Capcom Co., Ltd. (9697) Earnings Call Transcript & Summary

Good day to all of you. My name is Haruhiro Tsujimoto, President of Capcom. Before I begin, I would like to offer up our most heartfelt sympathies to all who have been affected by COVID-19. Today, I will discuss our medium-term management objectives as well as our plans and strategies for the fiscal year ending March 31, 2021. Our current medium-term management objective is to deliver increased operating profit each fiscal year. For the year ended March 2020, we once again focused on bolstering digital sales and steadily building up unit sales and profit. As a result, starting from the March 2013 fiscal year, we have achieved 7 consecutive years of profit growth and 3 consecutive years of record profit levels. In addition to operating income, net income has also increased for 7 consecutive years. Here, you can see a summary of our digital sales growth, an important KPI in delivering stable growth. Digital sales in our Consumer subsegment stood at JPY 2.8 billion at the end of the March 2012 fiscal year. However, since then, as a result of making stronger digital sales, a key focal point for management, in our guidance for this fiscal year, we anticipate digital net sales to exceed JPY 45 billion with a digital sales ratio of 73.9%. Next, I will discuss the factors of stable growth, looking at the extended sales lives of our major titles. Releasing high-quality titles and selling them digitally supports a stable growth because even in the years following their release, these titles can be sold over the long term as high-margin catalog titles. As you can see, this trend is especially clear following Resident Evil 7 released in the March 2017 fiscal year. Further, through strategic pricing, we can capture new user segments, including those in developing regions, allowing us to sow seeds for future releases in a series. Now I would like to go over how we will strengthen global sales through digital marketing. While further pursuing gameplay data collection and its utilization in marketing, which we began some time ago, we will promote strategies suited to each of the 4 major regions that roughly make up the global market: the Americas, Europe, Japan and Asia. Further, we will strengthen management and operations by establishing our organization anew, integrating business planning, marketing and sales from this April. As I have said, given that the tangible results we have achieved with stable growth thus far have grown larger, we will now specifically set our target annual operating income growth rate at 10%. Continuing this year as well, we will focus on growing our user base, increasing brand value and expanding globally, aiming to achieve JPY 25.5 billion in operating income and 4 consecutive years of record high profit. Now I'd like to look at the latest market forecast. The overall game market is expected to grow driven by the consumer and mobile markets. The market grew to $165.5 billion in 2019, up $18.7 billion from the previous year, exceeding the forecast from 1 year ago. Further, the market is expected to reach $226.4 billion in 2024, 1.3x 2019's market size. The mobile market in particular is expected to show the most growth, with growth anticipated in Asia and developing regions. Also, driven by digital sales growth, the consumer market is expected to show substantial growth, reaching 1.5x 2019's level. For us at Capcom, we continue to view the ongoing growth of the consumer and mobile markets as a significant opportunity. Next, I will go over our forecast for the March 31, 2021, fiscal year. Due to COVID-19, we are facing an uncertain situation in Japan and around the world. We have prepared our business forecast and as much as possible utilizing reasonable estimates at the present time. This fiscal year, we aim to grow our core Consumer business with multiple major new title releases and a continued focus on bolstering digital sales, targeting record profit at all levels. Further, we look to achieve our eighth consecutive year of operating income growth. Year-over-year, our forecast calls for net sales to increase by JPY 3.4 billion to JPY 85 billion and operating income to increase by JPY 2.6 billion to JPY 25.5 billion with a 30.0% operating margin. Ordinary income is expected to increase by JPY 2.5 billion to JPY 25.5 billion, and net income attributable to owners of the parent is expected to increase by JPY 2 billion to JPY 18 billion. Our earnings per share forecast is JPY 168.62, and our dividend forecast calls for an interim dividend of JPY 20 and a year-end dividend of JPY 25, resulting in a JPY 45 dividend for the full fiscal year. Now I would like to touch upon the impact of COVID-19 and our response. We expect a number of undetermined factors may each affect our business forecasts for this fiscal year. These include the effect on our content development process, any impact due to the suspension of operations in our Arcade Operations business or at Pachinko & Pachislo halls and the delay or cancellation of eSports tournaments and events. In terms of our response, we are working to thoroughly streamline content development to minimize impact. We will focus on growing sales of new titles and catalog titles by further promoting digital sales. Additionally, we are encouraging work from home for employees as well as handwashing, gargling and use of sanitizers and masks as means of preventing the spread of infection. Moving forward, I will go over our Digital Contents business. This year, we will again leverage our major brands. Looking at Consumer. Resident Evil 3, which was released on April 3, has exceeded 2.5 million units shipped as of the end of April. In addition to our major new releases, we will work to maximize sales by pursuing sales of catalog titles such as Monster Hunter: World and Iceborne. Further, on par with the previous year, we plan to deliver a digital sales ratio of 73.9% driven by regional expansion around the globe and stronger support of the PC platform. In Mobile, we plan to continue support for ongoing titles and release new titles while monitoring market trends. We will also pursue research into 5G technologies in preparation for its wider adoption. Here is a breakdown of our unit sales plan. The number of new titles we plan to release is down year-over-year. However, overall unit sales are expected to be 28 million units total, once again representing an increase. We plan to release 13 titles by SKU and sell 24.95 million units outside of Japan, 23.5 million units digitally and 18 million units in back catalog sales. This is the plan for our Digital Contents business. This year, we forecast net sales to increase by JPY 7 billion to JPY 66.9 billion, with physical package sales in Consumer increasing by JPY 3 billion to JPY 15.9 billion, and digital sales increasing by JPY 2.4 billion to JPY 45 billion, including an expected JPY 2 billion in digital licensing revenue. This will drive up the Consumer total by an anticipated JPY 5.4 billion to JPY 60.9 billion. We also expect an increase of JPY 1.6 billion to bring net sales in Mobile Contents to JPY 6 billion. Operating income is expected to increase by JPY 4.2 billion to JPY 28.3 billion. We anticipate an operating margin of 42.3%. Next, I will go over our Arcade Operations business. First is a look at the 2018 fiscal year market trends. While the market had maintained a recovery trend in terms of market size for Arcade Operations businesses, we expect the impact of COVID-19 to manifest itself going forward. We plan to continue rolling out the new format stores from the previous year while streamlining operations at existing stores. However, in considering the impact of COVID-19, we forecast a decrease in sales and profit year-over-year in this business. We expect same-store sales to be down 18% year-over-year and plan to open 3 new stores, bringing the total number of stores to 43. Further, we will focus on developing new store formats, such as cafés and merchandise shops, that leverage our brands. Year-over-year, our forecast calls for a JPY 1.5 billion decrease to JPY 10.5 billion in net sales and a JPY 1.2 billion decrease to less than JPY 100 million in operating income. Now I will discuss our Amusement Equipments business. The Pachislo market continues to decline following the impact of changes to verification methods since 2014. Here, I will go over our strategy for the Amusement Equipments business. We will closely monitor the operational status of Pachislo halls and plan to release one model built to the current standards, which utilizes our IP. Year-over-year, our forecast calls for a JPY 2 billion decrease to JPY 4.5 billion in net sales and a JPY 300 million decrease to JPY 1.7 billion in operating income, with an expected operating margin of 37.8%. Lastly, I will go through our Other Businesses. For our Other Businesses, having achieved both increased sales and an established global presence for our IP, we will further advance our single content multiple usage strategy. We plan to grow revenue in the Character Contents business, which deals with licensing and media through leveraging popular IP in merchandise and in collaborations. We also look to increase brand awareness globally with ongoing initiatives in theme parks and movies, such as the Hollywood adaptation of Monster Hunter scheduled for a September release. We are working to grow the base of stakeholders in our eSports business in the mid to long term in order to create business opportunities. In consideration of COVID-19, we will focus on business expansion by shifting tournaments online worldwide. We also aim to hold tournaments for female players in order to further grow the user base. Our forecast this year calls for an increase of JPY 100 million to JPY 3.1 billion in net sales. For operating income, while we will continue upfront investment in eSports, we expect a JPY 200 million increase to JPY 700 million. Thus concludes my presentation. We find ourselves in an uncertain situation, where we cannot know when the COVID-19 crisis will end. However, we are committed to strengthening our major brands and will work to realize stable growth in our core Consumer business while getting results in each business segment in order to deliver another year of record profit. Moreover, in tandem with delivering growth, we will make solid investments for the future. We are putting the health and safety of our employees, their families and our stakeholders first. And it is especially because we are facing these difficult times that we are determined more than ever to come together as one and focus our efforts on achieving our business plan for this year. Thank you.