Eltes (3967) Q1 FY2027 Earnings Deep Dive Report: Carve-Out Strategy and Transition to a New Growth Stage

Eltes Co., Ltd. (Securities Code: 3967) has announced its financial results for the first quarter of the fiscal year ending February 2027. This quarter marked a pivotal period for the execution of its carve-out strategy, the improvement of its financial structure, and the transition to a new growth stage. While consolidated net sales and operating income reached record highs, net income temporarily fell into the red due to special losses associated with the carve-out. However, this is positioned as a strategic investment for future growth.

Earnings Highlights: Record Profits and Strategic Losses

For the first quarter of FY2027, consolidated performance showed net sales of 2,110 million yen (up 11.5% year-on-year) and operating income of 65 million yen (up 46.5% year-on-year), both reaching record highs. This was attributed to the robust growth of core businesses and the gains from the sale of carve-out target businesses. However, net income recorded a loss of 68 million yen. This loss was primarily due to special losses of 419 million yen incurred from the sale of JAPANDX and JDX Solutions. This special loss is considered a strategic step for portfolio restructuring and financial health improvement, and the full-year earnings forecast remains unchanged.

Eltes is advancing its portfolio optimization, having recorded a loss from the sale of two companies (JAPANDX and JDX Solutions) in Q1. However, the company aims to sell the remaining two companies (GioLing and PlayNext) within the current fiscal year, expecting the gains from these sales to offset the Q1 loss. This strategy aims for concentration on high-profit businesses and the soundification of the financial structure.

The historical performance trend is as follows: This slide illustrates the progress of the ongoing carve-out strategy. The special loss incurred in Q1 is positioned as temporary, with a clear strategy to aim for completion of sales within the current fiscal year for the remaining two companies, expecting the gains from these sales to exceed the Q1 loss. This signifies a crucial step towards future profitability improvement and portfolio optimization, demonstrating a commitment to pursuing long-term benefits over short-term losses.

Segment-Specific Performance: Core Business Growth and Black Ink for Peripheral Businesses

Looking at segment-specific performance, each segment categorized as a core business showed steady progress.

• Digital Security Business : Net sales were 688 million yen (down 1 million yen year-on-year), remaining largely flat, but operating income reached 215 million yen. Monthly Recurring Revenue (MRR) projects in the IRI business are steadily accumulating, and despite some cancellations of existing contracts, segment profit remained solid. Annual Recurring Revenue (ARR) for internal threat detection services (IRI) increased from 2.48 billion yen to 2.76 billion yen, and the number of internal threat detection service IDs increased from 282,000 to 330,000, indicating expansion of a stable revenue base.
• Physical Security Business : Net sales were 544 million yen (up 11.4% year-on-year), and operating income was 6 million yen. The adoption of DX promotion consulting plans is expanding, leading to an increase in orders from large enterprises.
• Other Peripheral Businesses : Due to the sale of two carve-out target companies, net sales significantly increased to 901 million yen (up 20.9% year-on-year). Furthermore, operating income reached 16 million yen, achieving profitability in Q1. This can be seen as a result of the structural reforms.

Financial Structure Improvement and New Capital Policy: Net Cash Position and Shareholder Returns

The carve-out strategy has significantly contributed to the improvement of the financial structure. Through the sale of JAPANDX and JDX Solutions, interest-bearing debt was substantially reduced from 3.7 billion yen at the end of February to 3.0 billion yen at the end of May. This enabled Eltes to transition from a net debt position to a net cash position, greatly enhancing its financial soundness.

The reduction in interest-bearing debt is shown below: This graph clearly illustrates how much the carve-out strategy contributed to the reduction of interest-bearing debt. Interest-bearing debt decreased from 3.7 billion yen at the end of February to 3.0 billion yen at the end of May, primarily due to the sale of JAPANDX and JDX Solutions. This significant reduction is crucial for improving the company's financial health and creating capacity for future growth investments and shareholder returns.

Against the backdrop of this improved financial structure, Eltes has decided on a new capital policy. The company plans to implement shareholder returns of approximately 500 million yen over the next three years, which is more than four times the amount of the previous fiscal year. To thoroughly improve EPS (earnings per share), Eltes will suspend new share issuance for three years and consider share buybacks and cancellations, thereby thoroughly preventing dilution. This clearly demonstrates a commitment to maximizing shareholder value.

Furthermore, cost reductions through office relocation are also underway, consolidating multiple office locations and significantly reducing total rent expenses. This is expected to result in annual cost savings of approximately 100 million yen, contributing to the strengthening of the financial base.

Growth Strategy and 3-Year Management Plan: Eltes Lean Transformation

As a future growth strategy, Eltes has set forth " Eltes Lean Transformation From Quantity to Quality " and is promoting a 3-year management plan. Under this plan, the company aims to achieve an operating profit margin of 12% or more, operating income of 900 million yen, and an equity ratio of 40% or more by the fiscal year ending February 2029.

To achieve these targets, the following seven key initiatives have been established:

1. Expansion of high-profit IRI business
2. Cultivation of new revenue sources
3. Portfolio restructuring (carve-out)
4. Drastic improvement of financial strategy
5. Strengthening of organization and IR
6. Operational excellence
7. Productivity improvement through AI utilization

These initiatives aim for sustainable growth and enhanced corporate value through concentration on high-profit businesses, sound financial structure, and overall organizational efficiency. In particular, the expansion of the IRI business will be a crucial pillar in establishing a competitive advantage in the digital security domain and securing stable revenue sources.

The progress of KPIs in the 3-year management plan is as follows: This slide provides a comprehensive overview of the specific KPI targets and current progress of the 3-year management plan, which is extremely important for understanding the execution status of Eltes' growth strategy. Specifically, financial targets such as operating profit margin and equity ratio, along with their current progress, are clearly presented. While still halfway to the targets for the fiscal year ending February 2029, areas of steady progress and areas requiring further strengthening are made visible, indicating strong management commitment towards achieving the plan.

Strengthening IR Activities and Future Outlook

Eltes is also focusing on strengthening its IR activities, aiming for a market capitalization of 10 billion yen on the Tokyo Stock Exchange Growth market. To achieve this goal by the fiscal year ending February 2029, the company is actively promoting information disclosure and engagement with investors.

This earnings announcement demonstrates a strong will to execute strategic portfolio restructuring and financial structure improvement, transitioning to a new growth stage. Although temporary special losses were recorded, these are viewed as upfront investments for future profitability improvement and shareholder value maximization. With robust growth in core businesses, a strengthened financial foundation, and a clear 3-year management plan, Eltes aims for sustained enhancement of corporate value.