Project Management in System Development

In recent years, client requirements have become increasingly sophisticated, including shorter development periods and more complex functionality. To fulfill client contracts, development effort and functional improvements may exceed initial expectations, causing actual costs to exceed initial estimates and resulting in deteriorating profitability.

Furthermore, additional costs may arise from defect remediation and other work after delivery and revenue recognition, ultimately causing certain projects to become unprofitable and negatively affecting the Group’s profits. This risk is more likely to materialize in system development projects involving new business domains or new technologies with which the Group has no prior experience.

The Group works to strengthen and ensure thorough risk management in advance of system development projects. Before accepting an order, the Group determines whether to accept the order at an order assessment meeting, considering various risks related to business requirements, technologies, project structure, and other factors. The Group also obtains approval from the Estimate Review Committee, or a resolution of the Board of Directors for high-value projects and other cases in accordance with its decision-making rules.

After accepting an order, the Group designates particularly challenging projects as priority projects. Their progress is reported each month at meetings such as the Board of Executive Officers, where instructions on countermeasures are provided and progress is monitored to avoid or minimize the risk of losses.

The Group also manages the quality, progress, and other aspects of each project monthly and, when necessary, prepares improvement plans to fulfill client contracts. However, if costs are re-estimated, including costs required for improvements, and are expected to exceed the order amount, resulting in an anticipated loss, the Group records the estimated loss on order contracts outstanding at the end of each fiscal year as a provision for loss on order contracts in preparation for future losses.

Securing and Developing Human Resources

To promote the Group’s business expansion and business structure transformation, it is essential to secure and develop engineers with a certain level of skill. In particular, as projects become more sophisticated and development cycles shorten, securing and developing project leaders (PLs) remains an ongoing challenge. In addition, as the Group advances its transition to AI-driven development methodologies, it recognizes the need for planned investments to develop and expand its pool of engineers capable of making effective use of AI.

If efforts to secure and develop these human resources do not progress as planned, this could negatively affect the Group’s net sales and profitability. Even now, costs are rising, and earnings are being affected by intensified competition for human resources against the backdrop of a chronic shortage of engineers.

In line with its Medium-Term Management Plan, the Group recruits highly capable new graduates and experienced engineers who can contribute immediately. It also works to develop human resources capable of responding to new technologies, including AI, by strengthening PL development, expanding AI-related curricula, and supporting the acquisition of various professional certifications.

Dependence on Specific Clients

The top three clients by revenue accounted for 51.3% of total net sales in the fiscal year ended March 31, 2026, representing a high level of concentration.

Accordingly, depending on the business policies, operating results, and financial position of these clients, the Group’s net sales and profits could be negatively affected. At present, the Group does not recognize the likelihood or timing of this risk materializing, or any specific impact it may have on its operating results.

Based on its Medium-Term Management Plan and annual budget, the Group identifies clients targeted for business expansion and works to conduct strategic sales activities.

Compliance

If a compliance violation or similar incident occurs involving the Group or parties related to the Group, this could damage the Group’s reputation and negatively affect its net sales and profits. At present, the Group does not recognize the likelihood or timing of this risk materializing, or any specific impact it may have on its operating results.

Under the Compliance Committee, chaired by the Executive Officer in charge, the Group works to establish and promote its compliance framework. The Group also works to prevent compliance violations by conducting investigations, providing guidance, and implementing education and awareness-raising activities regarding compliance with various laws and regulations, including labor-related laws and regulations.

Management of Confidential Information

During system development, the Group may handle confidential information, including corporate information and personal information. If confidential information is leaked externally due to negligence, intentional misconduct, or other causes, this could damage the Group’s reputation and negatively affect its net sales and profits. At present, the Group does not recognize the likelihood or timing of this risk materializing, or any specific impact it may have on its operating results.

With respect to the protection of personal information, the Group has obtained Privacy Mark certification. The Group also regularly conducts information security education and testing for all officers and employees to enhance their knowledge and raise awareness. In addition, the Group enters into non-disclosure agreements with subcontractors concerning the leakage of confidential information and obtains written confidentiality undertakings from its employees and subcontractor personnel. The Group also implements security measures for its development facilities and portable information devices.

Mergers and Acquisitions

The Group conducts strategic M&A to accelerate medium- to long-term business growth and expand its business domains. However, there is no guarantee that an M&A transaction will yield the results initially expected. In addition, if goodwill arises from an M&A transaction, it is recognized as an asset. If actual performance subsequently falls significantly short of the initially projected plans, it may become necessary to recognize an impairment loss, which could negatively affect the Group’s profits.

During the M&A evaluation stage, the Group conducts thorough due diligence involving external experts in legal, accounting, and other fields. After completing a transaction, the Group also works to reduce these risks by strengthening its management control systems, steadily promoting post-merger integration (PMI), and conducting regular monitoring.

Natural Disasters and Other Disruptive Events

In the event of natural disasters such as earthquakes or infectious diseases such as novel influenza, the Group may be unable to secure the necessary system development environment, including development personnel and equipment. This could delay contractually agreed delivery dates with clients and negatively affect the Group’s net sales and profits.

In accordance with its Crisis Management Regulations, if an urgent and significant risk of loss arises, the Group establishes a response headquarters headed by the President and takes necessary action. The Group also prepares for large-scale disasters by migrating internal information systems to the cloud, maintaining a dual backup system, and conducting safety confirmation drills for all officers and employees.