Avex (7860) FY2027 Q1 Earnings Report

Quick View

Executive Summary

The first quarter of FY2027 saw higher revenue but lower earnings, with the key characteristic being that revenue growth did not translate into profit growth. Revenue increased to ¥3.493B (+6.7% YoY), while Operating Income declined to ¥0.128B (-12.4%), Ordinary Income to ¥0.137B (-4.7%), and Net Income to ¥0.049B (-46.0%), with the decline progressively widening at each level. The primary factors were that substantial revenue and profit growth in the Anime and Video Business partially offset declines in the Music Business, while increased extraordinary losses and a high corporate tax burden significantly depressed final profit.

Factors Affecting Business Performance

【Revenue】Revenue was ¥3.493B (+6.7% YoY), driven by the rapid expansion of the Anime and Video Business. Revenue from this business doubled to ¥0.888B (+106.3%), raising its revenue mix from 12.8% in the previous year to 25.4%. Meanwhile, the Music Business, the largest segment accounting for 73.5% of consolidated revenue, continued to decline, with revenue of ¥2.569B (-7.8%); the Overseas Business also contracted to ¥0.063B (-14.2%).

【Profit and Loss】Operating Income was ¥0.128B (-12.4%), and the operating margin declined to 3.7% from 4.5% in the previous year. Operating Income in the Anime and Video Business surged to ¥0.119B (+1946.6%), accounting for approximately 93% of consolidated Operating Income, while profit in the Music Business plunged to ¥0.035B (-77.7%), and the Overseas Business recorded a loss of ¥0.026B, expanding from a loss of ¥0.015B in the previous year. Net Income fell to ¥0.049B (-46.0%), due to extraordinary losses of ¥0.026B (¥0.008B in the previous year) and an increase in the effective tax rate. In conclusion, the Company achieved higher revenue but lower earnings.

Segment Analysis

The Anime and Video Business improved substantially, with revenue of ¥0.888B (+106.3% YoY), Operating Income of ¥0.119B (+1946.6%), and a profit margin of 13.4%, becoming the central driver of consolidated performance. The Music Business declined significantly, with revenue of ¥2.569B (-7.8% YoY), Operating Income of ¥0.035B (-77.7%), and a profit margin of 1.3%, indicating that it is losing the profitability it had as the core business in the previous year. The Overseas Business recorded revenue of ¥0.063B (-14.2% YoY) and an Operating Loss of ¥0.026B, with the deficit expanding from a loss of ¥0.015B in the previous year. Consolidated profit is now highly dependent on the Anime and Video Business, creating a situation in which quarterly performance is susceptible to fluctuations in the composition of projects within that business.

Key Financial Metrics

【Profitability】The operating margin was 3.7%, down from 4.5% in the same period of the previous year, while the net profit margin also narrowed to 1.4% from 2.3%. The gross margin was 28.7%, slightly down from 29.5% in the previous year, while the SG&A ratio remained almost flat at 25.0%.【Cash Flow Quality】Cash and deposits were ¥3.401B, accounting for 31.3% of total assets and ensuring ample liquidity. Inventories increased substantially from the previous year to ¥0.191B, indicating that the accumulation of work in progress is affecting the quality of working capital.【Investment Efficiency】Annualized ROE remained at 3.7%, while intangible assets increased to ¥0.647B (+30.1% YoY), reflecting expanded investment in content and rights-related assets.【Financial Soundness】The equity ratio remained at a stable level of 48.2%, while long-term borrowings remained low at ¥0.067B, indicating limited financial leverage.

Cash Flow Analysis

As detailed data from the statement of cash flows has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥3.401B, almost unchanged from ¥3.431B in the same period of the previous year, indicating that liquidity levels have been maintained. Meanwhile, inventories increased substantially from the previous year, and intangible assets also increased by 30.1%, suggesting that investment in content production and rights acquisitions is likely the primary use of funds. Interest-bearing debt was limited to long-term borrowings of ¥0.067B, indicating a low level of dependence on external financing. Net assets were ¥5.241B, slightly down from the previous year, while a decrease in retained earnings and a modest increase in the equity ratio were observed as changes in the capital structure.

Earnings Quality

There was a substantial divergence between Ordinary Income of ¥0.137B and Net Income of ¥0.049B, primarily due to the recognition of extraordinary losses of ¥0.026B and a high corporate tax burden of ¥0.062B. Corporate income taxes and other taxes accounted for approximately 55.6% of pre-tax income of ¥0.111B, substantially exceeding the normally expected tax rate and acting as a temporary factor depressing final profit. Non-operating income and expenses were primarily recurring items such as interest income and dividend income, with no significant anomalies observed; non-operating income was ¥0.013B and non-operating expenses were ¥0.004B, both relatively small. Comprehensive income was ¥0.058B, with the difference from Net Income of ¥0.049B limited, although foreign currency translation adjustments of +¥0.013B provided an uplift. The structure in which most consolidated profit depends on a single segment, the Anime and Video Business, requires monitoring from the perspective of earnings quality and sustainability.

Earnings Forecast and Guidance

The full-year Operating Income forecast is ¥0.600B (+46.9% YoY), with no revisions to either the earnings forecast or the dividend forecast. Q1 Operating Income of ¥0.128B represents progress of 21.3%, slightly below the 25% benchmark for even quarterly progress. Q1 progress toward the full-year Net Income forecast of ¥0.320B was only 13.3%, 11.7 percentage points below standard progress. Whether extraordinary losses and the high tax burden subside, and whether profitability in the Music Business recovers, will be key areas of focus for achieving the full-year plan.

Shareholder Returns

The full-year dividend forecast is ¥50.00 per share, and the full-year EPS forecast is ¥75.28, implying a forecast payout ratio of approximately 66.4%. This figure is a payout ratio based solely on dividends in the numerator and is not a total return ratio including share repurchases. The previous year's actual dividend was ¥25, so the full-year plan implies a dividend increase; however, Q1 Net Income progress was only 13.3%, making the accumulation of full-year profit a prerequisite for the dividend plan. The financial structure of cash and deposits of ¥3.401B and interest-bearing debt of ¥0.067B provides support for the Company's ability to pay dividends in the near term.

Risk Factors

1. Deterioration in the profitability of the core business: The Music Business, which accounts for 73.5% of consolidated revenue, deteriorated significantly, with revenue down -7.8% YoY and segment profit down -77.7%. If profitability in the largest business is slow to recover, sustained growth in consolidated profit will be difficult to achieve through the strong performance of the Anime and Video Business alone.

2. Concentration of profit in a single segment: The Anime and Video Business accounts for approximately 93% of consolidated Operating Income, creating a structure in which performance is highly susceptible to fluctuations in the composition of projects in this business, including productions, distribution, and licensing. The Overseas Business also saw its deficit expand, with revenue down -14.2% and an Operating Loss of ¥0.026B.

3. High tax burden and extraordinary losses: The effective tax rate was high at approximately 55.6%, putting pressure on the conversion of pre-tax income into Net Income. Extraordinary losses also increased to ¥0.026B from ¥0.008B in the previous year, making the extent to which these temporary factors subside a key focus for future Net Income recovery.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Within the peer group, both profitability metrics were below the median, with the operating and net profit margins positioned somewhat below the industry level.

Growth and Capital Efficiency

The revenue growth rate was also slightly below the industry median, remaining at a mid-range level of growth within the IT and communications industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. While revenue increased by +6.7% YoY, the operating margin declined by approximately 79bp and the net profit margin declined by approximately 111bp, highlighting that revenue growth has not translated into improved profitability.

2. The Anime and Video Business expanded to 25.4% of the revenue mix and generated approximately 93% of consolidated Operating Income. As profit declines in the core Music Business and losses in the Overseas Business continue to expand, the increasing dependence on a single business is a structural change in the earnings profile that warrants close monitoring.

3. Temporary and non-recurring factors, including an effective tax rate of 55.6% and extraordinary losses of ¥0.026B, significantly pressured Net Income and explain the 13.3% Q1 progress toward the full-year Net Income forecast. Whether these factors subside will be a key point to confirm in future earnings results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,092–¥1,153 at Cost of Equity ±1%, and ¥1,118–¥1,124 at ω±0.1.

Notes:

• Net Income is substantially compressed relative to Operating Income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (Net Income ÷ Operating Income 53%). This value reflects that compression at face value; if the factors are temporary, normalized earnings may be higher than this.
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used; there is a timing difference from 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 solely from publicly disclosed data; this 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.)

---

This report is an earnings analysis document automatically generated by AI through analysis of 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.

---End of Report---