SEGA SAMMY HOLDINGS INC. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥201.11B
• Operating Income: ¥10.06B
• Net Income: ¥2.75B
• Earnings per Unit (EPU): ¥13.01

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution Information

Segment Information

Full Year Forecast

Disclaimer

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

AI Financial Analysis

Executive Summary

Verdict: FY2026 Q2 was a materially weak quarter with sharp profit compression despite healthy liquidity and a solid balance sheet. Revenue declined 5.0% YoY to 2,011.1, while operating income dropped 69.3% YoY to 100.6, indicating significant margin pressure. Gross profit was 893.4 for a gross margin of 44.4%, but SG&A of 792.8 (39.4% of sales) consumed most of the gross profit, leaving an operating margin of about 5.0%. Based on the provided YoY changes, we estimate last year’s operating margin at roughly 15.5%, implying an operating margin compression of about 1,049 bps YoY. Net income fell 90.9% YoY to 27.5 (net margin 1.4%), implying a net margin compression of approximately 1,288 bps from an estimated 14.3% a year ago. Ordinary income was 108.2 (-67.3% YoY), supported by net non-operating income of 7.6 (non-operating income 48.7 vs expenses 41.1). Interest coverage remained acceptable at 7.63x (100.6 operating income vs 13.19 interest expense), helped by positive net interest (interest income 15.74 > interest expense 13.19). The effective tax rate was elevated at 57.3%, further depressing net income relative to pre-tax profits. Total comprehensive income of 144.1 far exceeded net income, indicating substantial positive OCI (likely FX/valuation gains), but these are non-cash and non-operating. The balance sheet is strong: current ratio 362%, quick ratio 346.6%, and cash and deposits of 1,421.6 against short-term loans of 73.8 indicate ample liquidity. Leverage is moderate (D/E 0.71x; financial leverage 1.71x), but capital efficiency is weak with ROE at 0.7% and ROIC at 1.4% (warning level). DuPont shows pressure from both a very low net margin (1.4%) and low asset turnover (0.31), while leverage is not high enough to compensate. Earnings quality assessment is constrained because operating cash flow is unreported; the gap between net income (low) and comprehensive income (high) highlights reliance on OCI rather than core cash earnings. Forward-looking, the company needs to restore operating profitability through stronger title/machine launches and tighter cost control, reduce the elevated effective tax drag, and lift ROIC toward mid-to-high single digits to improve shareholder value.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 1.4% × 0.310 × 1.71 ≈ 0.7% (matches reported). The largest deterioration driver YoY is net profit margin, given operating income fell 69.3% on a 5.0% revenue decline, and net income fell 90.9%. Business drivers: gross margin held at 44.4%, but SG&A at 39.4% of sales left limited operating margin (≈5.0%); likely mix and cost pressures in consumer entertainment/pachislot cycles, plus a high tax rate (57.3%) squeezed net margins. Asset turnover at 0.31 reflects a heavy asset base (notably intangibles 1,329.7 and goodwill 645.0), limiting efficiency; turnover likely declined YoY alongside revenue. Financial leverage at 1.71x is moderate and did not offset margin compression. Sustainability: the net margin trough appears partly cyclical (title/machine cycle, product mix) but the elevated tax rate may normalize; however, sustained improvement requires cost discipline and stronger hit pipeline. Operating leverage is adverse this quarter: SG&A did not flex down with revenue (-5% revenue vs much larger EBIT decline), indicating negative fixed-cost leverage. Flag: SG&A intensity of 39.4% of sales is high; with revenue down, this drove the bulk of operating margin compression.

Growth Assessment

Revenue declined 5.0% YoY to 2,011.1, suggesting softer demand or title/machine timing effects. Operating income contracted 69.3% YoY to 100.6, far outpacing the revenue decline, implying significant negative operating leverage. Non-operating income (48.7) partially cushioned results, but non-operating expenses (41.1) offset most of that; net non-operating contribution was modest (7.6). Net income fell 90.9% YoY to 27.5 due to margin compression and a high effective tax rate (57.3%). Interest income (15.74) exceeded interest expense (13.19), supporting ordinary income despite weak operations. The drop in profitability appears cyclical and mix-driven; without OCF disclosure, assessing sustainability of any rebound is limited. Outlook hinges on execution of the software/contents pipeline and pachislot/pachinko cycle upswing, alongside tighter SG&A controls. Near term, priority is restoring operating margin from ~5% closer to mid-teens through better mix and cost containment.

Financial Health

Liquidity is strong: current ratio 362% and quick ratio 346.6% (cash and deposits 1,421.6; accounts receivable 557.0; inventories 151.4 vs current liabilities 985.5). No warning triggers (Current Ratio well > 1.0; D/E 0.71x < 2.0). Maturity mismatch risk is low: short-term loans 73.8 are small relative to cash; working capital is ample at 2,582.1. Long-term loans total 1,282.5 within a moderate leverage profile, supported by total equity of 3,785.7. Intangible assets (1,329.7) and goodwill (645.0) are sizable, implying potential impairment sensitivity if profitability remains weak. No off-balance sheet obligations were disclosed in the data provided.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be assessed; we cannot conclude on accrual vs cash earnings quality this quarter. Free cash flow and capex are unreported; therefore FCF coverage of dividends is not calculable. Total comprehensive income (144.1) substantially exceeded net income (27.5), indicating significant OCI items (FX/valuation) that are non-cash and non-operational; reliance on OCI is not a substitute for operating cash generation. Working capital balances (AR 557.0; inventories 151.4) appear manageable relative to revenue, but without OCF we cannot confirm working capital inflows/outflows or potential end-quarter timing effects.

Dividend Sustainability

Dividend data are largely unreported; the calculated payout ratio of 417.7% indicates that dividends likely exceeded current-period earnings capacity due to depressed net income. With FCF unreported, coverage cannot be validated; reliance on balance sheet strength (cash 1,421.6 and low short-term debt) may support near-term commitments but is not a long-term solution if earnings remain weak. Policy outlook likely favors stability, but sustainability hinges on a recovery in operating profit and normalization of the tax rate. Given ROIC at 1.4% and ROE at 0.7%, improving cash earnings is necessary to underpin dividends without eroding balance sheet flexibility.

Risk Assessment

Business Risks:

• Title pipeline and product cycle risk in consumer entertainment affecting volume/mix and margins
• Pachislot/pachinko regulatory and cycle volatility impacting shipments and profitability
• Execution risk on SG&A control given high fixed-cost base (SG&A 39.4% of sales)
• Intangible asset and goodwill impairment risk amid weak profitability
• High effective tax rate (57.3%) depressing net income

Financial Risks:

• Low ROIC (1.4%) and ROE (0.7%) indicate poor capital efficiency
• Dependence on non-operating items: non-operating income equals 176.9% of net income
• Potential FX valuation swings impacting OCI and comprehensive income
• Unreported cash flow metrics limit visibility on cash generation and dividend coverage

Key Concerns:

• Sharp operating margin compression (~1,049 bps YoY) with revenue down only 5%
• Net margin collapse (~1,288 bps YoY) alongside tax drag
• Asset turnover at 0.31 constraining returns despite moderate leverage
• Visibility on OCF/FCF is lacking, impeding assessment of earnings quality

Investment Implications

Key Takeaways:

• Material profit compression with operating margin down to ~5.0%
• Net income -90.9% YoY due to operating weakness and high taxes
• Liquidity is robust (current ratio 362%, cash 1,421.6) and leverage moderate (D/E 0.71x)
• Capital efficiency is poor (ROIC 1.4%, ROE 0.7%); improvement needed
• Non-operating items and OCI cushioned optics but not core earnings

Metrics to Watch:

• Operating margin recovery and SG&A ratio trajectory
• Effective tax rate normalization
• Pipeline cadence and unit economics in key titles/machines
• OCF and FCF once disclosed (OCF/NI, FCF after capex)
• Impairment indicators for goodwill/intangibles
• Net interest balance and interest coverage

Relative Positioning: Within Japan entertainment/gaming peers, the company shows stronger liquidity and moderate leverage but currently lags on profitability and capital efficiency due to significant operating margin compression; recovery depends on execution and cycle normalization.

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