FRONTEO,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.38B
• Operating Income: ¥-5M
• Net Income: ¥206M
• 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

FRONTEO reported FY2026 Q2 (cumulative) consolidated results with revenue of ¥3,375 million, up 7.3% YoY, indicating steady top-line momentum. Gross profit reached ¥1,765 million, implying a robust gross margin of 52.3%, which speaks to favorable pricing/mix or improved delivery efficiency in its AI/eDiscovery and business intelligence services. Despite strong gross margins, operating income was slightly negative at ¥-5 million, though this represents a material YoY improvement (+32.7%), suggesting SG&A discipline and operating leverage are beginning to take effect. Ordinary income was ¥-23 million, reflecting modest non-operating headwinds including interest expense of ¥12.9 million. Net income came in at ¥-73 million (EPS ¥-1.86), improving 10.8% YoY, but still in loss due largely to taxes and non-operating items. EBITDA was positive at ¥173 million (5.1% margin), highlighting that core cash earnings before non-cash charges are positive even as operating profit is marginally negative. The company generated positive operating cash flow of ¥369 million, a strong result versus the accounting net loss, with an OCF/Net Income ratio of -5.05 indicating favorable earnings quality in this period. Free cash flow cannot be reliably assessed because investing cash flows were unreported (shown as zero), a key limitation for cash yield analysis. The balance sheet shows total assets of ¥8,040 million, liabilities of ¥3,239 million, and equity of ¥3,344 million; by calculation, the equity ratio approximates 41.6% despite the reported 0.0% figure (which reflects non-disclosure). Liquidity appears adequate with a current ratio of 140.7% and working capital of ¥1,159 million, supporting ongoing operations. Leverage is moderate with a debt-to-equity ratio of 0.97x (based on provided metrics), though the composition of interest-bearing debt is not fully disclosed. Interest coverage is weak at -0.4x on an EBIT basis, but EBITDA coverage would be more favorable, aligning with the positive OCF. Financing cash outflow of ¥564 million suggests debt repayment or other financing uses; details are not provided. No dividend was declared (DPS ¥0.00), consistent with preserving liquidity during a period of marginal losses and reinvestment. Overall, FRONTEO demonstrates improving profitability trends, solid gross margins, and healthy operating cash generation, yet remains sensitive to SG&A absorption, tax effects despite losses, and financing costs; disclosure gaps on cash and investing activity limit full assessment.

Profitability Analysis

ROE_decomposition: DuPont metrics indicate Net Profit Margin of -2.16%, Asset Turnover of 0.420x, and Financial Leverage of 2.40x, yielding a calculated ROE of -2.18%. The negative margin remains the primary drag, while asset turnover is moderate and leverage amplifies the small loss into a modestly negative ROE. margin_quality: Gross margin is strong at 52.3%, consistent with a knowledge-intensive service mix. Operating margin is approximately -0.1% (¥-5m on ¥3,375m), implying SG&A nearly fully absorbs gross profit. EBITDA margin of 5.1% indicates underlying cash profitability before D&A; D&A of ¥178m is a key non-cash burden. operating_leverage: With revenue up 7.3% YoY and operating loss narrowing 32.7% YoY, operating leverage is improving. Using an implied SG&A of roughly ¥1,771m (gross profit ¥1,765m minus operating income ¥-5m), even small revenue growth and mix improvements can swing operating profit to positive, suggesting high sensitivity of profits to scale.

Growth Assessment

revenue_sustainability: Revenue grew 7.3% YoY to ¥3,375m, implying healthy demand across eDiscovery/legal tech and AI analytics. The high gross margin suggests a scalable services/productivity mix, but sustainability depends on backlog, repeat litigation volumes, and enterprise AI project pipelines (not disclosed). profit_quality: Net loss of ¥73m is primarily due to non-operating items and taxes; operating loss is nearly breakeven and EBITDA is positive. Ordinary loss (¥-23m) indicates limited non-operating drag beyond interest expense. The positive OCF versus net loss underscores solid cash conversion this period. outlook: If revenue growth persists and SG&A is contained, FRONTEO is near an inflection to positive operating income. However, the weak interest coverage and tax expense despite losses could continue to weigh on bottom-line profitability absent further scale or cost optimization.

Financial Health

liquidity: Current assets of ¥4,003m and current liabilities of ¥2,844m imply a current ratio of 140.7% and working capital of ¥1,159m, sufficient for near-term obligations. Quick ratio mirrors current ratio given no reported inventories. solvency: Total liabilities of ¥3,239m vs equity of ¥3,344m results in a calculated equity ratio of ~41.6% (assets/equity ~2.4x), indicating a balanced capital structure. Debt-to-equity is 0.97x per provided metric, but the exact interest-bearing debt level is not detailed. capital_structure: Financial leverage (Assets/Equity) is 2.40x. Interest expense is modest at ¥12.9m, but EBIT-based coverage is negative (-0.4x), highlighting sensitivity to borrowing costs until operating income turns positive.

Cash Flow Quality

earnings_quality: Operating cash flow of ¥369m versus net income of ¥-73m yields an OCF/Net Income ratio of -5.05, indicating cash generation exceeded accounting profitability (benefiting from non-cash charges and/or favorable working capital). D&A of ¥178m supports this divergence. FCF_analysis: Investing cash flows were reported as zero (unreported), so free cash flow cannot be reliably computed. On a proxy basis, if capex were modest, underlying FCF could be positive given the strong OCF; however, this is not confirmable from disclosed data. working_capital: Positive OCF suggests net favorable working capital movements (e.g., collections/DSO improvements or payables management), though itemized components (receivables, contract assets/liabilities) are not provided.

Dividend Sustainability

payout_ratio_assessment: With net income negative (¥-73m) and DPS at ¥0.00, the payout ratio is effectively 0%. This aligns with the need to retain cash during a near-breakeven operating phase. FCF_coverage: FCF coverage cannot be assessed due to unreported investing cash flows; thus, dividend capacity from FCF is indeterminate this period. policy_outlook: Given marginal profitability and financing outflows, maintaining a conservative dividend stance appears prudent until sustained positive earnings and demonstrable FCF are established.

Risk Assessment

Business Risks:

• Dependence on eDiscovery/legal matter volumes and timing of large案件, leading to revenue volatility
• Project mix and utilization risk affecting gross margin despite strong headline margin
• Competitive pressure in AI analytics and legal tech from global and domestic peers
• Talent retention and hiring in data science, legal tech, and domain experts
• Client concentration risk in large corporate or law firm accounts (not disclosed)
• Execution risk on scaling proprietary AI platforms and maintaining accuracy/compliance
• Regulatory and data privacy constraints across jurisdictions (US/Japan, cross-border discovery)
• FX exposure if a material portion of revenue or costs are USD-linked (not disclosed)

Financial Risks:

• Weak EBIT interest coverage (-0.4x) with sensitivity to rate levels until operating profits improve
• Potential working capital swings affecting OCF, especially receivables collection cycles
• Unclear cash position due to unreported cash and investing cash flows
• Moderate leverage (financial leverage 2.40x; D/E 0.97x) could constrain flexibility
• Tax expense/adjustments despite losses (¥89m) depressing net income
• Refinancing and covenant risks if interest-bearing debt is significant (details not disclosed)

Key Concerns:

• Sustaining revenue growth while converting to consistent operating profitability
• Improving interest coverage to above 1x on an EBIT basis
• Clarifying cash, capex, and investing needs to assess FCF durability
• Managing tax effects that led to net losses despite near-breakeven operations

Investment Implications

Key Takeaways:

• Top-line growth of 7.3% YoY with a high gross margin of 52.3% indicates resilient commercial momentum and pricing power.
• Operating income is near breakeven (¥-5m) with positive EBITDA (¥173m), suggesting improving operating leverage.
• Positive OCF (¥369m) vs net loss (¥-73m) points to supportive cash conversion this period.
• Balance sheet is balanced with calculated equity ratio ~41.6% and current ratio 140.7%, though interest coverage remains weak.
• Disclosure gaps on cash, investing cash flows, and shares limit per-share and FCF analyses.

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio
• EBITDA margin and progression to positive EBIT
• Order intake/backlog and segment mix within eDiscovery and AI solutions
• DSO/receivables trends and OCF sustainability
• Interest coverage (EBIT and EBITDA basis) and effective tax rate normalization
• Equity ratio and any changes in interest-bearing debt

Relative Positioning: Versus TSE Growth/Information & Communication peers, FRONTEO shows mid-single-digit revenue growth and superior gross margins, but trails on profitability (negative ROE and EBIT) and interest coverage; leverage is moderate and liquidity adequate, positioning the company as operationally improving yet still in transition to consistent earnings.

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