TOSE CO.,LTD. Q2 FY2026 earnings call

Interim Financial Performance

• Core game development projects performed above expectations: Multiple major projects in the final development phase progressed smoothly despite high workload, with strong profitability maintained. A paused overseas major project had all planned work completed in the interim period, with no impact on interim earnings.

Technology Advancement & Productivity

• The company is proactively expanding generative AI use while ensuring safety. It has rolled out company-wide AI-enabled work environments, conducted usage training, updated internal policies, and strengthened information sharing from the AI R&D team to embed new technology efficiently.
• AI adoption is expanding from back-end efficiency improvements to user-facing areas (graphics/sound) in line with industry trends. The company is also exploring AI integration for its upcoming core system replacement to improve corporate operations efficiency.

Human Capital & Organizational Optimization

• Replaced the prior workplace recommendation survey with an employee engagement survey, and is implementing targeted improvements to address identified issues, as higher engagement is linked to lower turnover, better productivity, and higher customer satisfaction.
• Is strengthening compensation frameworks and revisiting evaluation systems to improve fairness. It is also promoting employee reskilling (including AI upskilling) and advancing next-generation leadership development through expanded executive-leader interaction.
• The under-construction new Nagaokakyo office building will be leveraged to improve development efficiency, support flexible content development, enable diverse work styles, and foster creative collaboration, with office design based on internal employee input.

New Business Development (Other Segment)

• The company is exploring new non-game growth areas, including interactive digital learning infrastructure for educational institutions, AI + gamified simulation tools for medical training, and combined digital/physical IP-based entertainment services centered on popular anime and sports content. Most activity is currently in market research and business planning stages.

Capital Strategy & Shareholder Return

• The company expects to record special gain from land sales associated with the Nagaokakyo office rebuilding project in the 2026 August fiscal year, with proceeds used to fund new office construction. The basic shareholder return policy is to maintain stable dividends while retaining capital to strengthen the business and fund expansion, with a target full-year dividend of 25 yen per share for 2026 August fiscal year. Special dividends may be considered at future business milestones such as the upcoming 50th company anniversary.

Total consolidated revenue for the interim period was 3.459 billion yen. Operating profit was 331 million yen, ordinary profit was 363 million yen, and net profit attributable to parent company shareholders was 242 million yen, a large year-over-year increase driven by the absence of the special losses incurred in the prior year's comparable period.

1. Game Segment: Total segment revenue was 3.272 billion yen, a 17.6% year-over-year increase. Segment operating profit was 324 million yen, a 22.6% year-over-year increase. It contributed 94.6% of total company revenue.

   • Consumer game console/PC related: Revenue was 2.71 billion yen, a 28.7% year-over-year increase, driven by strong progress across core projects, additional work orders, and new launches of small-to-mid size projects.
   • Smartphone related: Revenue was 559 million yen, a 16.8% year-over-year decrease, driven by a strategic priority shift to consumer game development and maturing existing operating titles that are all over 5 years post-launch.
   • Other game sub-segments (amusement/pachinko related): Revenue was 2 million yen.

2. Other Business Segment: Total segment revenue was 186 million yen, a 49.7% year-over-year decrease. Segment operating profit was 7 million yen, an 86.8% year-over-year decrease. It contributed 5.4% of total company revenue. The decline is driven by the completion of a large prior-period education content development project and declining revenue from home karaoke music distribution due to falling new user growth, with the segment currently focused on pre-revenue new business development.

• Management maintains the full-year 2026 August fiscal year earnings guidance released previously, with no upward or downward revision, and no changes to segment-level guidance.
• While interim results were solid and profitability exceeded expectations, management is prioritizing securing new orders to fill capacity opened up by the paused overseas project, alongside ongoing planned project transitions starting in the third quarter, which creates near-term uncertainty. The company will update guidance promptly if the outlook changes materially.
• For the Other Business segment, management expects profit contributions from new business prototypes to increase in the second half of the fiscal year, offsetting lower-than-expected interim performance from karaoke distribution.
• The company aims to fully fill the newly available development capacity by the end of the 2026 August fiscal year, and return to appropriate utilization levels for the 2027 August fiscal year.

• The unexpected pause of a large overseas development project created unplanned idle development capacity starting in the third quarter, creating near-term uncertainty for full-year performance achievement if new projects cannot be secured and launched quickly enough.
• The company did not receive compensation from the client for the idle capacity from the project pause, creating near-term earnings pressure from this unplanned event.
• Geopolitical tension and resulting energy/resource price increases could lead to higher development PC costs, higher utility expenses, and delays or cost overruns for the new office construction project, and could also slow overall growth of the game industry through higher hardware and software prices.
• While unlikely, unexpected client policy shifts could lead to pauses or cancellations of other major in-progress projects, though management notes that three other large pipeline projects are well advanced and a major policy shift would be required to stop them.
• Smartphone game market competition remains intense, with new project demand currently depressed, creating ongoing pressure on this sub-segment's revenue.

Q: The interim result is well ahead of full-year guidance. What are the core reasons for this strong performance? / A: The main driver is that all major game development projects operated at high utilization and maintained stable profitability with no major disruptions. Additional unplanned work orders, secured due to strong client satisfaction with Tose's delivery and quality, also increased project size and revenue beyond original forecasts. This confirms that recent internal operational improvements are effective.

Q: Has the 2024 experience with unexpected project cancellations helped Tose respond to the current paused overseas project? / A: Yes, Tose has implemented multiple changes since 2024: it strengthened ongoing dialogue with clients to identify potential policy shifts early, maintains a broad pipeline of projects across different start timelines to fill capacity gaps faster, and invests in skills development and process standardization to reduce talent-project mismatches. These measures are allowing a smooth transition to new projects in the current situation.

Q: Does the paused overseas project change Tose's strategy for working with overseas clients? / A: No, overseas game development remains a core strategic growth priority, as the global entertainment market is expected to continue expanding. Tose will adjust contracting practices to better address cross-border transaction risks, such as adding clauses that allow for compensation if clients cancel scheduled work abruptly, to reduce future impact from similar events. Tose maintains a good relationship with the paused project's client, and will continue dialogue for future collaboration opportunities.

Q: What is Tose's plan for AI adoption in game development, and how will it change the business? / A: Tose is already using AI for prototyping, asset management, and test automation to improve efficiency, and more clients are now discussing deeper AI integration with the firm. While AI adoption will expand gradually to user-facing areas like graphics and sound, Tose believes human creativity and final decision-making will remain core. The main shift will be growing demand for direction and coordination skills, so reskilling employees for this new environment is a key priority.

Q: How would a potential Nintendo Switch 2 production cut impact Tose's results? / A: Most of Tose's current consumer game projects are multi-platform, including Nintendo Switch 2, PlayStation 5, and Xbox Series X|S. Clients are still requesting early Nintendo Switch 2 support even with supply news, so there is no immediate impact on current development scope. Tose does note that extended supply constraints could slow broader market growth for the platform, which would impact overall game industry demand over time.