Corporate Information and Investor Relations

Risk information | From the president to investors

as of May 15, 2017

Below, we discuss the major risk factors related to the Group's operating results, share price, and financial condition. From the viewpoint of proactive disclosure to investors, we have also included factors that are not necessarily business risks but which we think are important for investors to know in order to make informed investment decisions and better understand our business activities. Because we recognize the potential for these risks to occur, we will strive to prevent their occurrence and prepare speedy and appropriate responses in the event that they do occur in order to avoid any impact on the Company's business activities
Forward-looking statements are based on management's judgments as of 2017 May 15

(1)Business environment

I. Diversification of Internet devices

We primarily handle Internet devices, including PCs, and such devices include all kinds of products, such as smartphones and tablets. We are aggressively promoting the sales of the above products and are proceeding to provide technical services and support when customers replace or purchase Internet devices. However, we could see the scope of our sales shrink due to the way we do business with manufacturers and other factors, or a sharp decline in PC sales volume due to a decrease in the number of PC users. In such cases, we may lose opportunities to sell products and technical support services, which may affect the Group's business performance.
Furthermore, the aggressive sales promotion of new Internet devices could result in a drastic change in product lineups at stores, an increase of inventories and costs, and losses due to obsolete inventories. In such cases, the Group's business performance may be affected.

II. Dependence on particular trading partners and products

For Internet devices, particular manufacturers or products sometimes suddenly become popular due to technological innovation and the development of special service. In such cases, we may increasingly depend on particular products or trading partners if we are allowed to handle the products and try to ensure a stable supply after we start to handle them. Those manufacturers could change their sales and marketing policy. Such a change may affect our purchasing of those popular products, preventing us from fully meeting customer demand, and this in turn may affect the Group's business performance.

III. Competition

Through our PC DEPOT stores and PC DEPOT Smart Life Stores, we provide technical services and support, as well as Internet devices and related products such as PCs, smartphones, and tablets. In this way, we differentiate ourselves from volume electronics retailers. We also expect to attract more customers through the synergy effects produced by opening new PC DEPOT stores close to volume electronics retailers.
However, if competitors offer substantial discounts when selling PCs or peripherals, our policy is to respond to such price-cutting competition; in such a case, the resulting fall in gross margins will make PC sales less profitable.

IV. Similar businesses

In our business, the sales from these services developed in-house account for a certain amount of total sales. Specifically, we provide unique service products such as technical support and services, a Premium Service (maintenance services provided on a monthly membership fee basis), and solutions services, in which products and services are combined with communication line services from MVNO and FVNO businesses. We make various efforts to legally protect these intellectual properties (e.g., obtaining system patents); however, our intellectual property is not fully protected with regard to the business we do. If other companies imitate our businesses by infringing our intellectual property rights, or at least operate similar businesses that do not infringe our rights, we would enter into fierce competition with them, which may affect the Group's business performance. In addition, if other companies imitate our businesses in an inappropriate manner, the bad reputation of the services provided by those other companies may affect the image of our company's services.

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(2)Business characteristics

I. Premium Service and other service products

The Group provides service products such as a Premium Service and solutions services for customers seeking our services and support in an ongoing manner to use the Internet and Internet devices. We also strive to improve and expand the quality of service products so that customers can use our services more safely and conveniently with a greater sense of security. However, as there may be delays in developing and offering service products, we may not be able to offer related content after the service product is released due to a suspension or termination of sales, or the number of Premium Service members could suddenly decrease. In such cases, the Group's operations and business performance may be affected.

II. MVNO and FVNO Businesses

We became a mobile virtual network operator (MVNO) in April 2009 and became a fixed virtual network operator (FVNO) in February 2015; we resell mobile services to customers provided via telecommunication companies' networks. We record a certain level of sales and provide services (billed monthly) to customers. However, if telecommunications companies' networks suffer interruptions or suspensions, our sales of telecommunications and related services may decline; thereby, the Group's business performance may be affected.

III. ISPs

The company and one of its subsidiaries serve as an Internet service provider (ISP). The Group's operations and business performance may be affected in the event that there is a sudden exodus of the subsidiary's members or if Internet service is temporarily suspended.

IV. Uncollectable accounts receivable

A part of the Company’s Premium Service and solutions services, etc., collect some of their information terminal sales, which comprises of product sales that combine services and Internet devices, the MVNO Business etc., through monthly service fees instead of collecting payments for devices upfront. Since accounts receivable for such products and services are increasing, we are striving to minimize the risk of default by stepping up credit management. However, if bad debt increases more than we expected and becomes irrecoverable, the Group's business performance may be affected.

V. Franchise credit losses

In accordance with our franchise contracts, we process the procurement debts of franchise stores as accounts receivable - other (credit) and the credit card settlement amounts of franchise stores as deposits received (debt). We hedge some of the credit loss risks by offsetting these accounts; however, we may not be able to recover all or part of the difference if the franchise store's parent goes bankrupt.

VI. Proprietary brand products

OZZIO is our original private brand. We have adopted an exclusive branding system whereby we convert products developed and manufactured by OEMs to our own brand. Although responsibilities for manufacturing and after-sales support lie with the manufacturer, we may be liable for damages beyond our duty as a seller in the rare event that an accident or other issue arises related to the products.

VII. Mistakes in returning products to their proper owners and procedural mistakes

To solve difficulties that customers encounter, we collect customers' Internet devices such as PCs, smartphones, and tablets at our stores' counters, and then provide technical services and support such as inspection and repair services, as well as data migration and recovery services. At that time, there is a possibility that the Company may make a mistake in returning Internet devices we have been entrusted with to their proper owners, or make a mistake in fixing a product. Though the Company practices store oversight to prevent such mistakes, in the rare event that such a mistake occurs, claims for damages may be filed which may impact the Group's business performance.

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(3)Store openings

I. New store openings

Our business performance is closely related to new store openings. Therefore, a change or delay in plans to open the Group's and franchise stores may affect the Group's business performance.

II. Store closings

If store profitability deteriorates due to intensifying market competition, we will strive to minimize the negative impact on our overall results as much as possible by closing stores at an early stage. However, losses from such stores' closures and/or losses from delays in opening substitute stores may affect the Group's business performance.

III. Store leases

We generally lease the buildings in which our stores are located. Therefore, if lessors go bankrupt, all or part of our guarantee and/or lease deposits may become unrecoverable.

IV. Changes to PC DEPOT PC Clinic stores within retailers

As of the end of the consolidated fiscal year, PC DEPOT PC Clinics had 53 directly managed stores, in addition to 5 stores managed by our subsidiaries; these stores are located within stores owned by K'S HOLDINGS CORPORATION. If the company experiences difficulty in continuing to operate multiple stores due to the closure of stores or of internal stores, etc. for some reason or other, the Group's business performance may be affected.

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(4)Management structure

I. Dependence on the representative

President and Chief Executive Officer Takahisa Nojima is the founder of the PC DEPOT Group and has been CEO since our founding. Mr. Nojima has a wealth of experience and knowledge about the retail industry, particularly volume electronics retailers, and he plays an extremely important role in decision-making and execution of management policy and business strategy. The Group is working to strengthen information sharing among directors and employee managers at board of directors and management meetings as well as other meetings, and we are strengthening our management organization to develop a management structure that is not overly reliant on Mr. Nojima. However, the Group's business performance may be impacted if Mr. Nojima is unable to continue his activities at the Group for some reason.

II. Human resources

The Group will need to enhance the expertise and skill of its sales staff, technical staff, quality control staff and staff in store development, planning and sales of service products, administrative departments and all other departments in the Group, in order to make efforts to improve quality across a wide-ranging area that covers from stores and call centers to the head office. This will allow customers to use the stores comfortably, as well as allow the Group to cope with further business expansion and diversification of business categories in the future. Through the appointment of workers from within the company, we are training workers so that they can immediately serve as an effective workforce. However, hiring recent graduates and mid-career workers as well as human resources training may not go as planned, creating problems in appropriately allocating human resources that reduce the Company's competitiveness and ability to expand operations, thereby impacting the Group's business performance.

III. Internal management system

Our Group is working to develop internal controls for legal compliance issues. To establish a more thorough internal management system, we have established the internal control office, and we confirm the attitude toward compliance of board directors, executive officers, and employees by having them sign oaths and confirmation documents stating that they will conduct corporate activities in accordance with high ethical principles. However, in the rare event that directors or employees engage in activities that violate laws or regulations, whether intentionally or due to negligence, this may impact the Group's business performance.

IV. The Group's brand image

In the event that the brand image of the overall Group is diminished due to improper behavior or rumors about the Company or its directors or employees, whether such rumors are true or not, or a scandal at a company under a franchise contract, the Group's operations and business performance may be affected due to diminished confidence in the Group, loss of personnel, difficulty in securing human resources, etc.

V. M&A

As we are a publicly traded company, there is a possibility that we may be acquired by another company in a different line of business as well as one of our industry peers. In such cases, this may impact the Group's business performance.

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(5)System failures

For the Group's businesses, we operate many kinds of systems and software such as our POS system, systems for tools to be provided for Premium Service customers, as well as solutions services, a total management system, and the Internet services of one of our subsidiaries. In order that systems can operate in a stable manner, we add system redundancy, enhance system availability, back up data, and increase security. However, in the event of system failures due to natural disasters such as earthquakes, infrastructure problems such as power outages, hardware or software malfunctions, our systems being overloaded due to too much access traffic, a computer virus infection, attacks from external networks, and the loss of system data, there are the following risks: store operations may be suspended; service products including Premium Service may be interrupted; the charging of customers may be halted; and there may be unrecovered charges. In such cases, we will deal with and solve such problems as a priority. However, we may lose business opportunities, suffer reputational damage, and incur temporary expenses required for system recovery. As a result, the Group's business performance may be affected.

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(6)Legal regulations

Our Group's store openings are regulated by the Building Standards Act, various prefectural ordinances, the Act on the Measures by Large-Scale Retail Stores for Preservation of Living Environment for new store openings or increases in sales floor space at existing stores with a sales floor space of 1,000 m2 or more (roughly 300 tsubo), and other rules. In the process of conducting our business, we adhere to regulations based on various laws relating to the provision of products such as the Act against Unjustifiable Premiums and Misleading Representations, the Antimonopoly Act, the Subcontract Act, the Telecommunications Business Law, etc. We undergo necessary inspections, and obtain permission and approval to promote our business.
Therefore, in the future, if legal regulations or ordinances are unexpectedly established or amended, or administrative organs change their guiding principles or request us to exercise self-regulations, we may be faced with adjustments or delays in store openings and operations, incurring new costs, or restrictions on our business activities. In such cases, the Group's operations and business performance may be affected.

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(7)Personal information protection

Our Group pays careful attention to personal information protection by strengthening our personal information administrative system and limiting access to personal information acquired and held by the Group. In particular, the ejworks Corporation, a subsidiary, properly administers personal information by complying with the Personal Information Protection Law as a network operator as well as the Guidelines on the Protection of Personal Information in the Telecommunications Industry formulated by the Ministry of Internal Affairs and Communications.
The Group's store operations are carried out according to the basic principle of personal information: "Don't ask, don't retain, and don't bring in unnecessary personal information." Also, call centers for the Premium Service strictly handle personal information according to specific rules, including restrictions on entry/exit and who is allowed to access such information.
However, there is a possibility that personal information may be divulged and/or misused, either intentionally or unintentionally, by persons affiliated with the Group, or through unexpected situations such as unauthorized access to systems and computer virus infection. In the rare event that such a situation occurs, the Group may be liable for damages, thereby impacting the Group's operations and business performance. In addition, the Group's credibility may be seriously diminished, thereby considerably impacting the Group's business activities.

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(8)Litigation

It is possible that the Group could become subject to litigation seeking compensation for damage resulting from infringing on the rights or profits of third parties, including customers, trading partners and employees. Not only could this hinder our business expansion and harm our corporate image, there is a possibility that the resulting financial burden could impact the Group's operations and business performance.

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(9)Administrative action

It is possible that the Group could become subject to an administrative action or administrative guidance from an administrative agency. In the event that such an action is taken or such guidance is received, not only could this hinder our business expansion and harm our corporate image, there is a possibility that the resulting financial burden could impact the Group's operations and business performance.

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(10)Natural disasters

In the event that the store operations of the Group or its franchises are interrupted by natural disasters (e.g., earthquakes, typhoons, flooding, or tsunami) or infrastructure problems (e.g., fires, power outages, rolling blackouts caused by power shortages, etc.), the resulting decline in sales and costs of restoration and supplementing personnel may affect the Group's operations and business performance. Moreover, in the event that a disaster occurs or an infectious disease breaks out, as the Group gives top priority to protecting the lives of our customers and employees as well as securing safety, we will suspend operations until risks have been eliminated and safety secured, so our business performance may be affected.
In order to prepare for natural disasters and infectious diseases, we will strengthen our crisis management system, mainly by reviewing our disaster response manuals and the seismic retrofitting of our stores and by setting response levels based on the extent of an epidemic of infectious diseases and putting all organizations on an alert status at an early stage.

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