sometimes I look at investor reports while I'm talking with other people about-- usually video games, but sometimes other things, and today I was struck by how I was staring at basically empty filler text. I want to record and document some of these, because I think it's more interesting when the filler text your eyes glaze over was something that a real person said
Focus on human capital while leveraging conservative financial strategies and a flexible management plan to strengthen our advantages
We believe that in the highly uncertain game development business, our financial approach should be conservative and prioritize safety.
For instance, there’s the issue of how to recognize the costs of game development projects that are becoming larger and taking longer in accounting terms. In the case of other gaming companies, it’s common to account for games under development as work in progress assets and then, after release, to amortize these assets as expenses. However, in KOEI TECMO’s case, even for games set to be released after the next fiscal year, the development costs incurred during the current fiscal year are recognized as expenses for that year. This prevents the risk of sudden impairment losses on games under development as non-performing assets in the future.
Furthermore, for each area such as new IP, series, and collaborations, we plan how to allocate our precious human resources for each game title and how to recoup cash. In other words, we set up a plan that links business strategies with cash flow, which is also one of the measures to ensure the reliability of our management plan. The title development plan, which looks several years ahead, and the associated resource allocation are constantly re-examined depending on the situation, allowing us to respond flexibly to business uncertainties.
We must also focus on initiatives to further enhance the strengths of our human resources. Currently, KOEI TECMO is devoted to expanding its development capacity both domestically and internationally. As we anticipate an increase in personnel costs in the future, it is essential to pursue growth and profitability commensurate with those costs and to build financial strength.
At KOEI TECMO, we place a strong emphasis on in-house development, with the quality and quantity of our human resources being directly linked to our development capabilities. Our basic human resources strategy is to attract and cultivate exceptional talent worldwide, fostering a long-term commitment from them. The excellent power of development, technology, and project management that underpin KOEI TECMO’s success today, as well as the high caliber of our game titles, are a testament to the effectiveness of this strategic approach.
For the development of outstanding titles in the future, it is crucial to create an environment where young talents can thrive. This fiscal year, KOEI TECMO has implemented a base salary increase for the eighth consecutive year, aiming for an industry-leading wage level. Investment in people is the source of sustainable growth, and we will continue to focus on recruitment, training, and improving compensation.
Investment of surplus funds with emphasis on risk/return balance and capital efficiency
The proportion of surplus funds, such as marketable securities, on our balance sheet has become very high. From the perspective of return on equity (ROE), the capital efficiency of these surplus funds is also a crucial element. We believe it is essential to manage these funds appropriately while considering the balance between risk and return, and to ensure that the entire balance sheet is working effectively.
In FY2020 and FY2021, we achieved non-operating income of over ¥14 billion on the back of an extremely positive market condition. However, the result for FY2022 fell far short. While we cannot attribute the reasons solely to macro-environmental factors, it’s fair to say that we were significantly influenced by the dramatic changes in the market.
The management of surplus funds is inherently designed to bolster our core business. Based on that, we have consistently pursued a balance of risk and return, aiming for stable asset management with a medium- to long-term outlook. While we have achieved notable non-operating income from our investment activities, we also acknowledge several severe criticisms regarding our oversight mechanisms in asset management. Recognizing these points, we are presently focused on refining our investment approach and fortifying our governance structure.
In our asset management approach, we are refining our portfolio with three key considerations: “Agility” to swiftly adjust to environmental changes, “Stability” to maintain a positive non-operating balance over the medium to long term, and “Soundness” to ensure asset integrity. To enhance our governance, we have initiated routine reports to the Chairperson and the Board of Directors, incorporated rigorous scrutiny by the Board of Directors, and amplified our internal oversight capabilities.
In addition, we continue with our policy to allocate 50% of our after-tax profit either to dividends or for share buybacks, ensuring returns to our shareholders. This 50% total payout ratio is relatively high among companies in Japan. Based on our ample cash flow, we believe that there will be no shortage of business funds even if we continue with our current shareholder return rate and future-oriented investments.