Pivot to quality via North America AI operations app "Kiddleton Force" launch and selective M&A strategy; EBITDA guidance revised upward to JPY 30B with inaugural dividend

Summary

FY01/2026 results exceeded initial guidance, with adjusted EBITDA of JPY 22.8B (+48.6% YoY) and adjusted net income of JPY 9.4B (+55.6% YoY). For FY01/2027, domestic organic growth absorbs a downward revision in North America, and the EBITDA plan has been revised upward from JPY 28B to JPY 30B. The North America business is in a transitional phase: root causes of operational deficiencies during the five-company integration (daily bank deposits reducing NEN route visit frequency by 40%) have been identified and resolved, with normalization underway through an AI operations app. Backed by positive FCF, the company declared an inaugural dividend totaling approximately JPY 1.5B and reiterated its policy of freezing any equity offerings for M&A war-chest purposes for at least three years.

Key Takeaways (Earnings Highlights And Growth Actions)

• Management Strategy And Market Positioning
  • M&A strategy recalibrated in alignment with capital markets; focus narrowed to core-domain roll-ups with a more selective approach to deal volume
  • Equity offerings for M&A war-chest purposes frozen for at least three years; management committed to generating JPY 5B in FCF from existing operations
  • Transition to IFRS (FY01/2027 Q4) expected to bring EBITDA to approximately JPY 45B, with PER roughly halving versus J-GAAP basis
• Current Business Progress And Key Drivers
  • Domestic amusement (AM) facility SSS generally tracked around 100% throughout the year (with some months dipping below 100%), driven by GiGO-exclusive IP prizes (200 items annually) and a 2x increase in brand awareness
  • Foreign currency exchange kiosks: AI-optimized collection routes lifted EBITDA from JPY 1B pre-acquisition to JPY 1.5B, with the current-year plan targeting JPY 2.3B — a rapid expansion trajectory
  • North America: NEN route visit frequency declined 40% during the five-company integration process, causing prize replenishment shortfalls; H1 guidance for the current year revised downward
• Strategic Initiatives And Inflection Points
  • North America-dedicated AI operations app "Kiddleton Force" launched in March, enabling rounders to complete all tasks via smartphone
  • Bulk placement contracts with major nationwide chains accelerating — including AMC (170 locations), Applebee's (85 locations), and others
  • Integration of the #1 and #2 karaoke equipment dealers created ENNE Inc., with a combined installed base of 30,800 units

Outlook And Strategy

• FY01/2027 plan: revenue JPY 215B, adjusted EBITDA JPY 30B (+31.6% YoY), adjusted net income JPY 10.6B (+12.8% YoY)
• North America: remediation measures to be phased in during H1, with full normalization in H2; mid-term plan targets expected to be achieved with an approximately six-month delay. At the briefing, CEO Kataoka described the current state as roughly half of where it should be, targeting 100% by summer
• Guidance metrics narrowed to three indicators — revenue, adjusted EBITDA, and adjusted net income — effectively eliminating mid-year revisions caused by M&A-related expenses
• Dividend policy: annual increases as a baseline, provided growth investment is not impaired. Share buybacks to continue opportunistically as a means of securing cheaper acquisition currency for M&A
• During the Q&A, the CFO presented a plan to generate JPY 7B in FCF: steady-state FCF of JPY 16.5B (EBITDA JPY 30B less taxes JPY 5B less maintenance capex JPY 6.5B) minus growth capex of JPY 11.5B — a JPY 15B improvement from negative JPY 10B in the prior year
• Adjusted EPS of JPY 57.71 plus upside anticipated, with further accretion assumed upon full deployment of M&A war-chest funds

Positive Factors

• Domestic AM SSS generally tracked around 100% throughout the year (with some months below 100%); GiGO brand awareness approximately doubled over the past year
• Foreign currency exchange kiosk EBITDA: JPY 1B pre-acquisition → JPY 2.3B current-year plan; AI-driven optimization lifted replenishment stops per person by +20%
• North America Japanese IP prize sourcing ratio surged from 0% to 54%, with management targeting 60–70% over time
• Placing IP prizes in existing large cranes in North America (zero incremental capex) drove 130% YoY revenue at targeted locations; rollout to 3,500 locations planned by end of April
• Across 62 M&A transactions since founding, cumulative goodwill impairment totals just JPY 260M — extremely limited
• Net Debt/EBITDA at 2.7x, preserving ample debt capacity; shift in FCF policy expected to turn borrowing levels downward from next fiscal year onward

Concerns / Risks

• Risk that operational normalization of the North America business is delayed further. At the briefing, management noted the current state is roughly half of where it should be
• Adjusted ROIC (on a unified effective tax rate basis) declined from 24.3% to 8.0%, primarily driven by delayed capital recovery in North America
• FY01/2027 Q1 budgeted for a YoY decline in adjusted net income (seasonality in photo studio and European businesses + front-loaded GAGA content lineup)
• During the Q&A, management explained that prior-year adjusted net income of JPY 9.4B included a deferred tax asset reversal (a tax-related tailwind), which explains why current-year growth is limited to +12.8%
• Goodwill of JPY 50.6B against net assets of JPY 65.1B; continued attention to goodwill impairment test outcomes post-IFRS transition is warranted
• North America business assumes USD/JPY 145; exposure to FX volatility warrants monitoring

Key Financial Highlights

FY01/2026 consolidated revenue reached JPY 170.7B (+52.7% YoY), reflecting inorganic step-change growth from M&A. Adjusted EBITDA of JPY 22.8B and adjusted net income of JPY 9.4B surpassed initial guidance with achievement rates of 103.8% and 115.9%, respectively. Meanwhile, GAAP operating income came in at JPY 7.4B (−6.1% YoY), weighed down by JPY 1.74B in M&A-related expenses and higher goodwill amortization.

Business Portfolio (FY01/2027 Plan)

• Adjusted EPS: JPY 52.98 (prior year JPY 41.44, +27.8%)
• Domestic AM SSS growth (day-of-week adjusted): ~106% annual average
• North America Japanese IP prize sourcing ratio: 54% (prior year 22%, +32pt)
• Foreign currency exchange kiosk EBITDA: JPY 1.5B (+50% vs. JPY 1B in the 11-month pre-acquisition period)
• Net Debt/EBITDA: 2.7x (prior year 1.7x)
• Goodwill: JPY 50.6B (cumulative impairment JPY 260M, impairment rate 0.05%)