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Financial Review

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(as of May 7, 2015)

Capcom Co., Ltd. announced that net sales decreased to 64,277 million yen (down 37.1% from the previous fiscal year) fiscal year ended March 31, 2015. As for profits, operating income was 10,582 million yen (up 2.7% from the previous fiscal year), ordinary income was 10,851 million yen (down 0.9% from the previous fiscal year), and net income was 6,616 million yen (up 92.1% from the previous fiscal year).

1. Qualitative information and consolidated financial statements

During the fiscal year ended March 31, 2015, the Japanese economy remained on a recovery trend supported by the improvement in employment environment and healthy capital investments, in addition to the yen's depreciation and the rising stock prices.

In our industry, though the package segment of the domestic market has continued to show signs of maturity due to the decentralization of the entertainment industry, the overall home video game market including the download segment has entered a growth cycle, as exemplified by the high popularity of the Tokyo Game Show 2014 held in September 2014, which attracted over 250,000 visitors, the second-highest number in its history.

Meanwhile, the social game market, which goes well with smartphones, continued to grow.

In the game arcade market, under the circumstances in which sales of existing arcades remained sluggish, industry-wide efforts were made to revitalize the market such as fan service and appreciation events held on the annual "Game Day" (November 23).

In such an environment, with regard to the home video games business, which is Capcom's core business, sales of "Monster Hunter 4G" (including "Monster Hunter 4 Ultimate") (for New Nintendo 3DS and Nintendo 3DS), which is expected to be a huge success, grew steadily supported by its strong popularity. Aiming to diversify distribution channels, the Company focused on digital download sales, which are expected to deliver a sustainable growth going forward. The Company also worked to streamline and reinforce its development function in order to shorten the development lead time and cut development costs for video game software by, for example, introducing a large 3D scanning system.

Moreover, in addition to measures aimed at reorganizing the business structure of its Mobile Contents business and others, the Company endeavored to improve its profits by reducing the cost of sales and cutting back on selling, general and administrative expenses.

In addition, the Company implemented a wide-ranging Single Content Multiple Usage Development, including "Resident Evil" and "Monster Hunter" events held at the Universal Studios Japan (USJ) and sales of game character glasses in collaboration with MEGANE TOP Co., Ltd.

On the other hand, the Pachinko & Pachislo business was forced to delay the introduction of a new model due to the revision in pachislo model certification method by the Security Communications Association starting on September 16, 2014.

Given the above, due to the delay in the introduction of a new model in the Pachinko & Pachislo business combined with the downturn in "Monster Hunter 4" (for Nintendo 3DS), a mega hit in the previous fiscal year, consolidated sales for the fiscal year ended March 31, 2015 were 64,277 million yen (down 37.1% from the previous fiscal year).

On the other hand, as profitability improved owing to an increase in digital download sales and the successful implementation of profitability improvement measures such as cost reduction efforts, operating income was 10,582 million yen (up 2.7% from the previous fiscal year), ordinary income was 10,851 million yen (down 0.9% from the previous fiscal year), and net income was 6,616 million yen (up 92.1% from the previous fiscal year).

The Company endeavors to employ people with diverse backgrounds from the perspective of diversity management and conducts personnel recruiting and evaluation without prejudice based on one's nationality, gender, age, etc. As part of such efforts, the Company is pushing forward with, for example, promoting women to management positions, securing and developing human resources that can function effectively in a global workplace, and employing handicapped persons. As a result, the Company currently employs 21 women in a management position (10.0% of all the employees in a management position) and 69 foreigners (3.4% of all the employees).

Status of each operational department

1. Digital Contents business

In the Digital Contents business, sales of the special feature title "Monster Hunter 4G" (including "Monster Hunter 4 Ultimate") (for New Nintendo 3DS and Nintendo 3DS) were largely in line with the plan and sales of "Ultra Street Fighter IV" (for PlayStation 3, Xbox 360, and PC) targeting overseas markets were also solid, reflecting its strong popularity.

"Resident Evil Revelations 2" (for PlayStation 3, PlayStation 4, Xbox 360, Xbox One, and PC), which is sold in a variety of purchase options (separate digital download sales of each episode followed by package sales), has also made a strong start.

In addition to the satisfactory sales of "Dead Rising 3" (for Xbox One and PC), which was a million seller in the previous fiscal year, a steady increase in the sales volume of digital download sales of repeat titles contributed to profits due to their high profitability.

On the other hand, sales of "Gaist Crusher God" (for Nintendo 3DS) were below expectations. Moreover, although there was a lack of major titles among Capcom's mobile phone contents with certain exceptions including "Monster Hunter Freedom Unite for iOS", the overhaul of the profit structure contributed to profitability improvement.

However, overall sales did not offset the aforementioned downturn in "Monster Hunter 4" (for Nintendo 3DS).

The resulting net sales were 45,351 million yen (down 31.1% from the previous fiscal year), and operating income was 10,208 million yen (up 127.4% from the previous fiscal year).

2. Arcade Operations business

In the Arcade Operations business, with the market continuing to be weak due to the increased diversity in how people spend leisure time, a lack of products that attract new customers, and other factors, Capcom strived to expand its customer base by acquiring new visitors such as senior and family customers in addition to the core younger generation customers. Specific measures taken included free experience tour offerings for elderly persons and the nationwide opening of five "Asobi Okoku peekaboo" sites targeting younger children.

However, business remained weak due to the underperformance of existing arcades, in addition to the impact of the consumption tax hike and fickle weather. During the fiscal year under review, a new arcade was open in Saitama Prefecture while one unprofitable arcade was closed, bringing the total number of arcades to 33.

The resulting net sales were 9,241 million yen (down 13.0% from the previous fiscal year), and operating income was 940 million yen (down 41.8% from the previous fiscal year).

3. Amusement Equipments business

In the Pachinko & Pachislo sub-segment, although the product lineup lacked variety to some extent due to the delay in the introduction of a new model caused by the revision in pachislo model certification method by the Security Communications Association, "Sengoku BASARA 3" introduced in the first half of the current fiscal year as well as highly profitable repeat sales supported the revenue stream.

In the Arcade Games Sales sub-segment, business was generally weak due to a lack of strong products as sales centered on existing products.

The resulting net sales were 7,540 million yen (down 67.4% from the previous fiscal year), and operating income was 2,736 million yen (down 61.6% from the previous fiscal year).

4. Other Businesses

The net sales from Other Businesses, mainly consisting of publication of game guidebooks and the sales of related goods, were 2,144 million yen (down 17.4% from the previous fiscal year), and operating income was 661 million yen (down 34.0% from the previous fiscal year).

2. Analysis of the consolidated financial position

Analysis of assets, liabilities and net assets

Assets

Total assets as of the end of the fiscal year ended March 31, 2015 increased by 4,162 million yen from the end of the previous fiscal year to 100,773 million yen.

Primary increases were followings: 6,478 million yen in work-in-progress for game software, 3,347 million yen in online contents in progress, 2,497 million yen in construction-in-progress and 2,483 million yen in cash on hand and in banks. Primary decreases were 10,129 million yen in notes and accounts receivable, trade.

Liabilities

Total liabilities as of the end of the fiscal year ended March 31, 2015 decreased by 3,292 million yen from the end of the previous fiscal year to 29,442 million yen.

Primary increase was 4,540 million yen in long-term borrowings. Primary decreases were 5,937 million yen in electronically recorded monetary liabilities and 1,860 million yen in notes and accounts payable,1 trade.

Net assets

Net assets as of the end of the fiscal year ended March 31, 2015 increased by 7,455 million yen from the previous fiscal year to 71,331 million yen.

Primary increases were 6,616 million yen in net income for the year and 2,863 million yen in cumulative translation adjustments which related to foreign exchange translation of the net assets of foreign consolidated subsidiaries. Primary decrease was 2,249 million yen in cash dividends.

Analysis of cash flow

Cash and cash equivalents as of the end of the fiscal year ended March 31, 2015 increased by 1,879 million yen from the end of the previous fiscal year to 27,998 million yen. Cash flow positions of each activity and their factors are described below.

Cash flows from operating activities

Net cash gained from operating activities was 4,286 million yen (13,201 million yen in the previous fiscal year). Primary items increasing cash flows were 10,701 million yen in net income before income taxes (5,315 million yen in the previous fiscal year), 10,382 million yen decrease in accounts receivable, trade (increase of 6,351 million yen in the previous fiscal year). Primary item decreasing cash flows were followings: 7,856 million yen decrease in notes and accounts payable, trade (increase of 4,806 million yen in the previous fiscal year), 6,443 million yen increase in work-in-progress for game software (decrease of 6,010 million yen in the previous fiscal year) and 3,347 million yen increase in online contents in progress (1,741 million yen in the previous fiscal year).

Cash flows from investing activities

Net cash used in investing activities was 5,496 million yen (6,155 million yen in the previous fiscal year).

Primary item used was 5,465 million yen in payment for acquisition of tangible fixed assets (2,203 million yen in the previous fiscal year).

Cash flows from financing activities

Net cash gained from financing activities was 1,278 million yen (15,099 million yen used in the previous fiscal year).

Primary item provided was 8,162 million yen provided from long-term borrowings (no long-term borrowings in the previous fiscal year). Primary items used were 3,169 million yen in repayments of long-term borrowings (145 million yen in the previous fiscal year), 2,251 million yen in dividends paid by parent company (2,283 million yen in the previous fiscal year) and 1,050 million yen net decrease in short-term borrowings (10,000 million yen in the previous fiscal year).

3. Prospects for the next fiscal year

As for future outlook, the home video game market is expected to face a fierce competition for the platform leadership including the increasing competition for customers from the growing social game market. Moreover, diversification of business domains (for example, the provision of additional contents and virtual item purchases through online functions in addition to "offline" package sales) could entail a major change in the distribution of power in the market. However, such diversification should also contribute to the expansion of the overall market due to the related synergy effect.

In the changing market environment, Capcom will aim to expand revenue by, among others, launching major titles and strengthening digital download sales.

As part of such efforts, in order to effect a breakthrough in the continued weakness of the Mobile Contents sub-segment, the Company will strive to increase the number of customers by developing and offering attractive contents designed to increase customer satisfaction through the accumulation of operation knowhow and effective marketing activities, in addition to the improvement of the development process and the reinforcement of the management structure.

Meanwhile, though the Pachinko & Pachislo sub-segment will continue to face some uncertainty due to the revision in pachislo model certification method by the Security Communications Association, the Company will endeavor to launch new products as soon as possible by implementing business strategies to respond flexibly to the change in the environment such as the speedy development of new models based on specification changes to satisfy new standards and pass the new test.

The Company will also work to develop a corporate structure that can secure stable profit through the promotion of across-the-board management rationalization such as the increase in internal production rate, business efficiency improvement, and cost reduction.

While the domestic market is maturing, overseas markets are expected to grow further, particularly in Asia. In order to accelerate the business expansion in such growth markets, the Company will focus on expanding business in certain Asian countries such as China, South Korea, and Thailand by expanding online game distribution through alliance with local companies as well as establishing its own bridgehead.

In the fiscal year ending March 31, 2016, the Company is scheduled to introduce "Dragon's Dogma Online" (for PlayStation 3, PlayStation 4 and PC) and a new mobile content "Monster Hunter Explore" in the market.

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