SOLXYZ Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥12.90B
• Operating Income: ¥1.07B
• Net Income: ¥362M
• EPS: ¥25.50

Income Statement

Balance Sheet

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: A strong FY2025 Q3 with clear operating leverage, materially higher margins, and solid balance sheet strength, albeit with limited visibility on cash flow quality due to unreported CF statements. Revenue rose 10.4% YoY to 129.01, driven by robust demand in core IT services, while operating income surged 91.2% YoY to 10.72. Gross profit reached 26.49, implying a gross margin of 20.5%. Operating margin improved to 8.3% (10.72/129.01), from an estimated 4.8% in the prior year period. Ordinary income increased 78.1% YoY to 10.78, with a modest non-operating contribution of 0.74, mainly dividends (0.38) and interest income (0.08). Net income climbed 76.4% YoY to 5.83, translating to a net margin of 4.5%. On a YoY basis, operating margin expanded by approximately 351 bps, and net margin widened by roughly 169 bps. The DuPont decomposition yields ROE of 8.2% (Net margin 4.5% × Asset turnover 1.049 × Leverage 1.74x), now in a broadly acceptable range for a mid-cap SIer. ROIC is strong at 16.2%, comfortably above the 8% excellence threshold, indicating attractive returns on invested capital. The tax rate is elevated at ~40.1% (2.42/6.05), dampening the conversion from operating to net profit. Liquidity is robust with a current ratio of 217% and net cash of roughly 31.1 (Cash 49.79 minus total loans 18.66), supporting flexibility for investment and shareholder returns. Interest coverage is exceptionally strong at 187.5x, reflecting minimal financial risk. Earnings quality cannot be verified due to unreported cash flows; OCF/NI and FCF are not calculable, which is a key limitation in assessing sustainability. SG&A intensity to revenue is 16.2% and to gross profit is high at ~78.9%, but operating leverage offset cost pressure this quarter. Forward-looking, margin improvement appears driven by mix and utilization gains, but sustainability hinges on maintaining pricing, managing wage inflation, and controlling subcontracting costs. Overall, the quarter reflects healthy growth, improved profitability, and a conservative balance sheet, with the main watchpoint being cash flow realization and tax normalization.

Profitability Analysis

ROE decomposition and drivers: Net Profit Margin × Asset Turnover × Financial Leverage = 4.5% × 1.049 × 1.74x ≈ 8.2% ROE. Component changes: The largest driver of ROE improvement is net margin expansion, as operating income growth (+91.2% YoY) far outpaced revenue growth (+10.4%). Business reasons: Better operating leverage (lower SG&A intensity relative to revenue growth), likely improved project mix/pricing and utilization, and low finance costs (interest expense 0.06) supported ordinary income; high taxes partially offset gains. Sustainability: Operating leverage benefits can persist if demand and pricing hold, but wage inflation and subcontracting costs could erode margins; tax rate normalization could help net margin. Margin quality: Operating margin is 8.31% vs an estimated 4.80% last year—about +351 bps. Net margin is 4.52% vs ~2.83% last year—about +169 bps. Non-operating impact is positive but modest (non-operating income 0.74; 12.7% of operating income), indicating core operations drove the improvement. Operating leverage signals: Operating income grew 9x faster than revenue, implying strong fixed-cost absorption. Cost flags: SG&A (20.88) equates to 16.2% of revenue; within SG&A, directors’ compensation (3.79) is notable in size (~18% of SG&A). Without YoY SG&A detail, we cannot confirm whether SG&A grew slower than revenue, but the magnitude of margin expansion suggests effective cost control.

Growth Assessment

Topline growth of 10.4% YoY to 129.01 indicates healthy demand across core service lines. Profit growth was outsized: operating income +91.2% and ordinary income +78.1%, implying favorable mix and/or productivity/utilization improvements. Net income +76.4% is strong despite a high effective tax rate (~40%), suggesting underlying operating strength. The gross margin of 20.5% indicates stable project economics; combined with the 8.3% operating margin, the business is scaling better than the prior year. Non-operating contributions (dividends and interest income totaling 0.46) are supportive but not the main driver. With ROIC at 16.2%, incremental growth appears value-accretive, assuming reinvestment opportunities persist. Sustainability hinges on talent retention, wage and subcontractor cost control, and maintaining day rates; absent order backlog disclosures, revenue visibility is limited. No equity-method income dependency is evident, supporting quality of profit as operating rather than investment-driven. The elevated tax rate constrains net growth conversion; any normalization would be an upside lever to net margins. Overall growth outlook is cautiously positive, conditioned on maintaining utilization and pricing against wage inflation.

Financial Health

Liquidity: Current ratio 217% and quick ratio 213.8% signal strong short-term solvency; no warnings (both > benchmark). Working capital stands at 43.81. Cash and deposits of 49.79 comfortably exceed short-term loans of 10.10, limiting refinancing risk. Solvency: Debt-to-equity at 0.74x indicates conservative leverage; equity ratio is approximately 57.5% (70.73/123.01), underscoring balance sheet strength. Interest coverage is extremely strong at 187.5x. Maturity mismatch: Current assets (81.24) exceed current liabilities (37.43) by a wide margin; no apparent mismatch risk. Off-balance sheet obligations: Not disclosed; no data to assess guarantees or operating leases beyond recognized liabilities. No thresholds breached (Current Ratio well above 1.0; D/E below 1.5).

Cash Flow Quality

Assessment is constrained by unreported cash flow statements. OCF/Net Income is not calculable; thus we cannot confirm earnings cash conversion—this is a key limitation. With cash (49.79) exceeding total loans (18.66), leverage risk is low even if working capital absorbs cash temporarily. Free cash flow (FCF) is not disclosed; therefore, we cannot evaluate coverage of capex and dividends. Working capital: Receivables (27.39) relative to revenue suggest typical billing exposure for SI; without YoY working capital moves, we cannot detect timing-related earnings management. No signs of aggressive non-operating income reliance; non-operating income is modest relative to operating profit. Overall, earnings quality appears operationally driven, but cash validation is pending CF disclosure.

Dividend Sustainability

Payout ratio (calculated) is 55.2%, within the typical sustainability threshold (<60%). DPS itself is unreported; the payout ratio implies a moderate return policy aligned with earnings growth. FCF coverage cannot be assessed due to missing operating and investing cash flows; therefore, our view is contingent on cash conversion remaining healthy. Balance sheet capacity (net cash ~31.1) provides a buffer to maintain dividends through normal volatility. Policy outlook: If margins remain at current levels and tax rates do not increase further, sustaining a ~50–55% payout appears reasonable; upward changes would require confirmation of FCF durability.

Risk Assessment

Business Risks:

• Wage inflation and subcontracting cost pressures that can compress gross and operating margins
• Utilization and pricing risk in project-based SI business, including potential delays or cancellations
• Customer concentration or sector cyclicality (e.g., financial/public sector budgets) not disclosed but typical for SI
• Talent retention and hiring challenges in a tight IT labor market
• High effective tax rate (~40%) reducing net margin conversion

Financial Risks:

• Cash flow visibility risk due to unreported OCF/FCF, limiting confirmation of earnings quality
• Intangible asset and goodwill impairment risk (intangible assets 13.22; goodwill 1.37) if project profitability weakens
• Interest rate exposure is limited given net cash, but investment income (dividends/interest) could fluctuate
• Potential increase in working capital needs with growth, affecting cash conversion

Key Concerns:

• Sustainability of the recent margin expansion amid wage inflation
• High tax rate keeping net margins structurally lower unless optimized
• Directors’ compensation (3.79) is sizable within SG&A; any one-time elements need clarification
• Lack of CF disclosure prevents assessment of dividend coverage by FCF

Investment Implications

Key Takeaways:

• Strong quarter: revenue +10.4% YoY and operating income +91.2% YoY with ~351 bps operating margin expansion
• ROE improved to 8.2% and ROIC is robust at 16.2%, indicating value-accretive growth
• Balance sheet strength with net cash (~31.1) and high liquidity (current ratio 217%) reduces financial risk
• Non-operating contributions are modest; core operations are the primary profit driver
• Dividend payout ratio at ~55% appears sustainable, conditional on cash conversion

Metrics to Watch:

• Operating cash flow and free cash flow (OCF/NI >1.0 target)
• Order intake/backlog and book-to-bill for revenue visibility
• Gross margin and SG&A ratio trends (evidence of persistent operating leverage)
• Utilization rates, billable headcount, and average billing rates
• Effective tax rate trajectory and any tax planning impacts
• Receivables days and working capital intensity

Relative Positioning: Within Japan’s mid-cap IT services/SI peers, the company currently shows above-peer margin momentum and a strong ROIC profile, supported by a conservative balance sheet; confirmation via cash flow would elevate confidence relative to peers with similar growth but weaker liquidity.

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