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Financial Strategy According to the CFO

Building a Stable Financial Foundation to Conduct Efficient Development Investments

Newly Appointed CFO

I was appointed Chief Financial Officer (CFO) by consensus at the Board of Directors meeting held in June 2016.

Up to now, I have been engaged in two initiatives: improving net cash and increasing capital efficiency. These initiatives are aimed at creating a lean financial foundation and securing funding to invest in growth. Currently, Capcom is executing growth strategies aimed at increasing corporate value over the medium- to long-term while increasing investment in R&D to enhance the development environment in the core Digital Contents business and promote enhancements to our title lineup. I will more closely scrutinize the selection and concentration of invested capital and thoroughly review cost of sales, selling, general and administrative expenses and other costs to improve our earnings structure and support the achievement of growth strategies from a funding perspective.

Kenkichi Nomura

Director, Executive Corporate Officer
and Chief Financial Officer (CFO)

Increasing Capital Efficiency

Capcom established the following ROE targets as an index of capital efficiency.

Moving average for three fiscal years ended March 2015 6.7%
Moving average for three fiscal years ending March 2017 8~10%

We are on track at present, having averaged 10.2% in the past two fiscal years. To achieve our objectives, we are placing priority on net margin improvement. Based on our growth strategy, we aim to further improve title lineup expansion in each business. Regarding TAT and financial leverage, we are cognizant that these are issues we need to address going forward. To this end, we will raise funds mainly through debt financing within the commitment line.

ROE components 3/'13 3/'14 3/'15 3/'16
Net margin (%) 3.2 3.4 10.3 10.1
TAT (%) 90.1 105.8 63.8 68.1
Financial leverage (times) 1.66 1.51 1.41 1.50

Securing Net Cash and Risk Management

For Capcom to efficiently generate net cash, we formulated two new financial strategies focused on generating cash flows through process management.
The first is to thoroughly manage return on investment. Accordingly, we manage a database able to compare the ROI status of each title while ascertaining and analyzing the investment profitability of each project.
The second strategy is to maximize working capital efficiency. To this end, we are creating a framework to manage our investment turnover period and turnover ratio in a more visible manner. Moreover, net cash in the fiscal year under review was 15.8 billion yen, which decreased for the second year in a row. This was due to enhancing development investment in line with lineup expansion, thus we expect a recovery from next fiscal year and an increase in net cash.

Net Cash on a Historical Basis (Billions of yen)

Diagram: Net Cash on a Historical Basis

Fund Procurement

Consumer game software development expenses have been on the rise following the arrival of high performance and multifunctional current game consoles. In addition to requiring a development period of two or more years for a major title and add-on contents, the investment payback period is lengthening. We must keep a certain amount of cash on hand to cover ongoing investments, including post-release upgrades to online games and network infrastructure maintenance.

To address these funding procurement issues, we determine the level of cash and cash equivalents that needs to be maintained in consideration of reserves from the investment plan and risk management. This amount will then be supplemented with cash on hand (28,429 million yen) as well as an unused 26.7 billion yen commitment line of credit (total contract value: 26.7 billion yen) to maintain an appropriate range.

Liquidity in Hand (Millions of yen)

Diagram: Liquidity in Hand

Investment Strategy

To achieve stable medium- to long-term growth, we recognize that it is critical to secure a sufficient amount of investment for the Digital Contents business, the source for our original IP. Specifically, in addition to an enhanced title lineup and new technologies including VR, we must invest in hiring more developers and preparing our development environment. Accordingly, we will allocate about 80% of management resources (R&D investment and capital expenditure totaling 34.5 billion yen in the fiscal year ending March 31, 2017), amounting to an investment of 27.5 billion yen in the Digital Contents business.

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