Toward the Implementation Phase of Growth Strategies

Launch of Strategies Aimed at Returning to a Growth Trajectory

Implementing Growth Strategies for Growth BusinessesIn Japan's digital game market, growth has softened, and conditions are polarizing. Consequently, return on investment from digital games ranking lower than 30th position is becoming difficult. In Japan, we will improve profitability by concentrating resources on existing mainstay titles. For example, we will undertake major updates of CHAIN CHRONICLE – Kizuna no Shintairiku, Hortensia Saga, and other titles. At the same time, we will continue developing titles that can gain high positions in the market. Further, based on the Noah Pass system, a reciprocal-customer-sending system with more than 130 million users, we plan to diversify earnings sources through the development of advertising businesses and other businesses.

Also, we will sow seeds for the future. Southeast Asia has a population of roughly 600 million and extremely high smartphone penetration. There is a strong likelihood that the smartphone app market will expand significantly as personal income levels rise in Southeast Asia. Anticipating conditions in several years, we intend to foster markets in emerging countries in this and other regions. One example of such efforts is the establishment of goPlay, a digital game platform that is a service of the Noah Pass system and which caters to digital game producers who want to enter overseas markets.

Currently in the advance investment stage, the Resort Business segment's immediate task is to entrench the profitability of Phoenix Resort Co., Ltd., and other facilities in Japan. The next step will be to ensure the success of PARADISE CITY, scheduled to open in Incheon, South Korea, in April 2017. As well as this initiative, we will accumulate expertise in integrated resorts by sending personnel to Paradise Casino Incheon, which PARADISE SEGASAMMY Co., Ltd., manages. We believe that if integrated resorts are established in Japan, the Resort Business segment will become a major pillar of our earnings. Of course, at this stage there are many uncertainties. For example, Japan has yet to enact a bill legalizing the establishment of integrated resorts. However, we have adopted a conservative investment stance. Furthermore, we are envisioning new ways to exploit the resources we have accumulated. I am eager to continue this ambitious initiative to establish a new mainstay for the Group.

Implementing Growth Strategies for Stable Revenue / Maintain BusinessesFor the Pachislot and Pachinko Machine Business segment, we have set raising the operating margin from fiscal 2016's 14.8%* to 30.0% in fiscal 2020 as a target. We will reach this target by establishing a robust earnings structure, which will entail increasing sales efficiency by revising our multibrand strategy to consolidate management resources while improving costs by promoting reuse through such measures as the introduction of common components.

Long-term decline in the player population and the 2014 change in the model-testing operation methods of the Security Communications Association are affecting the pachinko and pachislot machine market. On the other hand, challenging business conditions can offer opportunities. As the investment capacity of pachinko hall operators has declined, demand from them has focused increasingly on intellectual properties or the pachinko and pachislot machines of manufacturers that have the brand power to provide highly reliable returns on investment. Consequently, the contrast between winners and losers is becoming even more pronounced among pachinko and pachislot machine manufacturers. In these conditions, the Group has steadily increased the brand power not only of its pachislot machines, which have consistently claimed the leading share of their market, but also its pachinko machines. For example, Pachinko CR Shin Hokuto Muso, launched in March 2016, is recording brisk sales and stable utilization rates. The success of this product is a good example of how Sammy Corporation can respond to changing conditions by using its planning and development capabilities and creativity to realize gameplay on a par with that of old-format pachislot and pachinko machines.

In the pachinko and pachislot machine market, the responsibilities of manufacturers are expanding to include after-sales maintenance. This trend means low failure rates will become a differentiating factor for products, which could create a tailwind for the SEGA SAMMY Group because its offerings boast some of the lowest failure rates in the pachinko and pachislot machine industry. Therefore, through planning and development capabilities and product reliability, I want to cement our position among the industry's winners.

The Entertainment Contents Business segment's fiscal 2020 target is to achieve operating income of ¥20.0 billion. While the digital game area will drive efforts to meet this target, stable revenue / maintain businesses will need to almost double their earnings versus current levels. Based on a business management system strengthened through the establishment of separate companies, we aim to generate stable revenue in existing business areas while continuing reform. In the amusement machine sales area, in addition to introducing products targeting a wide player group, such as KanColle Arcade, we will explore the potential for establishing new business models through linkage with other media. In the amusement center operations area, we will continue focusing on improving profitability by strengthening operational capabilities, introducing major in-house titles, and increasing the number of prize game machines. Also, plans call for broadening the player group through such steps as introducing electronic money. In the packaged game software area, with efforts to improve profitability through an even stronger focus on mainstay intellectual properties as a premise, we will steadily grow the PC game area, mainly overseas. Total War: WARHAMMER has made a phenomenally good start, posting more than half a million unit sales in the first four days after its release in May 2016.

* After retroactive adjustment

Establishing Tie-Ups to Revitalize the IndustryWhile the pachinko and pachislot machine market is contracting, high component prices and research and development expenses are affecting costs. To initiate efforts to address these structural problems, the Group has begun establishing tie-ups with competitors. In March 2016, the Group and Universal Entertainment Corporation established a joint venture, ZEEG Co. Ltd., and began collaborating in the purchase of components and related devices, manufacturing, development, and sales. By introducing common units and components and collaborating in technology, we will simultaneously heighten entertainment value and strengthen earning power. Furthermore, we have our sights set on establishing a platform for units and components in the pachinko and pachislot machine industry. In the amusement center operations area, we have reached an agreement with Konami Digital Entertainment Co., Ltd., to explore the possibility of collaborating to establish electronic money infrastructure. The aim of such an alliance would be to counteract a decline in profitability accompanying consumption tax increases and expand the player group by establishing standard specifications for electronic money among companies, which have different systems at present.

Based on a shared sense of crisis with our long-standing competitors, we want to invigorate the market by cooperating actively in areas where collaboration is possible while continuing to compete with them in planning and other areas that originate added value.

Achievement of Fiscal 2020 Targets

More than 10 years have passed since the management integration of Sammy Corporation and the former SEGA CORPORATION. Unfortunately, despite ongoing structure reform of existing businesses, the SEGA SAMMY Group has yet to regain a growth trajectory. Looking back over this period since management integration, I am left with a deep sense of regret.

I have not given up my ambition of restoring operating income to the ¥100 billion level, which was achieved directly after management integration. From a shorter-term perspective, however, I want to identify issues clearly and focus the Group on improving profit margins as it makes concerted, steady efforts to implement strategies aimed at reaching the fiscal 2020 targets.

As we move forward, we would like to ask our shareholders and other investors for their continued support.

August 2016

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