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Quarterly Reports Archives FY2016

FY2016

    • Consolidated Financial Results for the year ended March 31, 2017

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    Question and Answer Summary

    What is your take on the unit sales performance for Resident Evil 7 biohazard (Resident Evil 7 below) and Monster Hunter XX (Double Cross) as of the end of FY 2016?
    1. As of the end of the fiscal year, Resident Evil 7 shipped 3.5 million units, and Monster Hunter XX (Double Cross) shipped 1.7 million units. It is a solid start, considering the short span between launch and fiscal year end. Further, unit sales for both titles continue to grow even now.
    2. What is more, the re-releases of Resident Evil 4, 5 and 6 for current generation platforms are an example of successfully leveraging our library of assets; and they shipped a total of 2.8 million units during the fiscal year.
    3. The lifecycle for games is growing longer, driven by ongoing digital sales; as a result, Resident Evil 4, 5 and 6 have each sold more than 7.5 to 10 million units cumulatively (including catalog and re-release sales). As such, we will work to achieve 10 million cumulative lifetime unit sales for Resident Evil 7 as well.
    How confident are you of achieving 2 million unit sales for Resident Evil 7 (as a catalog title) in the fiscal year ending March 31, 2018?
    This title was received favorably by both fans and the media; further, its unit sales continue to grow even now. We will work to achieve our unit sales goal this fiscal year by continuing to generate buzz with promotional activities that include events for fans, as well as with downloadable content.
    Tell us about expected unit sales for Monster Hunter XX (Double Cross) in the fiscal year ending March 31, 2018.
    There were only two weeks between the launch of this title and the end of FY 2016, and currently its unit sales continue to grow. However, we have not disclosed our unit sales targets for the current fiscal year. We will continue to focus our efforts on sales promotions this year to grow this title’s cumulative sales.
    If Capcom were to forge an alliance with another company in its Mobile business, what would Capcom look for in that partner?
    Capcom holds a significant number of valuable IPs. We have been able to accumulate operational know-how with Monster Hunter Explore, however, we are not yet fully satisfied with its performance. As such, we would look for a company that has both a track record in genres conducive to successful games, and ample experience with monetization. We also believe it is important to include whether a potential partner is able to understand our IP when utilizing it in our considerations going forward.
    Will you limit your Mobile business alliance partner to a single company, or are you considering alliances with multiple partners?
    Currently, we are gathering information to obtain a clearer picture of changes in the market while exploring potential future directions for our Mobile business via reforms to our internal structure. An external alliance is one portion of this overall situation that we are looking at, and rather than being limited to a single partner, we are considering the possibility of alliances with multiple companies as we move forward.
    Tell us about your outlook on the next generation of the mobile market, and what Capcom’s mobile strategy is.
    We believe that going forward, mobile devices will undergo drastic improvements in their capabilities akin to the dramatic evolution of home video game consoles in the past. At the moment, there is much room to improve upon mobile device functionality, such as screen size and control interface. We expect that these improvements will be realized as the hardware evolves. When this happens, we plan to launch our titles to maximum effect by leveraging our accumulated know-how in game development. We intend to disclose specific initiatives when the time is right, for instance after we have determined when there will be a contribution to earnings.
    You have continued to increase your developer workforce. Tell us how this has affected shortening the time needed to develop major titles.
    As the scale of game development has grown, we have both increased our developer workforce and pursued work efficiencies. Because of this, in addition to reducing launch delays for titles, we have nearly completed a development structure under which we can release multiple major titles every year.
    What is your policy regarding business expansion in eSports going forward?
    We expect the eSports market to grow significantly throughout the world, driven by initiatives in the more advanced eSports markets of North America and Europe. Spearheaded by our US subsidiary, we intend to strengthen promotions globally through activities that include expanding our user base via streaming video. However, we are not considering business expansion from advertising revenue at this time.
    What is the breakdown of new titles and catalog titles for the 3.6 million-unit increase in your Consumer business unit sales plan for the fiscal year ending March 31, 2018?
    Resident Evil 7 and Monster Hunter XX (Double Cross), both released in the previous fiscal year, will be recorded as catalog titles this year, consequently, our plan is more heavily weighted toward catalog titles. However, we believe it will be possible to achieve a download sales ratio of approximately 30% for new titles this year.
    • *Similar questions have been consolidated into single questions here.
    • *A portion of the questions were unanswered at the presentation. The Public Relations and Investor Relations Section has provided answers for these here.
    • Consolidated Financial Results for the 3rd Quarter of FY2016

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    Question and Answer Summary

    How is Resident Evil 7 biohazard (Resident Evil 7, below) performing?
    As of January 27, it has shipped 2.5 million units. (*3 million units as of February 10.) Compared to Resident Evil 6 this may seem like a lower initial pace, however this can be attributed to the recent wider adoption of digital downloads and the transition from a sharp initial spike in sales for games to a continuous long tail. Further, we believe that achieving our fiscal-year target of 4 million units for this title is wholly possible, as we expect sales to continue for a longer period, buoyed on highly positive post-launch reviews from both the media and consumers.
    With regard to revised guidance for the Digital Contents business, why is the decrease in operating income more significant than that of net sales?
    The revision in Digital Contents is due to a revision to the plan for PC Others. Factors such as the postponement of the period in which we record a running royalty for Monster Hunter Online (a licensed title we expect to have high margins), and being unable to cover depreciation and amortization due to the underperformance of existing titles such as Breath of Fire 6 have led to a revision to expected earnings.
    Please explain the reason for revising guidance for full-year unit sales despite no change to full-year net sales in the Consumer business.
    We have upwardly revised our expectations for unit sales due to the favorable performance of lower priced catalog and rerelease titles; however in terms of revenue, certain new, higher priced titles have not achieved their performance targets and therefore we have not revised the full-year plan for the Consumer business.
    It is taking longer than expected to monetize Monster Hunter Online. What is the future outlook?
    We expect it to produce royalty revenue on a continuous basis once the minimum guarantee has been recouped following the end of this fiscal year. Revenue levels have improved due to a major update at the Lunar New Year, and moving forward we plan to work with Tencent Holdings Limited with the aim of further invigorating the title.
    To what degree will Resident Evil 7’s additional downloadable content contribute to earnings?
    Earnings contributions from Resident Evil 7 will come primarily from sales of the main game, with additional downloadable content playing a complementary role. We believe strategically releasing appealing additional downloadable content to stimulate continuous interest among game players will result in an extended lifecycle for the title, and will be important in exceeding the lifetime units sold by the previous installment over the course of the game’s life.
    Dead Rising 4 was produced under a new development organization, following structural reforms; why has it not received more distinguishing reviews?
    Compared to the series up to now, this game was made more approachable in order to allow a wider audience to enjoy it; however, there was a wider range of opinions for the new game. Moving forward, we intend to grow unit sales on a continuous basis by releasing additional digital download content while implementing updates for improvements.
    PC Others is expected to produce a loss this fiscal year; what is the outlook for the next fiscal year?
    We expect to record a loss in PC Others this fiscal year due to factors including the postponement of the period in which we record a running royalty from Monster Hunter Online, and because certain existing titles are softening. Moving forward, we aim to return this segment to profitability by revitalizing titles through promotions and through operational rationalization.
    The cumulative third-quarter operating margin for the Digital Contents business is 5.1%; why is this lower than more recent levels?
    In addition to a downturn in PC Others, this is due to certain titles within Consumer missing their targets. We expect to improve this to 20% or more following the release of highly profitable, major titles in the fourth quarter.
    In the case that results for the fiscal year ending March 2017 are in line with expectations, Capcom will need to produce ¥23.5 billion in operating income in the next fiscal year in order to achieve its medium-term goals. Will this be possible?
    At the time our medium-term goals were set, Mobile and PC Others were expected to grow; however at present, these businesses have challenges and we are cognizant of the issue presented by these goals. We are now engaged in internal discussions in order to be able to share with you a new direction regarding our medium-term goals at our next fiscal results briefing.
    What measures are in store for the Mobile business from the next fiscal year onward?
    Presently, we are maintaining an open stance and are reviewing various measures in order to achieve growth for this business, which include both internal production and cooperation with other companies; however, we are unable to share any specifics at this point in time.
    Has Resident Evil 7 recouped its development cost at this point?
    Yes, it has recouped its development cost, and presently has shipped 2.5 million units. (*3 million units as of February 10.)
    ¥29.9 billion was booked under work in progress for game software at the end of the third quarter; what does this include?
    In addition to Resident Evil 7 and Monster Hunter XX (Double Cross), both fourth quarter releases, the development cost of titles scheduled to be released from the next fiscal year onward are recorded as an asset. This has increased since the end of the last fiscal year; however, we regard this as appropriate since we are strengthening our development lineup in accordance with our growth strategy.
    Do you have any plans to bring the Resident Evil series to PC Online games in China?
    Presently, we are proceeding forward with a number of future projects in the Asian region; however, at this point in time we are unable to share any specifics, including brand names.
    • Consolidated Financial Results for the 2nd Quarter of FY2016

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    Question and Answer Summary

    You have released Consumer-like games in new formats, such as Toraware no Paruma; will you be making use of Consumer development know-how in Mobile development?
    Launched in August, Toraware no Paruma was developed with a staff of female home video game developers at its core. While a title targeting female users is rare for Capcom, a fastidious attention to detail characteristic of home video game development proved successful and the title is indicating signs of a boom. We will analyze what made this a hit, and utilize that in future mobile development.
    What measures will you take going forward with regards to cost reductions in the PC Online business?
    In the PC Online business, we plan to continue to operate over the long-term via profitability improvements through streamlining areas such as server operation costs while also improving our user numbers and our DAU rate. In this market, however, it is said that 80% of sales are in general generated from 10% of users. We feel that resolving this unbalance is one issue we must face in order to make improvements to our profitability moving forward.
    What is Capcom’s stance with regards to developing for the Nintendo Switch?
    It is excellent to have the market invigorated with new hardware launches. As a software publisher, we endeavor to develop games that offer enjoyment best suited to each piece of hardware’s features and target users. Following first party, in order to introduce our own content we are currently moving forward with internal planning and analysis as a partner company.
    How many major titles is it possible to launch in one year from the Consumer business?
    We are proceeding with diversified planning based on our 60-month map internally, however due to structural reforms focusing on internal development we are shorthanded for developers. We will continue to proactively hire primarily new graduates, and expand our number of titles by increasing our number of development lines.
    What developments are in store for Resident Evil films and movies?
    With the Hollywood film Resident Evil: The Final Chapter, scheduled to premiere in December (in Japan), the films have reached a break; however, as with the feature-length Resident Evil CG films, we will continue a multifaceted expansion in this area beyond the live-action format.
    What are your expectations for lifetime revenue of Resident Evil 7 biohazard?
    We are expecting 4 million unit sales worldwide in this fiscal year. Also, we expect to recognize sales of the game as a catalog title in the next fiscal year; however, revenue for catalog titles tends to grow in relation with the timing of movie releases and new titles in a series. What is more, the sales lifecycles for titles has grown due to digital distribution, so we expect this game to become a foundation title, producing revenue not limited to the next two fiscal years but into the long term as well.
    How has Monster Hunter Online been received and what is the situation with the Chinese market?
    Service began in China in December of last year, and with the agreement between Tencent and Capcom as a base, we have been dedicating our fullest attention to vitalizing the title. However, we have reaffirmed the drastic differences in tastes that exist between the Chinese and Japanese markets, despite both being within the same Asian region. We perceive the title to be of extremely high quality, however believe that it requires certain steps to help it better resonate with local users.
    What is Capcom’s position regarding revenue opportunities in VR?
    We are actively pursuing expansion into VR, such as with full VR support on Resident Evil 7 biohazard and with the VR attraction Tokusatsutaikan VR Daikaijyu Capdon. However, elements of sales promotion and cutting-edge technology research are prominent in both of these cases, therefore we do not believe VR on its own will contribute to earnings immediately at this time. Going forward we will consider measures towards future revenue generation, including that of VR-only titles, following analysis of the market’s reception.
    Is it possible to develop multiplatform titles on the Nintendo Switch?
    We are currently carrying out research with regards to multiplatform implementation of software for PlayStation 4 and Xbox One on to the Nintendo Switch and thus are unable to comment at this moment. However, we do feel that there are differences in the desired direction and the play-style of the Nintendo Switch and those of the PlayStation 4 or Xbox One. At Capcom, we determine which platform to release a title for after considering the features of both our software and the hardware in question, believing we must bring the enjoyment of our games to their maximum potential.
    • *We have supplemented a portion of the questions and answers with comments.
    • Consolidated Financial Results for the 1st Quarter of FY2016

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    Question and Answer Summary

    Why have sales decreased in the PC Online sub-segment compared to the same quarter last year?
    While Monster Hunter Frontier G is performing steadily, some existing titles have fallen slightly short of expectations. Moving forward, we plan to improve upon both product appeal to users and customer satisfaction by actively carrying out updates on a continuous basis with the aims of invigorating our games and stabilizing long-term earnings.
    Results in the Mobile Contents sub-segment are improving; does this mean it has stopped declining?
    We believe that currently it has bottomed out and that moving forward it will continue to improve. Under our new structure, this year we plan to successively launch titles featuring Capcom IPs, with the aim of contributing to earnings.
    The full-year plan is heavily focused on the second half; how do you plan to even-out quarterly results?
    Due to reasons concerning the release schedule for this year’s major titles, we’re forecasting Consumer earnings for the first half to be effectively 20% of the full-year amount. From next year onward, we would like to aim for stabilized quarterly results by strategically building a profit structure that does not rely on the existence of major titles. We plan to do this by not only continuing to pursue shortened development cycles for major titles, but also via increasing the ratio of digital download sales and catalog titles.
    Tell me about the impact of exchange rates on this year’s plan. Will the release of numerous overseas titles in the second half affect operating income?
    Within this year’s operating income plan, we anticipate that a ¥1 fluctuation in the exchange rates will have an impact of approximately ¥100 million for the US Dollar and approximately ¥50 million for the Euro. With major titles being released overseas in the second half, it is necessary to monitor exchange rate trends; however, at present our assumed rates have not changed. Further, there have been no changes in our results forecast for our full-year plan as well.
    How much was the cost increase to make RESIDENT EVIL 7 biohazard VR-compatible?
    Certain things were required in making the game VR-compatible, such as graphic needs that are more complex than before, thus there was an increase in development investment. However, we believe we have succeeded in optimizing our development process via fundamental technologies including our 3D scanning system, lighting and shading, which allowed us to minimize additional costs while achieving high-quality development.
    Tell me about progress with digital download sales in the Digital Contents business and what your projections for the future are.
    The digital download sales ratio in Consumer reached 46% due to growth in catalog sales during the first quarter. Because the ratio of package sales will increase with the release of major titles, our plan has the digital download ratio at approximately 30% for the full year. However, we believe that in the future it is possible we can improve this ratio to as high as 40-50%.
    When will you be able to increase the full-year digital download sales ratio to 50%?
    We would like to achieve this as quickly as is possible, however we are unable to give a definite timeframe for achieving this at the present time since it depends on factors such as the future title lineup and human resource allocations for development staff.
    Tell me the breakdown of your development staff.
    As of the end of June 2016, we have approximately 2,200 people working as developers. Within that number, there are approximately 1,500 people in Consumer, 500 people in Online (Mobile, PC Online), and 200 people in Pachislo and Arcade Games.
    Tell me about future human resource allocation of developers.
    Essentially, we will allocate developers to our core businesses of Consumer, Online and Mobile Contents. While there is an urgent need to nurture creators that are highly-skilled with operations in the Online business, at the same time we must continue generating IP, the linchpin of our business, and therefore believe that strengthening human resources in Consumer is also important.

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