ISB CORPORATION FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥27.72B
• Operating Income: ¥1.72B
• Net Income: ¥1.55B
• EPS: ¥82.69

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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: Mixed quarter—solid top-line growth but significant margin compression led to a sharp decline in earnings. Revenue rose 10.7% YoY to 277.19, driven by continued demand, but operating income fell 20.1% YoY to 17.20 and net income declined 38.9% YoY to 9.46. Gross profit was 61.06, implying a gross margin of 22.0%, while operating margin fell to 6.2%. Ordinary income declined 20.5% YoY to 17.42 and ordinary margin was 6.3%. Net margin compressed to 3.4% from an estimated 6.2% a year ago. Operating margin contracted by approximately 240 bps YoY (from ~8.6% to 6.2%), and net margin contracted by roughly 278 bps. The effective tax rate was 29.3%. Profit before tax was 21.92, exceeding ordinary income, suggesting the presence of non-recurring items, but net income still weakened materially. Balance sheet remains very strong with a current ratio of 275% and cash/deposits of 84.58 (about 41% of total assets). ROE (DuPont) is 6.8% with asset turnover of 1.349x and financial leverage of 1.48x, indicating decent efficiency but pressured profitability. Earnings quality assessment is constrained due to unreported cash flows; OCF/NI is not calculable this quarter. The payout ratio is calculated at 65.4%, a touch above the typical sustainability benchmark, warranting monitoring if cash generation softens. Forward-looking, the key to earnings recovery will be stabilizing gross margins (pricing vs. wage inflation, mix) and controlling SG&A, while sustaining the order pipeline. Liquidity and solvency are not concerns; the debate centers on margin trajectory and profit quality. Near term, we expect management to focus on utilization, pricing discipline on fixed-price projects, and selective hiring to restore operating leverage.

Profitability Analysis

ROE decomposition (DuPont): ROE 6.8% = Net Profit Margin 3.4% × Asset Turnover 1.349 × Financial Leverage 1.48x. The component that changed the most YoY is the net profit margin, given net income fell 38.9% while revenue grew 10.7%. The likely business drivers are gross margin pressure (wage inflation, mix shift, project cost overruns on fixed-price work) and higher SG&A (recruitment, wages, and perhaps M&A-related costs), which compressed operating margin from ~8.6% to 6.2%. Non-operating items were modest (0.71), so they did not offset the operational headwinds; the gap between profit before tax and net income suggests additional below-the-line effects that weighed on bottom line. Sustainability: margin pressure is partly cyclical (labor tightness) but can be mitigated through pricing and utilization; however, near-term relief may be gradual. Concerning trend: with operating income down despite double-digit revenue growth, cost growth likely exceeded gross profit growth, indicating negative operating leverage; SG&A ratio stands at ~14.3% of sales, and appears to have risen in weight relative to sales. Monitor whether revenue growth continues to outpace expense growth to prevent further ROE erosion.

Growth Assessment

Top-line growth was healthy at +10.7% YoY to 277.19, implying resilient demand. However, profit growth was negative: operating income -20.1% YoY (17.20), ordinary income -20.5% (17.42), and net income -38.9% (9.46). Operating margin at 6.2% vs an estimated ~8.6% a year ago indicates adverse mix or cost inflation overcoming pricing. Net margin at 3.4% vs ~6.2% prior implies further pressure below operating line. With cash flow unreported, profit quality cannot be corroborated by OCF conversion. Outlook hinges on: price pass-through to offset wage inflation, utilization improvement, disciplined bidding on fixed-price projects, and maintaining backlog. Near-term, expect management to prioritize margin over growth given the sharp earnings compression.

Financial Health

Liquidity is strong: current ratio 275.3% and quick ratio 275.3%, with working capital of 101.66. Cash and deposits are 84.58, representing ~41% of total assets and ~147% of current liabilities, providing ample buffer. Solvency is conservative: debt-to-equity ratio 0.48x and short-term loans only 1.20; long-term loans and interest-bearing debt details are unreported, but total liabilities are modest at 66.21 vs equity 139.30. No explicit warning triggers (Current Ratio well above 1.0; D/E well below 2.0). Maturity mismatch risk is low: current assets 159.64 exceed current liabilities 57.98 by a wide margin. No off-balance sheet obligations are reported in the provided data.

Cash Flow Quality

Operating cash flow, investing cash flow, and financing cash flow are unreported; thus OCF/Net Income and FCF cannot be assessed this quarter. Given the significant decline in earnings and margin compression, cash conversion is a key watchpoint; however, the large cash balance mitigates near-term risk. Without OCF, we cannot confirm whether working capital absorbed or released cash. No clear signs of working capital manipulation are identifiable from the limited data.

Dividend Sustainability

The calculated payout ratio is 65.4%, slightly above the <60% benchmark for comfort. DPS and total dividends are unreported, and FCF coverage cannot be calculated. With a strong cash position and low leverage, near-term dividend capacity appears supported, but sustainability medium term depends on restoring operating margins and cash conversion. Policy outlook: if margin pressure persists and OCF lags, payout could crowd out reinvestment; conversely, stabilization of utilization and pricing could bring payout back within the comfort band.

Risk Assessment

Business Risks:

• Margin pressure from wage inflation for engineers and tight labor market
• Fixed-price project risk (cost overruns eroding gross margin)
• Adverse mix shift (lower-margin projects or startup costs for new programs)
• Client IT budget volatility impacting order intake and utilization
• Execution risk on integrating intangible assets/goodwill-backed businesses

Financial Risks:

• Profit compression with payout ratio at ~65% may constrain capital allocation if cash flows weaken
• Potential below-the-line items impacting net income (gap between PBT and NI)
• Dependence on timely collections (AR 60.13) in an expanding revenue base

Key Concerns:

• Operating margin contraction of ~240 bps YoY despite double-digit revenue growth
• Net margin compressed to 3.4%, down ~278 bps YoY
• Lack of cash flow disclosure prevents assessing earnings quality and dividend coverage

Investment Implications

Key Takeaways:

• Top-line momentum intact (+10.7% YoY) but earnings under pressure
• Operating margin fell to 6.2% (≈240 bps contraction), signaling negative operating leverage
• ROE at 6.8% driven mainly by reduced net margin; efficiency and leverage are adequate
• Balance sheet strength (cash-rich, low leverage) provides cushion to execute on margin recovery
• Dividend payout (~65%) slightly above comfort; sustainability hinges on OCF

Metrics to Watch:

• Order backlog and book-to-bill
• Gross margin and utilization rate by segment/project type
• SG&A ratio trend versus revenue growth
• OCF/Net Income and Free Cash Flow once disclosed
• Days sales outstanding (DSO) and AR trends
• Headcount growth and average billing rate (price realization)

Relative Positioning: Within Japanese mid-cap SIers/embedded software peers, ISB exhibits strong liquidity and moderate ROE but currently weaker margin momentum; recovery depends on pricing power and utilization 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