Simplex Holdings,Inc. Q3 FY2026 earnings call

• Overall 9M and Q3 Performance

  • Q3 2026 set all-time records for quarterly revenue, gross profit, orders received, and order backlog. 9M cumulative revenue hit 42.532 billion yen, up 24.7% YoY; gross profit hit 18.596 billion yen, up 33.9% YoY with a 43.7% gross margin matching the full-year target. Selling, general and administrative (SG&A) expenses hit 6.705 billion yen, up 19.9% YoY, slower than revenue and profit growth.
  • Operating profit hit 10.816 billion yen, up 54.4% YoY, equal to the full-year operating profit of the prior fiscal year, with an operating margin of 25.4%, already exceeding the 25% mid-term target originally set for next fiscal year.
  • Key drivers of operating profit growth: 4.7 billion yen increase in gross profit from larger engineer/consultant headcount and higher per-employee revenue; a 160 million yen YoY decrease in R&D expenses after a strategic review of the insurance segment that reduced R&D spend in the first half of the fiscal year. The 1.11 billion yen YoY increase in SG&A came from three factors: higher training/recruitment costs for an expanded new hire cohort (223 new graduates vs 185 prior year), a uniform 1 million yen salary increase for junior staff including SG&A department employees, and higher recruitment costs for increased mid-career hires.

• Order and Hiring Updates

  • Orders received in Q3 hit 15.892 billion yen, up 46.8% YoY, near the upper bound of the revised 145 billion yen ± 2 billion yen target range. Key large orders over 500 million yen include an 1.1 billion yen order for the requirements definition phase of a large-scale core system development project (total project size in tens of billions of yen), and the new development phase order for the Tokyo Financial Exchange (TFX) project, which was publicly disclosed after the press release on January 28, 2026. The 4-quarter moving average of orders has steepened, indicating a strongly strengthening order trend.
  • Order backlog hit 23.545 billion yen, up 16.9% YoY, with 12.5 billion yen allocable to the current fiscal year, up 20.9% YoY.
  • New graduate hiring is on track to hit the initial target of ~250 new hires joining in April. Mid-career hiring is outperforming expectations: 253 hires have been confirmed for this fiscal year (vs the prior year's 172 and the 200-250 target range), with 95 mid-career hires scheduled to join in Q4, exceeding the target upper bound. Even with total average engineer/consultant headcount (including 580 partner engineers/consultants) slightly below the initial 2,170 full-year estimate, three upward revenue revisions this fiscal year confirm growing per-employee revenue and improving productivity.

• Strategic Developments

  • Crosspier (the group's consulting subsidiary) now has reversible personnel mobility between itself and Simplex (the technology subsidiary), shifting from the historical one-way flow of Simplex to Crosspier to now allow Crosspier to Simplex transfers to support large project delivery, improving group synergy. The segment's gross margin recovered to the expected range in Q3 after an earlier temporary dip from imbalanced senior-junior headcount, with improvement expected to continue into Q4.
  • Capital Markets: A privately-owned exchange project has moved from the peak development phase to testing, and the TFX public exchange project has entered the development phase, establishing exchanges as the segment's third core revenue pillar alongside major banks and securities firms.
  • Financial Retail: The segment has built a foothold in stablecoin and crypto asset development starting from the JPYC project, and has shifted to strategic investment in the web3 space starting from Q3.
  • Enterprise DX: The segment now has the foundational capabilities to win large-scale projects, having secured a large project from USS in Q2 and the requirements definition phase of the large core system project in Q3, with growing demand for projects focused on key DX technologies including UI/UX, cloud, ERP, and generative AI.
  • The company approved a share repurchase program with an upper limit of 5 billion yen, covering up to 5.5 million shares through May 31, 2026, executed via two methods: ToSTNeT-3 off-exchange buybacks from founding members including the CEO, and discretionary market buybacks on the Tokyo Stock Exchange. The full-year dividend is set at 18 yen per share post 4-for-1 stock split, and ROE is expected to reach 19.4% if the 14.3 billion yen operating profit target is achieved, near the 20% target set after the MBO-driven ROE decline.
  • The company has restarted strategic R&D investment focused on generative AI and web3 starting in Q3, after a period of lower R&D spend following the insurance segment strategy reset. A dedicated R&D environment has been set up at group subsidiary Deep Percept to accelerate validation of generative AI use cases for financial system development, accounting for strict security and operational constraints.

By service type (for 9M FY2026 ended Q3):

1. Strategy/DX Consulting (Crosspier): 7.686 billion yen in revenue, 47.1% YoY growth, accounting for 18.1% of total 9M revenue. Gross profit margin hit 47.3% cumulative, and 48.2% in Q3 alone, recovering to within the initial expected range.
2. System Integration (Simplex): 24.444 billion yen in revenue, 29.5% YoY growth, accounting for 57.5% of total 9M revenue. Gross profit margin hit 43.7% cumulative, near the upper bound of the initial expected range, though Q3 alone was 42.2% due to a one-time buffer drawdown for one project that has already fully recovered.
3. Operation Services (Simplex): 10.392 billion yen in revenue, 3.8% YoY growth, accounting for 24.4% of total 9M revenue. Gross profit margin hit 41.0% cumulative, above the midpoint of the initial expected range, with Q3 alone reaching 42.7% after a recovery in performance-based revenue that was weak in the first half.

By business domain (for 9M FY2026 ended Q3):

1. Strategy/DX Consulting: 7.686 billion yen in revenue, 47.1% YoY growth.
2. Capital Markets: 12.1% YoY revenue growth, remaining a stable core segment focused on major megabanks and large securities firms.
3. Financial Retail: 16.1% YoY revenue growth, anchored by long-term relationship with SBI Securities.
4. Enterprise DX: 6.179 billion yen in revenue, 62.9% YoY growth, the fastest growing segment, with public sector accounting for ~40% of segment revenue.

• FY2026 (ending March 2026) Full-Year Guidance (upward revision from the October 2025 forecast):

  • Total revenue revised up by 1 billion yen to 58.0 billion yen, with a maintained gross margin target of 43.7%, matching the 9M cumulative gross margin. SG&A expenses revised up by 100 million yen for higher than expected recruitment costs, so operating profit is revised up by 300 million yen to 14.3 billion yen, for an expected operating margin of 24.7%.
  • By service type: Strategy/DX Consulting revised down 500 million yen to 11.0 billion yen, and System Integration revised up 1.0 billion yen to an upward net change of 500 million yen, reflecting a reallocation of the large core system project revenue that was originally expected to fall to consulting, after customer adjustments increased the share allocated to system integration.
  • By business domain: Capital Markets and Financial Retail each add 500 million yen in net revenue growth from solid small and mid-sized project performance, reaching 18.0 billion yen and 20.5 billion yen respectively; Strategy/DX Consulting and Enterprise DX have a 500 million yen internal reallocation resulting in full-year forecasts of 11.0 billion yen and 8.5 billion yen respectively.
  • The achievement probability for the 58.0 billion yen revenue target is 95.7% based on already secured revenue, order backlog, and unrecognized performance-based revenue as of the end of Q3, higher than the prior year's progress at the same point. If achieved, full-year revenue will grow 22.4% YoY, operating profit will grow 32.4% YoY, and net profit is expected to reach 9.666 billion yen, up 24.2% YoY (excluding the 430 million yen tax cut effect from the wage increase promotion tax credit that was included in the prior year; if the same tax cut is secured this year, net profit will exceed 10.0 billion yen for the first time).

• Mid-term and Long-term Guidance:

  • The medium-term management plan "Chuke 2027" originally had a full-year revenue target of 60.0 billion yen and operating profit target of 15.0 billion yen for the final year (FY2027 ending March 2027). The company now expects to achieve nearly all of these targets one year early, with FY2026 (current fiscal year) on track to hit 58.0 billion yen revenue and 14.3 billion yen operating profit, with an operating margin of 24.7% and ROE of 19.4% already exceeding the original FY2027 targets for capital efficiency.
  • For FY2027, management currently expects a revenue range of 65.0 billion yen to 68.0 billion yen, with a target operating margin of 25%, with the final target to be confirmed after further review and announced at the full-year earnings call in three months.
  • The long-term "Vision 1000" target of 100.0 billion yen in revenue is now expected to be achieved between FY2030 (ending March 2030) and FY2031 (ending March 2031), a 2 to 3 year acceleration from the original target of FY2033 (ending March 2033), with a 3 year acceleration (achievement in FY2030) achievable if current growth momentum holds. To achieve this, the company will focus on further large client development, possible use of joint venture structures, building a less labor-intensive business model leveraging generative AI and web3 over the next 4-5 years, and continued accelerated hiring.

No material operational risks or failures were explicitly discussed in the available transcript. Management noted that one system integration project required a small drawdown of safety cushion in Q3, but the issue has already been resolved and no material impact is expected for future quarters.

Q: On the Q3 system integration project that used the safety cushion: what kind of project was this, and will there be any continued impact in Q4 and beyond?

A: The project was not an extraordinary case, but required more costs than initially planned. The amount of the safety cushion used was minor, and all necessary adjustments have already been completed, so any impact on Q4 and beyond is expected to be very limited.

Q: Is the sales growth in Enterprise DX from Q3 driven entirely by the large core system construction project you mentioned?

A: The large core system project's upstream consulting work delivered over prior periods was booked to the Strategy/DX Consulting segment. Most of the requirements definition phase revenue for this project will be booked to Enterprise DX in Q4. The Q3 Enterprise DX sales growth was primarily driven by the USS large project that was awarded and started in Q2.

Q: What is driving the strong order growth since Q2? Is it increased demand for core system renewal related to the 2027 SAP standard maintenance end-of-life?

A: One key factor is that we have been able to win large, well-balanced projects across each quarter this fiscal year. In addition, as you noted, we are seeing more opportunities to propose and win core system renewal projects. We have leveraged our existing capabilities in UI/UX refresh, cloud migration, and AI adoption to win more system modernization projects for clients with legacy system issues. Unlike many peers, we do not focus on integration projects for pre-built ERP products, and instead target underserved segments where off-the-shelf ERP products are a poor fit for client and industry needs. The large core system project we won in Q3 is exactly this type of opportunity.

Q: Can you share your current outlook and future potential for your R&D investments in generative AI and web3?

A: In the first half of this fiscal year, we prioritized allocating engineering resources to client projects, so we were not able to dedicate much resource to R&D. Starting in Q3, we have scaled up investment in R&D for these areas. For generative AI, we are primarily running proof-of-concept tests to improve development productivity. For our core client base of financial institutions, system development has strict security and operational requirements, so we set up a dedicated R&D system environment at our group R&D subsidiary Deep Percept to enable more agile testing. We plan to share a summary of our testing results and an update on expected contributions to earnings from next fiscal year onward at the full-year earnings call. For web3, we believe we have three key competitive advantages: first, we built the issuance/redemption system for JPYC, Japan's first yen-denominated stablecoin; second, we have accumulated experience building and operating crypto asset trading systems and core wallet systems based on blockchain technology; third, we have a strong established relationship with SBI Securities, which is expected to lead web3 development in the Japanese financial industry. We plan to continue capturing relevant business opportunities as the web3 sector develops. All costs related to these investments are already included in the current full-year SG&A and R&D forecasts.

Q: Markets are concerned about an "AI recession", where downstream subcontractor software and development firms could be negatively impacted by AI adoption. In your view, what separates sustainable, surviving firms from others as AI adoption grows?

A: We have seen reports of overseas firms cutting headcount, but we believe this is often more of a strategic signal to proactively streamline headcount and focus on efficiency, rather than a result of AI-driven productivity gains already being fully realized. In Japan, stricter employment regulations make it hard to do proactive headcount cuts like overseas firms, and AI adoption is not yet advanced enough to immediately cause large changes to employment or workforce structure. Additionally, since we focus exclusively on prime contractor projects, we face a much lower risk of displacement by AI compared to subcontractor firms. Requirements definition, which makes up ~30% of total development work, requires drawing out client needs through direct dialogue and structuring business processes, which is the area least likely to be replaced by AI at this point. Even for testing, which is widely seen as more easily replaceable by AI, testing-focused firms are still reporting solid earnings, so AI impacts have not materialized yet. Overall, we believe the risk of AI forcing a major immediate restructuring of our current business over the next 3-5 years is limited.