Avex (7860) FY2026 Q3 Earnings Report

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Executive Summary

For the cumulative Q3 period, the Company reported higher revenue and a return to operating profitability, resulting in a significant improvement in profitability. Revenue was ¥10.306B (+11.3% YoY), Operating Income was ¥301M (compared with a ¥1.26B loss in the same period of the previous year), Ordinary Income was ¥3.52B (compared with a ¥1.14B loss in the same period of the previous year), and Net Income was ¥3.41B (+45.2% YoY). Operating leverage took effect as SG&A expenses declined 3.3% despite higher revenue, resulting in a return to profitability. Pre-tax profit includes a ¥1.05B gain on the sale of investment securities, indicating that part of earnings was supported by non-recurring items.

Factors Affecting Earnings

【Revenue】Revenue was ¥10.306B, up +11.3% YoY. The Music Business generated ¥8.491B in revenue (82.4% of total revenue, +11.5% YoY), the Animation and Visual Content Business generated ¥1.534B (14.9% of total revenue, +10.8%), and the Overseas Business generated ¥278M (+7.4%), with all major businesses reporting higher revenue. Growth in the Music Business, which accounts for the majority of the revenue mix, was the core driver of company-wide growth.

【Profit and Loss】Gross profit was ¥2.974B (gross margin of 28.9%, improving from 28.5% in the same period of the previous year), while SG&A expenses were ¥2.672B, down 3.3% YoY. Containing expenses at a pace exceeding revenue growth was the primary factor behind the change in the operating margin from negative 1.4% to positive 2.9%. By segment, the Music Business turned around from a ¥900M loss to a ¥2.33B profit, becoming the central contributor to the improvement in consolidated Operating Income. The Animation and Visual Content Business has the highest profitability among the segments, with a segment profit margin of 6.2%, while the Overseas Business continued to report a segment loss of ¥270M. Ordinary Income was ¥3.52B, also benefiting from ¥500M in equity-method investment gain and ¥80M in interest income. Net Income of ¥3.41B includes a ¥1.05B gain on the sale of investment securities (extraordinary income) and a ¥180M impairment loss (extraordinary loss), resulting in a ¥770M net benefit from extraordinary items. The Company reported higher revenue and higher profit.

Segment Analysis

The Music Business generated ¥8.491B in revenue and segment profit of ¥2.33B (profit margin of 2.7%), reversing from a ¥900M loss in the same period of the previous year and becoming the largest driver of the improvement in consolidated Operating Income. The Animation and Visual Content Business generated ¥1.534B in revenue and segment profit of ¥950M (profit margin of 6.2%), demonstrating the highest profitability among the major businesses. While the Overseas Business recorded higher revenue of ¥278M, it posted a segment loss of ¥270M. Following the ¥2.49B increase in goodwill associated with the consolidation of S10 Entertainment & Media LLC, achieving integration benefits and monetization remains a challenge.

Key Financial Indicators

【Profitability】The operating margin of 2.9% improved from negative 1.4% in the same period of the previous year, but remained below 5%. The net profit margin was 3.0%, up from 2.3% in the same period of the previous year. The gross margin was 28.9%, an improvement of 44bp from 28.5% in the same period of the previous year.【Cash Flow Quality】Pre-tax profit of ¥4.29B includes a ¥1.05B gain on the sale of investment securities, indicating that part of earnings depends on non-recurring asset sales.【Investment Efficiency】ROE (annualized) was 8.7%, reflecting the combined level of net profit margin, total asset turnover, and financial leverage.【Financial Soundness】The Equity Ratio was 47.0%, remaining broadly in line with 47.3% in the same period of the previous year. Working capital was positive, with current assets of ¥8.198B against current liabilities of ¥5.719B. Goodwill was ¥2.51B (+¥2.49B YoY), representing 4.8% of net assets, indicating a low degree of dependence on M&A value.

Cash Flow Analysis

Although individual data from the cash flow statement has not been disclosed, an analysis of cash movements based on changes in the balance sheet shows that cash and deposits were ¥3.327B, down ¥2.42B from ¥3.569B in the same period of the previous year. Meanwhile, inventories increased by ¥1.23B YoY, intangible assets increased by ¥2.41B, and goodwill increased by ¥2.49B, indicating that investments related to content production and M&A in the Overseas Business were the primary uses of funds. Investment securities amounted to ¥7.27B, down ¥2.57B YoY, consistent with the ¥1.05B gain on the sale of investment securities recorded during the period. The Company’s return to profitability from operating activities and the generation of funds through asset sales appear to be supporting growth investments and shareholder returns.

Earnings Quality

Pre-tax profit of ¥4.29B for the current period includes a ¥1.05B gain on the sale of investment securities (extraordinary income), while extraordinary losses include a ¥180M impairment loss. The ¥770M net extraordinary gain, representing the difference between the two, is one factor behind the high full-year progress rate and must be evaluated separately from recurring business earnings power. Equity-method investment gain of ¥500M was the primary component of ¥660M in non-operating income, reflecting contributions from the performance of business alliance partners. Comprehensive income was ¥3.58B, and the gap with Net Income of ¥3.41B was limited, although it includes factors affecting changes in valuation differences on other securities, such as a negative ¥210M adjustment related to retirement benefits. The return to profitability at the Operating Income level resulted from recurring factors—revenue growth and SG&A control—and is therefore relatively strong in terms of earnings quality. However, at the Net Income and pre-tax profit levels, it is important to assess the underlying earnings power after excluding the contribution from non-recurring items.

Earnings Forecast and Guidance

Against the full-year Operating Income forecast of ¥3.00B, the Company recorded ¥3.01B in the cumulative Q3 period, representing a progress rate of 100.4%, substantially exceeding the standard progress rate of 75%. Against the forecast of ¥2.80B in profit attributable to owners of the parent, the Company recorded ¥3.07B (progress rate of 109.5%), progressing at a pace above the full-year forecast. However, profit attributable to owners of the parent includes a ¥1.05B gain on the sale of investment securities. Accordingly, part of the progress is attributable to non-recurring factors, which should be taken into account when assessing the potential for an upward revision to the full-year forecast.

Shareholder Returns

The Q2 dividend was ¥25.00 per share, and the full-year dividend forecast is ¥50.00 per share. Based on the average number of shares outstanding during the period of 42.451M shares, the estimated total full-year dividend is approximately ¥2.12B, resulting in a Payout Ratio of approximately 75.8% against the full-year forecast of ¥2.80B in profit attributable to owners of the parent. Cumulative Q3 profit attributable to owners of the parent of ¥3.07B already exceeds the full-year forecast, providing a certain degree of dividend coverage based on earnings. However, as current-period profit includes a gain on the sale of investment securities, the sustainability of the dividend funding base should be assessed together with the level of recurring business profit.

Risk Factors

1. Business concentration risk: The Music Business accounts for 82.4% of consolidated external revenue, creating a structure in which fluctuations in demand for this business could have a significant impact on company-wide performance.

2. Overseas Business profitability risk: The Overseas Business recorded a segment loss of ¥270M against revenue of ¥278M. Goodwill increased by ¥2.49B in connection with the consolidation of S10 Entertainment & Media LLC, making integration benefits, delays in monetization, and the recoverability of goodwill key issues.

3. Earnings quality risk: Pre-tax profit of ¥4.29B includes a ¥1.05B gain on the sale of investment securities, while the operating margin remained below 5% at 2.9%. The recurring earnings buffer excluding non-recurring items is relatively thin.

Industry Benchmark (For Reference; Compiled by the Company)

Key Takeaways from the Earnings Results

1. The combination of an 11.3% increase in Revenue and a 3.3% decrease in SG&A expenses resulted in a turnaround from an Operating Loss of ¥1.26B to Operating Income of ¥3.01B. The Music Business’s return to profitability was the central driver of the improvement, confirming a structure of higher revenue and higher profit accompanied by cost discipline.

2. The progress rate against the full-year Operating Income forecast was 100.4%, but Net Income includes a ¥1.05B gain on the sale of investment securities. When evaluating the Company’s underlying full-year earnings power, the trend in Operating Income excluding non-recurring items is an important point to monitor.

3. Goodwill increased by ¥2.49B YoY to 4.8% of net assets, while the Overseas Business remained loss-making. The integration benefits and progress toward monetization following the consolidation of S10 Entertainment & Media LLC are key structural points of focus going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,072–¥1,131 at ±1% in the cost of equity, and ¥1,097–¥1,103 at ±0.1 in ω.

Notes:

• Because progress of Net Income against the full-year forecast (110%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies progressing ahead of forecast tend to outperform their forecasts. The adjustment may be excessive for businesses with strong seasonality).
• As 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 discrepancy with the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated at a somewhat high level.

(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 the future share price.)

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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. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional as necessary.

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