Company Reports

Keyence outsources its production in a highly effective manner that minimizes the risk of potential competition from suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

Keyence's fiscal 2026 (ending March 2027) first-quarter sales increased 33% year on year to JPY 346 billion. Gross and operating margins came in at 85% and 54%, up 240 and 450 basis points from a year ago, respectively. The shares are traded at 10% above the previous close intraday.

Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

Keyence posted JPY 1.16 trillion in sales for fiscal 2025 (ending March 2026), setting a record for the fifth straight year. In the March quarter, all overseas markets grew over 20% year on year, and operating margin rose to 54.3% excluding Cadenas amortization. Shares surged 16% the following day.

Keyence posted record quarterly sales of JPY 289 billion in the December quarter (up 11.4% year on year), with an operating margin of 49.8% and a net margin of 38.4%. Shares fell about 4% on the following trading day.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

Keyence posted record sales of JPY 284 billion in the September quarter, with an operating margin of 50.3% and a net margin of 37.9%. The company announced a dividend of JPY 550 per share for fiscal 2025 (ending March 2026), up 57% from JPY 350 in fiscal 2024.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

We are transferring coverage of Keyence, a leading global provider of sensors, vision systems, and measurement equipment. Keyence operates under a consultancy-like model, offering value-added solutions and institutionalized know-how, which underpin its high margins.

Keyence posted record-high June-quarter sales and operating profit, with sales in Japan and overseas up 5.2% and 5.9% year on year, respectively. The operating margin stayed high at 49.5%, despite a capital expenditure slowdown amid US-led tariff uncertainty.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

Narrow-moat Keyence reported that fiscal 2024 companywide sales and operating profit grew by 9.5% and 11.1% year on year, respectively, which aligns with our previous estimate, indicating remarkable resilience amid macro turmoil. Markets other than Europe reported strong growth in the December 2024 quarter, with quarterly sales from Japan, the Americas, and Asia growing year on year by 8.5%, 12.6%, and 17.7%, respectively. Management commented that China has returned to growth, with growth at around the same level as the Asia market. On the other hand, quarterly sales from Europe dropped by 6.5% yearly, or 5.5% sequentially, suggesting the demand recovery is likely to happen later than expected. As a result, we cut our sales estimates for Europe in fiscal 2025 to JPY 154 billion from JPY 188 billion. Given the recent slowdown in new hires, we also trimmed our fiscal 2025 sales estimate for Japan. Employee count decreased by 25 to 12,261 by the end of fiscal 2024, after the drastic increase of 1,619 and 1,706 in fiscal 2022 and 2023, respectively. Keyence has shifted its focus to on-the-job training for employees hired in the past two years and has slowed down its hiring pace, especially in Japan. Consequently, sales growth will mostly depend on growth in sales per employee rather than growth in employee numbers. We lowered Japan's fiscal 2025 sales assumption to JPY 402 billion from JPY 423 billion as previously estimated, representing 8% year-on-year growth, consisting of headcount growth of 2% and sales-per-capita growth of 6%. While we slightly raised our sales estimate for Asia to JPY 318 billion from JPY 316 billion, this cannot fully absorb our downward revision in Europe and Japan. Overall, we cut our companywide sales estimate by 4% to JPY 1.156 trillion for fiscal 2025, and we trimmed our fair value estimate for Keyence by 4% to JPY 61,400; the shares are fairly valued.

Keyence marked another solid quarter with historically high December-quarter revenue of JPY 259 billion, or year-on-year growth of 7.7%, slightly behind our estimate of JPY 264 billion, or year-on-year growth of 9.7%. The shortfall from our forecast was mainly due to continuous slow capital spending amid the weak macroeconomic environment in Europe. Revenue from Europe and other grew merely 1.1% year-on-year helped by favorable yen depreciation. On the other hand, other markets continue to enjoy strong momentum, with Japan, the Americas, and Asia growing by 9.3%, 9.6%, and 8.3%, respectively, in the December quarter. The company delivered a remarkable gross margin of 83.7% in this quarter, and we expect to see the gross profit margin to be maintained or further improved as the impact brought by the price revision that took place in the September quarter of fiscal 2022 is not coming to an end yet. We are almost sure that Keyence's revenue will surpass JPY 1 trillion in fiscal 2024, together with a historically high gross profit margin of more than 84%. We make minor changes to our earnings forecasts and maintain our fair value estimate for wide-moat Keyence at JPY 63,700. The shares are fairly valued at this moment.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

We raise our fair value estimate for wide-moat Keyence to JPY 63,700 from JPY 63,000, as we expect the company will weather the current headwinds better than our previous expectations. The company achieved a historically high gross margin of 84.1% in the September quarter, which has been improving since the September quarter of fiscal 2022 (ending March 2023), when the company revised its products to cover the higher logistics and component costs amid the supply chain disruptions caused by covid-19. We believe the company will maintain and further improve gross margin by continuously utilizing its specialization in the vision sensor/machine vision field to provide value-added solutions that address urgent issues such as rising wages and high energy costs.

Although Keyence’s 11% year-on-year revenue growth in the June quarter was largely in line with expectations, its operating margin of 49.9%, down 0.2 percentage points from the previous year, was disappointing, as hiring costs weighed on profitability. Consequently, we expect higher near-term personnel expenses and lower our fiscal 2024 (ending March 2025) and 2025 operating margin assumptions to 51.8% and 53.0%, respectively, from 52.5% and 54.0%. However, we keep our fair value estimate for narrow-moat Keyence at JPY 63,000 per share, as our 12% revenue compound annual growth rate between fiscal 2024 and 2028 remains intact—and we continue to expect the sales contribution from new hires to improve margins over the medium term. We believe the company’s shares are fairly valued.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.