Q1 saw operating profit surge despite lower revenue, putting the quality of earnings excluding the tariff refund in focus

Q1 revenue was ¥517,813 million, down ¥54,550 million from ¥572,363 million in the same period of the previous year. Operating profit, by contrast, increased ¥85,668 million, from ¥56,928 million to ¥142,596 million. The resulting operating margin rose 17.6 percentage points, from approximately 9.9% in the same period of the previous year to approximately 27.5% in the current period. This was a set of results in which product mix and cost factors significantly increased profit, rather than growth in revenue scale.

The company attributed the increase in operating profit to solid software sales and a refund of US IEEPA tariffs that had been recorded in cost of sales. However, it has not disclosed the amount of the tariff refund, the reduction in cost of sales in millions of yen, or what the operating margin would have been without the refund. In the interim results, disclosure of the refund amount, the related cost impact, or an explanation of underlying operating profit excluding the refund will be important in assessing the 27.5% margin.

Non-operating factors also lifted earnings. Ordinary profit was ¥206,150 million, up 115.1% year on year, while profit attributable to owners of the parent was ¥147,423 million, up 53.5%. Ordinary profit included ¥30.3 billion in equity-method investment income, ¥16.8 billion in foreign exchange gains and ¥13.1 billion in interest income, meaning that the factors behind the improvement in operating profit differed from those behind the increase in ordinary profit. The interim results will need to distinguish whether these investment-, foreign exchange- and interest-related gains continued into Q2 and whether the increase in profit can be explained by operating profit alone.

The company did not prepare a cash flow statement for Q1, so operating cash flow, investing cash flow, financing cash flow and cash at the end of the period cannot be confirmed. Accordingly, it remains unclear to what extent operating profit of ¥142,596 million was converted into cash inflows. The interim results will be used to assess operating cash flow, changes in working capital such as inventories and trade receivables, and whether the tariff refund was received or recorded as a receivable, in order to determine whether the improvement in accounting margins is consistent with cash-generation capacity.