Revenue surged on large-scale SI projects, but lower gross margin constrained profit growth

Revenue in the first quarter of the fiscal year ending March 2027 was ¥97.60 billion, up 27.1% year on year, while operating profit was ¥6.59 billion, up 9.2%. Revenue increased by ¥20.78 billion from ¥76.82 billion in the year-earlier quarter, but operating profit increased by only ¥560 million. The 18.0-percentage-point gap between revenue growth and operating profit growth shows that although project volume grew substantially, the profit remaining from each yen of revenue deteriorated.

By business, SI revenue was ¥50.74 billion, up 51.2% year on year, the strongest performance. Network services, excluding mobile, generated ¥31.63 billion, up 7.2%, while mobile and IoT generated ¥14.47 billion, up 11.3%. SI gross profit was ¥5.93 billion, up 25.2%, whereas network services gross profit was ¥11.68 billion, up only 0.7%. High-growth SI lifted revenue, while the limited increase in gross profit from the relatively stable network services business created a mix that tends to depress the company-wide margin.

On the cost side, procurement in the first quarter was ¥17.75 billion, up 183.7% year on year, personnel-related costs were ¥4.24 billion, up 16.2%, and selling, general and administrative expenses and other costs were ¥11.38 billion, up 6.8%, according to the presentation materials. SG&A as a percentage of revenue was 11.7%. The company explained that gross margin temporarily declined because two large-scale hardware-related construction projects with high procurement ratios were recognized, but it did not disclose gross profit by project or the number of billions of yen by which low-profitability projects reduced company-wide operating profit.

The individual projects identified as contributing to revenue growth included approximately ¥1.7 billion for the introduction of mobile devices for corporate customers, approximately ¥1.5 billion for network construction for government agencies and other projects, approximately ¥6.0 billion for an e-commerce platform, and approximately ¥12.0 billion for a GPU platform. Although these projects are large, some have high hardware procurement ratios, so profit quality cannot be assessed from the timing of revenue recognition alone. In the first-half results, it will be necessary to examine the revenue mix between SI construction and SI operations and maintenance, their respective gross margins, and the acceptance timing for major projects.

The primary points for the next results announcement will be whether gross margin rises from 18.4% in the first quarter and whether operating margin can maintain or improve on 6.7%. If gross margins by project and the profit impact of high-procurement projects remain undisclosed, it will be difficult to conclude that upside in revenue directly increases the likelihood of achieving the full-year operating profit forecast of ¥38.50 billion.