Mid-term Plans of Japan's Top Four IT Service System Integrators Remain Robust; AI Disruption Concerns Easing

Overview

This report focuses on the mid-term business plans of Japan's four major system integrators (NEC, Fujitsu, Nomura Research Institute, NTT Data), analyzing latest performance, order environments, and earnings forecasts, while comparing them with overseas peers. Goldman Sachs believes that despite market concerns about AI disruption, major Japanese system integrators are less likely to be directly impacted due to low client in-house development rates and high software customization levels. Their profit outlook remains robust. The report maintains Buy ratings for Fujitsu, NEC, and NRI, citing strong fundamentals and the potential for a stock price turning point.

Core views

Core View: AI disruption concerns are overblown; Japanese system integrators have strong fundamentals. The report notes that although concerns about AI disruption surged rapidly in early 2026, investor sentiment and US software stock indices show signs of recovery following Snowflake's strong results, Capgemini IR Day commentary, and NVIDIA CEO speeches. The weakness in the Japan IT Services sector stock is primarily driven by rotation toward hardware/tech stocks rather than deteriorating fundamentals or intensified AI disruption fears. With a ratio of in-house development at user companies versus system integrators of 3:7 (compared to 7:3 in the US), Japanese system integrators are less vulnerable to AI disruption. Generally Optimistic Mid-term Plans: The four major system integrators have released mid-term plans, expecting favorable profit trends even in the face of AI disruption. NEC's five-year plan forecasts a non-GAAP operating profit CAGR of approximately 15%; Fujitsu's ten-year plan targets an adjusted operating profit CAGR of 14-19%; NRI's three-year plan targets an operating profit CAGR of 8.5%; and NTT Data's five-year plan forecasts an EBITDA CAGR of 8%. Goldman Sachs views these ambitious but achievable targets, driven mainly by expanding demand for AI-related businesses, productivity gains from AI-driven development, workforce optimization, and exiting low-margin projects. Continued Improvement in Profit Trends: In Jan-Mar 2026, the combined adjusted operating profit of the four major system integrators (NEC, Fujitsu, NTT Data, Hitachi DSS) reached 612 billion JPY, a 15% increase YoY, marking the fourth consecutive quarter of double-digit growth. Margins continued to improve (operating margin increased by 2.4 percentage points YoY), primarily due to sales growth, price pass-throughs, and a reduced proportion of low-margin projects. The effects of AI-driven development began to appear for Fujitsu and Hitachi. Fiscal Year 2026 (March 2027 or December 2026 fiscal year) is expected to see widening profit gaps between companies, with NRI, NEC, Fujitsu, OBIC, OBC, and BIPROGY projected to achieve double-digit profit growth.

Analysis framework

Analysis Approach: The report employs a multi-dimensional analytical framework. First, it examines stock price trends, comparing the Japan IT Services sector with TOPIX and US software sectors to analyze changes in investor sentiment. Second, it deeply interprets the mid-term plans of the four major system integrators across five key dimensions: (1) profit/margin targets, (2) AI-related businesses/services, (3) AI-driven development, (4) pricing models, and (5) capital allocation (M&A and shareholder return policies). Third, it summarizes the latest performance and order environments to analyze earnings trends for large and medium-sized system integrators. Fourth, it references the performance of overseas peers (IT service companies such as Accenture, IBM, Capgemini, TCS, Cognizant, and security companies such as CrowdStrike, Palo Alto) for horizontal comparison and benchmarking. Finally, based on the above analysis, it provides ratings and target prices for each company and highlights key risks.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Tight supply and demand in the Japan IT Services market grant system integrators strong pricing power

  The report points out that Japan faces engineer shortages and tight supply-demand conditions, coupled with low client in-house development rates. This gives system integrators strong pricing power. Even if AI-driven development improves efficiency and lowers unit prices per project, cost reductions are larger, leading to improved project margins. Surplus engineers can be allocated to other projects, increasing total sales. This supply-demand analysis framework helps explain why concerns about AI disruption in the Japan market are relatively limited.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission in Value Chain

  Differences in client in-house development ratios between Japan and the US lead to different AI disruption risks

  The report contrasts IT talent distribution in Japan and the US: in Japan, IT talent is concentrated among IT service providers (User Company: System Integrator = 3:7), whereas in the US, it is concentrated among user companies (7:3). This means Japanese enterprises rely more heavily on outsourcing, giving system integrators stronger voice in the AI era and making them less susceptible to direct replacement by AI. This value chain analysis helps explain why AI disruption risks for Japanese system integrators are lower than those for global peers.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Distinguishing one-time expenses from core profitability to assess true earnings trends

  When analyzing the earnings of medium-sized system integrators, the report specifically highlights the impact of NRI's overseas business restructuring costs (including goodwill impairment of 98.4 billion JPY) on profits. Excluding this one-time impact, profits grew 13% YoY. This method of distinguishing one-time expenses from core profitability helps investors more accurately assess a company's true earnings trends and valuation levels.

• Event博弈 and Behavioral FinanceExpectation Gap/Expectation Management

  Overdue concerns about AI disruption differ from actual fundamental performance

  The report notes that excessive concerns about AI disruption appearing in February-March 2026 are gradually fading, with investors increasingly agreeing that major Japanese system integrators are less susceptible to AI disruption. This expectation gap analysis helps explain why the report considers the current timing opportune for focusing on potential stock price turning points, despite short-term headwinds from sector rotation.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  AI-driven development creates operating leverage, continuously improving margins

  The report analyzes that Fujitsu expects to increase gross margin by more than 2 percentage points annually through full-scale deployment of AI-driven development and workforce optimization in FY26-FY36; NRI's mid-term plan assumes achieving approximately 15 billion JPY in profit growth over the next three years through operational efficiency improvements (including AI-driven development). This operating leverage analysis helps understand how AI translates into actual profit growth.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Fujitsu (6702.T)

  Beneficiary: Leads in AI-driven development progress; Uvance business drives margin improvement; CPU/Quantum Computer business has upside potential

  Strengths

  AI-driven development application rate approx. 70%, planned to increase to over 90% early; Gross margin expected to rise by more than 2 percentage points annually; Active shareholder return policy (Dividend yield 30%, Total return 60%)

  Weaknesses

  Operating profit declined in Jan-Mar 2026 due to exit from large hardware projects (in line with guidance); Monitor impact of rising memory prices

  Comparison

  Along with NEC, a leader in AI-driven development with large margin improvement potential; Compared with NRI, lower overseas business exposure and smaller AI disruption risk

  Risks

  Deterioration in overseas IT services and electronic component demand; Weakness in telecom operator capital expenditure; Emergence of loss-making projects

• NEC (6701.T)

  Beneficiary: Social infrastructure business (defense, submarine cables) has high growth potential; AI-driven development advancing

  Strengths

  Increasing defense demand brings substantial upside; BluStellar business has room for profitability improvement; Collaborating with Anthropic to advance AI-driven development

  Weaknesses

  Loss-making projects totaled 16.8 billion JPY in Jan-Mar 2026, exceeding internal expectations; Domestic IT business temporarily weak

  Comparison

  Along with Fujitsu, a leader in AI-driven development; Compared with NTT Data, lower overseas business exposure (approx. 9%) and smaller risk

  Risks

  Weakening global business demand environment; Weak telecom operator capital expenditure; Emergence of loss-making projects

• Nomura Research Institute (4307.T)

  Beneficiary: Strong domestic business; AI-driven development platform has upside potential; Consulting business provides access to client management

  Strengths

  Overseas business restructuring completed, profitability bottoms out; High proportion of fixed-price contracts and cloud monthly fees, low AI disruption risk; Enhanced shareholder return policy (Dividend yield 40%, ROE target increased from 20% to 25%)

  Weaknesses

  Operating profit declined YoY in Jan-Mar 2026 due to overseas business restructuring costs (goodwill impairment of 98.4 billion JPY); Mid-term plan relatively conservative

  Comparison

  Compared with Fujitsu and NEC, AI-driven development progress slightly slower but proprietary platforms have upside potential; Compared with NTT Data, lower overseas business exposure (13%) and smaller risk

  Risks

  Client investment; Overseas demand; Loss-making projects

• BIPROGY (8056.T)

  Beneficiary: Strong regional bank core system business; Profit growth momentum continues

  Strengths

  Profit growth consistently outpacing industry averages; Software development and infrastructure construction businesses are strong

  Weaknesses

  Performance impacted by exit of business sale gains in Jan-Mar 2026

  Comparison

  Smaller scale but faster growth compared to large system integrators; Focuses on regional bank core systems, differentiated competition

  Risks

  Deterioration in demand for company products and services; Emergence of loss-making projects; Delays in internal system upgrades

• OBIC Business Consultants (4733.T)

  Beneficiary: Cloud transformation drives unit price increases; FY27 operating profit growth accelerates

  Strengths

  Strong cloud orders; Moving into a phase of rising unit prices with cloud transformation

  Weaknesses

  Revised earnings forecast and target price downward due to rising costs

  Comparison

  Smaller scale but faster cloud transformation progress compared to OBC; Focused on SME market compared to large system integrators

  Risks

  Investment trends of medium and small enterprises; Fluctuation in upgrade demand cycles; Intensifying competition in cloud accounting market

• Otsuka (4768.T)

  Adversely Affected: PC replacement cycle and GIGA School special demand ending; Operating profit expected to decline

  Strengths

  Growing demand for security products

  Weaknesses

  Declining PC sales, rising memory prices, reduced cross-selling opportunities; Earnings weakening starting from Q2 2026

  Comparison

  More reliant on PC-related demand than peers, stronger cyclicality

  Risks

  Increased investment by medium and small enterprises; PC upgrade cycle (including GIGA School projects) longer or larger than expected; Strengthened shareholder returns

• freee (4478.T)

  Adversely Affected: Stable earnings but unattractive valuation; Payback of prior investments required until FY2028

  Strengths

  Sales growth

  Weaknesses

  Sales promotion brings cost pressure; Full payback of prior investments required until FY2028

  Comparison

  Significantly different business scale and earnings trend compared to main companies in the IT Services industry

  Risks

  Rising expenses; Market growth driven by enhanced cloud penetration; Shareholder gain driven by changes in competitive landscape

Key data

• Adjusted Operating Profit of Top Four System Integrators (Jan-Mar 2026)612 billion JPY15% YoY increase, fourth consecutive quarter of double-digit growth
• Operating Margin of Top Four System IntegratorsIncreased by 2.4 percentage points YoYDriven by sales growth, price pass-throughs, and reduced proportion of low-margin projects
• NEC Non-GAAP Operating Profit 5-Year CAGR TargetApproximately 15%Five-year plan (FY2027-FY2031)
• Fujitsu Adjusted Operating Profit 10-Year CAGR Target14-19%Ten-year plan (FY2027-FY2036)
• NRI Operating Profit 3-Year CAGR Target8.5%Three-year plan (FY2027-FY2029)
• NTT Data EBITDA 5-Year CAGR Target8%Five-year plan (FY2027-FY2031)
• Revenue of Top Five Global IT Service Companies (Jan-Mar 2026)Grew 8.9% YoYFourth consecutive quarter of accelerating growth
• Revenue of Top Six Global Security Companies (Jan-Mar 2026)Grew 17% YoYAcceleration in growth rate, expansion of AI security demand
• Loss-Making Projects for NEC (Jan-Mar 2026)16.8 billion JPYIncrease of 7.7 billion JPY YoY; planned to be halved in FY2027
• Orders for Medium-Sized System Integrators (Jan-Mar 2026)1.6446 trillion JPY14.5% YoY increase; six-month moving average growth of 12.6%

Impact & implications

Impact on Industry: The report believes the proliferation of AI is likely to have a net positive effect on major system integrators' businesses. Positive impacts (price increases from integrating functions into systems, expanded demand for system updates, productivity gains from AI-driven development) are likely to far outweigh negative impacts (impact of simple software functions being replaced by generative AI). Generative AI is more likely to be integrated into backbone systems to enhance functionality rather than directly replace the core business of system integrators. Impact on Companies: Fujitsu and NEC benefit as they focus on providing services (solutions), have pricing models easier to adjust, and lead in AI-driven development progress, leaving significant room for margin improvement. NRI benefits from having fewer quasi-contractual agreements and strong cloud services, facing minimal negative impact from AI disruption. NTT Data has a high overseas business ratio (approx. 60%), requiring attention to overseas competition and AI disruption risks, but its domestic business is strong and its data center business has significant growth potential. NRI, NEC, Fujitsu, OBIC, OBC, and BIPROGY are projected to achieve double-digit profit growth, while NSSOL, TIS, Trend Micro, and Otsuka may see weak earnings due to one-time factors. Implications for Investors: Although IT Services sector stock prices may continue to face pressure in the short term due to sector rotation and AI disruption concerns, strong fundamentals, positive effects from AI (increased demand for AI-related businesses, margin improvement from AI-driven development), and changing sentiment in the US market indicate that AI beneficiary stocks are increasingly likely to experience a turning point. For stocks where AI disruption risks cannot be eliminated, even if valuations are at historical lows, upward price momentum may still face resistance.

Risks

• Deterioration of overseas business environment, especially sustained geopolitical tensions (Middle East situation)
• AI disruption risk: Generative AI replacing some software/service functions, leading to downward pressure on project unit prices
• Increase in loss-making projects: NEC's loss-making projects amounted to 16.8 billion JPY in Jan-Mar 2026, exceeding internal expectations
• Weakening telecom operator capital expenditure, affecting network equipment demand
• One-time factor impacts: NRI overseas business restructuring costs, TIS-Intec integration costs, Trend Micro staff increases and expanded losses from startup subsidiaries, end of Otsuka PC replacement cycle
• Persistent sector rotation: Capital flowing from IT Services to hardware/tech stocks, pressuring stock prices in the short term
• Slow recovery in global IT Services market demand; optimism awaits resolution of geopolitical tensions or manifestation of positive impacts in results

What to watch

• Progress trends in demand for AI-related businesses for each company
• Deployment status and productivity improvement effects of AI-driven development
• Changes in pricing models: Progress in transitioning from quasi-contractual agreements to turnkey contracts or value-oriented contracts
• Whether NEC's loss-making projects will be halved as planned in FY2027
• Progress of NRI's proprietary AI-driven development platform and whether operating profit targets can be met one year ahead of schedule
• Expansion of Fujitsu's CPU/AI servers and quantum computer businesses
• Progress of cooperation between NTT Data and NTT Docomo
• Overseas business trends: Recovery in North America, UK, Spain, Latin America; weakness in Germany and Australia
• Whether NRI will revise its mid-term targets around April 2027 (if earnings progress favorably)
• Expansion of enterprise security investments prior to the introduction of US government security evaluation systems