ZhugeEX Blog

For those of you unaware, I am a huge fan of Koei Tecmo games and I have been following them for around 15 years now. It all started when I discovered Dynasty Warriors 2 for PS2 and became hooked on the game, since then I’ve played a number of their different titles and remain a fan of their work to this day. Today I’d like to share with you their financial report for the first half of fiscal 2015/16 as well as some notes from a recent event where the CEO spoke about the future of gaming.

First lets start with some sales data-

• Arslan: The Warriors of Legend – 60,000 units sold in Japan and Asia
• Nights of Azure – 150,000 units sold in Japan and Asia
• Samurai Warriors 4: Empires – 100,000 units sold in Japan and Asia
• Dead or Alive 5: Core Fighters – 4 million downloads
• Nobunaga’s Ambition 201X – 600,000 downloads
• My Gamecity (gaming platform) – 800,000 members

As of October 26th 2015

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Nights of Azure was a success for GUST who took a break from the Atelier series to work on this brand new title. The game has already been confirmed to be launching overseas before the end of the fiscal year. The titles listed above were released in Japan and Asia only but Koei Tecmo did also release a number of titles overseas during the six month period ending September 30th 2015. Koei Tecmo released Nobunaga’s Ambition: Sphere of Influence with Power-Up kit for PS4, PS3 and STEAM & Samurai Warriors 4-II for PS4, PS3, PSVita and STEAM. Sales were in line with expectations for both titles. Also, Namco Bandai were responsible for releasing the Omega Force developed title, One piece Pirate Warriors 3 for PS4, PS3, PSVita and STEAM which saw healthy sales in the West. Koei Tecmo noted that their digital download segment has seen a boost in sales thanks to the continued success of the Dead or Alive: Core Fighters title for PS4, PS3 and Xbox One which has exceeded 4 million downloads.

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Koei Tecmo saw revenue decline 5.9% YOY and Operating profit also declined 24.8% YOY. This is mainly attributed to lack of game releases due to delayed launches. Total sales revenue reached ¥15,159m compared to the ¥16,110m that was generated during the same period last year. Game Software still remained the biggest segment for Koei Tecmo with Online and Mobile in a comfortable second place. Combined, these two segments account for ¥12,332m in revenue.

Total sales revenue in Japan decreased 9.9% YOY but still accounted for 74.9% of total revenues which shows that the domestic market is still the biggest for Koei Tecmo. The total amount of sales revenue generated in Japan for the half year reached ¥11,350m. Sales revenue overseas was up 8.5% YOY and accounted for ¥3,809m. North America and Europe saw the biggest decreases (5.5% and 14.4%) whilst Asia was up 75.9% YOY only accounting for ¥1,279m compared to ¥1588m in North America and ¥942m in Europe. Asia has seen huge growth and overtaken Europe to become the 3rd largest region for Koei Tecmo, this can mainly be attributed to the success of online and browser games in Asia as well as the successful console launch in China which saw Dynasty Warriors 8 with Xtreme Legends become a top seller in the country.

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Game Software

The Game Software segment saw revenues decrease by 10% to ¥8.873m, Operating profit also saw a higher drop of 31.6% to 1,611m. Total software sell in exceeded 2.1 million units worldwide which is down 27.5% compared to the year prior. Shipments in Japan for the six months ending September 30th 2015 totalled 810,000 units and accounted for 38.6% of total shipments. This was down 32.5% compared to the 1,200,000 units sold in to Japan during the same period last year.Overseas shipments exceeded 1,290,000 which was down 23.9% year on year with 570,000 units sold in North America, 185,000 in Europe and 535,000 in Asia. Japan, North America and Europe saw decreases in game shipments year on year with Europe seeing the biggest drop down 65.4%. Once again it was Asia that saw an increase of 132.6% year on year accounting for over 25% of total shipments.

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Online and Mobile

The Online and Mobile division saw revenues increase 6.8% to ¥3,459m, however operating income saw a slight decrease of 5.8% YOY to ¥561m. Koei Tecmo has huge ambitions in the Online and Mobile space and will be developing native applications for Android and iOS in order to create hit smartphone games based on their current IP’s as well as new IP’s. Online titles have been performing well in Asia with Uncharted Waters and Samurai Cats being the most popular titles. Koei Tecmo’s mobile title, “Nobunyaga guruguru dungeon” has exceeded 565,000 downloads across iOS and Android. Nobunaga’s Ambition 201X has also exceeded 600,000 downloads across iOS and Android. Koei Tecmo will continue to develop new Mobile titles with the plan to create big hit titles in the Mobile game space.

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Financial Results

Whilst both revenue and Profit were down year on year, Koei Tecmo actually beat their earnings forecast for the six month period and are on track to have a great year again. Koei Tecmo’s forecast estimated that operating profit would reach ¥1,700m but the actual number as mentioned in the summary above was ¥2,477, an increase of 45.7% on the forecast. Net Profit was also 84.6% higher than forecasted. Revenue was supposed to be lower this half year as some titles were delayed in order to improve quality, this was offset by royalties from collaboration titles and due to the ever expanding digital download segment which helped increase profitability for the six month period. Koei Tecmo are still on track to achieve their yearly forecast.

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Looking Ahead

Koei Tecmo CEO, Yoichi Erikawa stated that fiscal 2015/16 has got off to a successful start thanks to the games they created across console, PC and Mobile. Erikawa stated that their new IP’s such as Nights of Azure have seen early signs of success and their collaboration titles such as Hyrule Warriors for Wii U and Dragon Quest Heroes for PS4 continue to see success with more than 2 million units sold between the two titles. Koei Tecmo still have plenty of titles to come in the second half of the year such as Attack on Titan for PS4, PS3 and PS Vita

Erikawa explained that Koei Tecmo’s slogan: “IP Creation and Expansion” is the creation of brand new titles for multiple platforms as well as expanding traditional franchise games to multiple platforms as well. Koei Tecmo this year are using their own development tools to adhere to multi-platform solutions and continue maximising the profitability of each current and new IP. Koei Tecmo’s aim is to develop games for Console, Smartphone, Online browser, Online platforms such as Mobage (Japan) and even for Sony Computer Entertainment’s new PlayStation VR. Koei Tecmo released a technical demo entitled “Dynasty Warriors VR” at TGS this year and will be utilising this experience should they decide to go ahead and develop titles for the virtual reality system.

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Koei Tecmo noted that their digital download business now accounts for around 30% of total sales and continues to grow as digital is being adopted around the world. Full game downloads generated approximately ¥1,500m in revenue for the six months ending September 30th 2015 compared to ¥1,000m during the same period last year. DLC generated approximately ¥750m in revenue compared to around ¥500m during the same period last year. Koei Tecmo are forecasting that digital sales will bring in ¥4,000m in revenue for the full fiscal year. The Online and Mobile division is forecast to bring in an additional ¥7,700m.

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Koei, Tecmo and Gust are all working on new titles to introduce this year. Games for smartphones are being developed as well. There will be active and intense promotion on Koei’s smartphone titles this year. Koei Tecmo will be promoting new and existing IP across various hardware, software and internal platforms. The hardware platforms announced for upcoming titles are PS4, PS3, PS Vita, PS VR, WiiU, 3DS, Xbox One and other platforms. The software platforms announced for upcoming titles are DeNA, GREE, dGAME, Mobage, as well as Android, iOS and traditional internet browsers. Koei Tecmo will also continue to promote their online, social and mobile titles via my GAMECITY which now has over 800,000 members and more than 30 games.

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Koei Tecmo say that they whilst they plan to introduce new IP such as Ni-Oh and Toukiden, they will continue to collaborate with other companies on various IP. In fact the company recently set up a department that deals specifically with collaborations and as Koei Tecmo has experience in this sector they are now working on more collaborations than before. Examples given during the investor briefing were Attack on Titan for PlayStation systems, Yokai x Romance of the Three Kingdoms for Nintendo systems & Dissidia Final Fantasy for arcade systems. Koei Tecmo also said that they have made a collaboration deal with a very big Western IP and look forward to bringing us news on this large scale collaboration in the future.

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Koei Tecmo also talked about game tie-ups after the success with the Samurai Warriors Anime. Koei Tecmo expressed that they would like to continue working with other organisations to build the brand of their IP’s. Koei is aiming for their IP’s to have additional support via Anime, Toys, Movies, Food, Books, Apparel, TV, Music, Events, CD, Performances and other areas. The Fatal Frame movie was given as an example of a successful tie up in the past.

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The Asian market has seen huge growth for Koei Tecmo and is forecast to account for 5.8% of total revenue for the full fiscal year. This is compared to 6.0% for Europe and 8.0% for North America so it is clear that Asia is becoming increasingly important for the company. Koei Tecmo are continuously releasing smartphone titles and online browser games in the Asia region and with the launch of PS4, PS Vita and Xbox One in China the company now plans to launch more console titles in the region. Uncharted Waters V and Samurai Cats have been very successful in the Korean and Taiwanese markets, Samurai Cats will continue to release across South East Asia as planned. Koei Tecmo also plan to release their hit smartphone title, Dynasty Warriors Blast in China and Taiwan along with more console titles including the upcoming Romance of the Three Kingdoms 13 which will be fully localised for the Asian market.

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Romance of the Three Kingdoms is Koei Tecmo’s premier PC franchise and this year the company is celebrating the 30th anniversary of the series. Last year Koei Tecmo celebrated the 30th anniversary of the Nobunaga’s Ambition series and thanks to various promotions the game was able to perform favourably compared to previous instalments. This year the company is actively carrying out collaborations and tie ups to ensure that the IP value is maximised for the best performance. Koei Tecmo have planned to collaborate with Level 5’s “Yokai Watch” series and will release “Yokai ROTK” which will combine both IP’s into one fun game. Koei Tecmo also plan to release a smartphone title called “ROTK Legion” as well as introduce their very own Mario Maker clone entitled “ROTK Maker” which will allow users to create their very own game and scenarios. “ROTK Legend of Cao Cao Online” will also be a new title based on the original game of the same name but with a unique online aspect. As well as this the company plans to release various none game related media such as a DVD of the Chinese TV series and much more such as a special anthology of Romance of the Three Kingdoms titles from the past 30 years titled “Romance of the Three Kingdoms: Feudal Warlord” in Japan.

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Last week Mr Erikawa, the CEO of Koei Tecmo, spoke at the AMD Symposium on the history and future of video games. More specifically he spoke about the creation and expansion of contents services and where Koei Tecmo will be investing over the next few years as new forms of digital entertainment become favourable with consumers. The first thing Mr. Erikawa introduced was the history of video games starting with the Arcade era. Arcade video games were the beginning of digital video games that consumers could play, the most popular of which being “Invader” games which first released in 1978, the same year that Koei Tecmo was formed.

Next came PC Games which was actually the first type of game that Mr. Erikawa worked on. Nobunaga’s Ambition was one of Erikawa’s first PC games released in 1983 and thanks to the overwhelming success of the title the game received a console incarnation on the NES in 1987 and later on the SNES in 1993.This was the rise of the console era and Koei Tecmo continue to develop titles for PC and console today. In the last decade there has been a rise in mobile phone games and more recently fully fledged smartphone games. These game platforms came along in short succession and have a gone some way to enlarging the game market. With the additions of Cloud Games and Wearable Devices, Mr. Erikawa thinks that the Game Market is growing at a great pace and now is the right time for many to enter the games market and develop games for these new platforms.

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Mr Erikawa believes that Koei Tecmo has the right management policy of “IP Creation and Expansion” as this is the only way to realise growth and profitability of the company. By creating new IP, those titles can be expanded in many directions and platforms and therefore will reach all types of gaming consumers. Mr Erikawa gave an example that by releasing an IP on multiple platforms, creating tie ups for promotion, expanding the IP to global market, expanding the genres of that IP and then collaborating with other IP’s, they can create huge franchises that appeal to a large audiences.

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Mr Erikawa gave the example of Nobunaga’s Ambition IP which started out as, and to this day remains, a historical simulation game for PC. Whilst the game started on PC it quickly expanded over to consoles and the overseas market. Soon after Koei Tecmo changed the genre of the IP by creating a brand new “Online” title with a focus on “versus” mode rather than historical simulation. After that the IP made its way over to the Asian market as a social game and had a big collaboration with Pokemon in “Pokemon Conquest”. More recently the game has appeared on smartphones as a card game with a new genre as a futuristic shooter etc… What Erikawa is trying to demonstrate is that Nobunaga’s Ambition is no longer just a historical simulation game for PC but something much bigger and they hope they can follow this example with their other IP’s such as Dynasty Warriors, Toukiden and others.

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Koei Tecmo believes that a successful IP requires

• Platform Expansion
• Genre Expansion
• Collaboration Expansion
• Tie Up Expansion
• Global Expansion
• Asian Market focus

Collaboration titles have proved successful for Koei Tecmo and they will continue to develop games that cross their IP with another successful IP. Tie up’s have allowed games such as Samurai Warriors 4 to gain more exposure among customers who may not have played the game before. Koei Tecmo also noted that as well as global expansion it will also be good for the company to aggressively market their titles in Asia where there is a high affinity for Japanese IP’s. Also Koei Tecmo develop titles based on Ancient Chinese history and they sell very well in Asia, hence why “Asian Market focus has its own bullet point.

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Next, Mr Erikawa talked about the future of the games market and the direction that Koei Tecmo need to take in order to become successful. 3 main considerations need to be made-

1. Business Model
2. Development Budget
3. New Trends

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For 35 years, the game market in general has been continuing to grow. Domestically in Japan, while Arcade and Home Console game markets are showing a slowdown in growth and even a contraction or sorts, Smartphone games are stretching and comprehensively expanding the gaming market. In Europe and America, the Home Console game market is favourably expanding thanks to the success of PS4. In Asia Smartphone games are more spread out. Mr. Erikawa said that the games market in the whole world can be expected to continue growing from now on.

In the midst of that, the Games Business Model is largely changing with the spread of mobile phones and smartphones. The Digital Business is being developed in a different shape from conventional Package (Physical) Business. Depending on the play style, microtransactions can now be freely chosen and monthly payments are making a comeback.

Last year, Electronic Arts had its Digital Business sales exceed 50% of its whole sales. For Koei Tecmo Games it was a little less than 30% last year, but this year they are forecasting it to exceed 30%. Mr. Erikawa predicted that there will be more turning to Digital Business worldwide with North America and Asia leading the way.

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Mr. Erikawa said that the steep rise in development cost is one of the problem Koei Tecmo are also tackling along with many game companies. He mentioned that while smartphone games used to cost less to develop when compared to console games. The average mobile phone game required a budget of around $0.5m to $1.5m depending on the game type but as smartphone games continue to become more demanding both in performance and services the cost of development has risen from between $1.5m to $4.0m. This isn’t too far off the average console game development costs of $8m to $16m in Japan.

For many years in Koei Tecmo, by concentrating on developing basic technologies like game engine, have done their best to make game development more efficient and less costly. The company will continue to d this in an effort to lower development costs while still responding to game user’s every needs.

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Mr. Erikawa brought up trends of the game industry, which are “Game Broadcasting”, “Fusion of Smartphones and Game Consoles”, “Head Mount Display”, “Cloud Gaming” and “Maker-type”.

“Maker-type” refers to a user participation-style entertainment, where users create their own contents, such as “Minecraft” and “Super Mario Maker”. Right now it’s trending in every part of the world. Koei Tecmo Games also plans to release a “ROTK Maker” in the near future where users can create their own Romance of the Three Kingdoms.

Regarding the other trends, they were explained in detail by other speakers in AMD Symposium. Famitsu Group representative Hirokazu Hamamura talked about turning games to services and invigorating the community with eSports and broadcasts. SCE Worldwide Studios’ Shuhei Yoshida spoke about the possibility of PlayStation VR. And Shinra Technologies’ Yoichi Wada analyzed change in game industry’s crust with “Next-Generation Cloud Games”. Koei Tecmo recently released Nobunaga’s Ambition on smartphone where the game is processed in the cloud but played locally on the device.

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Mr Erikawa may be 65 but he still has plans to continue game development. He stated that he wants to look into various new technologies such as “Game Streaming”, “Natural Language Processing, AI, Simulation” and “Fusion between cloud server & current games”.

Mr. Erikawa saw a dream where he wanted to produce a game which utilises the same processing power of a supercomputer but where the processing takes place in the cloud, some people may consider buying a laptop which has the ability to handle most tasks but also is small and compact such as a 15 inch laptop which is just the correct size for programming and general day-to-day use. He wants to create a game with such throughput and which combines the abilities of game console and smartphone. Using “Uncharted Waters” as an example, the physics simulation of the natural world would be handled by a cloud server, and the player adventuring part would be handled by console as a device. Some people may be worried about the security of a cloud system when thinking about microtrantactions for certain games as it may be easier for a cloud server to contain criminal malware. Perhaps a service from http://www.thefinalstep.co.uk/ would be needed to protect it’s users from data loss.

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As well as the above, Mr Erikawa has the following plans:

• Continuation of Historical Simulation Games

Mr. Erikawa showed a desire to continue creating series like “Romance of the Three Kingdoms” which is on its 30^th anniversary. Furthermore, the latest iteration in the “ROTK” series “Romance of the Three Kingdoms XIII” is planned for release on 26 January 2016.

• Entertainment for Seniors

He wants to create games with a social aspect, having roots in Japanese culture, which would satisfy seniors in their 50s and 60s.

• A Fresh Game System

“I want to bring forth a console game title, which has an interesting combat system, is fresh and has a surprise factor,” said Mr. Erikawa. One of those efforts is Ni-Oh, It’s an action RPG with a peculiar game system, and our team are putting all their strength into developing it, including the meaning of transmitting Japanese history and culture.

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Fiscal 2015/16 plan

Koei Tecmo still plan to have a record breaking year thanks to the continued success of their games software division and online and mobile division. Koei Tecmo plan to generate ¥40,000m in revenue for the fiscal year ending March 31st 2016. This would be up 5.8% year on year and be the third consecutive year that sales revenue had increased. Operating profit is forecast to reach ¥10,00m, up 3.6% YOY and would represent the sixth consecutive years of rising profits for Koei Tecmo. Both the games software division and online mobile division are forecast to grow in both revenue and profit whilst the arcade management division is set to see a fall in profit this year.

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Japan is once again set to account for 80.2% of sales revenue, up from 79.0% last year whilst North America and Europe are set to see declines. North America is forecast to account for ¥3,200m, down 14.2%, whilst Europe is set to see a decline of 1.3% YOY to ¥2,400m. Once again it’s the Asian market which offsets the overseas decline as it has forecasted revenue up 30.5% YOY to ¥2,300m making the market size just as big as Europe for Koei Tecmo.

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Koei Tecmo plan to sell in 7 million units of game software for the fiscal year with 4 million sold in Japan, 1.4 million sold in North America, 1.0 million sold in Europe and 0.6m sold in Asia. Should the forecast come true then Japan will see an increase of 5.5% YOY whilst North America and Europe see decreases of 16.7% and 5.2% YOY. Asia once again should see an increase of 80,000 units compared to last year.

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We have some great content to look forward to in the near future-

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My friend recently changed his broadband provider through Usave and they provided him with a great service! He saved money and got better speeds! He could not be happier!
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Thanks to: Koei Tecmo Games, Famitsu, Blackkite