SHIFT (3697) FY2026 August Term Q3 Earnings Deep Dive Report

Introduction

SHIFT Inc. (Securities Code: 3697) reported its Q3 FY2026 earnings, announcing an upward revision to its full-year revenue forecast and significant progress in AI-related business growth and efficiency. However, a temporary decline in utilization rates and impairment losses led to a downward revision of some profit indicators. This report, based on the attached materials, provides a detailed analysis of SHIFT's latest performance, growth strategies, AI business progress, and future outlook.

FY2026 Q3 Earnings Highlights and Full-Year Outlook

SHIFT's Q3 FY2026 performance saw revenue reach 43.8 billion JPY (including Nissei Com), marking a 21.2% year-on-year (YoY) increase . Adjusted operating profit stood at 5.2 billion JPY (including Nissei Com), a 23.0% YoY increase . Notably, AI-related sales reached 7.9 billion JPY , accounting for 18% of total revenue. The gross profit margin for AI-related businesses remained high at 43.0% , demonstrating strong profitability.

The company's performance trends are illustrated below:

This "Earnings Highlights" slide is crucial for understanding SHIFT's financial performance for the quarter, as it concisely and comprehensively presents key financial figures and their year-on-year changes, including the contribution of AI. Specifically, AI sales accounting for 18% of total revenue with a high gross profit margin of 43.0% suggests that the company's growth drivers are shifting towards AI-related businesses. Furthermore, the improvement in the SG&A ratio is also contributing to profit growth.

Regarding the full-year earnings forecast, revenue was revised upwards from the initial forecast of 150 billion JPY to 160 billion JPY . This revision is attributed to steady business activities and M&A effects. However, adjusted ordinary profit was revised downwards from 20 billion JPY to 16 billion JPY, and adjusted final profit from 13.5 billion JPY to 9 billion JPY. This downward revision is primarily due to impairment losses from investments accounted for using the equity method , while the core operating profit level is expected to be maintained as initially planned.

For shareholder returns, the company announced its first dividend with a payout ratio of 10% starting from FY2026. This is part of a new capital allocation policy committing to a total return ratio of 20% (10% payout ratio and flexible share buybacks), reflecting an emphasis on balancing the strengthening of the balance sheet for future growth with shareholder returns.

Growth Strategy and AI Business Progress

At the core of SHIFT's growth strategy is the expansion and efficiency of its AI-related businesses. In Q3, AI sales significantly grew 3.1 times quarter-on-quarter , reaching 7.917 billion JPY . Particularly, the gross profit margin for Native AI sales was exceptionally high at 53.7% , indicating that the AI business is a major contributor to the company's improved profitability.

The revenue growth rate and expansion of AI sales are shown in the following graph:

This "Business Reform in Existing Businesses" slide visually demonstrates SHIFT's strong revenue growth trend and, critically, the explosive expansion of AI-related sales . The consolidated revenue YoY growth rate reaching 129.9% and AI sales expanding 3.1 times from Q2 to Q3, reaching 7.572 billion JPY, confirm that the company's AI strategy is yielding clear results. This data is essential for understanding that AI has become the company's primary growth engine.

The utilization rate temporarily declined to 90.1% (non-consolidated) in Q3, attributed to an increase in sales personnel from the beginning of the fiscal year and a shift towards AI and large-scale long-term projects. However, the non-consolidated utilization rate is expected to recover to a level comparable to the previous year by July , indicating a temporary impact.

The future sales pipeline is also steadily building, with a total pipeline of 75.4 billion JPY . Of this, the AI sales pipeline amounts to 17.0 billion JPY , and Native AI sales have increased 103-fold . This suggests an acceleration in acquiring AI-related projects.

Improvements in the SG&A ratio are also notable, with the adjusted SG&A ratio improving by 2.5 percentage points YoY to 20.7% . This improvement is due to accelerated efficiency through internal utilization of AI BPaaS and an early positive impact from a review of hiring policies. Specifically, the optimization of 110 personnel through back-office AI-fication is a concrete example of how AI contributes to cost reduction.

Segmental Performance and Future Initiatives

SHIFT is promoting AI utilization across its business segments: Consulting, AI Modernization, Testing, and AI BPaaS.

In the Consulting business , the number of clients and client unit prices are steadily increasing, with a shift from PMO-centric projects to upstream strategic support. By resolving client pain points and acquiring high-profit projects, the segment achieves a gross profit margin exceeding 40%.

In the AI Modernization business , Q3 saw steady progress in verifying deployment patterns, leading to an increase in the backlog of large-scale projects. The strategy is to accelerate revenue growth by improving proposal capabilities and win rates.

In the AI Test business , adoption patterns in the AI testing domain have been established, and AI-related sales have significantly grown by 26% . By leveraging SHIFT's accumulated "defect DB," defect detection capabilities have dramatically improved, clarifying the value of AI in quality management.

The AI BPaaS business has started offering its fully AI-driven back-office know-how as a service. This initiative, which externalizes internal efficiency gains, holds potential as a future growth driver.

The AI BPaaS initiatives are as follows: {{PAGE_30}}

This "AI BPaaS" slide is highly significant as it illustrates SHIFT's AI strategy in action: practicing AI-driven operational efficiency internally and then offering it as a new service . The concrete figure of 110 personnel worth of operational efficiency achieved through back-office AI-fication highlights the substantial cost-saving potential of AI adoption. Furthermore, the strategic intent to establish new revenue streams by offering this internal know-how as an external AI BPaaS service is evident. This demonstrates that SHIFT's AI technology contributes not only to revenue expansion but also to productivity improvement and new business creation .

Capital Policy and Future Outlook

SHIFT prioritizes organic growth in the AI era, with M&A primarily focused on platform building using external capital. For capital allocation by FY2028, the company is committed to allocating 80% to strengthening the balance sheet and a total return ratio of 20% (10% payout ratio and flexible share buybacks).

For FY2027, the company aims for revenue of 190-200 billion JPY and adjusted operating profit of 25.5-30 billion JPY . Plans include a significant increase in sales personnel in Q4 to expand Native AI acquisition.

Conclusion

SHIFT's Q3 FY2026 earnings report highlights explosive growth in AI-related businesses and a consequent upward revision of the full-year revenue forecast . While there was a temporary decline in utilization rates and a downward revision of profits due to impairment losses, core operating profit is progressing as planned, with efficiency gains and high profitability driven by AI . The initiation of dividends and clarification of capital allocation policy demonstrate an increased focus on shareholder returns. Moving forward, the continued pursuit of AI-centric growth strategies and efficiency improvements will be crucial factors supporting SHIFT's sustained growth.