Innovation (3970) FY2026 Q3 Earnings Report

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Executive Summary

While revenue increased by 29.2%, both operating income and net income swung to losses from the previous year, making the transition to a loss despite higher revenue the most important point this quarter. Revenue was ¥50.3B (¥38.9B in the previous year, +29.2%), operating income was ¥-3.7B (¥2.3B in the previous year, -261.9%), ordinary income was ¥-4.4B (¥2.2B in the previous year, -299.1%), and net income attributable to owners of the parent was ¥-4.4B (¥0.2B in the previous year). Although the gross profit margin remained high at 50.6%, SG&A expenses expanded to ¥29.1B (SG&A ratio: 57.9%), directly resulting in an operating loss.

Factors Affecting Performance

【Revenue】Revenue increased substantially to ¥50.3B (+29.2%). By segment, IT Solutions Services expanded sharply to ¥21.2B (+604.2%), becoming the primary driver of revenue growth, while Online Media Services declined slightly to ¥26.3B (-6.9%), and the Financial Platform decreased significantly to ¥2.7B (-64.4%).

【Profit and Loss】Operating income fell from a profit of ¥2.3B in the previous year to ¥-3.7B. Profit from Online Media Services declined to ¥7.7B (-25.5%), while the Financial Platform and VCFund recorded losses of ¥-1.5B and ¥-1.3B, respectively. IT Solutions Services turned profitable and contributed to earnings, with profit increasing to ¥1.8B (+75.9%); however, higher corporate expenses not allocated to the segments were the primary cause of the operating loss. Ordinary income deteriorated to ¥-4.4B due partly to non-operating expenses, including interest expenses of ¥0.2B and handling fees of ¥0.6B, while net income was ¥-4.2B. Extraordinary income and loss were both ¥0.2B, and their net effect was almost fully offset. Accordingly, the current loss resulted not from temporary factors but from the cost structure of the core business. In conclusion, the Company recorded higher revenue but lower earnings, with operating income swinging to a loss.

Segment Analysis

Online Media Services is the largest contributor to profit, with revenue of ¥26.3B (-6.9%) and operating income of ¥7.7B (profit margin: 29.1%), but profit declined 25.5% year on year. IT Solutions Services expanded sharply, with revenue of ¥21.2B (+604.2%) and operating income of ¥1.8B (profit margin: 8.5%, +75.9%), contributing to higher earnings. The Financial Platform contracted to revenue of ¥2.7B (-64.4%) and recorded an operating loss of ¥1.5B, while VCFund also recorded an operating loss of ¥1.3B, indicating deteriorating profitability. Although the simple total of segment profits was positive at ¥6.6B, unallocated corporate expenses were substantial at ¥-10.3B, which was the primary cause of the Company-wide operating loss of ¥-3.7B.

Key Financial Indicators

【Profitability】The operating margin deteriorated significantly to -7.3% (previous year: +5.8%), while the net profit margin was -8.4%; both metrics declined substantially from the previous year. The gross profit margin remained high at 50.6%, indicating that the deterioration in profitability was primarily attributable to the burden of SG&A expenses and corporate costs.【Cash Quality】Although detailed disclosures for the cash flow statement are unavailable, the Company’s ability to generate cash from operating activities may be limited given that it recorded a loss at the operating level. Within working capital, accounts receivable decreased to ¥5.4B (¥9.2B in the previous year), indicating an improving collection trend.【Investment Efficiency】Annualized ROE was -15.5%, a significant deterioration from the positive result in the previous year. Total assets contracted to ¥78.4B (¥83.2B in the previous year), and the decline in profitability, rather than asset efficiency, was the primary cause of the deterioration in ROE.【Financial Soundness】The equity ratio declined slightly to 46.6% (equivalent to approximately 48.9% in the previous year) but remained at a high level. While long-term borrowings increased substantially from the previous year to ¥19.6B, short-term borrowings were reduced, indicating a shift in the financing structure from short-term to long-term funding.

Cash Flow Analysis

As detailed disclosures for the cash flow statement are unavailable, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were largely unchanged at ¥33.9B (¥35.8B in the previous year), and liquidity remains ample. Meanwhile, within the liability structure, short-term borrowings declined substantially from the previous year, while long-term borrowings increased significantly, indicating a shift in funding from short-term to long-term sources. Given the recording of operating and net losses, the maintenance of cash and deposits may have been supported by financing activities or a review of the asset structure. Confirmation of the Company’s ability to generate cash from its core business through future disclosures is warranted.

Quality of Earnings

The loss for the current quarter was attributable to recurring factors arising from the cost structure of the core business rather than temporary factors, as extraordinary income of ¥0.2B and extraordinary loss of ¥0.2B were almost fully offset. Non-operating income was small at ¥0.1B, while non-operating expenses of ¥0.8B, including interest expenses of ¥0.2B and handling fees of ¥0.6B, further weighed on ordinary income. Comprehensive income was ¥-3.4B, while the amount attributable to owners of the parent was ¥-3.6B, representing a certain divergence from net income of ¥-4.2B; a positive ¥0.8B in valuation difference on securities partially offset the loss. Overall, earnings quality is determined by the burden of the cost structure, including SG&A expenses and allocated corporate costs, and reflects structural profitability challenges rather than one-off noise.

Earnings Forecast and Guidance

The full-year Company forecast is revenue of ¥70.8B (+32.5%), operating income of ¥-2.6B (-173.1% versus the previous year), and ordinary income of ¥-3.4B (-200.5%), and the earnings forecast was revised during the current quarter. Cumulative revenue through Q3 of ¥50.3B has reached 71.0% of the full-year forecast, indicating that revenue growth is progressing in line with the plan. Meanwhile, operating income and ordinary income are expected to remain in the red even under the full-year forecast, and the cumulative losses through Q3 (operating: ¥-3.7B; ordinary: ¥-4.4B) are larger than the full-year forecast losses (operating: ¥-2.6B; ordinary: ¥-3.4B). Whether profitability improves in Q4 will be a key focus in determining full-year results.

Shareholder Returns

The dividend forecast is ¥40.00 per share at year-end, with no revision to the dividend forecast as of the current quarter. However, because a net loss is projected for the full year, the payout ratio becomes a negative value with no meaningful interpretation when net loss is used as the denominator. Dividends are expected to be funded not by current-period profit but by the Company’s cash and deposits of ¥33.9B. The absence of a revision to the dividend forecast indicates that the Company is maintaining its policy of continuing dividend payments at this time.

Risk Factors

1. Deterioration in profitability due to the cost structure: Despite a gross profit margin of 50.6%, the Company recorded an operating loss of ¥3.7B due to SG&A expenses of ¥29.1B (SG&A ratio: 57.9%) and increased corporate expenses not allocated to the segments.

2. Uncertainty regarding the profitability of business segments: The Financial Platform (operating loss of ¥1.5B) and VCFund (operating loss of ¥1.3B) continue to record losses, resulting in significant disparities in profitability across the portfolio.

3. Interest burden associated with changes in the borrowing structure: Long-term borrowings increased substantially year on year to ¥19.6B, while interest expenses of ¥0.2B were recorded. The impact of future changes in the interest-rate environment on earnings therefore requires monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Profitability is substantially below the industry median, and the scale of the loss is also notable within the industry.

Growth and Capital Efficiency

The revenue growth rate is substantially above the industry median, placing the Company among the industry leaders in terms of growth.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Revenue continues to grow at +29.2%, substantially exceeding the industry median of +10.4%; however, the operating margin of -7.3% is substantially below the industry median of 8.3%, making the gap between growth and monetization the central issue in the earnings results.

2. While the simple total of segment profits was positive at ¥6.6B, allocated corporate expenses reached ¥-10.3B, creating a structure in which the allocation policy and scale of corporate expenses have a significant impact on overall earnings.

3. The dividend forecast of ¥40 per share at year-end has been maintained, but with a full-year net loss expected, the dividend funding source will depend on cash and deposits of ¥33.9B. Trends in the improvement of operating income will be a key focus in future earnings results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥635–¥669 at cost of equity ±1%; ¥634–¥664 at ω±0.1.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Goodwill represents a high proportion of net assets, and the assumptions would change significantly if impairment were incurred.
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest-rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, and you should consult a professional advisor as necessary.

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