NSD: Major-bank system development expands; FY3/27 guidance raised

NSD develops and operates business systems for financial institutions and other customers. JII believes core-system replacement work at major banks and the expansion of existing projects are lifting revenue and profit from long-standing customers. In 1Q FY3/27, Financial IT revenue rose 14.7% YoY to ¥9.59bn and operating profit increased 13.2% to ¥1.80bn. Order backlog rose 23.6% YoY to ¥11.65bn. If projects progress as planned and backlog converts into revenue, it should support revenue growth this fiscal year.

Core systems at banks support day-to-day operations such as accounts, payments, and lending. Replacement projects require not only the development of new functionality but also the technical capability to migrate to the new system without disrupting existing operations. Engineers who have built up detailed knowledge of a client's workflows and legacy systems through long-term relationships can be deployed from proposal through development on follow-on projects. This accumulated understanding of client operations supports repeat orders.

On September 28, NSD raised FY3/27 revenue guidance by ¥2.0bn to ¥128.0bn and operating profit guidance by ¥0.6bn to ¥20.1bn. Revenue for April-August rose 9.7% YoY to ¥51.03bn. The key indicators for assessing the likelihood of achieving revised guidance are current revenue progress and the pace at which Financial IT backlog converts into revenue.

NSD develops software tailored to client operations and handles IT infrastructure build-out, operations, and maintenance. Of FY3/26 consolidated revenue of ¥117.81bn, system development for external customers accounted for approximately ¥100.1bn and the Solutions business approximately ¥17.7bn. System Development comprises Financial IT, Industrial IT, Social Infrastructure IT, and IT Infrastructure, with Financial IT the largest by revenue.

Financial IT provides business systems for banks, insurers, securities companies, and other financial institutions. For major banks, core-system replacement and expansion of existing projects contributed to revenue growth from FY3/26 through 1Q FY3/27. Engineers involved from requirements definition through operations and maintenance accumulate knowledge of each client's specific workflows and legacy systems. Being able to deploy those engineers to the same client's next development project supports repeat business.

According to the 2025 Integrated Report, NSD has relationships of 10 years or longer with more than 80% of its top 50 customers. Losses on unprofitable projects averaged just 0.04% of revenue over the past three years. NSD reviews project profitability at order intake, estimates costs for each project, and manages quality at every stage. Its understanding of client operations supports follow-on orders, while disciplined project management helps protect profitability.

In 1Q FY3/27, consolidated revenue rose 9.6% YoY to ¥29.93bn and operating profit increased 17.4% to ¥4.18bn. Gross profit rose 15.2% to ¥7.21bn, outpacing the 12.3% increase in SG&A expenses. Operating profit increased by ¥0.62bn on revenue growth of ¥2.63bn, a ratio of approximately 23.5%. Higher earnings in Financial IT and a narrower operating loss in Solutions both lifted consolidated operating profit.

Financial IT revenue increased ¥1.23bn YoY to ¥9.59bn, while operating profit rose ¥0.21bn to ¥1.80bn. Revenue from major banks, classified by end-customer industry, also increased 17.1% YoY to ¥4.47bn. Financial IT figures are reported by business segment and include intersegment transactions, whereas major-bank revenue is external revenue classified by end customer, so the two cannot be added together. Although the scopes differ, both Financial IT overall and business with major banks recorded revenue growth.

Consolidated order backlog at the end of June 2026 rose 11.5% YoY to ¥31.97bn. Financial IT accounted for ¥11.65bn, or 36.4% of consolidated backlog. If projects progress as scheduled, this backlog should be recognized as revenue over subsequent quarters. By contrast, 1Q Financial IT order intake increased just 1.4% YoY to ¥7.22bn. Future order intake will be the key indicator for judging the persistence of replacement demand.

Solutions revenue rose 18.9% YoY to ¥4.07bn in 1Q. Healthcare increased 38.8%, Security 17.8%, and Shareholder-related Services 21.8%. The business posted a ¥0.07bn operating loss because of costs associated with strengthening its sales organization, but the loss narrowed from ¥0.22bn a year earlier. The next point to watch is whether continued revenue growth is sufficient to move the business into operating profit.

Source: material 2 (pp. 4-11).

The company guidance raised on September 28 calls for FY3/27 revenue of ¥128.0bn, operating profit of ¥20.1bn, and net income attributable to owners of the parent of ¥13.3bn. NSD cited core-system replacement and expansion of existing projects in Financial IT, as well as security product sales in Solutions, as the reasons for the revision. Revenue for April-August rose 9.7% YoY to ¥51.03bn. The pace at which Financial IT backlog converts into revenue will be important in judging revenue growth for the full year.

Revised guidance implies an FY3/27 operating margin of 15.7%, below the 16.2% achieved in FY3/26. The company plans to invest in employee development and R&D in AI and solutions, while deploying more staff to earlier project stages. In 1Q, gross profit growth outpaced the increase in SG&A expenses, lifting the consolidated operating margin from 13.0% a year earlier to 13.9%. For the full year, operating profit growth will depend on the extent to which higher gross profit from revenue growth can absorb these upfront investments.

Under its medium-term management plan, NSD aims to increase System Development revenue from approximately ¥100.8bn in FY3/26 to ¥124.0bn in FY3/29. Both figures are before elimination of intra-group transactions, so the scope differs from the external-customer revenue cited above. To expand orders at earlier project stages, including requirements definition and consulting, the company plans to increase consulting-related staff from 40 to 70 and develop more project leaders. If NSD can engage with existing customers from the conceptual planning stage of their next system investment and win more end-to-end development projects, such work could provide replacement revenue once the current bank replacement projects run their course.

Sources: material 2 (p. 5), material 3 (p. 13), material 5 (pp. 15-18 and 24), and materials 7 and 8.

Operating cash flow was ¥16.16bn in FY3/26, while free cash flow, defined here as operating cash flow plus investing cash flow, was ¥13.07bn. Cash and deposits stood at ¥29.48bn at the end of June 2026. JII believes this level of cash generation and on-hand liquidity leaves room to continue shareholder returns while investing in employee development and R&D.

On September 28, NSD raised its FY3/27 annual dividend guidance from ¥97 to ¥100 per share. Based on company guidance, the payout ratio is 56.7% and the total payout ratio including share repurchases is 71.6%. Of the share repurchase of up to ¥2.0bn authorized in May, the company had acquired ¥1.42bn by the end of August. It also plans to cancel 3.0mn treasury shares on October 16. The key issue is whether NSD can use operating cash flow to fund investment in people and R&D while continuing shareholder returns.

Using the September 30, 2026 closing price of ¥2,946.5 and shares outstanding excluding treasury stock as of August 31, JII estimates market capitalization at ¥222.32bn. Subtracting June-end cash and deposits of ¥29.48bn gives EV of ¥192.84bn, equivalent to 9.6x FY3/27 company-guided operating profit of ¥20.1bn. Based on the same share price and company guidance, forecast P/E is 16.7x and the forecast dividend yield is 3.4% on annual dividend guidance of ¥100 per share. Average daily trading value over the 60 trading days through September 30 was approximately ¥0.81bn.

Dividing current EV by the company's FY3/29 operating profit target of ¥23.4bn gives 8.2x. This is a reference figure that holds the September 30 share price and June-end cash balance constant and assumes the company achieves its plan. JII believes valuation will depend on whether backlog conversion translates into operating profit growth and how long follow-on development and work at earlier project stages continue after the current replacement projects.

Financial IT order intake and backlog are key indicators for judging the persistence of orders related to core-system replacement. In 1Q, order intake rose just 1.4% YoY, while backlog increased 23.6%. If order intake growth accelerates at the next interim results and backlog remains high, that would provide further evidence that replacement and follow-on development work at existing customers is continuing.

Financial IT margins are important in assessing the economics of large projects. The 1Q operating margin was 18.8%, close to 19.0% a year earlier. The medium-term plan calls for developing more project leaders and strengthening coordination with partner companies. If NSD can secure the people needed to expand projects and absorb staffing costs through higher revenue, Financial IT earnings growth should lift consolidated operating profit.

Over the medium term, the key question is whether NSD can win work at earlier project stages and new system development from existing bank customers. The company plans to increase consulting-related staff from 40 to 70. If NSD becomes involved in more projects from the conceptual planning stage of customers' next system investments, it should be able to secure new development revenue even after the current replacement projects run their course.