Gross margin deteriorated in Q2 alone, making the sustainability of the high-value-added mix the key focus for Q3

In Q1, revenue was ¥171.7 billion and operating profit was ¥18.5 billion, with operating profit up 41% year on year and an operating margin of 10.8%. In contrast, Q2 alone generated revenue of ¥168.1 billion and operating profit of ¥14 billion, with an operating margin of 8.3%; revenue rose just 1% year on year and operating profit fell 1%. Gross margin also declined 0.8 percentage points, from 32.3% in Q1 to 31.8% in Q2, indicating a shift to a situation in which revenue growth no longer translates directly into profit growth.

For the first half, revenue was ¥339.790 billion and operating profit was ¥32.488 billion, up 18.9% year on year. Although the first-half profit growth trend was not overturned by the decline in Q2 alone, the full-year operating profit forecast was raised from ¥60 billion at the end of Q1 to ¥63 billion, meaning that ¥30.512 billion in operating profit will be required in the remaining second half. This is close to the ¥32.488 billion recorded in the first half, raising the question of whether the plan assumes that the first half’s high profitability will continue unchanged.

The year-on-year change in Q2 operating profit is explained by +¥500 million from higher revenue, -¥1.3 billion from gross margin deterioration, and +¥600 million from lower SG&A expenses. In other words, SG&A was contained, but the deterioration in gross margin more than offset this benefit and pushed down profit. The company said that gross margins deteriorated mainly in Professional and Enterprise, but it has not disclosed the impact by segment of pricing, costs, or product mix. It is important that the pattern reversed in just one quarter from the improvement factors indicated in Q1: +¥1.4 billion from higher revenue, +¥2.4 billion from improved gross margin, and +¥1.5 billion from lower SG&A expenses.

At the next earnings release, the first points to check will be Q3 standalone gross margin and operating margin. If gross margin falls below 31.8% and the operating margin remains at or below 8.3%, the likelihood will increase that first-half profit growth depended on a temporary mix effect from high-value-added products. Conversely, if gross margin recovers and the company identifies specific factors behind the improvement in Professional and Enterprise gross margins, confidence in the ¥63 billion full-year operating profit forecast will increase.