Falcom’s 2016 EOY Report – Sen no Kiseki III and Ys VIII PS4 Confirmed for 2017 Release

Even via summary, this is a lengthy article. As such, I’m giving you links to jump around in it, instead of just scrolling through it every time.

1. Financial Summary for Year Ending on Sept 2016
2. Earnings Forecast for the Period Ending in 9/2017
3. Financial Condition
4. Operational Policies
5. Detailed Financial Summary
   • Balance Statement
   • Detailed Profit Statement
   • Detailed Statement of the Cost of Sales of Manufactured Goods
   • Document Regarding Fluctuations in Capital Stock
   • Cash Flow Statement
   • Other Related Information

More will be discussed on this in the shareholder meeting that will be taking place on 12/20 at 1:30pm.

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Falcom has released their numbers and offered a summary explanation for them.

In the 2015-2016 period:

• Ys VIII: Lacrimosa of Dana was released for the PlayStation Vita in July 2016, as well as Tokyo Xanadu eX+ being released for the PlayStation 4 in September 2016.
• Japan saw the release of licensed titles Sora no Kiseki SC Evolution, and Sora no Kiseki the 3rd Evolution, and the online game Akatsuki no Kiseki began its distribution. On top of this, this period also saw the English release of Trails of Cold Steel II, the Chinese and Korean language releases of Ys: Memories of Celceta, and the release of Ys VIII Lacrimosa in simplified Chinese. There have also been multiple collaborations with major game titles from this year.

Along with this information, Falcom has also announced three major plans for the 9/2016 ~ 9/2017 period.

• The Kiseki series, with its breakthrough release of Sen no Kiseki and Sen no Kiseki II will see the release of its next title, Sen no Kiseki III
• The highly anticipated PS4 release of Ys VIII -The Lacrimosa of Dana- will occur.
• There will be an initiative for multiple releases, not only domestically, but for North America, Europe, and Asia, and Falcom will be participating in the development for various platforms, and smartphone titles to provide a more proactive stance with their contents.

More details are past the cut.

Financial Summary for Year Ending on Sept 2016

	Total Sales		Operating Profit		Current Profit		EOY Net Income
2016	¥1,464,000,000 ($13,180,000)	? 7.0	¥584,000,000 ($5,258,000)	? 15.7	¥584,000,000 ($5,258,000)	? 15.3	¥386,000,000 ($3,475,000)	? 15.2
2015	¥1,575,000,000 ($14,179,000)	? 38.0	¥692,000,000 ($6,229,000)	? 46.8	¥689,000,000 ($6,203,000)	? 47.1	¥456,000,000 ($4,105,000)	? 41.1

All conversions are approximations, and have been rounded accordingly.
Conversion rates valid as of 11/22/2016 @ 2:45pm Central Time

For the fiscal year ending in Sept 2016, Nihon Falcom has posted the above numbers. In the summary to explain the numbers, they have pointed out that both console and handheld markets are in the process of stabilizing in the Japanese market as of this time, and that the PlayStation 4 is finally beginning a wider expansion internationally.

Falcom has made a push over the past year to get software out for both the PlayStation Vita and the PlayStation 4. Tokyo Xanadu was released at the end of last year, but has continued to enjoy sales into this fiscal year. Also included in this year, Ys VIII Lacrimosa of Dana was released in July as part of the company’s 35th anniversary. Afterwards, Tokyo Xanadu eX+ was released to PlayStation 4 in September. Falcom also promotes the high value of Tokyo Xanadu, due to its awards over the course of 2016.

As the total sales also includes licensing and royalties, Falcom also brings up other titles published outside of the company using their IP. This includes Sora no Kiseki SC Evolution in December 2015 and Sora no Kiseki the 3rd Evolution in July 2016, both for the PlayStation Vita. Akatsuki no Kiseki, a browser based game developed for the 10th anniversary of the series, also had its service begin in 2016.

North America and Europe saw the English language releases both Trails of Cold Steel, Trails of Cold Steel II for PlayStation Vita and PlayStation 3. Ys is also brought up, as continued sales of the Steam releases helps expand the awareness of the brand and series throughout English language gamers.

For the Asia territories, the Chinese and Korean versions of both Sora no Kiseki FC Evolution and Ys Memories of Celceta were released for PlayStation Vita. Furthermore, Ys VIII -Lacrimosa of Dana- was also released in simplified Chinese in August 2016.

Other collaborations include licensed additions to Phantasy Star Online 2 (from Sega), Lodoss War Online (from Game-On), Taiko no Tatsujin (from Namco), Monster Hunter Frontier (from Capcom), and Emil Chronicle Online (from Gung Ho Online Entertainment).

Earnings Forecast for the Period Ending in 9/2017

In million yen increments.

	Total Sales		Operating Profit		Current Profit		EOY Net Income
2017	1,800	? 22.9	750	? 28.4	750	? 28.3	500	? 29.2
2016	1,464	? 7.0	584	? 15.7	584	? 15.3	386	? 15.2

When writing about the forecast of the series, the first thing Falcom mentions is, unsurprisingly the upcoming release of The Legend of Heroes Sen no Kiseki III. The series, as a whole, has won the company numerous awards, including various Famitsu Awards, and the Users Choice Award from the PlayStation Awards on a repeated basis. As such, they state that the series, holds a great deal of value with the company and has sold over 9 million copies over all of the games and their releases.

Ys VIII -Lacrimosa of Dana- is also scheduled to see a PlayStation 4 release in the 2016-2017 fiscal year, as well.

In terms of licensing, they point out that brand recognition outside of Japan is getting stronger, and as such that they intend to play a more proactive role in the the licensing and release of their titles and property on various platforms and smartphones across the globe.

Financial Condition

Assets for the company have increased 299 million yen, to a total of 4,155 million yen, from the previous fiscal year. This is primarily caused by an increase of 759 million yen towards cash on hand, and a decrease of 448 million yen with accounts receivable.

The debts for this year have decreased 15 million yen to a total of 315 million yen. The primary causes for this are a decrease of 84 million yen in accounts payable, and an increase of 67 million yen in unpaid corporation taxes.

As a result, the company’s net worth has increased by 314 million yen at end of the fiscal year last year, to total up to 3,840 million yen. The causes for this would include the allotment of 71 million yen in dividends and a net profit of 386 million yen.

Falcom is very upfront on the sorts of risks that an investor will be encountering when considering stocks in the company. The risks included are the nature of the nature of the marketplace- Falcom’s income is very dependent on the goods they produce, so their earnings may fluctuate during the year based on market and whether or not a game has been released in that quarter.

Other risks include concerns from development times. While the average range is six months at its shortest to 2-3 years at its longest, technological innovations can interfere with development and lengthen these time periods. Intellectual property issues were also brought up, as there can be challenges in processing copyrights and the more that Falcom cooperates with third-parties, the greater the chances of IP infringements. They have also mentioned that the process of hiring and training new employees can constitute a risk with the company.

These aren’t the only risks. There are other risks that are outside of the company that can impact its value. Legislation, for example, can interfere with game development, especially if laws are put into place to impact the digital marketplace in Japan. Another risk comes in the form of game piracy- if it goes out of control on any of the titles, they will run into an issue of lost sales opportunities due to illegal copies being out on the marketplace. The last that’s brought up would be issues involving personal information. As the company interacts directly with the marketplace there is always the risk of hacking or the leak of personal information, which could damage the trust Falcom has with their customers and turn funds towards repairing this and handling any caused damages.

Falcom has also talked about the profit sharing policies that they have for their shareholders, and that they take careful considerations for the dividends that they pay out. They have also revealed that this year, it has been decided that shareholders will receive 7 yen per share of company stock that they own.

Operational Policies

Falcom addresses multiple topics when speaking about the management policies for the company. The foundation of the company’s management style seeks to maximize originality and high quality game content through creative staff members and effective teamwork. They also seek to utilize efficient management processes to help drive the creativity and staff members, as this kind of operation can help increase the amount earned through sales numbers.

When speaking about their long-term business strategies, they speak of an ‘attack and defend’ strategy that the company has held since its inception- ‘attack’ as in challenging themselves while creating new works to the game industry, and ‘defend’ from the risks that come about as they deal with issues related to development times, ensuring quality titles, and managing human resources. With a solid foundation, they can manage with the issues thrown at them.

Detailed Financial Summary

These are the various tables involved with the financial information of the company. Included in this section is the primary balance sheets that shows how they got to the numbers above.

Balance Statement

In thousand yen increments

	Prev. Year (2015)	Current Year (2016)
Property Division
Current Assets
Cash on Hand	3,052,949	3,812,687
Accounts Receivable	586,647	137,653
Manufactured Goods	2,487	1,301
Raw Materials	3,807	1,994
Prepaid Expenses	4,541	4,399
Deferred Tax Assets	34,497	36,598
Misc.	1,286	1,281
Current Assets Sum	3,686,216	3,995,916
Fixed Assets
Tangible Property
Facilities Related Installations	16,281	16,281
Total Depreciation Amount	13,052	13,895
Facilities Related Installations (Net Amount)	3,229	2,386
Tools, Equipment, and Furnishings	27,977	27,977
Total Depreciation Amount	3,229	2,386
Tools, Equipment, and Furnishings (Net Amount)	3,229	2,386
Fixed Assets Sum	7,389	4,564
Intangible Fixed Assets
Software	4,617	6,453
Telephone Permissions	757	757
Intangible Fixed Assets Sum	5,374	3,210
Assets from Additional Investments
Security Investments	116,578	116,578
Deferred Tax Assets	9,722	4,927
Securities and Deposits	31,075	30,680
Sum of Assets from Additional Investments	157,375	152,185
Sum of Fixed Assets	170,139	159,961
Total Assets	3,856,356	4,155,977
Debt Division
Current Liabilities
Accounts Payable	107,330	22,952
Arrears	70,570	60,235
Accrued Expenses	14,551	14,332
Unpaid Corporate Taxes	83,053	150,838
Unpaid Consumption Taxes	29,502	41,108
Advances Received	7	2
Deposits	5,753	5,870
Reward Provisions	20,250	20,250
Sum of Current Liabilities	331,017	315,590
Total Debts	331,017	315,590
Net Worth Division
Shareholder Equity
Capital Stock	164,130	164,130
Capital Surplus
Capital Reserve Fund	319,363	319,363
Sum of Capital Surplus	319,363	319,363
Profit Surplus
Miscellaneous Profit Surplus
Contingent Reserve	710,000	710,000
Transferred Profit Surplus	2,331,962	2,646,910
Sum of Profit Surplus	3,041,962	3,356,910
Treasury Stock	117	117
Sum of Shareholder Equity	3,525,338	3,840,286
Total Net Worth	3,856,356	4,115,887

Detailed Profit Statement

In thousand yen increments

	Prev. Year (2015)	Current Year (2016)
Sales
Sales of Manufactured Goods	770,537	817,068
Royalty Income	804,495	647,113
Total Sales	1,575,032	1,464,182
Cost of Sales
Cost of Sales for Manufactured Goods	250,069	260,976
Cost of Sales for Royalty Income	—	1,500
Total Cost of Sales	250,069	262,476
Total of All Sales	1,324,962	1,201,706
Sales and Administrative Costs
Shipping and Freight Costs	9,343	10,603
Advertising Expenses	65,335	91,014
Promotional Costs	21,940	15,643
Executive Salary	51,786	50,822
Executive Bonus	3900	—
Employee Salary and Wages	24,016	24,251
Bonuses	2,918	2,900
Sums Transferred into Bonus Reserves	2,353	2,295
Legal Costs	13,013	12,315
Hiring Costs	13,221	12,643
Utility Costs	1,196	878
Payment Handling	33,312	33,323
Supply Expenses	1,427	1,415
Travel Expenses	1,476	1,628
Communication Expenses (Postage)	752	585
Depreciation Costs	1,883	1,508
Research and Development	358,990	343,007
Miscellaneous	25,258	12,536
Sum of Sales and Administrative Costs	632,115	617.374
Operating Profit	692,807	584,331
Earnings from Outside the Business
Interest Receipts	620	349
Dividend Receipts	—	572
Excluded Profits from Unpaid Dividends	865	702
Sum of Earnings from Outside the Business	1,485	1,623
Costs from Outside the Business
Losses from Foreign Exchange	4,431	1,576
Sum of Costs from Outside the Business	4,431	1,576
Special Costs
Costs from Eliminating Fixed Assets	16	—
Sum of Special Costs	16	—
Current Income Before Taxes	689,846	584,378
Corporation, Municipal, and Enterprise Taxes	2009,492	194,777
Sum of Adjustments from Corporation Tax	24,198	2,693
Sum of Taxes	233,691	197,471
Current Net Income	453,154	386,907

Detailed Statement of the Cost of Sales of Manufactured Goods

In Thousand Yen Increments

Operation Section	Previous Year (2015)		Current Year (2016)
Division	Amount	Ratio (%)	Amount	Ratio (%)
I. Material Cost	219,847	87.9	225,991	87.0
II. Outsourcing Cost	30,239	12.1	33,737	13.0
SUBTOTAL	250,087	100.0	259,789	100.0
III. Inventory Count of Goods at Beginning of Term	2,470		2,487
SUM TOTAL	252,557		262,277
IV. Inventory Count of Goods at End of Term	2,487		1,301
Difference in Costs of Goods	250,069		260,976

Document Regarding Fluctuations in Capital Stock

Document for Previous Fiscal Year (9/2014 ~ 9/2015) (In Thousand Yen Increments)

	Shareholder Equity						Sum of Net Worth
	Capital Stock	Capital Surplus	Profit Surplus		Treasury Stock	Sum of Capital Stock
		Capital Reserve	Misc. Profit Surplus
			Special Reserve	Transferred Profit Surplus
Current Term Balance	164,130	319,363	710,000	1,978,607	?36	3,172,064	3,172,064
Change of Sums in Current Term
Surplus Shares				?102,799		?102,799	?102,799
Current Net Income				456,154		456,154	456,154
Treasury Stock Profit					?80	?80	?80
Sum of Fluctuations For the Current Period	—	—	—	353,354	?80	353,274	353,274
Remainder at the end of this Period	164,130	319,363	710,000	2,331,962	?117	3,525,338	3,525,338

Document for Current Fiscal Year (9/2015 ~ 9/2016) (In Thousand Yen Increments)

	Shareholder Equity						Sum of Net Worth
	Capital Stock	Capital Surplus	Profit Surplus		Treasury Stock	Sum of Capital Stock
		Capital Reserve	Misc. Profit Surplus
			Special Reserve	Transferred Profit Surplus
Current Term Balance	164,130	319,363	710,000	2,331,962	?117	3,525,338	3,525,338
Change of Sums in Current Term
Surplus Shares				?71,959		?71,959	?71,959
Current Net Income				386,907		386,907	386,907
Treasury Stock Profit						—	—
Sum of Fluctuations For the Current Period	—	—	—	314,948	—	314,948	314,948
Remainder at the end of this Period	164,130	319,363	710,000	2,646,910	?117	3,840,286	3,840,286

Cash Flow Statement

In thousand yen increments

	Prev. Year (2015)	Current Year (2016)
Cash Flow from Business Activities
Current Net Income Before Taxes	689,846	584,378
Depreciation Costs	6,620	5,378
Reduction of Fluctuations of Reward Reserves (? is decrease)	?1,500	—
Interest and Dividend Receipts	?620	?921
Loss from Elimination of Fixed Assets	16	—
Reduction of Fluctuations in Sales Credit (? is increase)	1,025,925	448,993
Reduction of Fluctuations in Inventory Assets (? is increase)	733	2,999
Fluctuation Amounts of Other Assets (? is increase)	394	479
Reduction of Fluctuations in Purchased Debts (? is decrease)	?197,014	?84,378
Reduction of Fluctuations of Arrears (? is decrease)	?42,251	?10,102
Fluctuation Amounts of Unpaid Taxes (? is decrease)	?25,571	11,605
Fluctuation Amounts of Other Debts (? is decrease)	?9,243	1,618
Subtotal	1,447,334	960,048
Amounts Received via Interests and Dividends	620	921
Amount Paid for Corporation Tax	?641,020	?129,418
Cash Flow from Business Activities	806,934	831,552
Cash Flow from Investment Activities
Expenses from the Value of Tangible Assets	?516	—
Expenses from the Value of Intangible Assets	?491	?387
Expenses from the Value of Investment Securities	?116,578	—
Other	—	63
Cash Flow from Investment Activities	?117,585	?324
Cash Flow from Financial Activities
Expenses from the Value of Treasury Stock	?80	—
Dividend Payments	?101,664	?71,489
Cash Flow from Financial Activities	?101,745	?71,489
Increased Reduction in Cash and Cash Value Articles (? is decrease)	587,603	759,738
Balance of Cash and Cash Value Articles at Start of Term	2,465,346	3,052,949
Balance of Cash and Cash Value Articles at End of Term	3,052,949	3,812,687

Other Related Information

Previous Fiscal Year: 10/1/2014 ~ 9/30/2015

Information on Manufactured Goods and Services
In thousand yen increments

	Manufactured Goods	Licensed Goods	Total Amount
Sales to Outside Clients	770,537	804,495	1,575,032

Regional Information – Total Sales
In thousand yen increments

Japan	Asia	North America	Total
1,053,630	350,257	171,144	1,575,032

Information on Major Clients
In thousand yen increments

Client Name	Total Sales	Segment Name
Konami Digital Entertainment	600,623	Game Development/Sales
Changyou.com	255,360	Game Development/Sales
Sony Computer Entertainment	226,463	Game Development/Sales
Marvelous USA, INC	167,520	Game Development/Sales

This Fiscal Year: 10/1/2015 ~ 9/30/2016

Information on Manufactured Goods and Services
In thousand yen increments

	Manufactured Goods	Licensed Goods	Total Amount
Sales to Outside Clients	817,068	647,113	1,464,182

Regional Information – Total Sales
In thousand yen increments

Japan	Asia	North America	Total
1,187,247	37,322	239,613	1,464,182

Information on Major Clients
In thousand yen increments

Client Name	Total Sales	Segment Name
Konami Digital Entertainment	694,711	Game Development/Sales
Sony Computer Entertainment	282,677	Game Development/Sales
Marvelous USA, INC	156,151	Game Development/Sales

[ Falcom 2015/2016 End of Year Financial Report ]
[ Falcom’s End of Year Financial Supplementary Document ]