GungHo Online Entertainment,Inc. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥73.59B
• Operating Income: ¥5.87B
• Net Income: ¥12.50B
• EPS: ¥52.92

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Soft quarter with sharp profit compression despite stable gross margin and a fortress balance sheet. Revenue was 735.95 (−3.8% YoY), while operating income fell to 58.68 (−62.9% YoY) and ordinary income to 69.68 (−59.6% YoY), indicating heavy margin pressure. Gross profit was 395.37, yielding a gross margin of 53.7%, broadly healthy for a mature mobile game portfolio. Operating margin deteriorated to about 8.0% from an implied ~20.7% a year ago, a contraction of roughly 1,268 bps, reflecting elevated SG&A and/or lower monetization per user. Non-operating income of 15.35, mainly interest income of 13.88, cushioned ordinary income, highlighting the contribution from a large net cash position. Profit before tax printed at 171.81, well above ordinary income, implying sizable extraordinary items; however, net income was only 28.92 (−70.2% YoY), suggesting substantial below-the-line impacts and/or non-controlling interest effects. Effective tax rate was 27.2%. ROE was 1.9% as per DuPont (NPM 3.9%, asset turnover 0.438, leverage 1.12x), underscoring subdued capital efficiency. The balance sheet remains exceptionally strong with total assets of 1,679.09 and equity of 1,498.70, and cash and deposits at 1,301.92. Liquidity is abundant: current ratio 986% and quick ratio 986%, with minimal interest-bearing debt (D/E 0.12x). Interest coverage is robust at 533x, thanks to tiny interest expense (0.11) versus operating earnings. Earnings quality cannot be fully assessed due to unreported cash flow statements; OCF vs NI divergence is unavailable. The calculated payout ratio of 143.5% indicates dividends exceed current earnings, likely relying on cash reserves rather than income. Forward-looking, sustaining profits depends on stabilizing live-ops monetization and managing user acquisition costs, as well as pipeline execution; balance sheet strength provides flexibility for shareholder returns and development investments, but current ROE is low and needs improvement. Near term, watch for any extraordinary gains/losses normalizing, the recovery trajectory of operating margin, and the deployment of large cash balances toward growth or returns.

Profitability Analysis

ROE decomposition (DuPont): ROE 1.9% = Net Profit Margin (3.9%) × Asset Turnover (0.438) × Financial Leverage (1.12x). The biggest change vs last year is the collapse in operating profitability, which cascaded into a much lower net margin. Implied operating margin declined from ~20.7% to ~8.0% (−1,268 bps), driven by either higher SG&A intensity (e.g., UA/marketing) or weaker revenue per active user leading to negative operating leverage. Non-operating income (interest) partly offset weaker operations at the ordinary level, but not enough to protect net margin. Asset turnover remains low at 0.438, reflecting a very cash-heavy balance sheet relative to revenue scale. Financial leverage is minimal (1.12x), which limits ROE uplift but appropriately de-risks the profile. The margin pressure appears cyclical/operational (title aging, competitive spend) rather than structural accounting changes, and may partially recover with content updates or new launches; however, absent a hit title, prior-year margin levels look difficult to repeat. SG&A growth likely outpaced revenue (revenue −3.8% YoY while OP −62.9% YoY), a concerning indication of negative operating leverage. Sustainability: interest income support is durable while cash remains high, but it is not a substitute for core game monetization recovery.

Growth Assessment

Top-line declined 3.8% YoY to 735.95, indicating a modest contraction in bookings/sales. Operating income fell 62.9%, signaling that cost intensity rose significantly relative to revenue. Ordinary income benefited from interest income, but core earnings quality rests with operating profit, which weakened materially. The net income drop of 70.2% and implied large gap between PBT and NI suggest below-the-line effects (e.g., extraordinary items or non-controlling interests) weighed on attributable profit. With gross margin steady at 53.7%, the primary growth headwind is SG&A/operating leverage rather than cost of sales inflation. Near-term growth sustainability hinges on live-ops events, gacha mechanics, retention, and ARPPU stabilization for key titles, plus the launch cadence of new titles. Overseas performance and FX can also influence reported revenue given the company’s historical international exposure. Outlook: without a fresh hit or a discernible uplift in user metrics, revenue likely remains range-bound and margins constrained; conversely, a successful new launch or major update could rapidly re-accelerate profits given the scalable model.

Financial Health

Liquidity is exceptionally strong: current ratio 986% and quick ratio 986%, far above caution thresholds. There is no warning for Current Ratio <1.0 or D/E >2.0; D/E is a conservative 0.12x. Cash and deposits of 1,301.92 vastly exceed current liabilities of 154.57, eliminating near-term refinancing or liquidity risks and indicating no maturity mismatch. Total liabilities are only 180.39 against equity of 1,498.70, reflecting a net cash balance sheet. Interest expense is de minimis (0.11), and interest coverage (533x) is robust. No off-balance-sheet obligations are disclosed in the provided data. Capital structure is under-levered, which aids resilience but depresses ROE in the absence of earnings growth or capital returns.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income and FCF cannot be assessed; thus, we cannot confirm earnings-to-cash conversion. Given the sizeable cash balance and positive interest income, liquidity is ample even if OCF temporarily lags NI. There are no explicit signs of working capital manipulation in the provided data, but limited line-item detail (inventories, payables/receivables turnover) constrains analysis. Dividend and capex coverage by FCF cannot be evaluated due to missing OCF and capex, but current cash reserves likely cover moderate shareholder returns and development spend near term.

Dividend Sustainability

Calculated payout ratio is 143.5%, implying dividends exceed current earnings and are not covered by this period’s NI. With large cash on hand (1,301.92), the company can fund dividends temporarily from the balance sheet, but long-term sustainability requires recovery in OCF and earnings. DPS and total cash dividends are unreported, preventing precise coverage analysis. Policy outlook: management may maintain dividends to signal stability, but if operating weakness persists, prudent options include aligning payouts with normalized earnings or using buybacks opportunistically given the cash position.

Risk Assessment

Business Risks:

• Hit-driven revenue model; dependence on a small number of titles for bookings
• User churn and ARPPU pressure amid intense competition in mobile gaming
• Platform dependency and fee structures (Apple/Google) impacting margins
• Regulatory scrutiny of gacha/loot box mechanics in key markets
• Title aging risk and content pipeline execution risk
• IP/licensing and live-ops cadence risks affecting monetization

Financial Risks:

• Low ROE (1.9%) due to margin compression and under-levered balance sheet
• High dividend payout (143.5%) relative to earnings may not be sustainable from income
• Earnings sensitivity to extraordinary items and non-operating income
• FX exposure on overseas revenues and cash holdings (not quantified)

Key Concerns:

• Severe operating margin compression (−1,268 bps YoY) despite modest revenue decline
• Net income significantly below profit before tax, indicating sizable below-the-line impacts
• Dependence on interest income to support ordinary profit amid weak core operations
• Limited visibility due to unreported cash flow and segment details

Investment Implications

Key Takeaways:

• Core profitability weakened sharply; operating margin down to ~8.0%
• ROE fell to a low 1.9% as net margin compressed and leverage remained minimal
• Balance sheet is exceptionally strong with 1,301.92 in cash and minimal liabilities
• Ordinary income supported by interest income, masking core pressure
• Dividend payout appears above earnings; sustainability relies on cash and future profit recovery

Metrics to Watch:

• Monthly grossing ranks/MAU/retention and ARPPU for key titles
• SG&A-to-revenue ratio and UA spend efficiency
• Operating cash flow and free cash flow once disclosed
• Pipeline milestones and launch performance of new titles/major updates
• Extraordinary items and minority interest impacts on NI
• Cash deployment: buybacks vs dividends vs development/M&A

Relative Positioning: Versus domestic mobile gaming peers, the company exhibits superior liquidity and a stronger net cash position but currently weaker profit momentum and low ROE; near-term performance depends on revitalizing existing franchises and delivering new hits while maintaining disciplined marketing spend.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis