&factory (7035) Q3 FY2026 Earnings Deep Dive Report

and factory has released its financial results for the third quarter of the fiscal year ending August 2026 (September 1, 2025 – May 31, 2026). This report provides a detailed analysis of the company's latest performance trends, the status of each business segment, and its future growth strategies.

Q3 FY2026 Earnings Highlights and Full-Year Outlook

The company achieved quarterly profitability in the third quarter, clearly demonstrating an improvement in profitability. This was realized through cost structure reforms initiated at the beginning of the fiscal year, the reliable monetization of spot projects, and the benefits from popular works. For the third quarter alone, net sales were 783 million yen , and operating income was 45 million yen . Cumulatively, while net sales were 2,208 million yen, operating income remained at ▲45 million yen, but the deficit has significantly narrowed compared to the initial budget.

Regarding the full-year outlook, despite considering the volatility in the progress of development projects in the latter half of the fourth quarter, the company anticipates achieving full-year profitability . Net sales are projected to be between 3,000 and 3,120 million yen, with operating income ranging from 0 to 50 million yen.

The quarterly performance trends are as follows:

This executive summary table clearly illustrates the significant improvement in the company's financial health. In particular, the turnaround to operating profit in the third quarter is a crucial indicator confirming that cost structure reforms and business monetization are steadily progressing. The projection of potential operating profit for the full year suggests confidence in future business operations. The trend in net sales shows a consistent increase quarter-on-quarter, indicating active business operations.

Cost Structure Reforms for Improved Profitability

The company has implemented several cost structure reforms to enhance profitability. Specifically, these include reviewing infrastructure and system costs to maintain appropriate cost levels, efficiently allocating advertising and promotional expenses relative to the top line, reducing cost of sales due to lower iOS fees , and optimizing personnel allocation based on service-specific profit margins. These initiatives significantly contributed to achieving profitability in the third quarter.

Strong Performance and Profit Contribution from the Manga Business

The Manga business is a key segment driving the company's revenue. In the third quarter, the flagship service, " Manga UP! ," saw a significant increase in sales, further boosted by single-project commissioned works. As a result, the Manga business alone recorded net sales of 541 million yen and operating income of 116 million yen , marking a substantial increase in profit .

The quarterly net sales and operating income trends for the Manga business are as follows:

This graph demonstrates the critical role the Manga business plays in the company's performance recovery. The sharp increase in operating income in Q3 FY26, in particular, highlights the significant improvement in profitability centered around "Manga UP!" It is believed that internal factors such as reduced iOS fees and optimized personnel allocation, along with the success of popular works mentioned later, fueled this profit growth. Net sales are also on a steady recovery path, indicating increased business stability.

In terms of Manga app KPIs, while MAU (Monthly Active Users) is driven by "Manga UP!," other services show a declining trend, remaining flat quarter-on-quarter. However, ARPU (Average Revenue Per User) has increased quarter-on-quarter , with the decline in total billing amount having a moderating effect on MAU reduction. Notably, " Yomi no Tsugai ," co-operated with Square Enix on "Manga UP!," became a major hit, leading to a 15% increase in gross sales and an increase in MAU compared to Q3 of the previous year. Numerous animated titles, such as "Yani Suu Futari Behind the Supermarket," are also planned for July 2026.

Furthermore, the Manga business is advancing AI-powered manga production (using Stable Diffusion, Nanobana Pro, ChatGPT, etc.) and R&D for AI-driven animation production . Through a business alliance with Alibaba, the company aims to expand production accuracy and variations using the latest AI, focusing on efficiency and quality improvement in content creation through technological innovation . Additionally, a cross-industry collaboration, " and ST × Soku Yomi ," with the e-book distribution service "Soku Yomi" has been launched to expand the user base by offering new reading experiences.

An example of AI-powered animation production is shown below:

This slide indicates that the company positions AI technology not just as an efficiency tool but as a core for new content creation . The ongoing R&D for animation production using generative AI tools, in response to increasing demand for short animations, is crucially important for establishing future competitive advantages . The business alliance with Alibaba, in particular, holds the potential to significantly transform the future of content production by leveraging global AI technology and expanding production accuracy and variations. This represents a strategic initiative that will lead to the sustainable growth of the Manga business and the creation of new revenue streams.

Entertainment Business Status and Proactive Investment in New Ventures

The Entertainment business saw a favorable trend in its phone fortune-telling service, leading to an increase in profit year-on-year. However, individual fortune-teller services struggled, resulting in an overall decrease compared to the previous year. Net sales were 186 million yen , and operating income was 9 million yen . The segment continues to make proactive upfront investments in new businesses, leading to significant increases in personnel and development costs. Nevertheless, the company is preparing to launch multiple new services next fiscal year and aims to steadily pursue profits during this transitional period .

Notably, the company plans to launch an AI love service in collaboration with Alibaba, utilizing generative AI Qwen. This aims to cultivate a new revenue pillar for the Entertainment business and the Wellness Tech domain.

Progress in Monetization of the Localize Business

The Localize business has seen the full-scale operation of its publishing business's monetization model , demonstrating the ability to recover localization costs for new titles within just one week of release, embodying a "low-cost, high-rotation" model. In March, monthly sales reached twice their previous record , and in May, they maintained a high level, ranking second monthly with one new title plus sales. Furthermore, in the translation and localization outsourcing business, large platformer projects have been secured , with revenue expected to be recognized this quarter. Having completed upfront investments, the business is now transitioning to a phase of actual profitability .

RET Business: Shift to Direct Operation and Store Expansion

In the RET business, the occupancy rate of &AND HOSTEL has remained steady. Net sales for the third quarter were 13 million yen , and operating income was ▲3 million yen . While sales decreased year-on-year due to a one-off real estate advisory fee recorded in the previous period, the actual trend is comparable. The company aims to consistently capture inbound demand and is exploring new store expansions and different types of accommodation asset management.

In August 2026, the company announced a new operational contract for " &AND HOSTEL NAMBA SOUTH ," marking the 20th property to be produced under the brand. This is part of a strategy to maximize profitability by transitioning from the existing consignment model to a direct operation model . Going forward, existing properties will also be sequentially converted to direct operation, with an anticipated increase in net sales and operating income next fiscal year.

Business Policies for FY26 and Beyond (Continued)

The company plans to leverage the strengths of its existing businesses and expand into related peripheral areas to accelerate monetization from FY26 onwards. The main business policies focus on the following three domains:

1. IP Content Tech Domain (Manga Business) : Rights management, Shueisha IP, Soku Yomi, Alibaba partnership, cloud sales, AI utilization, overseas expansion, content production, commissioned development.
2. Wellness Tech Domain (Fortune-telling Business) : Call platform expansion, AI media development, alliance sales.
3. Inbound/Tourism/Entertainment/Other Real Estate Asset Utilization Domain (Hostel/Real Estate) : Expansion of directly managed stores, tourism, multi-facility development leveraging real estate expertise, entertainment, inbound, VTuber, accommodation + α.

These strategies aim to maximize synergies across businesses and create new value through technology utilization .

Capital Policy and Policy on Holdings of Non-Listed Shares

The company continues to monitor its holdings of non-listed shares from the perspective of improving capital efficiency. It plans to flexibly sell and monetize these assets, seizing optimal exit opportunities such as IPOs or M&A, after carefully assessing the progress of business synergies. The cash generated will be reinvested and optimally allocated to growth areas, aiming to maximize corporate value . This represents a strategic approach to effectively utilize assets and accelerate the growth of its core businesses.

Conclusion

and factory achieved quarterly profitability in Q3 FY2026 due to cost structure reforms and strong performance in its core businesses. The Manga business, in particular, is a significant driver of profit, fueled by the success of "Manga UP!" and the efficiency/diversification of content production through AI utilization. While upfront investments continue in the Entertainment business for new ventures, the company aims to cultivate future revenue pillars such as the AI love service. The Localize business has seen its monetization model fully operational, and the RET business is solidifying its revenue base through direct operation and store expansion. The company demonstrates a commitment to deepening and expanding each business domain through technology and strategically monetizing non-listed shares to achieve sustainable growth and enhance corporate value.