Executive summary

Business overview

Profile: T&S is a systems integrator that generates roughly 70% of its revenue from the Toshiba, Hitachi, and KIOXIA groups.
It mainly provides contracted development, operation, and maintenance for business systems that are designed to optimize corporate functions such as production, inventory, and business management. It also dispatches engineers with expertise in the operation and maintenance of semiconductor plant systems. In FY11/21, the company reported revenue of JPY2.7bn and operating profit of JPY413mn. It had a workforce of 296 employees. It operates in three business categories: Solutions (76.9% of total revenue), Semiconductor (17.0%), and Advanced Technology (6.1%). In the Advanced Technology category, T&S surveys and evaluates research literature on AI algorithms, and conducts R&D on software for next-generation memory—namely, Magnetoresistive Random Access Memory (MRAM). It aims to develop this category into a growth driver.

History and customer base: The company was founded in 2016 via the merger of TECJAPAN Co., Ltd. (unlisted) and Shinano System Engineering Inc. (unlisted). The objective of the merger was to stabilize and expand the earnings platforms of the two predecessor companies. T&S offers services to roughly 50 companies, most of which are affiliated with the Toshiba, Hitachi, or KIOXIA groups. In a typical year, it undertakes contracted system development and other services for some 20 companies that belong to these groups. T&S has developed, operated, and maintained customized business systems for its customer companies for roughly three decades, since the days of its predecessors. This makes it difficult for its customers to switch to another service provider without incurring heavy costs.

Solutions: In this category, T&S mainly develops business applications that underpin the IT infrastructure of companies in the Toshiba and Hitachi groups (excluding semiconductor plants), operates and maintains such systems, and provides helpdesk support. It has supplied these services for over two decades. It has also developed systems for nuclear power plants. Many of its projects involve development and operational support for customized on-premises systems. T&S’s business model is labor-intensive, and the bulk of its revenue is a function of the number of engineers used, the monthly billing rate per engineer, and the development period. The company enters into contracted service agreements or engineer dispatching agreements with its customers, and books revenue every three months following acceptance inspections, regardless of the total duration of a project. The monthly billing rate per engineer is roughly JPY800,000–900,000, and GPM is about 30%. In FY11/21, the company employed roughly 180 engineers (60.8% of its total workforce of 296 employees).

Semiconductor: In this category, the company mainly offers IT infrastructure operation, maintenance, and helpdesk services to the semiconductor (NAND flash memory) plants of KIOXIA Corporation. In FY11/21, it dispatched roughly 74 engineers to customer locations under engineer dispatching agreements. Revenue is determined by the billing rate for dispatched engineers, the number of engineers dispatched, and the dispatch period. The monthly billing rate per engineer is roughly JPY600,000. This is lower than the corresponding rate in the Solutions category because the dispatched engineers are employed in regional areas where the customer plants are located (such as Yokkaichi City), and their salary is therefore lower. Profitability is on par with the Solutions category. Revenue is not affected by swings in operating rates for semiconductor production lines, but remains steady as long as customer plants remain in operation.

OPM exceeds peer group average: T&S’s revenue is low compared with the top 10 domestic systems integrators by revenue, which on average employ 24,478 employees and generate revenue of JPY617.2bn. However, its OPM of 15.1% in FY11/21 surpassed the 9.2% average for the 10 major systems integrators (calculated by Shared Research based on FY03/21 data). The company attributes this to its practice of adopting a development timeline for projects that is 1.5x the standard length, which eliminates bugs and reduces loss-making projects. The company has also managed to avoid price competition (and resulting profitability erosion) because its customers would face substantial costs if they were to switch to a different service provider.

Advanced Technology : In this category (launched in April 2018), the company provides R&D support to customers that develop artificial intelligence (AI) related products. For example, the company surveys research literature about AI algorithms (set of instructions that uses AI to process data), implement and evaluate such algorithms, and make proposals to customers. T&S also engages in contracted development of AI algorithms. In any of these operations, the company presents estimates (monthly billing rate per engineer multiplied by amount of work), including consulting fees, at the time of orders and books revenue at the time of acceptance inspections. It sees the AI market (software, hardware, and services) expanding over the medium to long term, and regards this category as a growth driver.

Departure from labor-intensive business model: In its Advanced Technology category, T&S plans to expand its earnings base in the field of next-generation memory (MRAM) over the medium term, while at the same time continuing to survey and evaluate research literature on AI algorithms for customers. It conducts joint research with Tohoku University and other partners, and engages in comprehensive R&D of MRAM software. Since MRAM consumes only 0.1–1% of the power needed for conventional memory, the company sees potential demand for such memory to be embedded in power-hungry AI processors (semiconductor integrated circuits designed for AI). T&S thinks that the commercialization of MRAM will fuel demand for its MRAM software, contributing to earnings expansion. By monetizing this business, the company believes it can break away from the labor-intensive business model that is characteristic of systems integrators.

Earnings trends

In FY11/21, T&S reported revenue of JPY2.7bn (+20.5% YoY), operating profit of JPY413mn (+35.6% YoY), recurring profit of JPY419mn (+37.7% YoY), and net income attributable to owners of the parent of JPY295mn (+24.7% YoY). Sales and profit reached new record highs. Revenue increased across all its business categories—Solutions, Semiconductor, and Advanced Technology. OPM increased 1.7pp YoY to 15.1% as the hiring of engineers went according to plan and revenue growth was able to offset performance-linked bonuses for employees.

The company’s FY11/22 forecast calls for revenue of JPY3.1bn (+13.4% YoY), operating profit of JPY550mn (+33.2% YoY), recurring profit of JPY557mn (+32.8% YoY), and net income attributable to owners of the parent of JPY391mn (+32.7% YoY). T&S expects to grow revenue across all its business categories—Solutions, Semiconductor, and Advanced Technology. Orders for system development from its major customers—the Toshiba, Hitachi, and KIOXIA groups—remain strong. The company forecasts an OPM of 17.7%, +2.6pp YoY.

On January 13, 2022, T&S unveiled a “Three-year Companywide Strategy” that covers the period from FY11/22 to FY11/24. The strategy includes quantitative targets for the number of employees and the amount of work. The company looks for an increase in the number of engineers, who generate revenue through software development, from 277 at end-FY11/21 to 372 in FY11/24. As a qualitative target, the strategy calls for continued development of existing operations by maintaining strong relationships with customers that operate their own semiconductor plants, while preparing capacity to dispatch engineers ahead of anticipated expansions at NAND flash memory plants. Another aim of the strategy is to support the development of next-generation memory (MRAM) through joint R&D with Tohoku University with a view to cultivating a future growth driver. MRAM consumes as little as 0.1% of the power needed for conventional memory, and T&S explains that the commercialization of MRAM is likely to expand its earnings opportunities as a result of its involvement in related software development.

Strengths and weaknesses

Shared Research thinks the company has the following strengths:

Extensive experience in handling on-premises business systems at Toshiba and Hitachi group companies, making it difficult for customers to switch to other service providers without incurring heavy costs.

OPM exceeding the sector average as competitive order prices and longer development timelines eliminate loss-making projects.

The company has become involved in the development of next-generation memory (MRAMs), due to stable relationships with the Toshiba and KIOXIA groups.

We think it has the following weaknesses:

Difficulties in expanding earnings in the Semiconductor category as confidentiality considerations prevent the expertise gained in operating IT systems at semiconductor plants from being used outside of the KIOXIA group.

Challenges in bringing in new customers in the on-premises systems field as winning business from customers whose systems are already being operated and maintained by competitors is no easy task.

Focus on on-premises systems, making it difficult to approach customers that rely on cloud systems.

Key financial data

Recent updates

Capital and business alliance regarding edge AI

On April 4, 2022, T&S, Inc. announced that it had entered into a capital and business alliance with Intelligence Design, Inc. (unlisted) regarding the edge AI business.

Overview of the alliance

The company is expanding businesses in the Advanced Technology Category, particularly in support for R&D of AI algorithms and contract development of AI software. It is also making steady progress in the R&D of software for AI processors that rely on spintronics technology. Meanwhile, Intelligence Design is developing the IDEA series of services that use AI-related technologies. The two companies decided to form an alliance with the aims of complementing what each other lacks in the areas of technology, expertise, and personnel resources and cultivating both the company's AI algorithm R&D support business and Intelligence Design's AI product development business that utilizes the latter's image recognition library.

Main initiatives of the alliance are as follows.

• Joint development of AI products
• Intelligence Design's provision of its AI analysis platform to T&S
• Sharing of engineer resources

The company will acquire 63 common share of Intelligence Design (voting rights ratio: 2.53%, acquisition price: JPY50mn) through third-party allotment of the latter's shares. The capital and business alliance is expected to have only a minor impact on the company's earnings.

Trends and outlook

Quarterly trends and results

Ｑ1 FY11/22 results (out April 14, 2022)

Summary

• Revenue: JPY733mn (+25.0% YoY; 23.6% of full-year target)
• Operating profit: JPY127mn (+77.0% YoY; 23.0%)
• Recurring profit: JPY127mn (+76.3% YoY; 22.7%)
• Net income*: JPY89mn (+74.4% YoY; 22.7%)
• * Net income refers to net income attributable to owners of the parent. 

Progress versus forecast

At end-Q1 FY11/22, revenue had achieved 23.6% of its corresponding projection in the company's full-year forecast, while operating profit had reached 23.0%, recurring profit 22.7%, and net income 22.7%. In contrast, at the conclusion of Q1 FY11/21, revenue had reached 21.5% of its eventual full-year result, while operating profit had achieved 17.3%, recurring profit 17.1%, and net income 17.3%. The company's start in FY11/22 was strong, with performance exceeding that observed in Q1 FY11/21.

Highlights

Both revenue and profit reached Q1 record highs. Sales amounted to JPY733mn (+25.0% YoY), growing in all categories including Solutions, Semiconductor, and Advanced Technology. The company's OPM rose 5.1pp YoY to 17.3%, absorbing a JPY15mn provision for performance-linked bonuses.

As of April 14, 2022, the company had 286 engineers (+3% compared to end-FY11/21). The company currently maintains a policy of increasing its engineer count by about 30 individuals (approximately 10% YoY) each year. In FY11/22, the company plans to add 31 engineers, and by the end of Q1, it had added nine.

Revenue by category

• Solutions: JPY538mn (+18.4% YoY)
• Semiconductor: JPY138mn (+23.9% YoY)
• Advanced Technology: JPY57mn (+174.3% YoY)
  

In the Solutions category, orders for contracted development from key customers stayed strong. The company reported particularly robust contribution from a large on-site system development project for a semiconductor manufacturer with whom the company began conducting business in FY11/21.

In the Semiconductor category, the company continued to acquire orders from a key customer as activity in the semiconductor market boomed. In addition, it reported growth in the number of engineers dispatched to the customer’s semiconductor plants to provide maintenance and operating services.

In the Advanced Technology category, orders from existing customers—particularly in the areas of R&D support services for AI and surveys and evaluations of technical literature—and new customers stayed strong. As in FY11/21, order acquisition from existing clients such as NEC Corporation (TSE Prime: 6701) was especially robust. In addition, T&S made progress with efforts to cultivate new customers (but it has not disclosed names of such customers or related project details). The Advanced Technology category accounted for 7.8% of revenue in Q1, up from 3.6% in Q1 FY11/21.

Revenue by major customer

• Toshiba group: JPY214mn (+12.6% YoY)
• Hitachi group: JPY150mn (+7.9% YoY)
• KIOXIA group: JPY185mn (+49.2% YoY)
• Other (combined): JPY183mn (+39.7% YoY) 
  

The company observed particularly large growth in revenue generated through the KIOXIA Group and through customers other than the three major corporate groups with which it conducts business. Amid robust demand for semiconductors, the KIOXIA Group has been shipping healthy volumes of solid state drives (SSDs) for data centers and enterprises. Given the construction of a new production facility at the KIOXIA Group's Yokkaichi Plant and the KIOXIA Group's announcement that it will begin construction on a new production facility for its Kitakami Plant, T&S projects expansion in the volume of orders it will book from this customer. In addition, the company is progressively developing new customers in the Advanced Technology category.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

FY11/22 company forecast (out on January 13, 2022)

FY11/22 forecast summary

• Revenue: JPY3.1bn (+13.4% YoY)
• Operating profit: JPY550mn (+33.2% YoY) 
• Recurring profit: JPY557mn (+32.8% YoY)
• Net income*: JPY391mn (+32.7% YoY)
• * Net income refers to net income attributable to owners of the parent. 
  

Highlights

The company forecasts record sales and profit. T&S forecast revenue growth across all its business categories—Solutions, Semiconductor, and Advanced Technology—but has not disclosed specific targets for each category. It forecasts an OPM of 17.7%, +2.6pp YoY.

In Solutions, orders for system development from the company's major customers—the Toshiba, Hitachi, and KIOXIA groups—remain strong, underpinned by orders for heavy electric machinery- and infrastructure-related systems, and large orders from semiconductor-related customers.

In the Semiconductor category, customers plan to continue expanding plant capacity against the backdrop of a strong semiconductor market, and the company expects engineer dispatch to continue growing. 

In Advanced Technology, the company forecasts AI-related work, such as deep learning technology work with NEC and surveys of research literature, to continue expanding. In particular, it aims to secure increased orders for AI development support from information infrastructure companies, automotive sector companies, precision equipment makers, and so forth. It expects to make progress in bringing in new customers. 

T&S plans to pay an annual dividend of JPY5 per share in FY11/22, effectively an increase of JPY1 per share. The company is conducting a share buyback in FY11/22, and forecasts a total return ratio of as much as 70.5%, assuming the upper limit of the share buyback amount is reached.

Medium-term management plan

On January 13, 2022, the company unveiled a “Three-year Companywide Strategy” that covers the period from FY11/221 to FY11/24. The strategy includes a quantitative target for the number of employees, but does not provide a revenue or profit outlook. T&S plans to increase its number of engineers, who generate its revenue through software development, from 277 at end-FY11/21 to 372 in FY11/24.

Over the long term (undetermined period), the company aims to steadily expand the scale of its Solutions category, which accounted for 76.9% of the total revenue in FY11/21. It also plans to invest in the Semiconductor and Advanced Technology categories by expanding the number of regional offices and strengthening its R&D organization (e.g., by recruiting qualified human resources).

The company has devised a growth scenario for the Advanced Technology category (6.1% of total revenue in FY11/21) under which it aims to expand the category to a level that matches the present scale of the Solutions category (76.9%).

Quantitative targets

The Three-year Companywide Strategy includes quantitative targets (medium-term key performance indicators [KPIs]) for the number of engineers in the Solutions and Semiconductor categories, and for the amount of work for annual orders (expressed as person months) in the Advanced Technology category.

Number of engineers

The company plans to bring up the total number of engineers across the company from 277 at end-FY11/21 to 372 by end- FY11/24. It looks to hire some 30 engineers per year (annual growth of about 10%), resulting in a cumulative increase of 95 engineers over three years, with the following breakdown.

Revenue largely tracks the number of engineers. Although the company has not disclosed revenue targets, Shared Research estimates revenue growth of JPY0.9–1.0bn in FY11/24 predicated on a monthly billing rate per engineer of JPY800,000–900,000.

Quantitative target for the Advanced Technology category

In this category, the company has set the amount of work for annual orders as a quantitative target.

Qualitative targets

The company has formulated the following three management strategies.

Promote customer first mentality

This strategy applies to the Solutions and Semiconductor categories, and targets the following objectives.

Aim to maintain strong relationships with customers that operate their own semiconductor plants.

Prepare an organization to support stable dispatch of engineers ahead of future production increases at NAND flash memory plants.

Prepare technology and human resources across the entire development value chain (process from consulting to definition of requirements, design, development, testing, and validation) to meet customer demands.

To achieve the objectives above, the company aims to expand its network of regional offices, recruit new personnel (mainly new graduates), and cultivate engineers internally. It plans to ensure thorough quality management. It believes that a focus on quality management is not only the best approach to increase profitability, but also a critical factor in strengthening the trust received from customers, contributing to long-term (robust) relationships with customers.

Develop Only One Technology for AI processors that takes advantage of spintronics technology

This strategy applies to the Advanced Technology category, and targets the following objectives.

R&D with Tohoku University: Continue R&D on error-correction technologies for next-generation memory that relies on spintronics* technology.

Monetize R&D results for application software designed to run on AI processors** that rely on spintronics technology.

T&S conducts joint research with the Center for Innovative Integrated Electronic Systems (CIES) at Tohoku University (for details, see the R&D section). In the period covered by its Three-year Companywide Strategy, the company plans to strengthen its R&D organization based on a long-term outlook. Specifically, it intends to focus on hiring mid-career workers who hold PhD degrees in relevant subjects and software engineers with equivalent knowledge (especially in the areas of AI and semiconductor memory).

Only One Technology mainly refers to spintronics technology.

Strengthen management foundations

This strategy applies to the company’s management functions, and targets the following objectives.

Aim to strengthen governance.

Aim to secure and cultivate skilled human resources who can help drive future business growth.

Aim to establish an organizational structure by introducing a core (enterprise resource planning [ERP]) system to improve management efficiency.

In February 2021, T&S changed its governance structure to a company with an audit and supervisory committee, and set up an internal audit office that reports directly to the audit and supervisory committee. On the personnel recruitment and training front, it is considering initiatives such as enhancing training systems and improving the operation of its personnel evaluation system.

M&A activity

The company plans to maintain and further expand its earnings base not only by pursuing organic growth, but also by exploring M&A opportunities. It says the prime targets for a potential acquisition are companies that possess advanced technologies (such as AI) and/or systems engineers (including companies operating in the same industry).

T&S is considering taking on interest-bearing debt as one of its funding options for M&A deals. As of FY11/21, the company had no interest-bearing debt.

Business

Business model overview

Company profile

T&S is a systems integrator that generates roughly 70% of its revenue from the Toshiba, Hitachi, and KIOXIA groups. It mainly provides contracted development, operation, and maintenance services for core systems of its customer companies. These IT systems are designed to manage corporate functions such as production, sales, inventory, and attendance management, as well as financial accounting. The company also dispatches engineers to domestic semiconductor plants to operate and maintain on-site systems.

T&S was formed in 2016 through the merger of TECJAPAN Co., Ltd. (unlisted) and Shinano System Engineering Inc. (unlisted).

The company derives roughly 70% of its revenue from the Hitachi and Toshiba groups. It has supplied services to both groups since its establishment, and has built long-term business relationships with some 20 companies.

The company employed 296 people in FY11/21, with 277 engineers (94% of total employees). Its workforce is considerably smaller than those of the major systems integrators in Japan (7,000–140,000 employees for the top 10 domestic systems integrators by revenue).

The company does not prepare consolidated financial statements.

In its most recent fiscal year (FY11/21), T&S generated over 90% of its revenue from system development and related services. While maintaining its existing businesses as a source of stable earnings, the company is cultivating AI software development and services to support the AI-related R&D of its customer companies as future growth drivers. Its own R&D activities are geared toward supporting the development of (1) Magnetoresistive Random Access Memory (MRAM: a type of next-generation memory used by processors of semiconductor integrated circuits [ICs]), and (2) CPUs with MRAM cache memory. The company aims to develop these R&D efforts into a new growth driver.

Overview by business category

In FY11/21, revenue was JPY2.7bn, operating profit JPY413mn, and OPM 15.1%. T&S has a single reporting segment (System Development and Related Services), but it operates in three business categories: Solutions, Semiconductor, and Advanced Technology.

In the Solutions category, the company mainly undertakes contracted development, operation, and maintenance of software and IT infrastructure for major companies.

In the Semiconductor category, the company offers on-site support for semiconductor plant system operation and maintenance, and IT infrastructure development. It mainly dispatches engineers to the semiconductor plants of KIOXIA Corporation (unlisted).

In the Advanced Technology category, the company develops AI software, and commercializes related R&D outcomes.

T&S regards its Solutions and Semiconductor categories as generators of stable annual revenue derived from transactions with some 40 existing customers. It has positioned the Advanced Technology category as a growth business that could help cement long-term earnings foundations.

Business model

Revenue

T&S mainly records revenue for contracted development, operation, and maintenance services provided to customers under contracted services agreements in the Solutions category, and for dispatched engineers under engineer dispatch agreements in the Semiconductor category.

The bulk of its revenue consists of one-time revenue that tracks the amount of work (number of engineers x development period).

The order price for contracted development and other projects is determined by multiplying the amount of work by the billing rate per engineer (monthly billing rate per engineer).

The monthly billing rate per engineer is JPY800,000–900,000 in the Solutions category, about JPY600,000 in the Semiconductor category, and over JPY1mn in the Advanced Technology category.

The company’s business is labor-intensive. It does not engage in procurement and sales of IT equipment and software.

The monthly billing rate per engineer in the Semiconductor category is lower than in the other categories. Operations in this category center on on-site software operation and maintenance, and these services tend to be compensated at lower rates than contracted development, which necessitates a higher degree of technical skill.

The monthly billing rate per engineer in the Advanced Technology category is higher as the work in this category requires expert knowledge of software development, and is accordingly handled by mid-career workers who hold PhD degrees in relevant subjects and software engineers with equivalent knowledge.

One-time vs. recurring revenue

T&S generates one-time revenue from contracted development under contracted development agreements, and recurring revenue from post-development operations under operation and maintenance agreements. The company does not engage in Software as a Service (SaaS) operations, and therefore does not derive revenue from monthly subscriptions (as of FY11/21).

Revenue is recorded based on acceptance inspections, which in principle are conducted every three months.

The company does not sell IT system equipment or standalone general-purpose software to an unspecified number of customers.

The company says it takes on a broad range of contracted development projects in the Solutions category, with the value per project ranging from several hundred thousands of yen for small projects to about JPY50mn for large projects. It does not focus on securing projects within a certain value range, which means its projects are not skewed toward any particular value.

According to the company, project values are similar in the Semiconductor and the Advanced Technology categories.

The bulk of the contracted projects are processed using a “waterfall” software development approach. In some projects, the development period may span several years, in which case the total contracted development cost can surpass JPY10mn.

Revenue recorded following trimonthly acceptance inspections

T&S records revenue based on acceptance inspections that follow a three-month cycle. Although some of its contracted projects span over a year, the company works to ensure financial stability by reducing seasonal fluctuations in its cash flow and stabilizing working capital. Recording revenue every three months also helps stabilize the cash flow of its customer companies, which place the orders.

Avoids one-off orders

If it only offered contracted development services in its Solutions category, the company believes it would likely attract a large number of ad-hoc (one-off) orders. To avoid this, it works to build business relationships with customers across the entire value chain of software development by offering consulting, definition of requirements, testing, validation, and other services, in addition to contracted development. Although work in each stage of the value chain (development, validation, etc.) is booked separately as one-off projects, the company aims to stabilize its revenue streams by concluding multiple agreements with each customer.

Revenue in the Advanced Technology category

When receiving an order, T&S provides a cost estimate (monthly billing rate per engineer x amount of work) that includes consulting fees. If the order is approved, the company starts the project, and records revenue following acceptance inspections.

Cost structure

Costs for human resources account for the bulk of the total expenses incurred by the company in the provision of its services (total of cost of revenue and SG&A expenses). In FY11/20, labor costs (booked under cost of revenue) and personnel expenses (SG&A expenses) made up 70.2% of total expenses. After adding in outsourcing costs (mainly compensation for engineers of collaborating companies, which account for 16.9%), costs for human resources made up 87.1% of total expenses.

Cost of revenue and SG&A expenses

In FY11/21, labor costs made up 69.9% of cost of revenue, and outsourcing costs 30.6%. Labor costs and outsourcing costs are mainly personnel expenses for engineers. Materials costs (0.4% of cost of revenue) accounted for a low percentage of cost of revenue because the company does not procure or sell third-party software or equipment.

Personnel expenses and R&D expenses respectively account for 45.0% and 7.0% of SG&A expenses.

R&D expenses

R&D activities center on basic research in the Advanced Technology category. Specifically, T&S conducts R&D on (1) Magnetoresistive Random Access Memory (MRAM) with an eye toward establishing this technology as a reliable next-generation memory, and (2) application software for AI processors that use spintronics technology (see below). It engages in joint research with the Center for Innovative Integrated Electronic Systems (CIES) at Tohoku University. For more details, see the R&D activities section.

Personnel recruiting and training

The company aims to expand its engineer workforce by roughly 10% or about 30 people per year. It targets a roughly even number of new graduates and mid-career hires.

In the Solutions and Semiconductor categories, the company trains new graduates as engineers on the job. It also favors in-house training over external hires for project manager positions.

In the Advanced Technology category, the company mainly recruits individuals with PhD degrees in relevant subjects and software engineers with equivalent knowledge. The bulk of the personal additions in this category are mid-career hires.

Aims for growth in order prices (higher margins) by periodically reassigning engineers

T&S periodically reassigns its engineers who carry out contracted work. Through this rotation system, it can raise the wages of such engineers, and enter into new agreements with revised order pricing with customers. The company develops long-term business relationships with it customers, making it difficult for them to switch to another service provider without incurring heavy costs. Shared Research understands that T&S faces little pressure from customers to reduce order prices compared with projects that are subject to competitive bidding (for details, see the Profitability section below).

Profitability

T&S targets a GPM of nearly 30% on contracted development work. OPM, a medium-term KPI for the company, rose to 15.1% in FY11/21, marking a fourth consecutive increase since FY11/17. The company aims to maintain OPM at about 17%, its target for FY11/22. To achieve this, it explains it needs to keep GPM at the current level.

By business category, GPM is roughly on par with the company average in the Solutions category, below the company average in the Semiconductor category, and above the company average in the Advanced Technology category. Order pricing in the Semiconductor category tends to be lower as the company mainly handles system operation and maintenance in this category, which is less complex than development and other related tasks.

OPM exceeds the sector average

T&S explains that its OPM exceeds the sector average. As its benchmark, it uses the OPM for the Information & Communications industry in the FY03/21 Summary of Earnings Digests by Listed Companies published by the Tokyo Stock Exchange.

The company’s OPM has exceeded the market average (total for TSE1, TSE2, Mothers, and JASDAQ) in the recent two fiscal years. In addition, it has held above the average OPM for companies listed on the Mothers market for three consecutive years.

Shared Research found that the company’s OPM also exceeds the 9.2% average for the 10 leading domestic systems integrators (based on research data for the most recent fiscal year [mainly FY03/21]; for details, see the Market and value chain section).

Works to ensure meticulous quality control and improve profitability

The company’s OPM has risen from 7.8% in FY11/17 to 15.1% in FY11/21. The increase was driven by efforts to ensure thorough quality control and avoid taking on low-margin or loss-making projects. Since 2016, T&S has only lost money on one project.

To ensure quality, the company adopts a development timeline for projects that is 1.5x the standard length. It says it structures its contracted services agreements in such a way as to allow ample time for bug fixes. According to the company, it can push for flexible development schedules because it has developed long-term business relationships with its customers, which makes it costly for them to switch to another service provider.

The company says an increase in the amount of work (number of engineers x project period) naturally leads to growth in contracted payments by customers, and ultimately allows it to complete its development on schedule (i.e., meet its deadlines). From a customer standpoint, agreeing to a longer development timeline from the start removes the risk of delays in deliveries, and contributes to profitability as originally envisaged in the service agreement.

The company says that low margins or losses on software development projects are generally attributable to unexpected costs. For example, a project may be plagued by a larger-than-expected number of bugs, pushing the actual amount of work above the budgeted allocation. Additional costs stemming from a larger amount of work (mainly personnel costs for engineer labor) are typically shouldered not by the customer but by the systems integrator (in this case, T&S). Therefore, the main objective of the company’s quality control efforts is to avoid these additional costs.

T&S believes that factoring in a longer development timeline from the start reduces the possibility of engineers having to work overtime. Experience has taught the company that stable daily working hours prevent an accumulation of physical and mental fatigue among its workers, and ultimately contribute to higher labor productivity.

The company wins the trust of its customers by offsetting its longer development timelines with a commitment that deadlines will be met. It explains this approach has provided opportunities to secure continued orders and raise order prices, which in turn have contributed to higher margins.

Does not resort to strategic pricing to gain market share

As of July 2021, T&S did not employ order strategies (such as discounting) designed to expand its customer base or market share over the medium to long term. Its policy is to consistently secure a GPM of around 30% on each project, and roughly 70% of its revenue comes from existing customers. The company does not have to compete with rivals for orders, but rather secures these independently from customers based on longstanding business relationships. This allows it to keep its GPM at around 30%.

Customers

T&S has business relationships with some 50 companies, roughly half of which are affiliated with the Toshiba, Hitachi, and KIOXIA groups. In FY11/20, the Toshiba group accounted for 33.0% of its revenue, the Hitachi group for 25.6%, and the KIOXIA group for 17.5%.

Targets major corporate groups in Solutions category

In the Solutions category, T&S pursues a strategy of targeting large companies regardless of industry. By offering services to major companies, it aims to also establish business relationships with their subsidiaries and group companies. The company believes that its track record in providing services to large corporate groups fosters trust in its capabilities, and thinks that this can help it secure new customers among companies that operate under these groups.

Long-term business relationships with existing customers (Toshiba, Hitachi, and KIOXIA groups)

T&S has provided system engineering services to the Toshiba and Hitachi groups for roughly three decades, going back to the days of its two predecessor companies: TECJAPAN Co., Ltd. and Shinano System Engineering Inc. The company builds long-term relationships with its customers, making it difficult for the latter to switch to another service provider without incurring heavy costs.

Shared Research understands that customers such as the Toshiba and Hitachi groups can reduce communication costs by calling on the company for annual system upgrades, taking advantage of a longstanding business relationship.

While contracted development projects for both groups in principle bring in one-time revenue, they can be regarded a form of stable recurring revenue as the company can expect to receive new projects from these groups each year.

The projects handled by the company include update projects for on-premises systems operated by the Toshiba and Hitachi groups. Unlike Software as a Service (SaaS) applications, these on-premises systems do not receive automatic updates from vendors. Instead, customers outsource update projects to the company, which is the original developer.

New customers

The company says it adds only several new customers per year in the Solutions category. Roughly 80% of its revenue is generated from transactions with existing customers. Its sales activities therefore mainly concentrate on securing new orders from existing customers.

Targets plants and large-scale production facilities (such as semiconductor plants) in the Semiconductor category

As of FY11/21, T&S derived most of its revenue in the Semiconductor category from transactions with the KIOXIA group.

Targets companies in the process of developing AI-related products in the Advanced Technology category

AI technology is used in a range of applications such as AI-powered automotive equipment, sensing equipment, imaging equipment (such as cameras), semiconductors, and information and communication devices. As of FY11/21, the company mainly provided services to NEC Corporation, Hitachi High-Tech Corporation, and Omron Corporation in this category.

Value chain

Process of providing services

The company’s services are labor-intensive, and generally require face-to-face interaction between its engineers and customers.

In the Solutions category, T&S provides contracted development, operation, and maintenance services, as well as engineer dispatch services. Contracted work accounts for three quarters of the revenue in the category.

In the Semiconductor category, the company mainly offers engineer dispatch services. It employs engineers locally in cities near the semiconductor plants of its customer (mainly Yokkaichi City and Kitakami City), and stations them at the plants.

In the Advanced Technology category, T&S mainly undertakes contracted development. It employs individuals with PhD degrees in software technology or software engineers with equivalent knowledge in this category.

The company established a new Totsuka office in Yokohama City in October 2020. The new office will serve as a development base for semiconductor systems, and will mainly provide system development support to semiconductor companies in the western part of Yokohama.

Overview of operations by business category

Solutions

Overview of operations

In this category, T&S mainly provides contracted IT systems development, operation, and maintenance services to the Toshiba, Hitachi, and KIOXIA groups. These services are the core business of the company. They were launched by its two predecessors, TECJAPAN (founded in 1996) and Shinano System Engineering (1985), which undertook contracted work for the Toshiba and Hitachi groups.

The company mainly provides services for core systems, which are used to manage basic corporate functions such as financial accounting and the management of production, sales, inventory, orders, and employee attendance. Such systems ensure the continuity of business activities. For example, if the production management system at a manufacturing company shuts down, that company’s business activities will come to a halt.

As a result of its track record in providing services to customers such as the Toshiba and Hitachi groups, the company says it excels in handling heavy electric machinery production management systems, power station systems, medical systems, and financial systems.

Core systems are often contrasted with IT systems such as email software, scheduling tools, and internal communication services. These differ from core systems in that disruptions of such systems rarely suspend business activities.

T&S engages in all aspects of the system development value chain, ranging from consulting to the definition of requirements, design, development, testing, and validation (collectively, the pre-delivery stages), as well as post-delivery operation and maintenance. By taking part in the entire value chain, the company aims to secure continuous orders from each customer.

On-site support

Roughly half of the engineers in the Solutions category provide on-site support. This means they are stationed at a customer location, where they conduct system development. For such services, T&S enters into either dispatch agreements or system engineering services (SES) agreements with its customers.

According to the company, roughly half of its engineers in the Solutions category provided on-site support in FY11/21.

The company also provides helpdesk services to employees of customer companies.

The company has experience in handling heavy electric machinery production management systems, nuclear power plant systems, business management systems, medical systems, and the installation of (and migration to) Microsoft SharePoint.

Semiconductor

Overview of operations

In this category, T&S mainly provides business system operation and maintenance services for the semiconductor plants of the KIOXIA group, as well as support for IT infrastructure development. The company has maintained a relationship with the KIOXIA and Toshiba groups for two decades, since the establishment of its predecessor TECJAPAN Co., Ltd.

Operation of plant systems: This involves ensuring the systems function normally. T&S explains system monitoring operations conducted as part of plant security measures are of paramount importance. These operations include monitoring of system operation conditions, data backup management, detection of unauthorized access and virus scans, and helpdesk functions for plant employees.

Maintenance of plant systems: This entails upgrades, revisions, modifications, and repairs of plant production systems or internal infrastructure systems. Based on customer requests, the company’s (dispatched) engineers modify or expand the code that runs such systems. During operation, the company also handles database tuning* and resolves irregular (unexpected) problems such as bugs.

Maintenance tasks (such as fixing bugs) must be conducted by engineers that are acquainted with a customer’s production or business systems. T&S has provided system maintenance services to Toshiba’s semiconductor plants for roughly two decades, since before Toshiba’s semiconductor operations were spun off and rebranded to KIOXIA. The company has also offered system maintenance services to operating facilities of nuclear power plants constructed by Toshiba. As a result of these longstanding business relationships, the company says its customers cannot switch to another service provider without incurring heavy costs.

Business flow

T&S stations its engineers at the semiconductor plants of its customers under dispatch agreements. As in the Solutions category, its engineers operate the core systems of the plants. The company explains that it will continue to dispatch engineers to the plants to operate their core systems as long as the plants remain in operation.

Engineers who work at production lines or on fixed-term projects are subject to labor demand driven by fluctuations in operating rates. However, the company specializes in handling core systems that support corporate activities (plant operation). As a result, its engineers continue to provide operational support even when the operating rates at the semiconductor plants of its customer are low.

The company says it dispatched roughly 70 engineers in FY11/21.

Stable revenue

As mentioned above, fluctuations in semiconductor output (rising or falling operating rates) as a rule do not affect demand for the company’s engineers. Even if operating rates for production lines decline, operation and maintenance work in principle do not decrease as long as the core systems are running. This contributes to steady revenue that is unaffected by economic trends.

Companies that handle non-core systems (such as production line systems) generally experience swings in system operation and maintenance work volume as operating rates are influenced by economic trends. T&S does not undertake this type of work.

KIOXIA Corporation plans to build new semiconductor fabrication facility

In the Semiconductor category, the company mainly dispatches engineers to the semiconductor plants of KIOXIA Corporation. It is preparing for an increase in the number of dispatched engineers as KIOXIA plans to expand its production capacity by adding new fabrication facilities.

In the spring of 2021, KIOXIA started building a new fabrication facility (Fab 7) at its Yokkaichi semiconductor plant. The new facility will support the production of sixth-generation 3D flash memory. Construction is slated to be completed in the spring of 2022, according to information disclosed by KIOXIA.

KIOXIA decided in December 2020 that it would acquire the site adjacent to its Kitakami plant (KIOXIA Iwate Corporation based in Kitakami City, Iwate Prefecture).

On-site operations segregated from those performed by other systems integrators

According to the company, it is not the only systems integrator to undertake contracted work at (or dispatch engineers to) KIOXIA’s plants. Other companies include Toshiba group affiliates (such as Toshiba I.S. Consulting Corporation) and Quest Co., Ltd. (TSE Standard: 2332).

The company explains its operations do not overlap with those performed by other companies at the plants, and it is therefore not forced into price competition. Its role at the semiconductor plants is to provide maintenance and operation services for on-site systems, as well as support for IT infrastructure operations (such as IT helpdesk services). It has no involvement in operation systems for production lines.

Advanced Technology

Overview of operations

In this category, which was launched in April 2018, the company provides R&D support to customers that develop AI-related products in the following areas.

Surveys and evaluation of research literature on AI algorithms (set of instructions that uses AI to process data)

Implementation and evaluation of such algorithms, and proposal of optimal algorithms to customers

Contracted development of AI software based on optimal algorithms

The company intends to monetize its R&D outcomes over the medium term (for details, see the R&D section).

Revenue

When receiving an order, T&S provides a cost estimate (monthly billing rate per engineer x amount of work) that includes consulting fees. If the order is approved, the company starts the project, and records revenue following acceptance inspections.

Recruitment of human resources

According to the company, a key difference between the Solutions and the Advanced Technology categories is the expertise of the human resources. In the latter category, the company strives to recruit software experts in fields such as machine learning, image processing and recognition, and statistical processing. It hires individuals with PhD degrees in these areas, or software engineers with equivalent knowledge. In contrast, the bulk of the new hires in the Solutions category are new college graduates (including individuals who have majored in humanities).

R&D activities

Overview of activities

The company’s R&D activities mainly consist of basic research to develop new businesses in the Advanced Technology category. They are conducted at its R&D Center. T&S spent JPY26mn on R&D in FY11/21. It engages in joint research with the Center for Innovative Integrated Electronic Systems (CIES) at Tohoku University.

Its joint research project with Tohoku University’s CIES has received a subsidy (up to JPY97.5mn allocated over three years) from the Ministry of Economy, Trade and Industry (for details, see the Supporting Industry Program section).

T&S develops technology and software related to Magnetoresistive Random Access Memory (MRAM), a type of next-generation memory.

MRAM is a type of memory that stores data by using the magnetic orientation of electron spin. Magnetic fields are generated by spinning electrons. MRAM does not require a continuous power supply to retain data. It also needs less power than dynamic random access memory (DRAM) and other conventional memory types that use electric charges to store data. MRAM can be used as standalone memory and be embedded in microcomputers and CPUs. In addition, it can temporarily store data that is undergoing processing.

Spintronics is a portmanteau of “spin” and “electronics.” It is a technology that takes advantage of the intrinsic charge and spin of electrons.

MRAM consumes only 0.1–1% of the power necessary for conventional memory, so T&S sees large potential demand for the technology in power-hungry AI processors (semiconductor ICs for AI applications). It expects progress with the commercialization of MRAM to fuel demand for its software (firmware and SDK: discussed below), leading to an expansion in earnings opportunities. 

By monetizing its R&D outcomes, the company believes it will be able to break away from its existing labor-intensive business model under which revenue (monthly billing rate per engineer x amount of work) tracks the number of engineers. 

Subsidy received from METI

The company’s joint research project with Tohoku University and other partners has been selected for the “FY2020 Strategic Core Technology Advancement Program” (hereinafter, “Supporting Industry Program”). This means the company and its research partners are eligible to receive subsidies from the Ministry of Economy, Trade and Industry (METI).

Companies that have been selected for the Supporting Industry Program can receive subsidies for up to two-thirds of their R&D expenses from METI.

The subsidies are capped at JPY45mn per year and JPY97.5mn for three years, and are awarded for research periods of two to three years.

The subsidies may be used to cover necessary R&D expenses, including the cost of goods, personnel, honorariums, travel, and outsourcing.

The Supporting Industry Program provides government subsidies for R&D, prototype development, and sales channel development initiatives jointly undertaken by small and medium-sized companies/small business operators and universities, public research institutions or other companies. 

The subsidies are intended to support R&D that advances basic manufacturing technology. Specifically, R&D that is eligible for the funding must be conducted in one of the 12 fields* listed in the Guidelines for Advancement of Specific Manufacturing Core Technologies in Article 3 of the Act on Enhancement of Small and Medium Sized Enterprises’ Core Manufacturing Technology.

The details of the company’s R&D project selected for the Supporting Industry Program are as follows.

Name of R&D project: Development and Commercialization of Spintronics/CMOS Hybrid LSI Design Technology and Software

Participating research organizations: T&S, Tohoku University’s Center for Innovative Integrated Electronic Systems (CIES), and Power Spin Inc. (unlisted)

Power Spin Inc.: Develops the necessary hardware (circuit design, process design kit*1, intellectual property*2, and design tools)

CIES (Tohoku University): Provides basic technology (such as device parameter extraction technology and characteristic analysis technology) to underpin the hardware development, and manages operations

T&S: Develops the software (firmware*3 and software development kit*4)

The three parties are jointly building the technology infrastructure to design circuits for spintronics/CMOS Hybrid LSI, design systems, and improve software implementation efficiency.

Joint research agreement with Endoh Laboratory of the Department of Electrical Engineering at Tohoku University

On October 4, 2021, T&S announced it had entered into a joint research agreement on “High-Efficiency and High-Performance Algorithms for AI Processors for Object Recognition Research” with the Endoh Laboratory of the Department of Electrical Engineering at Tohoku University. The one-year agreement runs from October 1, 2021 to September 30, 2022.

Market and value chain

Domestic software market

Market valued at roughly JPY13tn

T&S mainly operates in the domestic information services market. It estimates this market (total revenue for sector companies) was worth roughly JPY15tn in 2021 based on the Survey of Selected Service Industries conducted by METI. Over the 10 years ending with 2021, the market expanded at a CAGR of 4.5%.

METI divides the domestic software market into several segments. Among these, T&S operates in the following segments: contracted software development (valued at JPY9.1tn in 2021), contracted management and operation of systems, etc. (JPY1.9tn), and other services (JPY0.9tn). Its overall target market is therefore worth JPY11.9tn.

T&S expects demand to rise for software that can be loaded on AI-powered devices, self-driving vehicles, and robots. It sees the market for contracted software development—the largest segment of the broader information services market—expanding further, driving demand for the human resources it supplies in its Solutions category.

IT labor market

T&S expects IT workers, who drive software development, to remain in short supply as the software market continues to expand. 

Based on an IT Labor Demand Survey (March 2019) commissioned by METI, the company believes there was a shortage of roughly 260,000 IT workers (approximate range of 210,000–310,000) in 2019, and it expects this gap to widen to roughly 160,000–790,000 by 2030. 

T&S believes that persistent shortages in IT labor will continue to expand business opportunities in its Solutions category.

The assumptions underlying the estimates above are as follows.

The survey in question estimated the IT labor supply-demand gap in 2018, and envisaged three growth scenarios for IT demand from 2019: CAGR of 1%, CAGR of 2–5%, and CAGR of 3–9%.

It assumed the labor productivity in the IT (information services) industry will increase at a CAGR of 0.7%, which is the historical growth rate for 2010–2018 (METI estimate).

Definition of IT labor

The IT labor cited in the METI-commissioned IT Labor Demand Survey corresponded to “system consultants and designers,” “software creators,” and “other information processing and communication engineers.” These categories follow the classification used in census data.

Companies and businesses that hire IT labor are mainly defined in the survey as IT services companies, Internet-related services providers (mainly companies that provide IT services or software), and IT system divisions of companies that use IT services provided by third parties.

Semiconductor market

Projections based on World Semiconductor Trade Statistics

Based on World Semiconductor Trade Statistics (WSTS) projections, T&S understands that the semiconductor market has continued to expand YoY through 2021. The latest WSTS projections (semiconductor market forecast of spring 2021, announced in June 2021) showed the global semiconductor shipment value rising 6.8% YoY in 2020, and called for growth of 19.7% YoY in 2021 and 8.8% YoY in 2022.

In Japan, semiconductor shipment value rose 1.3% YoY in 2020, and is projected to increase 12.7% in 2021 and 5.4% in 2022.

On a yen basis, the WSTS expects the Japanese market for semiconductors to grow to JPY4.4tn in 2021 and to JPY4.6tn in 2022.

NAND flash memory market

According to the WSTS, semiconductor integrated circuits (ICs) accounted for roughly 80% of the global semiconductor product shipment value in 2020. Meanwhile, T&S estimates that memory devices make up about one-third of ICs, with DRAM and NAND flash memory commanding roughly even shares of the memory devices market (source: T&S’s securities report). The company expects the market for NAND flash memory to expand in tandem with growth in data storage volume driven by the adoption of cloud computing and Internet of Things (IoT) solutions.

The WSTS estimates global IC shipment value reached USD361.2bn (+8.4% YoY) in 2020, and look for growth to USD436.4bn (+20.8% YoY) in 2021, and to USD478.2bn (+9.6% YoY) in 2022.

KIOXIA plans to construct new semiconductor fabrication facility

The company believes its customers that manufacture semiconductor memory (such as KIOXIA) will continue to add fabrication facilities in the future. For example, KIOXIA Holdings Corporation started construction on a new fabrication facility (Fab 7) at its Yokkaichi semiconductor plant in the spring of 2021. The new facility is slated to be completed in the spring of 2022. In addition, KIOXIA in December 2020 announced plans to acquire the site adjacent to its Kitakami plant (KIOXIA Iwate Corporation based in Kitakami City, Iwate Prefecture), and thus secure land for new manufacturing facilities in the future.

AI systems market

T&S expects the market for AI systems to expand substantially in the future (but it has not disclosed underlying assumptions for its forecast).

IDC Japan survey (released on June 2, 2021)

According to a survey by IDC Japan, the domestic market for AI systems (based on end-user spending) rose to JPY158.0bn (+47.9% YoY) in 2020. Growth in the AI systems market is driven by two types of user companies.

Early adopters (leaders): Companies that have continually invested in AI systems based on a medium to long-term plan, have begun operating AI systems, and have started reaping the rewards of such initiatives.

Latecomers (followers): Companies that have recognized the importance of corporate reforms due to the COVID-19 pandemic, and are now stepping up investment in AI systems (i.e., companies that are actively testing such technologies in 2020).

The AI systems market as of 2020 can be divided into three segments (each occupying one-third of the market).

Software market (+45.2% YoY): Various AI applications adopted by user companies (included in the aforementioned domestic software market)

Hardware market (+104.2% YoY): Equipment such as supercomputers (e.g., the Fugaku supercomputer) and high-performance servers

Services market (+24.8% YoY): Services such as support for AI-powered business transformations, consulting, and support for development and operation of AI applications

IDC Japan outlook

IDC Japan sees the AI systems market expanding to JPY211.9bn (+34.1% YoY) in 2021, and further to JPY491.0bn in 2025. It projects growth at a CAGR of 25.5% from 2020 to 2025.

Competitive landscape

Position among domestic systems integrators

T&S’s revenue hit a record high of JPY2.7bn in FY11/21. The revenue at nine of the top 10 listed domestic systems integrators by revenue (excluding NTT DATA Corporation, which has revenue of over JPY2.0tn) averaged over JPY400.0bn based on recently reported results. While T&S operates on a smaller scale than the major Japanese systems integrators, its OPM of 15.1% exceeds the 9.2% average for its competitors (average for 10 companies other than T&S included in the table below).

Shared Research understands the relatively low revenue of the company is attributable to its smaller workforce of roughly 300 people (see table below). Because the bulk of its revenue is one-time revenue that tracks the amount of work (number of engineers x development period), revenue growth hinges on personnel increases. In addition, T&S does not sell standalone hardware or software.

The average salary per employee at T&S (non-consolidated) stood at JPY4.6mn in FY11/20, which was lower than at the major systems integrators (JPY5.9¬–12.3mn). The monthly billing rate per engineer in the Solutions category is JPY800,000–900,000, which is similarly below the sector average of JPY1mn. This is because the bulk of the work handled by the company’s engineers consists of development, operation, and maintenance of business systems for customers (such as production management systems and business management applications). In other words, there is little room for price increase by providing value added through consulting or development support for new businesses that utilize digital technologies.

KIOXIA group also a core customer of various competitors

Examples of companies deemed by T&S to be operating in its target industries are Quest Co., Ltd. (TSE Standard: 2332) in the Semiconductor category, and Fixstars Corporation (TSE Prime: 3687) in the Advanced Technology category.

T&S, Fixstars, and Quest all generated more than 10% of their revenue from the KIOXIA group in their most recent fiscal year (see table below). Fixstars also derived 14.2% of its revenue from the Hitachi group in FY09/20. In its most recent fiscal year, Fixstars generated the bulk of its revenue from domestic electrical equipment manufacturers, as did T&S.

According to T&S, all three companies record revenue from the KIOXIA group, but they do not compete with each other as their responsibilities within KIOXIA’s semiconductor plant are segregated.

Although T&S and Fixstars have workforces of roughly the same size, Fixstars generates 2.5–3.0x the revenue of T&S (based on a comparison of the two most recent fiscal years for both companies). Shared Research understands this discrepancy stems from higher order prices at Fixstars.

The average annual salary per employee is JPY7,067,000 at Fixstars and JPY4,629,656 at T&S (based on respective data for the most recent fiscal year).

Fixstars procures and sells equipment (boards), which is another factor that pushes its revenue above T&S’s. Fixstars’ cost of purchased goods accounted for 24.6% of its parent cost of revenue in FY09/21. In contrast, T&S does not record cost of purchased goods, and its materials costs accounted for 0.4% of its cost of revenue in FY11/21.