7537.T

Mid-interim period core financial performance

• Total consolidated revenue reached 102.6 billion yen, and ordinary income reached 1.7 billion yen, both significantly exceeding the initial forecast released in May, driven by strong performance of consumer semiconductors in the device segment and lower-than-planned selling, general and administrative expenses.
• Total revenue increased 4.2% year-over-year, but ordinary income decreased year-over-year due to lower foreign exchange gains compared to the prior year period, partially offset by lower interest expenses.
• Total assets decreased to 135.8 billion yen, total liabilities decreased to 75.9 billion yen, and total net equity reached 59.9 billion yen as of the end of the mid-interim period, driven by inventory reduction and lower accounts receivable.

Capital cost and stock price focused management

• Management estimates projected ROE for the current fiscal year is 5.6%, which is below the estimated shareholder cost of capital range of 6% to 9%. This gap is the key factor keeping the company's PBR at around 0.6x. The company has strengthened efforts to stabilize ROE above 9% targeting to achieve PBR above 1x.
• The company is pursuing three core strategies to achieve this target: 1) Execution of growth strategy, 2) Implementation of financial measures, 3) Deployment of non-financial measures.

Growth strategy under medium-term plan "Marubun Nextage 2027"

• The medium-term plan for fiscal 2027 sets targets of total revenue 240 billion yen, ordinary income over 8 billion yen, with segment-level targets: Device business ordinary income over 3 billion yen, System business over 4 billion yen, Entrepreneur business over 1 billion yen. For the first year of the plan (current fiscal year), the company expects revenue 210 billion yen and ordinary income 5 billion yen after the upward revision.
• Device business growth strategy: Focus on expanding sales in growing markets including strong consumer electronics, solid mobility demand, and AI-related data center investments. Maximize added value by combining existing strengths (broad customer base, global procurement network) with custom technical consulting support for customer product development.
• System business growth strategy: Leverage long-standing trusted relationships and delivery track records with core public infrastructure customers in space development and national security. This is a high-margin segment with very high entry barriers, and the company will continue to capture growing demand and drive profit growth for the whole segment including high-value after-sales services.
• Entrepreneur business growth strategy: Strategically positioned to incubate new high-value-added business segments for the future. The company is leveraging its existing sales channel for Japanese companies to cultivate new profit pillars in fast-changing areas including ICT communication services and AI/robotics, with the near-term target of returning to profitability via new AI/robotics project wins.

Financial and non-financial initiatives

• Financial initiatives: Maintain the existing dividend policy, continue shareholder return initiatives, and pursue ongoing balance sheet compression to strengthen the financial foundation. Allocate retained earnings to four core areas: pursuit of growth investment opportunities, business infrastructure investment, human capital investment, and balance sheet management.
• Non-financial initiatives: Target to reduce shareholder cost of capital. Prioritize sustainability management: continue human capital investment, as employee engagement score has increased 12.1pp since the start of initiatives, which serves as a leading indicator for long-term value creation. Strengthen stakeholder engagement and IR activities, including publishing an integrated report and expanding dialogue channels with investors. Refresh corporate governance under the new management team that took office in April 2025.

• The company upward revised its full-year 2026 March fiscal year earnings guidance from the initial May forecast, raising both revenue and all profit metrics. The new forecast projects full-year ordinary income of 5 billion yen, up from the prior 4.3 billion yen forecast, with an assumed exchange rate of 142 yen per USD for the second half.
• The company maintained its planned annual dividend at 50 yen per share (25 yen interim, 25 yen final), consistent with the initial forecast. Based on the revised earnings forecast, this results in a payout ratio of 43.6% and a dividend on equity of 2.6%, meeting the company's dividend policy target.

1. デバイス事業 (Device Business): Mid-interim reporting period revenue contribution accounts for 70% of total consolidated revenue. The segment achieved revenue growth driven by increased demand for semiconductors for consumer electronics, but decreased profit due to lower gross margin from a decline in agency transactions. For the full year 2026 March fiscal year, the segment is projected to report revenue of 145.8 billion yen and ordinary income of 1.4 billion yen, representing year-over-year decrease in both revenue and profit. Key product movements: custom IC for consumer electronics and microprocessors for mobility are expected to increase; application-specific IC for consumer electronics and analog IC for industrial equipment are expected to decrease. 2. システム事業 (System Business): Mid-interim period achieved both revenue and profit growth, led by strong demand for high-reliability components for artificial satellites in the aerospace segment. For the full year 2026 March fiscal year, the segment is projected to report revenue of 61.5 billion yen and ordinary income of 3.5 billion yen, representing year-over-year increase in both revenue and profit. Growth will be driven by continued strength in aerospace and defense, plus recovery in the industrial equipment market. 3. アントレプレナ事業 (Entrepreneur Business): Mid-interim period revenue declined due to lower demand for time synchronization systems for communication infrastructure, and the loss margin widened. For the full year 2026 March fiscal year, the segment is projected to report revenue of 2.7 billion yen and ordinary income of 20 million yen, expecting to return to profitability driven by new project wins from market development of AI and robotics products.

• The prolonged inventory adjustment phase in the industrial equipment market has led to lower revenue in the device business and a projected full-year year-over-year decline for the segment, with full recovery not expected until fiscal 2027.
• Foreign exchange fluctuations create accounting volatility for ordinary income under Japanese GAAP, even though the company's natural hedging strategy ensures dollar-based profit is stable. Yen appreciation in the second half would create downward pressure on reported profit, with an estimated 60-70 million yen of profit decrease per 1 yen of appreciation.
• The company's current projected ROE of 5.6% is below the estimated shareholder cost of capital, which has kept the company's PBR below 1x, creating pressure to improve profitability to meet market expectations.

Q: Why did the company keep its dividend plan unchanged despite the upward earnings revision? / A: The company's core policy is to maintain stable, consistent dividends, targeting the higher of 40% consolidated payout ratio or 2.5% DOE. The current 50 yen annual dividend meets the 2.5% DOE lower bound target based on the revised earnings. Management notes they will review the dividend forecast if future earnings outlooks change materially. (141 char)

Q: What end-markets drive the strength in consumer and mobility semiconductor products, and can you share specific details? / A: Custom IC for consumer devices primarily serves home appliances and amusement equipment. Microprocessors for mobility are focused on instrument cluster panels and associated applications for automotive. (116 char)

Q: When will the declining application-specific IC (consumer) and analog IC (industrial) return to growth? / A: Management expects the current industry adjustment phase to continue into fiscal 2026, and does not project a full return to growth until fiscal 2027. (85 char)

Q: What is the long-term profit contribution target for aerospace, defense, and what is the growth roadmap? / A: The segment is already a core high-margin growth driver for the system business, and the company does not disclose a specific target profit mix ratio. Barriers to entry are very high due to strict technical requirements and the need for long-term customer trust, and the company will leverage its established track record to capture growing market demand. (178 char)

Q: Can you explain the decline in the Entrepreneur segment's ICT solution business, and what are the key priorities for the AI/robotics segment? / A: The mid-interim decline stems from lower demand for time synchronization systems for communication infrastructure. Going forward, the company will strengthen sales in communication and grow recurring revenue from in-house developed cloud services. For AI/robotics, the priority is the medical and eldercare market, focused on AI robots and general-purpose ultrasound imaging devices, targeting full-year profitability. (212 char)