Funai Soken Holdings Incorporated FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥24.54B
• Operating Income: ¥6.37B
• Net Income: ¥4.04B
• EPS: ¥55.77

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: Solid topline and operating performance, but bottom line was hit by below-the-line items, leading to a sharp YoY decline in net income despite healthy core operations. Revenue rose 10.3% YoY to 245.4, while operating income increased 7.2% YoY to 63.71, indicating continued demand and resilient execution. Gross profit margin is reported at 34.8%, and we calculate the operating margin at 26.0% (63.71/245.40). Based on growth rates, operating margin compressed by approximately 70 bps YoY (from ~26.7% to ~26.0%). Net income fell 36.1% YoY to 25.85, pushing the net margin down to 10.5% from an estimated ~18.2% a year ago (about 770 bps compression). Ordinary income was 63.97 and profit before tax was 58.43, implying material extraordinary losses or adjustments (~5.5) between ordinary and pre-tax income. The reported effective tax rate was 30.8%, broadly in line with statutory norms, so the net decline is chiefly due to non-recurring or extraordinary items rather than tax. Balance sheet strength remains a standout: current ratio 253.6%, quick ratio 253.6%, D/E 0.33x, and working capital of 113.16, supported by cash and deposits of 124.77. Interest coverage is exceptionally strong at 1,744x, reflecting negligible financial risk. ROE is healthy at 11.2% (DuPont: 10.5% margin × 0.798 asset turnover × 1.33x leverage), driven primarily by profitability with modest leverage. Earnings quality cannot be confirmed because OCF and FCF were not disclosed; cash flow-based coverage of dividends is therefore uncertain. The calculated payout ratio stands elevated at 145.1%, suggesting reliance on cash reserves or prior retained earnings for shareholder returns this period. Forward-looking, core consulting fundamentals appear intact, but the sizable gap between ordinary and pre-tax income indicates one-off headwinds that may not persist. Monitoring extraordinary items, tax settlements, or impairment/loss recognition is key to judging the normalization of the bottom line into FY2026. With ample liquidity and low leverage, the company is well-positioned to navigate short-term earnings volatility. The main debate now is whether net profit rebounds in step with ordinary/operating trends as non-recurring items fade.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 10.5% × 0.798 × 1.33 ≈ 11.2%. Change driver: The most material change YoY is in net profit margin, which we estimate declined by ~770 bps (from ~18.2% to 10.5%), overwhelming modest changes in asset turnover and leverage. Business reason: The large gap between ordinary income (63.97) and profit before tax (58.43) suggests extraordinary losses or adjustments, which depressed net income despite solid operating profit growth (+7.2% YoY). Sustainability: The margin compression at the net level appears largely one-time if extraordinary effects do not recur; operating margin compression (~70 bps) likely reflects negative operating leverage (revenue +10.3% vs operating income +7.2%) and possibly investment in growth (personnel/SG&A) or pricing mix. Operating leverage/margin quality: Operating margin of ~26.0% remains high for a consulting model, but the YoY compression indicates cost growth outpaced revenue; SG&A as a percentage of sales is 10.6% this quarter, though YoY SG&A data is unreported. Watch for SG&A growth exceeding revenue over multiple quarters as a concern.

Growth Assessment

Revenue grew 10.3% YoY to 245.4, indicating solid client demand and likely stable utilization and pricing in core practices. Operating income rose 7.2% YoY to 63.71, lagging revenue growth and implying mild negative operating leverage this period. Ordinary income growth (+7.2% YoY) mirrors operating trends, suggesting limited contribution from non-operating items (non-operating net +0.24). Net income declined 36.1% YoY to 25.85 due to below-the-line items between ordinary and pre-tax income (gap of ~5.5), not core weakness. Revenue sustainability appears reasonable given the asset-light model and strong cash position; however, outsized YoY net profit volatility highlights sensitivity to non-recurring charges. Outlook hinges on normalization of extraordinary items and maintaining utilization/fee rates; continued revenue growth at high-teens to low-teens with cost discipline could re-expand operating margin. Key upside drivers: consultant headcount productivity, pricing power, cross-sell/retainer penetration, and seminar/event activity. Key constraints: wage inflation and recruitment costs possibly pressuring margins.

Financial Health

Liquidity is very strong: current ratio 253.6% (186.85 current assets vs 73.69 current liabilities) and quick ratio 253.6%. No warning triggers (Current Ratio well >1.0; D/E at 0.33x). Solvency is conservative with total liabilities 76.20 vs equity 231.15; interest-bearing debt is minimal (short-term loans 2.50, long-term loans 0.28) and covered by cash (124.77) many times over. Maturity mismatch risk is low: current assets exceed current liabilities by 113.16, and cash alone exceeds total current liabilities by ~51.1. Off-balance sheet obligations are not disclosed; no specific commitments or guarantees are reported in the provided data.

Cash Flow Quality

Operating cash flow and free cash flow are unreported, so OCF/Net Income and FCF coverage cannot be assessed. Consequently, we cannot confirm the conversion of earnings into cash (OCF/NI benchmark >1.0). Working capital quality looks sound from receivables (42.98) relative to revenue, but without cash flow we cannot detect timing effects or manipulation. With cash and deposits at 124.77 and low debt, near-term liquidity for operations and investments appears ample. Nonetheless, dividend and buyback capacity should ideally be evaluated against OCF and FCF once disclosed.

Dividend Sustainability

The calculated payout ratio is 145.1%, which is above the typical sustainability threshold (<60%) and implies distributions exceeded current-period earnings. OCF and FCF are unreported, so we cannot verify cash coverage of dividends; coverage could be supported by the large cash balance (124.77) and retained earnings (242.81), but relying on the balance sheet is not a durable long-term strategy if earnings do not normalize. Policy outlook likely hinges on management’s commitment to stable or progressive dividends versus near-term profit volatility from one-off items. Watch for guidance on full-year payout policy, FCF generation, and any share repurchase plans.

Risk Assessment

Business Risks:

• Profit volatility from extraordinary items impacting PBT and net income despite stable operations
• Wage inflation and recruitment costs potentially compressing operating margins in a human-capital model
• Utilization and pricing risk in consulting projects and seminars/workshops
• Client budget cycles and macro sensitivity among SME customers in Japan

Financial Risks:

• Elevated payout ratio (145.1%) relative to current earnings raises risk of distribution exceeding internally generated cash if OCF is weak
• Receivables collection timing risk (AR 42.98) could affect cash conversion in certain quarters
• Limited visibility on off-balance-sheet commitments due to unreported CF and notes

Key Concerns:

• Approximately 5.5 in extraordinary losses or adjustments between ordinary income and profit before tax
• Net margin compression of ~770 bps YoY to 10.5% versus stable operating performance
• Absence of OCF/FCF data prevents assessment of earnings quality and dividend coverage

Investment Implications

Key Takeaways:

• Core business healthy: revenue +10.3% YoY and operating income +7.2% YoY with operating margin ~26.0%
• Bottom-line decline (-36.1% YoY) driven by below-the-line items; operating trends remain supportive
• Balance sheet is fortress-like with cash 124.77 and minimal debt (D/E 0.33x)
• ROE 11.2% is solid, primarily driven by profitability with modest leverage
• Dividend affordability is unclear this quarter: payout ratio 145.1% with OCF/FCF unreported

Metrics to Watch:

• Extraordinary gains/losses and their drivers (impairments, litigation, asset sales, etc.)
• OCF/Net income and FCF once disclosed; cash conversion cycle and AR days
• Headcount, utilization, and average fee rates; SG&A growth versus revenue growth
• Operating margin trajectory and tax rate normalization
• Dividend policy guidance and capital allocation (dividends vs buybacks vs growth investment)

Relative Positioning: Within Japan’s consulting and business support peers, the company remains an asset-light, cash-rich operator with superior operating margins and low leverage, but its reported net income volatility this quarter (from non-recurring items) contrasts with typically steadier peers; normalization of below-the-line impacts would restore alignment between strong operating performance and bottom-line delivery.

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