Year Ended March 31, 2014 ANNUAL REPORT United by passion. Ready for success. 2014 Code Number: 9697 Corporate Philosophy “Capcom: Creator of Entertainment Culture that Stimulates Your Senses” Our principle is to be a creator of entertainment culture. Through development of highly creative software contents that excite people and stimulate their senses, we have been aiming to offer an entirely new level of game entertainment. Since Capcom’s establishment in 1983, we have developed numerous products with world-class development capabilities as our strength. Game content, an artistic media product that fascinates people, consisting of highly creative, multi-faceted elements such as characters, storyline, worldview and music, makes use of a variety of media that permeates our daily lives. Going forward, Capcom aims to become a unique company recognized around the world for content brimming with originality. Creation Activities Capcom’s Value Capcom’s 3 Value Creation Activities Highlights 9 11-Year Summary of Consolidated Business Performance Indicators 11 Key Performance Indicators (KPI) and Commentary 13 Business Segments Highlights Shareholders To Our 17 To Our Shareholders (From CEO & COO) 19 CEO’s Discussion of Performance Summary and Progress Towards Medium-Term Business Goals Add-on DLC Our Strategy for Growth Add-on DLC (Sales) Add-on DLC Add-on DLC Digital Add-on DLC Download Make effective Add-on DLC Contents use of DLC 27 Digital “Package software and DLC” business model Our Strategy for Growth Download Contents Capture users with additional DLC, acquire long-term, stable earnings Conversation: An Analyst’s Perspective on Capcom’s Digital Download Package 27 Contents Software Package Software Package “Package software only” business model Software Strategy for Growth Fans lose interest until sales of next title (Time) Mobile Contents PC Online Capcom Brand Beeline Brand Before Unable to meet user needs due to Diffuse competitive capabilities due Centered around weak link between development to games released for variety of users “Monster Hunter Frontier G” in Japan 1 and online management Develop- Manage- Users 29 Growth Strategy Development Strategy ment ment Women’s casual segment After Meeting user needs through Focusing the on women’s casual Strengthening overseas unification of marketing, segment enabling us to hone development mainly in Asia development and online management our strengths South Korea Improving the Consumer Business Marketing China Released Hong Kong Taiwan major updates Users in Japan Develop- Manage- Thailand ment ment Women’s casual segment 31 Growth Strategy 2 Media Strategy Capcom’s Advantages Large Successful number of Global Hollywood New 100% owned popularity movies games Online Business Reforms titles Hollywood movies Hollywood movies 3 © 2012 Screen Gems, Inc. All Rights Reserved 33 Growth Strategy Market Strategy Events Multiple usage development Editorial Policy Gaming machines Pachislo machines Characters Expanding Single Content Multiple Character merchandise Arcade games PC online Multiple platform This report was prepared for a wide range of readers, Mobile development Operability World view Popular PC online Usage Development contents Mobile games (home video games) from individual shareholders to institutional investors, Story Characters and is intended as a tool to aid in the understanding of Capcom management policies and business and Outlook for the Future Overview of Capcom’s Business strategies. We strive to go beyond simply presenting company 35 Overview of Capcom’s Business and earnings and provide insight into game and Outlook for the Future entertainment market trends; we have also compiled a game industry glossary included at the end of this 35 Digital Contents report. Furthermore, in response to investor concerns, 39 Arcade Operations we have enhanced financial analysis, governance and other information. In particular, this report focuses on 41 Amusement Equipments the sincere and proactive efforts of management and 43 Other Businesses employees working on the front lines. To the extent possible, we attempt to make data and content understood visually by making full use Corporate Governance of photographs, graphics and other design elements. 45 Corporate Governance The information presented in this publication is also available online. 45 Conversation: An External Director’s Perspective on Capcom’s Governance 47 Principal Discussions at Board of Directors Meetings Search Index in Fiscal 2013 To find out more about our businesses 49 Corporate Governance Structure and Initiatives PP3–8, PP13–16, PP35–44 53 Internal Management Structure and Initiatives Risk Management To find out more about our business performance 55 Creating Relationships with Shareholders and Investors PP9–16, PP19–21, PP35–44, PP63–68 57 58 CSR Initiatives To find out more about the business or market environment 59 Directors and Corporate Auditors P14, PP19–21, PP29–34, PP35–44 To find out more about our business strategy Financial Section PP17–18, PP22–25, PP27–34 61 Financial Section 62 Financial Strategy According to the CFO: 72 Consolidated Statements of Changes To find out more about our R&D Capabilities R&D Investment and Fund Procurement in Net Assets PP3–4, PP27–34, 63 11-Year Summary of Consolidated 73 Consolidated Statements of Cash Flows separate volume Financial Indicators 74 Notes to Consolidated Financial The Latest Development Report 2014 65 Financial Review Statements To find out more about the game industry glossary 69 Consolidated Balance Sheets 91 Independent Auditor’s Report PP93-94 71 Consolidated Statements of Income/ Consolidated Statements of Comprehensive Income Corporate Market Data Data 92 Corporate Data 93 Game Industry Glossary 95 Stock Data 96 History Game market Diagram1, 13, 18, 21, 22, 23, 24 Arcade facilities market separate volume Diagram27, 28 The Latest Development Report 2014 Amusement equipments market Diagram29, 30 It takes the best to create the best CAPCOM ANNUAL REPORT 2014 2 Capcom’s Value Creation Activities Capcom’s strength lies in the creation of original content for multiple usage on a variety of media. This section explains the value chain, which is the source of our development capabilities and maximizes corporate value, broken down into five steps. Maximize customer Create content Improve quality Expand fan base satisfaction Maximize profits Quality Sales and Online Media Development Control Promotion Management Development 3 CAPCOM ANNUAL REPORT 2014 Creation Activities Capcom’s Value Create content Development 3 Million-Seller Titles This Year Brings Total to 62 Creating content overflowing with originality using the world’s leading development capabilities. Capcom boasts the world’s leading development capabilities. This is evident by the amount of original content. More than 60 of our titles have sold over one million units, including “Street Fighter”, “Resident Evil” and “Monster Hunter”. The value chain, which is the source of content creation, maximizes corporate value through the following five steps. Million-seller total 62 (units) 35 21 12 1995 2000 2005 2014 (As of March 31, 2014) We Also Develop Our Game Engines In-House Multiplatform for next-generation consoles At Capcom, our proprietary development engines are the technological nuclei of game creation. In addition to our Panta integrated development environment “MT Framework”, which Xbox 360 Rhei 3DS facilitates common development for Xbox 360, PS3, PC, Wii U and Nintendo 3DS, we also utilize next-generation engine PS3 “Panta Rhei”. “Panta Rhei”, which maximizes the performance of PS Vita MT Framework MT Framework next-generation consoles, not only improves game quality, it Wii U mobile also makes the development process significantly more Smart- efficient through parallelization of the traditional serialized PC phone development flow. CAPCOM ANNUAL REPORT 2014 4 Capcom’s Value Creation Activities Improve quality Quality Control Quality Check 360,000 Hours per Year Capcom conducts a verification process in the thorough pursuit of increased game value. The role of Capcom’s quality control departments is not simply to check for bugs. The quality of the game is in the degree to which the users find it attractive. The verification process, conducted for 360,000 hours per year, is a thorough check of game content from the users’ perspective. If improvements are in order, the development departments are provided with feedback right away. This helps us make games that are as attractive as possible. Consumer Game Shipments (Thousands of Units) 17,000 16,700 17,500 2012 2013 2014 (As of March 31, 2014) 5 CAPCOM ANNUAL REPORT 2014 Expand fan base Creation Activities Capcom’s Value Sales and Promotion Monster Hunter Events* Attract 48,500 People Capcom expands its fan base by delivering game worlds through a variety of events. To expand the fan base, it is important that games worlds resonate with users. Before launching a new product, Capcom always posts the latest promotional movies online and holds user events across Japan to immerse users in a game’s world before it goes on sale. Capcom also attempts to create new fans by developing a wide range of collaborations with other industries, including arcade facilities, magazines and travel agencies. * “Monster Hunter Festa ‘13” (Five venues) Major User Events in the Fiscal Year Ended March 2014 “Monster Hunter Festa ‘13” “Monster Hunter the Real 2014” “Monster Hunter × Shibu hot springs resort in Nagano prefecture” “Resident Evil the Real”