Business results for the second quarter of the year ending March 31, 2018

Operating results

(Note) Comprehensive income
Second quarter of the year ended March 31, 2018: ¥326 million (-11.7%)
Second quarter of the year ended March 31, 2017: ¥370 million (-11.0%)

Financial position

(Reference) Shareholders’ equity
Second quarter of the year ended March 31, 2018: ¥28,887 million
Year ended March 31, 2017: ¥29,151 million

Dividends

Forecast earnings for the year ending March 31, 2018

Qualitative Information Regarding the Consolidated Results for the second Quarter

Explanation of Operating Results

The Japanese economy continued on a moderate recovery track during this consolidated second fiscal quarter against a backdrop of improved employment, income environments, and corporate earnings, although there were concerns over the potential impacts of the prospects of the government trends in the US and European countries and economies of emerging countries in Asia such as China as well as uncertainties in policies. In the pachinko industry where the Daikoku Denki Group (“the Group”) belongs, the promulgation of the “Regulations on the Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business, etc. and Regulations Regarding the Certification of Game Machines and Examination of Model” on September 4, 2017 (enforcement date: February 1, 2018) has triggered a situation of continuous uncertainties including how to respond to the revision. We consider the changes in the market surrounding the industry such as the revision of regulations as a positive opportunity from a mid-to-long-term perspective for the pachinko industry to evolve into an industry that is broadly supported by society. We will continue to strive to contribute to the activation of the market by responding flexibly to the changes in the market environment and by promoting countermeasures against problems associated with addiction toward pachinko. In the Information System Segment, against this market environment, the number of newly opened pachinko halls dropped sharply compared to the same period in the previous year. While capital investment in existing stores was entrenched in a cautious attitude, we focused on the continuous sales enhancement of our mainstay information publication terminals, “BiGMO PREMIUM” and “REVOLA,” as well as the proposal of “Fan-SIS,” the industry’s first publication service of fan trend data and the sales expansion of our new CR unit, “VEGASIA III,” which is necessary for the implementation of this service. In July, we held a press announcement regarding the release of the FY2016 version of “DK-SIS White Paper,” which is now in its 14th year. We took initiative in tackling the challenges faced by the industry by actively implementing data analysis seminars participated by hall companies and associations. In the Control System Segment, we worked to formulate a machine development and sales plan in light of activities by game machine manufacturers in response to the formal announcement of the promulgation and enforcement dates of the revision of regulations. In addition, we proposed new plans for game machines based on new ideas to adapt to the revised regulations and carried out activities to propose new products and contents. As a result of the above, during the consolidated second fiscal quarter, the net sales amounted to 17,996 million yen (down 10.9% year-on-year). The operating income was 375 million yen (down 38.1% year-on-year), the ordinary income was 493 million yen (down 30.1% year-on-year), and the quarter net income attributable to shareholders of the parent company amounted to 296 million yen (down 10.1% year-on-year). Segment results are as follows.

[Information System Segment]

During the consolidated second fiscal quarter, this segment increased new customers (i.e. pachinko halls) owing to the steady evaluation from the market toward information publication terminals for fans against a harsh market environment where pachinko halls have become passive toward capital investment. However, due to the decline in new store openings compared to the same period in the previous year, the number of shipped units of the CR unit, VEGASIA series, and prize customer system went down year-on-year. As a result, the net sales in this segment were 11,757 million yen (down 10.4% year-on-year) and the segment-operating income was 872 million yen (down 38.3% year-on-year).

[Control System Segment]

Parts sales for pachinko machines performed solidly for the consolidated second fiscal quarter in this segment, but the sales of one of the models of the display unit were delayed to the second half of the fiscal year and beyond, resulting in a drop in the number of units sold compared to the same period in the previous year. We marketed approximately 5,500 units (about 8,800 units in the same period in the previous year) of pachislot game machines, slightly exceeding our plans in the beginning of the fiscal year. In addition, a decrease in research and development expenses and the occurrence of bankruptcy procedures by a partnering game machine manufacturer in April 2015, which was finalized in July 2017, have resulted in segment profits exceeding the same period in the previous year owing to the return of allowance for bad debts. As a result, the net sales in this segment were 6,262 million yen (down 11.7% year-on-year) and the segment-operating income was 374 million yen (up 293.6% year-on-year).

(Note) Above figures for each segment include the amounts of inter-segment transactions.

Explanation of Financial Position

Current assets at the end of the consolidated second fiscal quarter were 26,714 million yen, a decrease of 3,173 million yen from the end of the previous consolidated fiscal year, owing to a sharp drop in cash and deposits, a decline in inventories due to sales of pachislot game machines, and a decrease in advance payment and accounts receivable. Fixed assets at the end of the consolidated second fiscal quarter were 16,785 million yen, a decrease of 153 million yen from the end of the previous consolidated fiscal year, owing to a drop in bankruptcy claims due to the completion of bankruptcy procedures by the trade partner, and although there were returns for allowance for doubtful accounts, fixed assets declined due to recognizing depreciation. As a result, total assets at the end of the consolidated second fiscal quarter were 435 million yen, a decrease of 3,327 million yen from the end of the previous consolidated fiscal year. Current liabilities at the end of the consolidated second fiscal quarter were 1,361 million yen, a decrease of 291 million yen from the end of the previous consolidated fiscal year, owing to a decrease in accounts payable due to the recognition of research and development expenses and less acquisition of fixed assets compared to the previous consolidated fiscal year and a decline in trade payables. Fixed liabilities at the end of the consolidated second fiscal quarter were 1,012 million yen, a decrease of 161 million yen from the end of the previous consolidated fiscal year, owing to a decrease in reserve for retirement benefits for officers. As a result, total liabilities at the end of the consolidated second fiscal quarter were 14,613 million yen, a decrease of 3,063 million yen from the end of the previous consolidated fiscal year. Net assets at the end of the consolidated fiscal year were 28,887 million yen, a decrease of 264 million yen from the end of the previous consolidated fiscal year, owing to a decrease in retained earnings resulting from a larger payment of dividends than consolidated net income attributable to shareholders of the parent company. Consequently, the Group’s equity ratio was 66.4% (a rise of 4.1 points when compared to that at the end of the previous consolidated fiscal year).

Explanation of Earnings Forecast such as Consolidated Business Results Forecast

Earnings forecast for the full fiscal year ending March 2018 remains the same as the forecast announced on May 15, 2017. Although we expect the market environment to continue to be harsh against a backdrop of declining appetite for investment of pachinko halls, we will strive toward achieving our full-year consolidated earnings forecast by strengthening our proposal capabilities and by promoting active and bold action. If the need for revision arises in the future, we will disclose such revision in a prompt manner.