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Capcom's Past, Present and Future Thorough Verification

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In the fiscal year ended March 31, 2015, consolidated operating income was in line with projections, enabling us to realize from the fruits of reforms conducted during the past three years. At the same time, revised pachislo model certification methods forced us to update the specifications for all pachislo machines under development.
As a result, we lowered our medium-term business goal for cumulative operating income by 10 billion yen. However, reforms in our core Digital Contents business are proceeding on track. This section will explain the verification of issues, measures and results in the current and next fiscal years.

The Past (Past two tears)

Stage 1 (Fiscal year ended March 31, 2013)

Consumer Business Structure Changes

Measures
  • Digital download content strengthened, increased internal R&D ratio
  • Rigorously evaluated work-in-progress game software as part of business restructuring measures

"Capcom's Past, Present and Future Thorough Verification" (previous year)

Stage 2 (Fiscal year ended March 31, 2014)

Online Business (Mobile Contents, PC Online Games) Structure Changes

Measures
  • Rigorously evaluated work-in-progress game software in mobile and online games as part of business restructuring measures
  • Drastically revised PC Online development flow, formulated new development map
The Present (Current fiscal year)

Stage 3 (Fiscal year ended March 31, 2015)

Strengthen Operating and Administrative Framework

Issues

Build a lean operating and administrative framework with absolutely no waste
(Improve cost to sales ratio 6.7 percentage points, raise operating margins 3 percentage points)

Results

Profitability significantly improved

Cost to sales ratio (company-wide) improved 11 percentage points to 59.7%
Operating margins (company-wide) rose 6.4 percentage points to 16.5%

Assumptions at the beginning of the year

As the culmination of these three years, we will build a streamlined operating and administrative framework with absolutely no waste to get the biggest results from the first and second stages.

Results at the end of the year

In terms of achievements, the cost to sales ratio improved 11 percentage points year on year, to 59.7%, while operating margins rose 6.4 percentage points to 16.5%. Both surpassed initial projections of a 6.7 percentage point improvement in the cost to sales ratio and a 3 percentage point improvement in operating margins. This significant improvement to profitability was due to structural revisions in the core Consumer Online business during the past two years, as well as operational and management structure enhancements during the fiscal year under review.

In addition, further progress from stage 1 results includes a digital download ratio improvement from 11% in fiscal 2012, to 18% in fiscal 2013, to 26% in fiscal 2014. Similarly, progress from stage 2 includes Online operating margins improving from a negative in fiscal 2013 to 15-20% in fiscal 2015.

Factors behind these achievements

The main factors behind these achievements include the effects of reduced cost of sales (7 billion yen) and the realization of reductions in selling, general and administrative expenses (1.1 billion yen in fixed expenses).

Specifically, these factors mainly involved the Consumer sub-segment and included (1) the discontinuation of unprofitable title outsourcing in the previous fiscal year, which stopped losses with a 2 billion yen rebound, (2) a tightened focus on highly profitable (major) titles and the impact of 2.1 billion yen from improvements to the employee utilization rate based on the 60-month title development plan and (3) growth in digital sales of catalog titles overseas amounting to 1 billion yen.

Furthermore, fixed expenses within selling, general and administrative expenses decreased 1.1 billion yen due to lower labor costs resulting from restructuring in Europe and the United States as well as a reduction in other general expenses related to facilities.

Issues next fiscal year and beyond

Over the past three years, we have been able to see results from the nearly completed operation and management structure aimed at accelerating our growth strategy. Issues going forward include the achievement of our medium-term business goal for top line sales growth (cumulative operating income of 70 billion yen and operating margins of 20% in the final year ending March 31, 2018). Progress analysis and policies necessary to achieve these goals are explained on the next page.

The Future

Final Stage

Accelerating the growth strategy to achieve medium-term business goals

Issues
  • Sales growth in the highly profitable Digital Contents business.
Measure
  • Strengthen lineup for Consumer, Mobile and PC Online.
  • Expand licensing in Asian regions.

Medium-Term Business Goal Progress Analysis 1: Cumulative Operating Income

In "The CEO's Discussion of Performance Summary and Progress Towards Medium-Term Goals" Q3, we revised the medium-term business goals and updated progress on the Amusement Equipments business, which was the cause of the revision.

Next, in terms of progress during the second year of the plan in the Digital Contents business, which is the key to achieving these goals, cumulative operating income reached 14.7 billion yen, 1.2 billion yen short of the 15.9 billion yen projection.

Analyzing this 1.2 billion yen shortfall by sub-segment, (1) Consumer added 4.9 billion yen, (2) Mobile was negative 3.6 billion yen and (3) PC Online was negative 2.5 billion yen. Although each sub-segment performed well in the fiscal year ended March 31, 2015, it was not enough to make up for Mobile and PC Online shortfalls in the fiscal year ended March 31, 2014.

However, we think we can catch up by executing measures (discussed below) over the next three years, thus our projection of 57 billion yen remains unchanged.

Digital Contents Business: Cumulative Operating Income Progress

(Billons of yen)
14/3 15/3 累計 16/3
Initial
Projections
Actual
Results
Initial
Projections
Actual
Results
Initial
Projections
Actual
Results
Difference Plan
9.1 4.5 6.8 10.2 15.9 14.7 -1.2 11

Medium-Term Business Goal Progress Analysis 2: Operating Margins

Our goal of achieving operating margins of 20% in the fiscal year ending March 31, 2018, remains unchanged. Structural reforms over the past three years have led to significant improvements in the operating margin, and although this is not a low hurdle, we believe we can achieve the 20% goal.

In terms of what specifically constituted improvements, in the Consumer sub-segment it was due to (1) outsourced title profitability improvements, (2) streamlining internal title production, and (3) increases in the DLC sales ratio.

In terms of business segments, the core Digital Contents business and the Amusement Equipments business both achieved their targets.

In the three years until March 31, 2018, if we are able to successfully implement the measures outlines below in these two businesses, we believe it is more than possible to achieve the 20% target.

Operating Margin Progress by Business Segment

(%)
  14/3 15/3 18/3
  Actual Results Actual Results Goals
Digital Contents 6.8 22.5 22.0
Arcade Operations 15.2 10.2 15.0
Amusement Equipments 30.8 36.3 27.0
Other Businesses 38.6 30.8 45.0
Total 10.1 16.5 20.0

Necessary Measures

In terms of issues going forward, we will promote the following measures in order to expand sales in the highly profitable Digital Contents business to increase consolidated operating income and operating margins and achieve our goals.

  • 1) In the Consumer sub-segment, we will utilize leading IP to expand our lineup for current game consoles and further enhance digital sales (both full-game and add-on content).
  • 2) In the Mobile Contents sub-segment, we will expand our lineup, beginning with distribution of "Monster Hunter Explore".
  • 3) In the PC Online Games sub-segment, we will launch "Dragon's Dogma Online" as the next mainstay after "Monster Hunter Frontier G".
  • 4) We will enhance expansion of licensing in Asia and expand profits in the Chinese market.

Executing these measures and expanding our lineup in each sub-segment and region will enable us to achieve post-revision medium-term business goals.

Main Pipeline (Fiscal Years 2013–2017)

diagram: Main Pipeline (Fiscal Years 2013–2017)

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