Cheap J-RPG Makers: Nihon Falcom (3723) & NIS (3851)
They do games on a budget, have a small but cultish following, and trade below book. What's not to like?
JRPGs were an inseparable companion of many of us. Wether it was playing Legend of Zelda or Golden Sun in the Nintendo portable consoles, or the Final Fantasy or Tales series when we were at home, we spent countless hours on it. Hell, even Pokemon is one of this games. With all those examples in mind, is easy to understand the attractive of this genre, and the loyalty between different installments it can inspire.
Because most JRPGs eventually become long-running series! Wether it was as a brand (like Final Fantasy, Shin Megami Tensei or Tales) or as a connected story or universe (as Trails or Ys, the Nihon Falcom series, or Pokemon itself), they tend to spawn multiple incarnations, banking on the loyalty of the fans. That is true also of games that didn't become that popular outside of Japan and its publishers. Today we are talking about Nihon Falcom, the developers of two of the longest JRPG series, and Nippon Ichi Software, their publishers in the west (among other stuff)
Nihon Falcom
The developer of the Ys and Trails (well, Legend of Heroes) series is an OG of the JRPG scene. They started way back in '82, and their most famous series have been Ys (1987 to today) & The Legend of Heroes/Trails (1989 to today)1. Over most of that time, Nihon has been a relatively successful publisher in Japan, but rarely heard of outside of the country's frontiers.
That has changed a bit in the last decade, and especially since 2020, when the relationship with NIS America really started to be fruitful and the pace of their releases of older Nihon Falcom games increased. They have gathered a small but dedicated following thanks to their storytelling and the continuity in the setting (although that is a double edged sword, of course).
Change in popularity outside of Japan is clearly visible in their financials. While sales have remained flat-ish since 2018, that has been due to a decline in Japan, that has moved from 86% of sales in 20182 to 57% in the last year, as the latest releases in Japan have failed to live up to the level of success of Trails of Cold Steel I-IV.
Nihon-Falcom usually releases one game per year, typically in September. Their structure is relatively small (65 employees, relatively stable since 2018-2019)
The latest set of results is nothing special, and sales are slightly below the first half of last year, but that is expected as the licenses launches in Asia were much expected last year. In both Japan and North America the sales improved, and that was despite no new major releases in North America3. So what we are seeing here is that Ys X performed decently in Japan, and now we have a decent set of releases coming up:
Japan
A new Trails entry is expected in September. Trails is the best performing series of Nihon, ahead of Ys, and there has been a 2 year gap since the last one, so it should perform decently. A performance in line
For next year, a sequel to Tokyo Xanadu, the best performing game Nihon Falcom has had in the last decade along with Trails of Cold Steel I-II.
Trails through Daybreak II will get a switch version in July
USA & Europe4
Trails through Daybreak I is scheduled for July
Ys X: Nordics is scheduled for September
My main point here is that we have a nice setup, with the games increasing both in available catalog and popularity in the west5, with some chances of going back to a good performance in Japan. That is combined with an extremely strong balance sheet that, were they to change their capital allocation policy, could give a nice surprise to the upside, taking into account it comes from two relative failures in the Trails series (Trails through Daybreak I & II were profitable, but far from previous entries).
Profits, balance sheet & capital allocation
Nihon Falcom has a ¥12B market cap, and ¥9.5B in book value, ¥9B of which is net cash (of ¥9.4B total cash). And that is pretty much the balance sheet. They have little other assets, a few receivables aside, and no liabilities worth mentioning.
That cash balance has been growing based on a very regular profit stream, slightly diminished in the last year and a half because of the relative underperformance in Japan. They keep getting about ¥1B of cash every year from a ¥2.5B revenue stream. Of late, they are disbursing about ¥200M in dividends, but I should note half of it is distributed with the excuse of anniversaries of series and of the date they started trading in the stock market, so no way of knowing if that will continue.
As you can see, the capital allocation is not perfect, but at least they have not decided to piss it in pointless growth! The company is solidly under control of insiders, with the Kato family (founders) seemingly controlling about 65% through personal holdings and the Falcom holdings society6. As the founder (Masayuki) nears 80, maybe they will start looking for exits and bigger dividends or repurchases will look more attractive, but we'll have to see.
Nihon Falcom summary
This is a well managed company from the operational aspect of things, with decent results and tightly controlled expenses, but not a lot of growth in the last few years. It has a decent perspective of growing through the increase in popularity in the west (sales in the west multiplied by 4.7 since 2018 and 2 since 2020), and stagnation in Japan has masked that somewhat. But one or two successes in Japan could send the results much higher.
They also have potential upside on capital allocation, as they hold 75% of the market cap in net cash. They have increased the dividend in the last couple of years, but the balance is still growing. The founder is nearing 80, which in my view increases the likelihood of allocation changes.
At the same time, given the solid fan base and how conservatively they are running the company, the downside is limited in my view.
A guaranteed homerun? No. Asymmetric? Sure. I own a small position, and will increase if I see signs of a change in allocation or better business performance.
Nippon Ichi Software (NIS)
And now it is the turn of the artificers of the increased popularity of Nihon Falcom games in the West: their publishers in North America and Europe. Nippon Ichi Software is a slightly more complex company, in the sense that their business is creating videogames, yes, but also publishing games of other Japanese companies in the West, and they also have a student dorm (well, why not?) and a TCG shop7
Let's ignore the student business though. It is about 2% of revenues, and the loss it makes is relatively tiny. It does have some weight in the balance sheet, though, and we can talk about that one later!
Basically, NIS has their own games, but they are not particularly successful. Even their flagship franchise, Disgaea, doesn't usually top the charts on release (although according to NIS they topped 5 million units globally, for the full franchise, in 2021). As an example, Disgaea 7 reached about 50k copies in its first week in Japan including digital sales (which made up most of it). As a reference, Trails through daybreak (relatively unsuccessful for the Trails series) surpassed that in physical sales alone (and Ys X got to 44k). So while they make some money out of that, most of their revenue comes from the publishing of games in the West.
That business has had its ups and downs, as they get some developers and lose others, and they have not shown a lot of growth in the last few years. Their profitability is also at the same level it was in 2016-208, although they had a couple of fantastic years during COVID.
The main developers they publish as of today are Nihon Falcom and Furyu910. Of those, Nihon Falcom is the most relevant one, and I think the one that is most relevant for the company, judging by how they have jumped into publishing their old games. Their problems re: profitability is that the cost of doing business in North America, where they derive most of their revenue from, has increased quite a bit… and the revenue has increased less. As of 2023, NIS America brings 73% of the revenue, but about 50% of the operating income. The annual report for 2024 is still not out, but judging by the results (which are), that has probably gotten worse.
So why do I find them interesting?
Well, the Nihon Falcom releases with Ys X and Trails through Daybreak should compare positively with last year, and I also think they will perform decently in terms of back-catalogue. Also, regarding Nihon, they keep getting closer to release in real time, with Ys X delayed for only a year. If they could get to simultaneous release an promotion for Trails, I think that would be a boon for both companies. But there is not much else, other than their balance sheet. They have a ¥5B market cap and ¥8B in tangible book value, with about ¥5B and a bit of debt that is tied to the other assets (student dorms, tcg store…). Plus, Disgaea 7 seems to have been better received by the fans (although I have less trust here). Last year they generated ¥400M in operating profits, which I think can improve slightly, but I don't expect it to reach the COVID tops (4x that).
Basically I would not have a big position here, as it is possible for it to be a value trap and I don't see as much potential for a change in policy or an improvement in business performance. Contrary to Nihon Falcom, there have been no moves to increase the dividend recently. And this company is still run by the founder and controlling shareholder, Koichi Kitazumi, who is still at it at 66. But sill, enough assets that tracking it is interesting (I don't have a position currently, but will keep an eye on it and might start it at some point).
Future entries
I wanted to give you all some visibility on what I am working on. First, I have found that Japan has a treasure trove of public companies in the entertainment business that nobody writes much about, so I am still looking at several small or mid companies there (Furyu11, Koei Tecmo, Cover Corp, Kotobukiya… ) aside from the more well-known ones (Kadokawa, Toei, Nintendo, Square Enix…).
While that could keep me busy forever, that is not the only thing I am looking at. First, I have long been thinking about writing on why am I so focused on niche videogames, tabletop games and anime, or niche entertainment. One entry in the coming weeks will focus on that, as it will also serve as a presentation for everyone new that decides to join!
Second, result season. I have neglected it a bit so far, SEGA aside. Partly because it has not brought that many changes, other than there. But I think a rapid-fire round is still in order.
And third… I haven't forgotten about Europe. Paradox Interactive will get a deep dive one of this days. I am not a shareholder, but I am a fan of many of their games, and have followed the company for a while. Frontier is also an interesting case with its ascendance, its fall from grace and, maybe, recovery perspective.
Now, except the why-on-earth-am-I-looking-at-videogames-right-now entry, the others are in no particular order. If you are interested in any in particular (or in other company in the space), let me know!
Much as Persona is a subseries of Shin Megami Tensei, The Legend of Heroes is a subseries of Dragon Slayer. As is Xanadu, including Tokyo Xanadu, if we are a bit strict with it. But for all intents and purposes, the Dragon Slayer brand stopped being relevant in the 90s, and it was simply a signifier of style, as SMT is now, so I will be omitting it going forward. The Legend of Heroes is itself only a marker of style, but no games outside of the Trails setting have been published since 1999
Nihon Falcom financial year finishes in September.
Boundless trails is a minor entry in the series, and performed as such.
Last year there were 3 releases, but we are talking about two main entries here. Boundless Trails is a minor entry in the series. Trails into Reverie is a main game and performed well (for this type fo game!). Trails to Azure is also a main game… but originally released in 2011. An adaptation made in 2023 was not expected to do much (and didn't)
They also sell in Asia, but revenues there have never exceeded 10% of the total. It was relevant for the H1 "underperformance” for a timing issue, but rarely is.
At least I think that company belongs to them, couldn't find confirmation.
Which is folded in the entertainment segment, so we won't talk about it exclusively.
Their FY ends in March, so it is not the same as the one Nihon Falcom uses.
They have published and Acquire title as well, but a minor one, and I doubt that continues. Acquire usually published with Square Enix (Octopath Traveler), and has been recently acquired by Kadokawa.
Furyu is another really interesting company, but not because of their videogames (probably a division they should nix to focus on the others). UFO-catcher prizes, photo booth/stickers and manga/anime collectibles are the interesting parts here.
Haha, divide and conquer, my friend! Pokemon, gotta write em all!