AI inside Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.32B
• Operating Income: ¥224M
• Net Income: ¥161M
• EPS: ¥40.87

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 and strong operating leverage drove a clear earnings beat at the operating and ordinary income levels, but cash conversion and an unusually high tax rate temper the quality of the quarter. Revenue rose 9.1% YoY to 23.18, supported by a 73.5% gross margin that underscores the high-value, software-like nature of the business. Operating income increased 39.6% YoY to 2.24, with operating margin at 9.7%. Ordinary income climbed 52.9% YoY to 2.27, implying an ordinary margin of 9.8%. Net income surged 173% YoY to 1.61, lifting the net margin to 7.0%. Based on implied prior-year figures, operating margin expanded by roughly 210 bps (from ~7.6% to 9.7%). Net margin expanded by approximately 422 bps YoY (from ~2.8% to 7.0%), driven by operating leverage and a smaller relative drag from non-operating items. However, operating cash flow of 0.87 covered only 54% of net income (OCF/NI 0.54x), flagging weaker cash conversion this half. The effective tax rate was elevated at 60.3% (tax 0.90 on PBT 1.49), which suppressed after-tax profitability and may reflect valuation allowance effects or non-deductible items. Liquidity remains strong with a current ratio of 253.7% and net cash of roughly 34.9 (cash 50.9 minus short-term loans 16.0). Leverage is conservative with D/E at 0.51x and interest coverage at 35x, providing ample financial flexibility. SG&A was 15.43, but the lack of YoY detail by line item limits granularity in cost analysis; nonetheless, OI outpaced revenue growth, indicating improved cost efficiency or scale benefits. Capex was modest at 0.27, and the company executed buybacks of 0.94, signaling confidence in equity valuation and balance sheet capacity. ROE stands at 3.4% on low asset turnover (0.316) and modest leverage (1.55x), implying scope for improving capital efficiency. Reported ROIC is 9.0%, suggesting the core investment returns exceed the cost of capital even as accounting ROE lags due to balance sheet structure. Forward-looking, sustaining margin gains will depend on continued scale in recurring revenues and controlling SG&A, while normalizing the tax rate and improving cash conversion are key catalysts. Overall, the quarter shows healthy momentum and improving profitability, set against earnings quality signals that merit close monitoring in 2H.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.4% = Net Profit Margin 7.0% × Asset Turnover 0.316 × Financial Leverage 1.55x. The largest YoY driver was net profit margin expansion (from an implied ~2.8% to 7.0%), given operating income grew 39.6% vs revenue at 9.1%, lifting operating margin to ~9.7% and cascading to the bottom line. Asset turnover remains low at 0.316, consistent with a cash-rich balance sheet that depresses turnover; we lack prior asset data to quantify YoY change, but it likely did not improve materially. Financial leverage at 1.55x is modest and stable; with net cash, leverage is not a meaningful ROE lever currently. Business reason for margin improvement: operating leverage on fixed SG&A in a high gross-margin (73.5%) software/AI model, plus limited non-operating headwinds (non-op net -0.12) compared to last year. Sustainability: operating leverage is structurally repeatable if revenue growth persists; however, the 60.3% effective tax rate appears atypically high and could normalize, which would further lift net margins, though the timing is uncertain. Watchpoints: if SG&A growth re-accelerates above revenue growth in 2H, operating margin gains could stall. Also, the low cash conversion (OCF/NI 0.54x) raises questions about the durability of margin expansion translating into cash.

Growth Assessment

Revenue grew 9.1% YoY to 23.18, a healthy pace indicative of resilient demand for AI/automation offerings. Operating income rose 39.6% to 2.24, demonstrating operating leverage on a high gross-margin base. Ordinary income growth of 52.9% suggests limited drag from non-operating items, though interest expense (0.06) and minor other expenses (0.13) remain present. Net income jumped 173% to 1.61; part of this outsized YoY gain reflects the low base effect from last year’s subdued net profit. Current operating margin is ~9.7%, with implied YoY expansion of ~210 bps; net margin improved ~422 bps. Efficiency metrics point to headroom: asset turnover at 0.316 is low for a software-like model due to large cash holdings; redeployment or buybacks could enhance returns. Reported ROIC at 9.0% indicates underlying project returns are sound relative to likely WACC. Outlook hinges on sustaining mid-to-high single-digit revenue growth and SG&A discipline; if the tax rate normalizes from 60% toward statutory levels, EPS could benefit disproportionately. Key uncertainties include conversion of bookings to revenue, churn in subscriptions, and the cadence of enterprise AI adoption.

Financial Health

Liquidity is strong: current ratio 253.7% and quick ratio 253.7%, with cash and deposits of 50.94 versus current liabilities of 23.57. No warning triggers (Current Ratio well >1.0; D/E 0.51x <2.0). The company holds short-term loans of 16.00 but maintains net cash of ~34.94, mitigating refinancing risk. Maturity mismatch risk appears low given current assets (59.79) comfortably exceed current liabilities (23.57); even excluding receivables (5.70), cash alone covers all interest-bearing short-term debt. Interest coverage is robust at 35.0x, indicating ample buffer against rate increases. Noncurrent liabilities are minimal at 0.63, limiting long-term solvency risk. Off-balance sheet obligations are not disclosed; no data to assess leases or guarantees. Equity of 47.44 implies a conservative capital structure, supporting optionality for investment or additional buybacks.

Cash Flow Quality

OCF of 0.87 covers only 54% of net income (1.61), flagging weaker earnings quality this half. Implied free cash flow (OCF - Capex) is approximately 0.60, positive but modest versus net income; note FCF was not disclosed, and this is an analytical derivation from reported OCF and capex. Potential drivers of weak cash conversion could include receivable build (AR 5.70 equals ~25% of H1 revenue), prepayments, or timing effects; detailed working capital line items were not disclosed, limiting diagnosis. No signs of aggressive working capital release to boost OCF; if anything, OCF trails NI, which warrants monitoring for sustainability. Financing CF was -0.54, including share repurchases of 0.94; despite outflows, cash remains abundant. With capex at 0.27, the business is asset-light; recurring OCF consistency is the key determinant of cash quality going forward.

Dividend Sustainability

Dividend data (DPS, payout, total dividends) were unreported, so direct assessment is limited. From a capacity standpoint, implied FCF of ~0.60 in H1 and large cash reserves (50.94) suggest the company could fund modest shareholder returns alongside growth investments. The company executed buybacks of 0.94 in H1, signaling confidence and providing an alternative return mechanism. Sustainability depends on improving OCF/NI toward or above 1.0x; with capex low, steady OCF would comfortably cover small dividends plus opportunistic buybacks. Policy outlook is unclear due to lack of disclosures; watch for year-end guidance on capital allocation priorities.

Risk Assessment

Business Risks:

• Revenue growth dependence on enterprise AI adoption cycles and customer onboarding pace
• Subscription churn or contract downsizing risk amid budget scrutiny
• Product execution and innovation risk in a fast-moving AI/software market
• Client concentration risk (not disclosed), potentially material for a company of this size

Financial Risks:

• Weak cash conversion (OCF/NI 0.54x) if persistent could constrain self-funded growth
• Elevated effective tax rate (60.3%) depresses net income and may be volatile
• Short-term borrowing of 16.00 introduces rollover exposure, albeit fully covered by cash
• Potential FX exposure in cloud costs or overseas sales (not disclosed)

Key Concerns:

• Earnings quality flagged by OCF trailing NI
• Low asset turnover (0.316) limiting ROE despite high gross margins
• Limited disclosure granularity (SG&A breakdown, R&D, investment securities) obscures cost and capital allocation visibility
• Sensitivity to macro IT spending and AI project ROI timelines

Investment Implications

Key Takeaways:

• Healthy topline (+9.1% YoY) with strong operating leverage (+39.6% OI) lifted margins
• Operating margin expanded to ~9.7% (≈+210 bps YoY) and net margin to 7.0% (≈+422 bps YoY)
• Cash conversion is the main blemish (OCF/NI 0.54x) despite asset-light capex
• Balance sheet strength (net cash ~34.9; current ratio 254%) provides downside protection and capital allocation optionality
• ROE 3.4% remains muted due to low asset turnover; ROIC at 9.0% indicates solid project-level returns
• Tax normalization would be a meaningful EPS lever if realized

Metrics to Watch:

• OCF/Net Income ratio trend toward ≥1.0x
• Operating margin sustainability vs SG&A trajectory in 2H
• Effective tax rate normalization path
• AR days and deferred revenue (if disclosed) as indicators of cash conversion and demand
• Net cash position and pace of buybacks/dividend policy signals
• Revenue growth run-rate and churn/retention metrics

Relative Positioning: Within Japanese small-cap AI/software peers, the company exhibits above-average gross margins and improving operating leverage, balanced by below-peer cash conversion and low ROE due to a cash-heavy balance sheet; liquidity and net cash provide a relative safety buffer.

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