Capcom Co Ltd

TSE:9697

Earnings Call Transcript 2022-Q4

[Haruhiro Tsujimoto, President]

I'm Tsujimoto, President of Capcom. Thank you for joining us today for Capcom Full Year Financial Results Presentation despite your very busy schedule.

Firstly, I would like to go over Capcom's corporate philosophy once again. Capcom is a creator of entertainment culture that stimulates your senses. And since our founding, we have provided games and other high-quality content to create smiles and move hearts around the globe. Our purpose is to contribute to building richer, more fulfilling lives for people through games and other content. We will bring joy and emotion to the world and work to create an environment where games can be enjoyed while providing the energy for people to push forward in their lives. And through these efforts, going forward, we will contribute to addressing important societal issues while building a sustainable society.

June 11 marks the 40th anniversary of our founding. To celebrate, we will open Capcom Town, a website built to be a digital destination that fans around the world can enjoy. We will also plan to release an anniversary video over our social channels and many other global-facing activities from different businesses. Through the activities, we'd like to express our gratitude for your support over the past 40 years, while also enhancing branding for further growth in the future.

Moving on, I will discuss our mid-term management objectives and our plans for FY '23. First, I would like to go over our medium-term management objectives.

Our current medium-term goal is annual operating profit growth of least 10%. In FY '22, we continued to pursue enhanced digital sales in our consumer business subsegment while steadily building up global software sales and profit. As a result, we achieved our 10th consecutive year of profit growth since FY '12, as well as our sixth consecutive year of record profit. In FY '23, we are aiming to grow further to JPY56 billion in operating profit.

Unit sales growth in the consumer business is supporting this ongoing profit growth. Unit sales volume has increased since FY 2014 for eight consecutive years due to promoting digital sales and the steady release of major hit titles in recent years. Further, following the shift to digital sales, both the volume and ratio of our catalog title sales has increased, thanks to expanding demand for catalog titles globally.

We will continue to aim for sales volume growth to support stable earnings growth. Beyond that, considering that the current population of game players is set to be 3 billion, I believe our long-term goal of 100 million units of annual sales is possible.

Next, I would like to explain our activities to further expand unit sales volume.

First is expanding our sales regions by actively supporting the PC platform. As shown by this map, we have widened our sales regions in recent years, thanks to greater adoption of digital sales on PC, which has enabled us to sell our games even in countries and regions where dedicated game consoles are not available. In the prior year, including our back-catalog of games, we sold 307 different products in 230 countries and regions, with more than 40% of volumes sold on the PC. Further, per country sales volume has also grown compared to five years ago.

Looking ahead, we will raise the level of sales volume in lower-performing countries and regions by executing price strategies and bolstering our brand. At the same time, we look to build synergistic effect between our pricing strategies and communications by utilizing digital events, such as Capcom Showcase and Capcom Spotlight.

The second effort is releasing high-quality titles on a regular continuous basis. In recent years, following the release of our new game, we've been able to continue selling that same game over the long term as high-margin catalog title by carrying out digital discount in stages. This is evidenced by the results since the FY 2016 results when we began to accelerate our focus on digital sales.

For example, Resident Evil 7 was released in FY 2016 and it has sold over 1 million units each year for seven consecutive years with cumulative sales now over 12 million units. Similarly, Monster Hunter: World released in FY '17 has sold a Capcom record of 18.8 million units. When including sales of bundle version, which contains massive expansion, Monster Hunter World: Iceborne, this figure exceeds 22 million units. Resident Evil 4, released in FY '22, has been highly reviewed and we are seeing positive response for ongoing sales. Further, we are readying multiple major releases for FY '23, including the upcoming Street Fighter 6.

As a result of expanding our sales regions and selling high-quality titles over the long term, catalog title sales volume has grown seven times over the past 10 years from 3.9 million units in FY '12 to 29.3 million units in FY '22.

Consolidated operating profit has grown in line, and, as I mentioned, we have achieved 10 consecutive years of profit growth. As growth of high-margin catalog title sales strongly promotes growth of our consolidated earnings, we plan to continue our focus on catalog title sales.

Now, I would like to review three points of our management strategy for ensuring long-term growth.

First point is our personnel investment strategy. As I said in last year's fiscal result presentation, we are pursuing investment in personnel as one of our strategic management priorities to ensure long-term growth of our company.

In the previous fiscal year, we increased the average annual salary of permanent employees by 30%, introduced stock-grant ESOP program, utilizing 4 million shares of treasury stock and strengthened the link between company performance and our bonus system. We look to continue to raise the level of salaries linked to sustainable earnings growth. And based upon this policy, we anticipate an approximate 10% year-over-year increase in the level of employee salaries.

We are also carrying out initiatives with future growth in mind, such as town hall meetings to share employees our business situations and securing Board room diversity. By providing an even more comfortable work environment for employees, we're carrying out hiring and training programs. We aim to enhance productivity going forward. Further, we are working to bolster our R&D organization by continuing to hire at least 150 new graduates.

The second strategic point is strengthening our brands. As I mentioned, we have widely expanded our sales regions. However, there is still a disparity in sales volume between regions. It is important for us to increase penetration and strengthen our brands for our content in many areas in order to reach 100 million units in annual sales. We will, therefore, promote global branding in order to increase awareness of Capcom's games among those who are yet to familiarize themselves with our titles.

For example, as we recently announced, working with Niantic, we are targeting fans outside of home consoles with the upcoming new mobile game Monster Hunter Now. A closed beta test for this title began in late April with a number of applications to take part, far exceeding the limit, giving us a real sense of how anticipated this title is. Further, movies and television shows are very effective for increasing brand penetration as they can convey the world and feel of the game without console [indiscernible].

We are steadily making progress here as seen by our establishment of Capcom Pictures last year and the recent announcement of -- about production of a new live-action Street Fighter movie. Further, we continue to promote growth of esports globally with initiatives such as increasing the price money at levels of each events. Additionally, we look to expand the Capcom brand worldwide through our support of popular sports, such as National Volleyball Association and Cerezo Osaka, as well as our participation in the World Expo 2025 in Osaka.

As I have explained, the main driver of our growth is in the global consumer home video game market. However, we are working to enhance earnings in each of our business segments. This is because by creating an earnings foundation in related businesses, such as arcade of operations and amusement equipment business, we can create stable growth. In each of these segment, we aim to continue building a stable earnings foundation, not only with existing business structures, but also by incorporating new formats and business models.

Moving on, I would take you through our strategies and plans for FY '23. To begin, let's look at the latest market forecast. The outlook for the game market is continued growth, including our primary consumer segment. In 2022, the market reached $203.4 billion. This is forecasted to exceed $242.1 billion in 2027, about 1.2 times of the market size in 2022. Market size by platform, the mobile market is expected to be the largest. However, PC and consumer are also forecasted to continue growing. While Capcom has achieved major growth over the past 10 years, given the market environment, we have analyzed that there is still room to grow further.

Next, I would like to go over guidance for the FY '23. First, in the previous fiscal year, we achieved 10 consecutive years of operating income growth and record high net sales, and profit at all levels, driven primarily by growth in consumer sub-segments of our digital content business. This year, we aim to achieve seventh consecutive years of record profit at all levels by focusing on new major title release and enhanced digital sales to grow our core consumer business. We also plan to achieve our 11th consecutive years of operating income growth.

We are forecasting consolidated net sales to increase by JPY14.07 billion to JPY140 billion; operating income to increase by JPY5.188 billion to JPY56 billion, and operating margin of 40.0%. Ordinary income is expected to increase to JPY56 billion. And net income is expected to increase by JPY3.263 billion to JPY40 billion. Earnings per share forecast is JPY191.28. And interim dividend of JPY27 and year-end dividend of JPY27, altogether annual dividend of JPY54.

Lastly, this is by segment. The Digital Content business continue to drive growth. We expect to sell record 45 million units for the year, with the major new release including the upcoming June 2nd release of Street Fighter 6 and by expanding digital sales catalog sales globally. As a result, we anticipate net sales to increase by JPY8.142 billion to JPY106.3 billion, operating income to increase by JPY5.396 billion to JPY58.9 billion, and [0.9 point] (ph) increase in the operating margin to 55.4%.

Also anticipate increased net sales profit of Arcade Operations business due to contributions from new and existing stores, as well as increased net sales profit in the Amusement Equipment business via launch of four new titles. In Other businesses, we continue to promote investment in esports, but anticipate increased sales and profit through strengthening activities in the character, contents and media business.

Once again, we would like to grow by focusing on consumer digital sales, so that we can record new high-end profit. In order for us to continue our expansion, all of us, including our employees, their families and our global stakeholders, we will come together as one and focus on our efforts and to grow. Thank you very much.