COVER Corporation Q2 FY2026 earnings call

• Core Financial Results for Q2: Total company revenue reached approximately 12.1 billion yen, up 13.4% year-over-year; operating income reached approximately 1.7 billion yen, down 33.3% year-over-year. Revenue missed the original first half guidance by approximately 4% due to the identified headwinds, but operating income beat guidance by approximately 10% due to controlled selling, general and administrative (SG&A) costs. Excluding the 550 million yen one-time inventory write-down, the cost of goods sold ratio was 49% with no material change in cost structure from the prior quarter. - Progress on Mid-Term Growth Drivers:
  • Co-created content strengthening: Improved facial capture accuracy for at-home VTuber streaming, launched the hololive RECORDS music label, and accumulated know-how for large-scale talent-led game tournament operations (over 500 teams participated in the September 2025 Tokoyami Matsuri event).
  • Global revenue base establishment: Completed the second consecutive collaboration with the Los Angeles Dodgers, held a large-scale collaboration with Taiwan's Wei Chuan Dragons that drew 100,000 attendees over 3 days, standardized style guides for overseas licensees, and launched a new official EC site in Indonesia in October 2025.
  • New business expansion: Launched hololive OFFICIAL CARD GAME sales at TSUTAYA stores nationwide, continued technology development for fan interaction in the HoloEarth project, and has multiple mobile games in development for gradual launch starting next fiscal year.
  • Human capital optimization: Strengthened internal HRBP functions, improved talent mobility via updated internal transfer rules, and enhanced management accounting and project management systems for better internal collaboration. - Capital Investment and Reforms:
  • Logistics: Progressed integration of domestic logistics hubs, and is targeting improved procurement, consolidated international shipping, and reduced costs from hub consolidation alongside fixed international shipping rates for overseas EC customers to improve user experience.
  • Game/HoloEarth: Joint-developed multi-platform titles including for Nintendo Switch have performed well and contributed to license revenue; HoloEarth has added new features including facial motion tracking and voice chat, and held ongoing talent interaction events to improve fan experience.
  • Management structure reform: Rolled out a new project monitoring system for future fiscal years, completed organizational and HR restructuring, improved talent support, and is on track to cut over 100 million yen (0.1 billion yen) in annual costs via SaaS and hardware optimization.

1. Distribution/Content: Grew revenue quarter-over-quarter, driven by increased summer viewership. Total content watch time decreased more than 10% in the first half of the fiscal year compared to the second half of the prior fiscal year due to past VTuber graduations, but overall video views continue to increase from accumulated content, short-form video reach expansion, and new talent acquisition. Revenue contribution was not explicitly broken out in absolute terms in the provided transcript. 2. Live/Events: Revenue grew 68% year-over-year, driven by strong sales of multiple solo talent live shows, post-live event merchandise, and Blu-ray releases. This segment was a key growth driver for the quarter. 3. Merchandising: Quarter revenue was flat year-over-year. EC sales growth slowed temporarily due to North American tariff impacts, inter-channel demand substitution, and reduced VTuber count, but trading card game (TCG) sales remained strong and retail expansion continued. The segment recorded 550 million yen (0.55 billion yen) in one-time inventory valuation write-downs for older stock. TCG booster pack sales remain on an expanding trajectory; English-language TCG sales launched last quarter reached 200 million to 300 million yen (0.2 billion to 0.3 billion yen) this quarter. 4. License/Collaboration: Quarter revenue exceeded 2 billion yen (2.0 billion yen) for the first time ever, growing 39% year-over-year. The segment was boosted by successful summer pop-up events in Japan and repeated large-scale collaborations overseas. Game-related revenue from small and mid-sized titles alone exceeded 100 million yen (0.1 billion yen) this quarter, growing its contribution to the business.

• Management aims to catch up to the full-year fiscal plan in the second half of the fiscal year, driven by expanded Fes/EXPO events, TCG business growth, expanded domestic and overseas license/collaboration opportunities, supply chain management improvements in merchandising, and sales channel expansion. - The company maintains its target of achieving the initial full-year profit guidance, with growth expected to be concentrated in the second half consistent with Cover's historical business pattern. Strong sequential momentum from back-to-back events is expected to lift all segments. - Key growth drivers for the second half include continued expansion of the TCG business, improvements to EC convenience in merchandising (fixed overseas shipping rates, economy delivery options), and continued growth in license/collaboration revenue. Management expects strong TCG demand to offset the temporary slowdown in EC merchandising growth. - Q3 expectations: Distribution/Content expects higher viewership during the year-end holiday season and enhanced engagement from the newly launched official fan club; Live/Events will host the Hololive Indonesia first local live and multiple large-scale arena solo concerts; Merchandising will continue TCG and retail expansion alongside customer service improvements; License/Collaboration will focus on monetizing growing domestic and overseas client transactions.

• Temporary headwinds to merchandising revenue: 500 million to 1 billion yen in EC demand has been lost to inter-channel demand substitution (shift from EC to retail) and North American tariffs, which have an estimated 300 million to 400 million yen negative impact on revenue. The shift from EC to retail is a gradual ongoing trend driven by expanded retail distribution, rather than a one-off event, and has created near-term imbalance in revenue performance. - VTuber graduations have reduced total talent count and total content watch time, which has created an estimated ~10% negative impact on customer engagement and related merchandise sales. - North American TCG market expansion requires longer time to penetrate, due to the fragmented market structure of small independent card shops versus the consolidated large franchise structure in Japan, so accelerated revenue growth in this region is not expected in the near term. - Logistics cost optimization initiatives are in progress, with compounding benefits expected across multiple measures over different timeframes, but near-term full cost savings cannot be guaranteed as of Q2 end. - Past expansion of product SKUs created accumulated excess older inventory that required a 550 million yen one-time valuation write-down this quarter. While management expects this to be a one-time clean-up phase, future inventory valuation adjustments could still occur if demand forecasting does not improve sufficiently.

Q: What is causing the inter-channel demand shift in merchandising that has reduced EC sales, is this a permanent trend, and what is the scale of North American tariff impact? / A: The demand shift is caused by growing consumer preference for immediate in-store purchases: for TCG, fans want to buy new booster packs on release date rather than wait for EC shipping, and for plush goods and other general merchandise, customers prefer to check size and product variation in person before buying. This is not a reduction in total demand, but a gradual shift driven by intentional retail channel expansion. Management estimates North American tariffs have had a 300 million to 400 million yen negative impact on revenue. Cover will implement better demand forecasting systems similar to large IP license holders to optimize sales across all channels and improve overall profitability.

Q: Q2 TCG sales of 1.7 billion yen are lower than Q1's 2.0 billion yen — what is the outlook for TCG growth in the second half and long term? / A: The Q1 sales figure was lifted by temporary one-time reissue sales, and underlying core booster pack sales continue to grow quarter-over-quarter, with strong oversubscription for TCG events confirming solid underlying demand. The lower Q2 figure is just normal volatility from product release scheduling, not a slowdown in demand. International expansion, especially in North America, will take longer due to the fragmented local market structure that requires tailored regional marketing, so growth will be gradual rather than rapid. Management expects underlying TCG demand to remain strong through the end of the calendar year, with a solid long-term growth trajectory.

Q: One year after the founding of COVER USA, how is overseas business progressing? / A: COVER USA is still in an early short-term growth phase focused on securing large local partner collaborations, such as the repeated Dodgers collab and the announced Twitch partnership, to deepen localization and build local brand presence. The North American hub is already functioning well, and growing revenue is driven by both local live events and increasing outbound collaboration requests from Japanese companies looking to enter the North American market. Cover also benefits from strong Japanese government policy support for global IP export. Looking forward, COVER USA will lead local marketing and partnership building for the TCG expansion in North America, which is a key priority for the second half and next fiscal year.

Q: Is the 550 million yen inventory write-down this quarter a sign of ongoing future inventory risk from increasing SKU count? / A: The write-down was a one-time clean-up of excess accumulated inventory from the 2023-2024 period of aggressive SKU expansion, when Cover intentionally increased product variety to fix the historical problem of too few products for customers. Demand forecasting and ordering processes have improved substantially since that period, and this write-down was completed as part of the warehouse relocation inventory count. Management expects large recurring write-downs to become less frequent going forward as it improves demand forecasting and conducts regular inventory reviews.