Business Risks

Information regarding our business and accounting conditions that may have a significant impact on investors’ decisions are described below. This section contains forward-looking statements that are based on our judgment as of the date of submission of this annual securities report.

1. Risks Associated with Business Activities

1. 1.

   Risks Associated with Changes in the Business Environment and Intensified Competition in the Information Services Industry

   The information services industry continues to grow due to the demand for restructuring and adding functions to existing systems using new IT technologies (AI, 5G, RPA and cloud services, etc.) to solve the 2025 problem, in addition to improving operational efficiency against a backdrop of labor shortages. While we have been working to secure orders from a wide range of industries by taking advantage of our advanced technological capabilities and the breadth of services we provide, a sluggish or worsening economy could affect our business performance as client companies reduce their investments in information technology.

2. 2.

   Risks Associated with Changing Client Needs

   In our market, which is related to the information services industry, there is an ongoing trend of “selection and concentration” due to the harsh business climate. In particular, user companies are switching to the use of external resources (outsourcing) for the development and operation of information systems. In contrast, our client base has adopted a strategy to avoid dependence on the total outsourcing of system planning, system development, and system operation and maintenance. To support this strategy, we are proposing and developing systems that take into consideration the systemization policies of our client base. If our client base changes their policies to use external resources in response to changes in circumstances or other factors, we will make every effort to secure orders from outsourcing partners; however, the success of these efforts may have an impact on our business performance.

3. 3.

   Risks Associated with Changes in the Sales Composition of Our Top 10 Clients

   Our main business is software development, and our aim is not the diversification of related businesses but the integration and distribution of the development field. Our basic business policy is to obtain orders for large-scale systems and develop business partners in a wide range of industries to maintain stable and high profits and ongoing business transactions. Regarding this policy, sales tend to be concentrated among our top 10 clients, which have accounted for 67.2%, 67.4%, and 65.8% of our net sales for the past three years, FY2020, FY2021, and FY2022, respectively.

   Since the top 10 companies in each period are not fixed, we believe our risk is lower than that of our manufacturer- or user-related counterparts. While we will continue our diversification efforts, fluctuations in the sales of our top 10 clients may affect our business performance if we are unable to achieve this goal.

4. 4.

   Risks Associated with Bad Debt

   We receive orders for software development from many of our clients on a contract basis. As payments for these orders are collected after the software products have been accepted, the financial deterioration of our clients may delay or make it difficult for us to collect the receivables, which may have an impact on our business performance. In accordance with our regulations on accounts receivable management, we conduct credit checks and establish credit limits for each customer prior to each transaction, as well as manage due dates and outstanding balances. Additionally, we conduct an annual review of credit status to identify and mitigate collection concerns due to deteriorating financial conditions and other factors.

2. Software Development Risks

1. 1.

   Risks Associated with Proprietary Technology

   Software technology in the information service industry is evolving at a breakneck pace, and while a variety of elemental technologies continue to emerge, it is difficult to discern which of these will see immediate demand from the market and which are transient fads. We have formed a team across sales, manufacturing, and research divisions to determine the nature of technologies and market trends. However, our business performance may be affected if we misjudge the rate of market demand or the selection of available technologies.

2. 2.

   Risks Associated with Product Liability

   Many of the systems we develop are deeply involved in social infrastructure. From the outset of product development, we have a quality assurance system based on our quality management system in place to guarantee product quality and avoid or reduce contract-related risks. Nevertheless, if a product defect results in product liability, our business performance could be affected.

3. 3.

   Risks Associated with the Establishment of Information Systems

   In the software development projects that we receive based on order contracts, it is sometimes assumed that the customer will use cloud services or packaged software for cost reduction or short-term development purposes. In this case, misreading the gap between cloud services or packaged software and the level of business required by the client may affect the accuracy of our development plan, resulting in a decline in profitability.

   In order to limit the occurrence of unprofitable projects, we estimate production based on our proprietary production management system (ACTUM), and we also forecast production results and remaining work against the production plan in a timely manner to detect and take early measures against potentially unprofitable projects. However, in spite of these measures, our business performance may be affected if unprofitable projects occur.

4. 4.

   Risks Associated with Fluctuations in Order Volume

   We strive to accept software development orders strategically, taking into account the development duration, scope, etc. However, if the development volume fluctuates unexpectedly due to client circumstances, we are unable to assign engineers to development work in a timely manner. While our adaptable engineers allow us to respond to fluctuations in development volume to some extent, if the fluctuations exceed a certain limit, our business performance may be affected.

5. 5.

   Risks Associated with Securing and Training Engineers

   In our core business of software development, securing human resources is essential for business expansion. While our earnings forecasts are based on our manning schedule, if we are unable to recruit and train engineers as planned or if the resignation rate increases more than expected, we may be able to compensate in part through outsourcing. However, our business performance may be affected if a shortage persists.

6. 6.

   Risks Associated with Subcontractor Partnerships

   We maintain a balance in the software development process by utilizing subcontractors in response to fluctuations in the development system (development personnel). However, if there is a sudden fluctuation in software production plans and we are unable to rescale outsourcing to subcontractors in a timely manner, our business performance may be affected.

3. Legal Risks

1. 1.

   Risks Associated with Compliance

   On April 16, 2004, we established the Charter of Corporate Behavior to ensure that we act with integrity and responsibility based on the values and ethics required not only by laws and regulations but also by society at large. The company, its directors, and its employees are committed to corporate activities in compliance with this Charter.

   By providing employees with appropriate compliance training and establishing a reporting system in accordance with the Whistleblower Protection Act, we strive for complete compliance with all applicable laws and regulations. Despite these efforts, there is no assurance that compliance issues can be completely avoided, and a violation of laws and regulations could result in a loss of trust in our company or affect our business performance.

2. 2.

   Risks Associated with Intellectual Property Rights

   In software development, we take every precaution to prevent third parties from filing lawsuits or claims for intellectual property infringement against the technology we use. However, in the unlikely event that we are forced to bear damages or acquire or develop alternative technologies, our business performance could be affected.

4. Information Security Risks

1. 1.

   Risks Associated with Information Security

   We receive a large number of system development orders to support our clients’ business strategies, and we occasionally store personal information related to these orders. To protect our clients’ information assets and personal information, we have established information security and personal information management systems. Since obtaining the “PrivacyMark” certification in September 1998 and the ISO/IEC 27001 certification, the international standard for information security management systems, in March 2006, we have continued to enhance these management systems. Despite these precautionary measures, in the unlikely event of a leak of confidential or personal information related to system development, we could face claims for damages from clients as well as damage to our credibility, which could affect our business performance.

5. Financial Risks

1. 1.

   Risks Associated with Financial Market Volatility

   We hold securities with a market value; however, if the market value of these securities declines due to financial market volatility, we may be forced to recognize impairment losses, which could affect our business performance. In accordance with our securities management regulations, we regularly assess the market value or financial condition of the issuer and review our holdings on an ongoing basis.

6. Risks Due to Disease Outbreak

1. 1.

   Risks Associated with COVID-19

   Stagnation in the travel, transportation, and other industries was evident with the spread of COVID-19, but activity is finally recovering. To mitigate the effects of the pandemic on our business performance, such as a decline in sales, we are leveraging our portfolio of clients across multiple industries and shifting orders to industries that are relatively less affected.

   In addition, by decentralizing development sites, including teleworking, we are minimizing the risk of illness to our employees and subcontractors, and we are making capital investments to limit productivity losses due to decentralized development.

7. Risks Due to Major Natural Disasters

1. 1.

   Risk of Business Partners Being Affected by Disaster

   Orders for system development may be stalled or canceled if our business partners are harmed by a major natural disaster or a fire, causing interruptions in their operations. As we face the impact of delays or an inability to carry out development, our business performance may be affected in such cases, including a decrease in sales.

2. 2.

   Risk of Our Company, Personnel, or Subcontractors Being Affected by Disaster

   We focus on developing systems that serve as the backbone of our clients’ businesses, some of which can be classified as social infrastructure. Large-scale natural disasters or other disasters that harm business sites, employees, or subcontractors may disrupt development activities. In preparation for such an event, we have prepared a business continuity plan and put in place procedures, etc., to enable a prompt response and the rapid restoration of business operations.