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

ISB Co., Ltd. (Consolidated, JGAAP) reported FY2025 Q3 cumulative revenue of ¥27,719 million, up 10.7% year on year, demonstrating solid top-line momentum despite a challenging cost environment. Gross profit was ¥6,106 million, implying a gross margin of 22.0%, which, together with the decline in operating income, suggests margin pressure versus the prior year. Operating income declined 20.1% YoY to ¥1,720 million, reducing the operating margin to 6.2%, indicating negative operating leverage as cost growth outpaced revenue expansion. Ordinary income was ¥1,742 million, slightly above operating income, implying minor non-operating gains or financial income. Net income fell 38.9% YoY to ¥946 million, pushing the net margin down to 3.41% and highlighting heavier tax/minority impacts and/or further below-the-line pressures. DuPont analysis shows ROE at 6.79%, driven by a net margin of 3.41%, asset turnover of 1.349x, and financial leverage of 1.48x; profitability is the primary drag on returns this period. Liquidity is strong with a current ratio of 281% and working capital of ¥10,472 million, supporting ongoing operations and buffer against project timing volatility. The balance sheet appears conservative, with total liabilities of ¥6,296 million versus equity of ¥13,930 million, implying an estimated equity ratio around 67.8% (equity/assets), despite the reported ‘0.0%’ equity ratio field reflecting non-disclosure. Cash flow figures were not disclosed in this dataset (values shown as zero), limiting assessment of earnings-to-cash conversion and free cash flow. Dividend data were also not disclosed; EPS was ¥82.69 but payout and FCF coverage cannot be assessed here. The combination of revenue growth and profit compression points to wage inflation, mix shifts toward lower-margin work, and/or elevated SG&A (including hiring, subcontracting, or M&A integration) as likely drivers. Ordinary income’s resilience versus operating income suggests non-operating items provided a small offset, but not enough to protect the bottom line from higher taxes/minorities. The capital structure remains healthy with low leverage (liabilities/equity ~0.45x) and ample liquidity, reducing financial risk even as earnings softness persists. Key watchpoints include gross margin recovery, SG&A discipline, utilization and billing rates, and any updates to order backlog and pricing power in embedded/software segments. Overall, the quarter shows healthy demand but impaired margins, leaving cash flow and dividends as key unknowns pending full disclosures.

Profitability Analysis

ROE (6.79%) decomposes as Net Margin (3.41%) x Asset Turnover (1.349x) x Financial Leverage (1.48x). The main headwind is margin compression: operating margin is 6.2% (¥1,720m/¥27,719m) and net margin is 3.41%, both subdued relative to revenue growth. Gross margin at 22.0% (¥6,106m/¥27,719m) indicates pressure at the cost-of-sales level, likely from wage inflation, subcontracting, or project mix (e.g., lower-margin fixed-price or hardware-adjacent work). The gap from gross to operating profit implies elevated SG&A, consistent with capacity investments or higher recruitment and retention costs. Ordinary income slightly exceeds operating income (¥1,742m vs. ¥1,720m), suggesting small non-operating gains, but these are not material to overall profitability. The steep 38.9% YoY decline in net income versus a 20.1% decline in operating income implies heavier tax/minority burdens or additional below-the-line items this year. Operating leverage is negative this period: revenue increased 10.7% while operating income decreased 20.1%, indicating costs rose faster than revenue and/or unfavorable sales mix. ROA is approximately 4.6% (¥946m/¥20,552m), highlighting that the return constraint is earnings margin rather than asset efficiency or leverage. With asset turnover at 1.35x, the business exhibits decent efficiency for a software/engineering services model, leaving margin normalization as the key driver for ROE improvement.

Growth Assessment

Top-line growth of 10.7% YoY to ¥27,719m reflects robust demand across ISB’s core domains (embedded software, communications, industrial/automotive), albeit segment details are not provided here. However, profit growth is not keeping pace: operating income fell 20.1% YoY, and net income declined 38.9% YoY, indicating that the revenue expansion is currently of lower incremental quality. The narrowing from gross to operating profit suggests increased SG&A and/or project cost pressures, possibly due to headcount growth, subcontractor usage, or integration costs from past acquisitions if any. Ordinary income’s resilience offers limited offset, implying the pressure is operational rather than financial. Without cash flow data, the sustainability of growth is harder to judge; if growth is accompanied by rising unbilled receivables or longer DSOs, cash conversion could be weak. Near-term outlook hinges on the company’s ability to improve pricing, optimize mix toward higher value-added projects, and lift utilization/billing rates while moderating cost inflation. Any visibility on order backlog, recurring maintenance/operation revenues, and customer capex plans (particularly in auto/industrial) will be pivotal to assessing durability. If profitability initiatives gain traction, operating leverage can turn positive given the solid top-line base, but the timing is uncertain. Absent further disclosures, we assume mid-teens revenue CAGR is unlikely; a mid- to high-single-digit growth trajectory with margin repair would be a reasonable base case pending updates.

Financial Health

Liquidity is strong: current assets of ¥16,257m versus current liabilities of ¥5,785m yield a current ratio of 281% and sizable working capital of ¥10,472m. Inventories were not disclosed; with quick ratio shown equal to current ratio, near-cash assets appear ample relative to short-term obligations. Solvency is solid with total liabilities of ¥6,296m against equity of ¥13,930m, equating to liabilities/equity of ~0.45x and an implied equity ratio near 67.8% (equity/assets), despite the 0.0% equity ratio field being undisclosed. Financial leverage in the DuPont framework is modest at 1.48x (assets/equity), supportive of balance sheet resilience. Interest expense was not disclosed in this dataset; given low leverage, interest burden is likely limited. The company has room to absorb short-term earnings volatility without undue balance sheet stress. Absent cash disclosures, we cannot evaluate net cash or debt maturities, but the low liability base reduces refinancing risk.

Cash Flow Quality

Operating, investing, and financing cash flows were not disclosed here (zeros indicate unreported), so earnings-to-cash conversion cannot be quantified. Consequently, metrics such as OCF/Net Income, free cash flow, and cash conversion cycle cannot be validated from this dataset. From the income statement and balance sheet, we note healthy working capital cushions; however, without receivables/payables detail, we cannot assess DSO trends or unbilled receivables, which are critical in project-based businesses. Earnings quality signals are mixed: revenue grew 10.7% but margins compressed, raising the importance of validating that growth is not tied to extended payment terms or cost accrual timing. Key items to monitor upon full disclosure include OCF/NI > 1.0 on a multi-quarter basis, stable or improving DSO, and capex remaining within a manageable range relative to depreciation and growth needs. Until cash data are available, we treat cash flow quality as uncertain but supported by the strong liquidity position on the balance sheet.

Dividend Sustainability

Dividend data (DPS, payout, and FCF coverage) were not disclosed in this dataset. EPS for the period is ¥82.69, but without DPS or operating/free cash flow, payout ratio and cash coverage cannot be assessed. Historically, Japanese mid-cap IT/services firms often target stable dividends with progressive policies, but we cannot infer ISB’s current policy from this data. Sustainability will depend on the balance of earnings recovery (margin repair) and cash generation relative to growth investments and potential M&A. Key thresholds to assess upon disclosure: payout ratio relative to normalized EPS (e.g., 30–40% common in the peer group), FCF coverage of dividends above 1.5x through the cycle, and net cash/liquidity buffers sufficient to withstand project cyclicality. Given robust liquidity and low leverage, balance sheet capacity appears supportive, but definitive conclusions require cash flow and policy guidance.

Risk Assessment

Business Risks:

• Margin pressure from wage inflation and subcontractor costs in a tight engineer labor market
• Project mix shifts to lower-margin, fixed-price, or hardware-adjacent work
• Customer capex cyclicality in automotive/industrial/communications end-markets
• Execution risk on complex embedded/software projects (delivery delays, rework)
• Pricing power constraints amid competitive SI/engineering services landscape
• Utilization volatility due to hiring ramps or demand timing
• Potential M&A integration costs if pursuing inorganic growth

Financial Risks:

• Earnings-to-cash conversion uncertainty due to lack of disclosed cash flow data
• Working capital swings (receivables, unbilled) affecting OCF in growth periods
• Tax/minority interest variability depressing net income vs. operating profit
• Limited visibility on lease liabilities or interest burden without detailed notes

Key Concerns:

• Negative operating leverage despite double-digit revenue growth
• Net margin compressed to 3.41% and ROE at 6.79%, below many domestic peers
• Absence of cash flow and dividend disclosures in this dataset limits assessment of quality and shareholder return capacity

Investment Implications

Key Takeaways:

• Top-line growth is solid (+10.7% YoY), but profit contraction indicates cost and mix challenges
• Operating margin at 6.2% and net margin at 3.41% constrain ROE to 6.79%
• Balance sheet is strong (implied equity ratio ~68%, liabilities/equity ~0.45x) with ample liquidity
• Ordinary income marginally above operating income suggests limited non-operating support
• Cash flow and dividend data are undisclosed here, leaving earnings quality and capital return uncertain

Metrics to Watch:

• Gross margin trend and subcontracting ratio
• SG&A-to-sales ratio and hiring/retention costs
• Utilization and billing rates, order backlog, and pricing on new wins
• Operating cash flow/Net income, DSO, and unbilled receivables
• Operating margin recovery toward peer levels (~8–10%+) and ROE trajectory
• Tax rate and minority interest impact on net margin

Relative Positioning: Within Japan’s mid-cap IT/engineering services and embedded software peers, ISB shows competitive revenue growth but currently lags on profitability, with an operating margin (~6.2%) and ROE (~6.8%) below many listed peers (e.g., larger SIers often at high-single to low-double-digit margins). Its conservative balance sheet is a relative strength that can support investment in capacity and stability through cycles.

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