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NOMURA RESEARCH INSTITUTE

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1. Company Overview
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Nomura Research Institute (NRI, TSE:4307) is Japan’s leading provider of integrated consulting and IT solutions, with deep roots in the country’s financial system. The company originated as Japan’s first private-sector think tank and Nomura’s computing arm, and today combines strategy/operations consulting with large-scale systems development, outsourcing, and industry platforms.

NRI makes money through four segments: Consulting, Financial IT Solutions, Industrial IT Solutions, and IT Platform Services. The economic engine is recurring revenue from long-term outsourcing and “industry standard” platforms, especially for Japanese financial institutions. Flagship platforms include THE STAR (brokerage back-office), T-STAR (asset-management operations), and BESTWAY (mutual-fund distribution for banks), plus BPO and managed infrastructure (including dedicated-region cloud for regulated workloads). Revenue and profit are predominantly domestic. In FY March 2025, revenue was ¥764.8b and operating profit ¥134.9b (17.6% margin). Profit contribution came primarily from Financial IT Solutions (~¥61.5b OP) and IT Platform Services (~¥30.5b), with Industrial IT Solutions (~¥24.2b) and Consulting (~¥18.4b) smaller but solid. Domestic revenue represented the vast majority of the total.

What historically made this a good business is the combination of (1) mission-critical systems with high switching costs in a regulated industry, (2) recurring multi-year outsourcing contracts, (3) a consult-to-build-to-operate model that compounds client lock-in and data/process know-how, and (4) conservative execution delivering stable mid-to-high teens operating margins and strong ROE.

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2. Why the Stock Is Near a 52-Week Low
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NRI’s shares have fallen sharply in recent weeks to around a 52-week low, down roughly a quarter from recent levels and about mid‑20s percent year over year. The decline accelerated despite nine-month FY March 2026 results showing higher sales and earnings versus the prior year.

The market appears to be pricing in two negatives: (1) an operating loss in the December quarter at NRI’s overseas industrial IT subsidiaries and an accompanying restructuring, and (2) a sector-wide de-rating of software and IT services stocks amid concern that generative AI will compress project work and threaten traditional systems integration/consulting economics. Some investors also worry that domestic IT spending could cool after a multi-year modernization cycle, pressuring growth and margins.

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3. What the Market Is Currently Pricing In
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(a) One-time / cyclical / sentiment-driven
- Sector selloff tied to AI disintermediation fears, pulling down all software/services names.
- Anticipated restructuring charges in 4Q related to overseas industrial IT.
- Macro/currency noise (yen moves) and typical year-end budgeting effects for Japanese clients.

(b) Medium-term business headwinds
- Overseas industrial IT drag: weak demand at Australian and other overseas subsidiaries, with margin pressure requiring restructuring and potential portfolio pruning.
- Domestic wage inflation versus bill-rate increases, creating concern about margin compression.
- Ongoing client cloud migration potentially reducing bespoke development scope/effort over time.
- Possible moderation in financial institutions’ capex after strong post-pandemic modernization.

(c) Potential long-term structural threats
- Generative AI automating portions of systems development, testing, and some consulting work, compressing billable hours and day rates.
- Hyperscalers and vertical SaaS encroaching on workloads historically built and operated by NRI, including some platform adjacencies.
- Client consolidation and selective insourcing, increasing price pressure and rebid risk.
- Talent supply constraints in advanced digital and AI skills.

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4. Reality Check vs Market Narrative
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Overseas industrial IT losses and restructuring: This is supported by hard data—management disclosed a December-quarter operating loss (around ¥2.3b) at overseas industrial IT subsidiaries and announced a reorganization to be executed in the March quarter. However, the group left full-year guidance unchanged, and nine-month FY26 sales (~¥602b) and net income (~¥83b) were up year on year, with EPS also higher. Context matters: the loss is small relative to NRI’s FY25 operating profit of ~¥135b, and overseas industrial IT is a minority of group profits. The market seems to be extrapolating a contained issue across the whole company.

AI-driven business model risk: The narrative is strong, but evidence of damage at NRI is limited so far. Domestic financial platforms and outsourcing contracts remain intact, margins were higher in FY25 (17.6% vs 16.3% prior year), and nine-month FY26 earnings improved. NRI is integrating AI into delivery and operations, and the company’s role operating regulated, mission-critical platforms reduces immediate displacement risk by pure AI automation.

Cloud/SaaS disintermediation of platforms: There is a structural trend toward cloud and packaged solutions, but NRI has already modernized much of its financial SaaS stack on dedicated-region cloud within NRI-managed facilities for compliance and availability. For core brokerage back office and asset-management operations in Japan, switching off NRI platforms entails multi-year risk, regulatory hurdles, and major migration costs. No broad-based client defections are visible.

Domestic demand moderation and margins: Wage pressure is real, but NRI has a record of price/mix management and productivity improvements; FY25’s margin expansion and steady nine-month FY26 profitability argue the company retains pricing power in the core. The worry is plausible but not yet evident as a broad earnings headwind.

Bottom line: The market is likely over-weighting a small overseas setback and a sector narrative about AI, while under-weighting the resilience of NRI’s domestic platforms and outsourcing base.

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5. Structural vs Non-Structural Diagnosis
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Focus: structural risks only.

1) Commoditization of overseas industrial IT (generalist SI exposure)
- Effect on value creation: Damages those subsidiaries’ economics; low differentiation, price-led competition.
- Moat impact: Weakened in those units; not core to NRI’s domestic platform moat.
- Time-to-repair: Requires footprint pruning, pricing discipline, focus on higher-value verticals; 4–8 quarters.
- Classification: Structural essence damage (within those units), but ring-fenced at the group level.

2) Generative AI compressing SI/consulting delivery economics
- Effect on value creation: Changes delivery model and staffing leverage; risks rate/hour compression.
- Moat impact: For commodity build/test work, yes; for regulated platform operations with domain/process IP, limited.
- Time-to-repair: Adaptation via outcome-based pricing, tooling, and AI-assisted delivery is feasible.
- Classification: Structural but survivable.

3) Hyperscaler/SaaS encroachment on NRI’s proprietary financial platforms
- Effect on value creation: Potentially reduces scope for bespoke development; risk of standardized substitutes over a decade.
- Moat impact: Moderated by regulation, data residency, integration complexity, and NRI’s installed base/network across brokers and asset managers.
- Time-to-repair: NRI is already migrating to dedicated-region cloud and operating platforms as regulated SaaS; this is the repair.
- Classification: Structural but survivable.

4) Client consolidation/insourcing in Japan
- Effect on value creation: Can intensify rebid pressure and pricing, but high switching costs and platform standardization defend the core.
- Moat impact: Some erosion at the margin; relationships, certifications, and uptime track record matter.
- Time-to-repair: Ongoing—won via performance and co-innovation; not a sudden shock.
- Classification: Structural but survivable.

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6. Time-as-a-Moat Test
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Assume we hold NRI’s current market capitalization in cash (~¥2.3 trillion).

- Rebuild in 2 years: Not realistic. You could assemble a generalist SI/consulting shop, but you would lack (i) regulatory-grade platforms for brokerage/asset management, (ii) decades of code/data/process IP, (iii) certifications and 24/7 operational credibility, and (iv) a network of marquee clients already integrated to those platforms.

- Rebuild in 5 years: You could achieve mid-scale domestic SI and some managed services, possibly acquire smaller assets. Winning Tier-1 financial cores or replacing THE STAR/T-STAR is still improbable; risk tolerance and regulatory sign-off would block cutover.

- Rebuild in 10 years: With sustained investment and acquisitions, you might create a credible alternative for select workloads, but wholesale displacement of NRI’s installed base remains unlikely. Barriers that persist: regulatory and data-residency constraints; mission-critical uptime requirements; embedded integrations with exchanges, custodians, and counterparties; accumulated domain knowledge; brand trust; and multi-tenant ecosystem effects across Japanese financial institutions.

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7. Moat & Mispricing Score
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Score: 7/10

The moat in NRI’s domestic financial platforms and outsourcing remains intact, supported by regulation, switching costs, operational track record, and embedded ecosystems. The overseas industrial IT weakness is structural for those units but small relative to group profits, and management is already restructuring. The recent share-price decline implies a level of permanent earnings impairment that is inconsistent with nine-month results, unchanged full-year guidance, and the stickiness of the core. The market is mispricing TIME, not ESSENCE—conflating a ring-fenced overseas reset and an AI narrative with damage to NRI’s regulated, high-switching-cost platform franchise. Even if overseas industrial IT ran at a multi-billion-yen loss for a year, that would jeopardize only a single-digit percentage of group operating profit, not the magnitude implied by the drawdown.

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8. Final Sanity Check
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If NRI disappeared tomorrow, would the world rebuild it in the same form? Yes. Japan’s financial sector needs a domestic, regulated operator of industry-standard platforms and outsourcing with deep domain knowledge and 24/7 reliability. Recreating that combination of platform IP, operational certifications, client integrations, and trust would be mandatory but would take many years; the rebuilt entity would likely look very similar—consult-to-build-to-operate, dedicated-region cloud for regulated workloads, and shared platforms spanning multiple institutions.

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