DAIKO XTECH,LTD. Q2 FY2026 earnings call

Overall Financial Performance

• Total first half cumulative results: Orders came to 21.477 billion yen, order backlog came to 10.689 billion yen (both increased year-over-year); revenue was 20.472 billion yen, down 355 million yen year-over-year, due to the lapso of a large prior-year PC sale and intentional reduction of low-margin hardware sales.
• Gross profit was 5.05 billion yen, up 127 million yen year-over-year, with gross margin rising from 23.6% to 24.7%. Selling, general and administrative expenses increased 303 million yen year-over-year to 4.376 billion yen, driven by higher human capital investment (salaries and training) and one-time costs from the April corporate name change.
• Operating profit was 674 million yen, down 175 million yen (-20.6%) year-over-year with an operating margin of 3.3%, down 0.8 percentage points year-over-year. Ordinary profit was 710 million yen, and net profit was 441 million yen.
• Quarterly trend: Q1 results were well below prior year, but Q2 saw significant profit improvement over prior year, with gross profit and operating profit both well above year-ago levels, as the shift to higher-margin business and improved project management delivered results.
• Balance sheet: Fixed assets increased 795 million yen to 6.145 billion yen, net assets increased 339 million yen to 13.059 billion yen, driven by mark-to-market gains on investment securities. Total assets reached 27.066 billion yen, with equity ratio improving 1.1 percentage points to 48.2%.
• Cash flow: Operating cash flow increased despite lower pre-tax profit, due to reduced retirement benefit and corporate tax payments. Investing cash flow decreased due to expenditures for the acquisition of Brit Application Co. shares. Financing cash flow decreased due to debt repayment and treasury stock purchases. Ending cash and cash equivalents stood at 9.325 billion yen, down 611 million yen year-over-year.

Mid-Term Management Plan "CANVAS TWO" Progress

• "CANVAS TWO" is the first cycle of a 3-cycle, 9-year total plan, and the first half of the first year has been completed, with 1/6 of the total 9-year period finished. The 2028 March fiscal year end targets are: 45 billion yen in revenue, 6.7% operating margin, 2.05 billion yen net profit, and ROE of 13% or higher. The core strategy is to increase total gross profit by 2 billion yen over the 3-year cycle: 600 million yen from core business high-value transformation, and 1.4 billion yen from priority solution growth.
• Organizational changes implemented in April to support plan targets have delivered steady gross profit improvement:
  1. Priority Solution Growth: Completed the M&A acquisition of all outstanding shares of Brit Application Co., gaining the integrated production management package BULiT Application AS for manufacturing clients. A new Mobility Business Division was launched October 1 with a sales-SE integrated structure to expand sales of this solution, targeting 6,853 potential Japanese automotive component supplier clients. A recent exhibition in Nagoya confirmed strong customer interest in the product. A specialized new organization was also established for new "Shin Business" areas, building out a full consulting support structure from business analysis to on-site implementation, and target project acquisition is progressing steadily.
  2. Core Business High-Value Transformation: High-value software solutions, particularly modernization (legacy core system renewal) projects, have grown steadily. A dedicated modernization business organization was established in April, which has driven stronger progress in commercialization and order intake.

Management Foundation Strengthening

• Financial Strategy: One M&A has been completed in the first half, in line with the 3-year plan to deploy 9 billion yen in growth investment focused on M&A to expand business and strengthen the revenue base. Current results: equity ratio 48.2% (target 50%), cash and deposits 7.3 billion yen (target 6 billion yen), progress against financial health goals remains on track. New shareholder return initiatives have been launched: a new shareholder benefit program with a September record date, and the addition of an interim dividend to the prior year-end only dividend schedule. The company maintains a policy balancing future growth investment and shareholder returns, targeting a 3% DOE base for stable dividends, and has implemented the planned 18 yen per share interim dividend this period.
• Human Resource Strategy: The company is focused on securing and developing specialized talent, and building organizational structures that maximize employee capability. Recruitment is progressing well, boosted by improved recognition from the corporate name change. Continued investment in employee training is underway, and employee retention remains at a high level.

By core vs priority solution business:

1. Core Business: Software solution orders and revenue grew, with increased gross margin driving steady gross profit growth. No absolute financial values are provided for this segment alone in the transcript.
2. Priority Solutions: Overall results fell year-over-year. Performance varied by region: Central Japan and Western Japan regions performed steadily, while the Kanto region delivered negative results that pulled the full segment down; absolute values are not disclosed.

By solution category (all figures for the first half cumulative period, converted per magnitude rules):

1. Product Solution: Hardware and supply product sales declined (an expected outcome), but maintenance service continued to grow from accumulated past operating assets; no absolute revenue value is disclosed.
2. Software Solution: Driven by solid growth in modernization projects and stock business, orders, revenue, and gross profit all increased; no absolute segment value is disclosed.
3. Network Solution: Orders and revenue decreased slightly due to fewer projects during the period, but gross margin improved leading to an increase in gross profit; no absolute segment value is disclosed.

• Full year 2026 March fiscal year original guidance is maintained at 43.2 billion yen in orders, 43 billion yen in revenue, and 11.4 billion yen in gross profit.
• Cumulative first half progress against full year targets is approximately 50%, which management considers solid after the Q1 slowdown, and the full year target is now within reach, driven by the strong Q2 performance.
• Order and backlog composition is shifting favorably, with software business and stock business order volumes growing steadily, supporting the full year target achievement.
• The 3-year "CANVAS TWO" mid-term targets (45 billion yen revenue, 6.7% operating margin, 2.05 billion yen net profit, 13%+ ROE by 2028 March fiscal year) are maintained, and progress against the plan is on track through the first half.

• Underperformance of the Priority Solutions segment was driven entirely by negative results in the Kanto region, so management identifies Kanto region business restructuring as an urgent priority to get the segment back to growth.
• The first half cumulative operating profit decline reflects planned investments in human capital (salary improvements and training) and one-time business transformation costs (corporate name change), which create near-term profit pressure that is expected to resolve as higher-margin new business scales.
• New priority solution areas in the new business segment still have a low volume of projects to date, so growth in this segment remains pending further scale-up.

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