Quick View
| Metric | Current | Prior | YoY |
|---|---|---|---|
| Revenue | ¥254.7B | ¥285.2B | −10.7% |
| Operating Income | ¥14.7B | ¥21.1B | −30.6% |
| Ordinary Income | ¥20.7B | ¥21.6B | −3.9% |
| Net Income | ¥12.2B | ¥9.3B | +28.9% |
| ROE | 1.3% | 1.0% | - |
Executive Summary
GREE Holdings FY2026 Q2 consolidated results show revenue of 254.7B yen (YoY -10.7%) and operating income of 14.7B yen (YoY -30.6%), representing declines in both topline and core profitability. Ordinary income reached 20.7B yen (YoY -3.9%), partially recovering from operating income levels due to non-operating gains including 6.3B yen in FX gains and interest income. Net income increased to 12.2B yen (YoY +28.9%), benefiting from 2.8B yen in investment securities sales gains recorded as extraordinary income. However, operating cash flow of 5.7B yen remained limited at 0.47x net income, indicating weak cash conversion. The company maintained strong liquidity with 512.6B yen in cash and deposits against total assets of 1,243.1B yen, while total debt stood at 90.0B yen, resulting in a conservative debt-to-equity ratio of 0.33x.
Key Metrics
[Profitability] Operating margin was 5.8%, declining from prior year as SG&A expenses remained elevated relative to the 10.7% revenue decline. Gross profit margin maintained a strong 46.6%, but administrative burden compressed operating profitability. Net profit margin reached 4.8%, supported by non-operating and extraordinary gains. ROE stood at 1.3%, calculated from net profit margin of 4.8%, total asset turnover of 0.205, and financial leverage of 1.33x, indicating room for improvement in capital efficiency. The effective tax rate of 48.1% represents a significant earnings headwind. [Cash Quality] Cash and deposits totaled 512.6B yen, providing short-term debt coverage of 5.70x against current liabilities of 192.1B yen. Operating cash flow to net income ratio of 0.47x and cash conversion rate of 0.34x suggest earnings quality concerns regarding cash realization. Accounts receivable of 73.6B yen translates to days sales outstanding of approximately 106 days, indicating extended collection periods. [Investment Efficiency] Total asset turnover of 0.205 reflects relatively low asset utilization efficiency. Capital expenditure remained minimal relative to depreciation, suggesting potential underinvestment in business infrastructure. Working capital of 899.4B yen is substantial but heavily concentrated in cash, limiting operational efficiency. [Financial Health] Equity ratio stood at 75.2%, improving from 70.5% in the prior period, reflecting strong capitalization. Current ratio of 568.1% indicates exceptional short-term liquidity. Debt-to-equity ratio of 0.33x and debt-to-capital ratio of 8.8% represent conservative leverage levels. However, debt-to-EBITDA of 5.39x warrants monitoring from a covenant perspective given the EBITDA decline.
Cash Flow Analysis
Operating cash flow generated 5.7B yen, representing 0.47x of net income and indicating that earnings were not fully converted to cash during the period. The gap between net income of 12.2B yen and operating cash flow suggests working capital absorption or timing differences in cash collection. Investing cash flow totaled negative 4.6B yen, primarily reflecting minimal capital expenditure as the company maintained existing asset base rather than expanding. Financing cash flow showed a significant outflow of 114.9B yen, driven by bond redemption of 90.0B yen and other debt repayments, representing active deleveraging efforts. Free cash flow of 1.1B yen remained limited after minimal capex, providing constrained capacity for shareholder returns relative to dividend commitments. Cash and deposits increased 24.1B yen from prior period end to reach 512.6B yen, maintaining robust liquidity buffers despite the substantial debt repayment activities. The balance sheet structure with 75.2% equity ratio and current ratio exceeding 500% confirms strong financial stability, though the weak operating cash generation relative to reported earnings warrants attention for sustainability of capital allocation policies.
Earnings Quality
Ordinary income of 20.7B yen versus operating income of 14.7B yen reflects a positive non-operating contribution of approximately 6.0B yen, primarily comprising FX gains of 6.3B yen and interest and dividend income. Non-operating income represents roughly 2.4% of revenue, indicating moderate reliance on financial and currency-related gains rather than core business operations. The company recorded extraordinary gains of 2.8B yen from investment securities sales, which boosted pre-tax income to 23.5B yen. This one-time gain contributed significantly to the 28.9% year-over-year increase in net income despite the 30.6% decline in operating income. The divergence between operating profit trends and net income improvement highlights dependence on non-recurring items. Operating cash flow of 5.7B yen remained below net income of 12.2B yen, with the operating CF to net income ratio of 0.47x indicating that less than half of reported earnings were converted to cash. Accrual ratio stood at 0.5%, suggesting limited accrual-based earnings management concerns, but the cash conversion rate of 0.34x and extended accounts receivable collection period of 106 days signal working capital efficiency challenges. The earnings composition shows core operational profitability under pressure while one-time gains from investment sales and favorable FX movements supported bottom-line results, raising questions about earnings sustainability and quality.
Risk Factors
Revenue decline risk remains significant as Q2 revenue fell 10.7% year-over-year, with operating income declining 30.6% due to operating leverage effects. The Game segment generating 14.7B yen in sales and VTuber Business contributing 4.4B yen show concentrated revenue exposure, while the Investment segment reported negative operating income of 233M yen. Continued revenue pressure without corresponding cost structure adjustments would further compress profitability. Dividend sustainability risk emerges from the calculated payout ratio of 211.7% based on period-end dividend of 14.50 yen per share against limited free cash flow generation of 1.1B yen. Operating cash flow of 5.7B yen covers only 0.47x of net income, and free cash flow coverage of dividends at 0.04x indicates current dividend levels exceed cash generation capacity, suggesting potential policy revision requirements. Financial covenant and tax burden risks are present with debt-to-EBITDA ratio of 5.39x elevated relative to conservative leverage metrics, while the effective tax rate of 48.1% significantly constrains net profitability. The high tax burden combined with extended accounts receivable collection of 106 days and weak cash conversion create structural headwinds to sustainable earnings and cash flow generation.
Industry Benchmark (Reference - Proprietary Data)
[Industry Position] (Reference - Proprietary Analysis)
GREE Holdings operates in the digital entertainment and gaming services sector. The company's operating margin of 5.8% and net profit margin of 4.8% reflect the current period's revenue challenges and cost structure pressures. ROE of 1.3% indicates below-average capital efficiency relative to typical industry participants which generally target mid-to-high single-digit ROE levels. The equity ratio of 75.2% substantially exceeds industry median levels, as digital entertainment companies typically maintain equity ratios in the 50-65% range, positioning GREE as highly capitalized. The revenue decline of 10.7% year-over-year contrasts with industry participants that have generally maintained flat to modest growth trajectories in recent periods. The company's minimal capital expenditure relative to asset base differs from industry peers pursuing active content development and platform investments. GREE's debt-to-EBITDA of 5.39x appears elevated compared to the sector median of 2-3x, driven by the significant EBITDA decline rather than aggressive leverage. The exceptionally high current ratio of 568.1% and substantial cash holdings of 512.6B yen reflect conservative liquidity management beyond typical industry practice. Industry participants generally maintain current ratios in the 200-300% range with more active deployment of cash into growth investments or shareholder returns.
※ Industry: Digital Entertainment and Gaming Services, Comparison: Historical periods and general industry characteristics, Source: Proprietary analysis
Key Takeaways from Earnings
Operating profitability deterioration requires management attention as the 30.6% decline in operating income against a 10.7% revenue decline demonstrates negative operating leverage, with SG&A expenses remaining sticky relative to topline contraction. The operating margin compression to 5.8% from prior year levels indicates need for cost structure realignment to restore profitability trajectory. Near-term earnings were supported by non-recurring items including 2.8B yen in investment securities sales gains and 6.3B yen in FX gains, which enhanced net income by 28.9% year-over-year despite core business headwinds. These one-time gains mask underlying operational challenges and create uncertainty regarding sustainable earnings power absent such contributions. Cash generation quality warrants monitoring given operating cash flow to net income ratio of 0.47x, accounts receivable collection extending to 106 days, and free cash flow of only 1.1B yen. The calculated dividend payout ratio of 211.7% substantially exceeds cash generation capacity, suggesting current shareholder return policy may require recalibration unless operational cash flows improve meaningfully. The company maintains exceptional financial flexibility with 75.2% equity ratio, 512.6B yen cash position, and conservative debt levels of 90.0B yen, providing substantial capacity to weather operational challenges and invest in business recovery initiatives.
This report was automatically generated by AI analyzing XBRL earnings data as an earnings analysis tool. This is not a recommendation to invest in any specific security. Industry benchmarks are reference information compiled from publicly available earnings data. Please make investment decisions at your own responsibility and consult professionals as needed.
AI Financial Analysis
Executive Summary
GREE Holdings delivered weaker underlying first-half FY2026 earnings as revenue and operating profit declined, while reported net income increased on foreign-exchange and securities-sale gains. Revenue fell 10.7% year on year to ¥25.47bn. Operating income declined 30.6% to ¥1.47bn, materially underperforming the revenue trend. The operating margin compressed 160bp year on year to 5.8% from 7.4%. Gross margin declined 520bp to 46.6% from 51.8%, indicating that the principal earnings pressure arose above the SG&A line. SG&A expenses declined 17.7% to ¥10.41bn, faster than revenue, which provided partial operating-leverage support but did not offset gross-profit erosion. Ordinary income fell only 3.9% to ¥2.07bn because non-operating income increased to ¥876m. FX gains of ¥627m represented 42.7% of operating income and were the largest contributor to the non-operating uplift. Profit before tax rose to ¥2.35bn, additionally supported by a ¥280m gain on sales of investment securities within net extraordinary gains of ¥273m. Net income attributable to owners rose 28.9% to ¥1.23bn, and basic EPS increased to ¥7.18 from ¥5.58. Consequently, the 4.8% net margin looks stronger than the core operating result and contains meaningful non-recurring and market-sensitive contributions. Cash earnings were comparatively weak, with operating cash flow of ¥573m covering only 0.47x net income. Free cash flow remained positive at ¥111m, but the modest level reflects low operating cash conversion rather than robust internally generated surplus. The balance sheet remains highly liquid, with cash and deposits of ¥51.26bn, a 568.1% current ratio, and net cash relative to reported interest-bearing debt. Financing cash outflow of ¥11.50bn was led by ¥9.00bn of bond redemption and ¥2.48bn of cash dividends, reducing cash despite positive operating cash flow. The immediate outlook depends on stabilizing revenue and recovering gross margin, because current reported profit growth is not representative of underlying operating momentum. Capital efficiency remains subdued, with annualized ROE of 2.6% and ROIC of 3.0%, reinforcing the need for improved monetization and disciplined capital deployment.
Profitability Analysis
The annualized DuPont decomposition gives ROE of 2.6%, comprising a 4.8% net profit margin, 0.410x asset turnover, and 1.33x financial leverage. The weak ROE is principally explained by low asset turnover and a subscale net margin rather than excessive leverage. Financial leverage is moderate and is not the primary driver of returns. The most material year-on-year deterioration was in gross margin, which fell to 46.6% from 51.8%, while operating margin declined to 5.8% from 7.4%. This gross-margin contraction reduced gross profit by 19.6% to ¥11.88bn, a steeper decline than the 10.7% revenue reduction. SG&A fell 17.7%, faster than sales, demonstrating cost flexibility and mitigating the operating-profit decline. However, the ability to cut SG&A cannot fully compensate for sustained revenue contraction and lower gross profitability. EBITDA was ¥1.67bn, corresponding to a 6.6% margin, only modestly above the 5.8% operating margin because depreciation and amortization was limited at ¥201m. Ordinary income exceeded operating income by ¥606m, primarily because of FX gains, while profit before tax was further lifted by a ¥273m net extraordinary gain. The tax burden was 0.524x, equivalent to a 48.1% effective tax rate, leaving less than 53% of pre-tax profit as net income. Although net margin improved versus the prior period, the improvement does not indicate a comparable strengthening in recurring profitability. Sustainable return improvement requires gross-margin recovery, revenue stabilization, and a larger contribution from operating income rather than FX and investment-realization gains.
Growth Assessment
Top-line momentum was negative, with first-half revenue declining 10.7% year on year to ¥25.47bn. Gross profit fell faster than revenue, down 19.6%, showing that the sales contraction was accompanied by adverse mix, pricing, content-cost, or monetization effects. Operating income declined 30.6%, confirming negative operating leverage before the benefit of lower SG&A. Management's expense discipline was constructive, as SG&A fell by ¥2.24bn year on year, but a revenue-led recovery is needed to restore earnings growth. Reported net income growth of 28.9% was driven by a ¥627m FX gain and ¥280m gain on sales of investment securities, rather than by growth in operating profit. The ¥3.02bn extraordinary income and ¥29m extraordinary loss also increased the gap between operating and bottom-line performance. For an IT and digital-entertainment-oriented business, sustaining growth will depend on content and platform monetization, user engagement, and the ability to renew revenue sources without sacrificing gross margin. The low level of capital expenditure, at ¥1m against ¥201m of depreciation and amortization, suggests that reported free cash flow is not being supported by substantial infrastructure investment. Operating performance should therefore be assessed primarily through revenue, gross margin, operating income, and operating cash-flow conversion rather than the current net-income growth rate.
Financial Health
Liquidity is exceptionally strong: current assets were ¥109.15bn against current liabilities of ¥19.21bn, producing a current ratio and quick ratio of 568.1%. Cash and deposits of ¥51.26bn represented 41.2% of total assets and exceeded reported interest-bearing debt of ¥9.00bn by ¥42.26bn. Working capital was ¥89.94bn, providing a substantial short-term liquidity buffer. Total liabilities were only 24.9% of total assets, while total equity was ¥93.42bn and equity represented approximately 75.1% of assets. The reported debt-to-equity ratio of 0.33x and debt-to-capital ratio of 8.8% indicate a conservative capital structure. There is no current-ratio or D/E warning: liquidity is well above the 1.0x threshold and D/E is well below the 2.0x risk threshold. However, debt/EBITDA of 5.39x is elevated because EBITDA is modest relative to debt, even though balance-sheet cash materially offsets refinancing risk. Interest servicing remains comfortable, with EBIT interest coverage of 13.35x and EBITDA interest coverage of 15.17x. Financing cash flow was negative ¥11.50bn, principally due to ¥9.00bn of bond redemption and ¥2.48bn of dividends paid, which reduced cash available for discretionary uses. Current liabilities include ¥6.00bn of current bonds payable, but available cash and short-term financial assets provide ample coverage. Contract liabilities of ¥3.46bn provide a portion of current funding and should be monitored alongside revenue trends because a declining balance can reduce operating-cash support.
Notable B/S Changes
Total assets: -¥8.59bn (-6.5%) to ¥124.31bn, primarily reflecting a reduction in cash-equivalent financial assets and debt-related financing activity. Cash and deposits: +¥2.41bn (+4.9%) to ¥51.26bn, maintaining substantial liquidity despite the overall ¥11.20bn decrease in cash and cash equivalents. Operational investment securities: +¥1.93bn (+9.3%) to ¥22.63bn, indicating a larger allocation to financial investments that should be assessed for liquidity, valuation, and return contribution. Short-term investment securities: +¥3.57bn to ¥3.62bn, representing a significant shift of liquid assets into short-term securities. Total liabilities: -¥8.36bn (-21.3%) to ¥30.90bn, improving balance-sheet leverage. Current bonds payable: -¥3.00bn (-33.3%) to ¥6.00bn, consistent with the ¥9.00bn bond redemption recorded in financing cash flow. Bonds payable: -¥6.00bn (-77.9%) to ¥1.70bn, materially reducing bond obligations and refinancing exposure. Contract liabilities: -¥335m (-8.8%) to ¥3.46bn, a decline that may modestly reduce advance-cash support if sustained.
Cash Flow Quality
Earnings cash conversion was the principal quality concern. Operating cash flow was ¥573m versus net income of ¥1.23bn, resulting in an OCF/net-income ratio of 0.47x, below the 0.8x caution threshold. OCF/EBITDA was 0.34x, also well below the 0.7x benchmark, indicating limited conversion of accounting earnings into cash during the first half. The low conversion is notable because net income benefited from FX gains and a gain on sales of investment securities, which do not necessarily translate into recurring operating cash generation. Trade receivables increased by ¥214m, contract liabilities decreased by ¥334m, and accrued expenses increased by ¥183m, producing a mixed working-capital profile with a net drag from receivables and contract liabilities. The 0.5% accruals ratio remains low and does not itself suggest aggressive accrual accounting. Free cash flow was positive at ¥111m after investing cash outflow of ¥462m, but its absolute level was modest. Investment cash flow was mainly affected by ¥1.80bn of purchases of investment securities, partly offset by ¥339m of sales proceeds. Capital expenditure was only ¥1m, or effectively 0.00x depreciation and amortization, which supports near-term free cash flow but raises a capital-allocation and reinvestment consideration. Cash fell by ¥11.20bn overall because financing outflows, especially bond redemption and dividends, materially exceeded internally generated cash. Future cash-flow quality should improve only if operating cash flow rises toward or above net income without relying on reductions in working capital or sales of financial assets.
Dividend Sustainability
The declared Q2 dividend was ¥0 per share. Cash dividends paid during the first half were ¥2.48bn, materially greater than first-half free cash flow of ¥111m and operating cash flow of ¥573m. Accordingly, the period's cash shareholder distribution was not covered by internally generated free cash flow. The company nevertheless has substantial liquidity, with ¥51.26bn of cash and deposits and a large positive net-cash position relative to reported interest-bearing debt. This balance-sheet capacity supports near-term flexibility in shareholder returns despite weak first-half cash conversion. Dividend sustainability over a longer horizon depends on restoring operating cash flow and maintaining adequate investment capacity, rather than solely on cash reserves. The absence of a Q2 payout means a period payout ratio based on declared DPS is not meaningful. The key capital-allocation issue is whether future dividends can be supported by recurring operating cash flow after debt maturities, investment activity, and ongoing business reinvestment.
Risk Assessment
Business risks include High priority — Revenue declined 10.7% year on year and gross margin contracted 520bp, creating a risk that the core digital-content and platform businesses face persistent monetization, mix, competitive-intensity, or user-engagement pressure., High priority — Operating income fell 30.6%, substantially faster than sales, demonstrating sensitivity of profit to gross-margin changes despite meaningful SG&A reductions., Medium priority — Very low capital expenditure relative to depreciation may preserve short-term cash flow but could constrain product, platform, technology, and content reinvestment if sustained., Medium priority — The sector remains exposed to rapid technology shifts, changing consumer preferences, platform-policy changes, cybersecurity incidents, and competition for engineering and creative talent..
Financial risks include High priority — OCF/net income of 0.47x and OCF/EBITDA of 0.34x indicate weak cash realization of reported earnings; receivables growth and lower contract liabilities contributed to the first-half shortfall., Medium priority — Debt/EBITDA of 5.39x is above the 4.0x high-leverage benchmark, although strong cash holdings, 13.35x EBIT interest coverage, and low debt-to-capital mitigate solvency risk., Medium priority — FX gains of ¥627m equaled 42.7% of operating income, exposing ordinary income to currency movements and reducing predictability., Medium priority — The 48.1% effective tax rate reduced conversion of pre-tax profit to net income and may continue to weigh on reported profitability if it persists..
Key concerns include Reported net-income growth of 28.9% diverged from the 30.6% operating-profit decline because FX gains and gains on securities sales supported earnings., Free cash flow of ¥111m was positive but insufficient to cover the ¥2.48bn cash dividend paid during the period., Annualized ROE of 2.6% and ROIC of 3.0% are below typical capital-efficiency benchmarks, leaving limited return headroom unless core earnings recover., A further decline in contract liabilities from ¥3.79bn to ¥3.46bn may reduce an element of operating funding if not offset by new bookings or improved collections..
Investment Implications
Key takeaways include Core earnings weakened: revenue was ¥25.47bn (-10.7% YoY), operating income was ¥1.47bn (-30.6% YoY), and operating margin was 5.8% (-160bp YoY)., Net income of ¥1.23bn (+28.9% YoY) was supported by ¥627m of FX gains and a ¥280m gain on sales of investment securities, limiting its usefulness as a measure of recurring earnings momentum., The balance sheet is a major stabilizer, with ¥51.26bn of cash, a 568.1% current ratio, and substantial net cash relative to reported interest-bearing debt., Cash-flow quality is currently weaker than accounting profitability, as operating cash flow covered only 47% of net income., Capital efficiency is low, with annualized ROE of 2.6% and ROIC of 3.0%, so improvement in core operating returns is the central financial objective..
Metrics to watch include Revenue growth and gross margin, particularly whether the 46.6% gross margin stabilizes or recovers., Operating margin and the extent to which SG&A reductions can be sustained without impairing growth investment., Operating cash flow, OCF/net income, OCF/EBITDA, receivables, and contract-liability movements., The recurring versus FX- and investment-gain-driven composition of ordinary income and profit before tax., Debt/EBITDA, bond repayments, cash balances, and the coverage of shareholder distributions by free cash flow., Annualized ROE and ROIC as measures of whether the large asset and cash base is being deployed more productively..
Regarding relative positioning, GREE Holdings combines unusually strong liquidity and low balance-sheet strain with comparatively weak core profitability and capital efficiency. Its 5.8% operating margin is below the 8% threshold generally associated with a solid profitability profile, while the 46.6% gross margin remains meaningful for a digital business. Relative financial resilience is strong, but earnings predictability is weaker because a large portion of the gap between operating income and ordinary income came from FX gains, and cash conversion remains below benchmark levels.