DIGITAL HEARTS HOLDINGS Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥19.11B
• Operating Income: ¥1.44B
• Net Income: ¥766M
• EPS: ¥33.99

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: A resilient profitability rebound in FY2026 Q2 with strong margin expansion and solid cash conversion despite modest top-line contraction. Revenue declined 4.0% YoY to 191.12, but operating income surged 74.2% YoY to 14.38, driving ordinary income up 75.7% to 14.22 and net income up 66.5% to 7.57. Gross profit reached 50.03 with a gross margin of 26.2%, and SG&A was 35.65, yielding an operating margin of approximately 7.5%. Based on last year’s implied operating income (~8.25) and revenue (~199.1), operating margin expanded roughly 337 bps YoY (from ~4.15% to ~7.52%). Net margin printed near 4.0% (7.57/191.12), aligning with the DuPont net profit margin input. Earnings quality looks healthy with OCF of 9.81 exceeding net income (OCF/NI = 1.30x), indicating decent cash realization of earnings. Interest burden remains minimal (interest expense 0.21) with an interest coverage ratio of 69.77x, reducing near-term financial stress. Liquidity is adequate with a current ratio of 139.6% and quick ratio of 139.0%, though reliance on short-term loans (55.00) is notable relative to current liabilities (105.58). Balance sheet leverage is moderate (D/E 1.13x), and ROE calculated at 8.0% reflects improved profitability and reasonable asset efficiency (asset turnover 0.942) with financial leverage of 2.13x. Cash on hand (80.27) and receivables (57.76) comfortably cover short-term debt, mitigating refinancing risk in the near term. Capital intensity remains low with capex at 1.04, supporting cash generation; implied FCF is around 8.77 (OCF minus capex). The payout ratio is elevated at 72.6%, but appears covered by implied FCF this period. Intangibles and goodwill total 25.33 (about 12–13% of assets), a manageable level but worth monitoring for impairment risk amid business mix shifts. Forward-looking, sustaining the improved margin profile will be key given the revenue decline; pricing discipline, utilization, and mix toward higher-margin service lines likely drove Q2 performance. Overall, the quarter demonstrates effective cost control and mix improvement, strengthening profitability and cash flow despite a softer top line.

Profitability Analysis

DuPont decomposition: ROE (8.0%) = Net Profit Margin (4.0%) × Asset Turnover (0.942) × Financial Leverage (2.13x). The most material change appears to be margin expansion, as operating income rose 74.2% YoY while revenue fell 4.0%, implying improved operating and net margins. Business drivers likely include a richer service mix (e.g., higher value-added QA/cybersecurity offerings), better pricing, higher utilization, and disciplined SG&A relative to gross profit. Given the structural nature of mix/pricing and potential ongoing efficiency gains, part of the margin improvement could be sustainable, though some elements may be one-time (e.g., project timing, temporary utilization peaks). No explicit signs of negative operating leverage this quarter; in fact, operating leverage worked favorably as SG&A (35.65) allowed gross profit (50.03) to translate into higher operating income. Concerning trends to flag: topline contraction (-4.0% YoY) against sharp profit growth suggests dependence on efficiency/mix; if revenue pressure persists, sustaining margins may be challenging.

Growth Assessment

Revenue declined 4.0% YoY to 191.12, indicating some softness in demand or project timing in the period. Despite this, operating income increased 74.2% and net income 66.5%, driven by margin expansion and likely favorable mix/utilization. Gross margin printed at 26.2%, and operating margin improved to about 7.5%, indicating better cost discipline and pricing power. The quality of growth is solid given OCF/NI of 1.30x, showing earnings backed by cash. Sustainability hinges on maintaining utilization and pricing while stabilizing revenue; absent backlog data, visibility is limited. The company’s low capex (1.04) supports continued FCF generation even at flat-to-down revenue. Outlook: if revenue stabilizes or returns to modest growth, current margin levels could support further ROE improvement above 8%; conversely, renewed revenue pressure could compress margins from current highs.

Financial Health

Liquidity is adequate: current ratio 1.40x and quick ratio 1.39x (both above the 1.0x warning threshold, albeit slightly below the 1.5x comfort benchmark). No explicit warning triggered (Current Ratio is not <1.0; D/E at 1.13x is below the 2.0 warning threshold). Short-term loans are 55.00 versus cash of 80.27 and receivables of 57.76, indicating manageable refinancing risk and coverage of near-term obligations. Noncurrent liabilities are minimal at 2.11, concentrating maturities in the short-term bucket; monitor rollover risk if credit conditions tighten. Equity totals 95.17 (owners’ equity 92.14), with retained earnings of 97.78 supporting capital adequacy. Intangibles and goodwill sum to 25.33 (~12–13% of assets), a moderate level that introduces some impairment sensitivity but not excessive. No off-balance sheet obligations were reported in the provided data.

Cash Flow Quality

OCF of 9.81 exceeds net income of 7.57, yielding an OCF/NI ratio of 1.30x (above the 1.0x benchmark), indicating healthy cash conversion. Capex was modest at 1.04, implying positive free cash flow of roughly 8.77 this period (OCF minus capex). With financing CF near zero and no investing CF detail, we cannot assess inorganic cash uses, but current operating cash generation appears sufficient to fund maintenance capex and support shareholder returns. Working capital quality looks reasonable given strong cash and receivables; however, AR collection efficiency should be monitored given the business model’s exposure to project timing. No signs of working capital manipulation are evident from the limited data (e.g., OCF comfortably above NI, inventories negligible at 0.59).

Dividend Sustainability

The calculated payout ratio is 72.6%, above the 60% benchmark for comfortable sustainability, suggesting a relatively generous distribution policy. However, implied FCF of ~8.77 appears to cover estimated cash dividends this period (roughly 5.5 by back-solving from the payout ratio), indicating acceptable near-term coverage of about 1.6x. With D/E at 1.13x and strong interest coverage, the balance sheet can support current payouts if operating trends hold. Sustainability will depend on maintaining recent margin improvements and cash conversion; if profits normalize downward or revenue softness persists, the elevated payout ratio could constrain reinvestment flexibility. DPS details are unreported; policy clarity (target payout or DOE) was not provided in the data.

Risk Assessment

Business Risks:

• Revenue softness (-4.0% YoY) indicating demand variability or project timing risk.
• Utilization and pricing risk in QA/cybersecurity services affecting margins.
• Client concentration risk typical in testing/QA segments (not disclosed but industry-standard).
• Human capital risk: wage inflation and hiring/retention pressures impacting SG&A.
• Potential impairment risk on goodwill/intangibles (25.33 total, ~12–13% of assets).

Financial Risks:

• Short-term funding concentration: 55.00 in short-term loans vs. 105.58 current liabilities.
• Refinancing risk if credit conditions tighten despite ample cash (80.27).
• Elevated payout ratio (72.6%) potentially limiting financial flexibility in a downturn.

Key Concerns:

• Sustainability of margin gains amid declining revenue.
• AR collection and working capital discipline in project-heavy periods.
• Visibility: limited disclosures on SG&A breakdown, dividends, and investing CF reduce transparency.

Investment Implications

Key Takeaways:

• Strong profit rebound with operating income +74.2% YoY despite revenue -4.0%.
• Operating margin expanded ~337 bps YoY to ~7.5%; net margin ~4.0%.
• Healthy cash conversion (OCF/NI 1.30x) supports implied FCF of ~8.77.
• Balance sheet moderate: D/E 1.13x, current ratio 1.40x, ample cash 80.27 vs short-term loans 55.00.
• ROE at 8.0% improved, underpinned by margin gains and reasonable asset turnover.
• Payout ratio high at 72.6% but appears covered by current-period FCF.

Metrics to Watch:

• Revenue trajectory and book-to-bill or backlog (if disclosed) to assess demand recovery.
• Operating margin sustainability and gross margin trend.
• OCF/NI ratio and FCF after capex and any M&A outlays.
• AR days and cash conversion cycle.
• Short-term debt rollover schedule and interest rate sensitivity.
• Shareholder return policy clarity (DPS/DOE targets) and payout discipline.

Relative Positioning: Versus domestic IT testing/assurance peers, the company demonstrates improving profitability and solid cash conversion with moderate leverage; ROE at 8% is competitive but still leaves room for improvement if revenue growth resumes and margin gains are sustained.

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