Question from a reader on Japanese stock IV

Q: How about BSP (ビーエスピー , 3800)?

A: I like the numbers, but there is a “but”.

BSP is an IT software development and management company.

The numbers are likeable because they have a nice balance sheet, the cash flow has remained stable over the last few years, they are capital-light, and the company is likely to print some good numbers this year.

The “but” comes in when you consider the parts of the company: a profitable “mainframe” business, which maintains mainframe computers, and which generated 1.64 B Yen of op inc on 2.25 B Yen of sales last year, and “products” and “solutions” segments which lost 0.63 B Yen and 0.4 M Yen at the operating level, respectively. (Note the above op inc is as reported in segments, and does not add up to the statutory total due to adjustments.)

These loss-making segments have a hodgepodge of services and products, including those in the “IT service management” area, which grew 642% last year, to 96 M Yen in sales (no op inc data).  The services in this area include cloud services.

In the “solutions” segment, it also provides services for “migration from mainframes”. You can either view this as them being opportunistic in profiting from the demise of their core business, or as not being able to make money on such a decline. In the last annual report, they say that, in relation to this area of migration business, there are “concerns over growth in migration from mainframes, as withdrawal from and shrinkage of mainframes were less than expected”.

Now, on their presentations, they say that they are restructuring their “solutions” business, to focus on consulting. They also have a plethora of various initiatives, new plans, and new products, as well as growth in China, improving staff, virtual data centers, and other things.

The problem for me is that the core of their business is mainframe maintenance, which newspapers tell me is a buggy-whip industry, and I could never really understand even if I tried very hard.  Also, all the mishmash of products and services they have are hard to fathom, so it is difficult to form a view on how the non-mainframe maintenance portion will perform in the future. Further, within the IT services company space, there seems to be an uncanny number of companies wanting to shift their focus on high value-added consulting.

Given their recent acquisition of the Chinese outfit, and the verbiage in their presentations, they are likely to spend loads of money on overseas acquisitions going forwards.  Their most recent quarterly filing MD&A was more of the same (no recovery yet).

If that does not put you off, then it seems you are either waiting for a pop in results in the fourth quarter, or betting that a recovery in IT spending will happen before their mainframe business starts to die (btw: last q’s mainframe business segment sales -4.9% YoY, op inc -2.2% YoY).