ISID >> information services international

October 28, 2004
Information Services International-Dentsu, Ltd. (ISID)
Jutaro Takinami, President and CEO
(Stock Code 4812 TSE)

Contact: Kenji Ryu, Executive Director
(Tel: 03-6713-6160)

Revisions to First-Half and Full-Year Earnings Projections for Fiscal Year ending March 2005 (Consolidated and Non-consolidated)

Considering the recent earnings performance, we made revisions to our earnings projections, announced on May 17, 2004, for the first half and the full fiscal year ending March 2005 (from April 1, 2004 to March 31, 2005).

1. Revised Financial Results for the First-Half of Fiscal Year Ending in March 2005 (April 1, 2004 through September 30, 2004)

a. Forecast of Consolidated Financial Results

(Units: JPY 1 Million)

	Sales	Operating Income/Loss	Ordinary Income/Loss	Net Income
Latest Forecast (A)	30,300	-950	-800	-1,350
Revised Forecast (B)	35,397	-365	-235	-1,020
Increase/Decrease (B－A)	5,097	585	565	330
Change (％)	16.8%	61.6%	70.6%	24.4%
(c.f.) Results for Previous Period Ending September 2003	32,037	-723	22	-233

b. Forecast of Non-consolidated Financial Results

(Units: JPY 1 Million)

	Sales	Operating Income/Loss	Ordinary Income/Loss	Net Income
Latest Forecast (A)	23,400	-550	-500	-840
Revised Forecast (B)	28,324	-245	-74	-529
Increase/Decrease (B－A)	4,924	305	426	311
Change (％)	21.0%	55.5%	85.2%	37.0%
(c.f.) Results for Previous Period Ending September 2003	24,671	-580	-9	8

2. Revised Financial Results for Fiscal Year Ending in March 2005 (April 1, 2004 through March 31, 2005)

a. Forecast of Consolidated Financial Results

(Units: JPY 1 Million)

	Sales	Operating Income/Loss	Ordinary Income/Loss	Net Income
Latest Forecast (A)	69,500	1,300	1,600	100
Revised Forecast (B)	72,396	1,367	1,692	-436
Increase/Decrease (B－A)	2,896	67	92	-536
Change (％)	4.2%	5.2%	5.8%	-
(c.f.) Results for Previous Period Ending March 2004	71,608	588	2,197	1,001

b. Forecast of Non-consolidated Financial Results

(Units: JPY 1 Million)

	Sales	Operating Income/Loss	Ordinary Income/Loss	Net Income
Latest Forecast (A)	54,500	1,200	1,300	100
Revised Forecast (B)	56,777	1,002	1,409	-1,185
Increase/Decrease (B－A)	2,277	-198	109	-1,285
Change (％)	4.2%	-16.5%	8.4%	-
(c.f.) Results for Previous Period Ending March 2004	55,982	97	1,288	735

3. Reasons for Revision

3-1. Factors Carrying Significant Effects on Earnings

We revised our projections of consolidated and non-consolidated sales as well as all categories of profits upward for the first half of the fiscal year. But regrettably, we had to make sharp reductions to our projections of full-year net income both on consolidated and non-consolidated bases. Followings are main factors that are likely to have large effects on full-year net income:

(1) Unprofitable Projects
a) Losses from the Discontinuation of the Project to Develop a Sales and Distribution Management System In our project to construct a sales and distribution management system for a customer, whose development started in October 2002, delays became apparent because of quality problems and the need for redoing work in the development phase which was planned for delivery in the current year. This gave rise to concerns that continuing the project might cause a future increase in costs on the part of both the customer and the Company. As a result of discussions with the customer, including a review of the objective of the development project, an agreement to discontinue the project was reached on October 28, 2004.
The discontinuation of the project generated a total loss of approximately 810 million yen, of which 260 million yen will be booked as a cost of defective work in our non-consolidated income statement for the fiscal first half. In addition, the payment of settlement money worth approximately 550 million yen will be booked as extraordinary loss in our non-consolidated earnings statement for the full year ending March 2005.
b) Losses from Other Projects Out three projects to develop ERP systems, we discontinued one project and delivered two systems. However all of the three projects resulted in gross losses. We consider that the losses stemmed from cursory cost estimates and an insufficient evaluation of risks at the start of the projects.
Combined gross losses from the three projects are estimated to total 250 million yen. Of the total, 200 million yen will be booked in the non-consolidated income statement for the first half and 50 million yen in the non-consolidated full-year statement for the year ending March 2005.
We have strengthened our oversight of projects, based on our experience of having a large unprofitable project in the fiscal year ended in March 2003. As we allowed projects to turn unprofitable again this time, however, we take this situation very seriously. We are determined to strengthen risk evaluation at the time of order receipts and enhance management of developments to prevent any recurrence of such situation.
(2) Impairment Losses on Shares of US Subsidiary At the board of directors’ meeting held on October 28, 2004, it was resolved to recognize losses on the impaired market value of our shareholdings on US subsidiary ISI-Dentsu of America, Inc., in accordance with the “Accounting Standards for Financial Instruments.” Of the book value of our investment in the subsidiary, we will recognize as valuation loss what is deemed irrecoverable considering the subsidiary’s future business performance.
Because ISI-Dentsu of America, Inc. is a consolidated subsidiary, extraordinary loss in the consolidated earnings statement for the full year ending March 2005 will not be affected. On the other hand, in the non-consolidated earnings for the same year, valuation loss on shareholdings in the subsidiary will amount to approximately 1,100 million yen (an impairment assessment rate of 70%) and will be posted as extraordinary loss.

3-2. First-Half Earnings Outlook

(1) Consolidated Consolidated sales are expected to be 5,097 million yen larger than the initial projection, primarily due to an expected increase in non-consolidated sales, which will be discussed later.
Consolidated operating profit is estimated to exceed the initial projection by 585 million yen. This reflects an increase in non-consolidated operating profit, which will be explained later, as well as growth in gross profit from businesses for the manufacturing industry in consolidated subsidiary companies and reduction on selling, general, and administrative expenses.
Consolidated ordinary profit is likely to increase 565 million yen because the non-operating income/loss is seen to be roughly in line with the initial projection.
Consolidated net income is presumed to show an improvement of 330 million yen over the initial projection, mainly because of an expected reduction of approximately 200 million in the relocation-related expenses that were planned as extraordinary loss.
(2) Non-consolidated Non-consolidated sales are expected to be 4,924 million yen larger than the initial projection. This is primarily due to increase of approximately 800 million yen in software product sales to manufacturing industry and approximately 1,400 million yen in order receipts for system development, compared to the initial projections. The larger-than-expected sales also reflects approximately 2,000 million in commission revenue from intermediate sales of software products and hardware products.
Non-consolidated operating profit is forecast to exceed the initial projection by 305 million yen, reflecting a reduction in selling, general, and administrative expenses among other factors. Although first-half non-consolidated sales are expected to exceed the initial projection, non-consolidated gross profit is likely to be roughly in line with the initial projection because of unprofitable projects explained earlier.
Non-consolidated ordinary profit is expected to increase 426 million yen from the initial projection, reflecting an improvement of non-consolidated operating profit and an increase in non-operating income such as dividend income and revenue from services provided to subsidiaries.
Non-consolidated net income is likely to show an improvement of 311 million yen over the initial projection, owing in large part to a reduction in the relocation-related expenses that were planned as extraordinary loss.

3-3. Full-Year Earnings Outlook

(1) Consolidated Although consolidated sales are estimated to exceed the initial projection by 5,097 million yen for the first half, excess over the initial projection is likely to be 2,896 million yen for the full year. This is because, while we anticipate that consolidated subsidiaries’ businesses for the manufacturing industry will remain steady, we have a conservative outlook for non-consolidated second-half sales in businesses for the financial services industry and the ERP-related businesses.
Consolidated operating profit is likely to increase 67 million yen from the initial projection. This is mainly because of an expected increase in operating profit from businesses for the manufacturing industry, in particular at subsidiaries, which will offset a likely drop in non-consolidated operating profit.
Consolidated ordinary profit is expected to show an increase of 92 million yen from the initial projection, because the non-operating income/loss is seen to be roughly in line with the initial projection.
However, consolidated net loss of 436 million yen is expected largely due to extraordinary losses on a non-consolidated basis.
(2) Non-consolidated Non-consolidated sales are expected to exceed the initial projection by 4,924 million yen for the first half, however, excess over the initial projection is likely to be no more than 2,277 million yen for the full year. While we anticipate that businesses for the manufacturing industry will remain steady in the second half, we have a conservative outlook for order receipts from the financial services sector because of the ongoing realignment in the banking industry. Our order receipts outlook is also conservative for the ERP-related businesses since we give a top priority to thorough risk management.
Although non-consolidated operating profit is estimated to increase 305 million yen compared to the initial projection for the first half, we forecast a decrease of 198 million for the full year. This reflects the disposal of losses from the unprofitable ERP-related projects mentioned earlier as well as our conservative outlook for non-consolidated sales.
Non-consolidated ordinary profit is expected to show an increase of 109 million yen from the initial projection. While operating profit is likely to fall short of the initial projection, we forecast an increase in non-operating income such as dividend income and revenue from services provided to subsidiaries.
The non-consolidated net balance is presumed to result in a loss of 1,185 million yen. Although the relocation-related expenses that were planned as extraordinary loss will likely be reduced by approximately 200 million yen, we plan to book?extraordinary losses of 550 million yen due to the discontinuation of the sales and distribution management system project discussed earlier, and 1,100 million yen for the reduced market value of our shareholdings in the US subsidiary.

Cautionary Remarks Regarding Forward-Looking Statements:

This report includes forward-looking statements that represent ISID’s assumptions and expectations in light of currently available information. These statements reflect industry trends, client situations and other factors, and involve risks and uncertainties which may cause actual performances results to differ from those discussed in the forward-looking statements in accordance with changes in the domestic and overseas business environment.