ANNUAL REPORT 2016 Fiscal year ended March 2016 B Contents 1 Avex Snapshot 2 Avex History 4 Dear Fellow Stakeholders 9 New Management Structure 10 At a Glance 11 Review of Operations 11 Music Business 12 Video Business 13 Management & Live Business 14 Other Businesses 15 The Avex Group’s CSR Activities 16 Compliance Policy 17 Corporate Governance 20 Directors, Auditors and Corporate Executives 21 Corporate Data and Investor Information 22 Financial Section Avex Snapshot (Fiscal years ended March 31) Performance Indicators Per Share Revenue and earnings decreased in the fiscal year ended March The operating income margin and ROE declined in the fiscal year The Avex Group has identified payout ratio and minimum dividend 31, 2016. This was largely attributable to a downturn in the number ended March 31, 2016. This largely reflected the downturn in earn- payment targets of at least 35% and ¥50 per share, respectively. of live performances at large venues, a drop in album production ings across all businesses. Despite this downturn, the shareholders’ Turning to the fiscal year under review, the annual dividend was ¥50 sales in the Music Business, and an upswing in expenses in line with equity ratio remains stable, exceeding 40%. Looking ahead, the per share and the payout ratio 50.1%. the revamp of video distribution service in the Video Business. Avex Group will continue to strengthen its financial base. Net Sales Operating Income Margin Net Income per Share (¥ billion) (%) (¥) 180 12 200 154.1 9 150 120 99.88 6 4.7 100 60 3 50 0 0 0 ’12 ’13 ’14 ’15 ’16 ’12 ’13 ’14 ’15 ’16 ’12 ’13 ’14 ’15 ’16 Operating Income ROE Equity per Share (¥ billion) (%) (¥) 15 20 1,200 1,144.82 15 900 10 7.2 10 8.7 600 5 5 300 0 0 0 ’12 ’13 ’14 ’15 ’16 ’12 ’13 ’14 ’15 ’16 ’12 ’13 ’14 ’15 ’16 Net Income Attributable to Owners of the Parent Shareholders’ Equity Ratio Cash Dividends (¥ billion) (%) (¥) 8 50 44.2 60 50.00 40 50 6 40 4.2 30 4 30 20 20 2 10 10 0 0 0 ’12 ’13 ’14 ’15 ’16 ’12 ’13 ’14 ’15 ’16 ’12 ’13 ’14 ’15 ’16 1 Consolidated Net Sales (¥ billion) (Fiscal years ended March 31) 200 200 April 1988 Founded in Machida, Tokyo December 1999 as a record importer October 1998 Listed on the First Section of and wholesaler Began trading on the OTC market (currently JASDAQ) the Tokyo Stock Exchange 150 150 September 1990 January 2000 Started music Current logo production and October 1997 (corporate identity) adopted established the record Established an in-house music label, “avex trax” package distribution company 100 100 July 1995 Went into the artist management business May 1993 50 Relocated to 50 Minami-Aoyama in Avex History Tokyo’s Minato Ward 0 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95* ’96 ’97 ’98 ’99 ’00 ’01 ’02 0 (Fiscal years ended August 31 in 1994 and earlier) * Seven-month fiscal period Since its foundation in 1988, the Avex Group has been October 2001 considering changes in its business environment as Opened Avex Artist Academy opportunities and has been providing people with ex- in Harajuku, Tokyo citement through entertainment. February 1990 August 1993 Although there was a phase during which growth Released a dance compilation album 50,000 people turned out for the free “avex leveled off, the Avex Group was able to sustain its ever- SUPER EUROBEAT VOL. 1 rave ’93” dance event that for one night only increasing growth by the implementation of structural turned the Tokyo Dome into a disco reforms heralded as its Second Takeoff. February 1992 May 2016 saw the announcement of the “avex group JULIANA’S TOKYO dance compilation album growth strategy 2020—towards an innovative future of en- became a major hit tertainment.” Positioning the formulation of the strategy as its Third Takeoff, the Avex Group will work to further im- prove its corporate value by implementing Companywide reforms relating to strategy, organization and principles. 2 September 2014 Due to the reconstruction, headquarters location changed to Roppongi 1-chome, Minato Ward November 2013 (Izumi Garden Tower) Plans for rebuilding Avex December 2014 headquarters building Established AWA Co. Ltd. as a joint announced venture with CyberAgent, Inc. Planned for completion April 2009 in 2017 200 Established Avex Broadcasting & Communications Inc. as 200 a joint venture with NTT DOCOMO, Inc. October 2004 May 2016 Shifted to a holding company system Announced “avex group growth 150 April 2005 150 strategy 2020” Second Takeoff. Implementation of structural reforms, ramp up The Avex Group will promote “avex group 360-degree strategy growth strategy 2020—towards an innovative 100 100 future of entertainment,” while working to maximize Group value and providing its cus- tomers with more surprises and excitement. 50 50 0 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 0 December 2007 April 2015 Gained top share of music software Redesigned and renamed “d-VIDEO” market for both Japanese and as “dTV International music May 2015 May 2009 Launched subscription music streaming service “AWA” Launched the “BeeTV” video distribution service that provides original programing August 2002 November 2011 February 2013 Started the “a-nation” nationwide circuit Launched the “d-VIDEO” Launched UULA, the video and music entertainment live music event video distribution service distribution service developed for smartphones 3 Dear Fellow Stakeholders Masato Matsuura Representative Director, CEO Dear Fellow Stakeholders Implementing Companywide reforms based on a new growth strategy 4 Fiscal Year Results and Shareholder Returns Market Conditions and Identified Issues For the fiscal year ended March 31, 2016, the Avex Group reported net sales of Since its founding, the Avex Group has been considering changes in its business ¥154,122 million (down 8.9% from the previous fiscal year), operating income of environment as opportunities and has been providing people with excitement ¥7,277 million (down 16.1%) and net income attributable to owners of the parent through entertainment. totaling ¥4,292 million (down 28.2%). Although there was a phase during which growth leveled off, the Avex Group was The decrease in revenue and earnings was attributable to a variety of factors. Major able to sustain its ever-increasing growth by the implementation of structural reforms factors including a downturn in the number of live performances at large venues in the heralded as its Second Takeoff in 2005. Management & Live Business, a drop in album sales in the Music Business, and an Over the past few years, the operating environment for the Avex Group has been upswing in expenses in line with the revamp of a video distribution service in the characterized by a shrinking market for music software but a growing market for Video Business. entertainment centered on live events, anime and digital content. As indicated by our Net income attributable to owners of the parent contracted owing to the decline recent performance, however, the Avex Group has not been able to keep pace with in operating income and investments made in new digital music distribution services. all the changes in the business environment. Regarding shareholder returns, Avex has a policy of paying a minimum annual In order to overcome the issues that arose while advancing our Mid-Term dividend of ¥50 per share while targeting a consolidated payout ratio of at least 35%. Strategy 2018 announced in the previous year and accelerate growth further, we In accordance with this policy, the Company distributed a dividend of ¥50 per share decided to reset the timeframe of our management plan, and unveiled a new growth for the fiscal year ended March 31, 2016, for a consolidated payout ratio of 50.1%. strategy in May 2016 called “avex group growth strategy 2020—towards an innova- tive future of entertainment.” Positioning the formulation of the strategy as its Third Takeoff, the Avex Group will work to further improve its corporate value by imple- menting Companywide reforms relating to strategy, organization and principles. Music (software, distribution) market*1 Live event market*2 Anime market*3 Digital (video distribution) market*4 (¥ billion) (¥ billion) (¥ billion) (¥ billion) 600 Annual contraction 400 Roughly doubled in size 2,000 About 1.3x larger in size 200 About 1.9x larger in size in market over past four years over past four years over past four years (35% smaller than in 2007) 300 1,500 150 300 200 1,000 100 100 500 50 0 0 0 0 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’11 ’12 ’13 ’14 ’15 ’10 ’11 ’12 ’13 ’14 ’11 ’12 ’13 ’14 ’15 *1 Source: Recording Industry Association of Japan *2 Source: All Japan Concert & Live Entertainment *3 Source: The Association of Japanese Animations *4 Source: Nomura Research Institute, Ltd. Promoters Conference 5 avex group growth strategy 2020 1 Selection and Concentration in Growth Markets —towards an innovative future of entertainment Position and Outline of Growth Strategy The Avex Group will tap into growth in the live event market and Live peripheral markets by leveraging its expertise as a leading producer Positioned as its “Third Takeoff,” the Avex Group has created the new “avex events of live events in Japan and partnerships with external parties. group growth strategy 2020” with plans to implement Companywide reforms to strengthen its growth strategy, reform the organization and review its princi- 1 ‌Increase the number of live events by expanding our library ples. Avex is focusing on creating new hits while working to enhance profit- In areas where it is unable to act on its own, the Avex Group aims to increase the ability without relying solely on the hits.