Encourage Technologies Co., Ltd.

Business Details

The company's core business is the development and sale of security-focused packaged software centered on privileged ID management and system audit trail monitoring, while also offering Maintenance Support Service, Cloud Service, Consulting Service, and SIO On-site Service. Its main customers are domestic companies, with NTT DATA Corporation being its largest customer, accounting for approximately 19.7% of net sales (¥509,830 thousand in FY2026 (ending March 2026)). All sales are domestic, and the company maintains a financially sound business structure with zero interest-bearing debt and a capital adequacy ratio of 71.7%.

Recent Overview

Net sales and operating profit increased, but license sales fell significantly short of the plan, remaining a challenge

In FY2026 (ending March 2026), the company achieved higher sales and profit, with net sales of ¥2,584 million (up 3.3% year on year) and operating profit of ¥303 million (up 1.7% year on year). However, license sales, positioned as the most important initiative, came in significantly below the target of ¥700 million at ¥504 million (down 12.8% year on year). Amid a shift in customer preference toward cloud offerings, large-scale lost deals occurred in combined privileged ID management and audit trail management negotiations. As a countermeasure, development of "ESS AdminONE Cloud" began during the fiscal year, with provision starting from April 2026. Cloud Service (up 39.7% year on year) and Consulting Service (up 20.5% year on year) provided complementary support. Profit for the period decreased 3.4% year on year to ¥212 million due to an increase in income taxes (from ¥82 million in the prior period to ¥102 million in the current period). Sales dependence on NTT DATA declined from 22.2% in the prior period to approximately 19.7%.

Key Products

Growth Drivers

• Continued high growth in Cloud Service (up 39.7% year on year in FY2026 (ending March 2026)). The launch of "ESS AdminONE Cloud" in April 2026 is expected to accelerate the acquisition of customers with a preference for cloud offerings
• Significant increase in Consulting Service revenue (up 20.5% year on year), driven by continued progress on orders received in the prior period and an increase in new migration projects (migrations to ESS AdminONE and ESS REC 6)
• Stable growth in Maintenance Support Service (up 3.2% year on year), supported by high earnings stability from achieving a 96% maintenance renewal rate and expansion of the stock-type revenue base
• Expanding demand for information security investment against a backdrop of increasing cyberattacks and heightened internal fraud risk, including growing cases of ransomware attacks affecting supply chains and demand related to a security assessment system for supply chain reinforcement scheduled to begin at the end of fiscal 2026
• Strengthened product competitiveness and creation of upsell opportunities with existing customers through the launch of the latest versions of ESS REC 6 and ESS AdminONE
• Continued expansion of IT and software investment against the backdrop of a domestic IT talent shortage (software investment: planned to increase 7.8% year on year in fiscal 2025 and 2.7% in fiscal 2026)

Risks

• Risk of failing to achieve the license sales plan. In FY2026 (ending March 2026), license sales significantly missed the target of ¥700 million, coming in at ¥504 million (down 12.8% year on year). This marks the second consecutive fiscal year of missing the plan under the first medium-term management plan, making achievement in the third year (FY2027, ending March 2027) a key challenge
• Risk of substitution from licenses to cloud offerings. The trend of customers shifting their selection criteria toward cloud provision has intensified, resulting in lost large-scale deals. This affects the timing of flow-type revenue recognition and the overall revenue structure
• Cost increase pressures, including rising outsourcing unit costs and increased headcount from partner companies (average increase in personnel during the period), higher performance-linked bonuses, increased advertising expenses, and cost increases from a continued 6% wage hike. For FY2027 (ending March 2027), the company plans to reduce outsourced personnel from 71 to 53, a cut of 18, to secure funding
• Risk of concentration on a major customer. Sales dependence on NTT DATA Corporation is high at approximately 19.7% (¥509,830 thousand in FY2026 (ending March 2026)), and business trends at this company significantly affect the company's performance. There have been instances where lost deals in a distributor's system renewal (SI negotiations) directly led to a decline in license sales
• Risk of profit pressure from increased corporate taxes. Total income taxes for FY2026 (ending March 2026) increased significantly to ¥102 million (from ¥82 million in the prior period), resulting in a 3.4% year-on-year decrease in profit for the period. As deferred tax assets continue to be drawn down, the effective tax rate may continue to rise
• Decline in the capital adequacy ratio. Liabilities increased 22.9% year on year due to an increase in contract liabilities (advances received), among other factors, causing the capital adequacy ratio to decline from 75.4% to 71.7%