Datasection Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.75B
• Operating Income: ¥-1.37B
• Net Income: ¥-1.46B
• EPS: ¥-71.97

Income Statement

Balance Sheet

Cash Flow Statement

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: FY2026 Q2 was a weak quarter operationally despite solid top-line growth, with deep operating losses and strained liquidity overshadowing revenue momentum. Revenue rose 28.4% YoY to 17.46, showing demand resilience in the core business. Gross profit reached 4.70 with a gross margin of 26.9%, but SG&A of 18.41 overwhelmed gross profit, driving operating income to -13.70 and an operating margin of -78.5%. The gap between gross margin and operating margin is an unusually wide -10,540 bps, highlighting a heavy fixed-cost burden and insufficient scale. Ordinary income was -14.30 and net income -14.65, translating to an EPS of -71.97 yen. EBITDA was -11.59, implying an EBITDA margin of -66.4% and limited flexibility to absorb shocks. Cash generation was weak: operating cash flow was -0.69 versus net loss of -14.65, with an OCF/NI ratio of 0.05x indicating poor earnings quality. Financing cash flow was a large inflow of 40.33, offset by substantial capital expenditures of -36.13, suggesting reliance on external funding to support investment and operations. Liquidity is tight with current assets 67.24 vs current liabilities 76.57 (current ratio 0.88), and cash of only 4.29 against short-term loans of 4.84. Balance sheet quality is mixed: intangibles (29.32) and goodwill (12.58) are sizable, elevating impairment risk if performance does not improve. Leverage is moderate by headline (D/E 1.36x), but debt service capacity is very weak with a negative interest coverage ratio. ROE was -25.0% on a DuPont basis, driven by an -83.9% net margin and low asset turnover of 0.127, despite financial leverage of 2.36x. ROIC of -22.5% indicates that invested capital is currently destroying value. With revenue growth positive but profitability and cash flow deteriorated, near-term priorities are cost rationalization, monetization discipline, and liquidity reinforcement. Forward-looking, execution on cost controls and converting backlog to cash will be critical; otherwise, additional financing or strategic restructuring may be required. Data gaps (e.g., SG&A breakdown, investing CF details) limit deeper diagnostics, but available metrics point to structural profitability issues rather than one-off factors.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-83.9%) × 0.127 × 2.36 ≈ -25.0%. The dominant driver of the negative ROE is the severely negative net profit margin; asset turnover is low at 0.127, and leverage at 2.36x amplifies losses. The sharp margin shortfall stems from SG&A (18.41) exceeding gross profit (4.70) by 13.71, indicating insufficient scale and potentially elevated personnel/overhead and development commercialization lag. Given the magnitude of the operating loss (operating margin -78.5%), the issue appears structural rather than a one-time event; sustainability requires material cost reduction or rapid revenue scaling at higher gross margins. Gross margin at 26.9% suggests limited pricing power or a services mix with high delivery costs; without mix shift or efficiency gains, improvement will be gradual. Operating leverage is currently negative: revenue grew 28.4% but operating profit deteriorated to -13.70, implying cost growth outpaced revenue. Warning signs include SG&A far outstripping gross profit and EBITDA negative, which constrain reinvestment and may necessitate continued external funding.

Growth Assessment

Top-line growth of 28.4% YoY to 17.46 is a bright spot, suggesting healthy demand or contribution from new/expanded contracts. However, gross margin at 26.9% and the large SG&A base yielded an operating margin of -78.5%, indicating growth is not translating to profitability. The margin gap of -10,540 bps between gross and operating levels highlights a need for cost base resizing or higher-margin product mix. With EBITDA at -11.59, the business lacks near-term self-funding capability, making growth quality questionable until unit economics improve. The large capex outlay (-36.13) may support future growth capacity or productization, but near-term returns are uncertain given ROIC of -22.5%. Without visibility on backlog, churn, or cohort profitability, revenue sustainability cannot be fully assessed; still, the YoY growth indicates traction that must be matched with cost discipline. Outlook hinges on executing cost controls, improving utilization and delivery efficiency, and elevating recurring/high-margin revenues; absent these, growth will continue to be dilutive to equity.

Financial Health

Liquidity is strained: current assets 67.24 vs current liabilities 76.57 yields a current ratio of 0.88 (warning threshold <1.0). Quick ratio is similarly weak at 0.873, reflecting limited inventories (0.42) but insufficient liquid assets. Cash and deposits are 4.29, below short-term loans of 4.84, indicating tight near-term cash coverage and potential refinancing risk. Working capital is negative at -9.33, underscoring a maturity mismatch with reliance on payables/short-term funding. Total liabilities are 79.43 vs equity 58.59 (D/E 1.36x), not excessive by level but risky given negative earnings and cash burn. Long-term loans are 1.88; the balance sheet tilts toward short-term obligations, heightening rollover risk. Intangibles (29.32) and goodwill (12.58) comprise a significant share of assets (≈30% of total), increasing impairment and covenant risks if losses persist. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF was -0.69 against net income of -14.65 (OCF/NI 0.05x), indicating poor earnings quality and limited cash conversion. The less-negative OCF versus NI likely reflects non-cash charges (D&A 2.11 and potential JGAAP amortization of intangibles/goodwill), not underlying cash strength. Free cash flow cannot be precisely calculated due to unreported total investing CF, but with OCF negative and capex -36.13, FCF is almost certainly deeply negative. Financing inflow of 40.33 appears to have funded capex and operating burn, pointing to external dependence. Working capital behavior cannot be fully assessed due to missing receivables/payables details; however, negative working capital and low cash suggest limited flexibility. No apparent signs of deliberate working capital release; rather, cash remains constrained.

Dividend Sustainability

Dividend metrics are unreported; given the significant net loss (-14.65), negative OCF, and capex intensity, a cash dividend appears unlikely to be sustainable in the near term. Payout ratios and FCF coverage cannot be computed from available data, but current cash burn and liquidity stress would take precedence over distributions under typical JGAAP conservatism. Policy visibility is limited without management guidance.

Risk Assessment

Business Risks:

• Structural unprofitability with SG&A (18.41) exceeding gross profit (4.70), risking continued operating losses
• Low gross margin (26.9%) and negative EBITDA (-11.59) indicating weak unit economics
• Execution risk on monetizing R&D/intangibles (intangibles 29.32) into profitable revenue
• Potential impairment risk on goodwill (12.58) and intangibles if performance does not improve
• Customer concentration and project delivery risks common in analytics/AI services (not disclosed but industry-typical)

Financial Risks:

• Liquidity risk: current ratio 0.88 and cash 4.29 vs short-term loans 4.84
• Refinancing risk due to reliance on short-term liabilities (current liabilities 76.57) and negative OCF
• Debt service capacity very weak (interest coverage negative)
• Dependence on external financing (financing CF +40.33) to fund capex (-36.13) and operations
• ROIC -22.5% and ROE -25.0% signaling value erosion and potential covenant/credit tightening

Key Concerns:

• Earnings quality: OCF/NI 0.05x
• Negative working capital (-9.33) and maturity mismatch
• Scale vs cost base misalignment leading to -78.5% operating margin
• Limited disclosure granularity (SG&A breakdown, investing CF) impeding root-cause analysis

Investment Implications

Key Takeaways:

• Top-line grew 28.4% YoY to 17.46, but profitability deteriorated sharply with operating margin at -78.5%
• Cash burn persists: OCF -0.69 and large capex -36.13 funded by financing inflow +40.33
• Liquidity is tight (current ratio 0.88; cash 4.29 < ST loans 4.84), elevating near-term funding risk
• Balance sheet carries significant intangibles/goodwill (41.9 combined), raising impairment risk if losses persist
• ROIC -22.5% and ROE -25.0% indicate material value destruction absent rapid margin improvement

Metrics to Watch:

• Quarterly operating margin trajectory and SG&A-to-revenue ratio
• Gross margin mix and utilization rates to gauge unit economics
• OCF and FCF trend versus financing dependence
• Liquidity buffer: cash balance and short-term debt rollover
• Impairment indicators on goodwill/intangibles and any restructuring charges

Relative Positioning: Within Japan small-cap AI/data analytics peers, revenue growth is competitive, but profitability, cash conversion, and liquidity are notably weaker, placing the company in a higher-risk quadrant pending evidence of cost discipline and margin recovery.

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