GENDA Inc. Q3 FY2026 earnings call

• Strategic Overhaul in Response to Share Price Weakness:
  • Management acknowledges the 8-month declining share price trend post-March 2025 Trump tariff shock, and attributes the weakness to three main factors: investor concern over the Player One M&A, repeated public offerings for pre-funding M&A, and the former CEO's block sale of holdings alongside the second public offering.
  • Unchanged core strategy: Maintain "continuous non-continuous growth" via M&A, and continue to only pursue M&A that boosts EPS. Long-term investors hold ~80% of outstanding shares, with long-term holder Capital increasing its stake to 9.18%.
  • Key strategic changes: (1) Pause public offerings for pre-funded M&A standby capital for at least 3 years (until January 2029); (2) Focus M&A on core segment roll-up and strictly screen non-core opportunities, reducing overall M&A volume; (3) Curate growth capex for existing businesses to target 5 billion yen of existing business free cash flow (FCF) next fiscal year, representing ~15 billion yen of FCF improvement from the current period.
  • The company has capacity to generate ~16.5 billion yen annual FCF if all growth capex is halted; after planned selective growth investment, 5 billion yen FCF is targeted, matching the size of the most recent 15.4 billion yen public offering for M&A standby capital.
• North America Operational Corrective Actions:
  • Identified underperformance of converted SWAP stores caused by insufficient prize restocking: faster-than-expected sales of popular Japanese IP prizes led to empty machines that were left unfilled, not weak demand for IP prizes. Corrective re-stocking delivered up to 248% sales growth at affected locations, confirming sustained strong demand for Japanese IP.
  • Three key improvement initiatives: (1) Standardize timely prize restocking processes; (2) Deploy DX monitoring to enable oversight from both U.S. and Japanese headquarters; (3) Deliver mandatory online training to all 220 North American sales managers to standardize operational quality. Pauses new North America M&A to focus resources on post-merger integration (PMI) and operational improvement.
• North America Capital Efficiency Improvements:
  • New store openings: Target 600 new locations next fiscal year, including over 100 new openings at Walmart, where pilot locations delivered strong enough results to justify full expansion after previously declining store counts. New openings benefit from favorable revenue-share rent terms due to proven IP sales traction.
  • Existing store investment: Scale Add-on investments from 200 locations this fiscal year to 1,000 next fiscal year due to high returns, while pausing additional SWAP conversions to focus on improving operations at the 1,500 already converted locations. For high revenue-share rent locations, the company now can repurpose existing large claw machines for large Japanese IP prizes with no incremental capex, delivering up to 283% sales growth per machine and dramatically improving internal rates of return.
• Capital Return: Announced a 3 billion yen share repurchase program running from December 15, 2025 to April 30, 2026, sized to not interfere with core M&A strategy. The current valuation (7.2x EV/EBITDA, 12.4x PER) was deemed attractive for repurchase.

Consolidated results for the third quarter cumulative period: Total net sales reached 119.6 billion yen, up 54% year-over-year; adjusted EBITDA was 14.7 billion yen, up 47% YoY; adjusted EBITA was 8.5 billion yen, up 23% YoY; adjusted net income before goodwill amortization was 5.6 billion yen, up 31% YoY. Domestic amusement existing stores have maintained steady growth, with same-store sales consistently above 100% YoY. North America segment: M&A of Player One has established nationwide presence, enabling full-scale rollout of Japanese anime IP prizes, which have delivered strong sales growth at converted locations. Cost synergies from North America business integration are tracking far above plan: projected annual cost cuts of 6.4 million USD (~0.93 billion yen) versus the original target of 2 million USD (~0.3 billion yen). SWAP (full conversion of existing machines to Japanese claw machines and IP prizes) locations have delivered average sales growth of 185%, while Add-on (additional placement of small claw machines and IP prizes in existing arcades) has delivered strong returns per unit of investment.

• Full year 2026 (January fiscal year) guidance is maintained, with cumulative third quarter results meeting initial budget after adjusting for one-off M&A costs, as stronger than planned performance in H1 offset North American operational weakness in Q3.
• 2027 (January fiscal year) consolidated guidance is upwardly revised: assuming no additional M&A, management forecasts net sales of 210 billion yen, EBITDA of 28 billion yen, and net income before goodwill amortization of 10.6 billion yen.
• North America medium-term targets are maintained: the company reaffirms the target of 6.5 billion yen North America EBITDA next fiscal year and 11 billion yen by 2030, with internal discussions focused on potentially exceeding the 6.5 billion yen target.
• Starting next fiscal year, the company will change guidance reporting to only three adjusted indicators (sales, adjusted EBITDA, adjusted net income before goodwill amortization) to eliminate confusion from one-off M&A costs and goodwill amortization that create mismatches between initial guidance and actual results when M&A closes during the period, after receiving approval from the Tokyo Stock Exchange.

• Short-term share price pressure from lingering investor uncertainty over M&A strategy, repeated past public offerings, and operational issues in the North America segment.
• Goodwill impairment risk for North America only materializes if performance falls far below the medium-term plan; acquisition valuations were attractive (NEN 3.6x EV/EBITDA, Player One 8.5x EV/EBITDA, other acquisitions 5.0x EV/EBITDA) and most capital invested is portable game machines that can be resold in the secondary market to recover capital if underperformance occurs, mitigating impairment risk.
• Operational execution risk in North America: the current prize restocking issue has pushed profit recognition back from the current fiscal year to next, though management expects full recovery.
• Prior strategic misjudgment: the company underestimated the negative impact of repeated pre-M&A public offerings on short-term share supply and demand, which created uncertainty that suppressed share price gains.

Q: How is GENDA progressing with Japanese IP acquisition for North America, and are there plans to align with upcoming popular Japanese movie releases like Super Mario and The Legend of Zelda? / A: Japanese IP acquisition is progressing very well, with the company building strong trust with Japanese IP holders. Multiple popular global anime IPs are already scheduled for exclusive North American rollout over the next 3 to 6 months. The company is already actively implementing in-theater co-location, placing claw machines with current movie character merchandise right outside theater exits to capitalize on hype, and this will remain a key strategic priority going forward.

Q: Is the North American stock-out issue purely operational, not a result of overall inventory shortage? How is the company improving demand forecasting to balance opportunity loss and excess inventory? / A: The issue was entirely an operational failure to restock empty machines, not a shortage of total inventory, and improvement is already underway. Domestic Japanese demand forecasting is already very accurate, as the company treats 3-month-ahead prediction of popular IP by location as the most critical driver of performance, and claims to be the global leader in this analysis. The company is rolling out its domestic forecasting expertise to North America to balance inventory levels, and will use improved operations to distribute correct quantities to each location.

Q: Is the understanding correct that only pre-M&A public offerings for standby capital are paused for 3 years, and what is the reasoning for the 3-year timeline? What does this mean for large M&A pipeline? / A: The policy only bans the past practice of raising undesignated capital for future unspecified M&A; if a large attractive EPS-accretive M&A is identified, the company will do a public offering after announcing the deal, if debt financing is not sufficient. The 3-year timeline is set to allow the market to see if the new strategic approach delivers results, after which management will re-evaluate the strategy. Domestic large M&A opportunities in amusement and karaoke still have an active pipeline, and the change in financing policy does not reduce the ability to pursue large domestic deals; the old pre-funding model was mostly used to accelerate smaller tuck-in acquisitions, so the change will not impact large deal activity.

Q: Why did GENDA decide to cut growth capex, and has the internal investment hurdle rate changed? / A: The company already had an internal hurdle rate of 10% IRR for all growth capex projects, and only approved projects that met this standard. While many projects met or exceeded the target, some failed to hit the hurdle. Moving forward, management will raise the hurdle rate and be more selective to prioritize generating positive FCF from existing operations, which is necessary to support the new debt-focused M&A financing strategy, after acknowledging the need to correct past overemphasis on growth speed over FCF generation.