[Earnings Deep Dive] DLE Inc. (3686) Q1 FY2027: Results of Structural Reform and the Roadmap to Full-Year Operating Profitability via "AI x Anime"

DLE Inc. (Securities Code: 3686) has released its financial results for the first quarter of the fiscal year ending March 31, 2027 (April 1, 2026 – June 30, 2026). The company has completed its "scrap and build" structural reform, marking a transition toward concentrating management resources on its core business: content production. This report provides a multi-faceted analysis of the Q1 earnings highlights, the growth strategy for achieving full-year profitability, and the progress of its new animation production business utilizing generative AI.

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1. Q1 Earnings Highlights: Dramatic Improvement in Gross Margin and Significant Reduction in Losses

In the first quarter of FY2027, consolidated net sales were 205,906 thousand yen (down 31.5% YoY) ; however, gross profit grew to 101,341 thousand yen (up 18.6% YoY) . While top-line revenue temporarily declined due to the reorganization and divestiture of non-core businesses and consolidated subsidiaries, the shift toward a high-profitability business structure has resulted in an increase in absolute gross profit.

[Slide Commentary: Changes in Profit Structure as Shown in the Consolidated P&L]

The slide above clearly illustrates the transformation of the company's financial structure. Most notably, the gross profit margin surged by 20.8 percentage points, rising from 28.4% in the same period last year to 49.2% . The dramatic decline in the cost-to-sales ratio is attributed to the elimination of unprofitable projects and increased efficiency in core content production. Furthermore, through the rigorous implementation of structural reforms, Selling, General and Administrative (SG&A) expenses were reduced by 115,747 thousand yen to 192,153 thousand yen (down 37.6% YoY) . Consequently, the operating loss narrowed by 131,647 thousand yen, from 222,459 thousand yen in the same period last year to 90,812 thousand yen , representing a significant improvement in the bottom line. Additionally, the company is advancing asset efficiency in parallel, such as recording a 45 million yen gain from the sale of investment securities.

From a balance sheet (B/S) perspective, cash and deposits increased to 897,645 thousand yen , and the company maintains high financial soundness with an equity ratio of 71.0% . With sufficient liquidity and safety secured, the foundation is now set to deploy management resources into future core business investments.

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2. Full-Year Earnings Forecast: A Dramatic V-Shaped Recovery and Path to Operating Profitability

The company is targeting a return to operating and net profitability in its consolidated earnings forecast for the fiscal year ending March 31, 2027.

[Slide Commentary: FY2027 Earnings Forecast Summary]

This slide outlines the company's plan for a dramatic V-shaped recovery for the full fiscal year. Full-year net sales are projected at 1,740,000 thousand yen (up 18.9% YoY) . Despite the impact of a significant reduction in consolidated subsidiaries in the previous year, the company plans to secure revenue growth through a strong backlog of orders in its core content production business. Regarding profitability, the company aims to pivot from the 595,127 thousand yen operating loss recorded in the previous fiscal year to an operating profit of 100,000 thousand yen and an ordinary profit of 100,000 thousand yen . Furthermore, with the inclusion of gains from the sale of investment securities, the company plans to achieve a net income attributable to owners of the parent of 150,000 thousand yen . The basis for this full-year profitability lies in the fixed-cost reduction effects from the completion of non-profitable business divestitures, combined with an increase in order volume.

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3. Supply-Demand Gap in the Anime Industry and DLE's Unique Positioning

The company's return to its core business is driven by structural environmental changes in the animation industry. While global demand for Japanese anime is exploding—supported by government policies prioritizing entertainment exports—the production front is facing severe challenges:

• Soaring production costs and extended production timelines
• Chronic shortage of production staff and creators
• Increased risk of bankruptcy for production companies due to high costs and delays
• Broadcast delays at key stations (e.g., six anime series could not be aired during the October 2025 season alone)

This has created a significant supply-demand gap where the "supply side cannot keep up with massive demand." The market is desperate not only for high-quality anime that takes years to produce but also for a "system capable of producing content speedily and reasonably." DLE's solution to this market challenge is its proprietary technology and approach: "Alternative Anime + AI Video."

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4. The "Two-Pillar" Strategy Driving Growth (Alternative Anime & AI Video)

To efficiently capture the expanding production demand, the company is concentrating its management resources on the following "two pillars."

[Slide Commentary: DLE's Two Pillars of Content Production]

The slide above is a crucial diagram showing the production portfolio that will serve as the source of the company's future competitiveness.

1. Alternative Anime
   • Features : "Mid-range quality" without excessive drawing costs, overwhelming "short delivery times," and high "price competitiveness."
   • Objective : To serve as a "safe haven" for broadcasters and streaming platforms struggling with long production times and high costs, thereby securing reliable order opportunities.
2. AI Video
   • Features : Order acquisition via "OBETA AI STUDIO," high-speed production and diverse expression through AI, and IP development via "AI Frogman Shokai."
   • Objective : To realize mass production of content and cost innovation that transcends the constraints of traditional production lines by leveraging generative AI technology.

Through these two pillars, the company has established a differentiated position that clearly sets it apart from traditional anime production studios.

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5. Specific Achievements and Pipeline for Each Strategy

(1) Successes in Alternative Anime

• First Title: "Hiroshi Nohara: The Way of Lunch" (Aired in the October 2025 season)
  • Won the Anime Buzz Award at the "Japan Anime Trend Awards 2025" and the Grand Prix at the "Niconico Video Awards 2025," generating significant buzz.
  • Contributing to secondary licensing revenue through various streaming platforms, with new inquiries continuing to arrive.
• Second Title: "Ko-3 Ashibe QQ Goma-chan" (Aired in the April 2026 season)
  • Highly acclaimed by families and long-time fans, steadily building a track record.
• The pipeline for the third title and beyond is underway , functioning as a continuous revenue base.

(2) New Developments in Generative AI x Popular IP and "Fast Entertainment"

• Launch of the new project "AI Frogman Shokai"
  • Fusing popular IPs such as "Eagle Talon," "Kofun Gal Coffy," and "Dokan-kun" with generative AI.
  • By combining FROGMAN's creativity with the latest AI technology, the company achieves mass content generation in an ultra-short period .
  • Changing the dimensions of IP production speed through short-form video deployment, building a new monetization axis called "Fast Entertainment."
• All-AI Anime "Mochi Mochi Panpaka Pants"
  • The first spin-off of the popular character "Panpaka Pants," produced entirely using AI.
  • Exclusive early streaming on Prime Video has been confirmed, demonstrating a new content business model using AI x popular IP.

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6. Strengthening Sales Capabilities and Proprietary Talent Development

Organizational measures to execute and promote these strategies are also progressing steadily.

• Expansion of Sales Opportunities : In June 2026, the company exhibited for the first time at "Content Tokyo 2026," one of Japan's largest content business trade shows. By strongly promoting Alternative Anime and "OBETA AI STUDIO," the company has secured concrete business negotiations and consultations from major corporations, advertising agencies, and TV stations.
• Proprietary Talent Development : Providing young creators with early practical experience through short-form and alternative projects. The company is internalizing a new generation of directors and creators who are proficient in AI tools, aiming for continuous productivity improvement.

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7. Comprehensive Analysis and Summary of the Growth Roadmap

The company's growth roadmap is very clear:

• STEP 1 (Completed) : Scrap and build (divestiture of unprofitable subsidiaries, fixed cost reduction, AI investment)
• STEP 2 (Q1 of current fiscal year onwards) : Expansion of the two pillars (doubling Alternative Anime titles + expanding AI video contract orders)
• STEP 3 (Full-year target) : Achievement of full-year operating profitability

The Q1 FY2027 financial results demonstrate that the structural reforms implemented to date are bearing fruit, clearly reflected in the dramatic improvement in gross profit margins and significant suppression of SG&A expenses . The key points to watch moving forward will be how much the "Alternative Anime" and "AI Video" pillars—which turn the industry-wide challenges of production delays and high costs into tailwinds—can expand order volumes, and the progress toward the full-year operating profit target.