Morpho,Inc. FY2025 Q4 Earnings Report

Financial Highlights

• Net Sales: ¥3.36B
• Operating Income: ¥45M
• Net Income: ¥5M
• EPS: ¥-14.80

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

Morpho (3653) reported FY2025 Q4 consolidated results under JGAAP showing resilient top-line but a sharp deterioration in profitability. Revenue was 33.59 (100M JPY), up 1.7% YoY, indicating modest growth despite a challenging demand environment for smartphone- and imaging-related software. Gross profit reached 18.44, yielding a healthy gross margin of 54.9%, consistent with a software/licensing-heavy model. However, SG&A expenses were 17.98, nearly consuming the entire gross profit and compressing operating income to 0.45, down 82.1% YoY. Operating margin fell to 1.3% by our calculation, despite the reported operating margin metric showing 0.0% due to reporting conventions. Ordinary income was 0.71 (−75.8% YoY), supported by non-operating income of 0.61, including interest income of 0.10 and equity-method gains of 0.23. Net income swung to a loss of -0.77, with EPS (basic) at -14.80 JPY. The loss was amplified by a very high effective tax rate of 204.8% (tax expense of 1.52 against pre-tax income of 0.74), likely reflecting tax adjustments or valuation allowances rather than operational tax burden. Cash generation weakened: operating cash flow was 0.14, and free cash flow (defined here as OCF + investing CF) was -3.99, driven mainly by investing outflows of -4.13 rather than capex (-0.51). The balance sheet remains strong with total assets of 41.46, cash and deposits of 25.25, minimal liabilities of 5.26, and equity of 36.19, resulting in a current ratio of 694.8% and debt-to-equity of ~0.15x. Asset turnover was 0.810 and financial leverage modest at 1.15x; with a net margin of -2.3%, DuPont ROE was -2.1%, matching the reported figure. EBITDA was 1.29 (margin 3.8%), indicating limited operating leverage at current scale. While revenue growth is intact, profit quality deteriorated due to SG&A intensity and a non-recurring tax burden. Liquidity and solvency are strong, but earnings visibility and cash conversion need improvement. Dividend data were unreported; with negative earnings and negative FCF, capital return appetite likely remains conservative. Overall, Morpho retains strategic optionality with a cash-rich balance sheet, but must improve operating efficiency and normalize taxes to restore ROE.

Profitability Analysis

ROE decomposition (DuPont): net margin -2.3% × asset turnover 0.810 × leverage 1.15x = -2.1% ROE. Gross margin is robust at 54.9%, consistent with high-value software licensing and royalties. Operating margin compressed to 1.3% (0.45/33.59) as SG&A (17.98) absorbed nearly all gross profit (18.44), signaling elevated fixed cost intensity or front-loaded investments in growth. EBITDA margin was 3.8%, indicating modest contribution from D&A (0.84) but insufficient to offset SG&A pressure. Ordinary income (0.71) benefited from non-operating items (interest income 0.10; equity method income 0.23), partially masking weak core profitability. Interest expense is negligible (0.01) and interest coverage is high (46.34x), but this reflects low debt rather than strong operating earnings. The effective tax rate of 204.8% drove a net loss despite positive pre-tax income, likely due to valuation allowance changes or non-deductible items under JGAAP. Operating leverage appears unfavorable at current revenue scale; small revenue growth (+1.7% YoY) translated into a disproportionate decline in operating profit (-82.1% YoY), implying either SG&A growth outpacing sales or mix effects reducing incremental margins. Margin quality is therefore weak near-term, with sustainability hinging on SG&A control and improved scale.

Growth Assessment

Revenue grew 1.7% YoY to 33.59, demonstrating resilience but no acceleration. Given Morpho’s exposure to imaging/AI software, growth likely reflects steady royalties and services rather than major new platform wins in the period. Profit growth quality deteriorated markedly: operating income declined 82.1% YoY and ordinary income 75.8% YoY, indicating negative operating leverage and/or product mix shifts toward lower-margin services. Non-operating contributions (0.61, notably equity-method income 0.23 and interest income 0.10) cushioned ordinary income but are not core earnings. The significant tax expense (1.52) despite small pre-tax profit (0.74) produced a net loss, which is unlikely to be structural but does reduce visibility on near-term bottom line. EBITDA of 1.29 suggests limited room to absorb SG&A without higher revenue scale. Outlook hinges on conversion of pipeline in automotive/embedded vision and stabilization in handset-related royalties; absent stronger top-line growth or cost discipline, earnings recovery may lag. Sustainability of revenue appears fair given recurring elements, but profit sustainability is weak until SG&A intensity normalizes and tax effects subside.

Financial Health

Liquidity is very strong: current assets 32.50 vs current liabilities 4.68 yield a current ratio of 694.8% and quick ratio identical given no inventories reported. Cash and deposits stand at 25.25, covering 5.4x current liabilities, providing ample buffer for operations and investment. Solvency is solid with total liabilities of 5.26 and equity of 36.19, implying debt-to-equity around 0.15x and financial leverage of 1.15x. Interest-bearing debt is unreported, but negligible interest expense (0.01) indicates minimal debt burden. Working capital is 27.82, supporting operational flexibility. Investment securities total 4.78, adding to liquidity but introducing some market value risk. Retained earnings are modest at 1.13, signaling limited cumulative profitability; losses will pressure this further. Overall capital structure is conservative and supports ongoing R&D and strategic investments without external financing.

Cash Flow Quality

Operating cash flow was 0.14 versus net income of -0.77, yielding OCF/NI of -0.18x, reflecting poor conversion in the period (loss plus working capital movements). Free cash flow, defined here as OCF + investing CF, was -3.99 due to sizable investing outflows of -4.13; only -0.51 was capex, implying most outflows were financial investments or intangibles. EBITDA of 1.29 indicates the business is cash-generative before working capital and investment, but not enough to offset investment activity this quarter/year. Working capital details are limited (AR 5.94; AP 2.12; inventories unreported), but the small OCF suggests either receivable build, lower advances, or other current account outflows. The gap between pre-tax profit (0.74) and OCF (0.14) plus the unusually high tax expense reduces earnings quality in this period. Cash balance remains high, mitigating near-term cash flow risk despite negative FCF.

Dividend Sustainability

Dividend data are unreported for the period. With net income at -0.77 and free cash flow at -3.99, coverage for potential dividends would be weak if distributions were contemplated. Equity remains strong (36.19) and cash is ample (25.25), but retained earnings are low (1.13), and JGAAP constraints plus loss-making status argue for a conservative stance. Absent disclosures on DPS or policy, we assume capital allocation will prioritize investment and stabilization of profitability over shareholder returns near term. If dividends resume or exist, payout ratio and FCF coverage would likely be strained in the short run until earnings normalize.

Risk Assessment

Business Risks:

• Customer concentration and program timing risk in handset and imaging ecosystems affecting royalty revenue volatility
• Slower smartphone market and elongated replacement cycles suppressing unit-driven royalties
• Execution risk in scaling automotive/embedded vision and AI deployments with long sales cycles
• Dependence on key technology platforms and potential IP/licensing changes by major OS and chip vendors
• Competitive pressure from global computer vision and AI software providers compressing pricing and margins
• Project mix shift toward services with lower margins impacting operating leverage

Financial Risks:

• High effective tax rate volatility (204.8% this period) creating earnings unpredictability
• Negative free cash flow driven by investment outflows reducing financial flexibility if sustained
• Market value risk on investment securities (4.78) and related OCI impacts
• Limited retained earnings (1.13) restricting dividend capacity and absorbing losses
• Potential FX exposure if a portion of revenues/costs are foreign-currency denominated

Key Concerns:

• Operating margin compressed to 1.3% with SG&A nearly equal to gross profit
• Ordinary income heavily reliant on non-operating items (equity-method gains, interest)
• Tax expense elevated versus pre-tax income, producing a net loss despite modest profitability before tax
• Weak operating cash conversion (OCF/NI -0.18x) and negative FCF (-3.99)

Investment Implications

Key Takeaways:

• Top-line grew modestly (+1.7% YoY) but operating income fell sharply (-82.1% YoY) on SG&A pressure
• Gross margin remains strong (54.9%), validating product value but not translating to bottom line
• High effective tax rate resulted in a net loss despite positive pre-tax income
• Balance sheet is cash-rich (cash 25.25) with very low leverage (D/E ~0.15x)
• OCF was weak (0.14) and FCF negative (-3.99) due to sizable investment outflows
• ROE turned negative (-2.1%) as net margin fell; asset turnover and leverage are stable

Metrics to Watch:

• SG&A trajectory versus revenue growth to gauge operating leverage recovery
• Order backlog and royalty run-rate (recurring vs. project-based mix)
• Operating cash flow and working capital movements, especially receivables collection
• Normalization of effective tax rate and any disclosures on valuation allowances
• Investment cash flows (nature of securities/intangible investments) and returns on invested capital
• Equity-method income stability and contribution to ordinary income

Relative Positioning: Within Japan small-cap AI/computer vision peers, Morpho is balance-sheet-strong with significant net cash and low leverage, but it currently trails on profitability and cash conversion due to SG&A intensity and tax volatility; sustained revenue scaling and cost discipline are needed to realign margins and ROE with peers.

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