Risk Factors

The following are some of the major risks that may have a significant impact on investors’ decisions regarding financial circumstances, operating results, and cash flow of Group businesses.
Forward-looking statements in this text are based on the group’s judgment as of June 30, 2024.

I.Matters Related to Business Environment

(1) Changes in the business environment in the information services industry

In recent years, the information services industry of which our group is a part has been experiencing changes in business conditions and needs due to intensifying service and price competition, rapid technological innovation such as the shift to cloud computing, and changes in our customers’ business environments.
The information services industry is characterized by low barriers to entry, as large facilities and equipment are not required, and it is relatively easy for a small number of people to start a new business. In addition, the information services industry is highly sensitive to economic conditions, and when the Japanese economy is sluggish, customers’ IT investments tend to decline.
In order to adapt to these changes, the group is actively expanding its business domain into areas using new technologies such as cloud computing and securing personnel with highly specialized skills by hiring new graduates and mid-career workers through systematic recruitment activities. However, in the event the business environment surrounding the group changes rapidly due to significant changes in economic conditions or other factors, our business performance may be affected.

Ⅱ.Business Activities

(1) Form of contract for system development

The group develops systems that meet the individual needs of its customers. Contracts for system development can be in the form of a work contract to undertake development, a quasi-mandate contract to utilize specialized knowledge to execute the work, or a dispatch contract to dispatch engineers. Work contracts have the potential for high profit margins depending on the group’s cost management, while quasi-mandate and dispatch contracts can be expected to generate stable profit margins. However, since the profitability of projects under work contracts is largely determined by the group’s management capabilities, if for some reason the group’s project management is compromised, the group’s business results may be affected.

(2) Project profitability

In recent years, the group’s policy has been to increase the number of large-scale projects, requiring more precise project management. The group manages system development we have taken on under contract with our own management methods from the angles of quality, periodic cost, and risk control. When we undertake a project, we prepare a project plan and identify resource and profitability risks. For projects exceeding a certain amount, the Management Division reviews progress and profitability and provides management support at each phase, including proposal of estimates, contract consummation, and acceptance inspection.
However, as projects become more complex and larger in scale, and with deadlines becoming shorter, even projects that were expected to be profitable at the time the contract was awarded and were managed using the above methods may not be able to achieve the planned quality or may not be completed within the development period due to a significant change in specifications during development, resulting in an increase in man-hours beyond the initial estimate. In such cases, there is a possibility of cost increase. Therefore, if the required man-hours and costs cannot be accurately estimated at the time the order is received, there is a possibility that the project will result in low profitability or fail to break even.
Furthermore, orders for the training of inexperienced employees and for the acquisition of new fields and technologies may be unprofitable in the short term.
The managers of each division check the progress of small-lot projects, including those mentioned above, using the company’s piece-work management system in a timely manner. If a project continues to be unprofitable, we may employ strategies to improve profitability such as order price adjustments. However, if unprofitable small-lot projects accumulate to a greater extent than expected, the Group’s business results may be affected.
In addition, for large projects, the group may incur late damage charges if the work is not completed or delivered by the deadline predetermined with the client, or compensation for damages if the work is ultimately not completed or delivered, which may affect the group’s business performance.

(3) Impact on the business forecast due to changes in the estimate of total project costs

For development projects undertaken by the group, the group recognizes revenue based on the degree of progress in satisfying performance obligations to the customer as it proceeds with development work based on the contract. Progress toward fulfillment of performance obligations is determined primarily by the ratio of the cost incurred through the end of the consolidated fiscal year to the estimated cost of the project (the cost-to-cost method). 
However, as projects become more complex and larger in scale, and with shorter delivery times, changes in specifications from the initial plan and other factors may necessitate a review of the number of man-hours spent on labor and subcontracting costs. While we conduct regular management of progress on each project and have a system in place to promptly deal with changes, in the event we are forced to drastically revise our estimates of total project costs due to changes in specifications or other reasons, our Group’s business prospects may be affected.

(4) Business with major customers

Contracted system development is mainly contracted either directly from the end users who actually use the systems or through other system integrators (Slers). We will continue to pursue a business strategy of increasing the percentage of contracts directly from end-users, which has a higher profit margin because we do not go through other Sler companies.
In the fiscal year ending June 30, 2024, the company’s largest customer accounted for 5.6% of total sales, meaning that the company’s performance is not greatly influenced by the trends of any particular customer. We are striving to build stable and continuous business relationships with our major customers by forming a good personal network. Among the customers that recorded turnover in FY6/2023, 84.3% continued to record turnover in FY6/2024. At the same time, we are also cultivating relationships with new customers.
However, failure to build relationships with major customers or to expand to new customers smoothly could affect the group’s business results.

(5) Cooperation with partners

In its business operations, the group has established a system of collaboration with various partners, including subcontractors. 
In the fiscal year ending June 30, 2024, subcontracting costs accounted for 39.8% of the group’s total production costs, and the presence of subcontractor personnel has an important place in the continuation and expansion of our business. In addition, the appointment of subcontractors is based on long-term relationships of trust among engineers and between companies. Since having more business partners enables us to undertake more projects, we recognize the importance of securing business partners with strong technical capabilities going forward.
However, if we are unable to secure these partners in a timely and appropriate manner, or if there is a change in the relationship, the launch or execution of projects or the provision of services may be impeded, which may affect the group’s business performance.

(6) Securing and developing human resources

ⅰ.Securing and developing human resources
The group differentiates itself from its competitors by providing advanced technological capabilities, but it is the technical staff that supports this differentiation, and for this reason we consider the securement and training of excellent system engineers to be critical. To this end, the group is actively engaged in recruitment activities, and in addition to enhancing our education system to develop human resources and improve their practical skills, we also provide in-house training to improve project management skills to enable management of large-scale projects.
We also make efforts to arrange for the right person whether in-house or outsourced with respect to specific placements. However, if it becomes difficult for the group to secure the personnel it needs due to the increasing sophistication and complexity of projects or the nationwide labor shortage, our business performance may be affected by lost orders or a decrease in sales due to a reduction in the size of orders.

ⅱ.Long working hours
Structural problems and the high degree of subjectivity in the systems and processes of a service and system development provided by the group may result in long working hours and excessive workloads. In addition to establishing days to encourage employees to take paid leave, the company uses an attendance management system for overtime applications, to manage working hours, and share information with management. Despite these efforts, the occurrence of overwork and health problems resulting from such excessive workloads, the filing of lawsuits as a result of such problems, or a decline in productivity could affect the group’s performance.

(7) Operation of data centers, etc.

The group operates an outsourcing business that provides operation and maintenance services focused on the data center. 
The development of data centers requires not only initial capital investment but also ongoing capital investment to ensure stable maintenance and operation of services, such as in the cases of aging facilities and facility expansion in response to increased demand. In addition, if demand from customers is weak for the resources we have, the utilization rate of our facilities may decline and profitability may wane. To this end, the group works to maintain its competitiveness by enhancing and updating its equipment and strengthening security. However, if facility operating conditions deteriorate due to intensified competition or other factors, the group’s business results may be affected.

(8) Data center failures

The group provides data center services such as hosting and housing. We take various measures to ensure the stable operation and maintenance of services, such as continuous enhancement and renewal of facilities, strengthening of security, and enhancement of training for operation engineers. However, in the event of equipment failure, cyber attacks, or operational errors despite these measures, the provision of services may be severely disrupted, and the group’s business performance may be affected by compensation for damages or loss of trust.

(9) New business

The group’s main business is contracted system development, outsourcing of data center operations and maintenance, and the development and sale of in-house products (software). However, in order to diversify our sources of revenue, we aim to actively develop services that have the potential to be highly profitable and to become symbols of our technological capabilities, while carefully examining our group’s risk tolerance.
Nevertheless, the development of a new business may involve a large upfront cost, and the failure of a new business developed by our group to progress as planned in the future may affect our group’s business performance.

(10) M&A

One of the group’s future management strategies is to enhance its technological capabilities and expand its customer base through corporate acquisitions and capital tie-ups. Although the group intends to acquire these assets at a suitable price after conducting prior legal and financial research, there is no guarantee that these investment activities will produce the results the group anticipates.
At the time of an acquisition or capital tie-up, if the synergies initially anticipated do not materialize, or if impairment losses are required due to deterioration in the earnings prospects of the acquired capital tie-up partner, the group’s business results may be affected.

Ⅲ.Other matters

(1) Information security

In the course of its business operations, the group retains personal information and other confidential information of customers, employees, and other parties. The group takes the utmost care in the protection of such information and promotes measures such as conducting internal audits to objectively evaluate and verify its handling. In December 2010, we obtained ISO/IEC27001 (ISMS: Information Security Management System) certification, and established an Information Security Committee within the company to establish various policies and related regulations. In addition, the company has established specific numerical targets for information security and conducts regular employee training. However, if in spite of these measures a leak of personal or confidential information were to occur, the group’s credibility would be damaged and compensation for damages would be paid, which could affect the group’s business performance.

(2) Intellectual property rights

As products and technologies become more complex with the development of the information services industry, the group may be subject to lawsuits or claims from third parties for infringement of intellectual property rights for the services or products it provides. For this reason, the group has established relationships with patent firms and conducts infringement searches as necessary, in addition to an in-house position in charge of conducting searches. Based on our awareness that intellectual property held by the group is an important corporate asset, we file applications after thoroughly examining their necessity, and we also collaborate with patent firms to be prepared in a case of rights infringement. 
However, if we were to be sued for infringement of intellectual property rights, or if we were required to file a lawsuit to protect our intellectual property rights, it could cost us time, money, and other management resources. Depending on the outcome of the lawsuit, we may be unable to use our key technologies, or we may be found liable for damages, which may affect the group’s business performance.

(3) Impairment of investments

The group recognizes an impairment on an investment when it determines that the investment has declined significantly in value and is unlikely to recover. The company’s consolidated subsidiaries and other unlisted companies are considered to have no possibility of recovery if their net asset values have fallen significantly below their acquisition prices due to deterioration in the financial condition of the relevant companies and the possibility of recovery cannot be supported by sufficient evidence through business plans and other means. Therefore, if future deterioration of market conditions, poor performance of consolidated subsidiaries, or other factors result in losses not reflected in the current book value or the inability to recover the book value of investments and impairment of investments is required, the group’s business results may be affected.

(4) Natural disasters

The group’s business may be affected by a large-scale natural disaster over a wide area if the group is unable to promptly restore or continue to provide its head office functions, important services provided by the group, or businesses operated by its partners and others. n preparation for this, the group is taking measures such as formulating a business continuity plan (BCP), establishing a safety confirmation system, and conducting disaster drills. In addition, the group’s data centers are seismically isolated or earthquake-resistant, equipped with uninterruptible power supplies that use in-house power generation, and have strong security. 
However, the group’s business performance may be affected if the impact of a large-scale natural disaster exceeds our expectations, and the aforementioned measures are unable to completely prevent the effects.

(5) Risks related to infectious diseases

Under the assumption that a threat such as a government-issued declaration of a state of emergency due to the spread of an infectious disease or a cluster (group of infected persons) within a business site may materialize, the group has established a COVID-19 response policy in order to respond promptly in the event of an emergency. In addition to taking into consideration the safety of clients, partners, employees, and other business associates, the company strives to implement systems and other measures to enable employees to work from home. However, if business and order-taking activities are hindered or productivity is reduced by the closure of offices or telecommuting due to an outbreak, the group’s business performance may be affected.

(6) Regulations and business licenses

Our group operates a worker dispatch business, mainly in the system integration business, in which our Group’s employees are dispatched to client companies based on dispatch contracts, and is licensed by the Minister of Health, Labour and Welfare as a general worker dispatch business with the details shown in the table below. Therefore, the relevant laws and regulations such as the Act on Ensuring Proper Operation of Worker Dispatching Businesses and Protection of Dispatched Workers (hereinafter referred to as the “Worker Dispatching Act”) are applied.
The group strives to comply with the Worker Dispatching Act through employee training and monitoring by the Internal Audit Office. However, in the event of a disqualification as a dispatch business owner or violation of laws and regulations, the group’s social credibility may be damaged and the group’s business performance may be affected.

License detailsAcquisition date
Regulatory authority
License number
Expiration date
System Support Inc.Worker Dispatch BusinessFebruary 1, 2006
Ministry of Health, Labor and Welfare
Dispatch 17-300039
January 31, 2024
T4C Co., Ltd.Worker Dispatch BusinessFebruary 1, 2018
Ministry of Health, Labor and Welfare
Dispatch 13-309181
January 31, 2026

(7) Interest rate fluctuation risk and financing risk

The group raises funds mainly through bank loans, which are affected by fluctuations in interest rates.The group’s business results may be affected if we are unable to absorb the increased costs associated with higher interest rates through our business activities.
Although we currently have a good relationship with financial institutions and have been able to procure the necessary funds without problems, there is no guarantee that we will continue to be able to do so in the future.