Revenue growth but a sharp decline in operating margin; H1 focus is on the recovery of cost-absorption capacity

1Q revenue was ¥6,353 million, up 5.7% year on year, while operating profit was ¥279 million, down 41.4%. On a simple calculation, the operating margin fell by approximately 3.5 percentage points, from approximately 7.9% in the prior-year quarter to approximately 4.4%, leaving a substantial gap from the approximately 8.9% implied by dividing the full-year operating profit forecast of ¥2,600 million by the full-year revenue forecast of ¥29,200 million. The fact that revenue growth did not translate directly into profit is the clearest change to monitor at the next results announcement.

Profit weakness was not uniform across all segments. Information processing services recorded revenue of ¥3,098.0 million, up 1.8%, while segment profit was ¥527.7 million, down 8.7%. Software development recorded the strongest revenue growth, up 15.8% to ¥2,199.9 million, but profit fell 36.2% to ¥213.3 million. Other information services recorded revenue of ¥781.1 million and profit of ¥135.5 million, up 29.7%, while systems equipment sales recorded revenue of ¥274.9 million and profit of ¥9.8 million, up 60.3%.

The company cites higher personnel costs from wage increases and expenses related to renewing the internal core system as factors behind the decline in profit, but has not disclosed the amounts or their impact on operating profit. The 1Q operating margin itself is also not a disclosed item; the 4.4% is calculated from disclosed revenue and operating profit. At the H1 results announcement, it will be important to explain on an amount basis whether the higher costs are temporary or represent structural margin pressure that will continue even in high-growth areas such as software development.

For the cumulative second quarter, simple benchmarks are revenue of ¥14,600 million and operating profit of ¥1,300 million, equivalent to 50% of the full-year forecasts. Operating profit in particular must increase by an additional ¥1,021 million from the 1Q result of ¥279 million by the end of H1. At the next results announcement, it will be important to confirm whether the operating margin has recovered from 4.4% in 1Q, the cumulative amount of wage-increase and system-renewal costs, and segment profit margins and the reconciliation to consolidated operating profit.