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

AI inside (4488) reported FY2026 Q2 standalone results under JGAAP showing steady top-line growth and strong operating leverage. Revenue was 2,318 million yen, up 9.1% year over year, while operating income rose 39.6% to 224 million yen, indicating good cost discipline and scale benefits. Gross profit reached 1,703.7 million yen, implying a high gross margin of 73.5%, consistent with a software/subscription-heavy mix and favorable unit economics. Ordinary income was 227 million yen and net income was 161 million yen, with net profit margin at 6.95%. DuPont decomposition points to a calculated ROE of 3.39% driven by net margin of 6.95%, asset turnover of 0.316x, and financial leverage of 1.55x, highlighting that profitability rather than leverage is the key ROE lever. Operating cash flow was 87.4 million yen, translating to an OCF/Net Income ratio of 0.54, which suggests weaker cash conversion this quarter likely due to working capital movements. The balance sheet appears conservative with total assets of 7,336 million yen and total equity of 4,744 million yen, giving a debt-to-equity ratio of 0.51x and ample liquidity (current ratio 253.7%). Interest expense was only 6.4 million yen with interest coverage at 35.0x, indicating minimal financial strain from borrowings. EBITDA was 300.9 million yen and the EBITDA margin was 13.0%; combined with rising operating margins, this supports improving earnings quality, albeit from a modest base. Reported effective tax rate in the summary table is 0.0%, but the income statement shows income tax expense of 89.9 million yen; this discrepancy suggests caution in interpreting tax rate metrics for this period. The company paid no dividends (DPS 0, payout 0%), consistent with reinvestment at the current growth stage and uncertain near-term free cash flow data. Working capital stood at 3,621.7 million yen, which underpins short-term solvency, though it may dampen OCF if receivables or contract assets expanded. The computed equity ratio was shown as 0.0% and cash and equivalents were shown as 0; per the data note, zeros indicate unreported items rather than actual zeros, so capital adequacy and cash balances should be inferred from other non-zero items. Overall, the quarter reflects healthy top-line expansion, significant operating leverage, and low balance sheet risk, offset by subdued ROE and weaker cash conversion relative to accounting profit. Data limitations—particularly around cash, investing flows, and share counts—constrain full valuation and per-share analysis, but the core operating trajectory appears favorable. Key watch points include sustaining revenue growth, improving OCF conversion, and clarifying the tax rate and capital allocation stance.

Profitability Analysis

ROE decomposes to 3.39% = 6.95% net margin × 0.316x asset turnover × 1.55x financial leverage, indicating earnings are primarily driven by margin strength rather than balance sheet leverage. Gross margin is high at 73.5%, consistent with a software/AI subscription and license model, and provides headroom for operating margin expansion. Operating margin of approximately 9.65% (224m/2,318m) improved faster than revenue (operating income +39.6% vs revenue +9.1%), evidencing positive operating leverage from cost scaling and opex control. Ordinary margin is about 9.79% (227m/2,318m), with limited non-operating drag given low interest expense of 6.4m. Net margin at 6.95% trails operating margin mainly due to tax and any non-operating adjustments. EBITDA of 300.9m and a 13.0% EBITDA margin indicate a reasonable buffer over depreciation and interest, though further scaling is needed to lift ROE. Interest coverage of 35.0x underscores minimal financing burden, so further profitability improvement will likely come from revenue growth and opex efficiency rather than leverage. Given the high gross margin, incremental revenue should drop to profit at an improving rate if sales efficiency and churn remain controlled. Margin quality appears sound but hinges on sustaining recurring revenue and managing customer acquisition costs.

Growth Assessment

Revenue grew 9.1% YoY to 2,318 million yen, a solid pace for a niche AI software provider, albeit below hypergrowth levels. Operating income growth of 39.6% significantly outpaced revenue, indicating strong operating leverage and improving unit economics. Net income rose 173.0% to 161 million yen, partly reflecting better operating performance and potentially lower non-operating drags versus the prior period. Asset turnover of 0.316x is modest, typical of a cash-rich, IP-heavy model; further scaling of revenue on the existing asset base would support ROE. The sustainability of revenue growth will depend on retention and upsell in existing accounts and the pace of new logo acquisition, particularly in enterprise and public-sector DX budgets. Given the high gross margin, maintaining growth in subscription or usage-driven lines should enhance profitability. Profit quality this quarter is decent at the operating level, but OCF lagged net income (0.54x), suggesting working capital headwinds or timing effects; sustaining growth with stronger cash conversion will be important. Near-term outlook: steady mid-to-high single-digit to low double-digit growth appears plausible if demand for AI/OCR and intelligent document processing remains resilient, though visibility is constrained by limited disclosure in this dataset.

Financial Health

Total assets were 7,336 million yen against total liabilities of 2,419.6 million yen and total equity of 4,744 million yen, resulting in a debt-to-equity ratio of 0.51x. Liquidity is strong with current assets of 5,978.6 million yen and current liabilities of 2,356.9 million yen, yielding a current ratio and quick ratio of 253.7% (no inventory reported). Working capital of 3,621.7 million yen provides a substantial buffer for operations and growth investments. Interest expense was only 6.4 million yen, and interest coverage was 35.0x, indicating low refinancing risk at present. The equity ratio was displayed as 0.0%, but given equity of 4,744 million yen and assets of 7,336 million yen, this appears to be an unreported metric rather than an actual value; the implied equity ratio would be approximately 64.7% if computed. Cash and equivalents were shown as 0, which per the data note likely indicates non-disclosure rather than zero; however, the high level of current assets supports adequate liquidity.

Cash Flow Quality

Operating cash flow was 87.4 million yen versus net income of 161.0 million yen, for an OCF/NI ratio of 0.54, signaling weaker cash conversion this quarter. This gap likely reflects working capital movements (e.g., growth in receivables or contract assets) or timing of collections relative to revenue recognition. Depreciation and amortization was 76.9 million yen, which, together with low interest expense, suggests limited non-cash distortion beyond working capital. Investing cash flow was shown as 0, which is likely an unreported value; therefore, free cash flow cannot be reliably assessed from this dataset despite a displayed FCF of 0. Financing cash flow was -54.1 million yen, indicating modest outflows (potentially lease repayments or minor debt repayment), with no dividends paid. Overall, earnings quality appears reasonable at the operating level, but confirmation requires a breakdown of working capital and capitalized development spend under JGAAP.

Dividend Sustainability

No dividend was paid (DPS 0.00; payout ratio 0.0%), consistent with reinvestment priorities at the current growth stage and limited visibility on free cash flow. With net income of 161 million yen and positive but modest OCF (87 million yen), the capacity to initiate dividends would depend on sustaining OCF and capex discipline. FCF coverage was displayed as 0.00x due to unreported investing cash flows, so we cannot accurately assess cash-based coverage. Balance sheet strength (implied equity ratio ~65% and low interest burden) provides flexibility, but management appears to prioritize growth investment over distributions. Policy outlook likely remains conservative on dividends until cash conversion improves and growth visibility strengthens.

Risk Assessment

Business Risks:

• Revenue concentration in key enterprise or public-sector clients, leading to volatility if contracts are delayed or churn.
• Competitive pressure in AI/IDP/OCR from domestic and global SaaS providers, potentially compressing pricing and margins.
• Execution risk in scaling go-to-market efficiently while maintaining high gross margins.
• Dependence on Japan’s digital transformation budgets and macro IT spending cycles.
• Technology obsolescence risk given rapid model advancements and need for continual R&D.
• Data security and regulatory compliance risks related to AI model training and document processing.
• Potential reliance on partners or channels for distribution, creating dependence risk.

Financial Risks:

• OCF lagging net income (0.54x) raises cash conversion risk if receivables growth persists.
• Small absolute profit base increases sensitivity to revenue shortfalls and cost overruns.
• Tax rate uncertainty due to discrepancies between income tax expense and reported effective tax rate metric.
• Limited disclosure on cash balances and investing cash flows constrains assessment of FCF and runway.
• Potential capitalization of development costs under JGAAP affecting earnings quality (if applicable).

Key Concerns:

• Sustaining double-digit-like operating profit growth without elevating customer acquisition costs.
• Improving working capital efficiency to lift OCF in line with net income.
• Clarifying true cash position, investing needs, and effective tax rate to assess sustainable ROE and FCF.

Investment Implications

Key Takeaways:

• Revenue up 9.1% YoY to 2,318m yen with strong operating leverage (operating income +39.6%).
• High gross margin of 73.5% underpins scalability and profit expansion potential.
• ROE at 3.39% remains modest; margin expansion and better asset utilization are needed.
• OCF/NI at 0.54 indicates weaker cash conversion this quarter, likely from working capital.
• Balance sheet is conservative with implied equity ratio ~65% and debt-to-equity 0.51x.
• Interest coverage 35.0x shows minimal financing strain.
• Dividend remains suspended (DPS 0), consistent with reinvestment and uncertain FCF visibility.

Metrics to Watch:

• Net retention and churn rates; ARR growth (if disclosed).
• Operating margin trajectory and sales efficiency (e.g., S&M spend vs growth).
• OCF/NI and changes in receivables/contract assets to monitor cash conversion.
• Capitalized development costs and investing cash flows to gauge true FCF.
• Tax rate normalization and any one-off items affecting net income.
• Customer concentration and backlog/booking trends.

Relative Positioning: Within Japan’s AI/IDP software segment, AI inside exhibits attractive gross margins and strengthening operating leverage with a conservative balance sheet, but currently trails best-in-class peers on ROE and cash conversion, making sustained growth execution and working capital efficiency key differentiators.

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