STEP (9795) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative Q3 results showed higher revenue and profit, accompanied by improved profitability, with the profit growth rate exceeding the revenue growth rate. Revenue increased to ¥122.2B (¥118.0B in the same period of the previous year, YoY +3.6%), Operating Income to ¥30.3B (¥28.5B, YoY +6.3%), Ordinary Income to ¥30.9B (¥28.9B, YoY +6.7%), and Net Income to ¥21.5B (¥19.9B, YoY +8.2%). The primary reason why profit growth exceeded revenue growth was the realization of operating leverage resulting from the improvement in the gross margin to 30.9% (30.1% in the previous year, +0.8pt). Although SG&A expenses increased by +5.6%, exceeding the revenue growth rate, the improvement in gross profit absorbed the increase. Progress against the full-year plan was also 74.1% for Revenue, 76.8% for Operating Income, and 78.1% for Net Income, with the profit items exceeding the standard Q3 progress benchmark of 75%. Improved profitability is supporting achievement of the full-year plan.

Factors Affecting Performance

【Revenue】Revenue increased 3.6% year on year to ¥122.2B. Non-operating income remained limited at 1.2% of revenue, indicating that the increase in revenue was primarily driven by expansion in the core business. Progress against the full-year revenue plan of ¥164.9B was 74.1%, nearly in line with the standard progress benchmark of 75% as of Q3.

【Profit and Loss】Operating Income increased 6.3% YoY to ¥30.3B, Ordinary Income increased 6.7% YoY to ¥30.9B, and Net Income increased 8.2% YoY to ¥21.5B, with all three exceeding the revenue growth rate. The gross margin improved to 30.9% (30.1% in the previous year), while the Operating Income margin improved to 24.8% (24.1% in the previous year) despite SG&A expenses rising to 6.1% of revenue (6.0% in the previous year). The ¥9.4B difference between Ordinary Income and Net Income was primarily attributable to ¥9.7B in corporate income taxes and other taxes; the effective tax rate of 31.0% was not particularly unusual. Extraordinary income of ¥0.3B (gain on the sale of fixed assets) was immaterial at approximately 1% of profit before tax, indicating that the source of profit was concentrated in the core business. In conclusion, these were high-quality results characterized by higher revenue and profit, together with improved profit margins.

Key Financial Indicators

【Profitability】The Operating Income margin improved to 24.8% from 24.1% in the previous year, a +0.7pt improvement, while the Net Income margin also improved by +0.7pt to 17.6% from 16.9% in the previous year. The improvement in the gross margin to 30.9% (30.1% in the previous year, +0.8pt) contributed to the expansion of both profit margins, indicating that profitability has been strengthened through improved cost efficiency in the core business.【Cash Quality】Non-operating income was 1.2% of revenue and extraordinary income was approximately 1% of profit before tax; both were small. Nearly all of the ¥9.4B gap between Ordinary Income of ¥30.9B and Net Income of ¥21.5B was attributable to corporate income taxes and other taxes (effective tax rate: 31.0%).【Investment Efficiency】ROE was 7.8%, explained by the decomposition of a 17.6% Net Income margin × 0.40x total asset turnover × 1.10x financial leverage. Total asset turnover remained broadly flat, and the improvement in ROE was primarily attributable to improved profit margins.【Financial Soundness】The Equity Ratio was 91.3%, up +1.6pt from 89.7% in the previous year. Current assets of ¥70.7B substantially exceeded current liabilities of ¥18.2B (current ratio: approximately 388%). Long-term borrowings had been reduced to ¥0.08B, and, together with financial leverage of 1.10x (1.12x in the previous year), the Company continues to maintain a conservative financial structure with low reliance on debt.

Cash Flow Analysis

Cash and deposits amounted to ¥59.1B, down ¥19.3B from ¥78.4B in the previous year, primarily due to changes in capital allocation. Investment securities increased by ¥12.2B (+26.0%) to ¥59.2B, indicating that a portion of surplus funds was allocated to securities investments. Treasury stock increased by ¥6.7B on a book-value basis, and progress in share repurchases was also a factor behind the decrease in cash. Meanwhile, long-term borrowings were reduced to ¥0.08B, with the repayment of interest-bearing debt also progressing in parallel. The increases in accounts receivable (+¥1.3B) and inventories (+¥0.3B) represented only a gradual expansion in working capital associated with revenue growth, with a limited impact on total assets. Overall, the Company appears to have maintained a balanced capital allocation policy, directing funds generated by the core business toward securities investments, share repurchases, and debt reduction.

Quality of Earnings

Of Net Income of ¥21.5B, the contributions from non-operating income (¥1.4B, 1.2% of revenue) and extraordinary income (¥0.3B, approximately 1% of profit before tax) were both small. The primary source of profit was Operating Income of ¥30.3B generated by the core business. The ¥9.4B difference between Ordinary Income of ¥30.9B and Net Income of ¥21.5B was primarily attributable to corporate income taxes and other taxes of ¥9.7B, with the effective tax rate at 31.0% and no particular distortion observed. Extraordinary income consisted solely of a ¥0.3B gain on the sale of fixed assets, so the contribution from temporary factors to profit growth was limited. The increases in accounts receivable and inventories were within the range associated with revenue growth, and both the Operating Income margin and Net Income margin improved simultaneously. Accordingly, profit growth can be assessed as being based on improved profitability in the core business rather than an apparent increase in profit dependent on accruals.

Earnings Forecast and Guidance

Progress against the full-year plan was 74.1% for Revenue (¥122.2B/¥164.9B), 76.8% for Operating Income (¥30.3B/¥39.4B), 76.8% for Ordinary Income (¥30.9B/¥40.2B), and 78.1% for Net Income (¥21.5B/¥27.5B). Compared with the standard cumulative Q3 progress benchmark of 75%, Revenue was nearly in line with the plan, while all profit items exceeded the benchmark by 1.8–3.1pt. Improved profitability resulting from the higher gross margin has led to performance exceeding the plan. Based on this progress, advancement toward achievement of the full-year plan can be assessed as steady.

Shareholder Returns

The annual dividend is forecast at ¥44 per share, representing an expected 10.0% increase from the previous fiscal year’s actual dividend of ¥40. Based on forecast EPS of ¥176.51, the Payout Ratio is 24.9%, a relatively restrained level compared with the profit level. In addition, treasury stock increased by ¥6.7B during the quarter on a book-value basis, indicating that share repurchases in addition to dividends are also progressing. While the dividend-only Payout Ratio remains conservative, on a total-return basis that takes share repurchases into account, the Total Return Ratio is considered to be above the Payout Ratio, suggesting an enhanced commitment to shareholder returns.

Risk Factors

1. Cost trend from the increase in SG&A expenses: SG&A expenses increased by +5.6%, exceeding the +3.6% revenue growth rate. Although the improvement in the gross margin is currently absorbing this increase, continued growth in SG&A expenses could cause the benefits of operating leverage to diminish.

2. Future cash outflows related to asset retirement obligations (ARO): Asset retirement obligations amounted to ¥6.09B, representing 23.3% of total liabilities of ¥26.1B. The timing of future expenses associated with restoration and other obligations will be a factor in cash flow management.

3. Market-value fluctuation risk in investment securities: Investment securities increased to ¥59.2B (+26.0% year on year), accounting for 19.7% of total assets. Although the impact of market price fluctuations on B/S carrying values is expanding, the Company’s resilience is supported by its substantial equity base and high Equity Ratio of 91.3%.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Profitability indicators are significantly above the industry median and rank at a high level.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, indicating a relatively moderate level of growth.

※Source: Compiled by the Company

Key Takeaways from the Results

1. The gross margin improved by +0.8pt year on year and the Operating Income margin improved by +0.7pt. Notably, the profit growth rate exceeded the revenue growth rate due to improved profitability in the core business rather than changes in the cost structure.

2. Progress against the full-year plan exceeded the standard progress benchmark of 75% by 1.8–3.1pt for the profit items. If the trend of improved profitability continues, achievement against the full-year plan may remain at a favorable level.

3. Under a conservative financial structure characterized by an Equity Ratio of 91.3% and minimal interest-bearing debt, the Company is simultaneously increasing its investment securities holdings and conducting share repurchases, indicating that its capital allocation policy is becoming structurally established.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from 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 to take any specific investment action.

Sensitivity: 1,764円–1,869円 at ±1% for the cost of equity, and 1,814円–1,817円 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical values may be calculated somewhat higher.

（Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not forecast 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 responsibility, after consulting a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q3 performance was strong, with profit growth outpacing sales growth and the company remaining on track for its full-year plan. Cumulative Q3 revenue rose 3.6% year on year to ¥12.22bn. Operating income increased 6.3% to ¥3.03bn, ordinary income rose 6.7% to ¥3.09bn, and net income grew 8.2% to ¥2.15bn. The operating margin improved by 62bp year on year to 24.8%, from 24.1% in the prior-year period. Gross margin increased by approximately 75bp to 30.9%, indicating that revenue growth was accompanied by improved cost efficiency. Net margin also expanded by approximately 75bp to 17.6%. SG&A expense increased 5.6% year on year, faster than revenue growth, but materially slower than operating-income growth; gross-profit expansion therefore more than absorbed the incremental overhead. Ordinary income exceeded operating income by ¥0.06bn, reflecting a modest positive net non-operating contribution. Profit before tax included a ¥0.30bn gain on sale of fixed assets, equivalent to about 1.4% of Q3 cumulative net income, so underlying earnings growth is modestly lower than reported net-income growth. The tax burden was 69.0%, corresponding to an effective tax rate of 31.0%, which was the principal drag between pre-tax and net income. Annualized ROE was 10.4%, supported mainly by a high net margin and efficient use of a low-leverage capital base. The balance sheet remains exceptionally conservative, with equity representing 91.3% of assets and interest-bearing debt negligible relative to equity. Liquidity is substantial, with ¥5.91bn of cash and deposits, a 388.5% current ratio, and ¥5.25bn of working capital. Q3 progress versus full-year guidance was 74.1% for revenue, 76.8% for operating income, and 78.1% for net income, placing profits ahead of the normal 75% seasonal benchmark. Achieving the unchanged guidance implies a Q4 operating margin of approximately 21.4%, below the Q3 cumulative margin but still consistent with a highly profitable operating model. The ¥44 interim dividend is unchanged under the stated dividend policy, while the full-year ¥88 DPS forecast implies a moderate and sustainable payout ratio. The principal financial-monitoring issue is not leverage but the concentration of asset-retirement obligations within total liabilities, reflecting the long-lived leased and property-related operating footprint.

Profitability Analysis

The annualized DuPont ROE of 10.4% decomposes into a 17.6% net profit margin, 0.541x asset turnover, and 1.09x financial leverage. The return profile is therefore driven primarily by unusually strong earnings margins rather than financial leverage. Financial leverage is low because the company funds its asset base predominantly with equity, limiting both financial risk and the mechanical uplift to ROE. The operating margin rose to 24.8% from 24.1% a year earlier, a 62bp expansion, while gross margin rose to 30.9% from approximately 30.1%, a 75bp improvement. This indicates that gross-profit growth was the main contributor to the operating-income outperformance. Revenue increased 3.6%, whereas gross profit grew 6.1% and operating income grew 6.3%, demonstrating positive operating leverage at the cumulative Q3 level. SG&A increased approximately 5.6%, above revenue growth, but its increase was more than offset by the stronger gross-margin performance. The cost-of-sales ratio declined by approximately 75bp, supporting the conclusion that cost management and/or pricing-mix improvement was favorable. The company generated an EBIT margin of 24.8%, well above the 15% benchmark for excellent profitability. The 69.0% tax burden is slightly below the 70% normal benchmark, reflecting a 31.0% effective tax rate. Interest burden was 1.031x because pre-tax income benefited from non-operating and extraordinary gains; financing costs themselves were immaterial. A ¥0.30bn gain on sale of fixed assets lifted pre-tax income, and should be separated from recurring operating profitability when assessing run-rate earnings. Nevertheless, the gain is small relative to ¥3.03bn of operating income and does not alter the conclusion that core profitability improved. Sustainability of the margin expansion will depend on continued revenue growth, instructor and facility cost discipline, and the ability to retain enrollment and pricing in the regional education-services market.

Growth Assessment

Cumulative Q3 revenue growth of 3.6% was modest but consistent with the 4.1% full-year revenue-growth forecast. Operating income growth of 6.3% exceeded sales growth by 2.7 percentage points, evidencing favorable operating leverage. Net income growth of 8.2% exceeded operating-income growth, although part of the difference reflects the ¥0.30bn fixed-asset sale gain. Q3 progress against full-year guidance is 74.1% for revenue, 76.8% for operating income, 76.8% for ordinary income, and 78.1% for net income. Revenue progress is broadly in line with the standard 75% Q3 benchmark, while profit progress is 1.8 to 3.1 percentage points ahead of that benchmark. The unchanged full-year forecast calls for revenue of ¥16.49bn, operating income of ¥3.94bn, ordinary income of ¥4.02bn, and net income of ¥2.75bn. This requires Q4 revenue of ¥4.27bn, operating income of ¥0.92bn, and net income of ¥0.60bn. The implied Q4 operating margin is approximately 21.4%, below the 24.8% cumulative Q3 margin, leaving a reasonable execution buffer if seasonality or year-end costs increase. The full-year plan implies operating-income growth of 4.3%, below the 6.3% achieved through Q3; accordingly, the guidance appears achievable provided operating conditions remain stable. The company operates a capital-intensive physical education-service network, with property, plant and equipment of ¥15.83bn and land of ¥8.60bn, making enrollment utilization, regional demand, and site economics central determinants of sustainable growth.

Financial Health

Financial health is very strong. The current ratio of 388.5% and quick ratio of 384.5% are well above healthy thresholds, with current assets of ¥7.07bn exceeding current liabilities of ¥1.82bn by ¥5.25bn. Cash and deposits of ¥5.91bn alone cover current liabilities by more than three times. Total liabilities are only ¥2.61bn against total equity of ¥27.51bn, resulting in a debt-to-equity ratio of 0.09x and a debt-to-capital ratio effectively at zero. There is no current-ratio warning and no excessive-leverage warning: both metrics are substantially more conservative than the relevant 1.0x current-ratio and 2.0x D/E risk thresholds. Interest coverage of 8,572x confirms that debt servicing is immaterial to the earnings profile. The asset base is long duration, with PPE accounting for 52.5% of total assets, investment securities 19.7%, and cash 19.6%. Investment securities increased ¥1.22bn, or 26.0% year on year, to ¥5.92bn, increasing exposure to market-value movements and investee performance, although the balance sheet has ample equity support. Cash and deposits declined ¥1.93bn year on year to ¥5.91bn, while total assets declined ¥0.45bn to ¥30.13bn; this suggests a reallocation of liquid resources rather than balance-sheet expansion. Accounts receivable increased ¥0.13bn, or 139.8%, and inventories increased ¥0.03bn, or 91.4%, but their absolute amounts remain very small at 0.8% and 0.2% of total assets, respectively. Long-term loans declined 75.0% to ¥0.01bn, reinforcing the deleveraging profile. Treasury stock increased by ¥0.67bn to negative ¥2.39bn, reducing equity available to absorb risk but remaining modest at 7.9% of total assets. Asset-retirement obligations were ¥0.61bn, equivalent to 23.3% of total liabilities and triggering the HIGH_ARO_RATIO alert. The root cause is the substantial obligation associated with restoring or retiring the company's long-lived property and facility footprint. This is structurally consistent with a business operating numerous physical locations, but it means that a meaningful portion of liabilities is long-term, non-financing and dependent on estimates of restoration costs and timing. The impact is limited by the strong cash position and low debt, but investors should monitor upward revisions in restoration assumptions, lease exits, or site closures.

Notable B/S Changes

Accounts receivable: +¥0.13bn (+139.8%) to ¥0.23bn - percentage growth is high from a low base; the absolute balance remains immaterial at 0.8% of total assets but should be monitored for collection trends. Inventories: +¥0.03bn (+91.4%) to ¥0.07bn - increase is large in percentage terms but remains only 0.2% of total assets and does not currently indicate material inventory risk. Long-term loans: -¥0.02bn (-75.0%) to ¥0.01bn - further reduces an already negligible debt burden and reinforces the conservative capital structure. Treasury stock: increased by ¥0.67bn to negative ¥2.39bn (-39.1% in reported balance change) - indicates continued share repurchase or treasury-share accumulation, reducing equity but remaining manageable given high capitalization. Investment securities: +¥1.22bn (+26.0%) to ¥5.92bn - raises exposure to market valuation and investee performance; securities now represent 19.7% of total assets. Cash and deposits: -¥1.93bn to ¥5.91bn - liquidity remains ample, but the decline alongside higher investment securities and treasury stock indicates active deployment of cash. Asset retirement obligations: ¥0.61bn, equal to 23.3% of total liabilities - meaningful obligation concentration related to the facility footprint; monitor changes in closure, restoration-cost, and discount-rate assumptions.

Cash Flow Quality

The earnings profile appears operationally robust based on margin expansion, but cash-flow conversion and free-cash-flow coverage cannot be quantified from the available period data. The ¥0.30bn gain on sale of fixed assets is non-recurring and should not be treated as operating cash-generation capacity. Working-capital balances warrant monitoring: accounts receivable increased ¥0.13bn and inventories increased ¥0.03bn year on year. However, both balances are immaterial relative to the ¥12.22bn cumulative revenue base and the receivables balance remains only ¥0.23bn. The balance-sheet change therefore does not, by itself, indicate material working-capital stress. Cash and deposits decreased ¥1.93bn year on year, while investment securities increased ¥1.22bn and treasury stock increased by ¥0.67bn in absolute negative balance. This pattern is consistent with capital allocation toward financial investments and share repurchases, rather than evidence of weak profitability. The sizable PPE and land base means cash generation should be assessed alongside recurring property maintenance, facility investment, and asset-retirement commitments. The cash balance of ¥5.91bn provides substantial near-term flexibility for dividends, property-related obligations, and routine investment.

Dividend Sustainability

The company paid or declared an interim DPS of ¥44 and forecasts full-year DPS of ¥88. Using forecast EPS of ¥176.51, the full-year dividend payout ratio is approximately 49.9%, below the 60% sustainability benchmark. The indicated interim-dividend payout calculation is 34.1% against cumulative Q3 net income, which is also conservative. The full-year dividend commitment implied by ¥88 DPS is approximately ¥1.37bn based on average shares outstanding, compared with the ¥2.75bn full-year net-income forecast. Retained earnings of ¥25.92bn provide a substantial capital cushion for dividend continuity. Liquidity further supports the distribution, with ¥5.91bn of cash and deposits and negligible interest-bearing debt. Treasury stock rose by ¥0.67bn year on year, indicating that repurchases have also been a component of shareholder distributions or capital management. As the value and timing of repurchases are not specified for the period, a total return ratio cannot be quantified. Dividend sustainability therefore rests principally on recurring operating earnings rather than the non-recurring fixed-asset gain, and the forecast payout remains supportable under the current earnings plan.

Risk Assessment

Business risks include Enrollment, retention, and pricing risk in the private education-services market could pressure revenue growth and classroom or facility utilization., Demographic decline and regional population shifts may constrain the addressable student base, particularly for a physical-location network with a large fixed property footprint., Competition from local tutoring schools, large education operators, and digital learning alternatives could require higher marketing, instructor, or facility spending., Teacher and staff recruitment, wage inflation, and the ability to maintain educational quality are key risks because personnel and site operations affect margins directly., The ¥5.92bn investment-securities portfolio introduces market-price and investee-performance sensitivity..

Financial risks include Asset-retirement obligations of ¥0.61bn equal 23.3% of total liabilities; changes in restoration-cost estimates, discount rates, or site-closure assumptions could increase liabilities and future expense., The ¥0.30bn gain on sale of fixed assets contributed to reported pre-tax income and is not recurring operating income., Treasury stock increased by ¥0.67bn year on year; continued buybacks would reduce liquid capital and equity, although current solvency remains very strong., Cash and deposits declined ¥1.93bn year on year, requiring continued monitoring of the balance between investment securities, buybacks, dividends, and property-related cash needs..

Key concerns include High likelihood/moderate impact: demographic and competitive pressures could limit sales growth and reduce the operating leverage that supported Q3 margin expansion., Moderate likelihood/moderate impact: fixed-location economics and asset-retirement obligations create longer-term operating-cost and exit-cost exposure., Low likelihood/moderate impact: valuation volatility in the enlarged investment-securities balance could affect comprehensive income and capital allocation flexibility., Low likelihood/low impact: leverage and liquidity risk are currently minimal given the 388.5% current ratio, 0.09x D/E ratio, and ¥5.91bn cash balance..

Investment Implications

Key takeaways include Revenue grew 3.6%, while operating income and net income increased 6.3% and 8.2%, respectively., Operating margin expanded 62bp to 24.8%, confirming strong core profitability and positive operating leverage., Annualized ROE was 10.4%, driven by a 17.6% net margin rather than leverage., Q3 profit progress is ahead of the standard seasonal benchmark, while full-year guidance remains unchanged., The financial position is conservatively capitalized, with 91.3% equity ratio, 388.5% current ratio, and negligible debt., The forecast ¥88 DPS implies an approximately 49.9% dividend payout ratio, which is within a sustainable range., The principal balance-sheet issue to monitor is the 23.3% asset-retirement-obligation-to-liabilities ratio..

Metrics to watch include Revenue growth versus the 4.1% full-year forecast, Operating margin and gross margin, particularly whether the 24.8% cumulative operating margin can be maintained, Enrollment trends, pricing, retention, and utilization across the physical education-service network, Personnel and facility-cost growth relative to revenue growth, Cash and deposits, investment-securities movements, and treasury-stock purchases, Asset-retirement-obligation estimates and property-network optimization, Recurring profit excluding gains on sale of fixed assets.

Regarding relative positioning, The company combines excellent operating and net margins with an unusually conservative balance sheet. Its annualized 10.4% ROE is good rather than exceptional because minimal leverage and a substantial low-turnover property and investment asset base temper returns. The business is positioned as a financially resilient, asset-backed education-services operator, but its relative earnings durability depends on preserving enrollment-driven operating leverage amid demographic, labor, and competitive pressures.