FRONTEO,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.38B
• Operating Income: ¥-5M
• Net Income: ¥-73M
• EPS: ¥-1.86

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: FY2026 Q2 was a near-breakeven quarter operationally with a small operating loss, but bottom-line remained in the red due mainly to net non-operating expenses and tax charges. Revenue grew 7.3% YoY to 33.75 (100M JPY), demonstrating topline resilience. Gross profit was 16.07 with a solid gross margin of 47.6%, indicating pricing and mix remained supportive. SG&A of 16.13 essentially matched gross profit, yielding operating income of -0.05 and an operating margin of roughly -0.15%. Ordinary income deteriorated to -0.23 as non-operating expenses (0.76) exceeded non-operating income (0.59), despite dividend and interest income contributions. Net income was -0.73, and the effective tax rate was a distortionary -260.4% due to tax expense of 0.53 despite a pre-tax loss, pressuring the bottom line. EBITDA was modest at 1.63 (margin 4.8%), suggesting limited cushion against interest expense (0.21) and fixed costs. Operating cash flow was -1.02, improving versus net income on a ratio basis (OCF/NI of 1.40x), but still negative in absolute terms, signaling cash burn. Liquidity is thin but not stressed, with current ratio 105.5% and working capital 1.86, supported by cash and deposits of 18.48 against short-term loans of 13.50. Leverage is elevated with reported D/E of 1.40x and interest coverage at -0.24x, indicating heightened debt-service risk if profitability does not improve. The balance sheet is intangible-heavy (intangibles 20.96 including goodwill 12.18), raising impairment sensitivity should growth underperform. ROE via DuPont is -2.2% (NPM -2.2%, asset turnover 0.420x, leverage 2.40x), with negative margins the key drag. ROIC is reported at -0.1%, well below the 7–8% target range, implying value creation remains a challenge at current returns. With SG&A effectively consuming gross profit, operating leverage from revenue growth is not yet translating to earnings, but incremental topline gains could swing results into profitability if costs are contained. Forward-looking, stabilization of non-operating items (especially interest) and normalization of taxes, along with improved cost discipline, are necessary for sustained profitability and debt service.

Profitability Analysis

ROE decomposition: ROE (-2.2%) = Net Profit Margin (-2.2%) × Asset Turnover (0.420x) × Financial Leverage (2.40x). The dominant driver of weak ROE is the negative net profit margin, despite moderate asset turnover and relatively high leverage. Business explanation: gross margin remains healthy at 47.6%, but SG&A of 16.13 fully absorbs gross profit, leaving operating loss of -0.05; net non-operating expenses (net -0.17) and an unusual tax charge (0.53) further depress net profit. The most material change vs. last year is likely margin-related (operating income improved 32.7% YoY but still negative), while revenue grew 7.3%, implying some improvement in operating efficiency but insufficient cost absorption. Sustainability: gross margin quality appears stable; improvement in operating margin could be sustainable if SG&A growth is contained below revenue growth. Concern flags: interest coverage is negative (-0.24x); and while explicit SG&A YoY growth is not disclosed, the fact that SG&A equals gross profit indicates limited operating leverage at current scale. Overall, margin repair (particularly SG&A efficiency) is the key lever for ROE normalization, not asset turnover or further leverage.

Growth Assessment

Revenue grew 7.3% YoY to 33.75, supported by demand resilience; however, growth did not translate into operating profitability due to SG&A absorption. Gross margin at 47.6% suggests product/service mix remains favorable; sustaining this while scaling volumes could rapidly improve operating profit given near-breakeven status. Non-operating line remains a headwind (net -0.17) and needs stabilization for clean earnings. EPS (basic) was -1.86 JPY, reflecting continuing losses; diluted EPS appears positive (5.24 JPY) but is inconsistent with net loss and likely reflects non-cash/one-off elements or share count effects—users should rely on basic EPS for economic performance. With EBITDA margin at 4.8%, incremental revenue growth combined with disciplined SG&A could shift to positive operating income in near term. Outlook hinges on: cost control, conversion of pipeline to revenue, and normalization of tax expense given current losses. Given ROIC at -0.1%, more efficient capital deployment or higher margin mix is required to achieve value-accretive growth.

Financial Health

Liquidity: current ratio 105.5% and quick ratio 105.5% are slightly above 1.0, indicating tight but adequate short-term coverage; explicit warning threshold (<1.0) is not breached. Working capital is 1.86, with cash and deposits of 18.48 providing a buffer against current liabilities of 33.99 and short-term loans of 13.50. Solvency: reported D/E is 1.40x (near the conservative threshold of <1.5), indicating elevated leverage; total liabilities are 46.96 vs equity 33.44. Interest coverage is -0.24x due to negative operating income, implying debt-service vulnerability if earnings do not improve. Maturity mismatch: short-term loans (13.50) are sizable relative to current assets (35.85), but cash on hand (18.48) mitigates near-term rollover risk; nonetheless, reliance on short-term funding increases refinancing exposure. Asset quality: intangibles of 20.96 (incl. goodwill 12.18) represent a substantial portion of assets (26%), raising impairment risk if performance weakens. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF was -1.02 versus net income of -0.73, yielding OCF/NI of 1.40x, which formally exceeds the 0.8 threshold but both figures are negative—quality is mixed and cash burn persists. Depreciation and amortization of 1.68 add non-cash support, yet OCF remained negative, implying either core losses or working capital build; with AR/inventory not reported, the working capital drivers cannot be isolated. Capex is modest at -0.19, suggesting limited capital intensity; however, investing cash flow overall is unreported, preventing FCF calculation. Financing inflow of 6.89 and share repurchases of -1.00 indicate external funding supported liquidity despite operating cash outflow. No clear signs of working capital manipulation can be identified from the limited disclosures, but the tax cash outflow despite losses contributed to negative OCF.

Dividend Sustainability

Dividend data are unreported; payout ratios and total dividends paid are N/A. Given negative net income (-0.73), negative operating cash flow (-1.02), and negative retained earnings (-1.77), capacity for cash dividends appears constrained. With leverage elevated (D/E 1.40x) and interest coverage negative, internal cash priorities likely favor stabilization of operations and debt service over distributions. Without investable FCF visibility (investing CF unreported), FCF coverage of dividends cannot be assessed. Policy outlook should be conservative until sustained positive OCF and operating profit are demonstrated.

Risk Assessment

Business Risks:

• Execution risk in converting revenue growth into operating profit as SG&A fully absorbs gross profit
• Intangible and goodwill impairment risk given 20.96 in intangibles including 12.18 goodwill
• Customer concentration and project timing risk typical for specialized AI/forensics and legal-tech services
• Pricing and utilization risk impacting gross margin and EBITDA margin

Financial Risks:

• Debt service risk with interest coverage at -0.24x and D/E at 1.40x
• Refinancing risk due to short-term loans of 13.50 against tight current ratio (105.5%)
• Cash burn risk with OCF at -1.02 despite small operating loss, indicating sensitivity to working capital and taxes
• Tax cash outflow despite losses (effective tax rate -260.4%), potentially recurring due to non-deductibles or prior-period items

Key Concerns:

• Sustained bottom-line losses (NI -0.73) despite revenue growth
• Non-operating net expense (-0.17) diluting earnings, including interest expense of 0.21
• Limited operating leverage at current scale; SG&A control required
• Data limitations (AR, inventories, investing CF, SG&A breakdown) restrict deeper diagnostics

Investment Implications

Key Takeaways:

• Topline grew 7.3% YoY, but operating margin remains slightly negative at ~-0.15%
• Gross margin is healthy at 47.6%, positioning the company near an inflection to profitability if SG&A is contained
• Leverage is elevated (D/E 1.40x) and interest coverage negative, raising urgency to improve operating earnings
• Cash position (18.48) covers short-term loans (13.50), but OCF is negative and current ratio is only 105.5%
• ROE (-2.2%) and ROIC (-0.1%) indicate sub-par returns; margin recovery is the primary lever

Metrics to Watch:

• Operating margin progression and SG&A-to-revenue ratio
• Non-operating result (interest expense trend and any investment income)
• Operating cash flow and working-capital movements (receivables, unbilled, and tax cash flows)
• Leverage metrics (D/E, interest coverage) and debt maturity profile
• Intangible asset and goodwill impairment indicators

Relative Positioning: Within domestic AI/forensics and legal-tech peers, FRONTEO shows decent gross margins but weaker operating leverage and tighter liquidity, with higher reliance on debt; successful cost discipline and stabilization of non-operating items would be required to close the profitability and risk gap.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis