NSD : 2Q Financial Results - Year ending March 31, 2024

October 31, 2023

Appendix to "Consolidated Summary Report"

for the Second Quarter of the Fiscal Year Ending March 31, 2024 (under Japanese GAAP)

	Table of Contents
1. Results of Operations and Financial Conditions	2
(1)	Operating Results	2
(2)	Financial Conditions	5
(3)	Information on Financial Forecasts	5
2. Quarterly Consolidated Financial Statements and Notes	7
(1)	Quarterly Consolidated Balance Sheets	7
(2)	Quarterly Consolidated Statements of Income and Quarterly Consolidated Statements of
	Comprehensive Income	9
(3)	Quarterly Consolidated Statements of Cash Flows	11
(4)	Notes to Quarterly Consolidated Financial Statements	12
	Notes on Premise of Going Concern	12
	Notes on Substantial Changes in the Amount of Shareholder's Equity	12
	Application of Accounting Methods Specific to Quarterly Consolidated Financial Statements ...	12
	Segment and Other Information	12
	Revenue Recognition	14

―1―

1. Results of Operations and Financial Conditions

(1) Operating Results

【Business Environment】

During the second quarter under review, the Japanese economy remained on a gradual recovery trend, as inbound consumption and other personal consumption recovered along with the normalization of social and economic activities, and corporate performance and employment conditions also showed signs of improvement, despite uncertainty about the future due to inflation and the depreciation of the yen. However, there are also concerns about the risk of an economic downturn, such as the situation in Ukraine and the Middle East and the slowdown in overseas economies, and it is necessary to pay close attention to future trends.

Under these circumstances, in the information service industry, where the NSD Group operates, the environment for orders remained favorable, with strong demand for IT investment in digital transformation (DX) and for core system renewal.

【Measures During the Second Quarter Under Review】

The NSD Group adopted the five-yearMedium-term Management Plan beginning in the fiscal year ended March 31, 2022, with the aim of becoming a corporate group with consolidated net sales of more than 100 billion yen during the period of the plan.

To achieve these performance targets, the Group is pursuing the sustainable expansion of the System Development Business, with the development of systems related to new technologies and DX, for which there are ever-increasing social needs, as a growth driver. In addition, to make the Solution Business its second earnings pillar, the Group is creating new solutions and bolstering its sales capabilities.

In addition to above organic growth, the Group is also pursuing non-organic growth to deal with the growing shortage of system engineers (SE) and to enhance its lineup of solutions. Under the current Medium-term Management Plan, the Group has prepared 20 billion yen in M&A funds.

In April, the Group increased the number of SE by more than 400 by making ART Holdings Co., Ltd. the Group's subsidiaries, which have strengths in the System Development Business. ART Group, with ART Holdings Co., Ltd. as its holding company, is headquartered in Fukui Prefecture and has a customer base consisting of major blue-chip companies in the insurance, credit card, electrical, electronics, and automotive industries, as well as high-quality human resources as a local blue-chip company.

In May, the Group made NHOSA Corporation, which has strengths in the dental system business, a subsidiary and enhanced its solutions in the medical field, such as receipt computer systems for dentists and dialysis business support systems, to strengthen the Solution Business.

Regarding M&A, the Group has invested a total of 19.4 billion yen in three companies, including Trigger Inc. last year. However, since the shortage of SE and the expansion of solution lineup are still important issues, the Group will continue to engage in M&A if there are good investment opportunities.

―2―

【Operating Results】

Reflecting the high demands of IT investment, the operating results become as follows.

(Unit: Millions of yen)

	Second quarter	Second quarter
	ended	ended
		YoY
	September, 2022	September, 2023
System Development Business	33,793	42,743	8,949		26.5%
Solution Business	3,973	7,590	3,616		91.0%
Net sales	37,767	50,333	12,566		33.3%
New Core Business	13,424	21,530	8,106		60.4%
Operating income	5,970	7,365	1,395		23.4%
Ordinary income	6,012	7,412	1,399		23.3%
Net income attributable to owners	5,244	4,402	(841)		(16.0%)
of the parent
EBITDA	6,324	8,698	2,374		37.6%
EBITDA margin	16.7%	17.3%	0.5%		－

• New Core Business consists of System Development Business related to New Technologies and DX, and Solution Business.
• EBITDA is calculated by operating income + depreciation + amortization of goodwill.

Net sales increased by 33.3% year on year to 50,333 million yen as a result of the steady organic growth and business expansion by M&A. Net sales of New Core Business, which the Group focuses on, increased by 60.4% year on year to 21,530 million yen because of a significant increase in the System Development Business related to New Technologies and DX utilizing cloud technologies, and sales of new solutions.

Operating income increased by 23.4% year on year to 7,365 million yen absorbing the increase in expenses such as pay raise and amortization of goodwill. Ordinary income increased by 23.3% year on year to 7,412 million yen.

Net income attributable to owners of the parent decreased by 16.0% to 4,402 million yen due to recording gain on sale of shares of affiliates on extraordinary income in the previous year and the raise of effective tax rate resulting from the increase of amortization of goodwill, which is not subject to the tax effect.

―3―

【Operating Results by Segment】

Operating Results by Segment are as below.
(Net Sales by Segment)				(Unit: Millions of yen)
		Second quarter	Second quarter
		ended	ended
			YoY
		September, 2022	September 2023
System	Financial IT	11,966	15,300	3,333		27.9%
Industry &	16,855	21,871	5,015		29.8%
Development
Infrastructure IT
Business
IT Infrastructure	5,061	5,681	620		12.3%
	Construction
Solution Business	3,983	7,595	3,612		90.7%
Adjustment		(99)	(114)	(15)		－
	Total	37,767	50,333	12,566		33.3%
(Operating Income by Segment)				(Unit: Millions of yen)
		Second quarter	Second quarter
		ended	ended
			YoY
		September, 2022	September 2023
System	Financial IT	2,118	2,766		647		30.6%
Industry &	2,754	3,211		457		16.6%
Development
Infrastructure IT
Business
IT Infrastructure	886	934		48		5.4%
	Construction
Solution Business	318	612		293		91.9%
Adjustment		(108)	(159)		(51)		－
	Total	5,970	7,365		1,395		23.4%

• Numbers are written including inter-segment sales and incomes.
• Adjustments are the total of inter-segment sales eliminations and costs of whole company (mainly G&A costs which do not attribute to the segments).

Net sales increased by 27.9% year on year to 15,300 million yen due to a significant increase in orders from major banks, insurance companies, and credit card companies resulting from expansion of existing projects such as system renewal projects, as well as the effects of M&A of ART Group, and operating income increased by 30.6% year on year to 2,766 million yen.

Net sales increased by 29.8% year on year to 21,871 million yen due to a significant increase in orders from service, manufacturing, and commerce sectors, as well as the effects of M&A of ART Group and Trigger Inc. Operating income increased by 16.6% year on year to 3,211 million yen due to increase in amortization of goodwill.

―4―

Net sales increased by 12.3% year on year to 5,681 million yen due to a significant increase in orders of infrastructure construction projects from public sector and cloud computing projects from banks and insurance companies. Operating income slightly increased by 5.4% year on year to 934 million yen due to a rise in cost ratio, resulting from M&A.

New solutions through M&A related to medical/healthcare and RFID contributed significantly to business expansion, and existing solutions also expanded steadily, resulting in an increase of net sales by 90.7% year on year to 7,595 million yen, and operating income increased by 91.9% year on year to 612 million yen.

(2) Financial Conditions

【Conditions of Assets, Liabilities, and Net Assets】

Both total assets and liabilities in the end of this quarter increased due to consolidation of ART Holdings Co., Ltd. and NHOSA Corporation through M&A.

Total assets increased by 12,106 million yen from March 31, 2023 to 80,266 million yen due to 2,389 million yen increase of notes, accounts receivable, and contract assets, 3,346 million yen increase of land and buildings, 8,381 million yen increase of goodwill, 8,440 million yen increase of customer-related assets, 708 million yen increase of other intangible assets, 966 million yen increase of investments and other assets, while there was 13,060 million yen decrease of cash and deposits.

Liabilities increased by 10,056 million yen to 22,757 million yen due to 685 million yen increase of accounts payable, 1,888 million yen increase of short-term borrowings (including long-term debt which are scheduled to be repaid within one year), 1,403 million yen increase of provision for bonuses, 1,686 million yen increase of long- term debt, and 3,305 million yen increase of other non-current liabilities.

Net assets increased by 2,049 million yen to 57,508 million yen due to 4,402 million yen increase resulting from net income attributable to owners of the parent company, 969 million yen increase resulting from repurchase and disposal of treasury stock, 793 million yen increase resulting from non-controlling interests, while there was 4,381 million yen decrease resulting from dividend payout.

【Conditions of Cash Flows】

Cash and cash equivalents in the end of this quarter were 25,225 million yen, decreased by 13,072 million yen from the end of the previous consolidated fiscal year.

Cash flows from operating activities were inflows of 6,486 million yen mainly due to 7,410 million yen inflow of income before income taxes.

Cash flows from investing activities were outflows of 15,556 million yen due to 15,292 million yen outflow of acquisition of its shares of subsidiaries resulting in the change in scope of consolidation.

Cash flows from financing activities were outflows of 4,108 million yen due to 4,381 million yen outflow of dividend payout and 1,400 million yen inflow of sales of treasury stock.

(3) Information on Financial Forecasts

Net sales and profits exceeded the original forecast due to favorable business environment in this second quarter. Given that favorable order environment is expected to continue in the third quarter and beyond, we revise the

financial forecast for full-year upward.

―5―

(Full-year Consolidated Financial Forecast of Fiscal Year Ending March 31, 2024)

			Operating	Ordinary	Net Income	Net Income
		Net Sales	Attributable to
		Income	Income	Owners of the	per Share
					Parent
		Millions of yen	Millions of yen	Millions of yen	Millions of yen	Yen
Previous Forecast	( Ａ )	97,000	14,000	14,000	8,700	113.18
Revised Forecast	( Ｂ )	101,000	15,000	15,100	9,800	127.24
Increase/Decrease (Ｂ－Ａ)	4,000	1,000	1,100	1,100	－
Percentage Change		4.1%	7.1%	7.9%	12.6%	－
(Ref.) Results of		77,982	12,524	12,662	10,219	132.31
FY March 2023

―6―

2. Quarterly Consolidated Financial Statements and Notes

(1) Quarterly Consolidated Balance Sheets

				(Unit: Thousands of yen)
		As of March 31, 2023		As of September 30, 2023
Assets
	Current assets
	Cash and deposits	38,366,801		25,306,093
	Notes, accounts receivable, and contract assets	16,077,460		18,466,885
	Securities	-		200,520
	Merchandise and finished goods	189,871		376,989
	Work in process	4,025		24,127
	Raw materials and supplies	10,698		183,538
	Other current assets	505,137		855,942
	Allowance for doubtful accounts	(34,700)		(41,475)
	Total current assets	55,119,293		45,372,621
	Non-current assets
	Property and equipment
	Buildings and structures, net	632,491		1,576,728
	Land	196,186		2,598,898
	Other property and equipment, net	488,895		498,084
	Total property and equipment	1,317,573		4,673,712
	Intangible assets
	Goodwill	2,582,414		10,963,729
	Customer-related assets	-		8,440,219
	Other intangible assets	593,871		1,302,395
	Total intangible assets	3,176,285		20,706,345
	Investments and other assets
	Investment securities	1,668,765		1,660,526
	Other assets	6,878,817		7,853,627
	Allowance for doubtful accounts	(783)		(812)
	Total investments and other assets	8,546,799		9,513,341
	Total non-current assets	13,040,659		34,893,398
	Total assets	68,159,952		80,266,020

―7―

(Unit: Thousands of yen)

As of March 31, 2023

As of September 30, 2023

Liabilities

Current liabilities

Accounts payable

Short-term borrowings

Long-term debt scheduled to be repaid within one year

Income taxes payable

Provision for bonuses

Provision for bonuses for directors and other officers

Provision for shareholder benefit program

Provision for loss on order received

Provision for product warranties

Other current liabilities

Total current liabilities

Non-current liabilities

3,952,554	4,637,773
-	1,250,000
-	638,835
2,929,594	3,062,691
477,113	1,880,736
-	24,000
69,089	134,335
3,097	1,749
3,943	-
3,688,273	4,108,444
11,123,665	15,738,565

		Long-term debt	-	1,686,079
		Accrued retirement benefits for directors	-	15,021
		and other offices
		Retirement benefit liabilities	955,696	1,390,966
		Other non-current liabilities	621,843	3,926,868
		Total non-current liabilities	1,577,540	7,018,935
	Total liabilities	12,701,206	22,757,500
Net assets
	Shareholders' equity
		Capital stock	7,205,864	7,205,864
		Capital surplus	6,773,912	7,458,877
		Retained earnings	51,070,853	51,092,343
		Treasury stock	(12,144,105)	(11,859,647)
		Total shareholders' equity	52,906,525	53,897,438
	Accumulated other comprehensive income
		Net unrealized gains or losses on available-	575,729	685,962
		for-sale securities
		Revaluation reserve for land	(8,682)	(8,682)
		Foreign currency translation adjustments	362,955	513,080
		Remeasurements of retirement benefit plans	872,811	877,838
		Total accumulated other comprehensive	1,802,813	2,068,198
		Income
	Non-controlling interests	749,407	1,542,882
	Total net assets	55,458,746	57,508,519
Total of liabilities and net assets		68,159,952	80,266,020

―8―

(2) Quarterly Consolidated Statements of Income and Quarterly Consolidated Statements of Comprehensive Income

Quarterly Consolidated Statements of Income (Cumulative)

					(Unit: Thousands of yen)
				Second quarter ended	Second quarter ended
				September 30, 2022	September 30, 2023
Net sales	37,767,231	50,333,920
Cost of sales	29,521,743	38,251,898
Gross profit	8,245,488	12,082,021
Selling, general and administrative expenses
	Salaries and allowances		819,557	1,343,379
	Provision for bonuses		106,030	208,471
	Provision for bonuses for directors and other officers		15,300	24,000
	Provision for retirement benefits for directors and		-	1,397
	other officers
	Retirement benefit expenses		22,244	42,580
	Welfare expenses		232,667	366,229
	Rental expenses		186,620	308,351
	Depreciation expenses		44,149	492,031
	Research and development expenses		62,969	107,343
	Amortization of goodwill		130,169	620,452
	Provision for shareholder benefit program		60,746	69,530
	Other		594,966	1,132,773
	Total selling, general and administrative expenses		2,275,422	4,716,540
Operating income		5,970,065	7,365,481
Non-operating income
	Interest income	2,764	3,039
	Dividend income		23,283	21,588
	Surrender value of insurance policies		643	39,691
	Other		39,710	43,892
	Total non-operating income		66,402	108,212
Non-operating expense
	Interest expenses	4,216	10,198
	Investment losses on equity method		15,784	-
	Foreign exchange loss		-	17,184
	Commission paid		1,599	21,265
	Other		2,332	12,240
	Total non-operating expenses		23,932	60,889
Ordinary income		6,012,536	7,412,805
Extraordinary income
	Gain on sale of shares of subsidiaries and affiliates	1,605,352	-
	Other		413	-
	Total extraordinary income		1,605,765	-
Extraordinary loss
	Loss on sales of investment securities	-	2,238
	Loss on valuation of golf club membership		21,641	-
	Other		21,071	-
	Total extraordinary losses		42,712	2,238
Income before income taxes		7,575,588	7,410,566
Income taxes	2,287,418	2,900,489
Net income	5,288,169	4,510,077
Net income attributable to non-controlling interests	44,016	107,088
Net income attributable to owners of the parent company		5,244,153	4,402,989

―9―

Quarterly Consolidated Statements of Comprehensive Income (Cumulative)

		(Unit: Thousands of yen)
	Second quarter ended	Second quarter ended
	September 30, 2022	September 30, 2023
Net income	5,288,169	4,510,077
Other comprehensive income
Net unrealized gains or losses on available-for-	59,168	111,495
sale securities

Foreign currency translation adjustments

Remeasurements of retirement benefit plans

Share of other comprehensive income of equity- method affiliates

170,430	155,968
23,477	5,026
4,121	-

Total other comprehensive income

Comprehensive income

(Composition)

Comprehensive income attributable to owners of the parent company Comprehensive income attributable to non-controlling interests

257,197272,490

5,545,3674,782,568

5,497,7294,668,374

47,637114,194

―10―