Key Positives From The 3Q Results
3Q standalone revenue was JPY 4,296M (+17.7% YoY) and operating income was JPY 759M (+198.3% YoY). Inazuma Eleven Cross, launched in June, contributed for a full quarter for the first time, driving revenue and profit growth versus 2Q. A higher external payment ratio and SG&A discipline also helped, and profit beat the company's quarterly guidance.
- Margin Expansion: 3Q standalone gross profit margin was 62.5% (+5.7pt YoY) and OPM was 17.7% (+10.7pt YoY). Revenue from the new title absorbed more of the fixed cost base.
- Guidance Beat: 3Q operating income came in JPY 276M above the quarterly guidance of JPY 482M. Net income came in JPY 279M above the guidance of JPY 239M.
- Lower Platform Fees: A rising external payment ratio slowed growth in platform fees. Platform fees fell to 14.8% of revenue from 16.3% in the prior-year period (our estimate).
- Narrower Equity-Method Losses: 9M equity-method investment losses narrowed to JPY 399M (JPY 947M in the prior-year period). As a result, recurring profit fell 31.1%, a smaller decline than at the operating level.
- Headcount Optimization: Headcount was 649 (-56 YoY). The company is right-sizing its live-ops staff while still investing JPY 308M per quarter in new-title development and related costs.
Key Concerns From The 3Q Results
On a 9M basis, revenue fell 11.6% and operating income fell 38.6%. The main drag was a tough comparison against the prior year's elevated 1Q revenue of JPY 5,168M. 4Q operating income guidance is JPY 130M (-82.8% QoQ), again highlighting earnings volatility tied to launch momentum of new titles.
- Gross Margin Compression: 9M gross profit margin was 59.0% (-4.3pt YoY). Cost of goods sold held flat YoY at JPY 4,583M while revenue declined.
- Revenue Miss: 3Q revenue fell JPY 183M short of guidance, asInazumadid not meet launch-based expectations. Part of the profit beat reflects unspent advertising and other costs.
- Soft 4Q Outlook: 4Q revenue guidance is JPY 3,509M (-18.3% QoQ). It factors in post-launch normalization atInazumaand the roll-off of theDragon Quest Tact6th-anniversary boost.
- Betimo Drag: Betimo remains in its investment phase, and equity-method losses continue to weigh on recurring profit. Investments in affiliates declined from JPY 426M to JPY 262M.
- Working Capital Strain: Accounts receivable and contract assets rose by JPY 1,370M while cash and deposits declined. Interest-bearing debt increased from JPY 100M to JPY 624M.
Focus Areas / Items To Monitor Going Forward
- Inazuma Retention: WhetherInazuma Eleven Crossretains users from its second quarter onward. Hitting 4Q revenue guidance of JPY 3,509M, which already assumes a post-launch dip, is key to the full-year outcome.
- New-Title Pipeline: The 4Q launch ofhololive Mahjong -Holojan-and the console titleThe Eminence in Shadow: Phantom Echoes, slated for 2027. Monetization of the pipeline will shape the growth trajectory next fiscal year.
- Betimo Breakeven: Progress toward monthly profitability at Betimo and the pace at which equity-method losses narrow. This remains a key driver of recurring profit and needs ongoing tracking.
- WhyInazuma Eleven Cross3Q revenue fell short of guidance, and the expected revenue decay curve from 4Q onward
- The launch timing ofHolojanand the revenue and advertising spend built into 4Q guidance
- Target timing for monthly profitability at Betimo and the outlook for narrowing equity-method losses
- The current external payment ratio and the scope to improve platform fee rates by rolling it out to existing titles
- The breakdown and collection timing of the doubling in accounts receivable, and the use of proceeds from increased borrowings
Key Financial Highlights
| Item | Value | YoY |
|---|---|---|
| Revenue | JPY 11,167M | -11.6% |
| Gross Profit | JPY 6,584M | -17.6% |
| └ Gross Profit Margin | 59.0% | -4.3pt |
| SG&A | JPY 5,294M | -10.1% |
| Operating Income | JPY 1,289M | -38.6% |
| └ Operating Income Margin | 11.5% | -5.1pt |
| Distributions Received | JPY 111M | -63.1% |
| Equity-Method Investment Loss | JPY 399M | -57.9% |
| Recurring Profit | JPY 1,023M | -31.1% |
| Quarterly Net Income Attributable to Non-Controlling Interests | JPY 7M | Prior-year period: JPY 125M |
| Quarterly Net Income Attributable to Owners of Parent Company | JPY 901M | -23.3% |
| EPS | JPY 19.32 | -23.2% |
| 3Q Standalone Revenue | JPY 4,296M | +17.7% |
| 3Q Standalone Operating Income | JPY 759M | +198.3% |
| 3Q Standalone Net Income | JPY 518M | +49.4% |
| R&D Expenses | JPY 800M | - |
(Margins and YoY changes are our estimates. 3Q standalone figures and their YoY changes are as disclosed by the company.) The 9M profit decline mainly reflects the high revenue base in the prior year's 1Q. On a standalone basis, 3Q profit rose sharply YoY, reversing the 9M trend. Net income fell less than recurring profit, helped by an income tax adjustment of JPY -115M.
Performance By Business Segment
The company operates a single Online Games segment. 3Q standalone revenue rose JPY 673M versus 2Q. Of this, game distribution services contributed +JPY 570M and development/operations contract work +JPY 102M (company disclosure). The new title's contribution coincided with acceptance of several contract projects, making the quarterly recovery clear.
Segment Performance Table
| Segment | Revenue | YoY | Operating Income | YoY | Margin |
|---|---|---|---|---|---|
| Online Games Business (Company-Wide) | JPY 11,167M | -11.6% | JPY 1,289M | -38.6% | 11.5% |
- Inazuma Eleven Cross: Its first full-quarter contribution lifted distribution service revenue by JPY 570M QoQ. Active users (AU) and paying rate remain high.
- Dragon Quest Tact: The 6th-anniversary event and new characters supported earnings. AU declined, but the paying rate rose.
- The Eminence in Shadow: Master of Garden: Both AU and paying rate increased. A license-out deal for Vietnam and Thailand opens a new channel for overseas monetization.
- Development/Operations Contract Work: Acceptance of multiple projects added JPY 102M QoQ. Operational support for Pawapuro Adventures and other projects underpins stable earnings.
- Monetization of Existing Titles: Legend of the Galactic Heroes: Die Neue Saga saw declines in both paying rate and ARPPU, and Ririsa saw a lower paying rate. There is still room to convert AU growth into spending.
- Logres of Swords and Sorcery: Goddess of Ancient: KPIs continue to erode given the title's long service life, though the company describes profit levels as solid.
- Betimo (Equity-Method Affiliate): Keirin betting volume continues to build, but the business remains in its investment phase. It generated a 9M equity-method investment loss of JPY 399M.
Progress Versus Full-Year Guidance
Full-year guidance equals 9M actuals plus 4Q guidance. As a result, progress rates are high at 90.8% for operating income and 96.1% for net income. The real question is whether 4Q guidance (revenue of JPY 3,509M and operating income of JPY 130M) is achievable. 4Q revenue guidance is 10.1% above the prior-year 4Q actual of JPY 3,186M. Operating income is expected to turn positive from JPY -18M in the prior-year 4Q (YoY comparisons are our estimates).
| Item | Value (9M Cumulative) | Full-Year Forecast | Progress Rate |
|---|---|---|---|
| Revenue | JPY 11,167M | JPY 14,676M | 76.1% |
| Operating Income | JPY 1,289M | JPY 1,419M | 90.8% |
| Recurring Profit | JPY 1,023M | JPY 1,066M | 96.0% |
| Net Income | JPY 901M | JPY 938M | 96.1% |
- Quarterly results swing widely with the timing of new-title launches and anniversary events for major titles. Given this short-term volatility, the company only discloses guidance for the following quarter.
- 4Q tends to carry higher advertising spend due to anniversary and year-end/New Year events for existing titles (per the company).
Changes To Guidance
Guidance was revised. The company set full-year guidance by adding new 4Q guidance to 9M actuals. In 3Q standalone, revenue fell short of guidance, but costs came in below plan and profit beat guidance.
- 3Q Standalone Revenue: Guidance JPY 4,479M → actual JPY 4,296M (-JPY 183M)
- 3Q Standalone Operating Income: Guidance JPY 482M → actual JPY 759M (+JPY 276M)
- 3Q Standalone Net Income: Guidance JPY 239M → actual JPY 518M (+JPY 279M)
- 4Q Guidance (New): Revenue JPY 3,509M, operating income JPY 130M, recurring profit JPY 43M, net income JPY 36M
- Reason For Revision:Inazumarevenue came in slightly below guidance. However, lower royalties and platform fees, restrained advertising spend and a higher external payment ratio brought SG&A JPY 371M below guidance, driving the profit beat.
Commentary On Shareholder Returns
Dividends through the end of 3Q of FY12/2026 were JPY 0.00, and the year-end dividend forecast remains undetermined. There was no revision to the dividend forecast and no mention of share buybacks.
Financial Position
The balance sheet remains healthy, with an equity ratio of 73.4% and net cash of JPY 4,730M. That said, rising trade receivables and higher borrowings are increasing the working capital burden.
- Key Figures
- Leverage Metrics
| Item | Value | Additional Information |
|---|---|---|
| Cash and Deposits | JPY 5,355M | -2.6% vs. prior FY-end |
| Accounts Receivable and Contract Assets | JPY 2,767M | +98.0% vs. prior FY-end |
| Total Assets | JPY 10,598M | +15.1% vs. prior FY-end |
| Shareholders' Equity | JPY 7,777M | +13.1% vs. prior FY-end |
| Interest-Bearing Debt | JPY 624M | Prior FY-end: JPY 100M |
| └ Short-Term Borrowings | JPY 74M | Prior FY-end: JPY 100M |
| └ Current Portion of Long-Term Borrowings | JPY 199M | None at prior FY-end |
| └ Long-Term Borrowings | JPY 350M | None at prior FY-end |
| Net Cash | JPY 4,730M | Cash and deposits minus interest-bearing debt (our estimate) |
| EBITDA | JPY 1,359M | Operating income plus depreciation of JPY 70M, 9M cumulative (our estimate). -36.8% from JPY 2,150M in the prior-year period |
| Metric | Value | Notes |
|---|---|---|
| Net Debt/EBITDA | -3.5x | Net cash position, based on 9M cumulative EBITDA (our estimate) |
| Debt/Equity | 0.08x | 0.01x at prior FY-end (our estimate) |
| Interest Coverage Ratio | 271.3x | Operating income ÷ interest expense of JPY 4M, 9M cumulative (our estimate) |
| Equity Ratio | 73.4% | -1.3pt from 74.7% at prior FY-end (company disclosure) |
Disclosures Released Alongside The Earnings Announcement
- 2026/10/27Disclosed the variance between 3Q standalone guidance and actuals. Revenue missed, but operating income beat guidance by JPY 276M, showing upside at the profit level
- 2026/10/27Released presentation materials on 3Q results and 4Q guidance. 4Q assumes operating income of JPY 130M and the launch of Holojan
- 2026/10/27Announced the initiation of research coverage by Envalith. Together with the move to the Standard Market, this strengthens investor communications
Major Announcements During The Quarter
- 2026/07/29Announced the dissolution of a game production committee (a specified subsidiary). The Ririsa production committee was removed from the scope of consolidation in the 9M period
- 2026/09/04Announced the first console game in The Eminence in Shadow franchise, slated for release in 2027. It will be multi-platform, including PS5, Switch 2 and Steam
- 2026/10/09Announced hololive's first mahjong game and opened pre-registration. The title features 37 talents and is positioned as a revenue driver in 4Q guidance
- 2026/10/19Signed an overseas license agreement for The Eminence in Shadow: Master of Garden covering Vietnam and Thailand. Licensing out existing IP broadens the revenue base
- 2026/10/19Received approval to change its listing to the TSE Standard Market, effective October 26
Large-Shareholding Filings / Material Proposals Over The Past Year
None
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