥342.8B from ¥488.6B, indicating changes in the working capital structure.【Investment Efficiency】ROE was 1.7% on a quarterly basis, and the equity ratio was 68.4%, up from 67.3% a year earlier. Financial soundness is high, although capital efficiency remains low.【Financial Soundness】Against total assets of ¥21786.6B, net assets were ¥14903.2B and the equity ratio was 68.4%, indicating a conservative capital structure. The company holds substantial cash and deposits of ¥3931.6B and investment securities of ¥4932.4B.

Cash Flow Analysis

Because details of the cash flow statement were not disclosed in these financial results, funding trends are assessed based on changes in the balance sheet. Cash and deposits were ¥3931.6B, nearly unchanged from ¥3949.8B in the same period of the previous year, indicating stable liquidity. Meanwhile, accounts receivable and notes receivable declined by ¥632.1B YoY to ¥1177.2B, while accounts payable and notes payable also decreased by ¥145.8B, demonstrating progress in working capital reduction. Long-term borrowings increased by ¥71.5B YoY to ¥168.0B, indicating a shift toward longer-term financing. Overall, the company continues to pursue conservative financial management, maintaining cash levels while simultaneously reducing assets and liabilities.

Earnings Quality

Recurring operating income and expenses account for the majority of earnings, while the impact of extraordinary items is extremely limited. Extraordinary income of ¥1.6B and extraordinary losses of ¥3.1B were each less than 0.1% of revenue, indicating minimal earnings distortion from temporary factors. Of non-operating income of ¥67.2B, gains from investment partnership management of ¥29.8B and dividend income of ¥7.4B were the primary components; however, both declined from the previous year, when gains from investment partnerships were ¥47.4B, indicating that reliance on non-operating income has actually decreased. The main reasons net income declined despite higher operating income were a reduction in equity-method income (¥14.4B versus ¥22.9B a year earlier) and a higher effective tax rate. The divergence between ordinary income and net income was primarily attributable to the higher tax burden, and structural distortion in earnings quality can be assessed as limited.

Earnings Forecast and Guidance

Progress against the full-year forecast was 22.7% for revenue, 20.2% for operating income, 22.2% for ordinary income, and 22.8% for net income attributable to owners of the parent, all below the standard quarterly progress rate of 25%. In particular, progress for operating income and ordinary income was relatively slow, at -4.8pt and -2.8pt, respectively, versus 25%. The full-year forecast calls for revenue growth of +4.5%, operating income growth of +3.2%, and ordinary income decline of -3.4% (EPS ¥263.57, DPS ¥120). Progress in accumulating earnings from the core segments from the second half onward will be key to improving performance against the full-year forecast.

Shareholder Returns

The company’s full-year dividend forecast is ¥120 per share, and no revision to the dividend forecast had been made as of the current quarter. Based on forecast EPS of ¥263.57, the payout ratio is approximately 45.5%. Given the sound financial foundation represented by cash and deposits of ¥3931.6B and an equity ratio of 68.4%, there is little concern regarding dividend sustainability. The prior-year dividend was ¥50 (an interim or period-specific figure), and confirmation of full-year results is necessary to assess the trend in annual dividend levels.

Risk Factors

1. Segment concentration risk: Security Services accounts for 56.1% of revenue and the majority of operating income, meaning that changes in unit pricing and utilization rates in this business could have a significant impact on company-wide performance.

2. Profitability dispersion: Geospatial Information Services continues to report an operating loss of ¥-15.7B, while Insurance Services also posted a 24.4% decline in operating income. Profitability disparities among segments create a structure that is susceptible to fixed-cost burdens and changes in project mix.

3. Margin pressure from rising costs: The SG&A ratio increased to 20.4% from 20.1% a year earlier. Personnel expenses, including salaries and allowances of ¥222.4B (+4.7% YoY), and higher rent expenses are increasing at a faster pace than revenue growth (+3.6%), potentially weakening operating leverage.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

The profitability metrics exceed the industry median, placing the company in the upper tier among its peers.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, placing the company at a relative disadvantage in terms of growth.

Source: Company analysis

Key Takeaways from the Financial Results

1. A two-tier structure is evident, comprising higher revenue and operating income in the core businesses but lower final earnings. Operating income increased by +3.9%, while ordinary income declined by -0.7% and net income by -4.2%, with the decline widening at subsequent profit levels. Trends in non-operating income and the tax burden are determining bottom-line earnings.

2. Profitability disparities among segments are widening. While Fire Protection Services posted a significant increase in profit (+410.8%) and BPO ICT grew strongly (+21.2%), Geospatial Information Services continued to post losses and Insurance Services recorded lower profit (-24.4%). The potential for earnings improvement within the portfolio will remain an important structural area of focus.

3. The increase in the SG&A ratio to 20.4% from 20.1% a year earlier offset the benefit of the improvement in the gross profit margin to 31.6%, leaving the operating margin essentially flat. If personnel and rent expenses continue to grow faster than revenue, operating leverage will be an important monitoring point.

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 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,170–¥3,355 at ±1% for the cost of equity, and ¥3,260–¥3,260 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end were used (there is a timing mismatch with the full-year forecast).

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This figure 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 discretion and responsibility, in consultation with a professional advisor as necessary.

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AI Financial Analysis

Executive Summary

Secom delivered a solid FY2027 Q1 operating performance, although below-operating-line income and a higher tax burden resulted in a modest decline in profit attributable to owners. Revenue increased 3.6% year on year to JPY298.5bn, while operating income rose 3.9% to JPY33.5bn. The operating margin was broadly stable to marginally higher at 11.2%, up approximately 3bp from 11.2% a year earlier. Gross margin improved by approximately 32bp to 31.6%, indicating that direct-cost control more than offset moderate cost inflation. However, SG&A expenses increased 5.2%, faster than revenue growth, and the SG&A-to-sales ratio rose by about 29bp to 20.4%. Salaries and allowances increased 4.7% to JPY22.2bn, consistent with persistent labor-cost pressure in the security-services industry. The security-services segment remained the core business, generating JPY164.0bn of external revenue and JPY31.9bn of segment profit. Fire protection was the strongest incremental contributor, with revenue up 13.9% and segment profit rising more than fivefold from a low prior-year base. Medical services and geospatial information services also improved, while BPO/ICT revenue declined modestly despite higher segment profit. Insurance segment revenue increased, but segment profit fell 24.4%, reducing the benefit from growth in the other businesses. Ordinary income declined 0.7% to JPY39.1bn because non-operating income fell 24.4%, principally reflecting lower gains on investments in partnerships. Profit attributable to owners declined 3.4% to JPY24.1bn, with the effective tax rate increasing to 33.2% from approximately 30.7% in the prior-year quarter. Comprehensive income rose sharply to JPY36.4bn, supported by JPY10.4bn of other comprehensive income, particularly valuation gains on securities and foreign-currency translation gains. The balance sheet remains highly liquid, with cash and deposits of JPY393.2bn and a current ratio of 260.4%. Full-year guidance was maintained, implying management continues to expect revenue growth of 4.5% and operating-income growth of 3.2% for the year. Q1 revenue progress against guidance was 22.7%, and operating-income progress was 20.2%, both moderately below the simple 25% quarterly run-rate but not materially outside a normal seasonal range. The central earnings question for subsequent quarters is whether security-contract growth and the fire-protection recovery can absorb labor and headquarters-cost inflation while restoring growth in ordinary and net income.

Profitability Analysis

The reported annualized DuPont ROE is 6.5%, comprising an 8.1% net profit margin, annualized asset turnover of 0.548x, and financial leverage of 1.46x. The principal constraint on annualized ROE is the moderate asset-turnover component, reflecting a capital base that includes JPY493.2bn of investment securities, JPY467.0bn of property, plant and equipment, and JPY393.2bn of cash and deposits. Financial leverage is conservative and therefore does not meaningfully amplify shareholder returns. The 8.1% net margin remains within a sound range, but is below the 10% level generally associated with superior profitability. Operating execution was stable: operating income grew slightly faster than sales, producing an approximately 3bp improvement in operating margin to 11.2%. Gross margin improved to 31.6% from approximately 31.2%, demonstrating favorable direct-cost absorption. The primary offset was SG&A growth of 5.2%, exceeding revenue growth of 3.6%; this represents modest negative operating leverage below the gross-profit line. Unallocated corporate expenses rose to JPY6.2bn from JPY5.7bn, also contributing to the SG&A pressure. The security-services segment achieved a segment margin of 19.5%, versus 19.4% a year earlier, underscoring the resilience of recurring security-contract economics. Fire protection's segment margin improved to 3.2% from 0.7%, while medical services maintained a margin near 7.2%. Insurance profitability weakened materially, with segment margin falling to 15.5% from 22.1%. Geospatial information services remained loss-making, although its loss narrowed to JPY1.6bn from JPY1.8bn. In the five-factor framework, the tax burden was 0.619, reflecting a relatively high 33.2% effective tax rate, while the interest burden of 1.163x was favorable because net non-operating financial income exceeded interest expense. JGAAP goodwill amortization was JPY1.8bn, equivalent to 5.3% of operating income, and is a recurring accounting charge that modestly depresses reported operating and net profit relative with an IFRS presentation.

Growth Assessment

Revenue growth was underpinned by the core security-services business, where external revenue increased 2.1% to JPY164.0bn and security-contract income increased 1.9% to JPY140.2bn. This recurring contract-income base represented 47.0% of consolidated revenue, providing meaningful revenue visibility. Fire protection revenue rose 13.9% to JPY40.0bn, representing the largest growth contribution among the operating segments. Medical-services revenue increased 5.4% to JPY23.3bn, and geospatial-information-services revenue rose 6.8% to JPY9.9bn. Insurance revenue increased 8.2% to JPY14.9bn, but the segment's profit decline means that sales growth did not translate proportionately into consolidated earnings. BPO/ICT revenue declined 1.6% to JPY31.7bn, though segment profit increased 21.2% to JPY2.3bn, indicating improved cost discipline or project mix. Other businesses, including real-estate leasing and construction-equipment works, recorded a 2.1% revenue decline but a 9.8% profit increase. The maintained FY2027 forecast calls for revenue of JPY1,313.5bn and operating income of JPY165.5bn. Q1 revenue progress was 22.7% versus the full-year forecast, 2.3 percentage points below the standard 25% pace. Operating-income progress was 20.2%, 4.8 percentage points below the standard pace, while ordinary-income progress was 22.2% and owner-attributable-profit progress was 22.8%. These shortfalls are not greater than the 10-percentage-point threshold that would indicate a substantial divergence from the annual plan. The forecast requires operating income to grow 3.2% for the full year, slightly slower than the Q1 increase of 3.9%, leaving room for normal quarterly variation. Earnings quality below operating income was softer because partnership-investment gains declined from JPY4.7bn to JPY3.0bn and equity-method earnings declined from JPY2.3bn to JPY1.4bn. Sustained growth will therefore depend more on recurring contract revenue, fire-protection execution, and cost containment than on investment-related income.

Financial Health

Financial health is strong. The current ratio of 260.4% and quick ratio of 254.3% indicate substantial coverage of current obligations by highly liquid assets. Working capital totaled JPY565.2bn, and cash and deposits of JPY393.2bn alone were 16.38x short-term borrowings. Interest-bearing debt was limited at JPY40.8bn, representing only 2.7% of capital. The reported debt-to-equity ratio of 0.46x remains conservative and is well below the 2.0x level associated with aggressive leverage. Interest coverage was exceptionally strong at 78.56x, with quarterly interest expense of only JPY0.4bn against operating income of JPY33.5bn. Current liabilities of JPY352.4bn are fully supported by JPY917.5bn of current assets, so there is no maturity mismatch between short-term funding and liquid resources. The short-term debt ratio was 58.8%, which triggers the refinancing-risk alert because more than 40% of borrowings mature in the short term. The root cause is the JPY24.0bn short-term loan balance relative to JPY16.8bn of long-term loans. In context, this maturity profile does not presently create material liquidity stress because cash substantially exceeds short-term loans and overall debt is low. Its investment impact is limited near term, but the mix should be monitored if management funds acquisitions, buybacks, or capital investment with additional short-dated debt. Long-term loans increased 74.1% year on year to JPY16.8bn, although the absolute increase of JPY7.2bn is modest relative to the balance sheet. Goodwill was JPY54.3bn, equal to only 3.6% of equity and 2.5% of assets, limiting balance-sheet dependence on acquired goodwill values. Intangible assets represented 5.9% of total assets, also a balanced level.

Notable B/S Changes

Accounts receivable: -JPY63.2bn (-34.9%) to JPY117.7bn - a substantial reduction that supports working-capital discipline and reduces customer-collection exposure. Accounts payable: -JPY14.6bn (-29.8%) to JPY34.3bn - lower supplier obligations partly offset the favorable receivables reduction in working-capital terms. Long-term loans: +JPY7.2bn (+74.1%) to JPY16.8bn - percentage growth is high from a small base, but absolute leverage remains modest given JPY393.2bn of cash and deposits. Treasury stock: -JPY22.4bn to -JPY259.1bn - the larger negative balance indicates a meaningful capital-allocation item and should be considered alongside dividends when evaluating shareholder returns. Investment securities: +JPY12.4bn (+2.6%) to JPY493.2bn - securities account for 22.6% of assets, maintaining meaningful exposure of equity and comprehensive income to market movements.

Cash Flow Quality

The earnings profile should be assessed primarily through operating profitability and balance-sheet working-capital movements. Trade receivables declined JPY63.2bn year on year to JPY117.7bn, a favorable movement for cash conversion if it reflects collection timing and disciplined receivables management. Trade payables declined JPY14.6bn to JPY34.3bn over the same period, partly offsetting the favorable receivables movement. The larger reduction in receivables than payables suggests no apparent balance-sheet indication of revenue being supported by an accumulation of unpaid customer balances. Inventories were stable, declining 1.7% to JPY21.3bn, which is consistent with controlled inventory exposure. Operating income increased while owner-attributable profit declined because investment-related non-operating income was lower and tax expense increased. Accordingly, the more durable earnings indicator this quarter is the 3.9% operating-income growth rather than the 3.4% decline in owner-attributable profit. Small extraordinary items were not material: extraordinary income was JPY0.2bn and extraordinary loss was JPY0.3bn. The JPY1.4bn gain on sale of investment securities was also small relative to quarterly revenue and profit before tax. Goodwill amortization of JPY1.8bn is a non-cash recurring JGAAP expense that should be considered when comparing the company's operating cash generation with IFRS-reporting peers.

Dividend Sustainability

The full-year dividend forecast is JPY120 per share, unchanged from the disclosed plan. Against forecast EPS of JPY263.57, the implied dividend payout ratio is approximately 45.5%. This is below the 60% sustainability benchmark and leaves a meaningful earnings retention buffer. Q1 owner-attributable EPS was JPY59.81, while full-year forecast EPS implies that earnings are expected to be weighted toward subsequent quarters. The company has substantial balance-sheet liquidity, with JPY393.2bn of cash and deposits and low interest-bearing debt of JPY40.8bn. Retained earnings were JPY1,306.2bn, providing substantial capacity to support shareholder distributions through ordinary earnings variability. Treasury stock was JPY259.1bn, equivalent to 11.9% of total assets, and should remain relevant when assessing capital-allocation priorities. The indicated dividend policy appears financially supportable based on forecast earnings, liquidity, and leverage. Dividend sustainability will depend principally on delivery of the maintained FY2027 earnings plan and continued control of personnel and corporate costs.

Risk Assessment

Business risks include Labor-cost inflation is a material risk for the personnel-intensive security-services model: salaries and allowances rose 4.7%, faster than the 3.6% revenue increase., Security services is the core business, contributing JPY31.9bn of segment profit; any deterioration in contract renewals, pricing, service quality, or staffing availability would have a disproportionate effect on consolidated earnings., Insurance segment profit declined 24.4% despite 8.2% revenue growth, creating risk that claims, investment performance, or underwriting conditions remain unfavorable., Geospatial information services remained loss-making at JPY1.6bn, leaving execution risk around restoring segment profitability., The security industry faces technology and cybersecurity risk as remote monitoring, digital platforms, and connected security devices increase the importance of system reliability and data protection..

Financial risks include Short-term debt represented 58.8% of total borrowings, above the 40% refinancing-risk alert threshold; the current impact is mitigated by cash covering short-term debt by 16.38x., Ordinary income declined despite operating-income growth because non-operating income fell 24.4%, including lower partnership-investment gains and equity-method earnings., Investment securities totaled JPY493.2bn, or 22.6% of total assets, exposing comprehensive income and equity to market-value movements., The effective tax rate increased to 33.2%, reducing conversion of pre-tax profit to owner-attributable profit..

Key concerns include Monitor whether SG&A growth, including personnel and corporate costs, continues to exceed revenue growth and erodes operating-margin gains., Monitor the recovery trajectory of fire protection, the durability of BPO/ICT margin improvement, and the earnings decline in insurance., Monitor investment-related income because lower partnership and equity-method gains were the main reason ordinary and net profit lagged operating profit., Monitor the maturity composition of borrowings if debt rises from current low levels..

Investment Implications

Key takeaways include Q1 operating performance was constructive, with revenue up 3.6%, operating income up 3.9%, and an operating margin maintained at 11.2%., Recurring security-contract income increased 1.9% to JPY140.2bn, supporting the stability of the core earnings base., The gap between operating-profit growth and net-profit decline was driven by lower non-operating investment income and a higher tax rate rather than a deterioration in core operations., Liquidity and solvency are robust, with a 260.4% current ratio, 78.56x interest coverage, and debt representing 2.7% of capital., The maintained full-year plan and an implied 45.5% dividend payout ratio frame a financially conservative capital-return profile..

Metrics to watch include Security-services contract-income growth and security segment margin, SG&A growth relative to revenue growth, especially salaries and unallocated corporate costs, Fire-protection segment margin and insurance segment profit recovery, Partnership-investment gains, equity-method earnings, and effective tax rate, Q2 operating-income progress relative to the JPY165.5bn full-year forecast, Short-term debt share and cash coverage of maturing borrowings.

Regarding relative positioning, Secom combines a recurring, high-margin core security franchise with unusually strong liquidity and low balance-sheet leverage. Its annualized ROE of 6.5% is restrained by a large asset base and conservative leverage rather than balance-sheet risk. Relative earnings differentiation will depend on the company's ability to convert security-contract growth and fire-protection momentum into margin expansion while containing labor costs and reducing reliance on volatile investment-related income.