COVER Corporation Q3 FY2025 earnings call

• Overall Business Portfolio Shift

  • Business expansion into new areas including TCG and video games has grown low direct VTuber labor revenue sources, changing the company's service mix. The company discontinued publishing VTuber per-person revenue as a core forecasting metric due to the shifted revenue structure, though the metric itself remained positive in Q3.
  • Generated revenue is reinvested into new growth areas to build a positive profit cycle.

• Mid-term Operational Progress

  • Live Events: Improved 3D modeling, AR and lighting technology to deliver more immersive VTuber concert experiences at large domestic venues, with multiple successful Q3 solo and world tour events.
  • TCG Business: Grew steadily alongside increasing player counts, with over 2,000 entries for a January tournament in Makuhari. New product launches are scheduled for Q4 (3 starter decks in February, 3rd booster pack in March) to continue expanding player pools.
  • Merchandising: Increased new fan contact via in-store pop-up events (including a Tokyo Station pop-up accessible to international tourists) to deepen brand engagement.
  • Game Development: Multiple mid-sized multi-platform titles are planned for release to expand brand awareness across the gaming ecosystem; development on HoloEarth progresses steadily with simulation area expansions.
  • VTuber Growth: Multiple new talents debuting after 2023 (domestic and overseas) have already surpassed 1 million YouTube subscribers, growing their fanbases through individual strengths. The company has strengthened talent support: hired a new head of talent management with global influencer experience, increased frequency of communication between management and talents, and expanded support beyond music to gaming and streaming planning to fit individual talent strengths.
  • North American Operations: Local hub profits exceeded plans, so the company expanded the local team, expanded EC shipping regions, and improved supply chain management.

• Cost and Profit Updates

  • Cost of sales increased YoY due to higher event costs from more larger live events and higher manufacturing costs from growing merchandising sales. Selling, general and administrative costs increased gradually due to higher outsourcing costs from expanding corporate functions and the North American hub.
  • Marginal profit hit a new Q3 record at +63.6% YoY despite margin adjustment from increased live event volume.

For the standalone Q3 FY2025 (ending December 2024):

1. Streaming / Content: 2.504 billion yen, +22.9% YoY, contributing ~21.3% of total Q3 revenue
2. Live / Events: 2.328 billion yen, +143.8% YoY, contributing ~19.8% of total Q3 revenue
3. Merchandising: 5.448 billion yen, +101.7% YoY, contributing ~46.3% of total Q3 revenue, led by strong hololive OFFICIAL CARD GAME sales
4. Licensing / Tie-ups: 1.476 billion yen, +17.7% YoY, contributing ~12.6% of total Q3 revenue Total Q3 revenue: 11.758 billion yen, +69.2% YoY. Cumulative Q1-Q3 revenue: 28.863 billion yen, 68.7% of the revised full-year guidance. Q3 gross profit: 5.862 billion yen (+76.5% YoY); Q3 operating profit: 2.171 billion yen (+83.0% YoY); Q3 net profit: 1.656 billion yen. Cumulative Q1-Q3 operating profit: 5.544 billion yen (74.9% of full-year guidance); cumulative net profit: 3.777 billion yen (74.1% of full-year guidance). The commerce (merchandising) share of cumulative revenue reached 64%, driven by TCG growth.

• The company upward revised full-year FY2025 guidance following strong Q3 performance. The Q4 full-year profit guidance is set at a conservative level due to: 1) historical upside volatility for Q4 event-driven growth that requires probabilistic conservative forecasting; 2) varying gross margins across business segments that create profit volatility based on final sales mix; 3) ongoing reinvestment in mid-term growth projects that are cost-forward with benefits accruing in future periods, leaving room for upside profit if performance exceeds expectations.
• Q4 FY2025 is expected to see strong growth driven by the annual hololive Super EXPO/hololive Fes. event, consistent with the company's typical Q4 seasonality where revenue is concentrated in the final quarter. Pre-sales for the annual event are already outperforming last year despite a 20% larger venue.
• Q4 planned activity by segment: 1) Live/Events: Multiple large solo concerts (including Nippon Budokan and Los Angeles shows) plus the annual Expo/Fes; 2) Merchandising: New TCG product launches and restocks of existing merchandise, with event-linked promotions driving both collector and active player demand; 3) Licensing: Expected B2B sponsor revenue linked to the annual Expo event alongside ongoing sales organization restructuring to improve profitability.
• Management expects that as the revenue base grows, next fiscal year's starting growth guidance will likely be more conservative than historical 20-30% growth targets, though upside from TCG expansion, overseas growth and new game launches remains possible. Growth is expected to come from maintaining average order value while growing new customers and increasing purchase frequency per customer, with customer base expanding broadly including significant growth among younger, mass-market audiences.

• Organizational inefficiency: Rapid headcount growth and expansion into multiple diverse business lines has created inter-departmental communication challenges, which management is addressing with planned organizational changes by April focused on improving communication and implementing 'selection and concentration' of resource allocation.
• Profit margin volatility: Gross margins differ significantly across business segments, so final full-year profit can vary substantially based on Q4 sales mix. There is uncertainty around next fiscal year's operating margin trajectory, as management prioritizes long-term growth investment over near-term margin targets.
• TCG growth dependency: Sustained TCG growth depends on consistent introduction of new card variants to maintain player diversity; without expanding card options, player growth could stall.

Q: What is the background behind the upward full-year guidance revision that only modestly increases operating profit despite a large sales uplift, which appears to be a conservative forecast? / A: Management notes that Q4 event-driven growth has historically been prone to upside surprises, so the forecast uses conservative probabilistic estimates. The sales mix impacts profit heavily because different segments have very different gross margins, so management built in flexibility for this variation. Ongoing growth investments for long-term expansion are cost-forward with benefits coming in future years, so there is still meaningful upside potential for Q4 profit if performance exceeds expectations. No material change to investment policy was made for the revision.

Q: What are the company's priorities for organizational changes and investment going forward, given past notes of operational inefficiency from growth? / A: Management separates organizational changes from investment planning. Organizational changes are planned for April to address cross-department communication issues from rapid growth, focusing on improving communication and concentrating resources on priority areas. For investment, the company will continue balancing near-term growth momentum with long-term investments: expanding already outperforming overseas hubs, investing in content production capabilities to serve the growing mass-market audience, developing scalable logistics systems for future growth, and expanding management teams to improve cross-functional coordination.

Q: What was the Q3 performance of the TCG business, including sales breakdown, channel mix, and delivery issues? / A: Q3 TCG sales were roughly the same size as Q2 sales, with 70% of sales through retail distribution and 30% through the company's own EC channel. Player count is growing steadily, evidenced by the over 2,000 tournament entries, so the company expects further growth as distributors align production plans with actual demand. There were no shipping delays in Q3 unlike last year; the lower recognized EC revenue in Q3 is due to normal seasonality where made-to-order goods naturally shift recognition to Q4 based on scheduled shipping dates.

Q: What is the company's approach to long-term operating profitability vs. growth investment, specifically regarding the 30% target operating margin? / A: Management states that growing absolute profit and free cash flow is the top priority. The 30% long-term operating margin target remains in place, but the company will not sacrifice long-term growth to hit the target in the near term. Investments in high-potential long-term opportunities like overseas expansion are prioritized for capital allocation right now, so the margin target will be achieved over a longer time horizon.