axell / 6730 - shared research

LAST UPDATE: 2018.05.15
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Axell / 6730 LAST UPDATE: 2018.05.15 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp
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INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent
earnings. First-time readers should start at the business section later in the report.
Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 3 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 4
Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 4 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------------------- 5
Outlook------------------------------------------------------------------------------------------------------------------------------------------------- 11 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 15
Business description -------------------------------------------------------------------------------------------------------------------------------------------- 15 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 21 Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 22 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 27
Other information ---------------------------------------------------------------------------------------------------------------------------------- 34 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 34 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 36 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 36 Dividends and shareholder benefits ---------------------------------------------------------------------------------------------------------------------- 36 Corporate governance ---------------------------------------------------------------------------------------------------------------------------------------- 37 By the way --------------------------------------------------------------------------------------------------------------------------------------------------------- 37 Company profile ------------------------------------------------------------------------------------------------------------------------------------------------- 38
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Key financial data
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Due to the dissolution of a subsidiary, the company shifted to no-consolidated accounting beginning in FY03/15. Figures in the above table are consolidated for FY03/14 and previous years, and no-consolidated from Q4 FY03/15.
Income statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Par. Par. Par. Cons. Cons. Cons. Par. Par. Par. Par. Est. Total sales 15,417 15,495 8,199 8,362 16,717 11,043 11,073 8,982 8,012 8,477 6,300
YoY 11.8% 0.5% -47.1% 2.0% 99.9% -33.9% 0.3% -18.9% -10.8% 5.8% -25.7% Gross profit 8,952 8,873 4,456 4,270 6,642 5,206 4,731 4,101 3,546 3,142 2,150
YoY 8.9% -0.9% -49.8% -4.2% 55.6% -21.6% -9.1% -13.3% -13.5% -11.4% -31.6% GPM 58.1% 57.3% 54.3% 51.1% 39.7% 47.1% 42.7% 45.7% 44.3% 37.1% 34.1%
Operating profit 6,147 6,211 1,568 1,183 3,260 1,938 1,645 244 141 156 -1,450 YoY 3.0% 1.0% -74.8% -24.6% 175.6% -40.6% -15.1% -85.2% -42.2% 10.6% - OPM 39.9% 40.1% 19.1% 14.1% 19.5% 17.5% 14.9% 2.7% 1.8% 1.8% -
Recurring profit 6,168 6,224 1,584 1,215 3,272 1,941 1,659 220 162 164 -1,450 YoY 2.8% 0.9% -74.6% -23.3% 169.3% -40.7% -14.5% -86.7% -26.4% 1.2% - RPM 40.0% 40.2% 19.3% 14.5% 19.6% 17.6% 15.0% 2.4% 2.0% 1.9% -
Net income 3,800 3,840 1,043 700 2,071 998 1,115 113 92 80 -1,050 YoY 4.7% 1.1% -72.8% -32.9% 195.9% -51.8% 11.7% -89.9% -18.6% -13.0% - Net margin 24.6% 24.8% 12.7% 8.4% 12.4% 9.0% 10.1% 1.3% 1.1% 0.9% -
Per share data (JPY; split adjusted) Shares issued (year end; '000) 12,570 12,570 12,402 12,402 12,402 12,402 12,402 11,188 11,188 11,188 EPS 303.9 309.7 84.2 56.4 167.0 80.5 89.9 9.9 8.3 7.2 -93.9 EPS (fully diluted) 303.3 309.7 - - - - - - - - Dividend per share 160.0 170.0 160.0 60.0 100.0 55.0 55.0 10.0 5.0 5.0 0.0 Book value per share 947 1,094 1,008 952 1,058 1,046 1,093 1,006 1,024 1,020.7 Balance sheet (JPYmn)
Cash and cash equivalents 11,795 13,308 10,427 11,118 13,263 9,907 11,499 8,063 8,738 6,868 Total current assets 13,198 15,178 12,398 12,169 14,823 13,018 13,689 11,061 10,508 11,492 Tangible fixed assets 296 239 217 293 239 271 298 336 342 266 Investments and other assets 201 219 564 269 535 521 536 726 1,131 - Intangible fixed assets 263 219 152 85 51 44 38 31 46 32 Total assets 13,960 15,850 13,332 12,817 15,649 13,855 14,562 12,156 12,029 13,035
Accounts payable 259 723 429 214 401 358 170 681 284 1,344 Short-term debt - - - - - - - - - -
Total current liabilities 2,226 2,288 819 999 2,496 845 969 843 536 1,580 Long-term debt - - - - - - - - - -
Total fixed liabilities - - 11 12 26 32 34 56 34 35 Total liabilities 2,226 2,288 831 1,012 2,523 878 1,005 900 571 1,616 Net assets 11,734 13,562 12,501 11,805 13,126 12,976 13,556 11,256 11,457 11,418 Total interest-bearing debt - - - - - - - - - - Cash flow statement (JPYmn) Cash flows from operating activities 4,168 3,825 -344 2,041 3,243 -2,015 2,597 -704 1,273 -1,490 Cash flows from investing activities -306 -276 -428 -222 -352 -162 -264 -303 -556 -301 Cash flows from financing activities -2,791 -2,036 -2,108 -1,363 -745 -1,178 -685 -2,429 -58 -55 Financial ratios ROA (RP-based) 44.0% 41.8% 10.9% 9.3% 23.0% 13.2% 11.7% 1.6% 1.3% 1.3% ROE 33.8% 30.4% 8.0% 5.8% 16.6% 7.6% 8.4% 0.9% 0.8% 0.7% Equity ratio 84.1% 85.6% 93.8% 92.1% 83.9% 93.7% 93.1% 92.6% 95.2% 87.6%
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Recent updates
Highlights On May 15, 2018, Shared Research updated the report following interviews with Axell Corporation.
On April 25, 2018, the company announced earnings results for full-year FY03/18; see the results section for details.
For corporate releases and developments more than three months old, please refer to the News and topics section.
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Quarterly trends and results
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Sales 1,696 4,010 6,728 8,012 1,434 3,387 4,613 8,477 99.7% 8,500
YoY -40.1% -35.1% -12.8% -10.8% -15.4% -15.5% -31.4% 5.8% 6.1% Gross profit 814 1,827 3,005 3,546 604 1,352 1,880 3,142 101.4% 3,100
YoY -40.6% -36.5% -15.6% -13.5% -25.8% -26.0% -37.4% -11.4% -12.6% GPM 48.0% 45.6% 44.7% 44.3% 42.1% 39.9% 40.8% 37.1% 36.5%
SG&A expenses 848 1,763 2,646 3,404 921 1,648 2,326 2,985 99.2% 3,010 YoY 8.6% -16.2% -10.2% -11.7% 8.6% -6.5% -12.1% -12.3% -11.6% SG&A ratio 50.0% 44.0% 39.3% 42.5% 64.2% 48.7% 50.4% 35.2% 35.4%
R&D expenses 576 1,261 1,916 2,453 705 1,211 1,666 2,134 99.3% 2,150 YoY 15.4% -20.2% -10.8% -12.6% 22.4% -4.0% -13.0% -13.0% -12.4% R&D ratio 34.0% 31.4% 28.5% 30.6% 49.2% 35.8% 36.1% 25.2% 25.3%
Operating profit -33 64 359 141 -316 -295 -446 156 173.3% 90 YoY - -91.7% -41.2% -42.2% - - - 10.6% -36.2% OPM - 1.6% 5.3% 1.8% - - - 1.8% 1.1%
Recurring profit -25 63 392 162 -311 -288 -432 164 182.2% 90 YoY - -91.6% -33.7% -26.4% - - - 1.2% -44.4% RPM - 1.6% 5.8% 2.0% - - - 1.9% 1.1%
Net income -18 45 243 92 -136 -123 -145 80 266.7% 30 YoY - -91.3% -40.4% -18.6% - - - -13.0% -67.4% Net margin - 1.1% 3.6% 1.1% - - - 0.9% 0.4%
Unit sales of graphics LSIs ('000) 220 470 740 870 140 260 380 630 98.4% 640 Quarterly performance (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 1,696 2,314 2,718 1,284 1,434 1,953 1,226 3,864
YoY -40.1% -30.8% 76.0% 1.7% -15.4% -15.6% -54.9% 200.9% Gross profit 814 1,013 1,178 541 604 748 528 1,262
YoY -40.6% -32.6% 72.2% -0.2% -25.8% -26.2% -55.2% 133.3% GPM 48.0% 43.8% 43.3% 42.1% 42.1% 38.3% 43.1% 32.7%
SG&A expenses 848 915 883 758 921 727 678 659 YoY 8.6% -30.8% 4.5% -16.6% 8.6% -20.5% -23.2% -13.1% SG&A ratio 50.0% 39.5% 32.5% 59.0% 64.2% 37.2% 55.3% 17.1%
R&D expenses 576 685 655 537 705 506 455 468 YoY 15.4% -36.7% 15.5% -18.5% 22.4% -26.1% -30.5% -12.8% R&D ratio 34.0% 29.6% 24.1% 41.8% 49.2% 25.9% 37.1% 12.1%
Operating profit -33 97 295 -218 -316 21 -151 602 YoY - -46.7% - - - -78.4% - - OPM - 4.2% 10.9% - - 1.1% - 15.6%
Recurring profit -25 88 329 -230 -311 23 -144 596 YoY - -47.9% - - - -73.9% - - RPM - 3.8% 12.1% - - 1.2% - 15.4%
Net income -18 63 198 -151 -136 13 -22 225 YoY - -46.2% - - - -79.4% - - Net margin - 2.7% 7.3% - - 0.7% - 5.8%
Unit sales of graphics LSIs ('000) 220 250 270 130 140 120 120 250
FY03/18
FY03/18
FY03/17
FY03/17
FY03/18
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Sales and orders
Sales breakdown of LSIs for pachinko and pachislot machines
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Shared Research calculated sales of graphics LSIs, memory modules, and LED drivers based on sales composition ratios announced by the company.
Full-year FY03/18 results
Sales: JPY8.5bn (+5.8% YoY)
Operating profit: JPY156mn (+10.6%)
Recurring profit: JPY164mn (+1.2%)
Net income: JPY80mn (-13.0%)
Sales and orders received (cumulative) (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 1,696 4,010 6,728 8,012 1,434 3,387 4,613 8,477
YoY -40.1% -35.1% -12.8% -10.8% -15.4% -15.5% -31.4% 5.8% LSI products for pachinko and pachislot machines 1,655 3,931 6,611 7,838 1,388 3,288 4,478 8,291
YoY -40.2% -35.1% -12.5% -10.4% -16.1% -16.4% -32.3% 5.8% LSI products for embedded systems 29 51 83 117 25 55 81 113 Other 11 26 34 57 20 43 53 72
Orders received 2,141 4,805 6,663 7,279 2,109 4,566 5,582 8,778 YoY -32.0% 7.3% 37.5% 10.1% -1.5% -5.0% -16.2% 20.6% LSI products for pachinko and pachislot machines 2,091 4,723 6,530 7,088 2,075 4,470 5,430 8,590
YoY -31.8% 9.0% 39.7% 11.1% -0.8% -5.4% -16.8% 21.2% LSI products for embedded systems 37 53 95 133 13 52 88 110 Other 11 29 27 58 20 43 63 77
Order backlog 2,341 2,691 1,831 1,163 1,838 2,341 2,132 1,464 YoY -48.9% 4.7% 31.5% -38.7% -21.5% -13.0% 16.4% 25.9% LSI products for pachinko and pachislot machines 2,304 2,659 1,788 1,117 1,805 2,299 2,070 1,416
YoY -49.1% 6.3% 32.4% -40.2% -21.7% -13.5% 15.8% 26.8% LSI products for embedded systems 35 29 40 43 31 40 51 40 Other - 2 3 1 1 1 11 6
Sales and orders received (quarterly) (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales 1,696 2,314 2,718 1,284 1,434 1,953 1,226 3,864
YoY -40.1% -30.8% 76.0% 1.7% -15.4% -15.6% -54.9% 200.9% LSI products for pachinko and pachislot machines 1,655 2,276 2,680 1,227 1,388 1,900 1,190 3,813
YoY -40.2% -30.8% 79.4% 3.1% -16.1% -16.5% -55.6% 210.8% LSI products for embedded systems 29 22 32 34 25 30 26 32 Other 11 15 8 23 20 23 10 19
Orders received 2,141 2,664 1,858 616 2,109 2,457 1,016 3,196 YoY -32.0% 100.3% 406.3% -65.2% -1.5% -7.8% -45.3% 418.8%
LSI products for pachinko and pachislot machines 2,091 2,632 1,807 558 2,075 2,395 960 3,160 YoY -31.8% 107.9% 426.8% -67.3% -0.8% -9.0% -46.9% 466.3%
LSI products for embedded systems 37 16 42 38 13 39 36 22 Other 11 18 -2 31 20 23 20 14
FY03/17 FY03/18
FY03/17 FY03/18
Cumulative FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales of LSI products for pachinko and pachislot machines 1,655 3,931 6,611 7,838 1,388 3,288 4,478 8,291
YoY -40.2% -35.1% -12.5% -10.4% -16.1% -16.4% -32.3% 5.8% Graphics LSIs 1,530 3,210 5,050 6,010 930 1,860 2,540 4,660
YoY -36.5% -35.0% -18.3% -16.4% -39.2% -42.1% -49.7% -22.5% % of LSI sales 90.0% 80.0% 75.0% 75.0% 65.0% 55.0% 55.0% 55.0%
Memory modules, LED drivers, others 130 720 1,560 1,830 460 1,430 1,940 3630 YoY -63.9% -35.7% 13.9% 18.1% 253.8% 98.6% 24.4% 98.4%
Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sales of LSI products for pachinko and pachislot machines 1,655 2,276 2,680 1,227 1,388 1,900 1,190 3,813
YoY -40.2% -30.8% 79.4% 3.1% -16.1% -16.5% -55.6% 210.8% Graphics LSIs 1,530 1,680 1,840 960 930 930 680 2,120
YoY -36.5% -33.6% 48.4% -5.0% -39.2% -44.6% -63.0% 120.8% % of LSI sales 90.2% 72.6% 67.7% 74.8% 64.9% 47.6% 55.5% 54.9%
Memory modules, LED drivers, others 130 590 840 270 460 970 510 1690 YoY -63.9% -22.4% 236.0% 50.0% 253.8% 64.4% -39.3% 525.9%
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Business environment and initiatives
According to the company, the amusement machines market continues to face harsh conditions marked by a gradual decline in
the number of players due to the diversification of leisure activities and recent voluntary industry regulations geared to counter
addiction. The Ordinance of Enforcement of Public Morals Act (aiming to deal with addiction), revised in February 2018, has
muddied the market outlook, causing a loss of appetite on the part of amusement halls to purchase new machines and making
the recent market environment particularly challenging.
The company focused on selling various products for the pachinko and pachislot market. The company also focused on initiatives
for graphics LSIs for embedded systems as well as new areas such as software IPs for products, including its movie middleware
product H2MD, and other middleware products. Further, the company explored business alliances and investments with an aim
to accelerate modification of its profit structure through entry into new businesses.
In FY03/18, the company advanced the following initiatives.
Started to sell software IPs and middleware products collectively referred to as “AXIP” (April 2017). In addition to movie
compression middleware H2MD which is already on sale, the company started selling audio compression middleware C-FA in
April 2017
Announced development and release of a smartphone game Mugen no Labyriz using AXIP (August 2017). The main goal is to
demonstrate the company’s middleware products, but the company also aims to generate revenue from game fees
Announced the launch of joint research with Tier IV, Inc. (unlisted) on system LSI to support self-driving technology (May 2017).
Axell is engaged in the research and development of LSI technology for efficiently running Autoware: software developed for
automated driving on public roads. In March 2018, Axell contributed capital to Tier IV but has not disclosed the amount of its
stake.
Announced participation in a research project sponsored by the New Energy and Industrial Technology Development
Organization (NEDO) named “Cross-cutting Technology Development Project to Promote IoT” (June 2017)
Made additional investment in sdtech Inc. (unlisted) whose forte is software development for automotive devices. After acquiring
800 common shares of sdtech for JPY60mn in June 2016, Axell additionally acquired 1,000 common shares for JPY100mn. With
this additional acquisition, Axell’s equity stake rose to 9.0%. The objective of the investment is to promote use of Axell’s software
movie codec (H2MD etc.) in the embedded devices market mainly for automotive devices. The company made the additional
investment seeing that some progress was made thus far and expecting that further strengthening of partnership could help
create synergies in the area of automotive devices
Sales by product
Sales of products for the pachinko and pachislot market were JPY8.3bn (+5.8% YoY). Unit sales of the mainstay graphics LSIs
(including graphics boards) for pachinko and pachislot machines were about 630,000 units (about 870,000 units in FY03/17).
Axell’s share increased YoY, but the market contracted and there was a significant impact from reuse by major customers.
According to Axell, the total pachinko and pachislot market contracted by 14.3% to 2.03mn units for the year, while the
company’s market share rose to 51% (from 45% in FY03/17). As mentioned, the Ordinance of Enforcement of Public Morals Act,
revised in February 2018, has muddied the market outlook, causing amusement halls to purchase fewer machines. Starting in
FY03/18, Axell began selling graphics boards with mounted graphics LSIs, accounting for 15% of the total number of graphics
LSIs sold (0% in FY03/17). The selling price of the graphics boards is about 1.5x that of the graphics LSIs alone, which has helped
to push up the average price of graphics LSIs. However, the GPM for the circuit board portion is low, and Shared Research thinks
this is one factor causing overall GPM to decline.
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Sales of other products for the pachinko and pachislot market, such as LED driver LSIs and memory modules increased YoY, as
memory module sales were underpinned by favorable sales trends at customers who use them.
Sales of graphics LSIs for embedded systems other than pachinko and pachislot machines totaled JPY113mn (-2.7% YoY).
Sales of other products—including development support software for clients, evaluation boards, and software IPs such as
H2MD—totaled JPY72mn (+26.4% YoY).
Gross profit was JPY3.1bn (-11.4% YoY). GPM declined 7.2pp YoY to 37.1%. Gross profit declined despite sales growth. This was
mainly due to a decline to 55% (from 75% in FY03/17) in the share of high-margin graphics LSIs in the sales mix.
SG&A expenses were JPY3.0bn (-12.3% YoY). The company cut costs across the board, and R&D expenses were down YoY. R&D
expenses were JPY2.1bn (-13.0%) as a portion of expenses slated for prototype development (about JPY740mn) was delayed
until FY03/19.
For details on quarterly and previous annual results, please refer to the Historical performance section.
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Full-year company forecasts
Forecast assumptions
Source: Shared Research based on company data *Market scale (number of amusement machines sold) and market share are estimates by the company
Full-year earnings forecasts for FY03/19:
Sales: JPY6.3bn (-25.7% YoY)
Recurring loss: JPY1.5bn (JPY164mn recurring profit)
Net loss: JPY1.1bn (JPY80mn net income).
Projected market size in FY03/19 for pachinko and pachislot machines is 1.6mn units (compared to 2.0mn units in FY03/18)
Axell estimates overall demand for pachinko and pachislot machines to decrease from 2.0mn units in FY03/18 to 1.6mn units in
FY03/19. The market environment remains tough due to the additional impact of the revised Ordinance of Enforcement of Public
Morals Act from February 2018 coupled with a shrinking player population as people turn their attention to other leisure
activities.
FY03/19 will serve as a period of transition to machines using the new standards outlined in the Ordinance of Enforcement of
Public Morals Act. Axell expects 1H to focus on machines that passed inspection prior to the revision, with the new post-revision
machines starting to come out in 2H. The law revision has muddied the market outlook, causing a loss of appetite on the part of
amusement halls to purchase new machines. The company expects the market environment to remain challenging in 1H in
particular.
Planned sales of 430,000 graphics LSIs for pachinko and pachislot machines, down approx. 200,000 YoY
Amid deterioration in the market environment, the company forecasts sales of graphics LSIs for pachinko and pachislot machines
to fall by about 200,000 units YoY to 430,000 units. The company expects about 100,000 of the total (accounting for about 25%
of sales) to be high value-added circuit board products with an embedded LSI. Axell expects sales of other products for this
market to decline due to the poor market environment, and for LED driver LSI and memory module sales to fall YoY.
1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. Sales 3,387 5,090 8,477 2,200 4,100 6,300
YoY -15.5% 27.2% 5.8% -35.0% -19.4% -25.7% CoGS 2,035 3,300 5,335 4,150 Gross profit 1,352 1,790 3,142 2,150
YoY -26.0% 4.1% -11.4% -31.6% GPM 39.9% 35.2% 37.1% 34.1%
SG&A expenses 1,648 1,337 2,985 3,600 YoY -6.5% -18.5% -12.3% 20.6% SG&A ratio 48.7% 26.3% 35.2% 57.1%
Operating profit -295 451 156 -1,600 150 -1,450 YoY - 485.7% 10.6% - -66.7% - OPM - 8.9% 1.8% - 3.7% -
Recurring profit -288 452 164 -1,600 150 -1,450 YoY - 356.6% 1.2% - -66.8% - RPM - 8.9% 1.9% - 3.7% -
Net income -123 203 80 -1,100 50 -1,050 YoY - 331.9% -13.0% - -75.4% -
FY03/19 company forecasts FY03/18 FY03/19 (JPYmn)
Market analysis FY03/18 FY03/19 Act. Est.
Market size ('000 units) 2,030 1,550 Number of graphics LSI’s for amusement machines ('000 units) 630 430 Axell's market share 51% 50%
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In light of customer demand trends, the company expects sales of roughly 34,000 graphics LSIs for embedded systems (40,000 in
FY03/18) and roughly flat sales for software IPs such as H2MD and middleware products.
GPM estimated to be 34.1%, down 2.9pp YoY
Axell forecasts gross profit will be JPY2.2bn (-34.1% YoY). Owing to a change in product mix, GPM is forecasted to decline by
2.9pp to about 34.1%. The company projects that graphics LSIs (including graphics boards) for the pachinko and pachislot
market with high profit margins will account for about 50% of total sales in FY03/19—a decrease from about 55% in FY03/18.
SG&A expenses to rise 20.6% YoY to JPY3.6bn
The company projects that SG&A expenses will total JPY3.6bn (+20.6% YoY), of which JPY2.8bn (+27.9% YoY) will be R&D
expenses. The company is working to reduce SG&A expenses across the board. The increase comes from some of the expenses
slated for prototype development (about JPY740mn) in FY03/18 being delayed until FY03/19.
Dividends
Axell forecasts a net loss for FY03/19 and therefore does not plan to pay any dividends.
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Outlook Axell has not released a medium-term management plan, but has announced the following earnings targets for FY03/19 through
FY03/21, including for new businesses.
Earnings targets for FY03/19 through FY03/21
Earnings targets for FY03/19 through FY03/21
Source: Company material *Market scale is the estimated number of pachinko and pachislot machines to be sold per year.
Axell expects lower sales and profit and an operating loss in FY03/19, but higher sales and profit, returning to an operating profit
position thereafter. Products for the pachinko and pachislot market will remain the mainstay, but the new middleware (details
follow) and encryption technology businesses will also contribute to sales.
In FY03/19, the company expects to sell 430,000 units of its mainstay graphics LSIs for the pachinko and pachislot market (down
200,000 units from FY03/18). However, it expects SG&A expenses to increase by JPY614mn due to a delay in R&D spending. The
expected drop in graphics LSI units is due in part to the anticipated drop in the number of pachinko and pachislot machines to be
sold for the year. The target is 1.55mn units, down 480,000 units from FY03/18. Another factor will be an increase in the reuse of
AG-5 (launched in March 2015) leading up to the launch of the new AG-6.
Axell expects higher sales and profit in FY03/20 and a return to operating profit. It expects the number of graphics LSIs for the
pachinko and pachislot market to increase YoY, as SG&A expenses fall upon completion of AG-6 development. The number of
graphics LSIs to be sold is slated to rise as the number of pachinko and pachislot machines to be sold rises to 1.7mn (+150,000
units YoY) and the impact of AG-5 reuse declines with the release of AG-6.
The company expects higher sales and profit to continue in FY03/21. It expects the number of pachinko and pachislot machines
sold to be level with FY03/20 at 1.7mn and for the transition to AG-6 to proceed, further lowering the reuse ratio. It also expects
the ratio of sales from graphics boards with mounted graphics LSIs to increase.
Plans regarding products for the pachinko and pachislot market The company plans to increase graphics LSI market share and the ratio of graphics cards and expand the lineup of peripheral
products for pachinko and pachislot machines.
Sales Operating profitEmbedded: other producs
Pachinko: other products
Pachinko: Graphics LSIs
FY03/18 Act.
FY03/19 Est.
(JPYbn)
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Axell had 45% of the market for graphics LSIs for pachinko and pachislot machines in FY03/17, down from 51% in FY03/16.
However, its market share recovered to 50% in FY03/18. The company also forecasts that market share will rise between FY03/19
and FY03/20 as it launches the next generation AG-6 graphics LSI, improves the functionality of development support tools, and
shifts focus to circuit board products.
Introduction of AG-6, next-generation Graphics LSI
The company, which was developing AG-6, a next-generation graphics LSI, as of May 2018, may start mass-producing the
product in FY03/20. The company expects to increase its market share further when the product is launched. AG-6 features better
image compression technology and works better with DUKE, a support tool to help clients reduce their development costs.
According to Axell, AG-6 will be easier to use and be able to display more pictures.
DUKE, development support tool
Axell has been providing its graphics LSI clients with DUKE since December 2015. DUKE is a support tool to help clients reduce
their development costs by replicating the mechanism of pachinko and pachislot machines. In the medium term, the company
will seek to expand its market share by improving the functionality of such support tools and making it easier for amusement
machine manufacturers to develop products.
Raising unit price by turning graphics LSI into module products
Axell had been selling graphics LSIs for the pachinko and pachislot market, the company’s mainstay, as standalone products until
FY03/17. However, the company began mass-producing and selling circuit board products that have both graphics LSIs and
DRAMs on a single substrate from FY03/18 (graphics cards accounted for 15% of sales in FY03/18). These products are sold at
prices 1.5 times those of conventional models. The company hopes that this pricing strategy will allow it to increase its gross
profit in absolute terms even if the margin declines.
Expanding peripheral products
The company plans to expand its business scale by increasing sales from producing general purpose memory modules in
particular. Axell had been supplying memory modules to only one client until FY03/16. The company wants to expand sales
during FY03/17 by adding general-purpose products that can be used in conjunction with graphics LSIs supplied by other
manufacturers. The company wants to further expand its client base over the medium term.
Initiatives related to new businesses Leveraging the technology and expertise it has cultivated in regard to products for the pachinko and pachislot market, Axell aims
to establish new businesses in the areas of middleware, encryption technology, and machine learning. Shared Research believes
the company can limit investment and expenses by using the technology and expertise it has already developed. The company is
targeting sales of JPY2.0bn and gross profit of JPY1.0bn from these new businesses in FY03/23, five years from their launch.
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Source: Company material
Middleware (AXIP) The company plans to use the core technologies it cultivated through the development of graphics LSIs for pachinko and
pachislot machines market (image compression, high-resolution image expansion, audio compression, encryption, etc.) and sell
software IPs and middleware products to the games market under the collective name AXIP to gain licensing income. Axell
suggests CRI Middleware Co., Ltd. (TSE Mothers: 3698) as an example of another company working in middleware. This
competitor offers video and audio compression technology, but Axell plans to differentiate itself by offering a proprietary product
lineup, including high-resolution image expansion, deep learning framework, and file packer technologies.
In February 2015, the company launched movie and audio middleware products. In April 2018, it added the high-resolution
image expansion IP GRADIA to its AXIP series lineup.
H2MD provides various functions for image-displaying on web pages, including displaying and controlling videos on a web page,
managing multiple videos playing simultaneously, and playing videos on a smart device browser.
C-FA can produce the audio quality of a general purpose codec while using only half of the CPU power. This allows videos to play
on various platforms.
GRADIA is a high-resolution image expansion IP. Compared to standard bilinear interpolation, Axell’s proprietary algorithms
produce smooth scaling and prevent jaggies (jagged lines in images).
In August 2018, Axell plans to add the AILIA deep learning framework (tool for conducting deep learning) to its product lineup,
and in September 2018 the VUCKET file packer. VUCKET will pack large volumes of image and audio files into a single file, and
will include damage checking, encryption, and compression functionality. In December 2018, Axell plans to add LESIA to its
lineup. LESIA will make it possible to reduce communication bandwidth through super high compression surpassing the
capabilities of H2MD.
Encryption technology
In encryption technology, Axell is planning to develop security products and blockchain business.
Security products
In security products, the company is planning to launch the SHALO encryption solution in December 2018. SHALO combines
SHALO-HL with SHALO-SL and is compatible with all applications used on standard platforms such as Microsoft Windows.
Machine learning Cryptographic technology: VIPPOOL-related Cryptographic technology: SHALO
AXIP
Sales (JPYmn)
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The company plans to expand uses of SHALO-HL, which has a USB dongle as a hardware key, to include login verification and
cryptocurrency hardware wallets. With SHALO-SL encryption solution software, it will issue licensed files and provide them to
users.
Blockchain business
In the blockchain business, Axell is considering the operation of mining pools (in which multiple miners cooperate to conduct
mining), the sale of mining hardware (such as field-programmable gate arrays [FPGA, an integrated circuit designed to be
configured by a customer or designer after manufacture]), and a blockchain support business.
Operation of mining pools: Axell may conduct in-house mining using the FPGA it used in developing the next-generation
graphics LSI, AG-6. It is also in negotiations to acquire the operating rights for VIP Pool, a mining pool for Monacoin.
Sale of mining hardware: The company plans to sell its own mining hardware (FPGA board).
Blockchain support business: The company plans to start providing B2B solutions using blockchain technology and computing
resources using merged mining (more efficient mining method that reduces required processing by allowing results gained in
mining one cryptocurrency to be used in the mining of a separate cryptocurrency) and to start providing key management
systems.
*Cryptocurrency mining refers to the verification and confirmation of transactions while maintaining consistency with the cryptocurrency transaction
history. To be verified are matters such as whether the individual who sent payment data is the legitimate owner of the cryptocurrency being used in
the transaction and whether the cryptocurrency is being used redundantly. In order to do this verification, the miner has to solve a mathematical
problem requiring a significant computational load. The first miner to solve the problem is rewarded with cryptocurrency of their own, which is newly
issued for that purpose.
*Monacoin, based on Litecoin, was the first cryptocurrency to be born in Japan (in December 2013). It uses an ASIC-resistant hash function. Monacoin
has an active community centered in Japan and can be used to make payments in brick-and-mortar stores. As of April 2018, Monacoin had a total value
of about JPY25.0bn.
*VIP Pool began service in February 2014. It is one of the largest Monacoin mining pools in Japan, known for its stability and its use of the Japanese
language.
Machine learning
Axell plans to research and develop machine learning technologies centered on image recognition. As a first step, it plans to
release the AILIA deep learning framework in August 2018.
The company is considering the development of component technologies needed for autonomous systems, such as
Convolutional Neural Networks (CNN, compatible with image recognition), as intellectual property (IP) products.
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Business
Business description Fabless semiconductor manufacturer of graphics LSIs for the amusement machines market Axell is a fabless semiconductor maker that develops and sells image-processing large-scale integration (LSI) devices and similar
products. The company generates most of its sales from products used in amusement equipment, such as pachinko and pachislot
machines.
Axell’s strengths are in graphics rendering and compression technologies, and its mainstay products are graphics LSIs for LCDs of
pachinko and pachislot machines. The electronic control system of pachinko and pachislot machines contains a main-base plate
that regulates the rate of winning and a sub-base plate that controls visual effects. The company’s graphics LSI chips are mounted
on the sub-base plate. In recent years, visual effects of pachinko and pachislot machines have become increasingly elaborate; they
are used not only for entertainment purposes to heighten expectations for winning when winning appears to be within reach or
to dramatize the event when the winning actually takes place, but also to accompany a variety of routine functions of the
machine. In fact, visual effects have become one of the key factors for product differentiation. Therefore, the company’s products
require extremely high performance. Axell’s graphics LSIs feature the company’s own advanced technology for data compression
and extension, as well as for graphics display.
Production is outsourced to Renesas Electronics Corporation (TSE1: 6723), Fujitsu Semiconductor (unlisted consolidated
subsidiary of Fujitsu Ltd. (TSE1: 6702)), and ROHM Co., Ltd. (TSE1: 6963), while sales are handled through Midoriya Electric Co.,
Ltd., Avnet Internix (delisted on December 3, 2012 after being acquired by Memec Group Ltd. of the U.K.), Okaya Electronics
Corp. (a consolidated subsidiary of Okaya Co., Ltd. (NSE1: 7485)), and Ryosan Co., Ltd. (TSE1: 8140).
Strength in compression technologies and image drawing The company, through its graphics LSIs, is able to develop highly advanced graphics for games by integrating its proprietary
high-performance image compression technologies capable of high-speed image drawing and retention of large quantities of
imagery data, while keeping the cost of memory chips down.
These products were well received by customers, and contributed to Axell gaining a roughly 51% market share for graphics LSIs
used in pachinko and pachislot machines (according to company estimates as of FY03/18). The markets Axell is going after are
niche ones, but they are key devices as far as the users are concerned. The main source of its demand, the pachinko and pachislot
machine market, exhibits some volatility due to the effects of regulations and macro factors. Keys to growth include greater
introduction of peripheral devices and circuit board products, as well as enhanced applications such as LED drivers, sound, and
sophisticated imaging for pachinko and pachislot machines.
A key characteristic of Axell’s graphics LSIs is its low heat emission technology during the imaging process. Its graphics LSIs can
also be directly touched while the imagery process is being conducted. Graphics LSIs used in personal computers are mainly
cooled directly by using a fan or heat sink. However, heat-resistance becomes an important feature for pachinko makers since
graphics LSIs used in such machines must be low heat emission since they are enclosed in a compact and small compartment.
The company’s main feature of its graphics LSIs, which is its low heat emission, and supporting customers from the development
stage, is a major reason why the company commands the top market share, and is able to gain repeat business.
Main business—graphics LSIs
Axell’s main earnings driver is graphics LSIs for pachinko and pachislot machines, which accounted for 55% of sales in FY03/18.
Including peripheral devices, products for pachinko and pachislot machines (LED driver LSIs, memory modules, etc.) accounted
for 98% of total sales in FY03/18. The remainder came from sales of graphics LSIs for embedded systems.
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LSIs for pachinko and pachislot machines The pillar of Axell’s product line is graphics LSIs for the pachinko and pachislot machine market. Its mainstay product as of May
2018 was the AG-5. The original AG-1 (short for Axell Graphics 1) graphics LSI was Axell’s main product up to H1 FY3/03, but a
second-generation version, the AG-2, was added in H2 FY03/03. The company focused on improving its compression technology
and graphics LSIs for pachinko and pachislot machines up to the second generation. AG-2, which is four times as efficient as AG-1,
helped the company expand its market share. Since then, Axell developed third-generation (AG333) and fourth-generation
(AG-4) versions with more advanced graphic functions (in resolution and rendering capabilities), upgraded compression
technology, and added sound and LED controls. The company introduced a fifth-generation version, AG-5, in FY03/15.
Graphics LSI market share expansion Axell made an immediate impact with its first generation, AG-1 graphics LSIs, introduced for pachinko and pachislot machines in
July 1998. It continued to win over customers by improving the graphic functions and expand market share with each new
generation of high-performance chips as the industry introduced pachinko and pachislot machines with LCD displays.
Its market share rose to around 35% in FY3/03 (with the introduction of AG-2) from around 25% in FY3/02 (AG-1). In FY03/18,
Axell had 51% share of the market, according to company estimates.
Axell’s image compression technologies Axell’s technical competitive advantage is in its image-processing technologies and its know-how in converting these
technologies into LSI chips.
The company’s graphics-rendering technology combines 2D and movies. This technology turns a high-resolution 3D movie
made for pachinko and pachislot LCDs from moving images using a personal computer into a 2D format. Car navigation systems
and home video game consoles require real-time images. In contrast, imagery data used in pachinko and pachislot machines can
be prepared in advance. Thus, the company believes that its technology combining 2D and movies are best suited for pachinko
and pachislot machines. For this reason, the company has applied this format to its data compression and decompression
technologies, and improved its compression rate.
As a result, the company’s technologies reduce the burden placed on CPUs more so than on 3D graphic systems, allowing for
high-speed and high-resolution images without being reliant on the CPU. Axell also has 3D technologies, but has been proposing
the best solutions taking into account the needs of its clients, and anticipating the type of machines to be developed.
According to the company, it is differentiating itself from competitors through its imaging compression and decompression
technologies that enable a high degree of compression. Its R&D expense has averaged around 25% of total sales over the past
five years.
Sales / R&D expenses ratio exceeds competitors’
R&D expense for Axell’s competitors is 7.2% (FY03/17) for Eizo Corp. (TSE1: 6737), 5.7% (FY03/18) for Yamaha (TSE1: 7951),
and 6.1% (FY03/17) for Toshiba Corp. (TSE1:6502). Shared Research estimates that R&D expense for Axell’s first generation
graphics LSI (AG-1) was around JPY30mn, but R&D costs have increased with each new generation. R&D expense for AG-4—a
mainstay product from FY03/12 through 1H FY03/15—was about JPY1.0bn. Shared Research estimates that R&D expenses for the
fifth generation AG-5—released in FY03/15—came to around JPY1.0bn.
LSIs for embedded systems While its current business is mainly limited to the pachinko and pachislot machine market, Axell expanded into non-PC
application graphics LSIs such as factory automation, measurement equipment, and medical equipment. The company has
developed and marketed the AG-9 and AG-10 series for LSI for embedded appliances that are used in rearview mirrors and
monitors used in heavy construction machinery, medical equipment, measuring equipment, various control devices, and
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automatic teller machines (ATMs). However, production of such products is extremely low compared with pachinko and
pachislot machines, and contributions to sales have been limited.
Research and development
Axell’s R&D expense reflects costs incurred during LSI development and prior to the commencement of high-volume production.
The company introduces new graphics LSIs for pachinko and pachislot machines based on a three-year cycle, and also conducts
development, including basic research, for the next generation of products. The unit price tends to remain stable throughout a
product’s lifetime.
Shared Research estimates that the R&D cost for one generation of graphics LSI chips has been increasing, and R&D expense for
the mainstay graphics LSI product (as of May 2018), AG-5, was around JPY1bn. In contrast, R&D expense for AG-1 was about
JPY30mn; for AG-3 around JPY500mn; and for AG-4 around 1bn. In line with the jump in LSI manufacturing costs, the company
expects development costs for next-generation graphics LSI may increase 2 or 3x.
R&D functions are organized into four teams – LSI chips, algorithm, systems, and software. Axell is involved not only in the design
of LSIs, but also in the development of evaluation circuit boards and software to support its customers' product-development
activities. The market has demanded increasingly sophisticated LSI functions, making it essential to maintain superior
technology-development capabilities, and a state-of-the-art design environment. To retain its competitive advantage, Axell
undertakes ongoing R&D in areas such as proprietary graphics systems and image-compression technology.
Production and sales system
Production outsourcing Axell does not own semiconductor plants and relies on outsourcing for production. As of 2016, it outsources production to
domestic foundries such as Renesas Electronics, Fujitsu Semiconductor, and ROHM. Axell’s business model follows a
build-to-order process whereby it receives a customer’s order generally with a three and a half month delivery date. It then
consigns the tailored production of that order in line with the customer’s specifications.
This business model originates from when the founder and chairman, Mr. Sasaki, was working in the LSI division of Nippon Steel
Corporation (now Nippon Steel & Sumitomo Metal Corporation (TSE1: 5401). For each generation of LSI for pachinko and
pachislot machines, Axell chooses the best manufacturer by assessing the technology and determining the cost, and awards
production of each LSI generation to a single manufacturer. This can be a unique characteristic of the pachinko and pachislot
industry. During the inspection process of pachinko and pachislot machines, parts used at the beginning of mass production of
the machines must match the same parts during inspection. For example, even the positioning of the print on LSI devices must be
a perfect match.
Source: Shared Research based on company data
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Sales distribution Pachinko and pachislot machines, and other machine makers are Axell’s end-users, but sales are handled through its three
contracted sales distributors. Midoriya Electric mainly handles sales related to pachinko and pachislot equipment, but Axell also
signed agreements with Avnet Internix and Okaya Electronics to cultivate new markets in the factory automation and IT fields. As
Midoriya is in charge of pachinko and pachislot customers, sales via this distributor accounted for around 70% (as of FY03/18) of
Axell’s sales.
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Profitability snapshot, financial ratios
Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Sales figures for graphics LSIs for the amusement machine market and other products for the amusement machine market from FY03/14 are Shared Research estimates, calculated based on the company’s publicly disclosed sales breakdown data.
Sales The company generates sales from products for the pachinko and pachislot machine market, graphics LSIs for embedded systems,
and other products. In FY03/18, sales of products for the amusement machine market comprised 97.8% of the company’s overall
sales.
LSIs for the pachinko and pachislot machine market Products for the pachinko and pachislot machine market include graphics LSIs for the pachinko and pachislot machine market,
the company’s mainstay, as well as memory modules and LED drivers.
Graphics LSIs for the pachinko and pachislot machine market
Sales of graphics LSIs for the pachinko and pachislot market fluctuate depending on sales of pachinko and pachislot machines, the
company’s market share, and the number of reused parts. The number of reused parts tends to rise toward the latter half of the
product cycle due to an increase in the number of available secondhand items.
Unit prices of graphics LSIs have been rising moderately as they come with new functions such as voice- and LED-control
mechanisms. The company sells its products through distributors, which charge final customers about JPY6,000 for AG3 and
JPY8,000 for AG4. AG-5, which the company began shipping in FY03/15, appears to sell for about JPY1,000 more than AG4.
Other products used in pachinko and pachislot machines
Other products for the pachinko and pachislot machine market include LED driver LSIs (LSIs that control LED lamps used in
pachinko and pachislot machines), memory modules (substrates with LSIs that store images displayed on the machine). Sales of
these products are highly dependent on a certain group of clients because the number of buyers is smaller than those of graphics
LSIs. Therefore, sales tend to be volatile and easily affected by customer demand.
Until FY03/16, the company had only provided memory modules to one company client. However, in FY03/17 the company
introduced a new general purpose memory module that could be used with graphics LSIs of other manufacturers. The company
plans to expand its business scale in the medium term by introducing split-screen technology (peripheral products) and offering
sensor related and display panel related peripheral products.
Gross profit
Axell is a fabless company that does not maintain its own production facilities. Therefore, the company’s CoGS tends to be
volatile. GPM varies according to products, with that for graphics LSIs for the pachinko and pachislot industry higher than other
FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Par. Par. Par. Cons. Cons. Cons. Par. Par. Par. Par. Sales 15,417 15,495 8,199 8,362 16,717 11,043 11,073 8,982 8,012 8,477
YoY 11.8% 0.5% -47.1% 2.0% 99.9% -33.9% 0.3% -18.9% -10.8% 5.8% LSIs for pachinko and pachislot machine market 15,109 15,272 7,407 7,985 16,417 10,697 10,708 8,743 7,838 8,291
YoY - 1.1% -51.5% 7.8% 105.6% -34.8% 0.1% -18.4% -10.4% 5.8% % of sales 98.0% 98.6% 90.3% 95.5% 98.2% 96.9% 96.7% 97.3% 97.8% 97.8% Graphics LSIs 11,799 12,893 7,345 6,828 10,612 8,834 7,751 7,186 6,009 4,662
YoY - - -43.0% -7.0% 55.4% -16.8% -12.3% -7.3% -16.4% -22.4% % of sales 76.5% 83.2% 89.6% 81.7% 63.5% 80.0% 70.0% 80.0% 75.0% 55.0%
Other LSI products 3,310 2,378 519 1,156 5,804 1,863 2,957 1,557 1,829 3,629 YoY - -28.2% -78.2% 122.7% 402.1% -67.9% 58.8% -47.3% 17.4% 98.4% % of sales 21.5% 15.3% 6.3% 13.8% 34.7% 16.9% 26.7% 17.3% 22.8% 42.8%
Graphics LSIs for embedded systems 170 138 254 232 205 203 180 146 117 113 YoY - -18.8% 84.1% -8.7% -11.6% -1.0% -11.3% -18.9% -19.9% -3.4% % of sales 1.1% 0.9% 3.1% 2.8% 1.2% 1.8% 1.6% 1.6% 1.5% 1.3%
Other products 0 85 79 144 94 142 184 92 57 72 YoY - - -7.1% 82.3% -34.7% 51.1% 29.6% -50.0% -38.0% 26.3% % of sales 0.0% 0.5% 1.0% 1.7% 0.6% 1.3% 1.7% 1.0% 0.7% 0.8%
CoGS 6,465 6,621 3,742 4,091 10,075 5,836 6,342 4,880 4,466 5,335 Gross profit 8,952 8,873 4,456 4,270 6,642 5,206 4,731 4,101 3,546 3,142
GPM 58.1% 57.3% 54.3% 51.1% 39.7% 47.1% 42.7% 45.7% 44.3% 37.1% SG&A expenses 2,804 2,662 2,888 3,087 3,382 3,268 3,086 3,857 3,404 2,985
SG&A ratio 18.2% 17.2% 35.2% 36.9% 20.2% 29.6% 27.9% 42.9% 42.5% 35.2% Operating profit 6,147 6,211 1,568 1,183 3,260 1,938 1,645 244 141 156
YoY 3.0% 1.0% -74.8% -24.6% 175.6% -40.6% -15.1% -85.2% -42.2% 10.6%
OPM 39.9% 40.1% 19.1% 14.1% 19.5% 17.5% 14.9% 2.7% 1.8% 1.8%
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products for the same market. As a result, the company’s GPM changes depending on the product composition. It has been
moving between 30% and 50% in recent years.
SG&A expenses
Major components of SG&A expenses are personnel and R&D. They are not directly affected by changes in sales. However, R&D
spending fluctuates depending on product cycles and the development stage. The company increased its R&D spending
significantly during FY03/16 from a year earlier in response to rising costs related to LSI development. Axell is also seeking to
come up with new products as part of a medium-term growth strategy. R&D spending is expected to remain at a high level until
the company completes its development of AG-6, the next generation graphics LSI for pachinko and pachislot machines slated for
release in FY03/19 (about JPY740mn in trial and development expenses Axell planned to book in FY03/18 have been moved back
to FY03/19).
Major SG&A expenses
Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.
SG&A expenses FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Par. Par. Par. Cons. Cons. Cons. Par. Par. Par. Par. SG&A expenses 2,804 2,662 2,888 3,087 3,382 3,268 3,086 3,857 3,404 2,985
YoY 24.7% -5.1% 8.5% 6.9% 9.6% -3.4% -5.6% 25.0% -11.7% -12.3% % of sales 18.2% 17.2% 35.2% 36.9% 20.2% 29.6% 27.9% 42.9% 42.5% 35.2%
Personnel expenses 466 480 481 467 636 527 561 474 425 YoY 1.1% 3.0% 0.2% -2.9% 36.2% -17.1% 6.5% -15.5% -10.3% % of sales 3.0% 3.1% 5.9% 5.6% 3.8% 4.8% 5.1% 5.3% 5.3%
R&D expenses 1,708 1,586 1,767 2,042 2,155 2,090 1,948 2,807 2,453 2,134 YoY 40.0% -7.1% 11.4% 15.6% 5.5% -3.0% -6.8% 44.1% -12.6% -13.0% % of sales 11.1% 10.2% 21.6% 24.4% 12.9% 18.9% 17.6% 31.3% 30.6% 25.2%
Others 630 596 640 578 591 651 577 576 526 YoY 11.1% -5.4% 7.4% -9.7% 2.2% 10.2% -11.4% -0.2% -8.7% % of sales 4.1% 3.8% 7.8% 6.9% 3.5% 5.9% 5.2% 6.4% 6.6%
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Strengths
Strong relationship with pachinko and pachislot makers: Axell is highly regarded amongst pachinko and pachislot
machine makers. The company has developed highly advanced graphic rendering, and compression and decompression
technologies, used in advanced graphics for increasing gaming qualities, as well as retention of large quantities of imagery
data cost effectively by through compression and decompression technologies. These technologies are developed from the
company’s own R&D efforts, and in conjunction with the needs of the pachinko of pachislot machine manufactures. Greater
use of LCD screens in pachinko and pachislot machines prompted the need for increasingly more advanced graphics and
compression technology (i.e., miniaturization of images, while retaining high quality features). Axell’s improved graphics
and compression capabilities helped it gain an edge in meeting pachinko and pachislot machine makers’ needs. As a result,
it increased its market share from 35% in FY3/03 to 51% in FY03/18. Axell’s strong reputation and relationship with end
users gives it an upper edge on its competitors.
Development support tools from the end-user’s perspective: Technological progress of graphics LSIs are advancing at
a rapid pace. Currently, it is difficult for end-users to undertake development immediately after receiving graphics LSI
devices from chip makers. As a result, Axell provides development support tools to end-users of its graphics LSI devices. The
company has placed great emphasis on R&D gained from providing this developmental support tools to its end users, and
has expended the equivalent amount of resources required for developing LSI devices. The company’s superior technology
does not stop at only developing highly advanced products, but also provides a competitive advantage in developmental
support tools, and provide the basis for the company’s stable earnings.
Specialized and focused: Axell is focused on one thing, namely making high functionality LSIs chips for pachinko and
pachislot makers. This emphasis on one industry sets Axell apart from its competitors, who cannot afford to focus on just one
market due to cost constraints. Axell has one goal, which is to be the number one supplier of LSI chips to pachinko and
pachislot machine makers.
Weaknesses
Dependence on a single earnings source: Axell is highly reliant on the pachinko and pachislot machine industry.
Products for the amusement machine industry comprised about 98% of the company’s overall sales in FY03/18. (These
products include memory modules and LED drivers.) Thus, the company could be affected by a sudden market contraction.
Stagnant pachinko and pachislot machine market: Annual unit sales of pachinko and pachislot equipment, which
reached a peak of 5.8mn units in FY2005, fell to 2.0mn units in FY2017. Axell expects that FY2018 sales will fall by roughly
480,000 units YoY, to 1.6mn.
Reuse of mainstay LSI parts: Despite its commanding market share and proprietary technology, Axell may be vulnerable
to the reusing of LSI parts in pachinko and pachislot machines. Pachinko and pachislot machine makers are reusing
substrates in the machines to reduce costs. Consequently, Axell has been developing advanced functionality LSI chips to
combat significant reusing of parts in pachinko and pachislot machines.
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Market overview
Pachinko parlor sales and the number of pachinko and pachislot players Sales at pachinko parlors, including those that offer pachislot games, peaked in 2005. In 1995 the player population was 29mn,
but by 2016 the population had dropped to 9.4mn. Pachinko parlor sales (rental ball revenue) expanded until 2005 as yearly
amount spent on rental balls per player increased despite the number of players falling. Pachinko parlor sales (rental ball revenue)
totaled JPY34.9tn in 2005, but fell to JPY21.6tn in 2016.
Trends in pachinko player population and pachinko parlor sales (rental ball revenue)
Source: Shared Research based on Leisure White Paper, Japan Productivity Center
Pachinko and Pachislot Machines In FY2016, the market for pachinko and pachislot machines totaled JPY882.1bn (-10.2% YoY). Sales of pachinko machines fell
14.4% YoY to JPY524.5bn, while sales of pachislot machines fell 3.3% YoY to JPY357.6bn. With the impact of voluntary controls
implemented by industry groups in November 2015 (for pachinko machines) and December 2015 (for pachislot machines), the
number of pachinko and pachislot machines sold has been declining.
As a result, it is difficult for Axell to make large sales increases in the pachinko and pachislot market alone, despite its top market
share in graphics LSIs. The company recognizes this and intends to expand into other areas.
Amusement machine market (value)
Source: Shared Research based on Yano Research Institute Ltd.
The market for pachinko and pachislot machines has been shrinking for an extended period of time. However, regulatory changes
could help stimulate the industry. These changes are overseen by the National Public Safety Commission, and include the
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Player population (mn people) 27.6 23.1 19.8 18.6 20.2 19.3 21.2 17.4 17.9 17.1 16.6 14.5 15.8 17.2 16.7 12.6 11.1 9.7 11.5 10.7 9.4
Market size (pachinko parlor sales) (JPYtn) 30.1 28.4 28.0 28.5 28.9 29.2 30.4 32.4 33.9 34.9 33.6 30.2 28.8 28.2 26.0 25.5 25.7 25.0 24.5 23.2 21.6
30.1 28.4 28.0 28.5 28.9 29.2 30.4 32.4 33.9 34.9 33.6
30.2 28.8 28.2 26.0 25.5 25.7 25.0 24.5 23.2 21.6
27.6
23.1
14.5 15.8
17.2 16.7
12.6 11.1
9.7 11.5
10.7 9.4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Market size (pachinko parlor sales) (JPYtn)
Player population (mn people)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Pachislot machine sales units ('000 units) 420 520 770 930 1,130 1,290 1,500 1,840 1,670 1,780 1,640 1,740 910 760 970 1,250 1,320 1,390 1,230 960 880
Pachinko machine sales units ('000 units) 3,930 2,840 2,350 3,120 3,360 3,230 3,170 3,680 4,010 4,040 3,830 3,170 3,330 3,330 2,900 2,600 2,490 2,060 2,010 1,880 1,560
Total 435 336 312 405 449 452 467 552 568 582 547 491 424 409 387 385 381 345 324 285 244
Pachislot market size (right axis; JPYbn) 182.8 235.3 269.3 314.5 351.3 396.5 526.3 522.5 536.5 490.9 502.5 247.8 225.8 286.7 375.0 430.0 477.4 427.4 369.7 357.6
Pachinko market size (right axis; JPYbn) 362.3 518.4 568.3 569.1 561.5 672.0 786.5 869.9 898.6 868.6 921.3 985.2 886.9 826.7 772.9 657.1 652.4 613.0 524.5
Total 597.6 787.7 882.8 920.4 958.0 1,198.3 1,309.0 1,406.4 1,389.5 1,371.1 1,169.1 1,211.0 1,173.6 1,201.7 1,202.9 1,134.5 1,079.8 982.7 882.1
0
100
200
300
400
500
600
700
800
900
1,000
0
2,000
4,000
6,000
8,000
10,000
12,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Pachislot machine sales units ('000 units)
Pachinko machine sales units ('000 units)
Pachinko market size (right axis; JPYbn)
Pachislot market size (right axis; JPYbn)
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inspection of Pachinko and pachislot machines by the local governments based on the Act on Control and Improvement of
Amusement Businesses.
The government has been revising technical specifications for these machines every dozen or so years in order to prevent
manufacturers from selling machines that have an excessive gambling element. After the government revised related regulations
in July 2004 (transfer from Type 4 to Type 5 pachislot machines), the industry saw an increase in demand for pachislot machines
that would meet the new specifications in 2007 after machines that met previous specifications were removed in 2006. Sales of
pachislot machines declined subsequently, though, as some players turned to pachinko. Even so, such regulatory changes usually
encourage manufacturers to compete with one another to develop new machines, spurring innovation for both software and
hardware companies.
In the first half of the 2000s, under the Type 4 pachislot machine regulations, machines with excessive gambling elements became highly popular as
pachislot machines were introduced which allowed players to win over 700 game balls in one jackpot and tens of thousands of balls in one day (at the
time one ball could be exchanged for JPY20). In order to limit the excessive gambling elements of the machines, in July 2004 the government
announced that it was revising pachislot specifications and the Type 5 pachislot machines began being sold in October 2005. Until December 2006,
pachislot machines that passed Type 4 standards were sold. In June 2006, Type 4 pachislot machines that had exceeded their installment period (3
years from inspection date) were removed. In September 2007, all Type 4 machines had exceeded their installment periods.
Industry regulations The industry association implemented voluntary regulations for pachinko machines in November 2015 and on pachislot
machines in December 2015. There were further voluntary regulations for pachislot machines in October 2017. Additionally in
July 2017, following the passage of the Bill for the Promotion of Integrated Resort Facilities and aiming to curb gambling
addiction, the National Police Agency (NPA) began inviting public comments before formalizing a partial amendment to the
Ordinance for Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning
Authorization and Model Approval for Amusement Machines. The proposed amendment includes a change in the number of
pachinko balls released per play. The amendment is to be made in February 2018.
Effect of measures to curb gambling nature of pachinko machines
In an effort to reduce the attraction of pachinko as a form of gambling and restore its popularly as a form of entertainment, the
pachinko machine manufacturers association (the Japan Game Machine Industry Association) agreed to change the lower limit of
the pachinko machine jackpot probability range to 1/320 (from 1/400 as of May 2015). Effective November 2015, this
self-imposed regulatory change meant that game machine manufacturers would no longer be able to sell max-type machines
(jackpot probability of 1/370–1/399) that were the mainstay at pachinko parlors prior to October 2015.
From May 2016, the Game Machine Industry Association also voluntarily introduced a lower maximum occurrence of a game
feature called “probability fluctuation” (the jackpot rate after a successful a jackpot) from around 80% to 65%.
This latest self-regulatory move was precipitated by the growing demand for max-type machines (jackpot probability of 1/370–
1/399) among hard-core pachinko players, which had led pachinko parlors to install more and more of these machines to the
point that max-type machines accounted for more than 40% of all machines in pachinko parlors. As this pushed up the average
cost of playing pachinko, the number of people playing game machines declined and the industry sought to tighten industry
standards to reduce the appeal of pachinko as a form of gambling with the hope of bringing back more players into pachinko
parlors.
Voluntary industry restrictions on pachislot machines (5.5 model restriction)
In September 2014, the Security Communication Association changed its testing methodology for pachislot machines. Previously,
pachislot machines had to register a token put-out ratio of 55% (11 out of 20) or better during a random test run. The new
standard called for the same minimum token put-out ratio to be scored while testing under a play mode set for the lowest
possible put-out ratio. That same month, the pachislot machine manufacturers association (the Japan Game Machine Industry
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Association) adopted a new standard that would prohibit penalty features in machines and also mandated that machine makers
switch to motherboards with AT/ART functionality.
Prior to this change, pachislot machines incorporated a main circuit board and a sub board, both of which controlled the payout
rate of game tokens. Effective December 2015, the new industry standard requires the sub-board program that controls game
token discharge to be incorporated into the main circuit board.
AT Machine: An abbreviation of Assist Time, an AT Machine is a type of pachislot machine. During regular play, even if the user selects the winning
icons, they do not match up on the screen because of the push-order rule. However, when the AT function is installed, if the machine selects the AT
mode, a display screen on the pachislot machine will indicate the order of the buttons to press to match up the icons on the screen, allowing the user
to increase their coins.
ART Machine: An abbreviation of Assist Replay Time, an ART Machine is a type of pachislot machine. When this function is installed, if the machine
enters ART mode, the odds of a replay increase, allowing the user to continue playing without using up coins.
Voluntary industry restrictions on pachislot machines (5.9 model restriction)
In June 2016, Liaison Conference of Pachislot Machine Manufacturers explained that they would implement voluntary regulations,
which limit ART functions for pachislot machines installed after October 2017, and classified pachislot machines that comply with
these voluntary regulations as 5.9 models. New units of the present 5.5 machine models can only be installed up to the end of
September 2017.
Shared Research understands that there will be two sections related to indicated functions (navigation function, such as the
push-order) for 5.9 models: a regular section, which will prohibit the ART mode, and a section in which ART mode is enabled.
Machines randomly select the transition from the regular to the ART mode per play, and the ART mode section will limit the total
amount of tokens released to 3,000 by ending the game after a maximum of 1,500 games. The chance of the ART mode being
selected is limited to under 70% of the total.
Invitation of public comments on proposed amendment including changes to number of game balls released
In July 2017, the NPA began inviting public comments prior to formalizing a partial amendment to the Ordinance for
Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning Authorization
and Model Approval for Amusement Machines. The proposed amendment includes a change in the number of pachinko balls
released per play.
The proposed amendment, which aims to reduce the attraction of pachinko as a form of gambling, limits the game ball-releasing
capacity of amusement machines as well as the maximum number of game balls released per jackpot. It also introduces a
“settings” feature for pachinko machines.
Tightening of regulations on the number of game balls released
The proposed amendment newly stipulates a rule, which curbs the ball-releasing capacity of amusement machines over a set
playing span of four hours. Under this rule, the total number of game balls released during a four-hour run must be less than 1.5
times the total number of game balls shot by the player. Existing technical specifications and standards for one hour and 10 hours
will also be tightened to the same degree so that the total number of game balls released may be reduced to about 2/3 of the
current level. For pachislot machines, a new regulation similar to that of pachinko machines also for a four hour playing span
(1,600 shots in the case of pachislot machines) will be put in place.
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Regulations on the number of game balls released per jackpot
For pachinko machines, the maximum number of game balls released per jackpot will be reduced from the current upper limit of
2,400 to 1,500. For pachislot machines, the maximum number of game tokens will be reduced from 480 to 300.
Changes to regulations on the number of balls released by pachinko machines (test values)
Play duration Current limit on balls released Revised limit on balls released
One hour Under 300% Over 33% and under 220%
Four hours - Over 40% and under 150%
10 hours Over 50% and under 200% Over 50% and under 133%
Changes to regulations on the number of balls released per jackpot
Current Revised
Changes to the number of rounds permitted in pachislot
Current Revised
Number of rounds Up to 16 Up to 10
Changes to regulations on the number of medals released by pachislot machines (test values)
Test Current limit on medals released Revised limit on medals released
400 games Under 300% Over 33% and under 220%
1,600 games - Over 40% and under 150%
6,000 games Under 150% Over 50% and under 126%
17,500 games Over 55% and under 120% Over 60% and under 115%
Changes to regulations on the number of medals released per jackpot
Current Revised
Introduction of a “settings” feature to pachinko machines
For higher operational flexibility, up to six pachinko machine settings defining jackpot probabilities will be allowed as in the case
with pachislot machines.
As a transitional measure, amusement machines certified under the current regulations and those belonging to the same model
type as the tested and approved models can remain in operation at pachinko parlors for a period of three years from the initial
dates of reckoning outlined in the supplementary provisions. This means that pachinko machines approved under the current
regulations (2,400 balls per jackpot) and 5.9 model pachislot machines can be sold and used at pachinko parlors until 2021.
The deadline for submission of public comments is August 8, 2017 and the amendment is slated for enforcement effective
February 1, 2018.
Reuse of LSIs in pachinko and pachislot machines The government introduced a law in 1991 aimed at recycling parts used in pachinko and pachislot machines. However,
difficulties in building systems from recycled machines, disassembly, and delivery of recycled parts, as well as the cost involved,
prevented recycling from achieving widespread adoption. In recent years, declining profits at pachinko parlors, attributable to
falling player population, and the emergence of low-priced pachinko has put pressure on pachinko and pachislot machine makers
to lower prices. To reduce costs and stay competitive, pachinko and pachislot machine manufacturers have turned to reusing
parts in machines. Reuse is an attempt to improve profits by lowering machine production costs and prices, which improves
pachinko parlor margins.
Essentially, all components of a machine except the ROM (which contains the algorithms that determine when a payout is
produced during pachinko play) can be reused. For this reason, a reused machine sells for 30%–50% less than the price of a new
machine.
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Cumulative unit sales of the old-generation graphics LSIs for the pachinko and pachislot market peaked prior to the introduction
of next-generation LSIs. The impact of this shift is increasing.
Source: Shared Research based on company data
Customers
Axell’s core market is the pachinko and pachislot machine industry, and its end users (i.e., customers) are pachinko and pachislot
machine manufacturers. The company sells to trading companies and not directly to the pachinko and pachislot machine makers.
Axell sells its products to all pachinko and pachislot machine makers (end users), except for Sanyo Bussan (privately held).
Barriers to entry
Axell’s dominant market share reflects its superior ability to gather information about pachinko and pachislot machine
manufacturers’ product-development programs. This allows Axell to provide machine manufacturers with LSIs that are
user-friendly. The pachinko and pachislot market is a niche market, where its products are difficult to use in other applications.
This limits the number of LSI chip makers willing to enter this field. Additionally, R&D costs are rising with each successive
generation of graphics LSIs. From this perspective, barriers to entry have also risen (i.e., significant R&D expense is required to
develop a state-of-the-art graphics LSI chip).
Competition
Axell’s graphics LSIs had a 51% share of the pachinko and pachislot machine market in FY03/18, according to company estimates.
Competitors include Sanyo Bussan (supplier of ASIC products), Yamaha Corp., Toshiba Corp., and NVIDIA Corp. of the United
States. These competitors each hold about 10% market share. Axell is able to maintain a high presence in the industry due to its
relationship with nearly all of the major pachinko and pachislot machine makers, which supports its market dominance. It is able
to identify industry and customer needs, optimizing its high-performance graphics LSIs with customers’ needs, as well as
supporting R&D efforts.
FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 (mn units) Act. Act. Act. Act. Act. Act. Act. Act. Unit sales of graphics LSIs 2.12 2.62 1.42 1.19 1.70 1.42 1.26 1.08 Units of reused graphic LSIs (estimated) - - 0.70 1.00 0.50 0.50 0.59 0.47
Reuse ratio - - 0% 0% 0% 0% 0% 0% Total - - 2.12 2.19 2.20 1.92 1.85 1.55 Total unit sales of amusement machines - - 3.87 3.85 3.85 3.43 3.1 2.9
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Sales: JPY4.6bn (-31.4% YoY)
Recurring loss: JPY432mn (JPY392mn recurring profit)
Net loss: JPY145mn (JPY243mn net income)
The company revised its full-year FY03/18 earnings forecasts based on its Q3 FY03/18 results. Compared to its initial forecasts, the
company lowered its sales forecast by JPY1.4bn, raised its operating profit and recurring profit forecasts by JPY70mn each, and
lowered its net income forecast by JPY15mn (see the Full-year company forecasts section). Cumulative Q3 sales reached 54.3% of
the revised earnings forecasts, and gross profit reached 60.6% of the revised earnings forecasts. The earnings forecasts projected
a surplus for operating profit, recurring profit, and net income, but losses were recorded in cumulative Q3 results.
Business environment and initiatives
According to the company, the amusement machines market continues to face harsh conditions marked by a gradual decline in
the number of players due to the diversification of leisure activities and recent voluntary industry regulations geared to counter
addiction. The revision of the Ordinance of Enforcement of Public Morals Act (aiming to deal with addiction) slated for enactment
in February 2018 has muddied the market outlook, causing a loss of appetite on the part of amusement halls to purchase new
machines and making the recent market environment particularly challenging.
The company focused on selling various products for the pachinko and pachislot market. The company also focused on initiatives
for graphics LSIs for embedded systems as well as new areas such as software IPs for products, including its movie middleware
product H2MD, and other middleware products. Further, the company explored business alliances and investments with an aim
to accelerate modification of its profit structure through entry into new businesses.
In cumulative Q3 FY03/18, the company advanced the following initiatives.
Started to sell software IPs and middleware products collectively referred to as “AXIP” (April 2017). In addition to movie
compression middleware H2MD which is already on sale, the company started selling audio compression middleware C-FA in
April 2017. It also plans to start selling high-resolution image expansion software in FY03/18 and security software from 2018.
According to the company, it plans to expand its product lineup to provide a multifunctional package for games and in-car
display panels and sell its user licenses
Announced development and release of a smartphone game Mugen no Labyriz using AXIP (August 2017). The main goal is to
demonstrate the company’s middleware products, but the company also aims to generate revenue from game fees
Announced the launch of joint research with Tier IV, Inc. (unlisted) on system LSI to support self-driving technology (May 2017).
Axell is engaged in the research and development of LSI technology for efficiently running Autoware: software developed for
automated driving on public roads
Announced participation in a research project sponsored by the New Energy and Industrial Technology Development
Organization (NEDO) named “Cross-cutting Technology Development Project to Promote IoT” (June 2017)
Made additional investment in sdtech Inc. (unlisted) whose forte is software development for automotive devices. After acquiring
800 common shares of sdtech for JPY60mn in June 2016, Axell additionally acquired 1,000 common shares for JPY100mn. With
this additional acquisition, Axell’s equity stake rose to 9.0%. The objective of the investment is to promote use of Axell’s software
movie codec (H2MD etc.) in the embedded devices market mainly for automotive devices. The company made the additional
investment seeing that some progress was made thus far and expecting that further strengthening of partnership could help
create synergies in the area of automotive devices
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Sales by product
Sales of LSIs for pachinko and pachislot machines were JPY4.5bn (-32.3% YoY). Unit sales of the mainstay graphics LSIs for
pachinko and pachislot machines were about 380,000 units (about 740,000 units in Q3 FY03/17). The company pointed out the
following four issues as reasons for the lower sales volume of graphics LSIs.
In cumulative Q3 FY03/17, the nail problem triggered the company to recall pachinko machines that may perform differently
from those submitted for testing and certification by the end of 2016, which brought about replacement demand. In
contrast, there was no such replacement demand in cumulative Q3 FY03/18.
Graphics LSIs that customers secured in FY03/17 for replacement remained in stock.
Customers were cautious about purchasing parts due to unclear market environment in anticipation of a revision of the
Ordinance of Enforcement of Public Morals Act scheduled in February 2018.
Reuse ratio rose at major customers.
According to the company, sales share for graphics LSIs for pachinko and pachislot machines was in line with previous year
figures.
Sales of other products for the pachinko and pachislot market, such as LED driver LSIs and memory modules increased YoY, due
largely to a rise in memory module sales.
Sales of graphics LSIs for embedded systems other than pachinko and pachislot machines totaled JPY81mn (-2.4% YoY).
Sales of other products—including development support software for clients, evaluation boards, and software IPs such as
H2MD—totaled JPY53mn (+55.9% YoY).
Gross profit was JPY1.9bn (-37.4% YoY). GPM declined 3.9pp YoY to 40.8%. GPM of graphics LSIs for pachinko and pachislot
machines improved due to the effects of mass production. However, due to a YoY decrease in the sales composition of these
relatively high-margin items by approx

axell / 6730 - shared research

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