NE Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.99B
• Operating Income: ¥723M
• Net Income: ¥489M
• EPS: ¥30.62

Income Statement

Balance Sheet

Cash Flow Statement

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 Financial Analysis

Executive Summary

Verdict: Solid topline growth with margin compression and weak cash conversion; balance sheet remains very strong. Revenue rose 7.0% YoY to 19.87, while operating income declined 3.3% YoY to 7.23, indicating cost pressure and/or lower operating leverage. Gross profit was 14.18, yielding a gross margin of 71.3%, which is robust for a likely software/services model. Operating margin stood at 36.4% (7.23/19.87), down an estimated 390 bps from roughly 40.3% a year ago (back-solved from YoY growth rates). Net income increased 3.6% YoY to 4.89, translating to a net margin of 24.6%, about an 80 bps compression from an estimated 25.4% last year. Ordinary income of 7.14 fell 3.6% YoY, with minimal non-operating contribution (net non-operating -0.09), implying the earnings change was operational. EBITDA was 8.08 with a margin of 40.7%, again strong but below the implied prior-year margin given OI decline. Cash conversion was weak: operating cash flow of 1.90 equated to just 0.39x net income, triggering a quality alert. Balance sheet strength is a clear positive: current ratio of 532%, cash of 25.97 versus current liabilities of 6.69, and low leverage (assets/equity 1.24x; D/E 0.17x). ROE calculated at 12.0% (NPM 24.6% × AT 0.394 × leverage 1.24x), respectable given the conservative balance sheet. Effective tax rate was 31.4%, broadly in line with statutory norms. With CapEx limited at 0.03, implied FCF is about 1.87, though investing CF detail is not disclosed. A computed payout ratio of 229.1% suggests either special or timing effects; sustainability is questionable if interpreted on a period basis. The divergence between OCF and net income indicates working capital headwinds or timing of tax/other payments; further breakdown is needed. Forward-looking, the company must manage SG&A discipline and working capital to defend margins and improve cash conversion, while its cash-rich balance sheet provides ample flexibility to invest or smooth distributions.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin 24.6% × Asset Turnover 0.394 × Financial Leverage 1.24x = ROE 12.0%. The most notable change componentally appears to be margin, as operating income declined 3.3% YoY despite 7.0% revenue growth, implying operating margin compression of ~390 bps to 36.4%. Business drivers likely include higher SG&A intensity (SG&A at 6.94, or ~34.9% of sales) and possible mix/talent cost inflation typical in software/services. Gross margin remains high at 71.3%, so the pressure is predominantly below gross profit (selling, hiring, or marketing investments). The sustainability of this margin compression depends on whether spending is growth-investive (e.g., salesforce/engineering ramp) or structural cost inflation; with EBITDA margin still 40.7%, normalization is possible if operating leverage returns. Watch for negative operating leverage signals: the decline in operating income alongside higher sales suggests expense growth outpaced revenue; if SG&A growth continues to exceed revenue growth, profitability could erode further.

Growth Assessment

Topline grew 7.0% YoY to 19.87, indicating healthy demand. However, profit growth lagged, with operating income -3.3% YoY and ordinary income -3.6% YoY, while net income rose 3.6% likely aided by nonrecurring/tax factors rather than operating strength. The revenue base and gross margin profile suggest resilience consistent with software/services, but operating leverage was negative this quarter. Sustainability hinges on cost control and sales productivity: if current SG&A intensity reflects growth investments, medium-term margins could recover; if cost inflation is structural, margins may remain under pressure. Near-term outlook: prioritize stabilization of operating margin and improvement in cash conversion, while leveraging the strong balance sheet to fund growth without over-reliance on external financing.

Financial Health

Liquidity is very strong: current ratio 532.1% and quick ratio 532.1%, with cash and deposits of 25.97 comfortably exceeding current liabilities of 6.69. There is no warning on the thresholds (Current Ratio well above 1.0). Debt metrics are conservative: D/E 0.17x, financial leverage 1.24x, and total liabilities 7.07 versus equity 40.72. Maturity mismatch risk appears low given large cash reserves and modest current liabilities; accounts payable is minimal (0.05), consistent with a light COGS model. Interest-bearing debt is unreported; however, given low liabilities and positive financing CF, solvency risk is limited. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

Earnings quality is a concern: OCF/Net Income at 0.39x is below the 0.8 benchmark, indicating weak cash conversion. Implied free cash flow is approximately 1.87 (OCF 1.90 minus CapEx 0.03), although full investing CF is unreported; this suggests modest positive FCF despite poor conversion. Potential drivers of weak OCF include working capital build (e.g., higher receivables at 6.22), tax timing (effective tax rate 31.4%), or other accruals; line-item detail is unavailable. No clear signs of deliberate working capital management are evident without payables/inventory dynamics; nonetheless, receivables concentration and billing/timing risk should be monitored. Sustainability of FCF for dividends and capex appears adequate in absolute terms given low CapEx and strong cash balance, but recurring OCF must improve to support any elevated payout.

Dividend Sustainability

A calculated payout ratio of 229.1% implies distributions exceeded earnings on a period basis, which is not sustainable if recurring. Dividend line items are unreported, so this figure may reflect timing (interim vs full-year) or special dividends. With implied FCF of ~1.87 and a large cash balance (25.97) plus retained earnings of 20.39, near-term capacity to pay is ample; however, long-term sustainability requires payout to align with normalized FCF and earnings. Policy outlook: expect management to balance growth investments (SG&A intensity) with returning cash; clarity on full-year DPS and any special distributions will be key.

Risk Assessment

Business Risks:

• Margin pressure from rising SG&A (talent, sales/marketing) despite revenue growth
• Execution risk in scaling a high gross margin services/software model
• Client concentration and project timing risk affecting quarterly revenue and cash collection
• Pricing pressure or contract mix shifts that could compress operating margin

Financial Risks:

• Weak cash conversion (OCF/NI 0.39) indicating working capital/timing headwinds
• Potential reliance on cash reserves to fund an elevated payout ratio (229.1%) if continued
• Limited disclosure on interest-bearing debt and investing cash flows, creating visibility gaps

Key Concerns:

• Operating margin compressed ~390 bps YoY to 36.4%
• Net margin compressed ~80 bps YoY to 24.6% despite higher net income
• Ordinary income down 3.6% YoY with minimal non-operating offsets
• Data limitations (dividends, debt detail, investing CF) constrain assessment of recurring cash coverage

Investment Implications

Key Takeaways:

• Healthy 7.0% revenue growth but negative operating leverage this quarter
• ROE at 12.0% is solid given low leverage, driven primarily by high net margin
• Cash-rich balance sheet (cash 25.97 vs current liabilities 6.69) provides flexibility
• OCF/NI at 0.39 is a notable red flag for earnings quality
• Payout ratio at 229.1% suggests possible special/timing effects; sustainability uncertain without full-year context

Metrics to Watch:

• Operating margin trajectory and SG&A as a percentage of revenue
• OCF/Net Income and receivables turnover/aging
• Full investing cash flow and CapEx pipeline
• Disclosure on dividend policy (regular vs special) and total dividends paid
• Contracting/pricing trends and backlog (if applicable)

Relative Positioning: Relative to typical TSE-listed software/services peers, the company exhibits strong gross margins and a very conservative balance sheet but lags on cash conversion this quarter; sustaining growth while restoring operating leverage will be key to maintaining its above-market profitability profile.

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