SOLITON SYSTEMS K.K. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥13.90B
• Operating Income: ¥1.86B
• Net Income: ¥722M
• EPS: ¥76.36

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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: Strong quarter with significant operating leverage and profitability improvement despite modest top-line growth. Revenue rose 5.0% YoY to 139.04, while operating income surged 79.0% YoY to 18.64, and ordinary income climbed 78.0% YoY to 19.13. Net income advanced 95.0% YoY to 14.15, with EPS of 76.36 JPY. Gross margin stood at 41.2% (gross profit 57.25), and SG&A was 46.83, implying an SG&A-to-sales ratio of 33.7%. Operating margin expanded sharply to 13.4%; based on implied prior-year figures, operating margin improved by about 555 bps (from ~7.9% to ~13.4%). Non-operating contributions were minor (income 0.37; expenses 0.03), underscoring that the earnings inflection was operational rather than financial. DuPont ROE was 11.4% (Net Margin 10.2% × Asset Turnover 0.585 × Leverage 1.92x), a healthy level for a software/security-oriented business. Balance sheet strength is solid: equity ratio is approximately 52.2%, current ratio 192.1%, and quick ratio 183.8%, supported by cash and deposits of 93.59. Debt burden appears light in terms of interest-bearing debt (only 0.58 short-term loans reported), though the reported D/E of 0.92x reflects total liabilities-to-equity rather than debt leverage. Comprehensive income of 13.27 trails net income due to negative OCI (~0.88), likely investment valuation effects. Cash flow disclosure is unavailable, preventing a direct assessment of earnings quality (OCF/NI not calculable). The calculated payout ratio is 72.5%, above the 60% benchmark for comfort; without FCF data, dividend sustainability cannot be fully validated. There is an internal inconsistency between profit before tax (10.78) and net income (14.15) versus the stated tax expense (3.56) and effective tax rate (33%); analysis relies on the provided net and operating metrics, acknowledging this data limitation. Forward-looking, the combination of improved operating margin and strong liquidity positions the company well, but sustaining the elevated margin will hinge on revenue mix, pricing, and SG&A discipline. Key watchpoints are operating cash flow conversion, receivables trajectory, and the durability of gross margin gains.

Profitability Analysis

ROE decomposition (DuPont): ROE 11.4% = Net Profit Margin 10.2% × Asset Turnover 0.585 × Financial Leverage 1.92x. The largest driver of improvement appears to be net profit margin: operating income rose 79% on 5% revenue growth, implying substantial operating margin expansion to ~13.4% (up ~555 bps YoY by our inference). Asset turnover at 0.585 is typical for a capital-light software/security integrator and likely changed modestly YoY given mid-single-digit sales growth. Financial leverage (1.92x) remains conservative given a ~52% equity ratio; little change is expected given low interest-bearing debt. Business reason: operating leverage from fixed costs and a richer mix (higher-margin software/security or subscription revenues) likely boosted margins, with minimal help from non-operating items. Sustainability: some margin gains may be sustainable if mix/pricing and subscription penetration remain favorable, but the magnitude of YoY expansion suggests some one-time timing/seasonality or project mix benefits. Watch for SG&A growth outpacing revenue in subsequent quarters; current SG&A-to-sales is 33.7%, and any reversion could compress margins.

Growth Assessment

Top line grew 5.0% YoY to 139.04, a steady but not rapid pace. Profit growth was outsized: operating income +79.0% and net income +95.0%, driven by margin expansion rather than volume. Non-operating items were small (non-operating income 0.37), indicating quality of profit was primarily operational. The implied operating margin uplift to ~13.4% suggests improved mix or pricing, potentially from security solutions/software and reduced low-margin hardware/projects. Without order/backlog data, revenue sustainability is uncertain; growth appears reliant on maintaining current win rates and client IT/security budgets. Outlook hinges on sustaining gross margin near 41% and controlling SG&A; even modest revenue growth can translate to strong profit if these hold. Risks to growth include deal timing, competitive pricing pressure, and potential normalization of utilization rates.

Financial Health

Liquidity is strong: current ratio 192.1% and quick ratio 183.8%, with cash and deposits of 93.59 versus current liabilities of 112.86. No warning on current ratio (<1.0) or D/E (>2.0); reported D/E of 0.92x reflects total liabilities-to-equity rather than debt load. Interest-bearing debt appears minimal (short-term loans 0.58; long-term loans unreported), suggesting low financial risk. Equity ratio is approximately 52.2% (124.11/237.82), indicating a solid capital base. Maturity mismatch risk is low given ample current assets (216.79) relative to current liabilities. No off-balance sheet obligations are reported; absent disclosure may hide lease or purchase commitments, but none are indicated in the dataset.

Cash Flow Quality

Operating cash flow, investing, and financing cash flows are unreported; OCF/Net Income cannot be assessed. Consequently, we cannot test cash conversion (OCF/NI > 1.0) or free cash flow coverage for dividends and capex. Working capital signs: accounts receivable 23.83 and inventories 9.40 are modest relative to sales and current assets, but without prior-period levels we cannot judge build/decline. No direct signs of working capital manipulation can be inferred from available data. Given the strong profit increase, validating cash conversion in the next disclosure is essential to confirm earnings quality.

Dividend Sustainability

The calculated payout ratio is 72.5%, above the typical comfort threshold of 60%, indicating a moderately stretched dividend relative to earnings. FCF coverage is not calculable due to missing cash flow and capex data. Balance sheet liquidity (cash 93.59; strong current and quick ratios) provides near-term flexibility to maintain dividends even if cash conversion is uneven. However, sustainability over the medium term will depend on maintaining operating margins and converting profits to cash. Company dividend policy is not disclosed here; watch for guidance on payout policy and potential alignment with profit growth or FCF.

Risk Assessment

Business Risks:

• Margin normalization risk after an exceptional YoY margin expansion (~+555 bps OPM).
• Project timing and order intake variability in security/IT solutions affecting quarterly revenue.
• Competitive pressure in cybersecurity/software potentially impacting pricing and mix.
• Talent retention and wage inflation for engineers, impacting SG&A and COGS.
• Product/technology cycle risk in security solutions.

Financial Risks:

• Earnings quality risk due to lack of OCF disclosure (OCF/NI not available).
• Dividend sustainability risk with payout ratio at 72.5% absent FCF data.
• Potential receivables concentration or collection timing, with AR at 23.83 (context YoY unknown).
• Valuation fluctuations affecting OCI and equity (comprehensive income below net by ~0.88).

Key Concerns:

• Inconsistency between profit before tax (10.78), net income (14.15), and effective tax rate (33%), which clouds exact bottom-line drivers.
• Sustainability of gross margin at 41.2% if mix shifts back toward lower-margin projects.
• Limited visibility due to unreported cash flow, depreciation, and detailed SG&A breakdown.

Investment Implications

Key Takeaways:

• Profitability inflected strongly: operating income +79% on +5% revenue, OPM ~13.4%.
• ROE at 11.4% is healthy for a capital-light model; leverage remains conservative.
• Liquidity is robust with cash 93.59 and current ratio ~192%.
• Dividend payout ratio at 72.5% warrants monitoring given missing FCF data.
• Non-operating factors had minimal impact; performance is primarily operational.

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (target ≥1.0).
• Operating margin and gross margin trajectory.
• SG&A-to-sales ratio and headcount/wage trends.
• Accounts receivable days and collection profile.
• Order backlog/ARR (if disclosed) and pipeline conversion.
• Dividend policy updates and FCF coverage.

Relative Positioning: Within Japan small/mid-cap security/IT solution peers, Soliton Systems demonstrates superior near-term operating leverage and solid ROE with a conservative balance sheet; key differentiators will be sustaining margin gains and delivering consistent cash conversion versus peers with steadier, subscription-heavy models.

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