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

Financial Highlights

• Net Sales: ¥19.11B
• Operating Income: ¥1.44B
• Net Income: ¥471M
• 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

Digital Hearts Holdings reported FY2026 Q2 consolidated results under JGAAP showing a clear improvement in profitability despite a modest top-line contraction. Revenue came in at ¥19.11bn, down 4.0% YoY, while operating income surged 74.2% YoY to ¥1.44bn, evidencing strong operating leverage and effective cost control. Gross profit of ¥4.87bn translates to a 25.5% gross margin, indicating improved mix, utilization, or pricing in higher-margin service lines. Ordinary income was ¥1.42bn and net income ¥0.76bn, yielding a 3.96% net margin. DuPont analysis shows ROE at 7.95%, decomposed into a 3.96% net margin, 0.942x asset turnover, and 2.13x financial leverage. The implied ROA (net margin × asset turnover) is approximately 3.73%, suggesting solid returns on assets for a labor-intensive services model. Operating cash flow was strong at ¥1.26bn, equating to an OCF-to-net income ratio of 1.66x, which supports the quality of earnings and indicates limited accrual risk this period. Liquidity metrics are adequate with a current ratio of 134% and quick ratio of 134%, underpinned by low inventory (¥65m) characteristic of the company’s services profile. The balance sheet shows total assets of ¥20.29bn and equity of ¥9.52bn; this implies an equity ratio around 47% despite the ‘0.0%’ reported field being undisclosed, denoting a generally conservative capital structure. Interest expense was a modest ¥16m, and interest coverage is robust at 90.7x, indicating limited refinancing or interest rate sensitivity at present profitability levels. Despite a small decline in revenue, the step-up in operating income points to margin recovery, likely from better utilization of delivery resources, cost discipline, and possibly favorable business mix in cybersecurity/enterprise QA. Effective tax burden (based on provided net income and tax expense) appears roughly in the low-30% range, consistent with a normalized rate, even though an ‘effective tax rate’ field shows 0.0% (undisclosed). Cash and equivalents and investing cash flow were undisclosed, limiting line-of-sight into net cash and capex; however, negative financing cash flow (−¥612m) suggests some combination of debt repayment, buybacks, or dividends at the consolidated level in past periods, though DPS is currently undisclosed as 0. The company did not disclose dividends for the period (DPS 0 shown), so payout assessment relies on policy rather than data. Overall, the quarter reflects healthy margin momentum, good cash conversion, and manageable leverage, with the main watchpoints being revenue trajectory, sustainability of margins, and visibility on capital allocation and capex. Data gaps (cash, FCF, equity ratio field, share counts) constrain precision, but available figures consistently depict strengthening profitability and cash generation.

Profitability Analysis

ROE of 7.95% = Net Profit Margin (3.96%) × Asset Turnover (0.942x) × Financial Leverage (2.13x). Operating margin is approximately 7.5% (¥1,438m / ¥19,112m), up sharply YoY given operating income grew 74.2% while revenue declined 4.0%, indicating strong operating leverage and effective cost containment. Gross margin at 25.5% (¥4,874m / ¥19,112m) supports the margin expansion, likely from favorable mix (higher-value testing/cybersecurity) and utilization gains. EBITDA was ¥1,693m with an 8.9% margin; the EBITDA-to-Operating Income spread (~1.4pp) reflects modest D&A (¥255m), consistent with an asset-light services model. Ordinary margin was ~7.4% (¥1,422m / ¥19,112m), nearly aligned with operating margin, reflecting low financial expenses (¥16m) and limited non-operating drag. Interest coverage at 90.7x underscores that financing costs are not materially constraining profitability. The implied ROA (NPM × AT) near 3.73% is reasonable for the business mix; ROE is elevated by moderate leverage (2.13x), but not excessive. Margin quality appears solid given OCF/NI at 1.66x, suggesting earnings are backed by cash and not driven by working-capital build or non-cash items.

Growth Assessment

Revenue declined 4.0% YoY to ¥19.11bn, indicating some softness in demand or client activity; however, profitability improved significantly, with operating income up 74.2% YoY, reflecting successful margin initiatives. The contrast implies management has enhanced delivery efficiency and cost structure, possibly via staff allocation, offshore leverage, pricing discipline, or business mix shift toward higher-margin services. Gross profit of ¥4.87bn (25.5% margin) supports the notion of mix/efficiency gains despite lower sales. Net income rose 66.5% YoY to ¥0.76bn, although the net margin remains sub-5%, leaving room for further structural improvements. Asset turnover of 0.942x is reasonable for a mid-scale service provider; sustaining or improving this ratio will be key for ROE expansion. Near-term outlook hinges on order momentum in gaming QA and enterprise/security segments and the ability to maintain utilization; cost normalization could temper some of the sharp margin gains if revenue re-accelerates and hiring resumes. While the quarter demonstrates solid profit quality (OCF/NI 1.66x), lack of disclosed capex and cash levels limits visibility into reinvestment capacity and inorganic growth. Overall sustainability will depend on maintaining gross margin at or above mid-20s and keeping operating expense growth below revenue growth. Watch for seasonality and client project timing that can affect quarterly revenue prints.

Financial Health

Total assets are ¥20.29bn, total equity ¥9.52bn, implying an equity ratio of roughly 46.9% (despite the undisclosed 0.0% field), which indicates a sound solvency position. Total liabilities are ¥10.69bn, giving a Debt-to-Equity ratio of 1.12x (liabilities/equity), suggesting moderate leverage with ample equity buffer. Current assets are ¥14.07bn versus current liabilities of ¥10.47bn, yielding a current ratio of 134% and quick ratio of 134%, both adequate for short-term obligations in a low-inventory services model (inventories only ¥65m). Working capital stands at ¥3.60bn, providing operating flexibility. Interest expense is low at ¥15.86m, and interest coverage is strong at 90.7x, indicating minimal interest rate risk on current earnings. The capital structure appears balanced; liabilities likely include a significant portion of operating payables/accruals given the services nature, rather than heavy interest-bearing debt. Data gaps (cash balance undisclosed) limit precise assessment of net debt and liquidity buffers.

Cash Flow Quality

Operating cash flow of ¥1,257.8m versus net income of ¥757.0m yields an OCF/NI ratio of 1.66x, supporting good earnings quality and cash realization. Depreciation and amortization of ¥254.5m are modest, consistent with an asset-light profile; EBITDA of ¥1,692.5m aligns with the cash generation capacity implied by operating profit. Investing cash flow is undisclosed (shown as 0), so free cash flow cannot be reliably computed; the reported FCF of 0 should be treated as not available rather than zero. Working capital dynamics appear supportive given the positive OCF alongside revenue contraction, implying collection discipline and/or favorable billing terms; however, detailed AR/AP movements are not disclosed. Financing cash flow was −¥612.3m, suggesting outflows for debt repayment, distributions, or other financing activities, but the lack of DPS/cash balance disclosure prevents a precise bridge. Overall, cash conversion looks healthy this period, but sustained assessment requires visibility on capex and cash levels.

Dividend Sustainability

DPS is undisclosed for the period (shown as 0.00), and the payout ratio is correspondingly undisclosed at 0.0%. With OCF at ¥1.26bn and strong earnings growth, capacity to fund dividends appears present; however, absence of cash balance, capex, and explicit policy disclosure constrains assessment. FCF coverage is shown as 0.00x due to missing investing cash flows and should not be interpreted as an inability to fund dividends. If the company targets a stable payout policy common among Japanese service firms, cash generation trends would support ongoing distributions, but confirmation awaits disclosure of capex and policy. For now, dividend visibility is low, but underlying cash earnings suggest potential flexibility.

Risk Assessment

Business Risks:

• Client demand cyclicality in gaming QA and enterprise/security projects leading to revenue volatility
• Utilization risk tied to headcount, staffing mix, and project timing
• Pricing pressure from competition and offshore providers in testing/cybersecurity services
• Execution risk in scaling higher-margin service lines while maintaining quality
• Seasonality and concentration risk if top clients or verticals account for a large revenue share

Financial Risks:

• Limited transparency on cash and capex (investing CF undisclosed) affecting FCF visibility
• Potential working capital swings impacting quarterly OCF despite strong current period
• Exposure to wage inflation and subcontractor costs compressing margins if not offset by pricing
• Moderate leverage (D/E 1.12x) though interest burden is currently low

Key Concerns:

• Sustainability of recent margin expansion amid a declining revenue base
• Data gaps: cash balance, investing cash flows, equity ratio field, and share information
• Visibility on dividend policy and capital allocation priorities

Investment Implications

Key Takeaways:

• Profitability inflected strongly: operating income +74.2% YoY on revenue −4.0%, lifting operating margin to ~7.5%
• Cash conversion is strong with OCF/NI at 1.66x, supporting earnings quality
• Balance sheet appears conservative with an implied equity ratio ~47% and interest coverage 90.7x
• Asset-light model evidenced by low D&A and inventories, enabling flexible cost structure
• Near-term focus should be on sustaining gross margin (~25.5%) and utilization to maintain elevated profits

Metrics to Watch:

• Revenue growth re-acceleration and order backlog/booking trends
• Gross margin and operating margin trajectory versus staffing and subcontracting costs
• OCF conversion and working capital days (DSO/DPO) to validate cash earnings
• Capex and M&A cash outlays to assess true FCF and reinvestment
• Leverage (net debt/EBITDA) and interest coverage once cash balances are disclosed
• Dividend announcements/payout policy updates

Relative Positioning: Within Japanese IT services and testing/cybersecurity peers, the company demonstrates above-peer near-term margin momentum and strong cash conversion, supported by a conservative balance sheet; however, revenue contraction and disclosure gaps (cash, capex, dividends) temper comparability and visibility versus fully transparent 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