CTW (CTW) Earnings Call Transcript & Summary

Patrick Federle, Head of Investor Relations at CTW. Hosting today's call is Ryuichi Sasaki. Founder, Chief Executive Officer and Chairman of CTW and Patrick Liu, Chief Financial Officer of CTW. 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 expectation 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 filed yesterday and our 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 earnings release and our Form 6-K filed yesterday and on the Investors section of our website. With that, I will now turn the call over to Ryuichi.

[Foreign Language]

Thank you, Ryuichi, and good morning and good evening, everyone. As Ryuichi mentioned, prioritizing returns over top line growth is central to our strategy. From a financial standpoint, the ongoing discipline guided full priorities in fiscal year '26, moving quickly when new titles underperformed, keeping our advertising spend above our return presold, investing selectively in our platform and global expansion and maintaining a strong debt-free balance sheet. The results reflect those [indiscernible]. Revenue declined but segment profit grew ROAS stayed above our 100% benchmark. Adjusted EBITDA remained positive, and we ended the year with $14.4 million in cash and cash equivalents and no debt. Revenue for fiscal year '26 was $82.5 million compared with $90.4 million in fiscal year '25, a decrease of 8.7%. Gross in-game purchases were $96.8 million, down 9.5% year-over-year. We launched 15 new games during the year and ended fiscal year '26 with 42 [indiscernible] titles. However, the titles we launched in the first half performed below our expectations and the several mature titles continued moving through the later stages of their life cycle. We saw success in the launch of High School of the Dead, Day Zero, which was released towards the end of April, meaning slightly over 3 months of contribution was recognized in fiscal year '26. So the strong user traction we have seen to date in Asia and North America with this title is only partially realized in results. Within our user base, the decline in activity was concentrated among nonpaying users. Monthly active user declined 33% to approximately 2.26 million from approximately 3.38 million last year, while paying monthly active users increased slightly to approximately 89,100 compared with approximately 88,500 last year. As a result, the ratio paying monthly active users to monthly active users improved to 3.95% from 2.62%. Paying daily active users declined 13% compared with a 7% decrease in overall daily active users, while average revenue per paying monthly active users declined to $90.60 from $100.74. We believe these trends partly reflected the weaker performance of our first half launch. ROAS was 105.8% in fiscal year '26 compared with 116.4% in fiscal year '25 while lower than last year, ROAS remained above our 100% benchmark, meaning the in-game purchases generated by newly acquired users continued to exceed the advertising spend used to acquire them. This supports our long-term ROAS-focused marketing strategy. We also continued to make progress on geographic diversification. Revenue from users outside of Japan increased 8.2% to $29.7 million or 36% of our total revenue, up from 30.4% last year. Revenue from users in South Korea increased to 12.4% to $10.5 million and revenue from users in Taiwan, Hong Kong and Macau collectively increased 71.2% to $8 million. It is encouraging to see this momentum in Asia outside of Japan. Combined revenue from users in these markets grew 31.9% to $18.5 million or 22.4% of total revenue, up from 15.5% last year. And we believe the appeal of Anime across the region gives us room to build on this growth. Revenue from users in North America, which includes the United States and Canada, was $6.2 million compared with $7.5 million last year. Our result [indiscernible] to use acquisition spending on underperforming trials. Building our presence in North America is a long-term effect, and our New York team established in February 2026 is focused on partnerships, user acquisition in that region, localization adverse and corporate communications. We expect to see a return to growth as we issue new titles and continue to implement our presence and growth initiatives in the region. Revenue from users in Japan decreased 16.1% to $52.8 million. Japan remains our largest market. But expanding our international mix remains a key strategic priorities. Turning to expenses and profitability. Cost of revenue increased to 29.2% year-over-year to $28.5 million, driven largely by higher personnel or sourcing and server and software costs, along with higher revenue share to IP holders and amortization, partly offset by lower payment [indiscernible] fees and the absence of the prior year prepaid-[indiscernible]. These increases reflect our continued investment in the team, infrastructure and [indiscernible] and resources that support our platform and game operations. General and administrative expenses increased to 37.9% to $11.7 million, primarily reflecting the buildup of our corporate and administrative functions as a public company. The opening of our New York state office and approximately $0.5 million of Taiwan business tax expense, a portion of which related to prior periods. We believe the core infrastructure required of the public company is now largely in place, and we expect the general and administrative expenses to increase only modestly in absolute terms over time as the business scales. Research and development expenses decreased 31.2% to $3.8 million. Sales and marketing expenses decreased 17.2% to $45.9 million driven by $11.4 million or 21.7% reduction in advertising expense to $41 million. Advertising declined at more than twice the rate of revenue. This reduction was intentional. Once titles did not meet our internal performance thresholds, we scale back marketing rather than pursue top line growth at an attractive returns. As a result, segment profits increased 3% to $32.3 million or 33.4% of in-game purchase, compared with $31.3 million or 29.3% of in-game purchases in fiscal year '25 as lower advertising expense more than offset lower in-game purchases and higher server costs. We reported an operating loss of $7.3 million compared with an operating loss of $1.1 million in fiscal year '25. Net loss was $4.1 million or $0.07 per share compared with net income of $3.8 million or $0.06 per share last year. Fiscal year '25 net income included a $4.7 million contingent gain on recovery of [indiscernible] assets and fiscal year '26 included an income tax benefit of $1.7 million. There are also two items worth noting for the year. First, we recorded $2 million of noncash share-based compensation expense compared to none in fiscal year '25, most of which related to share options granted to directors, executive officers and certain employees in December 2025 in recognition of their long-term commitment to the company and first in successfully launching our IPO. Second, following our early adoption of ASU 2025-26 effective August 1, 2025, we capitalized the $4.1 million internal use software development costs for our G123 platform. Both items are relevant to understanding the year-over-year financial profile and the level of ongoing investment in the business. On a non-GAAP basis, adjusted EBITDA was $3.5 million or 4.2% of revenue compared with $8 million or 8.8% revenue in fiscal year '25. We remain adjusted EBITDA positive while reducing advertisement spend and continuing investing in headcount, platform development and our global expansion initiatives. Turning to cash flow and balance sheet. Net cash used in operating activities was $3.2 million compared with $0.1 million of cash provided in fiscal year '25. This change reflected in our net loss and working capital movements, including $6 million of advances to our game developers as we invest in future content. Net cash used in investing activities was $4.7 million included the $4.1 million of capitalized software development costs. We ended fiscal year with $14.4 million in cash and cash equivalents up from $12.2 million at July 31, 2025 and supported by $10.6 million of net proceeds received at the closing of our IPO. We believe this positions us to continue investing selectively in content, systems and international growth while maintaining strong liquidity and financial discipline. Overall, fiscal year '26 was a year of softer top line performance, but it was one that demonstrated the responsiveness of our operating model. We acted quickly when new type of performance did not meet expectations, reduced advertising significantly while keeping ROAS above our 10% benchmark, grew segment profit and maintained positive adjusted EBITDA and a debt-free balance sheet with a vision to return to sustained growth in fiscal year 2027. Thank you for your time and interest in CTW. I will now turn the call back to Pat for a Q&A session.

[Operator Instructions] So with that, we'll now take a quick pause, and allow the queue to build. Okay. It looks like we have a few questions here. So with that, we're going to begin with Vincent Fernando from 01 Research.

All right. Thank you so much. So I have a few questions actually. I'll try to ask them to save some time. So the first question is your long-term [indiscernible] on current Anime, older catalog titles and original games. From what you're seeing, what kind of property works, what kind of Anime property works best relative to cost? How does that shape who we choose to license next?

Thank you very much, Vincent. So I'm going to respond to this question. So first of all, I do want to let you know. So from our perspective, we do not necessarily view newer Anime IP or establish the catalog or original games as inherently more attractive than the other ones, maybe. I think each anime title, each Anime IP has its unique characteristics, cost structures and potential audiences. So from the company perspective, when we evaluate the content opportunities, we consider a range of factors, including the pottery and engagement of the underlying fan base, expected monetization relative to the cost of licensing and launching the game. Including -- which include the prepaid royalties, the royalty rate, when we share rate and advance to the game developers. So as of the end of fiscal year '26, we had partnerships with 38 Anime IP holders and had 48 IP licenses. I think from our prior experiences loaning the IP-based, the games, we see that the age were the recency of IP does not necessarily determine its commercial potential. So for example, High School of Dead Day Zero, which is based on Manga first serialized back in 2006, and adapted for television in 2010, generated approximately $6 million in this first 3 plus -- a little bit over 3 months its launch. And the game itself actually became the highest revenue-generating games on our platform over that period. So I think this is actually a great example that demonstrates that establishes catalog IP with dedicated fund communities, can continue to offer meaningful opportunities, even though the Manga, the TV adoption of this Anime was almost over 10 years ago from right now. And also, beyond the popularity of the original IP, we also learned that successful game performance also depends heavily on how well the game captures the characteristics that fans appreciate about original content. And beyond that, the users also care a lot about overall quality of the gameplay, the overall user engagement and monetization. So that means even sometimes even a very highly popular IP may not necessarily translate into a very successful game if the game experiences did not meet the users' expectations. So we also recognize that sometimes different genres and different gameplay mechanics may appeal to different audiences and geographic markets. So from our perspective, I think looking ahead, we intend to maintain a diversified approach to content for selection, balancing well-known Anime IPs and properties, established catalog IPs and opportunities involved of original games or different game genres. So from the company side, we will continue working closely with our IP and the developer partners to evaluate the commercial potential of each of [indiscernible] and draw our experiences from prior launches and game operations to help us to continue grow the platform and grow the business. I think from the business side, the objective is very clear. So we don't just want to secure the most recognizable IPs. But to us, we want to identify the content that can deliver an attractive user engagement and sustainable monetization relative to the investments required.

Got it. My next question is -- just in regards to how you look at games when they launch. So what I understand is you have systems where you read a new game launch and within a couple of weeks, you're receiving data. And you're steering advertising towards titles that seem to be performing better based on various metrics. So I just want to dig into that a little bit. What does a title -- what do you look for in a title when it launches that shows you that, okay, I should put more ad spend on that title. And then so how do you -- and kind of as a corollary to that, how do you decide and to lean into the user acquisition on the platform in different titles? So I guess just get some visibility on what you look for in the metrics right after the launch.

Okay. Got it. Thank you for the question again. So from our perspective, after our games launched, in the very first few weeks after launch, we look closely at engagement and monetization data, something like user acquisition and character creation data, the first retention paying user conversion and some other early monetization trends and also, most importantly, the expected ROAS of our advertisement spending on the new launches. We believe that these indicators help us assess how well a game is attracting and retaining users and also most importantly, how [indiscernible] convert interest into actual spendings, and whether it's performance supports additional marketing investment. So we typically try to form an initial view of a new launch within the first few weeks. But after the game launches and operated on the platform, we definitely will continue monitor the performance of the games and refine our assessment as more operating data became available to us. So from a company perspective, our approach to use acquisition is basically, as you said, and also we talked to this a lot, during the earnings call. So we approached user acquisition driven by the actual performance of individual games rather than the single platform-wide advertising decision. So basically, that means for is individual title that launched and operated on the platform, we actually evaluated actual and expected ROAS and other operating KPIs to determine whether we want to invest additional marketing investment and whether those additional investments is actually justified. So once a game demonstrate attractive returns. We generally seek to increase advertising investment to capture additional monetization opportunities, but sometimes you see for whatever reason, some of the games has not performed as we expected. The performance falls below the expectation. At that moment, we will adjust the spending accordingly. I think from what we have -- this is actually exactly what we have experienced for fiscal year '26. And also, we do believe this discipline will continually get us into fiscal year '27.

Yes. I noticed, like, for example, the latest results, maybe some of that is playing out because obviously, maybe you pulled back a bit because I saw like the total MAUs come off a bit, but actually paying MAUs still very stable. So I thought maybe that's some of the dynamic there. My last question is -- so Japan has new smartphone rules, as I've understood. And then we've seen some U.S. court rulings on app store payments that's kind of starting to loosen app stores hold on app payments. And so are you seeing increased interest maybe from publishers who maybe previously felt they were locked into the app stores now looking for in browser game distribution through you. Does that -- is there any change now in how you're speaking to potential partners because of these new developments for app stores?

Thank you. So this is actually a quite interesting question. So we have actually talked with a lot of industry players on the gaming -- studio game development partner side. So we believe over the past few years, we have observed some increased interest from game developers, publishers in distribution channels outside of the traditional app store ecosystem I mean, through today, we still believe that app store remain as one of the important distribution channels for a lot of the game distributors and gaming studios. But the app stores have become increasingly competitively today, especially considering the large number of games right now available through app stores. So I think as a result of that, we do see some of the more and more developers who are actually increasingly interested in exploring some alternative ways to reach users improves some distribution efficiencies and manage platform with the cost. So we believe that the recent regulatory developments, as we mentioned, actually further support this broader trend that we observed from our side. I think this actually gives some unique advantages to our broader-based platform. Because G123 was designed from the beginning as a browser-based gaming platform and operating independently from the traditional app door ecosystem. So our game can be accessible globally across devices, and we don't need app downloads, and we process in-game purchases, through established third-party payment to providers that are connected directly with our platform. And also beyond just the global accessibility, we also offer some additional benefits to game developers and game studios. So beyond just the distribution, we also offer our game development partners, user acquisition and marketing capabilities. And we also support game developers in designs, in their games, and we provide the localization services, and we also give them access to an established Anime and Manga IPs. So from our perspective, we believe these in combination represent some very attractive value for all the game developers and publishers in the world. So I think this basically also means that from the from company side from CTW side, we believe the growing interest in the alternative distribution models and the channels actually create some additional opportunities for CTW to expand our developer and publisher relationship network. And in particular, I think this may allow us to engage with some larger and more established games developers that have traditionally focused more on just the native app distribution. So I think that's actually what we expect to see in the near future.

But just a super quick follow-up on that. You mentioned that new -- other game developers now may be more open to this outside the app store. What about IP owners. Were there some Japanese IP holders, maybe they kind of for some reason, they always want to be inside the app stores and now maybe are there new -- there are opportunities for new IP owners to work with you?

Yes. So from our side, I think based on our observation, we do see there are more and more IP holders that became more interesting [indiscernible] exploring other potential monetization channels and distribution channels. So -- but from our side, we don't necessarily think that there are direct connections or incentives for the IP holders to seek for distribution channels outside of traditional app stores, just because of the fact of the recent regulatory updates. Right? From our perspective of views, we have been seeing, and I think this is actually what will continue to be part of the truth is from IP holder side, they always want have a diversified monetization channels and approach. So that means from our -- because we are -- the platform we have built is totally outside of the traditional app store ecosystems. So that's always going to be something valuable for the IP holders to consider when they explore the different monetization opportunities beyond the traditional app store description channels. So I think from that perspective of views, from our side, we will continually contact and connect the way new IP holders, whenever opportunities come and beyond of just the traditional Japanese Manga and Manga IP holders Anime IP holders we may, from time to time, it depends on the market conditions. It depends on the opportunities. We may also exploring other IP holders outside of Japan as well.

So our next question here will come from Steve Silver at Argus Research.

Okay. Great. So Anime NYC was more than a month ago now, and it took place after the end of fiscal 2026. So I was just curious if you could talk or provide any color around whether there was any meaningful change website traffic noticed in the weeks following the conference? And just if you could talk a little bit about the types of professionals that attended that conference that you think may provide business development opportunities moving forward?