INTER ACTION (7725) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative results for Q3 reflected declines in both revenue and earnings, with demand adjustment in the core IoT-related business and deteriorating profitability in the Industry 4.0 Promotion Business progressing simultaneously as the key point. Revenue was ¥3.70B (down -30.2% year on year, or -¥1.60B), Operating Income was ¥0.66B (down -48.3%, or -¥0.62B), Ordinary Income was ¥0.80B (down -37.5%), and Net Income was ¥0.50B (down -45.1%). The decline in earnings exceeded the rate of revenue decline, highlighting negative operating leverage arising from the fixed-cost burden.

Factors Affecting Performance

【Revenue】Revenue was ¥3.70B, down 30.2% year on year. By segment, the IoT-related business generated ¥2.35B (63.4% of the total, down -26.1%), while the Industry 4.0 Promotion Business generated ¥1.35B (36.4% of the total, down -13.5%). Other businesses (the Environmental Energy Business) contracted to ¥0.01B (down -98.3%) due to the transfer of a consolidated subsidiary. The decline in revenue from the core IoT-related business was the primary cause of the decline in consolidated revenue.

【Profit and Loss】Operating Income was ¥0.66B (down -48.3%), and the Operating Margin declined to 17.8% from 24.0% in the same period of the previous year, a decrease of 6.2pt. Although the IoT-related business maintained a high segment profit margin of 47.2%, the Industry 4.0 Promotion Business saw its profit margin decline from 13.5% to 7.5%, contributing to the deterioration in the Company-wide profit margin. Company-wide expenses declined 10.4% year on year to ¥0.52B, but this was insufficient to absorb the decline in revenue. Ordinary Income was ¥0.80B, ¥0.14B higher than Operating Income, due to interest income of ¥0.04B and foreign exchange gains of ¥0.11B. Following the recognition of an extraordinary loss of ¥0.08B, Profit Before Tax was ¥0.72B and Net Income was ¥0.50B (down -45.1%). The period ended with declines in both revenue and earnings.

Segment Analysis

The IoT-related business is the core business, maintaining high profitability with Revenue of ¥2.35B (down -26.1% year on year), segment profit of ¥1.11B (down -33.3%), and a profit margin of 47.2%; it accounted for 90.9% of consolidated segment profit. The Industry 4.0 Promotion Business recorded a significant decline in segment profit to ¥0.10B (down -51.5%) against Revenue of ¥1.35B (down -13.5%), with its profit margin falling approximately 6.0pt year on year to 7.5%. The Other category (Environmental Energy Business) contracted to Revenue of ¥0.01B following the transfer of a consolidated subsidiary in July 2025, and the change in the scope of consolidation affected year-on-year comparisons. The decline in the Company-wide profit margin was attributable to both the decline in revenue from the core IoT business and deteriorating profitability in the Industry 4.0 Promotion Business.

Key Financial Indicators

【Profitability】The Operating Margin of 17.8% declined by 6.2pt from 24.0% in the same period of the previous year, but remains high in absolute terms. The Net Profit Margin also contracted to 13.4% from 17.0% in the same period of the previous year.【Cash Quality】Work-in-process inventory amounted to ¥0.64B, accounting for 46.0% of total inventory. Together with raw materials of ¥0.60B, this indicates a significant concentration of funds in work-in-process inventory.【Investment Efficiency】ROE of 4.6% can be decomposed into a Net Profit Margin of 13.4%, Total Asset Turnover of 0.30x, and Financial Leverage of 1.15x. The low asset turnover, primarily due to cash and deposits of ¥8.25B, is suppressing the ROE level.【Financial Soundness】The Equity Ratio was 86.9%, cash and deposits totaled ¥8.25B, and interest-bearing debt was ¥0.51B. The Current Ratio was 769.0%, indicating an extremely strong financial position.

Cash Flow Analysis

Although individual items in the cash flow statement were not disclosed for the period, movements in the balance sheet indicate that cash and deposits declined to ¥8.25B from ¥9.08B in the same period of the previous year, while net assets contracted to ¥10.74B from ¥11.77B. Inventory remained at a certain level, centered on work-in-process inventory of ¥0.64B, suggesting that funds continue to be tied up in inventory from the perspective of inventory days. Interest-bearing debt was limited to ¥0.51B, and no significant financing or repayments through financing activities were observed. Although ample cash reserves are being maintained, the speed of inventory conversion into cash remains an important point to monitor from the perspective of capital efficiency.

Quality of Earnings

The factors behind Ordinary Income of ¥0.80B exceeding Operating Income of ¥0.66B were non-operating income items consisting of interest income of ¥0.04B and foreign exchange gains of ¥0.11B. The foreign exchange gain was equivalent to 16.5% of Operating Income. Because these items are affected by market conditions, they should be evaluated separately from the earnings power of the core business. The extraordinary loss of ¥0.08B, mainly consisting of losses on the disposal of fixed assets and related items, was a temporary downward factor equivalent to 16.5% of Net Income. Comprehensive Income was ¥0.55B, approximately at the same level as Net Income of ¥0.50B, with foreign currency translation adjustments of ¥0.05B being the primary cause of the difference. Overall, recurring earnings power should be assessed based on Operating Income, while noting that Ordinary Income and Net Income include non-recurring elements such as foreign exchange gains and losses and extraordinary losses.

Earnings Forecast and Guidance

Progress against the full-year Company forecast (Revenue of ¥4.77B, Operating Income of ¥0.72B, and Ordinary Income of ¥0.86B) was 77.6% for Revenue, 91.2% for Operating Income, 92.9% for Ordinary Income, and 92.8% for Net Income. While Revenue progress was slightly above the standard quarterly benchmark of 75%, progress for all profit metrics was high, exceeding 90%. This indicates that the full-year forecast assumes a Q4 profit margin substantially below the cumulative actual Operating Margin of 17.8%, at approximately 5.9% on a reverse-calculated basis, implying either deterioration in profitability toward the fiscal year-end or a conservative plan. The fact that the earnings forecast was revised during the current quarter may also reflect changes in the business environment during the second half of the fiscal year.

Shareholder Returns

The Q2 dividend was ¥10.00, and the full-year dividend forecast remains unchanged at ¥44.00, with no revision to the dividend forecast during the current quarter. The forecast Payout Ratio calculated using forecast full-year Net Income of ¥0.53B and the full-year dividend forecast is approximately 84.9%, above the general benchmark of 60%. Meanwhile, the Payout Ratio based solely on the Q2 dividend against cumulative Net Income of ¥0.495B was only 23.3%. The financial base of cash and deposits of ¥8.25B and net assets of ¥10.74B supports the source of dividends, but achievement of the full-year earnings plan will be an important factor in maintaining the forecast Payout Ratio.

Risk Factors

1. Concentration of earnings in the core IoT-related business: The IoT-related business accounts for 90.9% of consolidated segment profit. Revenue declined 26.1% year on year, and changes in customer capital expenditure trends could have a significant impact on consolidated performance.

2. Deteriorating profitability in the Industry 4.0 Promotion Business: While Revenue declined only 13.5%, segment profit fell 51.5% and the profit margin declined by approximately 6.0pt to 7.5%. If improvement in project profitability and fixed-cost absorption is delayed, it could constrain recovery in the Company-wide profit margin.

3. Inventory and working capital tied up: Work-in-process inventory of ¥0.64B accounts for 46.0% of total inventory, indicating a significant concentration in work-in-process inventory together with raw materials. Delays in project progress or acceptance inspections could affect inventory valuation and cash-generation capacity.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Return

Profitability is well above the industry median for both Operating Margin and Net Profit Margin, placing the Company at a high level within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate was substantially below the industry median, with the Company’s revenue decline standing out within the industry.

※Source: Company analysis

Key Points from the Earnings Results

1. Operating Margin of 17.8% and Net Profit Margin of 13.4% exceed industry levels; however, the decline in margins from the same period of the previous year (Operating Margin: -6.2pt) and the decline in revenue from the core IoT business are weakening earnings momentum.

2. The accumulation of inventory, centered on a work-in-process inventory ratio of 46.0%, remains an item to monitor in determining whether future earnings recovery will translate into cash generation.

3. Although progress against the full-year Operating Income forecast is high at 91.2%, the reverse-calculated Q4 Operating Margin is substantially below the cumulative actual level. Profitability trends toward the fiscal year-end will determine the full-year outcome.

Theoretical Share Price (Reference Value)

Sensitivity: ¥913–¥963 at ±1% for the Cost of Equity, and ¥934–¥940 at ±0.1 for ω.

Notes:

• Because cumulative Net Income progress against the full-year forecast (93%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a range of +10% (because companies ahead of their forecast progress tend to outperform their forecasts; adjustments may be excessive for businesses with strong seasonality).
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated at a somewhat high level.

(Calculation model: Residual Income Model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q3 earnings were materially weaker year on year, although the company retained high absolute margins and an exceptionally liquid balance sheet. Revenue declined 30.2% YoY to ¥3.70bn. Operating income fell 48.3% to ¥0.66bn, a larger decline than sales, indicating negative operating leverage. Net income declined 45.1% to ¥0.50bn. Gross margin improved to 51.1% from 46.5% a year earlier, an expansion of 462bp, suggesting that product mix and/or project-level profitability remained favorable. However, operating margin contracted to 17.8% from 24.0%, a 623bp decline. The principal reason was a sharp reduction in gross profit in absolute terms combined with SG&A rising 3.5% YoY to ¥1.23bn despite the revenue contraction. Net margin narrowed 363bp to 13.4% from 17.0%. Ordinary income of ¥0.80bn exceeded operating income by ¥0.14bn, supported principally by ¥0.11bn of foreign-exchange gains and ¥0.04bn of interest income. Conversely, extraordinary losses of ¥0.82bn reduced pre-tax income to ¥0.72bn and represented 16.5% of reported net income. The IoT-related business remained the core earnings engine, contributing 90.9% of reported-segment profit. Both principal reporting segments experienced lower sales and lower segment profit, demonstrating that the weakness was broad-based rather than isolated. The disposal of the former environmental-energy subsidiary materially reduced the residual “Other” business, whose sales fell to only ¥0.01bn. Balance-sheet resilience remains a major offset to the earnings decline, with cash and deposits of ¥8.25bn exceeding interest-bearing debt by ¥7.74bn. Management has revised its full-year forecast, and Q3 results already represent 77.7% of revised revenue guidance, 91.3% of operating-income guidance, and 92.8% of net-income guidance. This implies a subdued final quarter in the revised plan, particularly at the operating-profit level. The key forward issue is whether the company can restore revenue volume while preventing the current SG&A burden and lengthy production cycle from further diluting operating returns.

Profitability Analysis

The reported annualized DuPont ROE is 6.1%, below the 8% level generally associated with an adequate return profile. The decomposition is annualized net profit margin of 13.4%, annualized asset turnover of 0.399x, and financial leverage of 1.15x. The low-leverage capital structure is conservative, but it also means ROE is chiefly determined by margin and asset utilization rather than financial leverage. The largest negative operating change was margin compression below gross profit: operating margin fell 623bp YoY to 17.8%, despite a 462bp improvement in gross margin to 51.1%. SG&A increased to ¥1.23bn from ¥1.19bn while revenue fell by ¥1.60bn, evidencing unfavorable operating leverage and a substantially higher SG&A-to-sales ratio. The annualized asset-turnover figure of 0.399x also indicates that the sizable cash balance and asset base are generating modest revenue relative to capital employed. The tax burden was 0.692, equivalent to a 30.8% effective tax rate, and was broadly within a normal Japanese corporate-tax range. The interest burden of 1.087x exceeded 1.0x because net non-operating income, notably FX gains and interest income, more than offset interest expense; it should not be interpreted as a recurring improvement in core operations. Interest coverage was nevertheless very strong at 117.4x. In segment terms, IoT-related revenue declined 26.1% YoY to ¥2.35bn and segment profit declined 33.3% to ¥1.11bn; its segment margin fell 500bp to 47.2%. Industry 4.0 promotion revenue decreased 13.5% to ¥1.35bn while segment profit fell 51.5% to ¥0.10bn, compressing its segment margin by 592bp to 7.5%. IoT-related operations are the core business by segment-profit contribution, but the decline in its profitability and the more severe deterioration in Industry 4.0 require close monitoring. Corporate costs declined by ¥0.06bn to ¥0.52bn, but this reduction was insufficient to offset the lower segment-profit pool.

Growth Assessment

Revenue contraction was broad across the two core reporting businesses. IoT-related sales, which account for 63.4% of consolidated revenue, decreased by ¥0.83bn YoY. Industry 4.0 promotion sales, representing 36.4% of consolidated revenue, decreased by ¥0.21bn. The residual Other business decreased from ¥0.57bn to ¥0.01bn following the July 2025 sale of the former environmental-energy subsidiary. Accordingly, the consolidated sales decline reflects both softer activity in the continuing businesses and portfolio contraction from the disposal. Gross margin expansion indicates that the company has retained pricing discipline or a favorable project/product mix despite lower volume. However, the lower absolute gross-profit base was insufficient to absorb fixed and semi-fixed selling and administrative expenses. The revised full-year forecast calls for revenue of ¥4.77bn, down 28.5% YoY, operating income of ¥0.72bn, down 49.1%, and net income of ¥0.53bn. Q3 cumulative revenue is 2.7 percentage points ahead of the standard 75% progress rate. Operating-income progress is 16.3 percentage points ahead of the standard rate, while net-income progress is 17.8 percentage points ahead. The forecast therefore embeds Q4 revenue of approximately ¥1.07bn, operating income of approximately ¥0.06bn, and net income of approximately ¥0.04bn. This unusually low implied Q4 profitability may reflect seasonal delivery timing, conservative revised guidance, or anticipated costs, and execution against this implied run rate will be important. FX gains of ¥0.11bn supported ordinary income, but this contribution is non-core and should not be relied upon as a driver of sustainable earnings growth.

Financial Health

Financial health is strong on liquidity and solvency measures. The current ratio is 769.0% and the quick ratio is 758.3%, substantially above conventional minimum thresholds. Current assets of ¥10.85bn exceed current liabilities of ¥1.41bn by ¥9.44bn, providing very substantial working-capital coverage. Cash and deposits of ¥8.25bn account for 66.8% of total assets and are 21.16x short-term borrowings. Interest-bearing debt totals only ¥0.51bn, comprising ¥0.39bn of short-term loans and ¥0.12bn of long-term loans. Debt-to-equity is a conservative 0.15x, debt-to-capital is 4.5%, and there is no balance-sheet leverage warning under the stated thresholds. Long-term loans fell 50.7% YoY to ¥0.12bn, further reducing structural leverage. The short-term debt ratio is nevertheless 76.2%, triggering a refinancing-risk alert because most debt matures within one year. In this case, the maturity concentration is substantially mitigated by cash of ¥8.25bn and the 21.16x cash-to-short-term-debt ratio; it does not presently indicate a liquidity strain. Its impact is principally a need to preserve disciplined treasury management rather than an immediate financing threat. Total equity decreased by ¥1.02bn YoY to ¥10.74bn despite the period's ¥0.50bn profit. Treasury stock increased in absolute carrying value by ¥1.10bn to negative ¥1.90bn, consistent with significant capital returned through share repurchases and/or other treasury-share transactions. This enhances per-share capital allocation effects but reduces the equity cushion and should be assessed alongside future profitability and dividends. Goodwill declined 36.7% YoY to ¥0.04bn, equal to just 0.3% of equity and 0.3% of assets, leaving negligible goodwill-related impairment dependence. Net defined-benefit liabilities of ¥0.46bn and bonus provisions of ¥0.34bn are recognized obligations but are modest relative to the liquidity position.

Notable B/S Changes

Treasury stock: increased by ¥10.99bn in negative carrying value, from negative ¥8.03bn to negative ¥19.02bn (+137.0% in absolute value) - substantial treasury-share accumulation/capital return reduced equity and increases the importance of earnings-funded shareholder-return discipline. Long-term loans: decreased by ¥1.25bn (-50.7%) to ¥1.22bn - lower long-term leverage improves solvency, although debt maturity remains concentrated in short-term borrowings. Goodwill: decreased by ¥0.21bn (-36.7%) to ¥0.36bn - already immaterial at 0.3% of equity, so goodwill impairment exposure is very limited. Cash and deposits: decreased by ¥8.28bn (-9.1%) to ¥82.52bn - liquidity remains exceptionally strong and continues to exceed total interest-bearing debt by a wide margin. Work in process: decreased by ¥2.76bn (-30.1%) to ¥6.42bn - the reduction is directionally positive, but WIP remains 46.0% of production inventory and requires continued conversion monitoring.

Cash Flow Quality

The supplied working-capital indicators point to a material cash-conversion risk in the manufacturing cycle. Inventory days are 211 days, well above the 90-day warning threshold. This alert is significant because extended inventory holding periods increase exposure to order deferrals, product obsolescence, project delays, and eventual inventory write-downs. The cash conversion cycle is 239 days, above the 120-day warning level, indicating that cash is tied up in operations for an extended period. A long cash conversion cycle is particularly consequential during a period of 30.2% revenue contraction, because slower sales can lengthen the time required to monetize work in progress. Work in process is ¥6.42bn and accounts for 46.0% of production inventory, exceeding the 40% high-WIP warning threshold. The high WIP share suggests a potential production bottleneck, long project lead time, or delivery timing concentration. Raw materials are ¥6.04bn, and finished goods are ¥1.50bn, reinforcing the importance of monitoring project completion and shipment conversion. Trade receivables are ¥0.76bn and electronically recorded monetary claims are ¥0.16bn, while trade payables are ¥0.18bn. The company’s cash reserve provides ample near-term funding capacity for this extended operating cycle. However, the investment case should focus on whether WIP converts into deliveries and cash without margin concessions or inventory provisions. Product-warranty provisions are ¥0.13bn, equivalent to roughly 0.3% of cumulative revenue, which is not indicative of an elevated warranty-cost burden.

Dividend Sustainability

The company paid an interim dividend of ¥10.00 per share. The disclosed cumulative dividend payout ratio is 23.3% relative to Q3 net income, indicating that the interim distribution alone is modest versus earnings recorded to date. Full-year dividend guidance is ¥44.00 per share, however, compared with forecast EPS of ¥52.09. On the revised full-year forecast, the implied dividend-only payout ratio is approximately 84.5%. This is above the 60% level generally viewed as conservative, although it remains below 100% and is supported by the company's substantial net cash position. The implied year-end dividend after the ¥10.00 interim payment is ¥34.00 per share. Dividend sustainability therefore depends less on balance-sheet capacity and more on the durability of operating earnings following the current revenue and margin reset. The decline in annualized ROE to 6.1% means that a high payout would distribute a large share of a reduced earnings base. The increase in treasury stock by ¥1.10bn also indicates that shareholder returns have included material capital allocation beyond ordinary dividends. When buybacks are considered, the appropriate measure is total return ratio rather than payout ratio, and the combination of dividends and treasury-share activity warrants monitoring against future earnings generation. The sizable cash balance provides flexibility, but maintaining dividends alongside buybacks should not compromise working-capital funding while inventory days and WIP remain elevated.

Risk Assessment

Business risks include Demand and order-timing risk: consolidated revenue fell 30.2% YoY, with both IoT-related and Industry 4.0 promotion businesses declining., Operating-leverage risk: SG&A increased 3.5% while sales declined, driving a 623bp operating-margin contraction., Manufacturing execution risk: inventory days of 211 and a 46.0% WIP ratio indicate a prolonged production cycle and possible bottlenecks in converting projects to shipments., Industry-specific technology-capex risk: demand for inspection, imaging, and Industry 4.0-related equipment can be volatile when semiconductor, electronics, or factory-automation customers defer capital expenditure., Foreign-exchange risk: ¥0.11bn of FX gains represented 16.5% of operating income, making ordinary earnings partly sensitive to currency movements., Portfolio-transition risk: the divestment of the environmental-energy subsidiary reduces revenue diversification and leaves a very small residual Other business..

Financial risks include Refinancing-risk alert: 76.2% of interest-bearing debt is short term. The risk is currently low in practical liquidity terms because cash covers short-term debt by 21.16x, but maturity concentration should remain controlled., Working-capital risk: a 239-day cash conversion cycle can absorb liquidity and raise the likelihood of inventory impairment if demand recovery is delayed., Capital-return risk: the large increase in treasury stock, combined with a forecast dividend payout ratio of approximately 84.5%, could reduce balance-sheet flexibility if lower earnings persist..

Key concerns include The highest-priority issue is whether high WIP and inventory days convert to revenue and cash at planned margins., The second priority is restoration of sales volume, as gross-margin resilience has not prevented a substantial decline in operating profit., The third priority is the sustainability of the planned shareholder return level relative to a weaker annualized ROE and reduced profit base., The implied Q4 operating margin under revised guidance is materially lower than the Q3 cumulative margin, making quarterly delivery timing and cost recognition important..

Investment Implications

Key takeaways include Core profitability remains high in absolute terms, with a 51.1% gross margin and 17.8% operating margin, but earnings have contracted sharply., IoT-related operations remain the principal profit contributor, generating ¥1.11bn of segment profit and a 47.2% segment margin., The balance sheet is exceptionally liquid: ¥8.25bn of cash versus ¥0.51bn of interest-bearing debt., The key operational weakness is cash-cycle efficiency, reflected in 211 inventory days, a 239-day cash conversion cycle, and 46.0% WIP concentration., Revised full-year guidance appears conservative or heavily back-end cost weighted, as Q3 cumulative operating profit already equals 91.3% of the full-year target..

Metrics to watch include IoT-related revenue growth and segment margin, Industry 4.0 promotion segment margin recovery from 7.5%, SG&A growth relative to revenue, Inventory days, WIP conversion, and cash conversion cycle, Quarterly operating income versus the approximately ¥0.06bn implied Q4 forecast, FX gains or losses relative to operating income, Dividend policy and treasury-share transactions relative to forecast earnings.

Regarding relative positioning, The company is financially stronger than a typical leveraged manufacturing peer, with very high liquidity, minimal goodwill exposure, low debt, and strong interest coverage. Operationally, however, its annualized 6.1% ROE, low 0.399x annualized asset turnover, sharp revenue decline, and extended production cash cycle place it below the profile of a high-efficiency technology-manufacturing compounder. Its valuation-relevant earnings profile is therefore likely to be driven primarily by evidence of order recovery and WIP conversion rather than balance-sheet repair.