CTW (CTW) Earnings Call Transcript & Summary

Good morning, and good evening. Thank you for standing by. Welcome to the CTW Earnings Conference Call for the first half of fiscal 2026, representing the 6 months ended January 31, 2026. Please note that today's conference may be recorded. My name is Matt Chesler from FNK IR. Hosting today's call is Ryuichi Sasaki, CTW's Founder, CEO and Chairman; and Patrick Liu, CTW's CFO. Before we begin, please be aware that today's discussion may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These statements reflect management's current expectations and involve risks and uncertainties that could cause actual results to differ materially. CTW undertakes no obligation to update these statements, except as required by law. For a detailed discussion of risks and uncertainties, please refer to our Form 20-F and other filings with the SEC. We will also discuss certain non-GAAP financial measures. These measures should not be viewed as a substitute for GAAP results and may differ from those used by other companies. Reconciliations to the most comparable GAAP measures can be found in our Form 6-K, our earnings release and on the Investors section of our website. With that, I'd now like to turn the call over to Ryuichi for a video and prepared remarks.

[Foreign Language]

Thank you, Ryuichi, and good morning, everyone. As Ryuichi discussed, the first half of fiscal year 2026 was a softer period than we expected from a content performance standpoint. Financially, our priorities were clear: respond quickly to underperforming game launches, allocate capital with discipline, product monetization efficiency and preserve balance sheet flexibility as we continue investing for long-term growth. Revenue for the first half was $40.9 million compared with $41.2 million in the prior year period, a decrease of 0.7%. Gross in-game purchases were $43.6 million, down 1.1% year-over-year. These year-over-year changes were relatively modest on the surface. Yet, they reflect an important shift in the underlying drivers of performance during the half. We launched 7 new games during the period, but as Ryuichi noted, those launches performed below our expectations, and at the same time, several mature titles continued moving through later stages of their lifecycle and overall user activity declined. That said, one of the more important takeaways from the first half is that even in this softer revenue environment, the quality of monetization across the platform remained resilient. Monthly active users declined to approximately 2.0 million from approximately 3.3 million last year. However, paying monthly active users remained stable at approximately 75,700, compared with approximately 76,700 last year. As a result, the conversion rate improved to 3.82% from 2.35%. In addition, we also saw improvements across key monetization and efficiency metrics. ARPDAU increased to $18.90 from $16.31. ARPU increased to $4 from $2.50 and ROAS improved to 109% from 106%. In practical terms, traffic declined primarily among non-paying users, while the platform continued to attract and retain a higher quality paying audience and generate more efficient returns on advertising spend. We also continued to make gradual progress on geographic diversification. Revenue from users outside Japan increased to 31.6% of total revenue, up from 28.8% last year. Japan remains our largest market, but expanding our international mix remains a key strategy priority. Turning to expenses and profitability. Cost of revenue increased at 39.6% year-over-year to $13.9 million. General and administrative expenses increased 13.6% to $5.1 million, and research and development expenses increased to 25.3% to $1.7 million, reflecting ongoing investments in platform capabilities and organizational infrastructure and additional costs associated with operating as a public company. At the same time, sales and marketing expenses declined 15.2% to $22 million, driven primarily by a $5.9 million reduction in advertising spend. This reduction was intentional, reflecting the disciplined response Ryuichi described earlier. When new titles did not meet our internal performance thresholds, we quickly scaled back, making marketing rather than pursuing top-line growth at unattractive returns. This responsiveness is a core strength of our operating model. As a result, we report an operating loss of $1.7 million compared with a half million loss in the first half of 2025. Net loss was $1.2 million compared with a net income of $0.6 million last year. While we are not satisfied with reporting a loss, it is important to view the net result in the context of a period in which revenue underperformed expectations, combined with the continued investment in infrastructure and long-term capabilities while maintaining minimal cost flexibility. There are also two period-specific items worth noting. First, we recorded approximately $1.9 million of share-based compensation expense related to stock options granted in December 2025. Second, following early adoption of ASU 2025-'26, we capitalized approximately $2.1 million of qualifying confirmed new software and cloud implementation costs. Both items are relevant to understanding the period-over-period financial profile and the level of ongoing investments in the business. On a non-GAAP basis, performance remained solid. Adjusted EBITDA increased to $4.3 million from $3.7 million, representing a 10.5% margin, and segment profit increased to $18 million from $11.6 million. These metrics highlight that the core economics of the platform remain healthy and responsive to disciplined cost management despite softer revenue and a GAAP net loss. Turning to cash flow and the balance sheet. Net cash used in operating activities was $0.4 million, compared with $2.6 million of cash generated in the prior year. This change was driven primarily by working capital movements, including additional advances made to game developers and higher pre-paid royalties as we invest in future content and platform support. We ended the period with $90.5 million in cash and cash equivalents, up from $12.2 million at July 31, 2025, supported by the proceeds from our IPO. We believe this positions us well to invest in selectively content, systems, and international growth while maintaining strong liquidity and financial discipline. Overall, the first half of fiscal year 2026 was a period of softer top-line performance, but also one that demonstrated the responsiveness of our operating model and the robustness of our financial monitoring systems. We acted quickly when new title performance did not meet expectations. We improved key monetization and efficiency metrics. We maintained positive adjusted EBITDA, and we ended the half with a solid cash position and the flexibility to continue investing for the long term. Thank you. I will now turn the call back to the operator for the Q&A sessions.

[Operator Instructions] The first question is going to be from Steve Silver from Argus Research.

I was hoping you guys could discuss a little bit about how the company is using technology to build in the capabilities of reacting quickly to changing user behavior. Just trying to get a sense as to any of the metrics you look at and how much time you give to a new title before making the determination that a title is underperforming and requires a change in the marketing strategy?

Okay, thank you. Thank you very much for the question, Steve. So in regards of your question, I think you asked about how our technology works and how we actually monitor new game launches and how we react in regards to the early performance indicators of a new game after it was initially launched, right? So basically, I think we have been communicated with the market before the company. We have internally developed a set of AI-backed systems and tools to help us monitor the performance of each new launch games as well as every live games, that is our live our G123 platform. And one of the very important system that we are using internally is the AI-backed advertisement amendment system, and also the user data monitoring tool that we are able to see the real-time performance of each individual game that is actually live on G123 platform. So for example, for each of the new games that launch on our platform, we basically -- most of the time we do a relatively softer launch. Means we may spend a small amount of advertisement in day 0 to day 3, immediately after the game is launched, and during that period of time, we're going to continually monitor the performance, including paying user retention, paying user conversion rates, and all those key KPIs that we believe indicates the potential of any new game launched on the platform. And based on the results of those games basically between day 0 to day 3, the marketing team of the company going to decide, is this really a hit title or this is somehow performed not as expected? And based on that result, we will further adjust advertisement spending as well as strategies for day 4 and 7, and we're going to continue monitor the performance of that game through that period of time. And eventually, we're going to roll into day seven to day 14, and then continue adjusting the advertisements proactively. I would say that is how internally we use our AI-backed tools to monitor game performance and adjust our advertisement marketing cost allocation and spending.

So in the context of the trend in terms of active users, do you get a sense as to whether a lot of that has been attributable to the customer excitement over some of these new underperforming launches? Or do you get a sense of whether there's any macroeconomic trends affecting those results as well?

So in regarding of these new titles that we launched for the first half of the fiscal year 2026, I don't think it's as simple as say, "Oh, it's a bad IP," or, "It's a single game format problem." I think broadly speaking, we believe the first half underperformance was primarily related to monetization quality and unit economics rather than traffic acquisition or initial user interest. I think several of the new titles generated reasonable engagement and user acquisition metrics initially, but the payer conversion, monetization depths, and long-term return on advertisement spends profile were below our internal expectations. I think in some cases we believe certain titles attracted broader casual audiences with lower monetization behavior relative to several of our stronger performing historical launches. As a result, while top of funnel traffic and engagement were acceptable, the long-term monetization efficiency did not justify aggressively scaling advertising investment. And also, we think that it is actually very important to recognize gaming performance can vary significantly by timing, audience fit, monetization design, live operations execution, and broader market conditions, even while underlying IP awareness is strong. So I think basically that is the observation we have been seeing from the first half of the current fiscal year.

Great. And one more, if I may. The prepared remarks or the press release cited 20 titles in the backlog. I'm curious as to whether there's any context around the number within that 20 in terms of maybe titles that might move into pre-registration in the back half of the fiscal year?

Yeah. Basically regarding of the future releases, the pipeline we have, so far you will be able to see on our website we have, I believe 6 games that is actually -- 5 or 6 games that is actually in pre-registration. And for the remaining of those titles, we are still working very actively with the app holders, with the game developers to assure that the game is actually under development and also is actually in -- or we're making the progresses in the correct way. But because the factor that for any of those games that we haven't really released their pre-registration for the game, so we are -- because of the contract we have with the app builders, we are still not able to explicitly disclose the specific name or IP related to those games. But we would say that a lot of those games are associated with very popular anime IPs, and some of them are very, also, like, recently popular in North American region. So we do have a lot expectations when those games are ready to be released to the public.

Our next question is from Vincent Fernando from Zero One Research.