AI CROSS Inc. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥2.90B
• Operating Income: ¥273M
• Net Income: ¥192M
• Earnings per Unit (EPU): ¥32.20

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution 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 mixed quarter—solid top-line growth but notable margin compression led to double-digit declines in operating and net profit. Revenue grew 6.7% YoY to 29.05, while operating income fell 21.3% YoY to 2.73 and ordinary income declined 20.1% YoY to 2.75. Net income dropped 37.1% YoY to 1.20, with an effective tax rate of 40.3% further exacerbating the bottom-line decline. Gross profit was 9.58 with a gross margin of 33.0%, indicating either rising cost of sales or unfavorable mix despite sales growth. Operating margin was 9.4% (2.73/29.05), down sharply from an estimated 12.7% a year ago, implying approximately 332 bps of compression. Net margin was 4.1%, down from an estimated 7.0% last year, a compression of around 288 bps. Ordinary margin was about 9.5% versus roughly 12.6% last year, implying ~313 bps compression. Non-operating items were negligible (non-operating income 0.01, expenses 0.04), so the earnings shortfall is fundamentally operational and tax-rate driven. Balance sheet strength is a clear positive: cash and deposits of 14.51 and current assets of 21.13 comfortably cover current liabilities of 4.90, resulting in a current ratio of 431% and D/E of 0.26x. Interest expense is essentially zero, yielding an interest coverage of ~2,256x, reflecting a de facto debt-free position. ROE is calculated at 6.5%, below typical software/IT peer medians, mainly due to lower net margin, not leverage. We cannot judge cash flow quality because operating cash flow was unreported; thus, earnings-to-cash conversion is a key unknown. Working capital appears ample (working capital 16.23), reducing liquidity risk. Forward-looking, sustaining revenue momentum while stabilizing gross margin and controlling SG&A will be essential to rebuild operating leverage. The elevated effective tax rate raises the hurdle for net income recovery and warrants monitoring for normalization. Overall, the company remains financially sound with room to invest, but profitability headwinds must ease for ROE to improve.

Profitability Analysis

ROE decomposition: ROE (6.5%) = Net Profit Margin (4.1%) × Asset Turnover (1.236) × Financial Leverage (1.26x). The component that changed the most versus last year appears to be Net Profit Margin, which fell from an estimated ~7.0% to 4.1% (≈-288 bps), while leverage remains modest and likely stable. The margin compression likely stems from increased cost of sales (gross margin at 33.0%) and/or higher SG&A intensity relative to revenue, compounded by a high effective tax rate (40.3%) that reduced net profitability. Non-operating factors had minimal impact, so the margin pressure is primarily operational and tax-related. Sustainability: If cost pressures (e.g., carrier fees, platform costs, or volume-related costs) persist, operating margin could remain under pressure; however, cost discipline and pricing/mix management could restore some margin. The tax rate may normalize closer to statutory levels if one-off tax items or valuation allowance effects subside, offering a potential tailwind to net margin. Concerning trend flags: operating income declined despite 6.7% revenue growth, implying negative operating leverage; without SG&A detail, we cannot confirm, but the pattern suggests expense growth outpaced gross profit growth.

Growth Assessment

Revenue expanded 6.7% YoY to 29.05, indicating underlying demand resilience. However, operating income declined 21.3% YoY to 2.73, evidencing margin headwinds that offset growth. Estimated operating margin contracted ~332 bps YoY to 9.4%, signaling that growth was not accretive to profitability this quarter. Gross margin was 33.0%; absent prior-period disclosure, we cannot quantify YoY change, but the combination of higher revenue and lower operating profit points to pressure at the gross and/or SG&A line. Ordinary income declined 20.1% YoY, consistent with operational compression rather than financial factors. Net income fell 37.1% YoY due to the compounded effect of margin compression and a high 40.3% effective tax rate. Profit quality: non-operating items were immaterial; thus, performance reflects core operations. Outlook: to sustain growth, the company needs to stabilize gross margin (pricing, mix, carrier/partner costs) and moderate SG&A growth to re-establish operating leverage. Any normalization of the tax rate would provide incremental support to net profit growth.

Financial Health

Liquidity is strong: current ratio 431.4% and quick ratio 431.4%, with cash and deposits of 14.51 covering current liabilities (4.90) nearly 3x, implying minimal short-term refinancing risk. Solvency is conservative: D/E at 0.26x (total liabilities 4.90 vs equity 18.61) and negligible interest expense yield an interest coverage of ~2,256x, indicating de facto debt-free operations. Maturity mismatch risk is low as all liabilities reported are current (4.90) and are well covered by current assets (21.13) and cash (14.51). No off-balance sheet obligations were disclosed in the provided data. No warnings triggered (Current Ratio >> 1.0; D/E well below 2.0).

Cash Flow Quality

Operating cash flow was unreported; thus, OCF/Net Income cannot be assessed and earnings-to-cash conversion is unknown. Free cash flow and capex were also unreported, limiting our ability to evaluate sustainability of internal funding for growth or shareholder returns. Working capital appears healthy (working capital 16.23), reducing near-term cash strain risk. Without receivables and payables detail beyond accounts payable (2.69), we cannot assess potential working capital timing effects or manipulation. Given the cash balance (14.51), liquidity coverage is ample even in the absence of OCF disclosure, but sustained profitability and positive OCF will be necessary to support long-term investments.

Dividend Sustainability

Dividend data (DPS, payouts, FCF coverage) were unreported, so we cannot assess actual distributions or policy adherence. From capacity and safety angles, the combination of cash and deposits of 14.51 and low leverage suggests headroom, but sustainability requires positive OCF and stable earnings. With net income at 1.20 and no capex/FCF data, we cannot calculate payout ratios or coverage. Policy outlook is therefore indeterminate based on the provided information.

Risk Assessment

Business Risks:

• Margin pressure risk: gross margin at 33.0% and operating margin down ~332 bps YoY indicate sensitivity to cost of sales and pricing.
• Execution risk: negative operating leverage despite revenue growth suggests cost discipline and mix optimization challenges.
• Tax-rate risk: elevated effective tax rate (40.3%) depresses net income and could remain high if structural.
• Customer concentration or volume volatility risk (common in digital communications/IT services), though not disclosed here.

Financial Risks:

• Cash flow visibility risk: OCF and FCF unreported, limiting assessment of earnings quality and investment capacity.
• Working capital risk: receivables and inventories unreported; collection cycles and potential bad-debt exposure are unknown.
• Small-cap financing access risk if profitability weakens, albeit currently mitigated by strong cash and low leverage.

Key Concerns:

• Operating income down 21.3% YoY despite +6.7% revenue growth.
• Net income down 37.1% YoY; net margin compressed to 4.1%.
• High effective tax rate (40.3%) exacerbating profit decline.
• Limited disclosure on cash flows and SG&A breakdown constrains analysis.

Investment Implications

Key Takeaways:

• Top-line growth of 6.7% YoY but significant margin compression across operating, ordinary, and net levels.
• ROE at 6.5% is modest, primarily constrained by low net margin rather than leverage or asset efficiency.
• Balance sheet remains very strong: current ratio 431%, D/E 0.26x, near-zero interest burden.
• Tax headwinds were material (40.3% ETR); any normalization could materially aid net profit.
• Non-operating items are negligible; performance reflects core operations.

Metrics to Watch:

• Gross margin trajectory and cost of sales ratio.
• Operating margin and SG&A intensity (SG&A-to-sales).
• Effective tax rate normalization toward statutory levels.
• Operating cash flow and free cash flow once disclosed.
• Revenue growth quality by product/service mix (if/when disclosed).

Relative Positioning: Versus domestic small-cap software/IT peers, AI CROSS shows healthy growth and a very conservative balance sheet, but profitability and ROE are currently below typical peer medians due to margin compression and a high tax burden.

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