HIMACS,Ltd. Q3 FY2026 earnings call

• Company Overview & Core Strengths

  • Founded in 1976, headquartered in Yokohama, celebrating its 50th anniversary in 2026, with 996 employees as of September 2025. It is a mid-sized independent SIer positioning itself against same and slightly larger competitors, with core strength in financial (especially insurance) system development.
  • 70% of revenue comes from 30+ year client relationships, rising to 80% when including 20+ year clients, with major clients including large SIers like Nomura Research Institute and end users like JCB and ALSOK.
  • Proactive expansion of new graduate hiring from ~50 to ~80 people annually to address industry-wide engineer shortages, with structured training: 3-month introductory training for new hires, layered internal/external curricula, and a skill/experience-based career path system.
  • Encourages professional certification acquisition with internal rewards, prioritizes training for DX engineers (data analysis, agile) and project leaders, and requires mandatory e-learning for all employees to upgrade skills.
  • Provides full lifecycle services across system planning, design, development, maintenance, and rebuild, with stable long-term maintenance contracts that accumulate client business knowledge and create advantages for winning future system rebuild projects.

• Generative AI Initiatives

  • Integrated generative AI into the end-to-end software development process to streamline design, implementation, and documentation creation, significantly improving development speed. Standardized frameworks to enable easy deployment across multiple projects and enhance business scalability, with strict risk management for information security, data protection, and copyright to establish a human-AI collaborative development model.
  • Developed the "Jishanavi" internal generative AI tool that learns client-specific internal rules and manuals to answer employee system usage questions, freeing up client system engineering teams from repetitive inquiry work.
  • Developed the "Skill Booster" generative AI tool for new hire training to support question answering and problem solving, now being tested for use by HR and development teams. Notably, the tool was led by a first-year employee, demonstrating the success of the company's DX education and environment building initiatives.
  • Started generative AI investments two years ago, began with researching client AI engine and platform choices, completed technology training last year, and currently is co-developing prototypes with clients and testing in-house proprietary platforms, positioning its progress as half a step to one step ahead of peer competitors at its scale.

• DX Project Progress

  • Currently DX projects are concentrated in information and front-end system areas, with core system DX still in early stages. The company targets to grow DX revenue share to 25% under its mid-term plan, and management expects DX will eventually grow to 50-60% of total revenue as legacy core system refresh demand accelerates, enabled by generative AI.
  • A large volume of legacy black-box systems remain in operation with few remaining staff who understand the original architecture, creating sustained demand for system refresh while undertaking business reform, with generative AI expected to accelerate this process.

The company's business is segmented by customer industry: 1. Financial industry segment: Accounts for approximately 70% of total revenue, with core strength in insurance business and financial system development, driven by expanding DX project demand. 2. Non-financial industry segment: Targets 30% of total revenue contribution, up from less than 20% a few years ago, focusing on DX projects and leveraging more active customer demand for digital transformation. By business line: 1. Planning, design & development (SSS): Expanding service territory, driving new revenue growth. 2. System maintenance service (SMS): Delivered 16.1% year-over-year increase in order backlog in the 3rd quarter of FY2026 (March year end), providing stable recurring revenue. Reported full year FY2025 (March year end) results: Total revenue 18.066 billion yen, operating profit 1.807 billion yen. 3rd quarter FY2026 (cumulative) results: Total revenue 13.471 billion yen (+1.1% YoY), operating profit 1.127 billion yen (-14% YoY).

• Full year FY2026 (March year end) guidance is maintained at 20.0 billion yen total revenue and 1.82 billion yen operating profit, with 110.87 yen diluted EPS. Management confirms the full year guidance is unchanged despite slower than expected progress through the third quarter, and will continue monitoring cost pressures from rising personnel and outsourcing costs, with timely disclosure if any material changes occur.
  • Mid-term plan NEXT C4 maintains a target of 30% revenue contribution from non-financial and direct end-user segments, up from less than 20% previously, with a target of 25% revenue contribution from DX projects.
  • Dividend guidance for FY2026 is a 46 yen per share annual dividend, a 1 yen increase year-over-year, marking 5 consecutive years of dividend increases, with a planned payout ratio of 41.5% aligned with the company's 40% target payout ratio policy.
  • The company completed acquisition of ~1.2 million treasury shares in December 2025, and plans to cancel ~1.4 million treasury shares in February 2026 to reduce equity dilution and improve capital efficiency.
  • Management targets to grow revenue beyond 20 billion yen under the mid-term plan, and aims to raise ROE from the current 10% level over the next several years through better deployment of excess cash holdings for strategic M&A and alliances.

• Industry-wide competitive pressure: Generative AI will improve development productivity and reduce project costs, leading to increased competition for sufficient project volume, with large firms expected to aggressively pursue new orders, putting competitive pressure on mid-sized SIers like Himax.
  • The 2% gap between generative AI's current output perfection and the 100% accuracy required for financial systems: Generative AI cannot currently identify and verify defect causes, requiring experienced senior engineers to resolve quality issues, and full automation of end-to-end development is not yet feasible.
  • Short-term profit pressure: Aggressive personnel investments, including 7.5% average base pay increase for current fiscal year and rising outsourcing rates, have compressed near-term margins, and it will take several years for the investments in new hires to generate full sales contribution as new graduates require ~3 years to become productive contributors.
  • Non-financial DX projects are still smaller in average size and scale than traditional financial projects, and have not yet grown enough to move the needle on total company revenue growth in the near term.
  • Market sentiment risk: Generative AI has created widespread investor uncertainty about the long-term viability of existing SIer business models, leading to generally depressed valuations for the sector that have not reflected current operational growth.

Q: What is Himax's market positioning and competitive environment?

A: We position ourselves as a mid-sized independent SIer, and most often compete with same-sized or slightly larger firms in project bidding. We have specific strength in financial system development, especially for the insurance sector. Overall industry demand is growing, but competitive bidding is still common, and firms need clear differentiators to win priority projects.

Q: What growing areas and winning strategies do you have to hit the 25% DX revenue target?

A: Currently DX is concentrated in information and front-end areas, with core system DX still ahead. We expect it will take several years to hit the 25% target, but long term we expect DX will grow to 50-60% of total revenue, as many legacy systems still need full refresh, which will be accelerated by generative AI.

Q: Is there still a large amount of outdated legacy systems in the market that need DX refresh after the "2025 cliff"?

A: Yes, many companies are still running outdated legacy systems that were built decades ago, with few staff remaining who understand the full system architecture, so there is strong pent-up demand to refresh these systems while reforming business processes, and this work will increasingly leverage generative AI.

Q: How far along is Himax on generative AI adoption compared to peers?

A: We started our generative AI journey two years ago, first studying what AI engines and platforms our clients are using, then completed internal training last year. This year we have progressed to co-developing prototypes with clients, and our in-house platforms for direct end-user clients are currently in the testing phase. We believe we are half a step to one step ahead of peer competitors at our scale.

Q: Do you work on generative AI analysis of black-box legacy systems for refresh projects?

A: We do get client requests for this, but it is still very challenging to add new requirements to completely undocumented black-box systems. Our approach is to first migrate the existing source code to a modern platform, regenerate the code base, release the migrated system, then add new business requirements in subsequent phases.

Q: What is your view on the risk that AI will eliminate jobs and reduce industry demand?

A: We do expect that generative AI will significantly improve productivity and reduce labor requirements per project, which is a positive development for us. We are preparing for this shift by expanding into upstream consulting services that leverage freed-up engineer capacity from higher productivity, and we are reorienting our business model for the next 10-30 years after our 50th anniversary.

Q: Are veteran engineers resistant to generative AI adoption, while younger engineers adapt faster?

A: It is true that younger engineers are more comfortable with generative AI, but they lack experience in system development rules and client-specific practices, so collaborative teams of junior and senior engineers are the most effective approach, which is what we use today. Currently generative AI is still not capable of identifying and debugging defects, so senior engineers still have critical roles to play in quality assurance.

Q: What is your assessment of the risk that concentration in financial services creates after financial DX demand cools? How do you expand non-financial business?

A: We are targeting to expand non-financial revenue to 30% of total revenue from less than 20% a few years ago. Currently non-financial clients are actually more advanced in DX adoption than financial clients, which are a bit behind the curve, so our growth path is to first grow non-financial DX, then focus back on financial DX after that segment cools. We will expand by matching our existing core strengths with generative AI opportunities, rather than targeting specific industries upfront.

Q: How urgent is project leader development, and how are you addressing it?

A: Project leader development is our most urgent priority, and we have been aggressively investing in it for 5 years, which is a common challenge for all mid-sized SIers. We created structured skill mapping tools that are updated annually to systematically address skill gaps, and we are heavily focused on expanding the number of qualified project leaders, which is the key constraint on our ability to take on more projects and grow revenue.

Q: How do you plan to deploy your large excess cash holdings, and what is your ROE target?

A: We will maintain our strong financial position while using excess cash for future working capital, strategic M&A, and alliances. We currently have a 10% ROE, and we aim to moderately increase it over the next several years through better capital deployment, which we are still evaluating.

Q: Will you pay a special 50th anniversary dividend?

A: We definitely want to return additional value to shareholders for our 50th anniversary, but we do not have any specific plan to announce at this point. We will disclose any decision as soon as it is finalized.

Q: What measures are you taking to improve margins amid rising costs from personnel investments?

A: We are prioritizing sustained selling price improvement with clients, and we have found clients are generally receptive to price adjustments to reflect higher labor costs. We are also driving productivity improvements through generative AI adoption, and these two measures will offset cost pressure over time. We view personnel investments as long-term investments that will be recouped in future years.

Q: What are you doing to address wage gaps for veteran middle/senior employees as starting wages rise?

A: Last year we focused wage increases primarily on younger employees, which left middle and veteran employees under-appreciated, and we received direct feedback from employee satisfaction surveys that this needed adjustment. We have already started planning for targeted wage increases for middle/veteran employees effective next spring, to make sure they can see clear improvement in their compensation.

Q: What do you think of the Shikiho forecast of 22.0 billion yen revenue and 1.45 billion yen net income for FY2027?

A: These numbers are not ones that we released, and we take them as the market's independent assessment of our business. We are prioritized building a solid foundation through upfront personnel investment first, then we will deliver returns after that investment pays off. We cannot confirm the accuracy of the forecast at this time.

Q: How long does it take for new hires to contribute to revenue and for personnel investments to pay off?

A: It takes approximately 3 years for a new graduate hire to build enough technical skill and practical experience to become a productive contributor, so that is the timeline we expect for investments in new hires to generate returns.

Q: Can you improve the accuracy of credit card fraud detection systems to reduce false positives?

A: False positive blocks typically only happen when the card is used in an unusual location or for an unusual large transaction, as a precaution to protect cardholders. Improving accuracy of gray-area decisions is a key priority, and we are working on leveraging generative AI to improve detection precision, which remains an ongoing challenge.

Q: Why has the stock price not risen along with the broader market, and how will generative AI change the SIer industry?

A: Generative AI improves productivity and reduces per-project costs, which means individual engineers can handle multiple projects, but the key competitive issue going forward will be securing sufficient project volume, with large firms expected to aggressively pursue new business. The market is currently pricing in significant uncertainty about generative AI's impact on existing SIer business models, which has kept valuations depressed even for firms delivering growth. However, I believe the outlook will brighten within 1-2 years: higher productivity will free up engineers to build new internal businesses, and there is significant potential to develop new business models that leverage technology and generative AI, which creates upside for the industry.

Q: What is your top initiative to improve profit margin in FY2026?

A: The most important step is continuing to push for selling price improvement to offset higher personnel and outsourcing costs. We had an average 7.5% base pay increase this year along with higher outsourcing rates, which compressed margins, and we are persistently negotiating price adjustments with clients aligned with JFTC guidance on fair pricing, which we are continuing to push forward.

Q: What is your strategy for growth through new client acquisition vs deepening existing client relationships?

A: We use a dual wheel strategy of both new acquisition and existing deepening. For new clients, we strengthen our value proposition for DX and generative AI projects for end users seeking business transformation and modernization, and pursue new orders aggressively. For existing clients, we leverage our full lifecycle service model: we use knowledge gained through maintenance projects to win follow-up system refresh and DX projects, and expand recurring revenue through this cycle.

Q: Why is top line growth slow despite aggressive hiring of 80 new graduates a year?

A: This is due to structural factors inherent to the SIer industry. New graduates take 3 years to become productive, so we incur training and personnel costs upfront before they contribute to revenue, so near term sales growth is limited. Additionally, non-financial DX projects are growing but they are still smaller in average size than our traditional financial projects, so they have not yet moved the needle on total revenue.

Q: Can you share KPIs for productivity improvements from generative AI projects?

A: We cannot disclose specific KPIs for competitive strategy reasons, we appreciate your understanding.

Q: What size of M&A targets are you looking for?

A: We are targeting targets with 1.0 billion yen to 2.0 billion yen in revenue that can create synergy with our core business.

Q: What will you do to increase the stock price?

A: We focus on two core priorities: 1) Grow revenue and improve profitability: we will expand growth by entering new non-financial industries beyond public and retail, and improve margins through selling price negotiations to offset personnel cost pressures; 2) Strengthen stable and flexible shareholder returns: we will maintain our policy of stable returns, balanced between business growth, profitability, and retained earnings, and adjust returns dynamically based on business performance.

Q: Are you considering adding benefits for long-term shareholders in your current Quo card shareholding benefit program?

A: We do not currently have tiered benefits for long-term holders, but we appreciate the feedback and will consider it for future changes to the program.

Q: Do you expect to have to downward revise full year FY2026 guidance given slower third quarter progress?

A: Progress through the third quarter is slightly slower than planned, but after a comprehensive review of project pipeline and business conditions, we are maintaining our full year guidance. We will continue to monitor cost pressures from rising personnel and outsourcing prices, and will disclose any material changes promptly if they occur.

Q: Will you adopt DOE (dividend on equity) as part of your return policy to enable larger dividend payments even with slower profit growth?

A: We are aware of the DOE framework as an approach to dividend policy, but we do not plan to adopt it at this time. We appreciate the feedback and will consider it when evaluating future dividend policy changes.