KLab Q2 FY2026 Earnings Deep Dive: Return to Profitability Driven by 'DQ Smash Glow' and Strategic Diversification into Middle East and AI Sectors

KLab Inc. (Securities Code: 3656) has announced its financial results for the second quarter of the fiscal year ending December 2026 . Reversing the loss-making trend observed through the previous quarter (Q1), the company achieved operating profitability on both a quarterly and first-half cumulative basis , fueled by the successful launch of new titles and effective measures for existing IP. Furthermore, to build a revenue base independent of the gaming business, the company is aggressively pursuing structural reforms, including the establishment of a UAE (Dubai) subsidiary and expansion into AI, defense, and smart home businesses .

This report provides a detailed analysis of the company's recent performance, cost trends, and future growth strategies, centered on 10 key topics extracted from the earnings materials.

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1. Q2 Earnings Highlights: Doubling Revenue and Returning to Operating Profit

In the second quarter of the fiscal year ending December 2026 (Q2 standalone), net sales reached 3,263 million yen (+91.3% QoQ, +113.9% YoY) , and operating profit stood at 493 million yen (compared to a 453 million yen loss in the previous quarter and a 359 million yen loss in the same period last year) , marking a sharp recovery.

The operating loss recorded in Q1 (453 million yen) was fully absorbed in Q2, bringing the cumulative operating profit for the first half to a surplus of 39 million yen . Quarterly net profit attributable to owners of the parent also reached 383 million yen , indicating that progress toward the full-year earnings forecast is on a steady track.

2. Primary Driver of V-Shaped Recovery: Contribution of 'Dragon Quest Smash Glow'

The primary factor driving the significant increase in revenue and profit is the successful launch of the new smartphone game 'Dragon Quest Smash Glow' (DQ Smash Glow) , released on April 21, 2026.

Despite being on the market for only a little over two months, the strong initial momentum generated substantial revenue share from in-game purchases and advertising, significantly bolstering the company's revenue base.

3. Quarterly Performance Trends and Profitability Visualization

Looking at the quarterly performance trends, the surge in sales and profit in Q2 is particularly striking.

[Slide 9: Significance of Quarterly Performance Trends and Background Analysis]

This slide visualizes that the company's performance has reached a clear turning point. Since 2023, the company had experienced declining sales and persistent operating losses; however, in Q2 2026, net sales saw a vertical rise to 3,263 million yen . Of particular note is the dramatic expansion of the bar graph representing domestic gaming business sales (light blue) . This is the result of the immediate contribution of 'DQ Smash Glow' in the domestic market, and the gross profit margin improved significantly from 7.8% in Q1 to 39.3% . This indicates a return to a highly efficient structure where sales growth absorbs fixed costs and generates profit.

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4. Status of Existing Titles and Overseas Sales Trends

Regarding existing flagship titles, the following trends were observed:

• 'BLEACH Brave Souls' : While the sluggish trend from the second half of the previous year continued, performance remained largely flat compared to the previous quarter in both the Japanese and international versions.
• 'Captain Tsubasa: Dream Team' : In addition to stable performance, the title saw revenue growth compared to the previous quarter in both Japan/Korea and overseas, driven by anniversary campaigns and the impact of the FIFA World Cup.

Although overseas sales remained solid at 1,027 million yen (+7.2% QoQ) , the rapid increase in domestic sales from 'DQ Smash Glow' resulted in the overseas sales ratio declining to approximately 30% .

5. Analysis of Cost Structure: Trends in New Title Development and Marketing Investment

In Q2, the cost of sales increased to 1,980 million yen (+26.0% QoQ) , and selling, general and administrative (SG&A) expenses rose to 789 million yen (+34.4% QoQ) . Key factors for the increase include:

• Outsourcing and Subcontracting Expenses : 1,071 million yen (+146.1% QoQ) , due to the recording of one-time costs associated with the development of new titles.
• Advertising and Promotion (PR) Expenses : 300 million yen (+395.1% QoQ) , driven by anniversary initiatives for 'Captain Tsubasa' and partial coverage of promotional costs for 'DQ Smash Glow'.
• Software Amortization : Software assets related to 'DQ Smash Glow' are planned to be amortized on a straight-line basis over the next five years .

6. Organizational Optimization and Financial Position

From a cost-control perspective, the optimization of group headcount is progressing. The number of employees, which exceeded 600 between 2020 and 2021, has been streamlined to 311 (including 262 in the gaming division) as of Q2 2026, contributing to the containment of fixed personnel costs.

Financially, current assets expanded to 8,357 million yen (+21.8% vs. Q1) due to an increase in accounts receivable. Net assets stand at 11,706 million yen , and the equity ratio remains at a healthy level of 78.1% .

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7. New Title Pipeline: Accelerating Global Expansion

To drive earnings growth from the second half onward, a series of new titles utilizing powerful IP are scheduled for release.

[Slide 12: Significance of the Launch of 'My Hero Academia: UNITED SURVIVAL']

This slide is of critical importance for expanding the company's future global revenue. 'HiroSaba' (My Hero Academia: UNITED SURVIVAL), released on August 6, 2026, for all regions excluding mainland China, is based on a globally hit anime IP. Leveraging the recognition of an IP with over 100 million copies of the original manga in circulation and top-tier status on platforms like Crunchyroll and Netflix, it is expected to serve as the main engine to drive the overseas sales ratio back up .

Furthermore, the following pipeline is in place:

• 'JoJo’s Bizarre Adventure: Golden Spirit' : A new title in the 'JoJo's Bizarre Adventure' series for which KLab provided development support. Pre-registrations surpassed 1.5 million , and global distribution began on August 13 via WANDA CINEMAS GAMES.
• 'Uta no Prince-sama Shining Live for Nintendo Switch' : Scheduled for release on December 17 as a console port.

8. Leveraging Advanced Technology: Approaches to AI, VTubers, and Crypto Assets

The company is actively deploying initiatives incorporating advanced technologies as new businesses outside of gaming.

• VTuber Business : Development of talent under the "Yumekairo Production" and the AI VTuber "Yume Minana." The company developed a proprietary video system that uses AI to automatically generate camera work, enabling low-cost, high-quality streaming.
• AI Creator Support : Strengthening investment in AI content by collaborating with AI film directors and establishing a registration system called " KLab AI GUILD ."
• Financial AI Automated Trading : Commenced proprietary trading using an AI automated trading system with Bitcoin on July 1 (currently in the tuning phase). The company aims to expand the scope to FX and stock indices in the future.

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9. Management Diversification: Establishment of 'KLab UAE' and Entry into New Domains

To mitigate the volatility inherent in a single-business model, the company is accelerating the diversification of its business portfolio.

[Slide 18: Significance of KLab UAE Establishment and Diversification Strategy]

This slide illustrates the overall structure of the reform aimed at transforming KLab from a "gaming company" into a "comprehensive entertainment and technology company." The company established a wholly-owned subsidiary, "KLab UAE," in Dubai, UAE, with a clear division of roles from the Japanese headquarters. The roadmap shows entry into non-gaming growth markets, such as anti-drone defense systems and AI smart home businesses (KH Living, a joint venture with HOMMA Group) , with the MENA (Middle East and North Africa) region as the base.

In the defense sector, the company has signed a memorandum of understanding to support the introduction of integrated protection systems that detect and neutralize unauthorized drones using radio jamming technology, and is working to cultivate this as a pillar of its real-world business.

10. Summary and Future Outlook

KLab's second quarter of the fiscal year ending December 2026 was a milestone quarter that marked the beginning of the second act of its growth strategy. The company achieved a significant earnings recovery (return to profitability) driven by the hit 'DQ Smash Glow' , while simultaneously launching major IPs like 'HiroSaba' and 'JoJo', and expanding into new businesses such as defense and AI centered on its Dubai base.

How the streamlining of the cost structure, the launch of new IP, and business diversification targeting the Middle East market will generate synergies remains a key point of interest for long-term corporate value enhancement.