Members Co.,Ltd. Q2 FY2026 earnings call

• Strategic positioning in the DX market • The domestic DX market is expected to grow at an annual rate of over 10%, with intensifying talent shortage driven by client companies' growing in-house transformation orientation. Unlike large competitors that focus on large outsourced projects, Members has built a unique "DX on-site support" position, providing technical talent to support client in-house DX planning and execution, with hands-on agile development by 2,500 digital creators (DC), operating as "just like internal employees", with strong cost competitiveness. • The company is accelerating its transition from traditional Web operation to DX on-site support positioning, with this transition progressing very well this fiscal year.

• Talent transformation and development • The company runs the SINCA90 project, targeting 90% of all DC to become DX-skilled talent. As of the 2nd quarter, the DX talent ratio reached 58.6%, on track to hit 65% this fiscal year and 90% next fiscal year. • PMO talent development is a core focus: 686 PMO-trained talent have been developed out of the 1,000 target, progressing well. The shift to DX has lifted average sales per employee to 924 thousand yen, up 6.2 percentage points YoY.

• Operational improvements • Total DC count at quarter-end is 2,534, down 93 from the previous quarter-end (planned, as the company has held back hiring until utilization rate recovers to a proper level). Overall utilization rate improved 8.8 percentage points YoY to 78.6%; utilization rate for employees excluding 1st and 2nd year new graduates hit 83.2% (up 0.4 percentage points YoY), progressing toward the full-year target of 85%. 2nd year new graduate utilization rate is 67.9%, up over 15 percentage points from Q1, but still has room for improvement. • Gross profit grew 50.6% YoY, gross profit margin improved 6.1 percentage points YoY to 22.7% driven by utilization rate improvement. Selling, general and administrative expense ratio improved 0.8 percentage points YoY. The Q2 standalone operating profit was 330 million yen (from ~10 million yen black ink last year), near pre-decline profit levels, with Q2 standalone gross margin at 26%, up from 19.2% last year, recovering to 2022/2023 levels.

• Full employee participation management • The Creator's Value 1.6 (CV1.6) initiative targets lifting base annual salary to 1.6x of 2020 levels by 2030; after this year's April base pay increase, salary is already 24% above 2020 levels, halfway to the target (1 year behind schedule, with continued progress planned). • 65.8% of employees hold company stock, accounting for 9.7% of total issued shares, with further increases planned. Employee engagement score recovered to 3.55 (up 0.14 quarter-over-quarter), a very high level, with a target of 4.0+. Decarbonization action score already exceeded the full-year target in the first half, up 70% YoY.

• Customer and social impact initiatives • Members holds customer user meetings to share social transformation cases and build strong customer relationships. Completed successful CSV (Creating Shared Value) cases, including supporting regional ride-sharing service meemo by Omron Social Solutions, and supporting Nippon Ham's internal digital transformation with generative AI, with ongoing decarbonization DX cooperation with Invoice.

1. DX domain: Overall value-added sales for the 2nd quarter cumulative period exceeded 5 billion yen (5.0 billion yen), growing at 35.2% YoY, and accounts for 52.1% of the company's total revenue. 20 specialized digital sub-companies (covering SaaS, agile development, UX, data, AI) lead this growth, on track to exceed 10 billion yen in annual value-added sales. The 4 core business segments within DX: Digital service development and data utilization support are growing steadily; the traditional legacy Web operation-focused production/UIUX and marketing DX segments are seeing gradual growth recovery via growth of DX-specialized sub-companies and cross-selling. 2. Decarbonization DX: Currently in the trial and investment stage, a new Circular DX sub-company focused on circular economy transition was launched in October 2025 to expand this new business.

• Full-year 2026 March fiscal year guidance has been upward revised from the initial plan: target sales revenue is 24.4 billion yen, value-added sales is 23.62 billion yen (up 11% YoY), and operating income is 1.4 billion yen. Operating margin target was revised upward from 5% to 5.7%, against the original 3-year profitability recovery plan.
• For the 2027 March fiscal year (the third year of the 3-year plan), the company targets an operating margin of 10% and value-added sales growth of 15% or higher, with the final target to be confirmed after reviewing full-year 2026 results. If achieved, sales will exceed 25 billion yen, with operating income exceeding 2.5 billion yen.
• Dividend policy maintains continued dividend increases: planned full-year dividend is 33 yen per share, up 1 yen from the previous year.
• The company expects utilization rate issues to be mostly resolved this fiscal year, with hiring expansion to accelerate in line with growth starting from next fiscal year.

• Turnover rate has been worse than previous levels, and the company is still monitoring this metric. If turnover remains high, the company may fail to reach its targeted digital creator headcount, leading to slower value-added sales growth.
• Slow growth of the legacy Web operation segment may continue, with uncertain downside pace that could drag overall company growth.
• As the company accelerates hiring expansion next fiscal year, if utilization rate does not improve as expected, profitability targets may not be met. Conversely, if talent supply falls short of growth targets, growth will slow, leading to lower than expected profit even if operating margin hits target.
• Competitors (large consulting firms, SIers) may eventually adopt the same DX on-site support positioning, creating future competitive pressure.

Q: Are there any direct competitors for Members' DX on-site support positioning? / A: Most DX firms focus on building in-house transformation infrastructure, training client staff, and creating operational manuals, rather than directly supporting the planning and execution of client in-house DX. BayCurrent Consulting focuses on business-side roles, which are separate from the digital execution talent Members provides, so there is clear market segmentation. Even when large firms expand digital engineer teams, they maintain high consulting pricing and will not move into the lower-price execution space. Currently, no large DX/consulting/SIer firms have a clear strategy to strengthen this positioning, so there is no direct competitor at this time.

Q: Why does Members continue aggressive hiring even as AI-driven efficiency gains lead to layoffs across large companies? / A: AI will reduce demand for fixed operational work, routine white-collar tasks, and basic programming/design generation work. However, client demand for in-house digital capability for AI-driven business transformation is just emerging, with massive talent shortage. Continuous new AI-focused projects and business pivots will sustain strong demand for digital talent to support in-house transformation, and Members' current 2,500 DC is already insufficient to meet this demand, so continued hiring is necessary.

Q: What risks could prevent hitting next fiscal year's 10% operating margin target? / A: Achieving 10% operating margin depends almost entirely on reaching proper utilization rate, since core project profitability has not declined from when the company hit 12.6% operating margin in 2022. The company's policy of holding hiring while growing existing business will naturally lift utilization rate, so hitting 10% is achievable if utilization normalizes. The main risk is on the growth side: high turnover may leave DC headcount far below target, leading to slower than expected value-added sales growth and lower total profit even if margin hits target.