A MESSAGE FROM THE COO

I am Haruki Satomi and recently became president and COO (representative director). I will forge ahead to ensure the continuous enhancement of the SEGA SAMMY Group’s corporate value and meet the expectations of the wide range of stakeholders that support the Group.

In fiscal 2017, the year ended March 31, 2017, we achieved year-on-year increases of 5% in net sales and 68% in operating income. The operating margin rose 2.9 percentage points year on year, to 8.0%, and ROA was up 4.2 percentage points year on year, to 5.2%. Profit attributable to owners of parent increased from the previous fiscal year’s \5.3 billion to \27.6 billion. In the fiscal year under review, we paid interim cash dividends of \20.00 per share and year-end cash dividends of \20.00 per share, giving full-year cash dividends of \40.00 per share.

By marketing mainstay title Pachislot Hokuto No Ken Syura no kuni hen and other pachislot machine titles belonging to well-established series, the Pachislot and Pachinko Machine Business grew net sales 5% and operating income 26% year on year. Similarly, the Entertainment Contents Business posted an 8% rise in net sales year on year, and the business segment’s operating income rose significantly from the previous fiscal year’s \4.2 billion to \11.1 billion. The business segment achieved good results in all areas, with existing mainstay titles performing steadily in the digital game area and new titles becoming major hits in the packaged games and the amusement machine sales areas.

Viewing fiscal 2017 as the implementation phase of structure reform, we steadily implemented a range of different initiatives. In one such initiative, the Group acquired all of the shares of France-based game developer Amplitude Studios SAS to further strengthen the Group’s development capabilities in the United States and Europe and intellectual property and title portfolio. In the Pachislot and Pachinko Machine Business, we established ZEEG Co. Ltd., as a joint venture with Universal Entertainment Corporation, thereby taking a significant step toward simultaneously enhancing product appeal and cost performance.

While embarking upon such proactive initiatives on the one hand, we steadily took conservative measures on the other. For example, in the Resort Business we sold 85.1% of the shares of SEGA LIVE CREATION Inc. Then, we changed the business model of JOYPOLIS indoor theme park operations from direct management to licensing. Other measures included discontinuing the development of a resort complex in Busan, South Korea. Further, we disposed of fixed assets in the amusement center operations area. We took each of the above measures with a view to improving our financial position, enhancing the capital turnover ratio, and concentrating management resources in growth businesses.

In fiscal 2018, the year ending March 31, 2018, the Group will finally move into a growth phase while continuing to steadily reinforce its standing.

The Group has important issues that it must tackle. Since management integration in October 2004, SEGA SAMMY HOLDINGS INC. has overcome difficult business conditions, and each operating company has established a solid presence in its business field. Meanwhile, the employees of Sammy Corporation, the SEGA Group, and other operating companies have a strong attachment to their operating companies. Unfortunately, however, there is not a sufficiently robust sense of shared values in the SEGA SAMMY Group as a whole. To ensure the Group returns to a growth trajectory, all of its employees must share a common commitment. Based on a strong awareness of this issue, I decided that, in tandem with the implementation of strategies, we should encourage a change of mindset. Accordingly, we embedded Road to 2020,which covers fiscal 2018 through fiscal 2020, into a mission pyramid that comprises the unchanging components of our DNA: a value, a mission (raison d’etre), a vision (ideal self), and a goal (specific target).

The mission is of particular importance to me. In my view, we are not in the business of simply providing “products.” Rather, I believe that our raison d’etre is to continue creating moving experiences, which arise from the disparity between expectations and actual experiences. In other words, the essence of entertainment lies in surpassing customers’ expectations. The mission’s subtitle, “Making life more colorful,” encapsulates value that the Group provides society by creating moving experiences. Moreover, the subtitle expresses the hope that each employee will have the courage to create moving experiences, if we accept the diverse approaches of, and even the failures of, our employees, as they work hard in a broad spectrum of business fields. The vision, “Be a Game Changer,” represents our commitment to being a leader that changes the industry and society for the better.

In accordance with the direction that the mission pyramid establishes for the Group as a whole, each business segment has prepared a mission pyramid. Based on these mission pyramids, the business segments are clarifying the organizations that are tasked with advancing strategies and formulating specific tactics. Further, we are setting out the measures that each division as well as the organizations and individuals under their management should implement. In this way, rather than simply setting out strategies in a top-down manner, we will advance Groupwide growth strategies through the accumulation of implementation by individuals. This accumulation will be based on systems designed so that, in their respective positions, individuals can act autonomously and with a sense of approval.

For fiscal 2020, its final fiscal year, Road to 2020 sets targets of 15% for the operating margin and 5% for ROA.

Based on its long-term vision ( P.14 A Message from the CEO), the Group will generate stable earnings through core businesses while strengthening the digital game area and increasing the area’s contribution to net sales and operating income. We have established a roadmap showing how the Pachislot and Pachinko Machine Business will grow earnings significantly in the third year of Road to 2020. This may seem an ambitious goal. However, having made progress in strengthening our earnings structure, we are already taking a range of different measures based on a long-term viewpoint. These measures include developing the product lineup. Therefore, I believe we can achieve a “jump” in performance in fiscal 2020. The key to success will be our ability to create major hit products in the digital game area.

For the Pachislot and Pachinko Machine Business, we have set realizing an operating margin of 30%^* by fiscal 2020 as a target. To reach this target, we intend to tackle three major tasks.

The first major task is to promote component reuse. Including such components as liquid crystal displays (LCDs), we plan to increase the number of reused components from the current level of between 10 and 15 to at least 50. We also plan to significantly increase reused components so that they account for more than 50% of cost of sales, compared to the present level of 30%. To align operations with these targets, we will change product designs and reorganize product lineups over the medium term. Introducing common components has the potential to significantly increase component reuse and reduce disposal risk. By reforming business processes from the product design stage onward, we intend to raise the common components ratio to at least 90% for pachislot machines and to at least 50% for pachinko machines. In addition, we will strengthen cost control even further.

Our second major task is to develop an industry platform by extending the scope of reuse to encompass machine cabinets, component units, and the entire industry. ZEEG Co. Ltd., the joint venture with Universal Entertainment Corporation will play a central role in accomplishing this task. By using the high-quality machine cabinets and versatile common components that ZEEG develops, the Group will enhance product appeal and promote collaborative cabinet reuse and component purchasing to improve costs going forward. With our sights set on increasing the efficiency of the industry as a whole,we will include other companies in the initiative and develop an industry platform. Looking ahead, we believe that the focus of competition is likely to shift from hardware to applications. Such a shift is desirable for the Group because it will be able to use creativity to achieve significant differentiation.

The Group’s third major task is to improve development efficiency. The industry’s structure means that further regulatory revision affecting the specifications of pachislot and pachinko machines is a possibility. If we take this into consideration, the length of existing development lead times becomes a management risk. Normally, completing the processes from planning through to application for prototype testing and then bringing a product to market requires between one and a half and two and a half years. We will shorten development lead times by between 20% and 30% by narrowing down the number of titles while increasing the number of personnel per title and by reforming a wide range of processes. As a result of these measures, we will launch products in a timely manner that ensures we do not miss opportunities to tap into peak demand. At the same time, we will strengthen the quality assessment process to further enhance product quality, which is one of our advantages.

I am increasing our commitment to efforts focused on helping to put a brake on the decline in the player population and revitalize the market. In addition to marketing focused on pachinko hall operators?who are our traditional clients?we are conducting business-to-consumer marketing, thereby extending the reach of our marketing to general players. Specifically, we aim to increase the player population by creating opportunities for people to come into contact with pachislot and pachinko through offline events and by managing an information website for smartphones.

* Excluding other and eliminations

The targets for the Entertainment Contents Business are net sales of at least \300 billion, operating income of at least \30 billion, and an operating margin of at least 10%. The key to reaching these targets will be the creation of titles that become global hits.

Therefore, the concentration of investment in carefully selected titles will be one of the business segment’s major measures. Moreover, to create a system that promotes sales in the global market, we will change the basic orientation of the business segment. In the digital game area, we created a “device-oriented” organization through such measures as establishing a separate company for operations that specialized in smartphones and used to be under the management of the former SEGA CORPORATION. The aim of these measures was to accelerate the implementation of strategies in the digital game area, a growth market. Partly because this area has reached a certain size, we will shift to “intellectual propertyoriented” operations and investment criteria and roll out the same intellectual properties through multiple channels, such as mobile devices, personal computers, and home video game consoles. The potential for intellectual property rollouts will become even greater if the Group widens the scope of these activities to leverage its diverse interfaces with customers, which include amusement machines, animation, and toys. As for regional rollouts of intellectual properties, we will increase sales globally by creating high-quality titles that garner solid endorsement in their local markets and then localizing the titles to reflect the characteristics of other regional markets. A good example of how effective this approach can be is the rollout of the packaged games Persona 5 by Group company ATLUS. CO., LTD. The company launched the title in Japan in September 2016, in Europe and the United States in April 2017, and then, after changing over to a direct sales system, in Asia. As a result, the title shipped more than 1.8 million units worldwide. Further, we intend to utilize more intellectual properties. In addition to existing intellectual properties, we will revive dormant intellectual properties and introduce external intellectual properties. In this way, we will create hit titles while maximizing the value of intellectual properties. The Group will capitalize on the significant advantages of the Noah Pass digital marketing platform. For example, we will use the platform to realize reciprocal customer sending between amusement machines and digital games and boost titles that have been published and localized as part of global rollouts.

To enable the above strategies, we will reform business structures. In each region, the Group will organize studios around intellectual properties to promote multi-device rollouts of respective intellectual properties. Also, through the integration of publishing in each region, we will achieve efficient global rollouts.

The Group’s array of businesses face differing business conditions. A feature of these businesses is that many of them operate in highly regulated industries. An advantage of the Group’s diversified portfolio is that even if one business struggles the Group can generate stable earnings through other businesses and invest in the creation of new businesses. By harnessing this advantage, we are developing the Resort Business.

Numerous companies have announced their intention to participate in Japan’s integrated resort business. At the Japan Gaming Congress in May 2017, I expressed our strong desire as Japan’s only company on an equal footing with worldfamous operators to participate in all aspects of the integrated resort business, including casino operations. Of course, ahead of other companies in Japan, we have been preparing steadily to realize this ambition.

The goals of the Resort Business are to achieve success in the integrated resort business and to enhance brand recognition. To ensure the success of the integrated resort business, we will make an all-out effort to acquire expertise. Through PHOENIX RESORT CO., LTD., which became a wholly owned subsidiary in 2012, we are accumulating know-how in the management of resort facilities. Although Phoenix Resort does not have a casino, we are investing to heighten the appeal of the resort, which is one of Japan’s foremost resort complexes and boasts one of the country’s largest convention centers.Thus, the resort is giving us the opportunity to develop and manage convention-related operations and hotels. We are accumulating casino management know-how primarily through PARADISE SEGASAMMY Co., Ltd. In April 2017, the company opened South Korea’s first integrated resort, PARADISE CITY. We have sent close to 40 personnel to the resort, and we will swell their ranks to accelerate our accumulation of know-how. In conjunction with these efforts, we intend to focus on marketing aimed at attracting more customers from Japan.

In the fall of 2018, we plan to consolidate the Group’s offices with a view to reforming work styles. The goals of this reorganization are to promote efficient management of the Group, create collaborations and synergies between businesses, and encourage interaction among personnel. A further important goal is to heighten employees’ sense of belonging to the Group.

I believe the SEGA SAMMY Group has a bright future. Our employees will pursue moving experiences and unite as we move forward decisively to reach the goals of Road to 2020.