KONAMI GROUP (9766) FY2027 Q1 Earnings Report

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Executive Summary

The company achieved higher revenue and earnings, with a significant improvement in profitability driving results, including a substantial expansion in the operating margin from 28.6% in the previous year to 35.0%. Revenue was ¥1,295.2B (¥969.6B in the previous year, +33.6% YoY), Operating Income was ¥452.9B (+63.3%), and Net Income attributable to owners of the parent was ¥325.7B (+64.2%). The primary driver of revenue growth was the expansion of the core Digital Entertainment Business (+36.4%), while the main factor behind earnings growth was an improved cost mix resulting from the higher gross margin (54.2%, up approximately +470bp from 49.5% in the previous year).

Factors Affecting Performance

【Revenue】Company-wide Revenue was ¥1,295.2B (+33.6%). By segment, the Digital Entertainment Business, which accounted for 77.1% of the revenue mix, led overall growth with Revenue of ¥998.3B (+36.4%). The Gaming & Systems Business recovered significantly, with Revenue of ¥123.8B (+64.9%); the Arcade Games Business recorded Revenue of ¥40.7B (+9.8%); and the Sports Business recorded Revenue of ¥126.2B (+4.6%), with each segment achieving higher revenue. By region, Japan grew to ¥1,037.0B (¥712.1B in the previous year, +45.6%), raising its share of the revenue mix to 80.1% (73.4% in the previous year), while Europe declined to ¥39.2B (¥58.5B in the previous year, △32.9%), indicating differences in supply and demand across regions.

【Profit and Loss】Gross Profit was ¥702.4B, and the gross margin improved to 54.2%, approximately +470bp from 49.5% in the previous year. SG&A expenses were ¥255.4B (SG&A ratio of 19.7%, improved from 20.9% in the previous year), growing by only +25.8%, below Revenue growth of +33.6%, resulting in positive operating leverage. Consequently, the operating margin expanded by approximately +6.4pt to 35.0% (28.6% in the previous year). Net financial income was positive at ¥9.3B (compared with a negative ¥0.2B in the previous year), boosting Profit Before Tax, which reached ¥464.5B (+66.6%). After deducting income taxes of ¥138.8B (effective tax rate of 29.9%), Net Income was ¥325.7B (+64.2%). Both Revenue and earnings increased.

Segment Analysis

By segment, the Digital Entertainment Business formed the core of company-wide performance, with Revenue of ¥998.3B (77.1% of the mix) and Operating Income (segment profit) of ¥438.7B (98.1% of the mix), while maintaining a high margin of 43.9%. The Gaming & Systems Business showed a clear recovery, with Revenue of ¥123.8B (+64.9%) and Operating Income of ¥8.3B, representing a significant swing to profitability from a loss in the previous year and a margin of 6.7%. The Arcade Games Business generated Revenue of ¥40.7B (+9.8%) and Operating Income of ¥9.3B (+58.8%), reflecting high profitability with a margin of 22.8%. The Sports Business recorded Revenue of ¥126.2B (+4.6%) and Operating Income of ¥7.6B (+79.3%), with earnings improving more than revenue and a margin of 6.1%. Company-wide Operating Income of ¥452.9B represents the level obtained by adding and subtracting adjustments for corporate expenses and other items (△¥17.2B) and other income and expenses (+¥5.9B) from total segment profit of ¥447.0B. The company is characterized by its high degree of dependence on the Digital Entertainment Business.

Key Financial Indicators

【Profitability】The operating margin improved to 35.0% (28.6% in the previous year, +6.4pt), the Net Income margin improved to 25.1% (20.4% in the previous year, +4.7pt), and the gross margin improved to 54.2% (49.5% in the previous year), indicating that an improved content mix is supporting profitability. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥163.4B, representing only 0.50x Net Income of ¥325.7B. Increased income tax payments (¥301.2B, +52.1% YoY) and higher working capital delayed cash conversion. 【Investment Efficiency】Quarterly ROE was 5.6%, based on Total Assets of ¥7,517.7B and Net Assets of ¥5,797.9B. 【Financial Soundness】The Equity Ratio was high at 77.1% (75.4% in the previous year, +1.7pt). Against interest-bearing debt of ¥399.4B, the company maintained ample liquidity, with Cash and Cash Equivalents of ¥3,161.1B.

Cash Flow Analysis

Operating Cash Flow was ¥163.4B (+55.4% YoY), Investing Cash Flow was △¥83.8B, primarily reflecting capital expenditures of ¥86.9B and maintaining an investment level roughly in line with the previous year, and Financing Cash Flow was △¥203.6B, mainly due to dividend payments of ¥187.2B and lease liability repayments of ¥16.3B. Free Cash Flow (Operating Cash Flow + Investing Cash Flow) therefore amounted to only ¥79.6B. Cash and Cash Equivalents were ¥3,161.1B, down ¥114.5B from the end of the previous fiscal year. The growth in Operating Cash Flow (+55.4%) was below Net Income growth (+64.2%), leaving the ratio to Net Income at only 0.50x. The primary factors were increased income tax payments (¥301.2B, compared with ¥198.0B in the previous year) and working capital pressure from an increase in inventories (△¥34.0B) and a decrease in trade payables (△¥47.6B). Meanwhile, contract liabilities increased by +¥51.6B, indicating that the accumulation of deferred revenue supports the recognition of future Revenue.

Quality of Earnings

Current-period Operating Income of ¥452.9B and Profit Before Tax of ¥464.5B included almost no special or temporary gains and losses. Recurring operating results were at the center of performance, with other income and expenses contributing a net gain of only ¥5.9B. Net financial income of ¥9.3B, comprising financial income of ¥10.8B and financial expenses of ¥1.5B, boosted Profit Before Tax and improved from the negative ¥0.2B net financial result in the previous year. Comprehensive Income was ¥340.2B, a difference of ¥14.5B from Net Income of ¥325.7B. The primary factor was a +¥15.1B foreign currency translation adjustment for foreign operations, reflecting foreign exchange factors associated with the translation of overseas subsidiaries rather than the underlying business itself. The +¥51.6B increase in contract liabilities indicates an accumulation of deferred revenue, while inventories increased by +¥34.0B. The somewhat widening time lag between accrual-based earnings and cash generation is a point to consider when evaluating earnings quality.

Earnings Forecast and Guidance

Progress toward the full-year forecasts—Revenue of ¥5,050.0B, Operating Income of ¥1,430.0B, and Net Income of ¥1,010.0B—was 25.6% for Revenue, 31.7% for Operating Income, and 32.3% for Net Income. Profitability is therefore progressing at a pace above the simple quarterly allocation of 25%. There were no revisions to the earnings or dividend forecasts during the quarter. Compared with the full-year plan’s Revenue growth rate of +2.3% and Operating Income growth rate of +5.2%, the growth rates achieved in Q1—Revenue +33.6% and Operating Income +63.3%—were substantially higher. Although the full-year plan may have been set conservatively, progress must be monitored in light of fluctuations associated with the timing of new title launches and business seasonality from the second half onward.

Shareholder Returns

Dividends paid during the quarter totaled ¥187.2B, representing payment of the year-end dividend for FY2026. No share repurchases were conducted (¥0.0B). The full-year dividend forecast is ¥112 per share. Based on forecast EPS of ¥745.08, the Payout Ratio is approximately 15.0%. As no share repurchases are planned, the Total Return Ratio is also expected to be at the same level. Given the financial base of an Equity Ratio of 77.1% and Cash and Cash Equivalents of ¥3,161.1B, constraints on the company’s ability to make recurring dividend payments appear limited.

Risk Factors

1. Business Segment Concentration: The Digital Entertainment Business accounts for 77.1% of the revenue mix and 98.1% of company-wide profit on a segment-profit basis, resulting in a high degree of dependence on the performance of major titles and the timing of new title launches.

2. Cash Flow Quality: Operating Cash Flow was ¥163.4B, only 0.50x Net Income of ¥325.7B. Increased income tax payments (+52.1%), higher inventories (+¥34.0B), and lower trade payables (△¥47.6B) delayed cash conversion.

3. Regional Demand Fluctuations: Japan’s share of the revenue mix increased to 80.1% (73.4% in the previous year), while Europe declined by △32.9% YoY to ¥39.2B, indicating variations in demand across regions.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The company’s Operating Margin and Net Income Margin both substantially exceed the industry median, placing it among the top performers in terms of profitability.

Growth and Capital Efficiency

The Revenue growth rate also substantially exceeds the industry median, placing the company among the top performers in terms of growth.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin improved by +6.4pt to 35.0% (28.6% in the previous year), while the gross margin expanded to 54.2% (49.5% in the previous year). The quantitative improvement in profitability resulting from a better digital content mix has been confirmed.

2. Progress toward the full-year forecast was 31.7% for Operating Income and 32.3% for Net Income, exceeding the simple quarterly allocation of 25%. This indicates that earnings are progressing ahead of schedule.

3. Operating Cash Flow remained at only 0.50x Net Income, with income tax payments and changes in working capital—particularly inventories and trade payables—constraining cash conversion. The time lag between earnings growth and cash generation should be monitored going forward.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥5,533–¥5,878 at ±1% for the Cost of Equity, and ¥5,663–¥5,761 at ±0.1 for ω.

Notes:

• Net Assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This figure 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. The industry benchmarks are reference information compiled by the company based on publicly available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

Konami Group delivered an exceptionally strong FY2027 Q1, with growth materially ahead of its full-year plan. Revenue rose 33.6% year on year to ¥129.5bn. Operating income increased 63.3% to ¥45.3bn. Net income attributable to owners increased 64.2% to ¥32.6bn. The operating margin expanded 640bp year on year to 35.0% from 28.6%. Gross margin improved 470bp to 54.2%, reflecting a favorable sales mix and strong profitability in digital content. The SG&A-to-revenue ratio declined by approximately 120bp to 19.7%, demonstrating substantial operating leverage as revenue scaled. Net margin expanded 460bp to 25.1%. Digital Entertainment was the primary earnings engine, generating ¥99.8bn of external revenue and ¥43.9bn of segment profit. Gaming & Systems also returned to profitability, with segment profit of ¥0.8bn versus a ¥0.2bn loss a year earlier. The company’s annualized ROE was 22.5%, supported principally by high profitability rather than balance-sheet leverage. Q1 revenue reached 25.6% of the full-year forecast, close to the standard 25% seasonal run rate. Operating-income and net-income progress were stronger at 31.7% and 32.3%, respectively, indicating an initially conservative annual earnings trajectory or a particularly strong first-quarter release schedule. Cash conversion was weaker than accounting earnings, however, as operating cash flow was ¥16.3bn against net income of ¥32.6bn. This 0.50x OCF-to-net-income ratio is the principal quality concern, largely reflecting ¥30.1bn of income-tax payments and working-capital outflows. The balance sheet remains exceptionally robust, with a 77.1% equity ratio, ¥316.1bn of cash, and a current ratio of approximately 4.0x. The FY2027 dividend forecast of ¥224 per share implies a forecast dividend payout ratio of about 30.1%, leaving ample capacity for investment and shareholder distributions if cash conversion normalizes.

Profitability Analysis

Annualized DuPont ROE was 22.5%, decomposed into a 25.1% net profit margin, 0.689x asset turnover, and 1.30x financial leverage. The dominant contributor to the high annualized ROE is the net margin, rather than financial leverage; the balance sheet is conservatively capitalized. Annualized asset turnover is reasonable for a group combining high-margin digital content with asset-heavy sports facilities, gaming equipment, and arcade operations. The most significant year-on-year operating change was margin expansion: operating margin rose to 35.0% from 28.6%, while net margin rose to 25.1% from 20.5%. Gross margin increased to 54.2% from 49.5%, and SG&A grew 25.8%, slower than 33.6% revenue growth, producing meaningful operating leverage. Digital Entertainment, the core business by segment profit contribution, produced a 43.8% segment margin, up from 38.0%; its ¥16.0bn profit increase accounted for most of the group’s ¥17.1bn increase in aggregate segment profit. Arcade Games improved to a 21.5% segment margin from 14.7%, while Sports improved to 6.0% from 3.5%. Gaming & Systems moved from a ¥1.7bn segment loss to a ¥8.3bn profit, a substantial positive swing, although its 6.7% margin remains materially below Digital Entertainment. The tax burden was 0.701, equivalent to a 29.9% effective tax rate, which is consistent with a normal corporate tax profile. The interest burden of 1.026 reflects net finance income of ¥9.3bn, rather than interest-related pressure. Finance income of ¥10.8bn was only 0.8% of revenue, so the quarter’s profit expansion was predominantly operational. Equity-method investment income was ¥2.4bn and was not material to the group earnings profile. Sustainability of the current margin level depends primarily on continued high-margin digital-content monetization and the durability of the Gaming & Systems turnaround.

Growth Assessment

Revenue growth was broad-based but highly concentrated in Digital Entertainment. Digital Entertainment external revenue increased 36.4% year on year to ¥99.8bn, representing 77.1% of consolidated revenue, while segment profit rose 57.4% to ¥43.9bn. Gaming & Systems revenue rose 64.9% to ¥12.4bn and returned to a ¥0.8bn segment profit from a ¥0.2bn loss. Arcade Games revenue grew 9.8% to ¥4.1bn and segment profit increased 58.8% to ¥0.9bn. Sports revenue increased 4.6% to ¥12.6bn, while segment profit rose 79.3% to ¥0.8bn. Geographic growth was led by Japan, where revenue rose 45.6% to ¥103.7bn. Asia and Oceania revenue increased 39.1% to ¥5.6bn, while US revenue increased 2.7% to ¥16.3bn. European revenue declined 32.9% to ¥3.9bn, creating a regional concentration risk despite strong consolidated growth. Product revenue increased 19.6% to ¥30.0bn, while service and other revenue increased 38.5% to ¥99.5bn, supporting the improvement in gross margin and underscoring the importance of service-oriented and digital revenue streams. The company retained its full-year forecast of ¥505.0bn revenue, ¥143.0bn operating income, and ¥101.0bn net income. Q1 progress was 25.6% for revenue, 31.7% for operating income, and 32.3% for net income, versus a standard first-quarter benchmark of 25%. The earnings progress rates are favorable but are less than 10 percentage points above the benchmark, so they do not by themselves establish a forecast revision case. Full-year guidance implies comparatively modest growth of 2.3% in revenue, 5.2% in operating income, and 1.0% in net income, making the maintenance of digital engagement and the continuation of Gaming & Systems recovery central to the outlook.

Financial Health

Financial health is very strong. Current assets were ¥422.9bn against current liabilities of ¥106.7bn, producing a current ratio of approximately 3.96x, well above the 1.5x healthy benchmark. The quick ratio was approximately 3.75x after excluding inventories, indicating that liquidity does not depend on inventory liquidation. Cash and cash equivalents of ¥316.1bn alone exceeded total liabilities of ¥172.0bn by approximately ¥144.1bn. Total liabilities represented only 22.9% of total assets, while the equity ratio was 77.1%. The reported debt-to-equity ratio was 0.30x, far below the 2.0x threshold for aggressive leverage. Non-current bonds and borrowings were ¥39.9bn, equivalent to only 6.9% of total equity, and finance costs were limited to ¥1.5bn. There is no evident maturity mismatch: current assets substantially exceed current obligations, and cash alone is almost three times current liabilities. Accounts payable declined ¥2.7bn from the prior-year quarter and ¥27.4bn from the fiscal year-end, consistent with lower short-term supplier obligations. Income taxes payable fell ¥169.4bn from fiscal year-end to ¥12.7bn following tax payments, while cash decreased ¥114.5bn over the quarter. Goodwill and intangible assets totaled ¥60.4bn, or approximately 8.0% of total assets, a modest asset concentration for an IP-based entertainment company. Deferred tax assets of ¥36.6bn equaled 6.3% of equity and remain a balance-sheet item to monitor for future recoverability, although the group’s earnings profile currently provides support.

Notable B/S Changes

Cash and cash equivalents: -¥114.5bn versus FY2026 year-end to ¥316.1bn - driven by dividends, capital expenditure, tax payments, and positive but lower-than-net-income operating cash flow; liquidity nevertheless remains very strong. Income taxes payable: -¥169.4bn versus FY2026 year-end to ¥12.7bn - reflects ¥30.1bn of income-tax payments and is the main explanation for weak Q1 operating cash-flow conversion. Other current liabilities: +¥81.7bn versus FY2026 year-end to ¥38.0bn - a material increase requiring monitoring alongside contract-liability growth, although it remains modest relative to total assets. Retained earnings: +¥138.0bn versus FY2026 year-end to ¥448.2bn - Q1 profit of ¥32.6bn more than offset the ¥18.8bn dividend distribution, reinforcing internal capital generation. Inventories: +¥38.2bn year on year to ¥22.8bn (+20.2%) - inventory growth exceeded the 20% monitoring threshold and contributed to working-capital absorption; future conversion into sales is important. Goodwill and intangible assets: +¥46.7bn year on year to ¥60.4bn (+8.6%) - still only about 8.0% of total assets, limiting balance-sheet dependence on intangible-value retention.

Cash Flow Quality

Cash-flow quality warrants attention because operating cash flow was ¥16.3bn, only 0.50x net income of ¥32.6bn and below the 0.8x quality threshold. The principal root cause was substantial income-tax payments of ¥30.1bn, which were close to the quarter’s net income and exceeded the current-period tax expense of ¥13.9bn. Working capital was also a cash outflow: inventories increased by ¥3.4bn, receivables increased by ¥0.8bn, payables declined by ¥4.8bn, and prepaid expenses increased by ¥5.2bn. These outflows were partly offset by a ¥5.2bn increase in contract liabilities, which is supportive of future revenue conversion. The reported accruals ratio was 2.2%, below the 5% high-quality benchmark, suggesting that balance-sheet accrual risk is limited despite the weak quarter-specific OCF/net-income conversion. Free cash flow was positive at ¥8.0bn after ¥8.7bn of capital expenditures. Capital expenditure was broadly stable year on year, while depreciation and amortization increased to ¥6.4bn; capex was approximately 1.35x depreciation and amortization, indicating ongoing reinvestment rather than underinvestment. However, free cash flow did not cover the ¥18.7bn dividend payment in the quarter. The cash shortfall after dividends was readily absorbed by the ¥316.1bn cash balance and should not be interpreted as a liquidity issue. The quality-alert impact is therefore moderate rather than structural: tax timing and working-capital movements depressed Q1 conversion, but sustained OCF below net income would reduce internally funded capacity for dividends and investment.

Dividend Sustainability

The FY2027 full-year dividend forecast is ¥224 per share, unchanged from the company forecast. Against forecast EPS of ¥745.08, the implied dividend payout ratio is approximately 30.1%, comfortably below the 60% sustainability benchmark. No share repurchases were recorded during the quarter, so the dividend payout ratio is the appropriate shareholder-return measure. Cash dividends paid were ¥18.7bn in Q1, compared with ¥8.0bn of reported free cash flow. Quarterly FCF coverage was therefore insufficient, but the payment is covered by the group’s very large net cash position and appears to relate to shareholder distributions determined from prior-period earnings. Annualized Q1 earnings are not required to support the stated full-year payout assessment because management has provided full-year EPS guidance. Retained earnings increased to ¥448.2bn despite the quarter’s ¥18.8bn dividend distribution, demonstrating substantial accumulated distribution capacity. The main determinant of dividend resilience is not leverage but the normalization of operating cash conversion after elevated tax payments and working-capital investment. With cash and equivalents of ¥316.1bn, low debt, and a 30.1% forecast payout ratio, the stated dividend appears financially sustainable under the company’s current earnings plan.

Risk Assessment

Business risks include Digital Entertainment concentration: the segment generated 77.1% of consolidated revenue and approximately 98% of aggregate segment profit before headquarters adjustments. A slowdown in game engagement, live-service monetization, content releases, or consumer spending would have an outsized group impact., Regional concentration and uneven demand: Japan revenue grew 45.6% and accounted for 80.1% of group revenue, while Europe declined 32.9%. Sustained weakness outside Japan could limit geographic diversification., Gaming & Systems execution risk: the segment returned to profit with ¥0.8bn of business profit after a ¥0.2bn loss. The turnaround is encouraging but its 6.7% margin remains far below Digital Entertainment, leaving earnings sensitive to product mix, casino investment cycles, and regulatory conditions., Industry-specific content-cycle risk: gaming and digital entertainment earnings can be affected by title timing, platform policy changes, competition for user engagement, intellectual-property popularity, and rapid technology shifts..

Financial risks include Cash-conversion risk: the 0.50x OCF/net-income ratio is below the 0.8x alert threshold. High tax payments and working-capital outflows explain the current gap, but persistence would weaken the translation of reported profit into distributable cash., Working-capital risk: inventory, receivables, prepaid expenses, and lower payables together absorbed cash, partly offset by higher contract liabilities. Monitoring whether inventory and prepayment growth converts into future revenue and cash is important., Deferred-tax-asset recoverability: deferred tax assets totaled ¥36.6bn. Their value depends on sufficient future taxable income, although current profitability provides meaningful support..

Key concerns include Highest priority: whether Digital Entertainment can sustain its 43.8% segment margin and strong service-revenue growth after an exceptional Q1., Highest priority: whether operating cash flow catches up with net income as tax-payment timing normalizes and working-capital investment stabilizes., Medium priority: whether the Gaming & Systems return to profitability can be sustained through customer investment cycles and regulatory environments., Medium priority: whether the decline in European revenue is temporary or indicative of weaker content or distribution momentum in that market..

Investment Implications

Key takeaways include Q1 operating income growth of 63.3% significantly exceeded revenue growth of 33.6%, driven by a 640bp operating-margin expansion to 35.0%., Digital Entertainment is the core business, combining 36.4% revenue growth with a 43.8% segment margin and generating the overwhelming majority of segment profit., Gaming & Systems shifted to profit, providing a secondary source of earnings improvement, although its margin remains comparatively low., The capital structure is highly conservative, with a 77.1% equity ratio, approximately 4.0x current ratio, and ¥316.1bn of cash., The principal counterweight to strong accounting earnings is weak quarterly cash conversion, with operating cash flow at 0.50x net income..

Metrics to watch include Digital Entertainment revenue growth, segment margin, and the service-and-other revenue mix., Gaming & Systems revenue growth and progress from its 6.7% segment margin., European revenue trajectory following the 32.9% year-on-year decline., OCF/net-income conversion, tax payments, inventory movements, prepaid expenses, receivables, payables, and contract-liability trends., Progress against full-year operating-income guidance, with Q1 already at 31.7% of the ¥143.0bn forecast., Free-cash-flow coverage of dividends and the sustainability of the ¥224 per-share annual dividend forecast..

Regarding relative positioning, Konami exhibits an unusually favorable combination for a diversified entertainment group: digital-content-scale profitability, a high 35.0% consolidated operating margin, low balance-sheet leverage, and substantial liquidity. Relative to businesses with large physical network or venue footprints, its earnings profile is supported by high-margin service and digital revenue; however, this also increases exposure to content-cycle variability and concentration in the Digital Entertainment franchise portfolio.