COVER Corporation Q3 FY2026 earnings call

• Overall Quarterly Financial Performance

  • Total company results: Net sales reached 12.9 billion yen, up 9.9% year-over-year; gross profit reached 7.0 billion yen, up 19.4% year-over-year; operating profit reached 2.6 billion yen, up 17.9% year-over-year; net profit reached 1.9 billion yen, up 16.3% year-over-year.
  • Gross margin hit the highest level in the past 3 years, driven by the rebound from Q2 inventory valuation losses, improved sales mix from growth of asset-based revenue (past live content, music), and improved cost structure and SG&A efficiency. Operating margin maintained at around 20% even with continued planned pre-production investment.
  • The company characterizes the current business environment as a phase of restructuring to support sustained medium-to-long-term growth, with ongoing structural improvement in operating profit momentum driven by strong performance of TCG and license/collaboration.

• Mid-term Target Progress

  • Co-creation content supply enhancement: Multiple new talent auditions are running in parallel to reduce operational concentration on existing talent, improve production technology and studio operation to enhance both content quality and production efficiency, while building better creative environments to support talent activities.
  • Global revenue base establishment: Official collaborations with Twitch and The Game Awards expanded exposure in overseas game markets: the Twitch collaboration gained over 50 million impressions and added approximately 250,000 new followers; the Game Awards collaboration as an official co-streaming partner gained 3 million total impressions for related social posts. Logistics efficiency improvements (including fixed overseas shipping) improved EC purchase experience, and the number of overseas B2B partner companies increased quarter-over-quarter.
  • New business revenue expansion: The new official hololive FANCLUB launched in October, and the renewed hololive Account fan ID product surpassed 1 million registered users. The company formally announced the development framework and overview of the upcoming mobile game hololive Dreams, planned for global simultaneous release in 2026.
  • Advanced human capital utilization: The company is reviewing organizational and evaluation systems for next fiscal year, and building mechanisms to promote cross-departmental collaboration.

• Talent Development Initiatives

  • Auditions are held across three categories: Japanese-speaking region, English-speaking region, and NEW PROJECT, with the goal of building repeatable talent discovery and cultivation processes and reducing workload concentration on existing talent. NEW PROJECT is framed as a pre-debut developmental project where successful participants can move to hololive Production or debut in specialized niche teams.
  • The first online 3D live from 2024-debuted FLOW GLOW showed improved performance quality and the company's internal progress in expression technology and operational capabilities.

• Pre-Investment Progress

  • hololive Dreams (large-scale official mobile game): Developed in collaboration with external partners, it will feature over 50 hololive talent and more than 150 recorded songs. The announcement drew 50,000 peak concurrent viewers for the reveal stream and over 10 million views for the reveal video on X, with strong positive reaction domestically and overseas.
  • Holoearth: The company held the nepolabo live re:VISION virtual concert to test participatory live experiences in virtual space, where attendees joined as avatars to share the space with talent, and also tested 3D archiving of live content for expanded experience value.

• Management Structure Reform

  • Organizational and personnel system review: The company is building structures to reduce silos and improve cross-departmental collaboration, to enhance decision-making and collaboration quality.
  • Talent support enhancement: The company expanded utilization of simple motion capture studios to enable flexible 3D content production, and is developing mechanisms to disperse concentrated talent workload.
  • Cost optimization: Cost governance for logistics and procurement has improved, and studio operation efficiency is increasing to enable both higher content quality and lower costs.
  • Project governance enhancement: The company is revising budget allocation and internal transaction rules to reduce inefficiency in cross-departmental large projects, with the goal of optimizing resource allocation through better alignment with overall corporate strategy.

1. Distribution/Content: Returned to growth on a quarter-over-quarter basis, driven by increased viewership during the year-end holiday period and momentum from new talent content. Large-scale distribution events such as the New Year's countdown live drew significant audience and drove overall segment momentum, with no specific absolute revenue value disclosed.
2. Live/Events: Revenue entered a temporary adjustment phase year-over-year, as the company prioritized providing exposure opportunities for emerging talent this quarter. Three large domestic arena concerts and multiple shows for the ongoing overseas world tour were held, with Blu-ray sales of past concerts (an asset-based revenue stream) continuing to perform strongly. The segment maintained an overall growth trend, with no specific absolute revenue value disclosed.
3. Merchandising: Achieved significant year-over-year revenue growth, supported by the expansion of the Trading Card Game (TCG) business. EC revenue remains in recovery, impacted by previous inventory expansion and overseas tariff policies, but benefits from the effects of convenience improvement initiatives including fixed overseas shipping fees and the expansion of sales regions, which are gradually materializing. The TCG sub-segment continued strong performance: large-scale tournaments of different sizes (Extremer Cup in October, World Grand Prix in November) were held to expand the player base, and new product sales remained solid, underpinning overall segment revenue. Revenue contribution percentage for this segment was not explicitly disclosed.
4. License/Collaboration: Continued revenue expansion year-over-year, driven by increased deal size, growing number of partner companies centered on overseas markets, and diversification of collaboration partners globally. Key growth drivers included large-scale sponsorship collaborations with global brands for the hololive production COUNTDOWN LIVE, continued strong sales of license products (led by figures), and expanded partnerships with local overseas firms, leading to ongoing expansion of the segment's overall business scope. This segment was one of the two core growth drivers for the quarter, alongside TCG.

• Full-year fiscal 2026 guidance is maintained unchanged, with the company factoring in the inherent seasonal trend where Q4 typically produces the largest annual revenue due to large-scale events.
• Q4 2026 outlooks by segment:
  • Distribution/Content: Management expects momentum build for the entire segment, driven by successive music releases tied to large live concerts following the start of the calendar year.
  • Live/Events: Multiple large arena concerts from popular talent (hololive 3rd Generation Live, Hoshimachi Suisei Live “SuperNova: REBOOT”) are scheduled, alongside the expanded hololive SUPER EXPO 2026 & hololive 7th fes, and the first Takanashi Kiara / Ninomae Ina'nis Concert in Los Angeles to advance overseas market expansion.
  • Merchandising: TCG is expected to remain solid, and management expects sales growth across retail and EC channels driven by back-to-back large events, which will also drive increased customer traffic for EC to support ongoing recovery.
  • License/Collaboration: Management expects revenue to hit its typical seasonal peak in Q4, with additional growth from increased deals with overseas clients and expanded revenue in the game sector.
• Pre-investment spending for next fiscal year is expected to remain roughly flat year-over-year (most pre-investment is for specialized talent hiring that will remain on the roster long-term), with the company currently refining budget levels.
• Next fiscal year headcount planning is expected to be more restrained than in previous years, with only moderate targeted increases needed (the hololive Dreams development is led by external partners, so only a small number of additional supervisory staff are required internally).

• Inventory risk: A portion of products produced during the 2023-2024 SKU expansion period face supply-demand imbalance due to changed market conditions and immature demand forecasting capabilities in that early expansion phase. The company is currently reviewing overall inventory portfolio rotation, supply planning, and sales planning consistency, and there is potential for one-time additional inventory valuation loss expenses to be recorded in future periods. The Q2 2026 inventory valuation loss was 550 million yen, and the size of any additional loss is still under review.
• Software development valuation risk: The company is re-evaluating the scope, priority, and schedule of software development investments for medium-term growth, including platform projects like Holoearth and internal management systems. There is potential for valuation loss on capitalized software development assets, with the scope and size of any such loss still under internal review.
• Operational risk: The company's heavy reliance on in-house operations across multiple business lines (in-house music production, pre-EC-logistics internal operations, single unified EC platform for domestic and overseas customers with diverse product types) has led to more internal operational issues as the business scale grows rapidly, and operational governance and processes have not fully caught up with business diversification and scale growth. Not all issues have been resolved as of the quarter.
• One-time restructuring cost risk: While the company advances business process improvement and re-alignment of strategic priorities for medium-term growth, there is potential for one-time costs to be recorded, which the company frames as a necessary investment for future sustained growth.

• Q: What is the scale of potential additional inventory valuation loss in Q4, given that 550 million yen was recorded in Q2?

A: The scale is still under review. Each SKU has different conditions, so the company is checking alignment between inventory rotation, supply plans, and sales plans across the full portfolio. Any potential expense will depend on this review, which is not yet complete.

• Q: Why was "Strengthening co-creation content supply" downgraded to a △ status (from ◯ in the previous update), even though many initiatives are ongoing?

A: The company has received internal and external feedback on operational issues related to talent workload management and the growing complexity of music/live production services. The company takes these feedback seriously and is working on improvements, so the △ status reflects this ongoing review and improvement work, though core initiatives for the theme are still progressing as planned.

• Q: What is the current status of talent support after the management overhaul, given recent public comments from a graduating VTuber about unresolved workload burdens?

A: The issues leading to that graduation arose long before the recent management improvements, and the company has been steadily progressing on corrective work. While improvements are ongoing, it is true that company-origin errors still occur, and the company accepts this and will continue pushing forward with improvement initiatives.

• Q: What is management's assessment of the initial reaction to hololive Dreams, and what is the expected revenue contribution from the game?

A: Public reaction on social media has been largely positive. However, this is Cover's first large-scale mobile game launch, and the co-development structure means it is difficult to give definitive guidance on revenue contribution at this stage. Initial revenue projections for next year will be conservative, and the company is more focused on the medium-to-long-term benefit of growing brand awareness and acquiring new fans through the game.

• Q: What is the progress of SG&A relative to plan, and how do you summarize the current SG&A trend?

A: The "other SG&A" category contains many temporary one-time expenses, which is why it appears large. Warehouse-related SG&A has been strategically compressed, and fixed personnel costs are being optimized through internal restructuring. These structural changes are progressing as planned numerically.

• Q: What is the background of Cover's inventory risk, given that character merchandise is typically low-risk due to high scarcity value?

A: Cover's EC originally operated primarily as a flash sale site with made-to-order models. When the company expanded to carry regular in-stock inventory around 2023 (after listing) to enable fans to purchase merchandise whenever they want, demand forecasting capabilities were not fully developed. That led to excess inventory for some products from the early expansion period. Demand forecasting has improved recently, and the company is now strategically controlling SKU count, shifting to a model focused on timely product release aligned with events and fan experience, and working to resolve existing excess inventory.

• Q: Where do the problems with operational improvement lie: are they caused by over-reliance on in-house operations, or structural issues with processes? What improvements have been implemented?

A: The core issue is that the company has rapidly expanded into many diverse business lines while keeping most operations in-house, so operational governance has not kept pace with the scale increase. For example, Cover does in-house music production (most other firms partner with external labels) and handles all pre-logistics EC operations in-house (logistics itself is outsourced), and serves both domestic and overseas customers from a single EC platform with a highly diverse product range. Rapid scale expansion increased the frequency of issues. The company confirms that it expanded in-house operations believing the benefits outweighed the risks, but now needs to narrow the scope of in-house activity to focus on core areas. Project management (PM) talent strengthening is a particular priority for improvement, and the company is accumulating experience from each issue to incrementally improve overall operational quality across the firm.

• Q: What software assets are under review for potential valuation loss, and how large could that risk be?

A: The review covers all capitalized software development assets on the balance sheet, including platform projects like Holoearth and internal revenue management/ERP-like systems. The company is re-assessing priority, scope, development approach, and schedule for all these assets. No decisions have been made yet, so any potential impairment will be disclosed at the appropriate time once the review is complete.

• Q: What are the key challenges and planned improvements for personnel systems and organizational structure?

A: The main challenge is that cross-business-unit work has increased significantly, leading to high inter-department coordination costs. The company is restructuring to consolidate business unit oversight and reduce these coordination costs, so teams can focus more on their core priorities.

• Q: What is the positioning of NEW PROJECT, and how is it different from existing hololive brands like hololive DEV_IS?

A: NEW PROJECT is a pre-debut developmental project, not an immediate talent debut brand like existing hololive lines. It is designed to allow aspiring talent to gain experience before potential debut in hololive Production or a specialized team.

• Q: Is Cover considering shifting more in-house operations to outsourcing, including for ERP? What is the current policy on in-house vs outsource?

A: The ERP system uses an off-the-shelf product from an external major vendor (not built in-house from scratch), with the company handling internal customization and operational management in partnership with the vendor, which is why it is capitalized as a software asset on the balance sheet. Cover constantly re-evaluates the in-house/outsource balance across all business areas: the company works with external production partners for studio work, and is always looking for the optimal split. For EC operations, for example, in-house operations maintain higher profit margins but carry more operational risk, so there is a possibility of shifting more activities to outsourcing in the future, with no fixed policy.

• Q: Why does Cover use external software developers, and what are the benefits? Is the core challenge operational rather than digital development?

A: Most development uses a hybrid model of internal project managers controlling external vendor engineers. The core need is for internal staff who understand Cover's unique business requirements to coordinate external developers, so the hybrid model is used. It is correct that the main current challenges are on the operational side rather than the digital development side.

• Q: Will pre-investment spending of around 3.1 billion yen disappear next year?

A: Most pre-investment spending is for personnel (for logistics development, overseas business development, etc.), and those employees will remain with the company after hiring, so spending is expected to stay roughly flat rather than disappearing. The company is still reviewing the final budget level.

• Q: Will headcount increase next year, following several quarters of flat headcount?

A: hololive Dreams development is led by external partners, so there will not be a large increase in internal headcount for the game, though a small number of supervisory staff for talent and music integration will be added. Overall, next year's headcount plan will be more restrained than in previous years. Headcount does not grow proportionally with revenue in Cover's business model, so the company only plans targeted increases for necessary roles, with a focus on preserving experience quality for both fans and talent.