STEP CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

For FY2026 Q2, Revenue was ¥83.6B (YoY +¥2.0B +2.4%), Operating Income was ¥23.8B (YoY +¥0.3B +1.2%), Ordinary Income was ¥24.3B (YoY +¥0.3B +1.2%), and Net Income was ¥17.0B (YoY +¥0.4B +2.7%). Revenue increased for the second consecutive period, and all profit measures exceeded the prior-year period. Operating margin remained high at 28.5% (down 0.3pt from 28.8% a year ago), while SG&A ratio rose to 5.9% (up 0.3pt from 5.6%), slightly compressing margins. Net margin improved slightly to 20.3% (up 0.1pt from 20.2%) due to stable tax burden. Progress against full-year guidance is 50.7% for Revenue, 60.4% for Operating Income, 60.3% for Ordinary Income, and 61.6% for Net Income, indicating profits are running ahead of schedule.

Drivers of Performance

[Revenue] Revenue increased to ¥83.6B (YoY +2.4%). Cost of sales was ¥54.8B (prior ¥53.5B, +2.4%), increasing in line with sales; gross profit was ¥28.8B (YoY +2.5%), and gross margin remained flat at 34.4% (prior 34.4%). Efficiency on the cost side has been maintained due to stable utilization and scale benefits in the classroom business.

[P&L] Operating Income rose to ¥23.8B (YoY +1.2%), but the growth lagged Revenue growth of +2.4%. SG&A was ¥5.0B (prior ¥4.5B, +9.1%), growing much faster than sales; SG&A ratio rose to 5.9% (up 0.3pt from 5.6%), which contributed to the 0.3pt reduction in operating margin. Non-operating income was ¥1.0B (including ¥0.2B in interest on marketable securities), non-operating expenses were ¥0.5B (interest expense ¥0.0B), yielding net non-operating income of ¥0.5B. Ordinary Income was ¥24.3B (YoY +1.2%). A gain on sale of fixed assets of ¥0.3B was recorded as extraordinary income, bringing Profit Before Tax to ¥24.6B (YoY +2.4%). Income taxes were ¥7.6B (effective tax rate 30.9%, nearly unchanged from 31.1% a year ago), and Net Income was ¥17.0B (YoY +2.7%), resulting in a year of both revenue and profit growth.

Key Financial Metrics

[Profitability] Operating margin 28.5% (down 0.3pt from 28.8%), Net margin 20.3% (up 0.1pt from 20.2%), and EBITDA margin 31.8% all remain at high levels. ROE is 6.1%, composed of Net margin 20.3% × Asset turnover 0.27 × Financial leverage 1.10. Although the rise in SG&A ratio pressured operating margin, Net margin edged up due to stable tax burden. [Cash Quality] Operating Cash Flow / Net Income is 0.93x, OCF/EBITDA is 0.59x, and cash conversion efficiency has slightly declined due to working capital build-up. Accrual ratio is 0.4%, indicating high earnings quality. [Investment Efficiency] Capex / Depreciation is 0.59x, indicating restrained renewal investment and maintained asset efficiency, while suggesting room for mid-to-long-term capex for renewal/expansion. [Financial Soundness] Equity Ratio is 90.6%, Current Ratio 407%, interest-bearing debt ¥0.2B (Debt/EBITDA 0.01x), effectively net-debt free with an extremely strong financial base. Cash and deposits are ¥75.9B, and interest coverage is over ~10,000x, indicating excellent solvency.

Cash Flow Analysis

Operating Cash Flow was ¥15.8B (YoY +1.4%), or 0.93x of Net Income ¥17.0B, slightly below benchmark but within acceptable range. Working capital increases (Accounts receivable increase -¥1.6B, Inventories increase -¥0.5B, Deferred revenue decrease -¥1.6B) pressured cash generation, resulting in OCF/EBITDA of 0.59x. Investing Cash Flow was -¥16.3B, driven mainly by acquisition of investment securities -¥5.0B and time deposits placed -¥10.0B; capital expenditures were limited to -¥1.6B. Financing Cash Flow was -¥12.1B, reflecting shareholder returns: dividend payments -¥7.1B and share buybacks -¥6.7B. Free Cash Flow was -¥0.5B (Operating CF + Investing CF), indicating that cash generation during the period did not cover shareholder returns and part of the abundant cash balance was used. Ending cash was ¥63.2B (down ¥12.6B from opening ¥75.8B), and liquidity remains ample.

Quality of Earnings

Of Net Income ¥17.0B, Operating Income ¥23.8B forms the core of recurring earnings, supplemented by net non-operating income +¥0.5B (including ¥0.2B interest on marketable securities) and extraordinary income ¥0.3B (gain on sale of fixed assets), indicating the majority of profits are from core operations. Of non-operating income ¥1.0B, ¥0.2B is interest on held investment securities, representing stable income with high recurrence. The extraordinary income ¥0.3B is a one-off with low sustainability. Accrual ratio is very low at 0.4% ((Operating CF ¥15.8B - Net Income ¥17.0B) / Total assets ¥306.2B × 100), indicating profits are backed by cash. However, working capital increases (Accounts receivable +¥1.4B, Inventories +¥0.5B) led to Operating CF / Net Income of 0.93x (<1), slightly slowing cash conversion. Comprehensive income is roughly equivalent to Net Income, with minor changes in other comprehensive income from marketable securities, indicating a clean earnings profile from a quality perspective.

Forecasts & Guidance

Full-year guidance is unchanged: Revenue ¥164.9B (YoY +4.1%), Operating Income ¥39.4B (YoY +4.3%), Ordinary Income ¥40.2B (YoY +4.0%), Net Income ¥27.5B (YoY +2.4%). H1 progress rates are Revenue 50.7%, Operating Income 60.4%, Ordinary Income 60.3%, Net Income 61.6%, indicating profit progress exceeding 60% and running ahead. The company assumes H2 Revenue ¥81.3B (below H1 ¥83.6B) and H2 Operating Income ¥15.6B (well below H1 ¥23.8B), incorporating seasonality and higher H2 costs into the full-year plan. Given current progress, the probability of achieving the full-year plan is high, with upside potential.

Shareholder Returns

An interim dividend of ¥44 per share was paid. Based on average shares outstanding of 15,636 thousand shares during the period, total dividends amount to approximately ¥6.9B. The dividend payout ratio against Net Income ¥17.0B is about 41%, a healthy level. Additionally, share buybacks of ¥6.7B were executed, bringing total shareholder returns to ¥13.6B and Total Return Ratio to approximately 80% ((dividends ¥6.9B + buybacks ¥6.7B) / Net Income ¥17.0B), representing a high level of shareholder returns. Full-year dividend forecast remains ¥44 (prior ¥44, unchanged), which implies a full-year payout ratio of about 25% against full-year Net Income forecast ¥27.5B, a conservative stance. Although Free Cash Flow is negative ¥0.5B, the substantial cash balance ¥75.9B and low leverage reduce short-term concerns about sustaining dividends and buybacks. Medium-term, recovery of Operating CF and balance in investment allocation will be key to sustaining total returns.

Risk Factors

1. Margin pressure risk from rising SG&A: SG&A ¥5.0B (YoY +9.1%) grew far faster than Revenue growth +2.4%, raising SG&A ratio to 5.9% (up 0.3pt from 5.6%). Continued rises in labor and operating costs could compress the currently high Operating margin of 28.5%. Cost control and productivity improvements are required.

2. Cash conversion efficiency risk from working capital increases: Accounts receivable ¥2.4B (prior ¥1.0B, +150%), Inventories ¥0.9B (prior ¥0.4B, +145%) show rapid working capital growth, resulting in low OCF/EBITDA 0.59x. Continued delays in receivables collection or inventory obsolescence could reduce cash generation and constrain shareholder returns and investment capacity.

3. Future cash outflow risk from asset retirement obligations: Asset retirement obligations ¥6.0B represent 20.9% of Total Liabilities ¥28.8B, a relatively large proportion, and may lead to cash outflows upon classroom exits or renovations. Aging facilities and contract renewals may increase costs and become mid-to-long-term financial burdens.

Industry Benchmark (Reference, Company Analysis)

Profitability & Returns

Profitability metrics significantly exceed industry medians, highlighting strong earnings power.

Growth & Capital Efficiency

Revenue growth trails the industry median substantially, placing the company in the lower ranks for growth.

※Source: Company compilation

Points of Note in the Results

1. Profit progress ahead of schedule and upside to full-year: Operating Income progress 60.4%, Net Income progress 61.6% exceed 60%, indicating high probability of achieving full-year plan with upside potential. High Operating margin 28.5% and EBITDA margin 31.8% are expected to persist, and the effectively net-debt-free balance sheet supports stable earnings generation.

2. Cash conversion efficiency and allocation of investment are key issues: OCF/EBITDA 0.59x, FCF -¥0.5B, and continued restrained capex (Capex/Depreciation 0.59x) point to declining cash conversion efficiency. Working capital increases may reflect timing shifts, but the timing of restoring investment allocation—important for capex for renewals/new openings and medium-to-long-term growth drivers—should be monitored. The presence of asset retirement obligations ¥6.0B (20.9% of total liabilities) should also be noted as a potential future capex/cash-outflow.

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This report was automatically generated by AI analyzing XBRL financial statement data. It does not constitute a recommendation to invest in any specific security. Industry benchmarks are reference information compiled by the Company from public financial statements. Investment decisions are your responsibility; consult professionals as needed.

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AI Financial Analysis

Executive Summary

FY2026 Q2 results were solid, with revenue and earnings growth maintained, although operating-margin progression lagged sales growth. Revenue increased 2.4% year on year to ¥8.36bn. Operating income rose 1.2% to ¥2.38bn. Ordinary income also increased 1.2% to ¥2.43bn. Net income grew 2.7% to ¥1.70bn, slightly outpacing operating profit growth. The operating margin was 28.5%, down approximately 35bp from 28.8% in the prior-year period. The gross margin was broadly stable at 34.4%. The net margin improved modestly by approximately 6bp to 20.3%. SG&A expense increased 9.1% year on year to ¥0.50bn, materially faster than revenue, explaining the modest operating-margin compression. EBITDA rose to ¥2.65bn and the EBITDA margin remained high at 31.8%. Earnings quality was acceptable overall, as operating cash flow of ¥1.58bn covered 0.93x net income and the accruals ratio was a low 0.4%. However, operating cash conversion of 0.59x EBITDA is below the 0.7x alert threshold, indicating that cash realization did not fully match the strong reported EBITDA during the half year. Free cash flow was slightly negative at ¥0.05bn after ¥0.16bn of capital expenditure. The balance sheet remains exceptionally conservative, with a 407.3% current ratio, ¥7.59bn of cash and deposits, and only ¥0.02bn of interest-bearing debt. Management has maintained its full-year forecast, under which Q2 sales progress was broadly normal at 50.7%, while operating-income and net-income progress of 60.4% and 61.6%, respectively, are ahead of the standard 50% midpoint pace. The unchanged ¥88 full-year dividend forecast implies that the company continues to balance shareholder distributions with a substantial net-cash position. The key forward issue is whether lower capital investment relative to depreciation represents disciplined asset utilization or an investment shortfall that could constrain future classroom capacity, service quality, or growth.

Profitability Analysis

Annualized DuPont ROE is 12.2%, comprising a 20.3% net profit margin, 0.546x asset turnover, and 1.10x financial leverage. The principal source of return is the exceptionally high net margin rather than leverage, consistent with the company's debt-light capital structure. Financial leverage is low and stable in economic terms, so ROE is driven by operating execution and the productivity of a sizeable asset base. Annualized asset turnover of 0.546x is modest, reflecting the asset-intensive property footprint, including ¥15.85bn of PPE and ¥8.60bn of land. The 28.5% EBIT margin and 31.8% EBITDA margin are well above the stated excellent-profitability benchmarks. Gross margin was stable at 34.4%, indicating that direct delivery costs remained controlled. In contrast, SG&A grew 9.1% year on year versus 2.4% revenue growth, resulting in approximately 35bp operating-margin compression. This unfavorable cost-growth spread is the key near-term profitability watchpoint. The five-factor analysis shows a 0.691 tax burden and 1.032 interest burden; the latter reflects immaterial financing costs and limited debt dependence. The effective tax rate was 30.9%, a normal level for a domestic Japanese corporate taxpayer. Profit before tax exceeded ordinary income due to a ¥0.30bn gain on asset sales, which supported net income but is non-recurring. Excluding this extraordinary gain, underlying after-tax earnings growth would be somewhat less favorable than reported net-income growth. The high operating margin appears structurally supported by the business model, but sustaining it requires SG&A growth to normalize closer to revenue growth. No goodwill amortization burden is evident in EBITDA, and intangible assets are only 0.4% of total assets.

Growth Assessment

Revenue growth of 2.4% was slower than the full-year sales-growth forecast of 4.1%, although Q2 sales progress reached 50.7% of the full-year target and is therefore close to the standard midyear pace. Operating income reached 60.4% of the full-year forecast, 10.4 percentage points above the standard 50% progress rate. Net income reached 61.6% of forecast, 11.6 percentage points ahead of the standard pace. The above-plan profit progress reflects strong first-half profitability, but part of the net-income outperformance includes the ¥0.30bn gain on sale of assets. Ordinary income progress was 60.3% of the full-year target, suggesting that core profitability is also running ahead of the seasonal benchmark. Management has not revised either its earnings outlook or dividend plan, which indicates a cautious stance toward second-half execution. The forecast implies second-half revenue of ¥8.14bn, operating income of ¥1.56bn, and net income of ¥1.06bn. This implied second-half operating margin is approximately 19.2%, below the first-half 28.5%, consistent with seasonality and/or planned cost absorption. The business must therefore maintain enrolment, pricing, and utilization while containing overhead growth to meet the full-year plan without further margin dilution. The asset base provides operating capacity, but the 0.59x CapEx-to-depreciation ratio warrants monitoring because sustained spending below depreciation can eventually limit expansion and asset renewal.

Financial Health

Financial health is very strong. The current ratio is 407.3% and the quick ratio is 402.9%, demonstrating ample coverage of current obligations by highly liquid assets. Working capital was ¥6.44bn, while cash and deposits alone were ¥7.59bn versus current liabilities of ¥2.09bn. Total liabilities were only ¥2.88bn, equal to 9.4% of total assets, and equity represented 90.6% of assets. Interest-bearing debt was only ¥0.02bn, producing a debt-to-equity ratio of 0.10x, debt-to-EBITDA of 0.01x, and debt-to-capital of 0.1%. There is no maturity-mismatch concern: current liabilities are fully covered by cash, and long-term loans are immaterial at ¥0.02bn. Interest coverage of 9,260.7x is economically equivalent to no financing-stress risk. Accounts receivable increased 150.1% year on year to ¥0.24bn, but remains only 0.8% of total assets and is small relative to revenue; its absolute scale limits credit-risk implications. Inventories increased 145.1% to ¥0.09bn, but represent only 0.3% of assets and do not presently indicate material inventory risk. Treasury stock increased by ¥0.67bn year on year to negative ¥2.39bn, reflecting active share repurchases and reducing the equity base available to absorb future shocks. Investment securities rose ¥2.93bn year on year to ¥4.99bn, or 16.3% of assets, increasing exposure to market-value movements and capital-allocation outcomes. Asset retirement obligations were ¥0.60bn, equivalent to 20.9% of total liabilities, triggering the high-ARO-ratio alert. This ratio is elevated because total liabilities are very low; nevertheless, the obligation is a meaningful long-duration commitment related to the company's property footprint and should be funded through asset-retirement planning.

Notable B/S Changes

Accounts receivable: +¥0.14bn (+150.1%) to ¥0.24bn - sharp percentage increase, but the balance remains only 0.8% of total assets and is not currently material to credit risk. Inventories: +¥0.05bn (+145.1%) to ¥0.09bn - increased working-capital usage, though inventories remain only 0.3% of total assets. Long-term loans: -¥0.17bn (-50.0%) to ¥0.17bn - further reduces already negligible leverage and reinforces the net-cash capital structure. Treasury stock: -¥0.67bn (-39.1%) to negative ¥2.39bn - reflects active share repurchases; supportive of per-share metrics but reduces equity flexibility. Investment securities: +¥2.93bn (+6.2%) to ¥4.99bn - now 16.3% of assets, increasing market-value and capital-allocation exposure. Property, plant and equipment: -¥1.43bn (-0.9%) to ¥15.85bn - broadly stable in aggregate, but capital expenditure below depreciation indicates continued monitoring of asset renewal is warranted.

Cash Flow Quality

Operating cash flow was ¥1.58bn, equivalent to 0.93x net income of ¥1.70bn. This is below the 1.0x high-quality benchmark but above the 0.8x concern threshold, supporting an overall acceptable assessment of earnings conversion. The accruals ratio was only 0.4%, which is favorable and indicates limited reliance on accrual-based earnings generation. Cash conversion, measured as operating cash flow divided by EBITDA, was 0.59x and is below the 0.7x warning threshold. The root cause is that EBITDA of ¥2.65bn exceeded operating cash flow, with cash taxes, working-capital movements, and other operating cash uses constraining conversion. Receivables increased by ¥0.16bn and inventories by ¥0.05bn in the cash-flow statement, representing modest working-capital use. The receivables balance is still low relative to sales, so there is no strong indication of aggressive revenue recognition or working-capital manipulation. Capital expenditure was ¥0.16bn, below depreciation and amortization of ¥0.27bn, yielding a 0.59x CapEx-to-depreciation ratio. This triggers both underinvestment alerts: capital spending may be insufficient to maintain or expand the physical asset base if the pattern persists. Free cash flow was negative ¥0.05bn after capital expenditure, leaving no internally generated free-cash-flow coverage for distributions during the half year. Investing cash flow was negative ¥1.63bn, principally including ¥0.50bn of investment-security purchases and ¥1.00bn placed into time deposits, in addition to capital expenditure. Financing cash flow was negative ¥1.21bn, including ¥0.71bn of dividends and ¥0.67bn of share repurchases. The ¥1.26bn net decrease in cash is therefore primarily a capital-allocation outcome rather than evidence of operating stress.

Dividend Sustainability

The Q2 dividend was ¥44 per share, and the unchanged full-year dividend forecast is ¥88 per share. The calculated dividend payout ratio is 43.2%, which is comfortably below the 60% sustainability benchmark. Based on forecast EPS of ¥176.51, the planned full-year dividend represents a forward payout ratio of approximately 49.9%, also within a sustainable range. Dividend payments in the first half totaled ¥0.71bn, compared with operating cash flow of ¥1.58bn, indicating that dividends were covered by operating cash generation. Free cash flow was negative ¥0.05bn, however, so FCF did not cover dividends after capital expenditure in the reported period. The FCF coverage ratio of negative 0.07x should be interpreted alongside the large cash balance and the discretionary nature of investment-security purchases and time-deposit placements. Share repurchases were ¥0.67bn in the half year. Combining dividends and repurchases, the period total return ratio was approximately 81.4% of net income, marginally above the 80% sustainability benchmark for aggregate shareholder returns. This elevated total return ratio is readily supported by the net-cash balance and extremely low debt, but it leaves less internally generated cash for investment if repurchases continue at this pace. Dividend sustainability is strong under the present earnings profile, while the scale and cadence of buybacks should remain aligned with operating cash conversion and required asset renewal.

Risk Assessment

Business risks include Demand and enrolment risk: the education-services model depends on sustained student demand, regional demographics, competitive intensity, and the ability to preserve tuition pricing., Cost discipline risk: SG&A rose 9.1% year on year against 2.4% sales growth, and continued overhead growth above revenue could erode the currently high 28.5% operating margin., Physical-network renewal risk: CapEx-to-depreciation of 0.59x is below the 0.7x alert threshold; persistently low reinvestment could reduce facility quality, capacity, or growth flexibility., Investment-security valuation risk: investment securities of ¥4.99bn account for 16.3% of assets, exposing equity and comprehensive income to market-price movements..

Financial risks include Cash-conversion risk: OCF-to-EBITDA of 0.59x is below the warning threshold, meaning reported operating profitability was not fully translated into cash during the half year., Capital-allocation risk: ¥0.67bn of repurchases and ¥0.71bn of dividends, combined with negative free cash flow, produced an approximately 81.4% period total return ratio., Asset-retirement obligation risk: asset retirement obligations of ¥0.60bn equal 20.9% of liabilities, creating a meaningful long-term property-related obligation despite otherwise low leverage., Treasury-stock expansion: treasury stock increased to negative ¥2.39bn, reducing equity flexibility if earnings or asset values weaken..

Key concerns include Highest priority: whether the SG&A growth rate moderates sufficiently to prevent further operating-margin compression., High priority: whether cash conversion improves toward or above 0.7x EBITDA and restores positive free cash flow after routine capital spending., Medium priority: whether CapEx rises toward depreciation to support long-term asset maintenance and expansion needs., Medium priority: the extent to which the ¥0.30bn asset-sale gain contributed to first-half net-income outperformance versus the full-year forecast., Lower priority: receivables and inventory increased sharply in percentage terms, but their absolute balances remain immaterial relative to assets and sales..

Investment Implications

Key takeaways include The company combines excellent operating profitability, with a 28.5% operating margin and 20.3% net margin, with a highly conservative balance sheet., Annualized ROE of 12.2% is good rather than exceptional, as high margins are partly offset by modest asset turnover inherent in a substantial property base., First-half earnings are ahead of the full-year seasonal progress benchmark, but the unchanged guidance embeds a materially lower second-half operating margin., Earnings accrual quality is favorable, but sub-0.7x OCF-to-EBITDA conversion and negative free cash flow require monitoring., Shareholder distributions appear balance-sheet sustainable, though the combined dividend and repurchase pace is slightly above the stated total-return sustainability benchmark..

Metrics to watch include Revenue growth versus the 4.1% full-year forecast, SG&A growth relative to revenue growth and the operating-margin trajectory, Operating cash flow to EBITDA, with improvement above 0.7x as a key threshold, CapEx-to-depreciation, with movement toward 1.0x indicating more complete asset renewal, Investment-security balance and valuation changes, Share repurchases, total return ratio, and cash-balance trajectory, Asset retirement obligation funding and property-network commitments.

Regarding relative positioning, The company is positioned as a high-margin, low-leverage domestic education operator with unusually strong liquidity and substantial property and investment-security holdings. Its profitability profile is stronger than the stated operating-margin benchmarks, while its return profile is constrained less by financing and more by asset intensity. Relative differentiation rests on maintaining high margins and disciplined capital allocation rather than leverage-driven returns.