Earnings call transcript: CTI Engineering Q2 2025 sees earnings miss, stock drops

CTI Engineering Co Ltd reported its Q2 2025 earnings, revealing a significant miss with an EPS of -4.07, leading to a 4.33% drop in its stock price after hours. The company’s revenue stood at 20.68 billion yen, but the negative earnings per share and revised net income forecast have raised concerns among investors, contributing to the stock’s decline. Despite recent volatility, InvestingPro analysis shows the company maintains a strong financial health score of 3.06 (rated as "GREAT"), with notably low price volatility compared to industry peers.

Key Takeaways

• Orders received increased by 11.7% year-over-year.
• Operating income and net income saw significant declines.
• Stock price fell by 4.33% following the earnings report.
• The company revised down its net income forecast by 600 million yen.

Company Performance

CTI Engineering’s overall performance in Q2 2025 was mixed. While the company saw a strong increase in orders received, up by 11.7% year-over-year, its operating income fell by 12%, and net income dropped by 23%. This decline in profitability suggests challenges in managing costs or other operational issues despite robust demand in certain sectors. According to InvestingPro data, the company maintains strong fundamentals with a current ratio of 2.79 and minimal debt, holding more cash than debt on its balance sheet. The stock currently trades at a P/E ratio of 14.59, suggesting potential value opportunity based on InvestingPro’s Fair Value analysis.

Financial Highlights

• Revenue: 20.68 billion yen
• EPS: -4.07
• Orders Received: 60.9 billion yen (+11.7% YoY)
• Operating Income: 6 billion yen (-12% YoY)
• Net Income: 3.8 billion yen (-23% YoY)

Earnings vs. Forecast

The company reported an EPS of -4.07, which missed expectations significantly. This miss, coupled with a decrease in operating and net income, suggests that CTI Engineering is facing challenges that were not anticipated by analysts or investors.

Market Reaction

Following the earnings report, CTI Engineering’s stock price fell by 4.33%, closing at 3,090 yen after hours. This decline reflects investor concerns over the negative earnings and revised income forecasts. The stock’s movement contrasts with its 52-week high of 3,275 yen, indicating a significant deviation from its peak performance.

Outlook & Guidance

Despite the earnings miss, CTI Engineering maintains its full-year forecast for orders received, sales, and operating income. The company aims for an operating income margin exceeding 10% by 2025. However, the net income forecast was revised down by 600 million yen, which may affect future investor confidence. InvestingPro subscribers can access 10 additional key insights about CTI Engineering, including its impressive 32-year dividend payment track record and detailed financial health metrics. For comprehensive analysis, check out the Pro Research Report, available exclusively to subscribers.

Executive Commentary

• "Orders received were strong, increasing by 11.7% on a year-over-year basis," noted the company presenter, highlighting robust demand.
• "We successfully accelerated activity in the growth area of our business portfolio, which grew by 21%," reflecting strategic expansion efforts.
• "We will strive to ensure quality, carry out work keeping profitability, and increase orders received," emphasizing a focus on sustainable growth.

Risks and Challenges

• Declining profitability as seen in the reduced operating and net income.
• Potential challenges in cost management or operational efficiency.
• Revised net income forecast suggests possible future financial difficulties.
• Competitive pressures in the domestic and international markets.
• Macroeconomic factors that could impact project funding or timing.

CTI Engineering faces a challenging landscape as it navigates declining profitability and investor concerns. The company’s strategic initiatives and strong order growth provide some optimism, but financial and operational hurdles remain significant.

Full transcript - CTI Engineering (9621) Q2 2025:

Company Presenter/Financial Officer: Welcome to today’s financial results presentation. Today’s presentation will focus on the following three agenda items, second quarter financial results for fiscal year twenty twenty five, the end of fiscal year forecast, and lastly, progress made in the execution of the mid term management plan and future actions towards the end of the fiscal year. Allow me to start with the highlights from the second quarter. Orders received were strong, increasing by 11.7% on a year over year basis. Sales remained steady, equivalent to the same period last year, and while operating income decreased by 12%, this decline was in line with initial company forecasts.

We’ll be going over the details in a moment. Net income decreased by 23% due to the impact of extraordinary losses. In terms of the full year forecast, sales and profits are expected to increase as planned. Conversely, the net income forecast has been revised downward due to the impact of extraordinary losses recorded in the second quarter. Lastly, as it stands, we expect to maintain the dividend forecast at 75 yen per share corresponding to a planned dividend payout ratio of 33.1%.

Next are the consolidated financial highlights for the second quarter. Orders received stood at 60,900,000,000.0 yen, a year over year increase of 11.7% resulting from strong results in the domestic and overseas segments. Orders received from local governments and Nippon Expressway Company boosted sales in Japan, while large scale orders received in Asia drove the overseas business. Sales stood at 50,800,000,000.0 yen, slightly higher, but very close to the results for the comparable period last fiscal year. Operating income came in at just under 6,000,000,000 yen, in line with the forecast.

Results were affected by an increase in SG and A expenses on a consolidated basis, a deterioration in the cost of sales ratio in some projects, and lower margins for the overseas business. Lastly, net income attributable to owners of the parent stood at 3,800,000,000.0 yen. The horizontal bar graph shows progress on each line item versus the revised full fiscal year forecast. As of the end of the second quarter, the progress rates versus the forecast were approximately 60% for orders received, 50% for sales, and 60% for both operating income and net income attributable to owners of the parent. This graph shows the trend of first half orders received, sales, and operating income margin on a consolidated basis.

Orders received, shown here in the navy colored bar, are on track, as are sales, which continue on a growth trajectory. Lastly, while the operating income margin peaked back in the 2023, we nevertheless expect to exceed our margin target of 10% for 2025. Next is the consolidated profit and loss statement. The results in terms of orders received, sales, and operating income are as I described earlier. Ordinary profit came in at 6,000,000,000 yen, which represents progress of approximately 60% versus the full fiscal year forecast, in line with the progress rate for operating and net income.

Next is the consolidated balance sheet statement. Total assets increased by approximately 2,000,000,000 yen due to an increase in accounts receivable and other factors. Liabilities decreased by 1,700,000,000.0 yen due to a decrease in short term borrowings and other factors. As a result, the net worth ratio now stands at 71.6%, up 2.9 percentage points from the comparable period last year. I would now like to go over the results outlined by segment, starting with the domestic consulting engineering business.

Our efforts of transforming the business portfolio have translated into an increase in orders received, which grew by approximately 10% on a year over year basis. Sales stood at 35,800,000,000.0 yen, mostly in line with the results in the comparable period last fiscal year. Operating income decreased to approximately 6,000,000,000 yen due to a higher cost of sales ratio for some projects and an increase in SG and A expenses. This represents a year over year decrease of approximately 8.6%. Lastly, the operating income margin stood at 16.6%, down 1.7 percentage points from the comparable period last fiscal year.

Next is a breakdown of the trend in orders received within the domestic consulting engineering business, starting with client type. The vertical bar graph on the left shows our orders by source. Starting at the bottom, we have the Ministry of Land, Infrastructure, Transport and Tourism, former public corporations and foundations, local government municipalities, and finally private sector clients. Looking at the actual numbers, we recorded 19,400,000,000.0 yen in orders from the Ministry of Land, Infrastructure, Transport and Tourism, 500,000,000 yen more than during the comparable period last fiscal year. Orders from local municipalities soared by approximately 2,100,000,000.0 yen, and orders from clients in the private sector also increased by 400,000,000 yen.

The vertical bar graph on the right shows the order amounts by contract method. Starting at the bottom, we have proposals, comprehensive evaluation, government negotiated contracts, and price competition. We saw an increase in orders from the proposal contract method, while orders from the price competition method also rose by 1,300,000,000.0 yen. The vertical bar graph on the left contains an overview of the orders received amount by sector. Starting from the bottom, we have the sectors of water and land, transportation and urban, environment and social, and construction management.

Orders increased by approximately 1,800,000,000.0 yen on a year over year basis in the water and land sector driven by a 50% increase in orders for water supply and sewerage projects. Orders also increased by 1,100,000,000.0 yen in both the transportation and urban sector and the construction management sector, the latter of which has posted strong results driven by several multiyear projects. The pie charts on the right show each sector as a percentage of the total amount in orders received. The breakdown remains virtually unchanged on a year over year basis. I would now like to go over the results outlined for the overseas consulting engineering business.

Orders received stood at 19,100,000,000.0 yen, a year over year increase of 16.3%. Conversely, sales were down slightly and came in at approximately 15,000,000,000 yen. Operating income after goodwill amortization decreased by 86% on a year over year basis, primarily as a result of a worsening in the business progress ratio due to contract delays at CTI Engineering International last year. Another significant factor was an increase in national insurance employer contributions at Waterman Group plc, which are a result of policy changes enacted by the new labor government in The UK, and persistently high personnel costs. The vertical bar graph on the left shows the trend in the orders received amount.

Starting at the bottom, CTI Engineering International secured 5,300,000,000.0 yen in orders, delivering tremendous year over year growth. Waterman’s private sector related business recorded order amounts in line with the comparable period last year, while the public sector related side saw a slight decrease during the same period. The order backlog, shown on the right, grew by approximately 1,200,000,000 on a year over year basis, underscoring our efforts and success in securing orders. I would now like to discuss the end of fiscal year forecast. Circling back to what I said earlier, orders received increased by 11.7% on a year over year basis, delivering a very strong performance.

Second, the carryover order backlog at the end of the second quarter increased by 8% year over year. Third, the cost of sales ratio and operating income are expected to remain in line with our full year plans. In light of this, the forecast for orders received, sales, and operating income remains unchanged on both a consolidated and non consolidated basis. Lastly, the full year forecast for net income has been revised downward by 600,000,000 yen due to the impact of the aforementioned extraordinary losses recorded in the second quarter, and this applies on both a consolidated and non consolidated basis. Today’s final agenda item is an overview of the progress of the mid term management plan and future actions towards the end of the fiscal year.

The first key topic within this overview of the progress of the mid term management plan is business portfolio transformation. Starting on the left, we have the results in our core business. Projects from local government municipalities and primary government agencies are doing well, delivering year over year growth of 1,160,000,000.00 yen or 4%. We successfully accelerated activity in the growth area of our business portfolio, which grew by 21%, driven by good results in information provision and CMPM services. Our PFAS and PPP related businesses did well, driving growth in the new business area, which grew by 43%.

Lastly, as part of our new business initiatives, we had been engaged in the agricultural business. However, a lackluster performance in this business has informed our decision to transfer this business to Nakata Farm Co. Ltd, a company with the requisite expertise and capability and strong ties to the local community. All shares of our agricultural subsidiary were transferred on 07/01/2025. Next are our efforts in human capital, DX and production system reform, with the goal of driving profit growth.

A KPI within our efforts to enhance human capital is the number of engineers. As of the end of the second quarter, the engineer headcount stood at seventeen fifty, having increased by 82 since the December 2024. We continue growing the engineer headcount and making progress in line with company expectations. We also made steady progress in reducing working hours, which decreased by fifteen hours in the first half of the ongoing fiscal year. Last, allow me to discuss future actions towards the end of the fiscal year.

In the domestic consulting engineering business, we will strive to ensure quality, carry out work keeping profitability, and increase orders received in accordance with business portfolio transformation policies based on the midterm management plan. In the overseas consulting engineering business, CTI Engineering International aims to increase orders received and improve profitability by utilizing local subsidiaries. In addition to increasing orders received, Waterman aims to improve profitability by negotiating with clients to transfer increased national insurance employer contributions and higher personnel costs, and by streamlining the consulting engineering business in The UK. Lastly, within the scope of human capital and DX and production system reform, we will work to secure and utilize human resources by various recruitment methods, and the implementation of systems that support various working styles. Other initiatives involve promoting the use of DX, including the automatic error detection systems we have already developed, the use of generative AI at the overall group level, and improvements to the efficiency of administrative work by utilizing RPA and BI.

This concludes today’s financial results presentation. Thank you for your time.

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