Alpha-Win Company Research Report
CUBE SYSTEM INC.
(2335 TSE First Section)

Issued: 8/14/2019

Research Dept., Alpha-Win Capital Inc.
http://www.awincap.com/● Summary◆ Independent, mid-tier system integrator with long-term, stable growth・CUBE SYSTEM INC. (hereinafter, the “Company”) is an independent, mid-tier system integrator (SI) listed on
the First Section of the TSE. Its main customers include Nomura Research Institute and Fujitsu Group. It provides
services and develops systems mainly for the finance, distribution, and telecommunications industries. Its strengths
are its excellent customer base, extensive experience, strong trust from its customers, and the skill and know-howthat it has built up over the years. Founded in 1972, it has 47 years of history.
・With the exception of one fiscal year, the Company has been continuously increasing sales YoY for the past 18
years. During this period, its annual sales growth rate (simple average of the rate of increase in sales) was +6.4%
and its annual recurring profit growth rate (simple average) was +6.0%; the Company has been steadily expanding
its business and keeping its business in the black over many years. The recurring margin has been stable at around
7% and the increase in sales has been contributing directly to increases in profit, dividend, and market
capitalization.

◆ This Q1’s results: sales inc. by 9.6% YoY and O.P. dec. by 8.8% YoY – sales rose withstrong growth in orders received but profit temporarily fell due to unprofitable projects
・Results for the first quarter of FY 2020 (April to June 2019; hereinafter “Q1”) (note that all fiscal years in thisreport are March-ending; e.g. FY 2020 ends in March 2020) were as follows: sales were Y3,379 million (+9.6%
YoY), operating profit was Y100 million (-8.8% YoY), recurring profit was Y107 million (-19.0% YoY), andquarterly profit attributable to owners of the parent (hereinafter “net profit”) was Y50 million (-34.2% YoY)
(Figures 1-3). Sales were strong, but the profits fell because some projects became unprofitable. Consequently, thegross margin and operating margin both fell by about 0.6 point from 16.1% in Q1 of the previous year to 15.5% in
Q1 of this year and from 3.6% to 3.0% (in the same order), respectively (Figure 4). Sales seem to have slightly
exceeded the Company’s internal targets (undisclosed), but the profits had probably been below the targets.
[Figure 1] Financial Results for Q1

By Service Category

TotalCons. Sales
Sales

Gross Profit

Gross
Margin (%)

By Industry

Sales

Gross Profit

Gross
Margin (%)

Total

Q1 Results

FY 2019 Q1

FY 2020 Q1% Change

Difference

Share of Diff.

Share of Total

Unit: Y million

Apr-Jun 2018

Apr-Jun 2019

YoY: %

YoY: Y mil / %

%

%

9.6
11.4
-6.5
23.9
2.9
2.9
23.9

297
247
-36
86
10
2
15
-1.2
1.7
0.4
137
76
13
99
25
-53
50
-6
4
-3
-2
-13
2.8
-2.6
0.3
-4.8
-2.5
-1.2
29
-0.6
38
0.0
-9
-0.6
-26
-1.1
-26
-1.0

Name of Service/Industry

System Integration: SIS
System Outsourcing: SOS
Professional: ProS
System Integration: SIS
System Outsourcing: SOS
Professional: ProS
System Integration: SIS
System Outsourcing: SOS
Professional: ProS

Finance
Distribution
Telecommunications
Manufacturing (other)Government (other)
Other (other)
Finance
Distribution
Telecommunications
Manufacturing (other)Government (other)
Other (other)
Finance
Distribution
Telecommunications
Manufacturing (other)Government (other)
Other (other)

Gross Profit

Gross Margin (%)
SG&A Exp.

SG&A Exp. Ratio (%)
O.P.

O.P. Margin (%)
R.P.

R.P. Margin (%)
N.P.

N.P. Margin (%)

3,082
2,164
556
361
344
93
58
15.9
16.7
16.1
856
695
472
297
220
539
131
128
70
48
36
79
15.4
18.5
14.9
16.4
16.6
14.8
496
16.1
386
12.5
109
3.6
133
4.3
76
2.5

3,379
2,411
520
447
354
95
73
14.7
18.4
16.5
993
771
485
396
245
486
181
122
74
45
34
66
18.2
15.9
15.2
11.6
14.1
13.6
524
15.5
424
12.5
100
3.0
107
3.2
50
1.5

16.0
10.9
2.8
33.5
11.2
-9.9
37.7
-4.9
5.3
-5.5
-5.6
-17.2

5.7
9.9
-8.8
-19.0
-34.2

FY 2020 Company Target % Change
Apr 2019 - Mar 2020

YoY: %

100.0
83.2
-12.1
29.0
37.0
7.4
55.6

100.0
71.4
15.4
13.2
67.6
18.1
13.9

15,500

8.2

46.1
25.6
4.4
33.3
8.4
-17.8
175.4
-21.1
14.0
-10.5
-7.0
-45.6

29.4
22.8
14.4
11.7
7.3
14.4
34.5
23.3
14.1
8.6
6.5
12.6

4,317
3,988
2,176

7.8
30.7
7.5

5,019

2.0

-

-

1,090
7.0
1,090
7.0
684
4.4

18.3
13.6
14.6

(Note) All figures were prepared by Alpha-Win Res. Dept. based on the financial results summary and financial results supplemental
reference materials. Due to various processing during calculations, there may be slight differences in the numbers.

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1/5This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting fromthe use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual
property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 8/14/2019[Figure 2] Quarterly Change in Sales[Figure 3] Quarterly Change in O.P.

(Unit: Y million)(Unit: Y million)[Figure 4] Quarterly Change in O.P. Margin(Unit: %)
12.0%

4,500

450

4,000

10.0%

400

3,500

350

3,000

8.0%

300

2,500

250

2,000

200

1,500

150

1,000

100

500

50

6.0%
4.0%
2.0%

0

0
FY 2014

FY 2015

FY 2016

Q1

FY 2017Q2Q3FY 2018

FY 2019

0.0%
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020E

FY 2020 E

Q1

Q4

Q2

Q3

FY 2014Q4FY 2015

FY 2016

FY 2017

FY 2018

FY 2019 FY 2020 E

Q1

Q2

Q3

Q4

FY

(Note) In Figures 2-4, FY 2020 Q1 is based on the actual results and Q2 and full-year values are based on the Company’s estimates/forecasts (E).

・Overall, sales increased by Y297 million YoY. By service category (three categories), Q1 sales for the System
Integration Service (SIS) increased by Y247 million YoY with a 11.4% sales growth, accounting for 83% of thetotal increase in sales. This rise was brought by the increase in the projects for the distribution industry dealing
with the consumption tax and new business areas, the projects for the finance industry concerning systems forinternet banking and credit, and the projects for manufacturers including construction machinery and paper
processing. However, since the profitability of some projects deteriorated, the gross margin decreased from 15.9%
in the previous Q1 to 14.6% in the current Q1, so that the gross profit only increased slightly by Y10 million (+2.9%). On the other hand, sales of the System Outsourcing Service (SOS) decreased by Y36 million (-6.5% YoY)
due to the completion of projects for telecom carriers but its gross profit remained about the same since the grossmargin had improved. Thanks to the expansion of consulting projects, etc., sales of the Professional Service (ProS)
increased by Y86 million (+ 23.9% YoY) and its profit increased by Y13 million (+ 27.1% YoY).
・By industry (four industries), as described above, sales increased for all industries (Figure 1). Sales and profits ofthe finance industry especially increased as the development of new business fields began to clearly improve thebusiness with this industry. For the distribution industry, sales increased by 10.9% but profit declined by 4.9%
(gross profit), and for the other industries, too, sales increased by 6.7% but profit declined by 11.2% (gross profit).
This result was caused by the decline in gross margin due to the occurrence of unprofitable projects and thechangeover period of the profitable projects.
・Figure 5 shows the factors that increased or decreased operating profit in the current Q1. The increase in sales
accompanying the expansion of projects for distribution, finance, and other industries (manufacturing/government)
greatly contributed to the increase in profit, offsetting the decline in sales for the telecommunications industry, therise in subcontracting cost (rise in work hours and unit price for certain projects), and the rise in various expenses
such as personnel and R&D expenses. For non-operating profit/loss, the premium refund for cancelled insurance
that had been recorded during last Q1 is no longer present in the current Q1, causing a decrease in the non-operating
profit by Y16 million from Y23 million to Y7 million. No extraordinary gain or loss has been recorded.
[Figure 5] Factors that Increased or Decreased Operating profit in Q1
Decline of sales
for otherindustries

+350

-53

(Unit: Y million)

Inc. inpersonnel &skill training
expenseIncreasedsubcontracting
cost

-19

Inc. in R&D
expense, etc.

-180

-15

109

Profitability
deterioration

Inc. in workin process
Inc. in otherexpenses

-19

100

-50
-23

Expansion of projects
for dist., finance,makers, and gov.

June 2018

Y9 million decrease YoY

June 2019(Note) Financial results supplemental reference materials

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2/5This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting fromthe use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual
property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 8/14/2019

・Due to the nature of the Company's business model, the sales growth largely depends on the number of employees.
The number of domestic employees has increased from 707 in June 2017 (at month-end) → 745 in June 2018(+38; +5.4%) → 766 in June 2019 (+21; +2.8%). Although the number of employees is still somewhat short ofthe potential demand for systems, the Company is reinforcing recruitment as well as putting efforts into improving
the productivity of each person such as sales and operating profit per person.
・The balance sheet at the end of Q1 has not changed significantly. The Company has ample liquidity at hand, withcash and deposits of Y3.1 billion. Its financial standing is also firm, with an equity ratio of 68.1%.

◆ No change to the initial full-year forecast that sales will rise by +8.2% and profit willgrow at a double-digit rate and the plan to increase dividend by Y2・The Company has not changed its initial forecast on H1 and full-year sales, profits, and dividend announced at
the beginning of the fiscal year. Like the previous fiscal year, it plans to increase sales and profits during this fiscal
year and hit a record high in sales for consecutive fiscal years, as well as achieving a record-high in profit. The
Company will also aim again to raise operating profit and recurring profit so that they exceed Y1 billion for the
first time (this challenge had been tried but could not be achieved during last fiscal year).
・Q1's progress in terms of the full-year company forecast was 21.8% for sales and 9.2% for operating profit. In
comparison, last fiscal year’s Q1 progress rate against the full-year results was 21.5% for sales and 11.9% foroperating profit. The simple average of Q1 progress rates over the past six years, including the previous fiscal year,
is 22.5% for sales and 14.6% for operating profit; this Q1’s progress rate is below the average progress rate ofrecent years. However, the Company has been experiencing seasonal variability on a quarterly basis such that, inrecent years, the fourth quarter (Q4: January to March) has been contributing the most to the full-year results(27.9% of sales and 35.4% of operating profit on average for the same six years), the second quarter (Q2: July to
September) has been the next largest in contribution (26.4% and 27.2%, in the same order), the third quarter (Q3:
October to December) has been the third largest (23.3% and 22.9% in the same order), and Q1 has been the smallest
in contribution. This means that there is a potential for recovery in the future. Also, when the Q1 results are
subtracted from the Company’s disclosed H1 forecast, we can see that the Company is planning to increase sales
and profit in Q2 such that Q2 sales reach Y4,058 million (+7.6% YoY) and operating profit reaches Y324 million(+30.6% YoY) and improve the operating margin from 6.6% in the previous year’s Q2 → 8.0% during this Q2.
・As Alpha-Win Research Department, we have made analysis that the Company’s sales and profits may both hit
their record highs, although they may be somewhat below the Company’s full-year targets. In addition, we havenoted that the Company has been strengthening sales toward its main accounts (clients), expanding existing
businesses, and developing business in new domains and areas. The number of orders received during this Q1 andthe order backlog at the end of Q1 have both grown at a steady pace of about 20% YoY. Therefore, at this stage,
we have not revised the full-year forecast. However, the occurrence of unprofitable projects from the end of last
fiscal year to Q1 despite the reinforcement of project management in recent years, as well as the consequent struggle
in improving the profit margins, has been a surprise. In Q2 and onward, we must closely examine the impact of
this trouble on the profit and loss, its duration, the Company’s measures against its reoccurrence, and theeffectiveness of those measures. We may consequently make some revisions to the profit forecasts for this fiscal
year and onward.
・Over the medium to long term, the users are expected to continue to increase their IT investments to develop new
business models, strengthen their competitive advantage, deal with the labor shortage, streamline and speed up
operation, and promote DX. Consequently, the Company’s growth potential is large. We expect that the Company’s
profit and sales will grow stably at a rate of 8-10% per year by expanding its Enhancement business, acquiring newcustomers, developing new and overseas businesses, and improving its productivity through various measures.

◆ Stock price and characteristics: market-average valuation, outperforming TOPIX overmany years as a domestic-demand-related, stable growth stock・Compared to the average of the First Section of the TSE (based on the closing price on 8/2/2019: P/E of 13.3, P/Bof 1.1, and simple-average dividend yield of 2.1%) and its competitors (HIMACS and Toho System Science; Figure6), its valuation is about average. Going forward, if the Company could achieve a relatively stable, double-digit
profit growth, then its stock price could potentially rise.
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3/5This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting fromthe use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual
property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 8/14/2019

・The Company’s stock is a domestic-demand-related, defensive, stable growth stock that is little affected byfluctuations in foreign exchange and international trade wars. Its stock price’s volatility is relatively small.
・In the past ten years or so, the Company’s stock price has increased by about four times and has been largely
outperforming the TOPIX. Regarding stock price, the quarterly financial performance in Q2 and onward is the key
factor to watch over the short term. Over the medium term, we should watch the Company’s change in margins
and profit growth rate in the next fiscal year and onward, development of and achievements in new technologies
and businesses domains, and shareholder return (dividend hike, shareholder benefit program enhancement, sharebuyback, stock split, etc.), as well as the financial performance and IT investment trends of the Company’s end
users (Japanese companies).
[Figure 6] Comparison of Valuation Indicators with Competitors
Company Name
Code
Stock Price (at 8/2 closing)Market Cap (Y mil)P/E (price-to-earnings ratio)
P/B (price-to-book ratio)
Dividend Yield (%)
EV/EBITDA
P/S (price-to-sales ratio)

CUBE SYSTEM(CS: consolidated)

HIMACS(HM: consolidated)Toho System Science(TS: non-consolidated)

2335

4299

4333

808
12,346
16.3
2.1
2.2
9.5
0.8

1,825
11,327
16.5
1.2
2.7
5.7
0.8

973
13,492
15.3
1.7
2.6
5.7
1.0

Market cap= (shares outstanding) x (market share price [at 8/2/2019 closing])
The companies' planned EPS and dividend values for FY 2020 were used in all P/E and dividend yield calculations.
Actual BPS values of FY 2019 were used in P/B calculations.
EV/EBITDA=(market cap + interest bearing debt - cash&deposits)/(O.P. + depreciation + intangible fixed asset amortization)
P/S=market cap / sales [the companies' forecasts for FY 2020](Ref) Prepared by Alpha-Win Research Dept. based on each company’s financial results summary(Note) CE = the Company’s estimate/forecast. E = Alpha-Win Research Dept.’s estimate/forecast. Q1 is from April to June, Q2 isfrom July to September, and H1 (first half) is from April to September.

(Note) Estimates/forecasts were made by Alpha-Win Research Dept.

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4/5This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting fromthe use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual
property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.

Alpha-Win Company Research Report
CUBE SYSTEM INC. (2335 TSE First Section)

Issued: 8/14/2019【Performance】
PeriodReturn vs. TOPIX
1 month-7.3%-5.4%
3 months-11.5%-12.7%
6 months-3.5%
1.2%
12 months-13.9%-2.5%(Note) Reflects stock price and index
values up to the closing price on
8/2/2019. However, performance for the
one-month period was calculated basedon the closing price at the end of July
2019. The same applies to other periodsin the performance calculation.

＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊

Disclaimers
This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-WinCapital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this Report.
This Report is not to be construed as a recommendation or solicitation of investment. Alpha-Win
shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make theirown decisions on all investment matters and take full responsibility regarding their investment.
This Report has been prepared with a focus on objectivity and neutrality based on the analysis of generally
accessible public information and supplemental information including interview(s) by the analyst. AlphaWin, the writer, and/or other persons involved in the publication of this Report may already hold, or buy
and sell in the future, the stock of the company presented in this Report.
Contents of this Report are based on information current as of the issue date and are subject tochange without notice. We do not warrant or represent that the information in this Report isaccurate, reliable, complete, appropriate, or fit for any purpose and do not accept any responsibility
or liability.
Copyright of this Report belongs to Alpha-Win and no part of the publication may be copied, photocopied,cited, or translated without our consent.
For inquiries regarding this Report, please send us an e-mail to info@awincap.com. However, Alpha-Win
and the writer of this Report do not have any obligation to reply to inquiries.
PSV20190814-10

Short Report

5/5This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in thisReport for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate,or fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting fromthe use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual
property of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.