Will margins continue to contract despite higher revenue as large projects become unprofitable?

FY2027-Q1 revenue was ¥4,552 million, up ¥6 million, or 0.1%, from ¥4,546 million in the same period of the previous year. Operating profit, however, fell ¥47 million from ¥402 million to ¥355 million, and the operating margin declined by approximately 1.1 percentage points, from approximately 8.8% to 7.8%. With revenue almost flat, only profit declined, making project profitability and production-system efficiency, rather than order volume alone, the focus.

The supplementary materials explained the ¥47 million year-on-year decline in operating profit as follows: improved margins, mainly in the service-provision business, contributed ¥41 million of profit growth, while investment to strengthen growth areas and R&D, the occurrence of unprofitable projects, and higher costs associated with production-system development reduced profit by ¥35 million, ¥33 million, and ¥20 million, respectively. Despite the benefit from higher profitability, investment costs and unprofitable projects together created a ¥58 million drag. At the next results announcement, it will be necessary to determine whether these costs are upfront investments that will generate future revenue and profit, or fixed-cost burdens accompanied by further deterioration in project profitability.

By business model, SI revenue was ¥1,958 million, up 9.6% year on year, while operating profit was ¥144 million, down 7.5%. The enhancement business posted revenue of ¥2,258 million, down 9.0%, and operating profit of ¥187 million, down 15.2%. As the company narrows its traditional sources of revenue and shifts toward higher-margin projects, both revenue and profit are under pressure. The company explained that, in FY2026, productivity and team-building for large projects failed to keep pace, making them unprofitable, while the provision for contract losses increased from ¥29 million at the previous year-end to ¥180 million. In FY2027-H1, the focus will be on changes in the provision, the completion status of loss-making projects, and improvements in profitability by project.

Details of project hours, unit prices, gross margin by project, and losses attributable to delays in establishing teams have not been disclosed. At the next results announcement, it will be necessary to assess separately from revenue growth whether the operating margin has returned to approximately 8.0%, the FY2026-H1 level, whether SI and enhancement operating profit have returned to year-on-year growth, and whether the provision for contract losses has grown beyond ¥180 million.