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Presentation of Financial Results in FY2013

May 9, 2014

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Question and Answer Summary
What specific actions are you taking to achieve the goals of the medium-term plan?

With a higher percentage of internal content creation in a more efficient development environment, we plan to improve profitability and increase the operating margin. We also believe these actions will reduce the time needed to develop major titles by increasing the flexibility of scheduling and the use of our development personnel. In addition, we think we will be able to create even higher quality content. We believe that the goals of the medium-term plan can be reached by using the benefits of these actions to increase our operating income level.

You will need earnings of about 20 billion yen in each fiscal year starting in the year ending in March 2016 to reach the medium-term term target of cumulative operating income of 80 billion yen. Please explain how you plan to raise earnings.

We have fallen behind in our progress toward this target because of the reduction in our earnings forecast last year. However, we believe that this target is within our reach due to internal structural reforms and subsequent strengthening of our existing businesses. In specific terms, we plan to increase our total earnings by improving the operating margins in all three sectors of our core Digital Contents business: the Consumer sub-segment, PC Online sub-segment and Mobile Contents sub-segment.

When do you think your operations in Asia will become a significant source of earnings?

In Asia, content for smartphones and PCs account for most sales because of the low utilization of game consoles. Our subsidiaries in Taiwan and Korea are developing content and these titles are already contributing to earnings. However, we believe that more time will be needed until Asian operations can become a significant source of earnings.

What are your thoughts about the operation of "deep down"? Isn't the free-to-play approach very risky?

We understand that there are some risks, partly because "deep down" is our first free-to-play game for a next-generation console. But we believe that risk taking to some extent is required in part because this title is the starting point for our growth in content sales for next-generation consoles. Furthermore, a business model in which we do not simply sell games has the advantage of giving us access to feedback from users. We are able to use that information to solve issues, so we plan to continue to refine and update "deep down" for some time.

What is your outlook for game software under development?

We plan to invest 28 billion yen for development activities in the current fiscal year, about the same as in the previous fiscal year. But we expect work-in-progress in game software at the end of this fiscal year to be higher than one year earlier partly because of our decision to focus on fewer titles.

What are you plans for assigning people to the buildings now under construction?

We have not finalized plans for the deployment of personnel to the two new development buildings under construction. Incidentally, regarding the integration of the development operations for the PC Online and Mobile Contents businesses, we have established a unified organization for the reporting line. But we have not reached a decision about which development operations should be located in Osaka or Tokyo.

Why is your plan for the sales volume of "Monster Hunter 4G" less than actual sales of "Monster Hunter 4"?

We are planning sales volume that is about the same as for the previous title, so we do not believe that our "Monster Hunter 4G" plan is "less". Our basic stance is for people who enjoyed the previous title to enjoy this new one as well.

What is your outlook for earnings from "deep down" in the current fiscal year?

We have not decided when to launch this title. But since we will use the free-to-play business model, earnings will probably be small in the first fiscal year regardless of when we start this service because of depreciation expenses. We anticipate earnings from this title for longer term starting in the following fiscal year.

Do you have plans for second and subsequent versions of "Monster Hunter Online" in China?

Development of "Monster Hunter Online" is progressing with Tencent Holdings Limited playing the leading role as we move closer to starting this service. But we have no plans at this time for any other titles.

What is your plan for the Pachinko & Pachislo business in this fiscal year and for new titles?

We plan to sell three titles and 65 thousand units this fiscal year. We are unable to provide names of titles at this time. But we are able to say that development is under way based on our fundamental policy of using core game series like "Monster Hunter" and "Resident Evil" as well as a broad array of content created in our Consumer business.

Please describe your development framework for creating the sequel of major franchises.

We have about 30 key developers and are able to deploy the required personnel at the required times as needed. This allows us to develop content with a small number of people while operating a number of lines at once. Ideally, we want to use a development period of 1.5 years as a rule for each team. Our goal is to make the development cycle even shorter.

How much will the transition to next-generation consoles increase your development expenses?

We believe that development expenses can be lowered by producing more content internally and establishing a more flexible framework for development operations. In addition, we will not have any leasing expenses at the new development buildings, so this will hold down development expenses over the long term.

Forecast Revisions

March 31, 2014

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3rd Quarter in FY2013 Presentation of Financial Results

February 7, 2014

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Question and Answer Summary
In the Mobile Contents business, what is the ratio of sales in Japan and overseas?

In this 9 months, Japan accounted for about 60% of sales and about 40% of sales were overseas.

How much of sales come from native apps for smartphones?

Native apps account for all Beeline brand sales that are included in Mobile Contents. Sales of "Smurfs' Village" are steady. In Japan, browser type games also continue to contribute to earnings.

Mobile Contents sales growth appears to be slowing. What are your plans for improving performance?

We are reexamining our software development operations and accumulating expertise involving game operations and upgrading this know-how. For the Beeline brand, we are working on developing content for the "super casual" customer segment in Europe and North America. In Japan, we plan to combine our Division 2 of Consumer Games Development, which has many accomplishments in the online business in Tokyo, with the development team in Osaka to enable these developers to share knowledge about operations.

In the consumer business, what is your outlook for the division of sales between packaged and digitally distributed contents (DLC) ?

DLC is about 15% or 16% of sales in the consumer business now. We believe this ratio will continue to increase.

What is the difference between the profitability of packaged software and full-game download for each game title?

At this time, the difference in earnings for each title is negligible.

How will the consumption tax hike affect the Arcade Operations business and what are your plans to offset this effect?

We think the higher consumption tax will affect sales to some degree. Raising the price of individual games would be difficult. But we are considering a number of possible actions. Our primary goal is to maintain profitability by attracting a larger number of customers. We plan to do this by increasing measures to attract seniors, children and other segments that currently are not significant users of our arcades.

How many units of the "Monster Hunter Gekka Raimei" pacihslo machine do you plan to sell and how many orders have you received so far?

We plan to sell 35,000 units. We are not able to provide information about orders received at this time. We are confident that we can reach our sales goal because of the strong response generated by this unit at a recent exhibition.

What actions are you taking to cut costs?

We are always examining selling, general and administrative expenses and other expenses. We plan to continue our constant cost-cutting measures in the next fiscal year.

Do you expect your cost of developing software to start decreasing in the next fiscal year?

The cost of development and other general expenses vary depending on our plans and sales for each title. This is why we place importance on achieving a suitable cost of sales ratio rather than on lowering the actual amount of our costs. At 69%, we believe the cost of sales ratio in the current fiscal year is high. We are managing all our operations with the goal of reducing this ratio and building a framework that can generate an appropriate amount of earnings in relation to sales.

Please provide data on the operating margin of each segment of the Digital Contents business.

The third quarter (3months) operating margin in the Consumer business (packaged, DLC) was higher than in the second quarter (3 months). Third quarter profitability was lower for Mobile Contents and PC and others.

Are Mobile Contents development expenses included in intangible fixed assets? How to you amortize these expenses?

We record as intangible fixed assets expenses for developing titles for ongoing business models, such as titles in the PC online game and Mobile Contents sectors. These expenses are included in the "other" item of intangible fixed assets. The amortization period is different for each title, but in general we amortize these expenses over a period of two to five years.

Please explain the soundness of online content under development that is included in other intangible fixed assets.

We examine and reassess our earnings plans for titles every quarter. Therefore, we believe that the current amount of software under development in other intangible fixed assets is sound.

Can you provide a rough outlook for your performance in the next fiscal year?

We are not able to say anything now because we are still working on our plan for the next fiscal year. We foresee a number of changes in our business climate, notably the shift to next-generation consoles for consumer games and changes in the Mobile Contents market. As a result, we view the next fiscal year as a period for building a stronger foundation for our operations. Furthermore, this will be the second year of our five-year plan, so we will also be taking actions aimed at achieving strong growth during the plan's last three years.

What is latest "Monster Hunter 4" shipment figure?

Shipments currently total 4.1 million units and sell-through is also high. We just announced our latest title, "Monster Hunter 4G", which we plan to start selling in the fall of this year. Since the transfer of data from "Monster Hunter 4" is mostly possible, we will continue to use events and other measures to raise awareness of these titles and focus on increasing repeat sales.

Is your P&S development infrastructure capable of producing four new models in the next fiscal year?

We have not yet determined how many models to release in the next fiscal year. We will soon complete work to establish an infrastructure that can release four models every year (one in each quarter). We are making steady progress toward our goal, such as by increasing the number of developers and enlarging production lines.

Is the social game ARPPU different for users in Japan and overseas?

There are large differences among game titles but no significant difference between Japan and other countries. The ARPPU is relatively high overseas as well for "Smurfs' Village" and other titles. So we do not think that the ARPPU of overseas users is significantly lower than the ARPPU in Japan.

2nd Quarter in FY2013 Presentation of Financial Results

November 1, 2013

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Question and Answer Summary
What were first half sales for mobile content in relation to your plan for the fiscal year ending March 2014? Also, if you fall short of plans for upcoming titles to start distributing, how much would this affect overall performance?

There are many challenges in this business, including market conditions. We believe that we can reach our fiscal year plan with contributions from titles launched in the first half and new titles in the second half. Even if a particular title falls short of our plan, we believe this can be offset in total consolidated performance by repeat sales of "Monster Hunter 4" in the Digital Contents business and changes in other businesses.

The Mobile Contents business continues to decline very slowly. Are you thinking about making changes to the development framework or taking other actions?

In the mobile content market, we are seeing explosive growth worldwide due to the popularity of smartphones in the number of users who have never played a mobile game before. We also think that the mobile content industry itself is currently in a phase of determining the needs of users. Consequently, we believe there is an urgent need at this time for the flexible development of games in many categories.

What is your plan for performance in the fiscal year ending March 2015?

We are unable to say anything at this time about our forecast for the next fiscal year.

What are the major elements of the first half full-game download sales of 2 million units?

This figure is full-game download volume for consumer titles. Major titles included in these sales are "Monster Hunter 4", "Duck Tales", "Resident Evil 6", and "Resident Evil Revelations". We are unable to provide figures for individual titles. Note free to play (with paid content in-game) titles are not included in these downloads.

Please provide information about progress with "Monster Hunter Online", which you plan to operate with Tencent Holdings Limited in China.

Tencent Holdings Limited is currently developing this title. A closed beta test took place in June 2013 and work on the title is proceeding as planned.

Will Capcom continue to develop major titles for overseas markets? What is your policy concerning development activities?

There is no change in our basic policy of aiming to develop content that is competitive worldwide. As in the past, Capcom will create "brand content" with the potential of becoming continuous hits and we will maximize brand value by using our Single Content Multiple Usage strategy.

What is your strategy for the Pachinko & Pachislo (P&S) business?

We are currently building a development infrastructure with the aim of eventually launching one new model every quarter. In the first half of this fiscal year, we sold about 25,000 units for one model. If we can do this for four models, this would translate into sales of 100,000 units in a fiscal year. This is why we will continue to focus on establishing the capability to introduce four models every year.

In the P&S business, what is your standard for selecting content for pachislo machines?

We select content from among our consumer titles that will be widely recognized and highly appealing for pachislo users.

Please provide regional data for first half Mobile Contents business results of operations.

In Japan, there was a larger than expected downturn in existing titles that made a big contribution to performance one year earlier. Overseas, "Smurfs' Village" continues to perform well but there was a decline in sales of small and midsize titles. The domestic-overseas composition of first half sales was 6-to-4.

In the second half, are you planning on more growth in Japan or overseas for mobile content?

Our fiscal year plan is for a 6-to-4 ratio for sales in Japan and overseas.

What is your outlook for the final sales volume of "Monster Hunter 4 "?

We revised our plan for the current fiscal year to 3.3 million units but we are unable to say anything now about our outlook for the final sales volume. Repeat sales are steady. We will work on maximizing volume by holding events for users and making extensive use of other promotional activities.

Will development expenditures continue to increase in association with the reorganization and launch of next-generation game consoles?

We do not anticipate a big increase in these expenditures. Our goal is to make development operations more efficient by raising the share of work performed internally and reducing outsourcing.

Why was "Monster Hunter 4" successful and what percentage of sales are downloads?

We believe the success is the result of our ability to skillfully translate into a game our fundamental philosophy for creating products: "make enjoyable products that can satisfy users". Offering users new elements and forms of enjoyment is what we think generated a strong response from users. In addition, we believe that using networks for the constant distribution of content also contributed to heightening customer satisfaction. Downloads are about 15% of sales volume.

Why is Capcom shifting to an internal development infrastructure?

Outsourcing every step of the development process creates restrictions involving schedules and resources. This prevents us from developing titles as originally planned. By performing most of the work ourselves, we can manage time and resources with more flexibility. This makes it possible to create content with much more attention to detail. Ultimately, we want to go beyond game development to perform every aspect of comprehensive marketing activities internally. Doing this includes creating online content introduction plans and the strategic horizontal expansion of content using our Single Content Multiple Usage strategy.

1st Quarter in FY2013 Presentation of Financial Results

July 31, 2013

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Question and Answer Summary
Digitally distributed content (DLC) sales are higher than one year earlier. How does the ratio between package and DLC sales compare with your target?

We have no particular target at this time. The DLC market has been changing greatly during recent years. We are responding to these changes while taking into account market conditions and the needs of users. Our basic stance is to continue focusing on the DLC sector as a growing market.

What are the domestic and overseas sales ratios for Mobile Contents and your upcoming plans for this business?

In the first quarter, 60% of sales were in Japan and 40% overseas. There is no change in our Mobile Contents strategy of using both the Capcom and Beeline brands. We will use the Capcom brand for content based on our own intellectual property. The Beeline brand is used for the distribution of global content aimed at families and casual game players. By using this strategy, we plan to continue increasing our earnings in the growing mobile content market.

Will licensed titles remain the primary component of the Beeline brand?

We plan to use both original titles and titles licensed from other companies.

What is the reason for the decline in unit selling prices of package software? Is the caused by the yen's weakness?

Average unit prices of "Dragon's Dogma" and "Resident Evil Operation Raccoon City", two major titles of the previous fiscal year, increased because Japan accounted for a high share of sales. In this fiscal year, there has been an increase in overseas sales volume and titles with low unit prices, such as derivative versions. This has brought down the overall unit price. The effect of the weaker yen is negligible.

First quarter Mobile Contents sales were 1.9 billion yen. How does this compare with your target and what are the reasons for this performance?

Sales were slightly below our target but operating income was generally in line with our plan. The primary causes of the small sales shortfall were weaker sales of existing social games and the lack of any new hits in the first quarter.

I have the impression that it is becoming increasingly difficult to create a hit title in the mobile contents category. If Capcom is unable to create successful new titles, won't this make it difficult to reach the fiscal year targets?

Our plan assumes a certain contribution to sales and earnings from titles that we plan to start distributing. Even if all titles do not perform as planned, we believe that we can respond with flexibility by using swift management and operational measures. At this time, we are aiming to reach the fiscal year targets by introducing many new titles in the remaining three quarters.

What is Capcom doing about developing software for next-generation consoles?

We are currently developing "deep down" for PlayStation®4 and "Dead Rising 3" for Xbox One®.

Does your strategic shift from outsourced to internal software production also mean a change in your investments?

Although we are unable to provide any specific figures, internal software development expenditures were about two-thirds of our first quarter development expenses, which is higher than in prior years.

What is the download volume for major titles? Also, why were DLC sales higher than one year earlier?

We are unable to provide download figures for individual titles at this time. Full title downloads account for approximately 80% of total DLC sales. Furthermore, the sales growth from one year earlier was not the result of higher sales of a particular title. We believe that this growth is due to the larger number of downloadable titles and the emerging benefits of our DLC strategy. DLC sales are increasing as expected regarding our target for the fiscal year.

Please provide more information about the online titles that will be announced on August 1 at the Capcom Network Game Conference.

We plan to announce 13 new titles at this event. More information about these titles will be provided at the conference.

Are the titles you will announce at this conference included in the initial plan for this fiscal year?

Titles to be launched in this fiscal year are already included in this plan.

What is your outlook for the mobile contents market in Japan?

There are media reports of worries about this market shrinking. Capcom has no specific stance regarding this subject. Because of continuing growth in the number of smartphones used in Japan, we believe that there is an urgent need to continue supplying content that is highly appealing to users of mobile devices.

How did the performance of each business segment perform compare with your first quarter plans?

Arcade Operations were slightly below our plan but performance in the Amusement Equipments business was better than we expected. In the Digital Contents business, sales were less than planned but operating income matched our plan.

Please explain the flexibility regarding expenses for Mobile Contents. If you expect sales to be less than planned, can you use cost management to meet the target for operating income?

We are constantly working on cutting expenses and improving efficiency in all our operations regardless of the performance of a particular business segment with respect to our plans.

What are your plans for R&D investment in the next fiscal year and afterward?

We plan on R&D investment of 31 billion yen in the current fiscal year and do not foresee any significant change in this figure over the next few years. We plan to increase the internal production ratio by recruiting and cultivating new graduates to work as creators and increasing the utilization rate of creators. We expect external development expenses to decline.

What are the multi-platform possibilities for smartphones and portable game consoles?

For "Dragon's Dogma Quest", which we recently started distributing, we plan to release iOS and PlayStation® Vita versions. For freemium titles with item fees, we have no plans right now but will consider a multi-platform approach depending on demand for these titles.

How is the Chinese version of "Monster Hunter Online" performing? Also, please explain your business model with Tencent,Inc.

Tencent,Inc. performed beta testing in June 2013 that was successful. We are not able to provide information about the business model, such as the division of earnings, because of the terms of our contract with them.

Why was the first quarter cost of sales about 1.3 billion yen higher than one year earlier?

The main reason is the recording of expenses for developing titles that were launched in the first quarter.

Did the drop in package software earnings cause the sharp downturn in Digital Contents business earnings? If so, was there a loss in the Consumer business?

Lower earnings in the Consumer business were the main reason for the decline in Digital Contents business earnings. There was a small loss in the Consumer business in the first quarter.


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