Pacific Net Co.,Ltd. Q2 FY2026 earnings call

• Company Overview: Pacific Net was founded in 1988, and is marking its 20th year as a listed company. It operates three core businesses covering the full lifecycle of IT equipment, with 7 locations nationwide from Sapporo to Fukuoka, enabling full one-stop in-house service coverage from IT equipment procurement/introduction, operation/maintenance, collection, and proper disposal. This national one-stop structure is a key entry barrier and source of customer value. - Interim Consolidated Performance Highlights: The company achieved record-high interim results, with total consolidated revenue of 5.012 billion yen (up 32.2% year-over-year), operating profit of 697 million yen (up 121.3% year-over-year), and operating margin of 13.9%, an improvement of 5.6 percentage points year-over-year. This marks the first time the company achieved over 600 million yen in operating profit in the first half of a fiscal year, driven by strong capture of Windows 10 end-of-support PC replacement demand leveraging the company's national footprint. Stock revenue reached 197 million yen and flow revenue reached 321 million yen, both higher than typical annual levels. The company invested approximately 130 million yen in wage increases for human capital, DX, and capital expenditure, which was fully absorbed by strong profit growth. - Balance Sheet and Cash Flow Update: Rental assets increased by approximately 1.1 billion yen in line with the expansion of the IT subscription business. Equity ratio improved 1.2 percentage points quarter-over-quarter to 25.7%, with all investment decisions made within existing financial discipline. Operating cash flow grew 593 million yen year-over-year to 2.246 billion yen. Negative free cash flow came from approximately 3.0 billion yen in planned investment in subscription assets to maintain the company's competitive advantage of same-day delivery of in-stock equipment to customers. - Productivity and Investment Strategy: The company has strengthened hiring to meet growing demand, with a specific focus on productivity. While selling, general and administrative expenses increased due to headcount growth and wage increases, per-employee revenue and operating profit both grew strongly, and current human capital investments are assessed to be improving the company's underlying earning power. - Corporate Value Enhancement Strategy: The company has positioned share price growth as a key management priority, and operates around three core pillars focused on capital cost and share price awareness: growth strategy, shareholder returns, and enhanced IR activities. The company set quantitative medium- to long-term targets including ROE of 18% or higher and operating margin of 10% or higher, and maintains financial discipline around D/E ratio and equity ratio given the company's leverage-reliant business model, making all investment decisions within these bounds. - Segmented Growth Strategy: The company focuses on organic stable growth of existing businesses, expanding customer base and service scope to drive accelerated growth, prioritizing sustainable organic growth and adjacent market expansion aligned with customer IT needs over aggressive rapid growth. For the IT Subscription business, the company is targeting enterprises struggling with IT labor shortages and cross-selling ITAD BPO services, resulting in a 21.5% year-over-year increase in PC rental units and expanding the base of recurring stock revenue. For the ITAD business, the company is prioritizing enterprise customer development as a BPO provider for IT equipment disposal, prioritizing profitability over top-line growth due to the business's sensitivity to seasonal factors, and focusing on improving resale value via in-house auctions and low-cost operations to maintain high quality and volume. For M&A and alliances, the company targets acquisitions of adjacent services to enhance existing offerings rather than entering unknown new areas, specifically looking to flexibly integrate external resources in cloud, security, and AI to drive growth. - Shareholder Return and IR: The company maintains targets of a 30% or higher payout ratio and 5% or higher DOE, prioritizes progressive dividend growth, and plans a 9th consecutive year of dividend increases this fiscal year. The company has conducted 12 meetings with institutional investors in the first half, maintains timely communication with retail investors, feeds back investor concerns such as memory price increases and post-boom outlook to management, and pursues highly transparent management.

1. IT Subscription Business: Revenue grew 26.5% year-over-year, segment profit grew 30.3% year-over-year. It has maintained a 23.1% average annual growth rate to date, and has become the main driver of overall revenue and profit growth for the company driven by strong long-term contract accumulation from Windows 11 upgrade demand. As of the interim period, the total subscription asset base reached 17.3 billion yen on an acquisition cost basis, with asset utilization maintained above 80%. It contributes the largest core revenue stream to the company. 2. ITAD Business: Revenue grew 58.5% year-over-year, segment profit grew 98.8% year-over-year. Driven by the full-scale increase in PC disposal from enterprises and local governments following the end of Windows 10 support, the business saw higher-than-expected incoming volume during the interim period driven by seasonal OS upgrade factors, alongside growth in high-margin services such as data erasure that further boosted performance. 3. Communication Device Business: Segment profit grew 79.1% year-over-year, with shipment volume reaching an all-time high. This business (operating the "Earphone Guide" audio guide service for tourism) benefited from the continued recovery of post-COVID tourism demand, and delivered strong growth alongside the company's two core businesses. All three business segments achieved segment profit growth of more than 30% year-over-year in the interim period.

• Full-year 2026 May fiscal year guidance has been upwardly revised again following strong interim performance, with full-year revenue lifted to 10.0 billion yen and full-year operating profit lifted to 1.1 billion yen. The interim revenue progress rate against the revised full-year budget is 50.1%, and the interim operating profit progress rate is 63.4%. While the company typically concentrates revenue and profit in Q3 and Q4, the company secured more orders than expected through the interim period due to seasonal factors, and the revised full-year forecast reflects careful analysis of current semiconductor shortage conditions, human capital investment plans, and ongoing negotiation pipeline, with the full-year outlook for all business segments maintained at the highest double-circle rating with no changes from prior assessments. - For the second half of the fiscal year, management notes that semiconductor component shortages have emerged since late last year driven by AI demand shifting memory and other semiconductors to data centers, which has already started pushing up PC prices. Management views this as a positive tailwind that will push more customers to consider subscription services, and expects demand for the company's services to remain firm amid ongoing labor shortages. Rising new PC prices are also expected to push up used PC market prices, which will benefit the ITAD business's established exit strategy, with full-year PC disposal expected to remain solid, and used PC sales expected to grow after the current one-time upgrade demand cycle ends. Management also notes that a projected dissolution of the lower house and general election on February 8 is a positive macro tailwind, as general elections have historically been favorable for the company's rental business. - Looking beyond the current fiscal year, the end-of-support Windows 10 replacement demand is expected to taper off in 2026 and the market will return to normal conditions. After completing PC replacement work, enterprise IT teams will have bandwidth to focus on operational efficiency and productivity improvement, which management views as the period where the company's core strengths will be best utilized. Ongoing deepening labor shortages are expected to support sustained firm demand for IT lifecycle management (LCM) services, and current PC price increases and inventory shortages create a favorable environment for the company, which can deliver immediate delivery of in-stock rental equipment, creating an opportunity to expand the company's market presence. Management expects sustained growth beyond the current fiscal year.

There is no explicit discussion of material risks or operational failures in the available transcript. Management noted emerging semiconductor component shortages driven by AI demand, but framed this shortage as a net positive opportunity that will increase customer demand for the company's services rather than a material risk to performance. All investment activity is noted to be conducted within established financial discipline, and management confirmed that financial health remains solid.

No question and answer section is included in the available transcript.