Innovation Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.37B
• Operating Income: ¥-261M
• Net Income: ¥-267M
• EPS: ¥-101.72

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 top-line beat but a bottom-line miss, with strong 30% YoY revenue growth overwhelmed by elevated SG&A, resulting in continued operating and net losses. Revenue reached 33.69, while gross profit was 16.95 on a gross margin of 50.3%, indicating healthy unit economics at the contribution level. Operating income was -2.61 (operating margin -7.7%), deteriorated by a combination of SG&A intensity and limited operating leverage in the quarter. Ordinary income fell to -3.27 (margin -9.7%), as non-operating expenses (0.73) outweighed non-operating income (0.07), including interest expense of 0.15. Net income posted a loss of -2.69 (net margin -8.0%), declining 82.8% YoY, highlighting pressure below the operating line. SG&A totaled 19.56, equal to 58.1% of sales, exceeding gross profit by 2.61 and fully explaining the operating loss. EBITDA was -1.55 (margin -4.6%), reflecting limited near-term operating leverage despite scale benefits in revenue. Liquidity remained robust with cash and deposits of 34.21, supporting a current ratio of 232% and working capital of 26.74. The balance sheet carries significant intangibles (27.90, including goodwill 13.66), making equity sensitive to potential impairment. Despite the net loss, operating cash flow was positive at 2.77, aided by non-cash D&A (1.06) and likely working-capital release, but OCF/NI of -1.03 triggers a quality flag under our rule-of-thumb. Financial leverage (assets/equity) is 2.12x and the reported D/E is 1.12x, manageable but interest coverage is deeply negative (-17x) due to operating losses. ROE was -7.2% per DuPont (NPM -8.0%, AT 0.423x, FL 2.12x), and ROIC of -8.2% is below the 5% warning threshold. Financing cash flow was -3.27, including share repurchases of -0.70, suggesting continued shareholder returns despite losses. Forward-looking, the key swing factors are SG&A discipline, monetization efficiency to convert revenue growth into margin expansion, and safeguarding cash while intangibles-driven impairment risk is monitored. If SG&A growth moderates versus revenue, operating leverage could inflect; otherwise, interest coverage and ROIC will remain problematic. In summary, revenue momentum is strong, but profitability and capital efficiency must improve to de-risk earnings and sustain any capital returns policy.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-8.0%) × 0.423 × 2.12 ≈ -7.2%. Component changes: the largest drag is the negative net profit margin; asset turnover at 0.423x is modest for a software/marketing services model and leverage at 2.12x is moderate. Business drivers: SG&A at 58.1% of sales outweighed a solid gross margin of 50.3%, producing an operating margin of -7.7%; non-operating expenses (notably interest of 0.15) further widened the ordinary loss. Sustainability: the gross margin profile looks defendable, but the current SG&A intensity is not; improvement hinges on slowing hiring/marketing spend or scaling recurring revenue. One-time vs recurring: no large one-time gains/losses disclosed; losses appear operational/recurring. Concerning trends: SG&A outpaced revenue growth in absolute yen, and ordinary income (-22.7% YoY) deteriorated faster than operating income (-19.6% YoY), implying non-operating pressure (interest and other costs) is compounding operating weakness.

Growth Assessment

Revenue grew 30.0% YoY to 33.69, indicating solid demand and/or successful expansion of offerings. Gross profit of 16.95 implies incremental growth is not eroding pricing at the gross level. However, operating income of -2.61 and net income of -2.69 show growth has not translated into profit due to elevated SG&A. Ordinary income fell -22.7% YoY and net income -82.8% YoY, signaling worsening earnings conversion. Profit quality is strained: EBITDA margin is -4.6% and interest coverage is negative, leaving little buffer if growth slows. Outlook hinges on expense normalization and improved monetization (ARPU, retention, and upsell rates) to achieve operating leverage; otherwise, continued losses will weigh on ROE/ROIC. With cash of 34.21, the company has runway to execute, but persistent negative margins could force a recalibration of growth investments.

Financial Health

Liquidity is strong: current ratio 232.3% and quick ratio 232.3%, with working capital of 26.74 and cash/deposits of 34.21 covering current liabilities of 20.21 comfortably. Solvency: reported D/E is 1.12x (below our 1.5x caution), financial leverage is 2.12x, and long-term loans of 18.48 dominate the debt stack. Interest coverage is -17.02x due to operating losses, a key pressure point if rates rise or covenants tighten. Maturity mismatch risk is low near term given ample cash relative to short-term loans (0.46) and current liabilities. Balance-sheet quality: intangibles total 27.90 (35% of assets) including goodwill 13.66, increasing impairment risk if profitability does not improve. No off-balance sheet obligations were reported in the dataset.

Cash Flow Quality

OCF was +2.77 versus net income of -2.69, yielding OCF/NI of -1.03, which triggers our screen but here reflects loss offset by non-cash D&A (1.06) and likely favorable working-capital movements. Estimated FCF (OCF - capex) is about +1.99, given capex of -0.78; this suggests adequate coverage for modest shareholder returns this quarter. Sustainability: sustained positive OCF will require operating profit inflection; relying on working-capital releases is not repeatable each quarter. Working-capital manipulation signs are not evident from single-period data; however, monitoring receivables and deferred revenue trajectories is advisable when OCF and NI diverge.

Dividend Sustainability

Dividend data is unreported; a calculated payout ratio of -40.9% is not meaningful with negative earnings. With estimated positive FCF (~1.99) and strong cash, limited distributions could be covered near term, but negative EBITDA/operating margin and poor interest coverage argue for a conservative stance. Policy outlook likely hinges on achieving operating breakeven; sustained dividends or buybacks would be higher quality once OCF and EBIT turn structurally positive.

Risk Assessment

Business Risks:

• Operating leverage risk: SG&A at 58.1% of sales keeps operating margin negative despite 50.3% gross margin.
• Execution risk in scaling: converting 30% revenue growth into positive EBIT requires cost discipline and monetization improvements.
• Intangible asset impairment risk: goodwill 13.66 and total intangibles 27.90 could face impairment if growth stalls.
• Market demand/advertising cycle sensitivity if offerings are linked to corporate marketing budgets.

Financial Risks:

• Interest coverage is deeply negative (-17.02x), limiting debt capacity and raising covenant risk.
• Dependence on non-operating items: ordinary loss (-3.27) worsened by non-operating expenses (0.73).
• Leverage moderate (D/E 1.12x) but profitability shortfalls could magnify equity volatility.
• Potential refinancing risk if losses persist, despite current cash buffer.

Key Concerns:

• ROIC at -8.2% is below the 5% warning threshold, destroying value near term.
• OCF/NI ratio -1.03 triggers a quality flag; OCF strength may not be durable without EBIT improvement.
• EPS anomaly: basic EPS -101.72 JPY vs diluted EPS 8.73 JPY suggests data/reporting peculiarity; clarity needed.
• High concentration in intangibles (35% of assets) elevates downside to equity in stress.

Investment Implications

Key Takeaways:

• Revenue momentum is strong (+30% YoY) but not yet translating into profit.
• Operating margin -7.7% reflects SG&A intensity (58.1% of sales) overriding a 50.3% gross margin.
• Ordinary and net losses widened due to non-operating expenses, including interest.
• Liquidity is ample (cash 34.21; current ratio 232%), providing execution runway.
• Capital efficiency is weak (ROE -7.2%, ROIC -8.2%); margin inflection is needed.
• Estimated FCF positive (~1.99) this quarter, but sustainability hinges on EBIT improvement.

Metrics to Watch:

• SG&A growth vs revenue growth (target: SG&A ratio trending below 50%).
• Operating margin trajectory toward breakeven and positive EBITDA.
• Interest coverage improvement as operating losses narrow.
• Cash conversion: OCF/NI moving toward >1.0 without relying on working-capital releases.
• Intangible asset impairment indicators and segment profitability (if disclosed).

Relative Positioning: Within Japan small-cap digital/marketing solutions peers, the company shows above-average revenue growth but below-peer profitability and ROIC, supported by stronger-than-average liquidity yet constrained by negative interest coverage.

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