Appirits Inc. Q4 FY2026 earnings call

Corporate Overview & Strategic Direction

• Appirits was founded in 2000, currently in its 26th fiscal period, with 886 consolidated employees as of Q4 FY2026. 47.3% of shareholders are individual investors, and 44.4% are domestic corporations, forming a stable shareholder base.
• The company operates three core segments, with the Web Solution segment positioned as the primary growth driver: corporate demand for large-scale DX projects is growing in size and complexity, driving continued increases in average order value, supported by the company's full-stack service capability from consulting to post-launch operation.
• Long-term VISION 2030 targets 20 billion yen in consolidated net sales and 1,700 employees, with planned ongoing M&A of 1-2 targets per year to supplement organic growth of existing businesses.

Web Solution Segment Initiatives

• The segment provides one-stop DX solutions including large-scale system development, smartphone application development, and digital marketing, with core differentiation strengths in high-traffic B2C service development, advanced UI/UX design, and large-scale data processing.
• The company has shifted strategy to prioritize large 100 million yen+ contracts to target higher added value and margins, as average project size has grown to 100 million yen to 200 million yen (these large projects now represent over 60% of the segment's portfolio, up from less than 30% for sub-30 million yen projects pre-2020).
• Post the unprofitable project incident, the company has implemented comprehensive governance reforms:
  • Established an independent PMO (Project Management Office) with gatekeeping authority to conduct pre-order due diligence, holding weekly PMO meetings attended by the CEO to review all project and pricing status.
  • Required senior project managers (aged 40+) to intervene in upstream requirements definition to improve quality.
  • Paused new graduate hiring to reallocate resources to hiring experienced senior professional talent, targeting to increase the share of 40+ year-old senior staff to 20% of the organization to match the needs of large-scale DX projects.
  • Expanded Human Centered Design (HCD) training to improve requirements definition accuracy; the company now has over 100 HCD-qualified staff to prevent scope and cost estimation errors.
• The company is already offering three generative AI services to existing clients: generative AI reskilling support, generative AI-enabled operational efficiency support, and generative AI-powered existing project enhancement, with a deployed case at Lotte's customer support portal.

Digital Human Resource Development & Dispatch Segment Initiatives

• The business provides dispatched engineers to clients with under-resourced development teams, plus corporate engineer training via proprietary curricula, and has started developing LINE Mini App contracted development as a new high value-add offering.
• The company is accelerating development of generative AI-ready talent capable of leading upstream design and high value-add contracted development, and is building a new contracted development line that is currently creating temporary startup costs that pressure near-term profits. Starting in FY2027 January Term, part of the segment's resources will be reallocated and integrated into the Web Solution segment to shift toward higher value-add contracted development and improve profitability.

Oshi Culture & Game Segment Initiatives

• The segment develops and operates oshi activity support services including fan games for idol groups and official fan club websites, following a stock growth model of taking over operation of existing proven titles from other companies.
• This model avoids large upfront investment and new hit uncertainty, delivering stable revenue from launch. Multiple new transferred operation projects are currently in progress, and the segment acts as a stable cash flow foundation for the group.

For the full FY2026 January Term, consolidated net sales totaled 9.955 billion yen, with a 10.5% year-over-year increase. The fourth quarter (Q4) consolidated net sales was 2.335 billion yen, flat year-over-year. Q4 consolidated cost of goods sold and SG&A totaled 2.52 billion yen, 105.3% of the prior year level, with Q4 consolidated operating loss of 184 million yen.

1. Web Solution Segment: Q4 FY2026 net sales: 751 million yen, down sharply year-over-year. This decline reflects two factors: temporary stagnation of new development pipeline due to resource concentration on unprofitable projects, and a one-time 89 million yen negative adjustment to previously recognized revenue from unprofitable projects for balance sheet clean-up. Q4 cost of goods sold was 738 million yen (103% year-over-year), with the segment recording an operating loss of 137 million yen. The unprofitable card points/settlement system project was fully concluded by March 2026, with total costs reaching 300 million yen against projected sales of 120 million yen, resulting in a total project loss of 180 million yen. Revenue contribution share (Q4 FY2026): ~32.1% of total consolidated net sales.

2. Digital Human Resource Development & Dispatch Segment: Q4 FY2026 net sales: 421 million yen, down quarter-over-quarter. The decline was driven by the cancellation of a contract with a large client that created temporary idle capacity for nearly 30 engineers, plus upfront investment for future value-add growth initiatives. Q4 segment operating loss was 45 million yen. Idle staff reallocation is progressing, and utilization is recovering gradually heading into FY2027 January Term. Revenue contribution share (Q4 FY2026): ~18% of total consolidated net sales.

3. Oshi Culture & Game Segment: The segment performed strongly through the full year. Q4 FY2026 net sales: 1.182 billion yen, up year-over-year, supported by strategic seasonal promotions for the year-end/New Year holiday period. Q4 segment operating profit was 143 million yen, with an operating profit margin of 12.1%, exceeding the segment's 10% target margin. After closing the unprofitable self-operated title 『ゴエティアクロス』 to optimize resource allocation, the segment now operates 7 titles focused on stable revenue from transferred operation and contracted development. Apparent SG&A increased after the segment was spun off into a separate subsidiary in Q3, as previously allocated head office costs are now directly recorded at the segment level. Revenue contribution share (Q4 FY2026): ~50.6% of total consolidated net sales.

• For FY2027 January Term, consolidated net sales is projected at 10.8 billion yen, operating profit at 228 million yen, and net income at 114 million yen, representing a return to consolidated profit after the FY2026 loss.
• Due to temporary idle capacity costs from reallocating staff from concluded unprofitable projects in the first half of FY2027, the first half is projected to report an operating loss of 167 million yen. The second half is expected to see full utilization of reallocated staff, delivering 396 million yen in operating profit with a rapid margin recovery; no negative signs of delay are seen in current active projects to date.
• Operating margin is projected to recover gradually: it will rise from the low first quarter level to historical levels by Q3/Q4 FY2027, and reach steady-state cruise margin levels from the FY2028 January Term onwards.
• Appirits views the rise of generative AI as an opportunity for structural reform rather than a threat: generative AI reduces the value of simple coding, which allows the company to cut production costs while shifting focus to higher value added upstream consulting and architecture work. Structural reform initiatives around generative AI are already in progress.
• The VISION 2030 medium-long term plan will be updated and re-released during FY2027 January Term, with the company currently prioritizing rebuilding its earnings base and will release a more reliable growth plan after current reforms progress.
• For shareholder returns: the company maintained a full-year dividend of 28 yen per share for FY2026, prioritizing stable continuous returns despite the earnings miss that would have required a dividend cut under the 30% payout ratio policy. For FY2027 January Term, the company plans a 1 yen increase to a 29 yen per share dividend to demonstrate management confidence in the earnings recovery plan.

• The large unprofitable card system project in the Web Solution segment resulted in 180 million yen in total losses, locked up 50 staff for an extended period, and caused the company to lose opportunities to accept new high-quality profitable projects, creating significant material damage to group earnings. The root causes were under-estimation of back-end business logic complexity, poor initial requirements definition, insufficient project management, and weak negotiating power to pass through additional costs to the client, compounded by an organizational structure that was too skewed to junior staff that was not ready to handle the growing complexity of large DX projects.
• FY2026 ended with a large consolidated net loss that reduced net assets, pulling the equity ratio down to 31.2%; the company will focus on restoring internal reserves via FY2027 profits to return the balance sheet to a healthy level.
• Tighter project screening to avoid unprofitable projects could create near-term pressure on sales growth, as the company will forgo lower quality higher-risk projects to protect aggregate profit.
• While the new governance framework is expected to greatly reduce the risk of large unprofitable projects, the company acknowledges that eliminating all unprofitable projects entirely is difficult even for large mature system integration firms.
• Q1 FY2027 will still see temporarily low profitability due to the project gap after concluding the unprofitable project, while staff are being reallocated to new high-margin projects.

Q: Is the one-time negative revenue adjustment for the unprofitable project a special one-off event, or could it happen again in the future?

A: This adjustment was done to fully clear all future risks from the balance sheet. Even if another large unprofitable project arises in the future, the likelihood of this kind of large negative revenue adjustment is extremely low. The new governance framework is designed to detect deviations between project progress and revenue recognition early and correct issues as they arise, so future deviations will be much smaller.

Q: Could stricter project screening lead to insufficient order intake and lower sales growth? How do you balance this risk?

A: It is true that tighter screening will have some impact on near-term sales, but we have made the judgment that having the courage to reject high-risk projects will maximize company-wide profit. Chasing too much near-term sales creates exposure to unprofitable project risk, so the correct priority is selecting high-quality projects that can be completed reliably and deliver solid profit.

Q: Is the stricter order process overseen by top management such as the board of directors? How much stricter has the process become?

A: We hold weekly PMO meetings every Friday focused on order management and progress tracking for active projects, and the CEO attends these meetings to maintain detailed visibility into all project and pricing status. The board of directors also holds regular discussions about project progress. This process was launched after a prior unprofitable project in the previous fiscal year, and we continue to refine the process, add team members, organize checkpoints, and steadily improve meeting and review quality.

Q: You mentioned Q1 FY2027 will have low profitability — will margins return to prior levels after Q2, or will recovery take longer? When will we reach steady-state margins?

A: Q1 will see low profits, but margins will rise gradually starting in Q2, and return to historical levels by Q3 and Q4. We expect to reach steady cruise speed profit margins around the FY2028 January Term.

Q: 2027 January Term full-year operating margin is projected at 2.1%, which looks low compared to industry averages — [transcript cuts off mid-question] A: [No answer included in the provided transcript]