MegaChips Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥21.33B
• Operating Income: ¥1.03B
• Net Income: ¥377M
• Earnings per Unit (EPU): ¥24.04

Income Statement

Balance Sheet

Cash Flow Statement

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: FY2026 Q2 was a weak earnings quarter for MegaChips, marked by revenue decline, sharp profit compression, and very poor operating cash flow, partially cushioned by strong balance sheet liquidity and large unrealized gains in other comprehensive income. Revenue fell 14.2% YoY to 213.28, while operating income dropped 42.2% YoY to 10.28. Ordinary income fell even more, down 63.4% YoY to 7.10, as net non-operating expenses weighed on results. Net income slumped 87.0% YoY to 3.98, implying a sharp contraction in profitability at the bottom line. Gross margin printed at 18.0%, and the operating margin was roughly 4.8% (10.28/213.28). Based on last year’s implied operating margin (~7.1%), operating margin compressed by about 233 bps YoY. Non-operating items were a drag: non-operating income of 1.47 (mainly 1.21 interest income) was more than offset by non-operating expenses of 4.65, resulting in a net -3.18 headwind. The effective tax rate was elevated at 46.9%, amplifying the decline from ordinary income to net income. Earnings quality is a major concern: operating cash flow was -29.66 versus net income of 3.98, yielding an OCF/NI of -7.45x. Free cash flow, approximated as OCF minus capex, was about -47.55, indicating internal cash generation did not fund investment or shareholder returns this period. Despite weak P&L and cash flow, total comprehensive income was 584.32, suggesting substantial unrealized valuation gains (likely on investment securities) flowed through OCI rather than the P&L. The balance sheet remains robust, with current ratio 237.5% and quick ratio 223.0%, and an estimated equity ratio around 71–72%, underpinned by 1,907.01 of investment securities. Leverage is conservative (D/E 0.40x) and interest burden nominal (interest coverage 178.5x). Capital efficiency deteriorated: ROE was 0.2% and ROIC a very low 0.3%, reflecting a large asset base relative to earnings. Shareholder returns were skewed to buybacks (51.29) amidst negative FCF, implying reliance on cash/portfolio assets or financing for distributions. Looking ahead, a recovery in end-demand and normalization of non-operating items and taxes are necessary to restore margins and cash generation; absent that, capital returns may need to calibrate to FCF.

Profitability Analysis

ROE decomposition (DuPont): ROE 0.2% = Net Profit Margin 1.9% × Asset Turnover 0.090 × Financial Leverage 1.40x. The biggest driver of the weak ROE is extremely low asset turnover (0.090), reflecting a very large asset base (notably 1,907.01 in investment securities) relative to revenue. Net margin also compressed, with operating margin falling to ~4.8% and ordinary income pressured by net non-operating expenses (-3.18) and a high effective tax rate (46.9%). Operating margin contracted by ~233 bps YoY (from ~7.1% to ~4.8%) due to negative operating leverage: revenue fell 14.2% while SG&A remained sizable at 28.13, squeezing operating profit. Business reasons include softer sales volume/mix and higher relative fixed costs; non-operating expense further reduced ordinary income. Sustainability: the margin pressure from negative operating leverage is cyclical and could reverse with demand recovery; however, structurally low asset turnover is likely to persist as long as investment securities and other low-turn assets remain large relative to the operating business. Concerning trends: revenue decline outpaced any visible SG&A reduction, implying SG&A intensity rose; ordinary income dropped 63.4% YoY, much steeper than operating income, due to non-operating headwinds; ROIC at 0.3% is well below a healthy 7–8% benchmark.

Growth Assessment

Revenue contracted 14.2% YoY to 213.28, indicating cyclical softness in demand. Operating income declined 42.2% YoY to 10.28, implying negative operating leverage as fixed costs were not fully flexed. Ordinary income fell 63.4% as net non-operating expenses increased, and net income declined 87.0% on top of an elevated tax rate. Profit quality is weak: EBITDA margin of 6.4% and operating margin of ~4.8% are low for sustaining reinvestment and shareholder returns. Total comprehensive income surged to 584.32 due to valuation gains (OCI), but these are non-cash and volatile. Near-term outlook hinges on a recovery in shipment volumes and mix improvement to lift gross margin above 18% and restore operating margin toward historical levels. Cost discipline (SG&A) is needed to mitigate revenue cyclicality. Non-operating line normalization and tax rate moderation would support net profit, but these are uncertain. Overall, top-line stabilization and better fixed-cost absorption are prerequisites for earnings recovery.

Financial Health

Liquidity is strong: current ratio 237.5% and quick ratio 223.0% exceed healthy benchmarks, with cash and deposits of 125.54 plus accounts receivable of 203.92 covering current liabilities of 168.89. No warning on current ratio (<1.0) or leverage (D/E 0.40x is conservative). Estimated equity ratio is ~71.7% (1,696.41/2,367.68), indicating a well-capitalized balance sheet. Maturity mismatch risk appears low: short-term loans of 85.00 are comfortably covered by current assets of 401.10; working capital is positive at 232.21. Interest burden is minimal (interest expense 0.06) with interest coverage of 178.5x. Noncurrent liabilities of 502.38 are primarily supported by large investment securities (1,907.01), providing additional financial flexibility. No explicit off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF/Net Income is -7.45x, flagging poor earnings quality and likely working capital outflows (e.g., increase in receivables or reduction in payables). Approximated free cash flow (OCF - capex) is about -47.55, indicating that operations did not fund investments this period. Financing cash flow of 13.17 and sizeable share repurchases of 51.29 suggest reliance on cash/portfolio assets and/or borrowings to support shareholder returns amid negative FCF. With AR at 203.92 against half-year revenue of 213.28, receivables intensity appears high, which can depress OCF; monitoring DSO and collections is important. There are no clear signs of aggressive working capital pull-forwards (e.g., unusually low inventories), but the large OCF deficit warrants caution. Sustained improvement in OCF is required to align cash generation with net income.

Dividend Sustainability

Payout ratio is reported at 726.5%, which is distorted by the very low EPS; the underlying dividend cash amount is unreported. With estimated FCF at roughly -47.55 and share repurchases of 51.29 executed in the period, total shareholder returns exceeded internally generated cash. Near-term dividend capacity is supported by balance sheet strength (cash 125.54 and substantial investment securities of 1,907.01), but sustainability depends on restoring positive FCF. Policy-wise, buybacks appear to be a key return tool, but may need to be paced to operating cash generation if demand does not recover. In sum, headline payout looks unsustainably high versus current earnings and FCF; balance sheet provides coverage in the short term, but medium-term sustainability hinges on earnings and cash flow normalization.

Risk Assessment

Business Risks:

• Demand cyclicality in end-markets leading to negative operating leverage (revenue -14.2% YoY, operating income -42.2%).
• Margin pressure from lower utilization and fixed-cost absorption (operating margin ~4.8%).
• Execution risk in cost control as SG&A remained high relative to shrinking sales.
• Product/customer concentration risk typical for semiconductor-related businesses (not disclosed, but industry-standard).
• Pricing and mix risk impacting the already low gross margin (18.0%).

Financial Risks:

• Very weak operating cash flow (OCF -29.66) versus net income (3.98), OCF/NI -7.45x.
• Reliance on financing and/or asset liquidation to fund buybacks amid negative FCF (~-47.55).
• High effective tax rate (46.9%) dampening net profits; potential volatility in non-operating items (net -3.18).
• Low capital efficiency (ROIC 0.3%, ROE 0.2%) reducing resilience to shocks.
• Short-term debt of 85.00 introduces refinancing timing risk, albeit mitigated by strong liquidity.

Key Concerns:

• Sustained negative OCF despite positive reported earnings.
• Operating margin compression (~233 bps YoY) with limited visibility on near-term recovery.
• Large gap between net income (3.98) and total comprehensive income (584.32), highlighting dependence on volatile OCI valuation gains.
• Asset turnover of 0.090 indicates a large, low-yield asset base relative to revenue.

Investment Implications

Key Takeaways:

• Earnings weakened materially across the P&L, with net income down 87% YoY.
• Operating margin compressed to ~4.8% on a 14.2% revenue decline, indicating negative operating leverage.
• Cash generation is the main red flag: OCF -29.66 and estimated FCF ~-47.55.
• Balance sheet strength (equity ratio ~72%, current ratio 238%) provides near-term cushion.
• Non-operating expenses and high taxes amplified the drop from operating to net income.
• Capital efficiency is very low (ROIC 0.3%, ROE 0.2%), underscoring the need for earnings recovery or asset reallocation.
• Shareholder returns skewed to buybacks (51.29) despite negative FCF; sustainability depends on future OCF.

Metrics to Watch:

• Order trends and revenue trajectory in H2 FY2026.
• Gross margin recovery from 18.0% and operating margin progression toward prior levels (~7%).
• OCF/Net income ratio (target >1.0) and working capital movements (AR/Days Sales Outstanding).
• Non-operating balance (interest income/expenses, other items) and effective tax rate normalization.
• Capex discipline relative to revenue and FCF.
• Leverage and liquidity buffers (cash, short-term loans, utilization of investment securities).

Relative Positioning: MegaChips currently exhibits weaker profitability and cash conversion than desirable for semiconductor-related peers, but offset by a notably strong balance sheet with substantial investment securities and low leverage; near-term performance depends on demand recovery and margin normalization.

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