Neural Group Inc. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥2.54B
• Operating Income: ¥24M
• Net Income: ¥-155M
• EPS: ¥-3.41

Income Statement

Balance Sheet

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 Integrated Analysis

Analysis integrating XBRL data (GPT-5) and PDF earnings presentation (Claude)

Executive Summary

Neural Group Co., Ltd. (40560) reported FY2025 Q3 consolidated results under JGAAP with revenue of ¥2,535 million, down 1.3% YoY, indicating modest top-line softness amid what appears to be a services/solution-heavy mix. Gross profit was ¥1,684 million, implying a robust gross margin of 66.4%, consistent with a high value-added software or service-centric model. Operating income improved to ¥24 million (+350% YoY), lifting operating margin to 0.9% despite the slight revenue decline, suggesting meaningful operating cost discipline and positive operating leverage from SG&A controls. Despite the operating profit, ordinary income was a ¥9 million loss, reflecting non-operating headwinds; with interest expense of ¥13.4 million, this implies additional net non-operating losses of roughly ¥19.6 million (e.g., investment losses, forex, or valuation impacts). The company posted a net loss of ¥52 million (flat YoY), with an unusual tax expense of ¥55 million despite negative ordinary income, pointing to factors such as non-deductible items, valuation allowance changes, or prior-period adjustments under JGAAP. DuPont analysis shows a net margin of -2.05%, asset turnover of 0.606x, and financial leverage of 2.16x, yielding a calculated ROE of -2.68%, in line with the reported ROE. Liquidity is tight: the current ratio is 98.9% and the quick ratio is 85.3%, with negative working capital of ¥16.8 million, indicating near-term funding pressure if receivables elongate or collections slip. The balance sheet shows total assets of ¥4,180 million and equity of ¥1,939 million; while the reported equity ratio is shown as 0.0% (unreported), the implied equity ratio is approximately 46.4% (equity/total assets), which is moderate for the sector. Leverage appears manageable with a debt-to-equity ratio of 1.22x, but interest coverage at 1.8x underscores sensitivity to profit volatility. Cash flow statement line items are unreported this quarter (zeros in the disclosure), limiting assessment of earnings-to-cash conversion and free cash flow generation. No dividend was declared (DPS: ¥0), which is consistent with current loss-making status and preserves liquidity given the tight short-term position. Operationally, the combination of high gross margin and improving operating income despite slightly lower revenue suggests potential for margin recovery if growth resumes. However, the slippage from operating profit to ordinary loss indicates non-operating volatility that needs to be contained for sustained bottom-line improvement. The net loss and tax expense relationship merits monitoring due to its implications for effective tax rate normalization. Overall, the company demonstrates a fundamentally high-margin profile and moderate capitalization, offset by near-term profitability and liquidity challenges and limited visibility on cash flows due to unreported CF data.

From Earnings Presentation: The Q3 FY2025 results for Neural Group highlight the significant strengthening of the financial foundation through a public offering of 1.36 billion yen (net cash improved from -1.14 billion yen to +280 million yen, D/E ratio improved from 3.3x to 1.0x) as the most significant development. While revenue of 2,535 million yen remained flat year-over-year (99%), the company achieved positive operating income of 24 million yen (up 106 million yen year-over-year) through continued cost efficiency improvements. However, as SG&A efficiency improvements progressed faster than anticipated, Q3 operational activities were temporarily constrained in the short term, resulting in core service revenue growth slowing to 97% year-over-year. Management explained that this issue has been largely resolved and the impact on medium-term growth is limited. The capital raised will be allocated to AI technology development and sales force expansion to accelerate revenue and profit growth from 2026 onward. Full-year guidance remains unchanged (revenue: 3,700 million yen, operating income: 160 million yen).

Financial Analysis

Profitability

ROE_decomposition:

• net_profit_margin: -2.05
• asset_turnover: 0.606
• financial_leverage: 2.16
• calculated_ROE: -2.68
• commentary: ROE is negative primarily due to a -2.05% net margin; asset turnover is moderate at 0.606x and leverage at 2.16x provides limited amplification. Improving net margin is the most direct lever to restore ROE. margin_quality:
• gross_margin: 66.4
• operating_margin: 0.9
• ordinary_margin: -0.3
• net_margin: -2.05
• diagnostics: High gross margin indicates strong value-add and pricing power. The spread from operating to ordinary loss reflects non-operating costs (interest ¥13.4m) and other non-operating losses (~¥19.6m). Tax expense despite losses distorted the bottom line. operating_leverage: Revenue declined 1.3% YoY while operating income improved to ¥24m (+350% YoY), evidencing cost control and positive operating leverage at the SG&A level. Sustained revenue stabilization could translate to higher operating margin given the high gross margin base. interest_coverage:
• operating_income: 24.0
• interest_expense: 13.407
• coverage_ratio_x: 1.8
• commentary: Coverage is thin; profitability volatility could quickly pressure ordinary income.

Growth

revenue_sustainability: Top line decreased slightly (-1.3% YoY to ¥2,535m). The high gross margin suggests a sticky, high-value offering, but the modest decline indicates either slower demand, project timing, or churn pressures. Sustained revenue stability is key for operating leverage to materialize. profit_quality: Operating income positive but slim; non-operating items erased operating gains. The tax charge of ¥55m against negative ordinary income implies temporary/timing effects or valuation allowance dynamics, reducing visibility into normalized net margins. outlook: If revenue stabilizes and non-operating losses normalize, operating profitability can scale from a high gross margin base. Management focus on SG&A efficiency and cost of capital (reducing interest and other non-operating drag) will be critical for a return to positive ordinary and net income.

Financial Health

liquidity:

• current_ratio_percent: 98.9
• quick_ratio_percent: 85.3
• working_capital_millions_JPY: -16.82
• commentary: Near-par current ratio and negative working capital indicate tight liquidity; cash conversion cycles must be well-managed to avoid short-term funding strain. solvency:
• total_assets_millions_JPY: 4180.0
• total_liabilities_millions_JPY: 2362.537
• total_equity_millions_JPY: 1939.0
• debt_to_equity_x: 1.22
• implied_equity_ratio_percent: 46.4
• commentary: Moderate capitalization with equity covering ~46% of assets. Leverage is not excessive, but thin profitability and interest coverage of 1.8x constrain cushion. capital_structure: Balance sheet shows moderate leverage (Liabilities/Equity 1.22x). Managing borrowing costs and non-operating exposures is important given limited operating margin headroom.

Cash Flow

earnings_quality: Assessment constrained by unreported cash flow data this period. Net loss and tax charge suggest non-cash tax and non-operating items affected earnings quality. free_cash_flow:

• operating_CF_reported: unreported
• investing_CF_reported: unreported
• financing_CF_reported: unreported
• FCF_estimate: not assessable due to unreported OCF/Capex
• commentary: Without OCF and capex disclosure, FCF conversion cannot be evaluated. High gross margin model often supports cash generation, but working capital tightness is a risk. working_capital_dynamics: Negative working capital (¥-16.8m) with a quick ratio of 85.3% implies reliance on timely collections and potentially advance billings; slippage could pressure liquidity.

Dividend Sustainability

payout_ratio_assessment: DPS is ¥0 and payout ratio reported as 0.0%, consistent with loss-making status (EPS -¥3.41). Preserving cash is prudent given tight liquidity and non-operating volatility. FCF_coverage: Not assessable this period due to unreported cash flows. With net losses and thin operating margin, sustainable distributions would require clear, recurring FCF. policy_outlook: A resumption of dividends likely requires restoration of positive ordinary and net income and demonstrable OCF generation. Near-term focus is expected on reinvestment and balance sheet resilience.

Business Outlook

Full-year guidance maintained at revenue of 3,700 million yen (+3.8%) and operating income of 160 million yen (operating margin of 4.3%). Q4 structurally reaches peak revenue during the Christmas shopping season (revenue and profit rise smoothly from Q1 to Q4). For the medium term, FY2025 is positioned as a foundation-building period for core services, with plans to recover to a 15-20% year-over-year growth trajectory from FY2026 onward. Core service growth strategy is driven by four pillars: (1) Scale capability (reselling to existing customers and new customer acquisition), (2) Product capability (implementing new technologies in existing services to increase unit prices), (3) Business creation capability (commercializing new services from the innovation segment, utilizing M&A), (4) Sales capability (expanding own 10 locations + agency network). The operational constraints in Q3 will be resolved through personnel additions in Q4 and beyond (progressing smoothly), with expectations to return to revenue growth trajectory in FY2026.

Management Guidance

Management explicitly acknowledged that as SG&A efficiency improvements progressed faster than anticipated, operational activities were temporarily constrained, resulting in core service revenue slowing to 97% year-over-year, while repeatedly emphasizing that "the issue has been largely resolved" and "impact on medium-term growth is limited." While headcount reached historical low (lean) of 213 as of end of September, hiring from Q4 onward is progressing smoothly, with management explaining that organizational preparations for growth acceleration from FY2026 onward are on track. With the financial foundation strengthened through the capital raise, positioning this as a "shift to growth phase," management announced plans to accelerate investments for revenue and profit growth (AI technology development, sales organization expansion). Full-year guidance remains unchanged, expressing confidence in recovery in Q4.

Strategic Initiatives

• Utilizing 1.36 billion yen in capital raised to invest in AI technology development (miniaturization and securitization of NEURAL.LLM, AI Agent development) and sales force strengthening (expansion of nationwide sales locations + agency network)
• Promoting four-pillar growth strategy for core services: (1) Scale capability (new business discussions with approximately 1,000 companies monthly), (2) Product capability (implementing new technologies in existing services to increase unit prices), (3) Business creation capability (commercializing new services from innovation segment, utilizing M&A), (4) Sales capability (expanding nationwide reach through both own locations and agencies)
• Pursuing non-continuous growth through M&A: actively welcoming companies that create synergies with our AI technology and core services into the group, accelerating scale through utilization of new group companies' customers and assets
• Continuously elevating innovation segment technologies to core services: implementing image generation AI, multi-task AI models, edge AI voice systems, uncompromising AI accuracy research, etc. into commercial services to build entry barriers and promote service generalization
• Miniaturizing and securing our proprietary 320-billion-parameter LLM "NEURAL.LLM" to enable operation within corporate closed networks, supporting LLM utilization while protecting confidential information (on-premise compatible)
• Accelerating social implementation of AI technology leveraging nationwide 10 locations + agency network + customer base exceeding 12,000 companies (rare for an AI startup)

Risk Assessment

Business Risks:

• Revenue softness (-1.3% YoY) indicating potential demand or project timing risk
• Execution risk in scaling operating margin from a high gross margin base
• Customer concentration or churn risk typical of niche software/services
• Talent retention and wage inflation for engineers impacting SG&A
• Project delivery timing and acceptance risk affecting revenue recognition

Financial Risks:

• Tight liquidity with current ratio at 98.9% and negative working capital
• Thin interest coverage (1.8x) increases vulnerability to profit volatility
• Non-operating losses (~¥19.6m) and tax expense despite losses add earnings volatility
• Refinancing risk if short-term liabilities require rollover under tighter credit conditions
• Limited visibility on cash generation due to unreported cash flow data

Key Concerns:

• Persistence of non-operating losses driving ordinary loss despite operating profit
• Unusual tax expense (¥55m) while loss-making, impacting net margin and cash
• Liquidity headroom given negative working capital and quick ratio of 85.3%

Risk Factors from Presentation:

• As SG&A efficiency improvements progressed faster than anticipated in Q3, operational activities were temporarily constrained, causing core service revenue to slow to 97% year-over-year (short-term risk)
• Risk of falling below break-even point due to fixed cost burden (SG&A ratio approximately 65%) if core service growth temporarily decelerates
• Structural risk of operating losses in Q1 due to seasonality (revenue and profit bottom in Q1 → peak in Q4)
• Susceptible to economic fluctuations and Christmas shopping season impact due to focus on SME customers
• Innovation segment revenue showing declining trend (down 22.9% year-over-year), with commercialization speed of new technologies as a challenge
• Continued interest burden (interest expense of 13.4 million yen) and tight short-term liquidity (current ratio 98.9%, working capital -16.8 million yen)

Investment Implications

Key Takeaways:

• High gross margin (66.4%) provides a solid foundation for operating leverage
• Operating income improved meaningfully despite slightly lower revenue
• Ordinary and net losses driven by non-operating and tax effects require normalization
• Liquidity is tight; working capital discipline is critical
• Moderate leverage (D/E 1.22x) but thin coverage (1.8x) caps financial flexibility

Metrics to Watch:

• Revenue trajectory and backlog/conversion indicators
• Operating margin progression and SG&A ratio
• Non-operating income/expense line items and interest cost
• Cash conversion (OCF, DSO/DPO/DIO) once reported
• Effective tax rate normalization and deferred tax movements
• Equity ratio (implied ~46.4%) stability and any changes in leverage

Relative Positioning: Profile consistent with a high-margin, service-oriented TSE-listed software/IT solutions company exhibiting strong gross profitability but currently constrained by non-operating losses, tight liquidity, and limited cash flow disclosure; margin scalability is plausible if revenue stabilizes and non-operating factors normalize.

Supplementary Insights (Key Highlights)

• Executed public offering of 1.36 billion yen, transforming net cash from -1.14 billion yen to +280 million yen, dramatically improving financial health
• SG&A efficiency improvements exceeded expectations, temporarily constraining Q3 operational activities and slowing core service revenue to 97% year-over-year, but expected to be resolved through personnel additions
• Achieved positive Q3 cumulative operating income of 24 million yen (up 106 million yen year-over-year), demonstrating the materialization of break-even point reduction effects
• Core service revenue maintained positive growth at 2,105 million yen (+4.7%), aiming to recover to 15-20% year-over-year growth levels going forward
• Utilizing capital raised to invest in AI technology development (LLM, etc.) and sales force strengthening, also pursuing non-continuous growth through M&A
• Group headcount reached historical low of 213 as of end of September reflecting lean operations, with Q4 and beyond hiring progressing smoothly
• Established rare nationwide reach for an AI startup with 10 domestic locations + 1 overseas location sales network and customer base exceeding 12,000 companies

Q&A Insights

PDF materials pages 41-42 include "Frequently Asked Questions from IR" section, providing the following insights: (1) Seasonality (bottom in Q1 → peak in Q4) stems from SME customer investment appetite cycle and is expected to continue. (2) Transition from "AI license provision model" at IPO to "proprietary AI service provision model" successfully expanded total addressable market (TAM). (3) Innovation segment revenue decline is intentional, prioritizing speedy core service conversion with policy to converge to approximately 10% of total. (4) FY2025 is core service foundation-building period, aiming for 15-20% year-over-year growth from FY2026 onward. (5) NEURAL.LLM is currently being tested in innovation segment, AI Agent has independently operating functionality with future core service conversion under consideration. (6) R&D expenses focus on small, secure LLM, maintainable at appropriate levels to differentiate from global investment competition. (7) No plans for investments that would significantly damage profitability for future growth, with profitable business growth as requirement for commercialization approval.

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
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