Risk Management

The Capcom Group is focusing on global expansion as one of the key initiatives in our growth strategy. The ratio of overseas sales to the Group’s consolidated sales is approximately 66%.

A. Market trends, the presence of competitors, political, economic, legal, cultural, religious, and customary factors, as well as various other country risks in the countries and regions where we sell overseas, as well as the securing of human resources, may adversely affect the Group’s business strategy, performance, and financial condition.

To address this, Capcom maintains steady communications with our overseas subsidiaries and distributors to understand the market trends of each region and carry out marketing that suits local needs.

B. As the volume of overseas transaction expands, it is possible that losses or expense burdens will increase depending on regulations or the interpretation of the accounting laws by the customs or taxation authorities. The operating results and financial position of Capcom may be affected negatively by these conditions.

To address this, we work closely with our overseas subsidiaries and distributors to promote legal compliance.

C. There is a risk that our business performance may be adversely affected by the increase in expenses and the failure to recover overseas investment in the event of unforeseeable circumstances which cannot be predicted by feasibility studies.

In preparing our consolidated financial statements, the Group converts the financial statements of overseas consolidated subsidiaries into yen. Additionally, a significant portion of the Group’s overseas sales is conducted in local currencies, and we hold a substantial amount of foreign currency-denominated operating receivables. Therefore, if exchange rates fluctuate significantly beyond expectations, it may affect our group’s performance and financial condition.

As a countermeasure, we strive to minimize the impact of exchange rate fluctuations by utilizing forward exchange contracts to hedge against future exchange rate risks.

A. Increase in Development Costs
Development costs have been rising steeply in recent years for home video games, driven by factors including the introduction of new technologies and functional advancements in devices. As such, there is a risk that we will be unable to recoup the development costs for some titles, such as for those that do not reach their target unit sales.

To address this, Capcom is focusing on maintaining our proprietary development engine, increasing and efficiently allocating development personnel to improve quality and development efficiency, and controlling development costs. Additionally, we are working to secure long-term profits by expanding catalog sales and improving profit margins through strengthening digital sales.

B. Development Technologies
Products relating to game machines, including home video games, are subject to rapid technological progress. Therefore, there is a risk that sales opportunities may be lost due to any delays with technological progress, which may have an adverse effect on our business results and financial condition.

To address this, we are ceaselessly focused on development enabled by cutting-edge technology and provide a state-of-the-art work environment while employing top-tier developers.

C. Obsolescence of Game Software
Being a luxury good, video games face intense competition from other industries whose consumer segments overlap with our own, and the purchasing trends for video games can be affected by strong consumer interest in other forms of leisure. Further, long product life for physical, packaged games is not guaranteed. Given this, product obsolescence can occur quickly, and we might face the risk of increased inventories and irrecoverable development costs.

To address this, we are endeavoring to secure long-term revenue streams by aiming to reduce product inventories with stronger digital sales while continuously leveraging our major intellectual property with rereleases of past titles and in spin-off products.

D. Dependency on Popular Series
The Group has released many games, and a portion of these have tended to be more popular than others. Sales for our established franchises show limited volatility and help stabilize our business performance; however, if the market environment changes or if there are any defects or issues with these games, we face the risk of losing users, which could have an adverse effect on our business strategies, performance and financial condition.

To address this, in addition to regularly releasing major titles that utilize our core IP while creating new IP, we are pursuing enhanced revenue by expanding our user base while working to further increase brand value globally and better understand customer needs.

E. Violent Scenes and Depictions
Some of our popular games contain scenes of violence, grotesque imagery, or other provocative depictions. When violent crimes or crimes involving juveniles occur, certain members of the media often claim that games have an effect on or relationship to these incidents. Because of this, we may be subject to defamation in public or possible regulatory action by governing bodies, which may have an adverse effect on our business performance or financial condition.

To address this, Capcom strictly follows the guidelines of age-based rating systems for video game software while working to raise awareness among children, students, schools and guardians through carrying out guest lectures and company visits.

F. Seasonal Fluctuations
The market experiences peak demand from the Christmas season through the New Year’s holiday. Accordingly, trends in the demand for games fluctuate substantially throughout the year and there is a risk that business performance may substantially fluctuate from quarter to quarter.

To address this, we endeavor to extend the product lives of our games and stabilize revenue by strengthening digital sales and through flexible pricing strategies.

G. Trends in Game Platform Adoption, such as Home Video Game Consoles
We provide video game titles primarily for home video game consoles made by Sony Interactive Entertainment Inc., Nintendo Co., Ltd., the Microsoft Corporation (U.S.), as well as on platforms such as the game distribution service provided by Valve Corporation (U.S.). Therefore, depending upon home console and platform adoption trends or the existence of defects or other issues in these, there is a risk that our business strategies, performance and financial condition may be adversely affected.

To address this, in addition to basing estimates for our future outlook on investigation and analysis of each game platform market, we diversify revenue risk by releasing titles on multiple platforms.

H. License Agreements with Console Manufacturers
We take a multi-platform approach, which involves providing home video game software titles on major current-generation game platforms and PC. Accordingly, while they are also our competitors, we have licenses for manufacturing and distributing game software from Sony Interactive Entertainment Inc., Nintendo Co., Ltd., and the Microsoft Corporation (U.S.), as well as a license to sell and distribute game software from Valve Corporation (U.S.). However, there is a risk that amendments to the licensing agreements and new terms and conditions of the agreements may have an adverse effect on our business strategies, performance and financial condition.

To address this, in addition to home video game consoles we are also focusing on sales of games for the PC platform while pursuing revenue growth globally.

I. The Home Video Game Platform Cycle
In the past, new home video game platforms have been released every three to seven years. Consumers tend to be reluctant to purchase new game software during transitions between hardware generations. Therefore, there is a risk that our business performance and financial condition may be adversely affected by sluggish sales during these transitional stages.

To address this, Capcom aims to increase sales volume by strengthening the provision of games that are not dependent on specific hardware, lengthening the life cycles of our games via digital sales ratio improvements, and bolstering catalog sales and flexible pricing policies.

J. Mobile Market
The game market has been expanding following the wide adoption of smartphones and other mobile devices; however, failing to adapt to new technology quickly enough has been known to disrupt IP holders’ ability to provide content. Further, in-game purchasing systems have become a social issue, introducing the risk of government regulation. In addition to this, if the number of users were to decline due to more diverse entertainment options or consumer needs, there is a risk that our performance and financial situation could be adversely affected.

To address this, we are working to provide games that utilize our popular IP and capture new customers through monetization methods that do not pressure players for in-game purchases.

The earnings of the Arcade Operations business can be significantly affected by the popularity of machines, the diversification of entertainment options, the declining birthrate, intensified competition, changes in market conditions, and other such factors. Additionally, this business is regulated by the “Act on Control and Improvement of Amusement Business, etc.” and related laws. Future amendments or enactments of these laws may narrow the scope of business activities or increase the strictness of pre-screenings and inspections by supervisory authorities. As a result, there is a risk that the Group’s business plans may be hindered, potentially adversely affecting our performance and financial condition.

To address this, we are working to attract new fan demographics and increase awareness by developing new business formats such as experiential amusement facilities, capsule toy specialty stores, and stores that sell character merchansise, as well as by installing original VR corners and kids’ corners and holding events. Additionally, we strive to collect information from the police and administrative authorities, ensure compliance with laws and regulations, and maintain safe and sound store operations.

Regarding sales of Pachislo machines, under the provision of The Entertainment and Amusement Trades Rationalizing Act, we are allowed to sell only those machines that meet Security Electronics and Communications Technology Association requirements. Performance in this business segment may be significantly affected by the aforementioned systemic industry factors. As a result, there is a risk that our performance and financial condition may be adversely affected.

To address this, through our membership in Nichidenkyo, we have worked to build a structure where we are able to ascertain the movements of the regulatory authorities and quickly adapt to changes in regulations.

1. Although digital downloads have grown, our principal business of home video games is exposed to the risk of short product life for some titles, which hastens obsolescence and drives increased inventories. There is a risk that our business results and financial condition may be adversely affected by this.

2. Our business performance may substantially fluctuate from quarter to quarter, as the market environment may change throughout the year in our industry. Also, we may not be able to generate cash flows as originally planned due to declines in sales, changes in management strategies and other factors, which may have an adverse effect on our business results and financial condition in the years following.

To address this, we strive to secure adequate funds by setting the level of cash and deposits required for activities such as ongoing development investment.

The mobility of personnel is relatively high in the game industry, and it is possible that our business activities will be disturbed if our talented employees decide to resign or move to our competitors. As such, these factors may negatively affect the business results and financial condition of Capcom.

To address this, in addition to continuing initiatives to facilitate direct communication between management and employees by strengthening our human resources operations under the direction of the Chief Human Resources Officer (CHO), we are striving to further improve the working environment by securing and developing future talent, enhancing welfare programs, and expanding the development environment and facilities that support our development system.

As we expand our business domain, it is possible we may be taken to court in the future over product liability, labor or intellectual property rights related issues. As a result, depending on the type of lawsuit and the amount claimed in the lawsuit, there is a risk of this adversely affecting our business results and financial position.

To address this, we have been taking a variety of measures to reduce the risk of litigation globally.

In the case that an unforeseeable event arises, either in Japan or overseas, it is possible that it may negatively affect the Capcom Group’s business performance and financial position. Some examples of these events include: social unrest due to natural disasters such as typhoons, earthquakes and tsunamis; sudden changes in the climate; the outbreak or unchecked spread of disease and pandemics; economic crises due to unstable financial and asset markets; political disorder due to violence or terrorism, etc.

To address this, we are working to prevent crises and minimize any impact should an unforeseeable event occur with measures that include crisis management regulations and an organization-wide risk management system.