TOSE CO.,LTD. Q1 FY2026 earnings call

• Overall Business Performance

  • Multiple major game projects that saw increasing development activity in the second half of the 2025 August term remained active in the quarter, driving consolidated revenue above the year-ago level
  • Major game development projects progressed smoothly with good profitability overall, though lower revenue sharing compared to the prior year quarter pulled down overall profit
  • The game business continued its solid performance following a V-shaped recovery in the prior term, with gradually improving operational utilization

• Game Business Updates

  • Multiple major ongoing development projects (including those started before the 2023 August term) remained in their most active development phase, driving steady sales growth
  • Multiple small-scale development projects, including for Nintendo Switch 2, have been launched, further improving utilization
  • No new smartphone game development projects are ongoing, as the company prioritizes client requests for home game console development; ongoing smartphone game operations remain stable, but most titles have been live for over 5 years, leading to gradual declines in some revenue streams
  • All large development projects expected to generate over 500 million yen in full-year 2026 August term revenue are progressing generally well, with stable sales and profit trends
  • Lower revenue sharing in the quarter was due to fewer contributing titles based on client software release timing, and shrinking revenue from some mature smartphone games, but strong revenue growth from major home/PC projects and smooth project progress limited the operating profit decline

• Other Business Updates

  • The segment is in a preparation phase for new business creation, conducting market and needs research and service planning across multiple fields
  • The company is participating in development and maintenance of an interactive digital learning platform that customizes educational content based on learner progress and uses learning data to improve curricula in the education field, and is developing cross-industry game combination projects and IP proposals in the entertainment field
  • A large education-related content development project that contributed significantly to prior year quarter revenue was completed in the prior term, leading to lower development revenue in the quarter; home karaoke music distribution revenue remained stable at roughly the same year-ago level

• Capital Project Update

  • The company plans to demolish two aging buildings (Nagaokakyo Tose Building and adjacent Nagaoka Terminal Building) in Nagaokakyo City, Kyoto Prefecture, and build one new office building; excess land outside the new construction site will be sold, with a special gain on the sale expected to be recorded in the 4th quarter of the 2026 August term, estimated at approximately 789 million yen; proceeds from the sale will be used to fund construction of the new office building

• Historical Performance Context

  • In the 2024 August term (a transition period before the announcement of next-generation game consoles), the company experienced temporary poor performance due to project cancellations, lost contracts, and overlapping issues with new client projects, but consistent investment in development technical capability allowed an early recovery in the 2025 August term, and current sales and profit are stable

1. Game Business:
   • Home game console/PC related: Revenue of 1.471 billion yen, 26.3% year-over-year increase, accounting for 79.3% of total company revenue
   • Smartphone related: Revenue of 285 million yen, 17.2% year-over-year decrease, accounting for 15.4% of total company revenue
   • Other within Game Business: Revenue of 0.6 million yen
   • Total Game Business revenue: 1.758 billion yen, segment operating profit of 223 million yen (year-over-year decrease narrowed to 44 million yen)
2. Other Business:
   • Revenue of 97 million yen, 52.5% year-over-year decrease, accounting for 5.2% of total company revenue
   • Segment operating profit of 9 million yen, 66.8% year-over-year decrease

Consolidated total company results: Total revenue 1.855 billion yen (year-over-year increase), operating profit 232 million yen, ordinary profit 264 million yen, net income attributable to parent company shareholders 186 million yen

• Full-year 2026 August term earnings guidance is maintained unchanged from the prior announcement, despite stronger-than-expected first quarter progress, with a 28.5% first quarter progress rate for game business revenue against the full-year forecast, a stronger start than the first quarters of the past two years
• The decision to maintain guidance reflects high uncertainty around new development projects scheduled to launch in the second half of the year: several major existing projects are approaching completion, and new projects will take their place, but some of these new projects still require adjustment of start dates and requirements with clients, creating uncertainty at this stage
• The company will work to ensure smooth project transition, monitor business trends closely, and will update the full-year outlook promptly once there is greater certainty after considering second quarter and subsequent performance
• The lower progress rate of first quarter net income against the full-year forecast compared to operating and ordinary profit is expected, as the special gain from the land sale will only be recorded in the fourth quarter
• For the Other Business segment, lower first quarter operating profit progress is in line with original planning, as the segment is expected to spend the full year in a preparation phase for new business, and current activities are progressing as planned

• High uncertainty exists for new game development projects scheduled to launch in the second half of the full year, as adjustments to start dates and requirements with clients are still required, which could impact full-year performance if projects are delayed
• Competitive pressure in the smartphone game market remains intense, and revenue from ongoing mature smartphone game operations continues to gradually decline
• The company faces the inherent risk of project cancellation or lost contracts from factors outside its control, even after improving internal project management
• Large-scale game projects create challenges for stable operational utilization: utilization tends to be lower at project launch and completion, which can create gaps between projects that disrupt steady revenue

Q: The first quarter 2026 August term performance has a high progress rate against the full-year forecast—why is the full-year forecast not being upgraded?

A: While the first quarter saw strong sales and profit performance driven by active progress across multiple game projects leading to high progress against the full-year forecast, several major existing projects are approaching completion, and multiple new projects are scheduled to launch in the second half of the year. Some of these new projects still have high uncertainty due to required adjustments to start dates and requirements with clients, so the prior full-year forecast is maintained at this time. The company will work to smoothly shift staff to new projects, monitor business trends, and will announce an updated outlook promptly once greater certainty is achieved after considering performance from the second quarter onward.

Q: Given the uncertainty around projects launching in the second half, is there a possibility full-year performance will come in below the current forecast if projects do not start as scheduled?

A: The current full-year forecast already incorporates a certain level of risk, and is set at a level with high achievement probability. In addition, several major new projects scheduled for the second half already have increasing order certainty. For these reasons, management believes the probability of full-year performance falling below the current forecast is low.

Q: Can you explain revenue sharing for your business? Does it come based on end-user sales of the developed titles?

A: That is correct. In the game business, revenue sharing is success-based compensation paid by the publisher based on the sales performance of the developed title, and it generates revenue without associated product cost. It can come from end-user sales of titles we developed, or from user spending on smartphone games we operate that we receive a share of. The sharing percentage and structure varies by title and client based on contract terms, and revenue sharing is a critical factor that heavily impacts overall project profitability. We also have some revenue sharing (royalty income) from sublicensing IP in our other business lines, though in these cases license fees paid to the original IP holder count as cost of goods sold.

Q: Game business sales grew year-over-year this quarter, but lower revenue sharing led to lower segment operating profit. Are there any titles that can be expected to contribute higher revenue share in the future?

A: Revenue sharing fell year-over-year this quarter due to limited contributing titles based on client software release timing, and shrinking revenue from some of our operated smartphone games. We proactively negotiate revenue sharing terms with clients for our developed titles as a general practice, so depending on the sales performance of upcoming scheduled releases, revenue sharing could increase. We prioritize working on titles expected to achieve hits, and aim to grow revenue share by providing high-quality development services.

Q: What is your order book for Nintendo Switch 2 development?

A: We have already received and started work on several new orders for multi-platform development that includes Nintendo Switch 2. We have also received inquiries and already started work on porting existing or in-development titles to Nintendo Switch 2. In addition, we are proactively making planning proposals that leverage the new console's performance and characteristics, and are working to expand orders going forward.

Q: Game business profit levels have increased since the second half of the 2025 August term. What strategies do you have to grow profit further going forward?

A: To expand profit, we will focus on improving development technical capability and productivity, improving the quality of development talent, and expanding development resources. This will allow us to increase both the sales size and profitability of our development projects by focusing on handling high-difficulty projects and maintaining high development quality. We also view maintaining stable appropriate utilization as a key priority: we are focused on hiring and training talent capable of advanced project management, upgrading the skills of all development staff to improve project matching, and strengthening communication with clients to allow more flexible negotiation of project schedules. We also prioritize working on titles expected to achieve hits and long-term operation to grow revenue sharing and operational sales.

Q: The pipeline slide shows 4 large projects—how many small unlisted development projects are currently ongoing?

A: We have several ongoing small to mid-sized projects worth hundreds of millions of yen, plus multiple smaller projects focused on partial production work. We face inherent challenges maintaining stable utilization with very large-scale projects: while full production requires massive development resources, utilization tends to be lower at launch and completion, which can create longer than expected gaps between projects. For this reason, we run a mix of project sizes in parallel, adjust schedules with clients, optimize staff assignment to projects, and work to stabilize utilization.

Q: Are you currently facing any development issues like the problems that hit in the 2024 August term?

A: The work of our Project Management Support Office has been effective, and we currently have no major development troubles. The office monitors progress and quality from an independent third-party perspective, focused on the large pipeline projects, and provides guidance as needed. We will continue to operate under this robust management framework to avoid issues going forward. While there is always a risk of project cancellation due to factors outside our control, we are working to strengthen relationships with clients to minimize this risk. We also actively pursue discussions with multiple clients in parallel to ensure we can launch new projects quickly if a cancellation or lost contract occurs, and we invest in training and organizational structure to allow flexible reassignment of development talent to new projects.

Q: Will the new smartphone regulations affect Tose's performance?

A: We understand the new regulations will create positive profit impacts for many smartphone game publishers by reducing fee burdens associated with expanded payment method options. At this point, we do not expect any major impact on Tose's performance. If the new regulations lead to market growth that increases publishers' development and operation investment, this could lead to higher orders and higher revenue sharing for Tose in the future.

Q: Other Business performance was weak this quarter. What specific initiatives do you have to grow revenue in the future, and when can new businesses start contributing meaningfully to results?

A: The year-over-year decline in revenue and profit for Other Business this quarter was due to the completion of a large education content project that contributed to prior year results, and the segment being in an exploration phase for new business. We are currently conducting market and needs research and service planning across multiple fields: for example, we are participating in development and maintenance of an interactive personalized digital learning platform in education, and working on cross-industry game and IP projects in entertainment. We will share more details as they become available. We expect it will take some time before new businesses contribute meaningfully to results, and we are repeating the planning, testing, and evaluation process to build a new long-term revenue base.

Q: How do you plan to use the cash from the land sale?

A: We expect an estimated special gain of approximately 789 million yen from the land sale associated with the Nagaokakyo Tose Building reconstruction project (this is an estimate after deducting book value and estimated transfer costs). All proceeds from the sale will be used as construction funding for the new office building. The new building will serve as our main development hub, consolidating development talent to improve development efficiency and productivity, and strengthen our capability to handle increasingly large and complex game development. We are also progressing construction plans to improve the work environment and support more creative and diverse work styles.