FAN Communications,Inc. FY2026 Q2 Earnings Report

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Executive Summary

Cumulative Q2 FY2026 results were characterized by a decline in earnings without revenue growth, with deterioration in the gross margin of the core business placing significant pressure on profitability. Revenue was ¥34.3B (¥36.4B in the previous year, YoY -5.8%), Operating Income was ¥4.9B (¥10.6B in the previous year, YoY -54.0%), Ordinary Income was ¥4.6B (¥10.5B in the previous year, YoY -56.1%), and Net Income was ¥2.0B (¥6.9B in the previous year, YoY -71.4%). The primary causes of the significantly larger decline in earnings than in revenue were lower revenue and gross margin in the core CPA Solutions Business, as well as expanding losses in the Strategic Business.

Factors Affecting Results

【Revenue】Revenue was ¥34.3B, a 5.8% year-on-year decline. The core CPA Solutions Business recorded a significant revenue decline to ¥25.3B (external revenue of ¥24.8B, down 17.0% year on year), weighing on consolidated revenue. Meanwhile, the Strategic Business grew to ¥10.4B (up 48.7% year on year), raising its revenue mix from 18.0% in the previous year to 27.8% and indicating ongoing changes in the business portfolio.

【Profit and Loss】Operating Income declined 54.0% year on year to ¥4.9B, while the Operating Margin decreased by 1,500bp to 14.2% (29.2% in the previous year). Although the gross margin deteriorated to 78.0% (89.4% in the previous year), SG&A expenses remained almost unchanged at ¥21.9B, resulting in negative operating leverage as the relative burden of fixed costs increased in response to the decline in revenue. By segment, profit from the CPA Solutions Business was ¥16.1B (down 19.8% year on year), while the Strategic Business posted a loss of ¥4.7B, expanding from a loss of ¥3.3B in the previous year. Ordinary Income was ¥4.6B, down 56.1% year on year, after the addition of ¥0.9B in non-operating expenses, including losses on the operation of investment partnerships. A ¥0.6B extraordinary loss, including a ¥0.5B impairment loss on investment securities, was recorded, resulting in Profit Before Tax of ¥4.0B. Combined with the high effective tax rate of 50.8%, Net Income declined 71.4% year on year to ¥2.0B. The results are characterized as a decline in both revenue and earnings.

Segment Analysis

The CPA Solutions Business recorded revenue of ¥25.3B (down 17.0% year on year) and segment profit of ¥16.1B (down 19.8% year on year). Although it remains highly profitable, with a profit margin of 63.7%, this deteriorated from 67.3% in the previous year. The Strategic Business expanded rapidly, with revenue increasing 48.7% year on year to ¥10.4B; however, its segment loss expanded to ¥4.7B, compared with a loss of ¥3.3B in the previous year, resulting in a loss ratio of approximately 45%. Goodwill of ¥1.2B was generated in connection with the acquisition of Rayleigh Co., Ltd., and the monetization of this company will be a key focus going forward. The fact that revenue growth has not translated into reduced losses remains a challenge for improving consolidated earnings.

Key Financial Indicators

【Profitability】The Operating Margin was 14.2%, down 1,500bp from 29.2% in the same period of the previous year, while the Net Profit Margin contracted significantly to 5.8% from 19.0% in the same period of the previous year.【Cash Quality】Cash and deposits of ¥121.3B, together with investment securities of ¥46.4B, accounted for approximately 80% of total assets, and the asset turnover ratio remained low.【Investment Efficiency】Annualized ROE was 2.4%, with the decline in the Net Profit Margin being the primary factor restraining capital efficiency.【Financial Soundness】The Equity Ratio was 76.6%, and the Current Ratio remained high at approximately 314% (current assets of ¥152.6B / current liabilities of ¥48.6B), while a conservative capital structure was maintained with a debt-to-equity ratio of 0.31x.

Cash Flow Analysis

Although explicitly disclosed data from the cash flow statement is limited, an analysis of fund movements based on changes in the balance sheet indicates that cash and deposits declined by more than ¥24B to ¥121.3B from ¥146.9B in the previous year. The increase in investment securities and investment securities from ¥36.9B in the previous year to ¥46.4B, an increase of ¥9.5B, is believed to have accounted for part of the use of funds. Current assets were ¥152.6B and current liabilities were ¥48.6B, maintaining a high Current Ratio of approximately 314%, with no issues observed in short-term liquidity. On the other hand, accounts receivable of ¥24.4B is large relative to the scale of revenue, and the annualized collection period may have lengthened, which should be noted when evaluating Operating Cash Flow generation capacity.

Quality of Earnings

The composition of current-period earnings includes temporary and non-recurring factors, including ¥0.9B in non-operating expenses, including losses on the operation of investment partnerships, and ¥0.6B in extraordinary losses, including a ¥0.5B impairment loss on investment securities. Non-operating income includes a foreign exchange gain of ¥0.2B and interest income of ¥0.4B, both of which are different in nature from the earning power of the core business. The effective tax rate was high at 50.8%, significantly restraining the conversion of Profit Before Tax of ¥4.0B into Net Income of ¥2.0B; fluctuations in the tax burden are therefore a factor contributing to volatility in Net Income. Comprehensive Income was ¥2.3B, with only a limited divergence from Net Income of ¥2.0B; however, this included an increase of ¥0.3B in the valuation difference on securities, and attention is required because fluctuations in the market prices of investment securities could affect Comprehensive Income going forward.

Earnings Forecast and Guidance

The Full-Year forecast is Revenue of ¥73.3B (up +3.3% year on year), Operating Income of ¥12.0B (down -38.9%), and Ordinary Income of ¥11.8B (down -41.4%). Cumulative Q2 progress rates were 46.8% for Revenue, 40.7% for Operating Income, and 38.9% for Ordinary Income. All were below the 50% benchmark for an evenly split first and second half, indicating a plan weighted toward the second half. Achieving the Full-Year Operating Income target requires ¥7.1B in the second half, equivalent to an Operating Margin of 17.8%, presupposing an improvement from the first-half result of 14.2%. In light of the revision to the earnings forecast during the current quarter, a bottoming-out of the core business’s revenue decline and a reduction in losses in the Strategic Business during the second half will be conditions for achieving the plan.

Shareholder Returns

The interim dividend was ¥10.50 per share, and the dividend amount based on the average number of shares during the period of 65,939 thousand shares was approximately ¥6.9B. The Payout Ratio against cumulative Q2 Net Income of ¥2.0B was approximately 352%, substantially exceeding current-period earnings. The Full-Year dividend forecast is ¥21.00 per share (no revision to the dividend forecast), and the Payout Ratio against the Full-Year Net Income forecast of ¥6.9B is expected to be approximately 202%. Both figures represent the Payout Ratio based solely on dividends, and no share repurchases have been confirmed. Against the backdrop of retained earnings of ¥148.9B and cash and deposits of ¥121.3B, the dividends are strongly characterized as being funded by accumulated internal reserves rather than current-period earnings.

Risk Factors

1. Slowdown in the Core Business: Revenue in the CPA Solutions Business declined 17.0% year on year, while segment profit declined 19.8%. Consolidated earnings are directly affected by advertisers’ spending trends and the competitive environment in the performance-based advertising market.

2. Profitability of the Strategic Business: While revenue in the Strategic Business increased 48.7% year on year, its segment loss expanded to ¥4.7B. The situation in which revenue growth has not translated into improved earnings continues.

3. High Tax Burden and Asset Valuation: The effective tax rate was high at 50.8%, restraining the conversion of Profit Before Tax into Net Income. Investment securities of ¥46.4B, equivalent to 21.8% of total assets, include a ¥0.5B impairment loss, and fluctuations in market prices could affect earnings and Comprehensive Income going forward.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Compared with the industry median, both the Operating Margin and Net Profit Margin are inferior, placing profitability in the lower range of the industry.

Growth and Capital Efficiency

While many companies in the industry are experiencing revenue growth, the Company recorded a revenue decline and ranks in the lower range of the industry from a growth perspective as well.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The decline in revenue and gross margin in the highly profitable CPA Solutions Business reduced consolidated Operating Income by 54.0%, making the presence or absence of a bottoming-out in the core business a key focus going forward.

2. While the Strategic Business continues to grow, with revenue up 48.7%, its segment loss expanded to ¥4.7B. The transition from growth investment to monetization remains a structural challenge.

3. The Payout Ratio substantially exceeds current-period earnings on both a cumulative Q2 and Full-Year forecast basis, and the earnings data confirms that capital returns funded by retained earnings and cash continue.

Theoretical Share Price (Reference Value)

Sensitivity: ¥208–¥219 at ±1% for the Cost of Equity, and ¥212–¥214 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end are used (there is a timing difference relative to the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

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