SOURCENEXT CORPORATION FY2025 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥5.92B
• Operating Income: ¥-985M
• Net Income: ¥-1.91B
• 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

SourceNext Co., Ltd. reported FY2025 Q2 consolidated results under JGAAP with revenue of ¥5,916 million, up 14.1% year over year, indicating a recovery in top-line momentum. Despite the revenue growth, profitability remained weak with operating income at a loss of ¥985 million and ordinary income at a loss of ¥1,128 million, reflecting continued operating strain and some non-operating drags. Gross profit was ¥2,623 million, implying a gross margin of 44.3%, which is healthy for a software/content-oriented model and suggests pricing and product mix remain supportive. EBITDA was negative at ¥774 million, but the gap between EBITDA and operating income (¥211 million) shows a moderate non-cash burden from depreciation and amortization. Net income was a loss of ¥764 million, aligning with the calculated net margin of -12.91% and reinforcing that revenue growth has not translated into breakeven at the bottom line. The DuPont bridge indicates that negative ROE of -9.15% is primarily driven by the negative net margin, while asset turnover of 0.38x and financial leverage of 1.86x are within a reasonable range for the business model. Liquidity is adequate, with a current ratio of 184% and quick ratio of 141%, supported by working capital of ¥5,177 million, which provides a buffer for near-term operations. The balance sheet shows total assets of ¥15,562 million and total equity of ¥8,353 million, implying an equity ratio around the mid-50% range (approx. 53.7% based on provided balances), pointing to a relatively solid capital base. Total liabilities of ¥7,855 million and a debt-to-equity ratio of 0.94x indicate moderate leverage, but ongoing losses and interest burden (¥36 million) need monitoring. Operating cash flow was negative ¥527 million, which is 0.69x of net loss, indicating some earnings quality support from non-cash items but still a cash burn in the core business. Financing cash inflow of ¥1,529 million suggests the company tapped external funding to bridge operating cash needs and maintain liquidity. Inventory of ¥2,647 million is sizable relative to revenue and should be tracked for turnover and obsolescence risk, particularly if hardware or physical products form part of the portfolio. Tax expense of ¥205 million despite a net loss likely reflects non-cash tax items (e.g., valuation allowances, deferred tax adjustments) under JGAAP rather than current cash taxes. With DPS at ¥0.00 and a payout ratio of 0%, management appears to be prioritizing reinvestment and liquidity preservation amid losses. Data limitations exist for certain metrics (e.g., reported equity ratio, cash and equivalents, investing cash flows, share count and book value per share are unreported), so conclusions are based on the available non-zero disclosures and derived calculations. Overall, the story is one of improving revenue traction but insufficient operating leverage so far, with adequate liquidity and solvency providing runway to execute on profitability initiatives.

Profitability Analysis

ROE of -9.15% decomposes into a net margin of -12.91%, asset turnover of 0.38x, and financial leverage of 1.86x, clearly showing margin weakness as the main driver of negative equity returns. Gross margin at 44.3% is robust, suggesting the core product mix retains pricing power; however, operating margin is -16.6% (operating loss of ¥985 million on ¥5,916 million revenue), indicating elevated SG&A or growth investments outpacing gross profit growth. EBITDA margin of -13.1% signals limited operating leverage at current scale; the ¥211 million D&A implies asset intensity is modest, so margin recovery must come from SG&A efficiency and scale. Ordinary loss of ¥1,128 million versus operating loss of ¥985 million points to net non-operating expense, including interest of ¥36 million and other items. Interest coverage on an EBIT basis is -27.0x, reflecting inadequate earnings to service interest from operations, though the absolute interest burden remains small relative to revenue. Effective tax rate appears not meaningful due to losses and reported tax expense dynamics; the ¥205 million tax expense despite losses likely reflects deferred tax and valuation allowance impacts rather than cash taxes. Overall, profitability is constrained by insufficient operating leverage despite decent gross margins, suggesting the need for cost discipline, product mix optimization, or further revenue scale to reach breakeven.

Growth Assessment

Revenue rose 14.1% YoY to ¥5,916 million, indicating demand resilience or successful new product launches and channel expansion. The gross profit base of ¥2,623 million grew with sales (implied by the stable 44.3% margin), suggesting growth quality is not primarily discount-driven. However, operating loss remained at ¥985 million (flat YoY per disclosure), implying the incremental gross profit was largely absorbed by operating expenses, limiting flow-through. The negative ordinary and net income underscore that growth is not yet profitable, and achieving breakeven will depend on cost containment and/or further scaling. Given inventory levels of ¥2,647 million, growth sustainability will hinge on inventory turnover and avoiding obsolescence, especially if tied to hardware or time-sensitive SKUs. The outlook will be driven by monetization of existing installed base, subscription/recurring revenue expansion, and retention improvements to raise lifetime value. Near-term, management’s ability to convert revenue growth into positive OCF will be a key indicator of quality. As data on segment mix and product breakdown are not provided, conclusions on the durability of the revenue mix are constrained; monitoring margin trajectory over the next two quarters is essential.

Financial Health

Total assets are ¥15,562 million and total equity ¥8,353 million, implying an equity ratio of approximately 53.7% (computed), despite the reported equity ratio being unreported. Total liabilities of ¥7,855 million produce a debt-to-equity ratio of 0.94x, indicating moderate leverage. Liquidity appears sound with current assets of ¥11,343 million and current liabilities of ¥6,165 million, yielding a current ratio of 184% and quick ratio of 141%. Working capital stands at ¥5,177 million, providing operational flexibility even as the company posts losses. Interest expense is ¥36 million; while coverage is negative due to losses, the absolute interest burden is manageable if cash buffers and financing access are intact. The absence of reported cash and equivalents constrains a precise liquidity view; however, the ¥1,529 million financing inflow in the period suggests proactive balance-sheet management. No major solvency red flags are evident from the leverage metrics alone, but persistent losses could erode equity over time.

Cash Flow Quality

Operating cash flow was negative ¥527 million versus a net loss of ¥764 million, yielding an OCF/NI ratio of 0.69; this indicates partial support from non-cash items (notably ¥211 million D&A) but still a core cash burn. EBITDA of -¥774 million is broadly consistent with the OCF deficit after working capital movements, suggesting no outsized one-off cash distortions are apparent in the quarter. Investing cash flow is unreported, limiting visibility into capex or acquisition spending; consequently, reported free cash flow is also unreported. Working capital dynamics are partially visible: inventories stand at ¥2,647 million and current assets are significantly above current liabilities, but without period-on-period detail we cannot attribute OCF movements to specific working capital lines. Tax expense of ¥205 million amid losses likely reflects non-cash deferred items; cash taxes are likely low, supporting near-term cash preservation. Overall, earnings quality is mixed: non-cash addbacks soften the cash loss, but the business remains cash consumptive pending improved operating leverage.

Dividend Sustainability

The company paid no dividend (DPS ¥0.00) with a payout ratio of 0%, which is appropriate given negative earnings and negative operating cash flow. With FCF unreported and OCF negative, distributions would not be covered by internal cash generation. The balance sheet shows adequate equity and liquidity, but capital is currently better deployed to fund operations and growth initiatives rather than dividends. Under JGAAP and typical Japanese corporate policy, reinstatement or initiation of dividends would likely require sustained profitability and positive free cash flow; near-term policy likely remains conservative.

Risk Assessment

Business Risks:

• Execution risk in converting revenue growth into operating profitability amid persistent operating losses
• Product mix and pricing risk despite currently solid gross margins
• Inventory turnover and obsolescence risk given ¥2,647 million inventories relative to sales
• Competitive pressure in software/content and device-related markets impacting margin and retention
• Dependence on successful new product launches and channel performance to sustain growth

Financial Risks:

• Continued cash burn with OCF of -¥527 million necessitating external financing if not reversed
• Interest coverage negative (EBIT/interest -27.0x) though absolute interest cost is modest
• Potential erosion of equity if losses persist, pressuring the computed equity ratio (~53.7%) over time
• Unreported cash balance and investing cash flows limit visibility into liquidity runway and capex needs

Key Concerns:

• Operating leverage not materializing despite 14.1% YoY revenue growth
• Reliance on financing cash inflow of ¥1,529 million to support operations
• Tax expense of ¥205 million despite losses suggests non-cash items but reduces reported net income
• Data gaps on cash, investing flows, and share metrics constrain full assessment

Investment Implications

Key Takeaways:

• Top-line growth of 14.1% YoY with stable gross margin at 44.3% is encouraging but not yet translating to profit
• Operating loss remained sizable at ¥985 million; SG&A efficiency and scale are critical levers
• Liquidity is adequate (current ratio 184%, quick ratio 141%) and equity base is solid (~53.7% equity ratio by calculation)
• OCF negative at ¥527 million; financing inflow of ¥1,529 million bolstered liquidity
• Leverage moderate (D/E 0.94x) with manageable interest expense (¥36 million), but coverage remains negative

Metrics to Watch:

• Operating margin and EBITDA margin progression over the next two quarters
• Operating cash flow and any disclosure of capex to derive true free cash flow
• Inventory turnover and working capital intensity
• Non-operating items affecting ordinary income and interest expense trend
• Equity ratio and net cash/debt once cash balances are disclosed

Relative Positioning: Within Japanese small-cap software/content peers, the company exhibits competitive gross margins but lags on operating leverage and cash generation; balance-sheet strength provides time to execute, yet sustained improvement in OCF and operating margin is necessary to close the gap with profitable peers.

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