SOURCENEXT CORPORATION FY2025 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥5.92B
• Operating Income: ¥-985M
• Net Income: ¥-1.11B
• EPS: ¥-5.53

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: FY2025 Q2 (cumulative) shows top-line recovery (+14.1% YoY) but a deep operating loss, with cash flow and leverage still manageable; profitability and ROIC remain the core concerns. Revenue rose to 59.16, while cost discipline lagged, resulting in operating income of -9.85 and ordinary income of -11.28. Gross profit was 31.10, yielding a solid gross margin of 52.6%, but SG&A at 40.96 outpaced gross profit, driving the operating loss. Operating margin for the period is about -16.6%, and net income came in at -7.64 (EPS -5.53 JPY). Non-operating expenses of 1.63 (including interest expense of 0.43) further weighed on ordinary income, partially offset by 0.21 in non-operating income. Cash and deposits remain sizeable at 47.51 versus total interest-bearing loans of roughly 42.12 (short-term 31.00, long-term 11.12), keeping net cash slightly positive. Liquidity is adequate with a current ratio of 177% and quick ratio of 128%, limiting near-term refinancing stress despite losses. ROE is -9.2% (DuPont: margin -12.9%, asset turnover 0.380, leverage 1.86x), pointing to margin-driven underperformance. ROIC is -12.6%, indicating value destruction relative to typical 7–8% cost-of-capital benchmarks. OCF was 1.67 despite the net loss, but the OCF/NI ratio of -0.22 signals earnings quality concerns and potential working capital timing effects. Capex was modest (-0.09), and financing cash flow was -7.97, likely reflecting net debt repayment or interest outflows. Balance sheet shows retained earnings of -87.21 (accumulated deficit), offset by large capital surplus (115.96), so book equity remains positive at 83.53. Intangible assets are substantial at 34.39 and investment securities at 20.69, implying potential impairment or valuation swing risks. With inventories at 27.45 and accounts receivable at 15.22, execution on sell-through and cash conversion will be critical to sustain liquidity. Forward-looking, restoring operating leverage by aligning SG&A with the revenue base and preserving gross margins are the key levers; continued cash discipline and interest burden management are essential. Overall, the quarter marks progress on revenue but underscores profitability, ROIC, and earnings quality as the primary issues to monitor.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-12.9%) × 0.380 × 1.86 ≈ -9.2%. The dominant driver of weak ROE is the negative net margin; asset turnover is modest, and leverage is not excessive. Business reasons: SG&A of 40.96 exceeded gross profit of 31.10, erasing operating profit despite a healthy 52.6% gross margin; non-operating expenses (notably interest expense of 0.43) further widened losses. Sustainability: the current margin pressure stems from cost base misalignment to revenue scale; absent cost actions or further revenue acceleration, this negative margin is not sustainable. Asset turnover at 0.380 suggests underutilized assets, with sizeable intangibles (34.39) and inventories (27.45) weighing on efficiency; improvement depends on sell-through and product cycle strength. Leverage at 1.86x is moderate; it is not the primary cause of ROE deterioration but can amplify losses if margins remain negative. Flags: SG&A growth versus revenue growth cannot be precisely assessed due to lack of prior-period SG&A, but the level of SG&A relative to gross profit is a concern. Operating leverage is negative this period: incremental revenue did not translate into operating profit. Margin quality: gross margin is robust at 52.6%, implying pricing/mix strength or higher software/content mix, but the negative EBITDA (-7.65) indicates insufficient scale to cover fixed costs. One-time items: limited visibility; the non-operating line is small relative to operating loss, suggesting core operations are the main issue.

Growth Assessment

Revenue grew 14.1% YoY to 59.16, indicating some recovery in demand or successful product launches/promotions. However, the top-line expansion did not deliver operating leverage: operating income was -9.85 and operating margin -16.6%. Gross profit increased to 31.10 with a high 52.6% gross margin, suggesting pricing/mix resilience; the issue is SG&A intensity (40.96) overwhelming gross profit. With ordinary income at -11.28 and net income at -7.64, earnings remain highly sensitive to cost control and non-operating burden. Efficiency metrics are soft: asset turnover 0.380 and ROIC -12.6% point to underutilized assets and inadequate returns. The near-term outlook hinges on cost down, tighter marketing spend, and improving sell-through of inventories (27.45) to convert revenue into cash. Given intangibles at 34.39 and investment securities at 20.69, impairment/valuation swings can affect reported profit, adding volatility. Without disclosure of segment or product mix, sustainability of the 14.1% revenue growth is uncertain; watch seasonality into H2 and holiday demand. In sum, growth is present but not yet profitable; structural cost actions and improved working capital turns are needed to translate growth into earnings.

Financial Health

Liquidity: Current ratio 177% and quick ratio 128% indicate healthy short-term liquidity. Cash and deposits of 47.51 cover short-term loans of 31.00, reducing near-term refinancing risk; working capital stands at 43.24. Solvency: Debt-to-equity is 0.86x (within conservative range), and implied equity ratio is approximately 53.7% (83.53/155.62), despite accumulated deficit (retained earnings -87.21) offset by capital surplus (115.96). Interest-bearing debt totals about 42.12 (short + long), with net cash position of roughly 5.4 (cash minus total loans). Maturity mismatch risk: manageable, as current assets of 99.37 comfortably exceed current liabilities of 56.13; however, reliance on short-term loans (31.00) implies exposure to rollover and rate risk. Interest coverage is very weak at -23.00x, reflecting operating losses; continued negative EBITDA would pressure debt service capacity if cash declines. Off-balance sheet: no specific disclosures provided; potential obligations (e.g., purchase commitments, guarantees) are unknown due to data limits.

Cash Flow Quality

OCF was 1.67 against net income of -7.64, producing an OCF/NI ratio of -0.22, which signals low earnings quality and potential reliance on working capital movements or non-cash charges to support cash flow. Depreciation and amortization of 2.20 help bridge the loss to OCF, but without detailed working capital disclosure, sustainability is unclear. Capex was modest at -0.09, suggesting limited cash burn from investments; however, total investing CF is unreported, and intangible additions (if any) could be material. Indicatively, OCF minus capex implies positive FCF around 1.6, but this may overstate true FCF if other investing outflows are present (data limitation). Financing CF was -7.97, likely reflecting debt repayments and interest; combined with operating/investing flows, this reduced cash balances unless offset by other sources. Signs of working capital management risk include inventories of 27.45 relative to receivables of 15.22; absent turnover data, we cannot confirm channel inventory build or drawdown. Overall, cash generation is fragile and contingent on working capital; quality is insufficient given negative earnings.

Dividend Sustainability

Dividend data are unreported; given net losses (NI -7.64), negative ROE (-9.2%), and accumulated deficit (retained earnings -87.21), capacity for cash dividends appears constrained. While implied FCF may be positive this period due to low capex, the lack of profit and weak interest coverage argue for capital preservation. Policy outlook likely prioritizes rebuilding earnings and strengthening the balance sheet over distributions. Without reported DPS and payout ratios, we cannot calculate coverage; any future dividend would need to be funded from free cash flow and/or capital surplus, subject to legal constraints.

Risk Assessment

Business Risks:

• Profitability risk: SG&A (40.96) exceeds gross profit (31.10), driving operating losses.
• Execution risk on cost reductions and operating leverage amid only moderate revenue growth.
• Product demand and pricing risk typical for consumer software/devices, affecting gross margin and volumes.
• Inventory risk with inventories at 27.45; potential obsolescence or discounting pressure if sell-through weak.
• Intangible asset risk (34.39) including potential impairment if performance underwhelms.

Financial Risks:

• Earnings quality risk: OCF/NI at -0.22 indicates weak cash conversion.
• Interest burden and coverage risk: interest coverage -23.00x amid operating losses.
• Refinancing and interest rate risk due to reliance on short-term loans (31.00).
• Valuation risk on investment securities (20.69) impacting comprehensive income and equity.
• Accumulated deficit (retained earnings -87.21) limits flexibility for distributions and may constrain covenants.

Key Concerns:

• Negative ROIC (-12.6%) and ROE (-9.2%) signal value destruction.
• Persistent operating losses despite a 52.6% gross margin, implying fixed cost overhang.
• Potential impairment exposure from sizable intangibles.
• Unreported details (SG&A breakdown, investing CF) reduce visibility on structural costs and FCF.

Investment Implications

Key Takeaways:

• Top-line growth (+14.1% YoY) but operating loss of -9.85 underscores cost base misalignment.
• Liquidity is adequate (current ratio 177%, net cash ~5.4) despite losses, limiting near-term solvency risk.
• Earnings quality is weak (OCF/NI -0.22) and interest coverage is deeply negative.
• ROIC at -12.6% highlights urgency for profitability improvements and asset efficiency.
• Intangibles and investment securities introduce impairment/valuation swing risks.

Metrics to Watch:

• Operating margin progression and SG&A as a percentage of sales
• Gross margin stability (currently 52.6%)
• OCF versus NI and working capital turns (inventory and receivables)
• Short-term loan balance and effective interest rate; interest coverage
• ROIC and asset turnover, especially utilization of intangibles
• Net cash position and cash runway relative to loss trajectory

Relative Positioning: Within Japan small-cap software/consumer tech peers, SOURCENEXT shows better-than-average liquidity but weaker profitability and returns; the path to normalization hinges on SG&A control and inventory monetization to translate growth into sustainable cash flow.

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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