Risk of Contracted Projects Becoming Unprofitable

「Provision for contract loss − 213」

「In addition, if outsourcing costs increase or estimating accuracy declines due to intensified competition for orders, personnel shortages accompanying order growth or other factors, overall business profitability may deteriorate, potentially affecting our business performance and financial position.」

「Although we conduct order-taking activities after carefully assessing the profitability and other aspects of each project, specification changes and other factors may require more work hours than initially estimated, creating a risk that projects will become unprofitable due to higher-than-expected costs.」

「Provision for contract loss − 3,366」

「The company carefully considers the profitability and other aspects of project orders before accepting them, but changes in specifications and other factors may require more work hours than initially estimated, potentially causing project orders to become unprofitable due to higher-than-expected costs.」

「Change in provision for loss on orders received (△ indicates a decrease) 6,188 459」

「Orders for existing services remained firm and revenue increased year on year, but projects tended to become larger and more sophisticated, and the substantial increase in resource-related costs became a factor putting pressure on profits.」

「The company is strengthening measures including visualization of profitability by project and customer and reviews when orders are accepted and when system requirements are defined, to ensure appropriate profitability on commissioned projects.」

「Provision for loss on orders received － 15,246」

「Change in provision for loss on orders received (△ indicates a decrease) 6,188」

「The group works to maintain appropriate profitability on commissioned projects by visualizing profitability by project and customer and conducting reviews when orders are accepted and when system requirements are defined.」

「Provision for loss on orders received included in cost of sales」

「Although project profitability is improving as a result of these efforts, measures such as strengthening order-taking risk management, reviewing transactions with unprofitable customers and refining project plans continue to cause orders to remain sluggish in the short term.」

「Because project profitability improved and cost of sales was contained, the company was able to limit the decline in gross profit to ¥67 million from the same period of the previous year.」

「As a result, project profitability improved, but the effects of the measures on sales activities took time to emerge, and the operating loss widened due partly to a reduction in transactions involving a large project at a consolidated subsidiary.」

「During the consolidated fiscal year, the company refrained from accepting orders for highly complex projects to prevent problems and implemented measures including reviewing transactions with unprofitable customers.」

「Although project profitability has been steadily improving as a result of these efforts, measures such as strengthening order-taking risk management, reviewing transactions with unprofitable customers and refining project plans became factors limiting order growth in the short term.」

「In this business environment, the group began transitioning to a new organizational structure on 1 April 2018 and implemented measures to strengthen sales capabilities, improve profitability by further strengthening project management, enhance employee training and improve productivity by promoting work-life balance. These efforts helped increase revenue year on year and contributed to a reduction in the operating loss.」

「Revenue remained firm, driven by favorable market conditions, particularly for social media and owned-media projects. Although the measures described above showed an overall trend toward improved project profitability, profits were materially affected by the expected substantial increase in development costs due to problems on projects ordered before the measures were implemented, as well as costs exceeding the initial estimate in completing a project for which a provision for loss on orders received had been recorded in the previous fiscal year. As a result, the company posted an operating loss for the second consecutive fiscal year.」

「In this environment, the company has been implementing measures to restore performance, including strengthening marketing activities to expand revenue, improving the estimation process to enhance profitability, establishing a new management organization to prevent troubled projects, reviewing low-profitability projects and strengthening employee training to improve project quality.」

「The company recorded operating losses on both a consolidated and standalone basis in the previous fiscal year. In addition to strengthening its management framework to prevent project problems, it has been implementing measures to improve profitability and develop human resources, and plans to continue focusing on these efforts in the second half of the fiscal year.」

「For a troubled project on which the company had been working to resolve issues since the previous fiscal year, the scheduled portion expected to be delivered in the first quarter was changed from delivery in the first quarter to delivery in the second quarter.」

「Due to losses arising on projects ordered before the second quarter」

「In the fourth quarter, development problems and delivery delays occurred on another project, and personnel were assigned to address them, resulting in an overall personnel shortage that affected order-taking activities from the third quarter onward. In addition, because costs exceeding the initial budget were incurred and a loss was expected in connection with these problems, the company recorded a provision for loss on orders received.」