TOSE CO.,LTD. Q4 FY2025 earnings call

2025 FY Performance Recovery Highlights

• The company achieved a faster-than-expected recovery: originally projected a 2-year recovery from FY2024's deficit, but ended the year with record high sales (first time exceeding 6 billion yen since 2009) and the highest operating profit in 15 years, exceeding pre-downturn performance levels.
• A segment structure change was implemented starting Q1 FY2025: the former "Digital Entertainment Business" was split into "Game Business" (covering all core game software development/operations for console, smartphone, arcade) and "Other Business" (covering non-game entertainment content planning/development) to support clearer management of expanding non-game activities.
• The company incurred 314 million yen in special losses in FY2025 related to pre-construction costs for the redevelopment of its Nagaokakyo Tose Building, leading to 250 million yen in net profit attributable to parent shareholders after the impairment charge.

Mid-term Business Environment and Strategic Priorities

• Key market opportunities: Cross-platform/cross-media content expansion (e.g., game IP adaptations to film/anime, retro content popularity), rapid technological advancement including generative AI that improves operational efficiency and expands leisure content demand, sustained high global game market size driven by new console launches (including Nintendo Switch 2) and government policy support for Japanese content exports targeting 20 trillion yen in export value.
• Business line strategy:
  • Game business: Focus on growth and improved profitability via development for high-performance platforms and remake/remaster titles, leveraging the company's strengths in solid planning and high-quality development to win more clients domestically and globally.
  • Non-game business: Build new businesses in established education-related content, adjacent mental well-being services, and broad IP-enabled entertainment, leveraging the company's development expertise to address social needs.
• Resource and capital strategy:
  • Invest in continuous development of technical skills (including AI integration) and operational efficiency, with upskilling of all roles and DX/AI-driven process efficiency to free up time for creative and growth activities.
  • Expand and improve human capital via expanded internal training, strengthened mid-career hiring, workplace improvements, and updated compensation/evaluation systems to boost employee engagement. The new Nagaokakyo office will be used to build a creative, flexible work environment.
  • Target stable ROE of 8% or higher to improve capital efficiency and market valuation, with a focus on expanding operating profit and clearer information disclosure to stakeholders.

1. Game Business: Total FY2025 August Term net sales of 6.045 billion yen. Within this segment: (1) Console/PC game development: Sales grew 75.1% year-over-year to 4.769 billion yen, driven by active development on carryover projects and additional project scope from client追加発注. (2) Smartphone game-related development: Sales fell 9.4% year-over-year to 1.267 billion yen, as the company prioritized console development requests over new smartphone projects amid intense market competition. (3) Other game-related sales: 8 million yen. Segment operating profit recovered from a prior-year deficit to 621 million yen, boosted by the elimination of prior-year development loss impacts, better-than-expected project profitability, and a temporary increase in revenue share income. 2. Other Business: Total FY2025 August Term net sales grew 31.6% year-over-year to 591 million yen, driven by growth in education-related content development with new clients and contribution from multiple prototype projects across sports/entertainment sectors. The stable home karaoke music distribution business maintained flat high-margin performance versus prior year. Segment operating profit reached 68 million yen, lifted by growth in education-related revenue. Total company consolidated sales for FY2025 August term was 6.636 billion yen, with consolidated operating profit of 689 million yen.

• Full year FY2026 August term consolidated guidance: Total sales are projected to be nearly flat year-over-year at 6.51 billion yen. Operating profit is projected at 405 million yen (down from 689 million yen in FY2025) and ordinary profit at 410 million yen, due to an expected pullback in revenue share income after FY2025's outperformance. Net profit is projected to jump to 790 million yen, driven by 789 million yen in expected special gains from the sale of excess land for the Nagaokakyo building redevelopment; the land sale proceeds will be used to fund new office construction.
• Segment guidance:
  • Game Business: Projected sales of 6.11 billion yen, with segment operating profit of 360 million yen. The company will continue prioritizing console game development requests over new smartphone development; existing large projects will move to their final phase, with new projects launching in parallel, and the company will focus on reducing remaining development talent idle capacity via smooth staff reassignment. Revenue share is expected to decline more than 200 million yen year-over-year due to limited contributing titles based on client release schedules and shrinking smartphone operation business.
  • Other Business: Projected sales of 400 million yen, with segment operating profit of 45 million yen. FY2026 will be an investment phase focused on market research and R&D for new non-game opportunities, with some FY2025 one-off content development revenue lapsing.
• Shareholder return guidance: Maintain the annual dividend target of 25 yen per share for FY2026, consistent with FY2025. The company will consider special dividends, stock splits, or dividend increases at future business milestones based on sustained profit growth.

• Uncontrollable client-driven risks: Project cancellations or lost orders can still occur due to shifts in publisher development strategy, even with the company's mitigation efforts. There is a shortage of experienced project management talent, leading to unmet demand for some client requests, and skill mismatches between available staff and project requirements leave some idle development capacity unresolved.
• Industry risks: Intense competition in the smartphone game market, and the trend of game publishers moving toward increased in-house development to control costs and risk, could pressure future outsourcing demand.
• Cost risks: Inflation has driven increases in personnel costs (the company has implemented base salary increases for three consecutive years to attract and retain talent) and external subcontractor rates, while construction/material costs for the Nagaokakyo building redevelopment are subject to inflationary volatility that requires careful cost management.
• Technological risks: Rapid technological change including AI advancement requires continuous upskilling of the workforce to maintain development competitiveness.

Q: What is the outlook for game business order intake from FY2026 to FY2027, following 2024's project cancellations? / A: While major domestic publishers continue to pursue in-house optimization and project reviews, Tose continues to receive strong inquiry and order volume, and overall demand for contracted development is not expected to drop sharply. The company is deepening communication with clients to understand future plans, minimize sudden cancellations, and smooth transitions between projects, while increasing outreach to new and lapsed clients, so order intake is expected to remain steady.

Q: How did Tose achieve a one-year recovery from FY2024's deficit, what core strengths drove this result? / A: After a period of slowed technical growth for console development when smartphone demand boomed, the company has spent years systematically improving its technical capabilities to support high-end game development. It has also prioritized consistent delivery of high-quality work that exceeds client expectations to build trust. This effort allowed the company to retain relationships even after past issues and win back orders from lapsed clients, driving the fast recovery.

Q: What is the status of development and order intake for Nintendo Switch 2 titles? / A: Many of the new orders and in-progress projects for Switch 2 are multi-platform titles that include the console. The company is also seeing additional requests to add Switch 2 compatibility to projects that were already in development before the console's announcement. The team is currently optimizing development work to align with the console's specific performance and characteristics.

Q: Why isn't the company increasing the dividend for FY2026 despite the large expected net profit gain from the land sale? / A: Tose's core policy is to maintain stable dividends while building internal reserves for future growth. The company maintained the 25 yen annual dividend even during the 2024 deficit, and will keep it at 25 yen for FY2025 and FY2026. Proceeds from the land sale and internal reserves will be used for the new office building construction, human capital investment, and R&D. The company will consider special dividends or increased dividends at future business milestones once growth is sustained.