Full Year 2013 Capcom Co Ltd Earnings Presentation On

THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT 9697.T - Full Year 2013 Capcom Co Ltd Earnings Presentation

EVENT DATE/TIME: MAY 09, 2013 / 4:30AM GMT

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CORPORATE PARTICIPANTS Kenzo Tsujimoto Capcom Co. Ltd - Chairman and CEO Haruhiro Tsujimoto Capcom Co. Ltd - President and COO

PRESENTATION Kenzo Tsujimoto - Capcom Co. Ltd - Chairman and CEO Thank you for attending. I realize that this earnings announcement season is a busy time for you. Thank you very much for taking the time today to attend our information meeting. Every year we contact analysts and investors in Japan and overseas to hear your thoughts about our mid-term goals, strategies, IR activities and other subjects. Your input is one of the items we consider when reaching management decisions and we appreciate your cooperation. At today's information meeting I will cover four subjects, an overview of our performance in the past fiscal year, an analysis of market conditions and our responses associated with last year's earnings revision, our review of mid-term goals, and our stock repurchases.

In the fiscal year ended March 2013 our sales were higher than one year earlier, but earnings decreased. There are two reasons for the growth in sales. First is increase of JPY9.1b, plus 119%, in sales in the Amusement Equipments business because of the success of our Resident Evil 5 pachislo machine. Second is the increase of JPY3.8b, plus 6%, in sales in the Digital Contents business because of growth in sales of mobile content and digitally distributed content, DLC, of the Home Video Games.

Higher sales in the Amusement Equipments business contributed JPY4b, plus 450%, to operating income, but the Digital Contents business had a negative effect of JPY5.8b, minus 45%, on operating income. Sales of the flagship title Resident Evil 6 fell short of our target at 4.9m units and we decided to postpone the launch of Monster Hunter 4 to the summer of 2013. Net income was down JPY3.7b, minus 56% (sic -- see presentation "44.2%"), because of special losses of JPY7.2b, associated primarily with a re-examination of our games under development to reflect changes in market conditions.

Looking at our markets, I believe there were two reasons for our earnings revision in the previous fiscal year. One is the drastic changes in the industry's market environment. The other is the concentration of AAA titles in the hands of few foreign competitors.

I will explain changes in our markets by looking at each game platform. I think the general view of stock investors is as follows. People are increasingly using smartphones and tablets to enjoy games. As a result, the package software market has matured because there is only a small number of core users and downward pressure on prices. Furthermore, business risk involving package software is growing. The main reasons are higher game development expenses because of next-generation game hardware and the concentration of some major titles among a few companies. Consequently, investors request that Capcom should shift its focus to the mobile and PC online categories.

We see the package game market in 2017 will be $5.3b, minus 29%, smaller than in 2012. During this same period we foresee enormous growth of $7.8b, plus 110%, in the DLC market. I think that channeling our resources to the DLC market will enable us to earn sufficient profits for Home Video Games too.

The single-content multiple-usage strategy is the basis of our operations. We use in many ways intellectual property created for package software. Our goal is to make our title line-up more powerful by continuing to increase sales, package plus DLC, from major titles. To accomplish this goal we will re-examine the structure of our organization. For example, one theme is combining the production skills of our people in Osaka with the business operations skills of our people in Tokyo.

We performed a comparison of sales volumes between 2007 and 2012 of series titles of our competitors. In general sales of the AAA titles of our competitors, even for package software alone, were flat or higher. We also analyzed sales from 2007 and 2011 of titles that sold more than 5m units. The number of these titles was the same in 2007 and 2011, but these titles increased as a share of total sales volume in 2011. This shows that the market is becoming increasingly dominated by AAA titles.

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Our analysis of our markets and the shortfall in last year's performance identified two major issues. First is the delay of response to the shift to digital media in the Home Video Games business. Second is less than anticipated quality of titles outsourced to overseas developers being attained.

Delayed response to the shift to digitally distributed content, DLC, in the Home Video Games business. In the home video game market DLC accounted for 27% of sales in 2012, but at Capcom this ratio was only 11%, demonstrating our high reliance on packaged software. The actual DLC ratios are somewhat lower because sales in this market include monthly payments to hardware manufacturers. By 2017, the DLC ratio is expected to be more than 50% in the market. This is why there is an urgent need for the Company to undertake initiatives to increase the level of such content.

In 2009 we started making extensive use of overseas development companies, but the subsequent rapid advances in technology have created a clear dividing line between strong and weak developers. As a result, some companies can develop hit titles such as Blue Castle Games, which Capcom acquired. At other companies there are many problems involving quality and delays.

To deal with this problem we will make two strategic changes of direction in the Consumer business by increasing the DLC ratio and producing more titles internally. Shifting production back to Capcom will allow us to improve quality by accumulating expertise, as well as to follow schedules closely. In addition we will establish a digital strategy framework in our development and marketing sections. I believe these actions will raise the DLC ratio, which will lead to higher earnings.

Capcom previous mid-term goal was accumulative sales to JPY500b and operating income to JPY75b over the five-year period ending in March 2015, while placing priority on achieving an operating margin of at least 15%. During the three-year period that ended in March 2013, sales totaled JPY273.8b, 55% of the five-year goal. Operating income was JPY36.7b, which is 49% of the goal. And the operating margin was 13.4%. As you can see, we have not been making sufficient progress toward the mid-term goal. Delayed response to the expanding digital contents market, as I just explained, is the reason.

We have established a revised mid-term goal and strategy in association with the strategic shift to reflect the change in market conditions. Capcom will start the revised mid-term plan in the fiscal year ending in March 2014. By implementing this plan we are determined to return to growth.

The revised mid-term goal is a cumulative operating income to JPY75b to JPY80b over the five-year period ending March 2018 and an operating margin of 20% in the year ending March 2018. We have not established a sales target due to the growth of the digital contents market. We instead established operating income and operating margin goals and plan to reach these goals by strengthening online content operations, which consist primarily of the DLC, mobile, PC online categories. The ultimate objective is to increase our corporate value.

We are currently re-examining our 60-month map and other items in association with the realignment of our Consumer business. Therefore, we plan to provide more information about the revised midterm plan at the information meeting for our first half results of operations.

As of the end of April, Capcom has purchased 425,900 shares of stock, authorization is 1.5m shares, at a cost of about JPY700m, authorization is JPY2.5b. I cannot say when we will reach the maximum number of shares authorized because this depends on the stockmarket movement and legal restrictions, but we plan to complete the full repurchase authorization if possible.

We are repurchasing our stock for the purposes of conducting operations in a manner that reflects changes in the operating environment and implementing capital policies with speed and flexibility. Consequently, we plan to hold this stock for the time being. In addition, since stock repurchases also enable us to use equity more efficiently, thereby by raising the ROE, we will continue to purchase stock in accordance with changes in the operating environment.

This completes my presentation. The President of Capcom will provide more information about our strategies in the current fiscal year.

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Haruhiro Tsujimoto - Capcom Co. Ltd - President and COO My presentation today will cover our strategies and plans for the fiscal year ending in March 2014. I will begin with an explanation of the highlights of our growth strategy for the current fiscal year.

I anticipate more growth of the video game market worldwide even as rapid and dramatic changes take place. This market is expected to grow to sales of $86.6b in 2017, which is 40% higher than in 2012. Capcom will continue to concentrate on the growing mobile and PC online sectors by adapting with speed and flexibility to the diversification of hardware and market expansion in emerging countries. In the home video game market I believe that growth will be backed by digitally distributed content, DLC. Capcom will continue to channel resources to this sector in order to compete on a global scale.

Capcom is pursuing two strategies for growth. The first is improving our Consumer business. One goal is to improve profitability by strengthening our digital strategy. Another is producing more titles internally in order to develop games more efficiently and raise the quality of our games. In addition, we aim to shorten the development-to-launch cycle for releases of series titles in order to retain game series fans.

The second is strengthening our Online Games business, which has a lot of growth potential. We will target the many types of hardware used to enjoy social games by offering both browser and app versions of our games. We will also move quickly to create games for ebook readers and other new game platforms. Next, to strengthen our Online business outside Japan, we will work on expanding operations in the rapidly-growing markets of Asia. We also plan to increase our development workforce by about 100 every year. Most of the new developers will be assigned to the Online sector in order to achieve these strategic goals.

My next subject is our Online Contents sales growth. Online Contents sales are the sum of sales of, one, mobile contents, two, PC online products and, three, digitally distributed contents, DLC. Since the fiscal year ended March 2009, these sales have been climbing at an annual pace of more than 20%. We foresee more growth in the current fiscal year in all three categories with total sales rising to JPY28b. Our original goal for Online Contents was sales of JPY30b in the March 2015 fiscal year. Since we will come close to this goal in the current fiscal year, I think we should aim for even higher sales.

My next subject is our forecast for the fiscal year ending in March 2014. In the fiscal year ending in March 2014, one, we expect sales to increase JPY2,925m to JPY97b. Two, operating income to increase JPY1,849m to JPY12b. Three, resulting in an operating margin of 12.4%. Four, ordinary income to increase JPY756m to JPY11.7b. Five, and net income to increase JPY3,827m to JPY6.8b. Six, resulting in earnings per share of JPY118.91. Seven, we plan to pay a dividend of JPY40 per share, the sum of a JPY15 interim dividend and JPY25 year-end dividend.

Our markets continue to change constantly. We are determined to make steady progress with our growth strategies of improving the Consumer business and strengthening the Online Contents business. Furthermore, we expect a steady contribution to results from the pachinko and pachislo business, which grew significantly in the previous fiscal year. In addition, since this is the first year of our revised medium-term plan, it is particularly important to reach our operating income target of JPY12b.

My next subject is our fiscal year strategy for the Digital Contents business. In the Consumer business we plan to improve profitability by reinforcing our digital strategy. First, to build an organization for next-generation business activities, we will establish stronger global links between our development and marketing operations. This will make us more competitive overseas. We have already announced the development of Deep Down, a new title for the PlayStation 4, a next-generation console. Work is now under way on this game. In Japan, which is a highly profitable market, we plan to launch Monster Hunter 4, Ace Attorney 5, Sengoku BASARA4 and other major titles with proven track records.

Increasing DLC sales is another priority. We will strategically introduce additional DLC for major titles with the aims of prolonging and maximizing earnings from each title. For main title downloads, we plan to increase the line-up of titles sold exclusively as downloads, such as a Dungeons & Dragons game.

My next subject is our sales plan for major package titles. We plan to release Monster Hunter 4 in the summer of 2013 and plan on sales of 2.8m units. We will start selling Resident Evil Revelations Unveiled Edition in North America on May 21 followed by launches in Europe and Japan. The

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©2013 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. MAY 09, 2013 / 4:30AM, 9697.T - Full Year 2013 Capcom Co Ltd Earnings Presentation sales plan is 1.2m units worldwide. The scheduled release date for Lost Planet 3 in North America is August 27, followed by Europe and Japan, and we plan on sales of 1.2m units worldwide.

Our sales plan in the previous fiscal year for Monster Hunter 4 was 2m units. We have raised this figure to 2.8m units mainly for two reasons. First is the long repeat sales period following the launch. Second is the higher quality of the game due to our decision to push back its introduction. Sales plans for the other titles are based on our view of current market conditions.

For package software units' volume we expect a 1m decrease to 13m units in the fiscal year ending in March 2014. This is because a cyclical market downturn is occurring at the same time as our business restructuring measures. We expect a decrease of 16 in the number of titles to 30. By region, we anticipate a 1.8m increase to 6.3m units in Japan due mainly to the contribution of Monster Hunter 4. In other regions we expect a downturn in sales volume because of the high volume one year earlier backed by Resident Evil 6 and other popular titles. For titles of other companies that we distribute, we forecast a 200,000 unit increase to 750,000 units. The plan for old and lower-priced titles is 3m units, down 900,000 from the previous fiscal year.

My next subject is our strategy for mobile contents. For our entire Online Contents business our goal is to grow along with expansion of the market by increasing the number of developers for online contents.

For the Beeline brand our strategy is to continue distributing titles that target the family user segment, which is where this brand is strongest worldwide. The brand is growing steadily. Cumulative downloads were more than 100m at the end of March 2013. Smurfs' Village, this brand's major title, still ranks among the 25 top-selling games and is expected to make another consistent contribution to earnings this year. Activities involving Beeline will also quickly reflect the increasing use of ebook readers and other types of platform.

Beeline Interactive Thailand, which was established in the previous fiscal year, will begin full-scale operations this fiscal year. This will increase Beeline development bases to four locations, enabling us to further strengthen the product lineup. We plan to start distributing a game tentatively titled Snoopy 2 in 2013 winter.

My next subject is our strategy for the Capcom brand. For the Capcom brand we will sell social games that primarily use our current major brands. We will use our Osaka and Tokyo development bases to develop both app and browser versions of games. Osaka, which is skilled in developing rich content, will concentrate mainly on app versions. In addition we plan to increase the number of developers in order to introduce more titles and raise the quality of our games.

In the PC and others sector, which includes PC online games, we plan to increase earnings mainly by significantly updating core titles. We started offering the PC online game, Monster Hunter Frontier Online G, on April 17, 2013 and the title's initial performance is strong. In addition we will offer versions of the Onimusha Soul browser game for new platforms.

For overseas growth we will use collaboration with Tencent Holdings of China to start selling in China Monster Hunter Online, a game already on sale in other regions. We plan to start beta testing in 2013. We plan to start selling Onimusha Soul in Taiwan, too. Beta testing started on April 30, 2013 and is going well. Due to the expected contributions of these titles, we expect a big increase in PC and others sales from JPY6.7b in the previous fiscal year to JPY9.5b.

We expect growth in sales and earnings in the Digital Contents business in the fiscal year ending in March 2014 because of growth of online contents and for other reasons. Our plan is for sales of JPY64.5b, operating income of JPY9.1b and an operating margin of 14.1%.

My next subject is our Arcade Operations business. Japan's arcade market appears to have stopped declining in terms of market size and the number of amusement arcades. However, existing arcade sales at Capcom were down 5% from the previous fiscal year. As a result we still need to closely monitor changes in market conditions. Our goal is to hold sales and earnings steady in the current fiscal year by rigorously managing costs, including measures concerning unprofitable arcades.

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At existing arcades we will make operations as efficient as possible and develop new sources of demand, such as by holding events for seniors. Our plan is to achieve existing-arcade sales that are down only 1% from the previous fiscal year. We plan to continue our scrap-and-build program for arcades. After adding three locations and closing five, we plan to have 32 arcades at the end of March 2014. Our plan is for sales of JPY11b, operating income of JPY1.7b and an operating margin of 15.5%, all basically unchanged.

My next subject is the Amusement Equipments business. In the pachinko and pachislo market, the pachislo sector continues to grow steadily. In the market for arcade games, there are signs of an upturn in market's interest in making investments along with the end of the downturn in the arcade market.

Our Amusement Equipments business strategy is to further increase earnings by making extensive use of our popular home video game series. In the pachinko and pachislo business we plan to strengthen operations for making our own machines. This fiscal year we plan to introduce two Capcom machines. In addition we will continue our alliance with Fields Corporation in order to maintain and enlarge our sales network. We also plan to reduce opportunity losses by enlarging our production capabilities. For our business of making machines for other companies, we plan to develop and start selling several new models. We expect these operations to make a consistent contribution to earnings.

We expect that the Arcade Games Sales business will make a stable contribution to earnings because of introductions of new machines. In April 2013, we started installations of Mario Party Fushigi no Kokokoro Catcher 2, which is the second version of this successful machine. In the summer of 2013, we plan to start installations of a new arcade game called Monhan Nikki Puripuri Pugi Race.

Overall, we anticipate higher sales but lower earnings in the Amusement Equipments business, with sales up JPY1.8b to JPY18.5b and operating income down JPY0.5b to JPY4.3b, resulting in an operating margin of 23.2%. The outlook for lower earnings is due to the strong earnings in the previous fiscal year because of the introduction of the Capcom Resident Evil 5 pachislo machine.

For other businesses, we will strengthen global operations as part of our Single Content Multiple Usage strategy. In the character contents business, we will work even harder on raising awareness of Capcom by linking TV programs and stage productions with launches of new games. For example, the Takarazuka Revue will start performing Sengoku BASARA in June 2013. Another project under way includes an animated TV program, toys and games associated with Gaist Crusher, a title for children that follows Mega Man. For activities linked to Capcom's 30th anniversary, we plan to sell commemorative books, merchandise and other products worldwide. In other businesses we plan on sales of JPY3b, operating income of JPY1.2b and operating margin of 40%.

Everyone at Capcom has a firm commitment to achieving our planned sales and earnings in this fiscal year. Thank you for your support and understanding.

Editor Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.

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