CTW

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 six months ended January 31st, 2026. Please note that today's conference may be recorded. My name is Matt Schussler from FNKIR. 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. CCW 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 20F 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 6K, our earnings release, and on the investor section of our website. With that, I'd now like to turn the call over to Ryuichi for a video and prepared remarks.

Good morning, everyone, and good evening. Thank you very much for joining us today. Today's meeting will be the first meeting after the summit. As a top-level company, we will continue to improve corporate value through global development, focusing on stable business operations and high transparency. First, I would like to explain the business history. In 2016, we released seven new games, with 35 titles at the end of the year. This continuous global expansion reflects the wide range of anime and IP content and the high accessibility of horror-based models. In terms of finance, the total cost of the game was $48.6 million, and the sales value was $40.9 million. Both were reduced by about 1% in the same year. The main reason was that the release of the new game, the release of the title, was not as expected. As a result, the content of the game was not as expected. On the other hand, our company has made rapid adjustments to the cost of advertising investment and operation, even though sales are down. We have continuously analyzed user involvement, profitability, and marketing efficiency in the company. Based on these, we are flexible in adjusting advertising investment and cost distribution. As a result, sales and marketing costs decreased by 15% in the previous year, while advertising costs were reduced by 24%. We are not doing a simple sales growth, but an operation that focuses on the effect of the investment body. If the expected results are not seen, we are quickly reviewing the measures. In addition to sales decreases, The increase in the cost of operation of the new title A investment and the increase in the cost of operation as a senior company, as well as the influence of the river, led to a loss of $1.7 million and a loss of $1.2 million. As a company, we accept this result, but we think that we have been able to adjust the loss range to a certain extent by promoting control. At the end of the year, the balance sheet was $19,500,000. We have maintained a stable financial foundation based on the payment funds provided by the IPO. The sales cash flow has been reduced to $400,000, In addition to business factors, it is due to the continuous investment of the infrastructure and organization system. We believe that this is a turning point for the future growth of our company. Since the beginning of this year, we have released four new titles, including the school's wooden books and the hanging scrolls. We are still in the early stages, but as for the initial figures, there is a tendency for improvement compared to the paper machine titles. In addition, additional titles such as the one-man drug store and the shunner of the drug store are also on the way. In terms of regional development, about 70% of the paper machine sales will be in the Japanese market, but we believe that there is a great potential for growth in the overseas market, especially in the North American market. As part of this initiative, we established a base in New York in January, and we are currently building a real-time team for marketing, partnership, and user acquisition. Our browser-based model does not need to be installed and can be accessed immediately, and it also supports multi-device. We believe that this is one of the strengths of our company in the market environment where user acquisition costs rise. In the future, we will continue to invest in human resources and infrastructure, and we will continue to operate with an emphasis on financial stability. Our priority is clear. We will continue to improve the quality and stability of the content pipeline, expand the overseas market, continue to invest in technology systems, and continue to operate with an emphasis on short-term returns. I would like to express my sincere gratitude to the staff and staff of the company for their hard work. I would also like to express my deep gratitude to the shareholders for their support of the company, which has been running for the first year. In addition, I would like to make it clear that the goal of CTW Cayman is to clarify the unification of global brands and NASDAQ takers. Our company is still in the process of growth, but we are confident in our future progressive growth based on expanding our overseas expansion and data analysis pipeline. Thank you very much for your time today. Let's continue with Patrick Liu of CFO.

And good morning, everyone. As Raoji discussed, the first half of fiscal year 2026 was a softer period than we expected from a company performance standpoint. Financially, our priorities were clear. Respond quickly to underperforming game launches. Allocate capital with discipline. protect monetization efficiency, and preserve balance sheet flexibility as we continue investing for long-term growth. Revenue for the first half was $48.9 million compared with $41.2 million in the prior year period, a decrease of 0.7%. Growth in-game purchases were $48.6 million down 1.1% year-over-year. service, yet they reflect an important shift in the underlying driver's performance during the half. We launched seven new games during the period, but as Ryoichi noted, those launches performed below our expectations. 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 75.7 thousand compared with approximately 76.7 thousand last year. As a result, the compensation rate improved to 3.82% from 2.35%. In addition, we also saw improvements across key monetization and efficiency metrics. ARP PDAU increased to $18.19 from $16.31, ARP MAU increased to $4 from $2.50, and RAS improved to 1.09% from 1.06%. 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, strategic priority, turning to expenses and profitability. Cost of revenue increased 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 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 Ryoichi 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 reported 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 net income of 0.6 million last year. While we are not satisfied with reporting the loss, it is important to view the debt result in the context of a period in which revenue underperformed expectations, combined with continued investment in infrastructure and long-term capabilities, while maintaining meaningful 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 2025-06, we capitalized of qualifying internal use software and cloud implementation costs. Both items are relevant to understanding the period-over-period financial profile and the level of ongoing investment in the business. On a non-gap 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 poor economics of the platform remain healthy and responsive to disciplined cost management, despite softer revenue and gap net loss. turning to cashflow and the batting sheets. 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 gain developers and higher prepaid royalties as we invest in future content and platform support. We ended the period with 19.5 million in cash and cash equivalents, up from 12.2 million at July 3, 2025, supported by the proceeds from our IPO. We believe this positions us well to invest selectively in 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, 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. and efficiency metrics. We maintained the 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 and I will now turn the call back to the operator for the Q&A sessions.

Thank you, Patrick. We're now going to open up the call to questions and answers. From Zoom, there are two ways that you can participate. The first is to use the Raise Your Hand icon, which is at the bottom of the screen. Clicking this alert will alert us that you want to be called on to ask a live question, and then you'll be placed in queue and called upon in turn. Just note, you're going to be on mute until you are called upon. The second way to participate in Q&A is to use the Q&A widget, which will allow you to type in and text the question. We'll take questions from there as well, but just note if we run into a time constraint, we'll get back to you if your question is not asked on today's call. With that, we'll now pause for a moment to build the queue. The first question is going to be from Steve Silver from Argus Research. Steve, go ahead.

Everybody, thanks for taking the questions. I was hoping you guys could just 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 on our G1Grade platform. And one of the very important systems that we are using internally is the AI-backed advertisement management 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 G103 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 soft launch, means we may spend small amounts of advertisements in day zero to day three, immediately after the game is launched. And during that period of time, we can continually monitor the performance, including paying user retention, uh pay-per-user conversion rates and all those key kpis that we believe indicates the you know uh potential of any new game launched on the platform and based on the results of those games on the basically between day zero to the day three with the marketing team of the company gonna decide uh is this really a hidden 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 four and seven. And we're going to continue to 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.

Great, thanks. 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 regarding of these new uh titles that launched for the first half of the fiscal year 2006 uh i don't think it's a it's as simple as say oh it's a bad ip or is a single game format problem i think probably broadly speaking we believe the first half and performance was primarily 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 advertising spend 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 investments. And also we think that it is actually very important to recognize gaming performance can vary significantly by timing, audience feed, monetization design, live operations execution, and broader marketing 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 preregistration in the back half of the fiscal year.

Yeah, so basically regarding the future releases, the pipeline we have. So far, you will be able to see on our website, we have, I believe, five or six games that are actually in pre-registration. And for the remaining of those titles, we are still working very actively with the upholders, with the game developers, to assure that the game is actually under development and also is actually making the progresses in the correct way. But because the fact that for any of those games that we haven't really released pre-registration. For the games, we are, because of the contract we have with the developers, 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 They're also recently popular in the North American region. So we do have a lot of expectations of when those games are ready to be released to the public.

Great. Thank you for taking my questions.

Thank you, Steve.

Our next question is from Vincent Fernando from Zero One Research. Vincent, please go ahead with your question.

Hi, so I see that your segment margin expanded from 23.7% to about 37% despite flat in-game purchases. So that shows there's some operating leverage in the platform. I'm just wondering... Can you walk us through maybe the dynamics behind that? Is it that you're able to detect where certain products and in-game purchases are doing well, and you divert resources into that? I just want to understand the dynamics. How are you able to increase the percent of the margin from the in-game purchases? Thank you.

OK, got it. So in regard of the margin of the in-game purchases versus the revenue. So the main factor of that is actually reflecting the new combination or mix of all the games that is actually on our platform. So historically, I believe you probably see that we have been disclosed that there's a significant portion of our revenue is actually generated by the game, which is called Weaved Army. And for that game, we historically has a slightly higher revenue share percentage with the game developer. of that game. And because the fact that along the way of, along the fiscal half year of the fiscal year 2026, we actually launched, historically we have been launching, continually launching new games and the product mix, the game mix has actually changed slightly. So right now the Web Army is actually not the, I mean, it's still the largest game by itself, but the game developer of that game is actually not the largest game developers that generates revenue for us. So for the newer games, we tend to give a slightly lower revenue share to the game developers. And because of the change of the revenue proportion generated by higher revenue share games, the overall average revenue share percentage actually declined year over year. And that explains why you see, yes, even though the top line is softer, but from in-game purchases to revenue, we actually see a slightly improved margin.

Great, thank you. Another question, you know, I see that, you know, your ROAS was 109% and obviously you've optimized your marketing title by title. This kind of maybe goes back to the question that previous asked a bit, but I just want to understand like, how do you you know what what's the is it is that is that kind of a level that's like kind of a a target and then your your engine is kind of optimizing to make sure you maintain that level and and and how quickly does it respond to that and just want to understand how the engine uh operates relative to ros

Yeah, so basically in regards to the ROAS, so internally we do try to set up a target for each individual game. Overall, I think if we just do a quick calculation of the average ROAS target we set for all the games, I think we do expect to see return on advertisement spending over 100%. from the platform in total, overall. And to monitor that, I think I kind of explained that earlier when Steve asked about how we monitor new game launches. So basically it's a step-by-step procedures. And we do early, when we launch a new game, we monitor the first, basically from day zero to day three to see, you know, the early, performance indicators and based on those we adjust our advertisement spending um basically proactively and then continue to monitor the you know return ras plus other you know key kpis that indicate the performance of the game and adjust the advertisement spending at occasion accordingly i think that is the way how we maintain a relatively high res compared to you know the industry average got it

So the other thing I want to go into is basically, despite your top line being a little softer, you've had paying monthly active users sustained. So how does the engine look at paying monthly users? Do you market to them when you see that they're paying so that you redirect spend to the people who are paying? Do you have loyalty programs, things like that? I just want to understand the dynamic, how the engine maintains the paying active users.

So in regard of the paying monthly active users, I would say the main efforts we put as the company to maintain their activity within the games and within our platform is actually not through a lot of the online advertisements because for those paying monthly active users, a lot of time they have already spent a significant amount of time as well as money in the game on our platform so they kind of know us already a while before and to maintain the activity level for those paying mental active users we tend to work a lot with the game developers and ask them to continually update the game content so every single time when the user come back to the game they are seeing something new and they still you know basically keep the interest up right and in regards to the online advertisements a lot of times the online advertisements is mainly to attract the new users and the new paying users so that is also explains a little bit about you know while we do see advertisement expense go down a lot because we're actively monitoring how we should spend the advertising money The payment of active users doesn't really change much, but you see MAU is down a lot, and that is actually a fact of a lot of those new users or non-active users that are attracted by those online advertisements.

Okay, just one more question, if I may. So revenue outside Japan rose from 29% to 32%. You said you've opened the new New York office. I guess with anime culture being increasingly a global trend, even a huge thing in the US, how do you view how large the international opportunity is for CTW over the next two to three years? I mean, I guess if we think about

know where where are you targeting let's say in like two to three years where can work in international revenue go you know as percent of total yeah so basically i think one of the common is a strategy regarding marketing is we definitely i think we have been continually saying this is that we are uh aggressively expanding into the north american region us markets in particular and the the rationale behind of that decision is that we realized that There's a lot of marketing potentials, as you just mentioned. So in regarding to our expectation for the next two or three years, like how we see revenue generally from outside of Japan versus Japan. We do believe that as long as we are able to efficiently do the localization and find new partners in the new regions and adapt our model to the new regions, we should be able to eventually get around, say, 50% to 60% of our revenue generated from regions outside of Japan.

but that also depends on a lot of you know external factors marketing trends and everything great thank you so i'll leave the queue for other questions thank you thank you vincent at this time there are no more questions in the queue so i am going to turn the call back to patrick for some concluding remarks

Okay. All right. Thank you, everyone, for joining today's earnings release for the first half of fiscal year 2096 of CTW. And so we are looking forward to keeping everybody informed as we progress. Again, thank you, everybody.

Thank you, everyone, for joining us today. You may now disconnect your lines.