ディー・エヌ・エー（2432） – Consolidated Financial Results for the Fiscal Year Ended March 31, 2022 [IFRS]

The following information was originally prepared and published by the Company in Japanese as it contains timely disclosure materials to be submitted to the Tokyo Stock Exchange. This English translation is for your convenience only. To the extent there is any discrepancy between this English translation and the original Japanese version, please refer to the Japanese version. Consolidated Financial Results for the Fiscal Year Ended March 31, 2022 [IFRS] May 10, 2022 Company name: DeNA Co., Ltd. Stock exchange listing: Tokyo Stock Exchange Code number: 2432 URL: https://dena.com/intl/ Representative: Shingo Okamura, President & CEO Contact: Jun Oi, Member of the Board (CFO) Phone: +81-3-6758-7200 Scheduled date of Ordinary General Meeting of Shareholders: June 26, 2022 Scheduled date of commencing dividend payments: June 27, 2022 Scheduled date of filing securities report: June 27, 2022 Availability of supplementary briefing material on financial results: Yes Schedule of financial results briefing session: Yes (for institutional investors, analysts and the press) (Amounts are rounded to the nearest million yen.) 1. Consolidated Financial Results for the Fiscal Year Ended March 31, 2022 (from April 1, 2021 to March 31, (1) Consolidated Operating Results Revenue Operating profit Millions of yen % Millions of yen (% changes from the previous corresponding period) Profit for the period % Profit before tax % Millions of yen % Millions of yen 130,868 (4.5) 11,462 (49.0) 29,419 (5.9) 30,651 16.3 136,971 12.8 22,495 ― 31,259 ― 26,354 ― Total comprehensive income for the period Basic earnings per share Diluted earnings per share Profit for the period attributable to owners of the parent Millions of yen % Millions of yen % 30,532 19.1 29,055 (43.6) 25,630 ― 51,538 ― Yen 256.20 207.24 Profit before tax to total assets Operating profit to revenue Ratio of profit to equity attributable to owners of the parent % 13.2 12.7 % 8.8 10.7 Yen 256.45 207.54 % 8.8 16.4 2022) Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 (For reference) Equity in earnings (losses) of affiliates: Fiscal year ended March 31, 2022: ¥14,226 million Fiscal year ended March 31, 2021: ¥3,275 million (2) Consolidated Financial Position As of March 31, 2022 As of March 31, 2021 (3) Consolidated Cash Flows Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 2. Dividends Total assets Total equity Total equity attributable to owners of the parent Ratio of equity attributable to owners of the parent Equity per share attributable to owners of the parent Millions of yen Millions of yen Millions of yen 340,570 244,907 240,626 327,121 228,659 223,711 % 70.7 68.4 Yen 2,024.39 1,826.73 Operating activities Investing activities Financing activities Cash and cash equivalents at end of period Millions of yen Millions of yen Millions of yen Millions of yen 18,375 29,967 (19,924) (8,640) (18,549) 6,614 78,296 97,301 Dividends per share End of 1st quarter End of 2nd quarter End of 3rd quarter End of year Total Total dividends paid (annual) Payout ratio (consoli- dated) Dividends on equity attributable to owners of the parent (consoli-dated) Yen Yen Yen Yen Yen Millions of yen % % ― ― 0.00 Fiscal year ended March 31, 2021 Fiscal year ended March 31, 2022 Fiscal year ending March 31, 2023 (Forecast) (Notes) 1. The total dividends paid do not include dividends for stocks provided for the Stock Grant ESOP (Employee 32.00 39.00 32.00 39.00 3,906 4,623 0.00 15.4 15.2 2.0 2.0 ― ― ― ― ― ― ― ― Stock Ownership Plan) Trust account. 2. The dividend forecast for the fiscal year ending March 31, 2023 has not been determined at this time. 3. Consolidated Financial Results Forecast for the Fiscal Year Ending March 31, 2023 (from April 1, 2022 to March 31, 2023) The consolidated financial results forecast for the fiscal year ending March 31, 2023 cannot be provided due to the difficulty of reasonably and accurately estimating the figures. However, the Company aims to achieve a year-on-year increase in revenue and operating profit with the exception of one-off gains and losses. For the major factors related to performance that are expected to impact the trends of each business, please refer to “1. Overview of Operating Results and Financial Position (1) Overview of Operating Results for Fiscal 2021 (Outlook for Fiscal 2022)” of the Appendix. * Notes (1) Changes in Significant Subsidiaries during the Period under Review (changes in specified subsidiaries accompanying changes in scope of consolidation): No 1) Changes in accounting policies required by IFRS: No 2) Changes in accounting policies other than 1) above: No 3) Changes in accounting estimates: No (2) Changes in Accounting Policies and Changes in Accounting Estimates (3) Number of Shares Issued (common stock) 1) Total number of shares issued at the end of the period (including treasury stock): 2) Total number of shares of treasury stock at the end of the period: As of March 31, 2022 As of March 31, 2021 As of March 31, 2022 As of March 31, 2021 3) Average number of shares during the period: Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 130,210,945 shares 130,210,945 shares 11,674,919 shares 8,152,593 shares 119,054,854 shares 123,494,862 shares (Note) The 191,158 shares of the Company’s stock owned by the Stock Grant ESOP Trust account are included in the “Total number of shares of treasury stock at the end of the period” as of March 31, 2022, and the 199,619 shares of the Company’s stock owned by the same trust account are included in the “Total number of shares of treasury stock at the end of the period” as of March 31, 2021. (For Reference) Summary of Non-consolidated Financial Results 1. Non-consolidated Financial Results for the Fiscal Year Ended March 31, 2022 (from April 1, 2021 to (1) Non-consolidated Operating Results (% changes from the previous corresponding period) Net sales Millions of yen Operating income Millions of yen % Ordinary income Millions of yen % % Net income Millions of yen % 93,005 2.0 5,083 21.6 10,161 23.1 13,253 127.0 91,201 13.6 4,181 ― 8,256 682.3 5,839 ― Basic earnings per share Diluted earnings per share Yen 111.32 47.28 Yen 111.21 47.21 (2) Non-consolidated Financial Position Total assets Net assets Equity ratio Millions of yen Millions of yen 239,021 246,702 177,857 176,206 Net assets per share Yen 1,494.84 1,437.53 % 74.1 71.1 (For reference) Equity: As of March 31, 2022: ¥177,193 million As of March 31, 2021: ¥175,463 million March 31, 2022) Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 As of March 31, 2022 As of March 31, 2021 * This report of consolidated financial results is outside the scope of audit by a certified public accountant or accounting auditor. * Explanation of the Proper Use of Financial Results Forecast and Other Notes (1) Consolidated Financial Results Forecast The forward-looking statements herein are based on information available to the Company and certain assumptions deemed reasonable as of the date of publication of this document. They are not intended as the Company’s commitment to achieve such forecasts, and actual results may differ significantly from these forecasts due to a wide range of factors. (2) Method of Obtaining Supplementary Briefing Material on Financial Results The Company is planning to hold a briefing session for institutional investors, analysts and the press on May 10, 2022. The briefing materials for this session are scheduled to be posted on the Company’s website after the timely disclosure of the Consolidated Financial Results for the Fiscal Year Ended March 31, 2022 on the same date. In addition, videos and primary Q&A of the briefing session are scheduled to be posted on the Company’s website at a later date shortly thereafter. Appendix 1. Overview of Operating Results and Financial Position (1) Overview of Operating Results for Fiscal 2021 (2) Overview of Financial Position and Cash Flows for Fiscal 2021 (3) Basic Policy for Distribution of Profit and Dividends for Fiscal 2021 and 2022 (4) Risk Factors 2. Basic Stance Regarding Selection of Accounting Standards 3. Consolidated Financial Statements and Principal Notes (1) Consolidated Statement of Financial Position (2) Consolidated Income Statement (3) Consolidated Statement of Comprehensive Income (4) Consolidated Statement of Changes in Equity (5) Consolidated Statement of Cash Flows (6) Notes on Going Concern Assumption (7) Notes to Consolidated Financial Statements 1. Segment information 2. Earnings per share 3. Impairment of assets 4. Other income 5. Investments accounted for using the equity method 6. Significant subsequent events 2 2 4 5 5 17 18 18 20 21 22 23 24 24 24 27 27 28 29 29 – 1 – 1. Overview of Operating Results and Financial Position (1) Overview of Operating Results for Fiscal 2021 The Group has made efforts to enhance corporate value over the mid to long term by working to form an earnings base on the two approaches of working to entertain and to serve and by evolving into a new kind of tech company, including encouraging synergy between the two approaches. The Group has also challenged itself to achieve leaps in growth to establish an even stronger business portfolio. During the fiscal year ended March 31, 2022 (from April 1, 2021 to March 31, 2022), revenue was ¥130,868 million, down 4.5% year-on-year. While revenue decreased year-on-year in the Game Business, the Live Streaming Business grew and the Sports Business recovered. Cost of sales was ¥64,931 million, up 4.7% year-on-year. While commission fees, etc., which fluctuate in line with the performance of the Live Streaming Business and the Game Business, etc. increased primarily in line with the growth of the Live Streaming Business, the decrease in revenue of the Game Business had an impact. Selling, general and administrative expenses were ¥57,220 million, down 1.5% year-on-year, staying mostly flat year-on-year. Sales promotion expenses and advertising expenses increased, primarily reflecting the performance of the Live Streaming Business and the Game Business, while outsourcing expenses and commission fees declined. Other income was ¥7,145 million, compared to ¥11,323 million for the previous fiscal year. During the fiscal year ended March 31, 2022, the Company recorded one-off gains of ¥4,166 million in total related to the update of its business portfolio and other efforts, including a gain on step acquisitions due to the acquisition of all the shares of IRIAM Inc. and a gain on sales of shares due to the transfer of all its shares in Everystar Co., Ltd. Furthermore, the Company recorded compensation of ¥2,090 million for loss on suspension of operations of the Yokohama DeNA BayStars Baseball Club, Inc. Other expenses were ¥4,400 million, compared to ¥5,689 million for the previous fiscal year, primarily as a result of recording an impairment loss on software in the Game Business. Share of profit of associates accounted for using the equity method was ¥14,226 million, up 334.4% year-on-year. This was due to the performance trends of Cygames, Inc. and Mobility Technologies Co., Ltd., the major associates accounted for using the equity method, during the fiscal year ended March 31, 2022, as well as the recording of a one-time gain from the capital increase of Mobility Technologies Co., Ltd. through a third-party allotment, which was conducted during the fiscal year ended March 31, 2022. As a result, revenue of the DeNA Group was ¥130,868 million, down 4.5% year-on-year, operating profit was ¥11,462 million, down 49.0% year-on-year, profit before tax was ¥29,419 million, down 5.9% year-on-year, and profit for the period attributable to owners of the parent was ¥30,532 million, up 19.1% year-on-year. Business performance by segment is as follows. 1) Game Business 2) Sports Business Revenue of the Game Business was ¥74,697 million, down 18.2% year-on-year, and segment profit was ¥11,596 million, down 38.5% year-on-year. During the fiscal year ended March 31, 2022, both revenue and profit decreased as operations were centered on existing titles and virtual currency consumption decreased year-on-year. To strengthen the earnings base, the Company released new titles and continued to strive to make the cost structure more robust and optimize fixed costs. Revenue of the Sports Business was ¥14,712 million, up 14.7% year-on-year, and segment loss was recorded of ¥2,575 million, compared with segment loss of ¥3,589 million for the previous fiscal year. Due to the spread of COVID-19, the official professional baseball games in the 2020 season commenced on June 19, 2020, later than a normal season, and first games were held without spectators. The 2021 season, however, began on March 26, 2021, as in a normal year. While some measures still needed to be taken to prevent the spread of COVID-19, such as restrictions on the number of spectators allowed, the performance of the Sports Business recovered from the previous fiscal year. – 2 – 3) Live Streaming Business Revenue of the Live Streaming Businesses was ¥34,664 million, up 43.2% year-on-year, and segment profit was ¥3,484 million, down 32.9% year-on-year. During the fiscal year ended March 31, 2022, Pococha continued to perform solidly in Japan, and the Company made progress in its efforts to expand into new genres with a view to market growth and expansion with genre diversification, including IRIAM, and to develop the global Pococha service. In addition, the Company made proactive investments to capture market growth opportunities in the respective areas. On August 2, 2021, IRIAM Inc., which operates the anime character live streaming service IRIAM, became a wholly owned subsidiary of the Company. Due to the transfer of a portion of the Company’s shares in SHOWROOM Inc., effective June 30, 2020, the said company has become an associate accounted for using the equity method. As a result, starting from the second quarter ended September 30, 2020, the business performance of SHOWROOM Inc. has been excluded from the business performance by segment. 4) Healthcare Business Revenue of the Healthcare Businesses was ¥3,000 million, up 42.9% year-on-year, and segment loss was recorded of ¥624 million, compared with segment loss of ¥1,194 million for the previous fiscal year. The performance of “kencom” and other related businesses in the healthcare service field was solid. While the Company made prior investments for the future, this segment recorded a profit in the third quarter ended December 31, 2021. On September 1, 2021, Nippontect Systems Co., Ltd., a provider of dementia-related services, became a wholly owned subsidiary of the Company through a share exchange. 5) New Businesses and Others Revenue of the New Businesses and Others was ¥3,850 million, down 43.6% year-on-year, and segment loss was recorded of ¥326 million, compared with segment loss of ¥162 million for the previous fiscal year. This section comprises various initiatives that aim to reinforce the Group’s business portfolio over the mid to long term as well as services of the E-commerce Business. (Outlook for Fiscal 2022) The consolidated financial results forecast for the fiscal year ending March 31, 2023 cannot be provided due to the difficulty of reasonably and accurately estimating the figures. However, the Company aims to achieve a year-on-year increase in revenue and operating profit with the exception of one-off gains and losses. The Company’s views on the individual businesses are as indicated below. For the one-off gains and losses recorded in the fiscal year ended March 31, 2022, please refer to the information regarding other income and other expenses in “1. Overview of Operating Results and Financial Position (1) Overview of Operating Results for Fiscal 2021” described above. For the fiscal year ending March 31, 2023, there are no other matters to be disclosed that may be linked to such one-off gains or losses as of the date of submission of these Consolidated Financial Results. 1) Game Business The releases of about five new titles are planned for the fiscal year ending March 31, 2023, mostly in the second half. Depending on their performance, they could be upside factors for the Company’s business performance, but taking into consideration the period during which they could contribute to results and the overall structure of the Game Business, existing titles are expected to be the main contributors to results for the fiscal year ending March 31, 2023. 2) Sports Business Official professional baseball games began in late March, as in a normal year, and are being held without restrictions on the number of spectators allowed as of the date of submission of these Consolidated Financial Results. If these conditions are maintained throughout the fiscal year ending March 31, 2023, and the number of games and other conditions are the same as in a normal year, segment profit or loss is expected to improve compared to the previous fiscal year. However, close attention must continue to be paid to the impact of – 3 – COVID-19, and it remains difficult to set reasonable assumptions for calculating the outlook for the segment. 3) Live Streaming Business For the fiscal year ending March 31, 2023, the Company will continue to place major importance on revenue growth and positioning in different regions. From a medium- and long-term perspective, the Company will work to further expand and strengthen Pococha in Japan as a revenue-producing division. Furthermore, with respect to taking on the challenges of a global service launch, expanding into new genres, etc., the Company will strive to achieve growth by leaps. The Company will implement these investments flexibly and with discipline in line with progress on its strategies during the fiscal year, while maintaining segment profitability throughout the fiscal year. 4) Healthcare Business Based on the business performance of this segment up to the fiscal year ended March 31, 2022, from the fiscal year ending March 31, 2023, onward, the Company will further reinforce its efforts in implementing segment strategies aimed at achieving medium- and long-term growth, such as strategies involving health big data. The Company will make flexible growth investments through balance sheet management, among others. (2) Overview of Financial Position and Cash Flows for Fiscal 2021 1) Financial Position Total assets at the end of the fiscal year ended March 31, 2022 were ¥340,570 million, an increase of ¥13,448 million compared to the end of the previous fiscal year. Current assets were ¥110,420 million, a decrease of ¥19,466 million compared to the end of the previous fiscal year. This was due mainly to a decrease in cash and cash equivalents by ¥19,005 million. Non-current assets were ¥230,150 million, representing an increase of ¥32,915 million compared to the end of the previous fiscal year. This was due mainly to increases in goodwill by ¥11,568 million and in investments accounted for using the equity method by ¥14,869 million. Total liabilities at the end of the fiscal year ended March 31, 2022 amounted to ¥95,663 million, a decrease of ¥2,800 million compared to the end of the previous fiscal year. Current liabilities were ¥56,025 million, representing an increase of ¥15,049 million compared to the end of the previous fiscal year. This was due mainly to an increase in borrowings by ¥20,022 million. Non-current liabilities stood at ¥39,638 million, representing a decrease of ¥17,849 million compared to the end of the previous fiscal year. This was due mainly to a decrease of ¥19,876 million in borrowings. Total equity at the end of the fiscal year ended March 31, 2022 was ¥244,907 million, representing an increase of ¥16,248 million compared to the end of the previous fiscal year. This was primarily attributable to an increase of ¥26,250 million in retained earnings. In terms of liquidity, the liquidity ratio and ratio of equity attributable to owners of the parent were 197.1% and 70.7% respectively at the end of the fiscal year ended March 31, 2022. 2) Cash Flows Cash and cash equivalents (collectively, “cash”) at the end of the fiscal year ended March 31, 2022 decreased by ¥19,005 million to ¥78,296 million compared to the end of the previous fiscal year. Cash flows in each area of activity and their respective contributing factors are as follows. (Operating activities) Net cash provided by operating activities for the fiscal year ended March 31, 2022 was ¥18,375 million, compared to a cash inflow of ¥29,967 million in the previous fiscal year. The principal cash inflow factor was ¥29,419 million in profit before tax. (Investing activities) Net cash used in investing activities for the fiscal year ended March 31, 2022 was ¥19,924 million, compared to a cash outflow of ¥8,640 million in the previous fiscal year. The principal cash outflow factor was ¥11,526 million in acquisition of subsidiaries or other businesses, net of cash acquired. – 4 – (Financing activities) Net cash used in financing activities for the fiscal year ended March 31, 2022 was ¥18,549 million, compared to a cash inflow of ¥6,614 million in the previous fiscal year. The principal cash outflow factor was ¥10,868 million in purchase of treasury stock. (3) Basic Policy for Distribution of Profit and Dividends for Fiscal 2021 and 2022 The Company regards continuing enhancement of its corporate value through business growth and strengthening of the management structure and contributing to shareholders’ interest to be important management priorities. With respect to allocating profit to shareholders through dividends, while considering performance of each fiscal year, the Company, as a basic principle, sets as a minimum whichever is higher, a consolidated payout ratio of 15% or an annual dividend of ¥20 per share of the Company’s common stock, and plans to continue paying a dividend with the aim of a consolidated payout ratio of 30% in the future. As one approach to capital management policy is to respond flexibly to changes in the Company’s stock price and conditions in the operating environment and return a portion of the profit for the period to shareholders, the Company appropriately considers purchases of its own shares from the market. As stated in in “1. Overview of Operating Results and Financial Position (2) Overview of Financial Position and Cash Flows for Fiscal 2021,” the Company purchased its own shares during the fiscal year under review. Regarding retained earnings, the Company’s objective is to make effective investments in the establishment of a business portfolio that realizes medium- to long-term growth, while making aggressive investments to strengthen the earnings base of its principal businesses in order to maximize corporate value. Based on the basic principle described above, the Company is scheduled to pay a regular cash dividend for its common stock of ¥39 per share (consolidated payout ratio of 15.2%) for the fiscal year under review, having taken into account performance, the future business environment, and internal reserves for the continued growth of business. The basic policy regarding the payment of dividends from surplus is to pay a year-end dividend once a year. (4) Risk Factors This section reviews the principal matters among the various items related to the business and accounting situation that management recognizes as possible risks for the DeNA Group and having a material effect on the decisions of investors. The policy of the Group, after these matters are recognized as risks that may occur, is to work to prevent their occurrence and develop countermeasures in the event of an occurrence. However, the Company believes that the judgments of investors regarding the Company’s stock must be made after the careful consideration of these matters and other factors that are not covered here. Unless otherwise indicated, matters related to future developments that are mentioned in this section are judgments of the Group that were made as of the date of the issuance of this report. Since these matters have inherent uncertainties, the actual results and outcomes may differ from these judgments. (1) Business Environment Risk 1) Responding to Changes in the Internet and AI (Artificial Intelligence)-related Industries and New Technologies Internet usage continues to expand, particularly usage by mobile devices, and every day new Internet services are created in a diverse variety of fields. In addition, increased utilization of AI technologies in business is gaining attention in society. The Group is capitalizing on its strengths in Internet services for mobile devices, such as smartphones, with the provision of games and all types of services, and working on initiatives aimed at boosting the value of its services through the utilization of AI technologies. However, in the markets associated with the services that the Group provides, sudden changes in market share owing to new entrants into the industry and structural changes in the market in association with the emergence of new business models may have an adverse impact on the Group’s business performance, etc. – 5 – With the development of new Internet and AI-related technologies and the constant introduction of new services based on these technologies in society at large, in the event that the Group lags behind new technologies due in part to its inability to promote research and development as well as alliances with other companies, retain engineers, or develop personnel, its competitiveness may decline. Furthermore, in the event that large expenditures are necessary for responding to new technologies, this may have an adverse impact on the Group’s business performance, etc. Moreover, with regard to AI technologies, the reliability, accuracy, and usability of services that use AI technologies in general can become an issue, and ethical problems related to matters such as human dignity, privacy, fairness, and transparency may arise depending on how AI technologies are used. If such issues or problems have an impact on provision of services, it may adversely affect the Group’s business performance, etc. Due to the nature of technological innovations and changes in business structure related to the Internet and AI, it is difficult to reasonably predict when and how much of an impact there will be on the business environment. However, the Group recognizes that there will definitely be an impact considering the history of development of information technologies and changes in business structure. The Group stipulates in its vision that it engages in business while fully leveraging the Internet and AI. One part of the DeNA Promise, which is part of the Group value, is our social promise to challenge ourselves to develop new technology and services while overcoming any issues that may arise. As such, the Group recognizes that responding to such technological innovation and changes in business structure related to the Internet and AI is an important issue. At the same time, with the aim of reducing these risks, the Group has established a management system, which includes compliance and risk management departments, that conducts multifaceted business reviews, when planning and implementing services that utilize the Internet and AI. By creating this system, the Group is promoting initiatives aimed at improving service value through further utilization of the Internet and AI, and is working to secure business opportunities and enhance its competitiveness. However, due to the nature of technological innovation and business structure related to the Internet and AI, these measures may not be able to prevent the above risks from materializing, which could in turn have an adverse impact on the Group’s business performance, etc. The Group operates its business aimed at mobile devices equipped with operating systems (OS) such as Android or iOS. Accordingly, in the event that the Group is unable to provide its services due to accidents or other problems related to these OSs, or if the Group is unable to provide its services due to measures introduced by the OS providers that are difficult to predict, if the Group is unable to provide the same services as in the past because of major or unforeseeable changes in existing conditions, rules and their application, or the establishment of new conditions and rules imposed by the OS providers for providing services on these OSs, if responding to such changes in or the new establishment of the conditions, rules and their application requires large expenditures, if the conditions, rules and their application are changed to those disadvantageous to the Group, or if the Group is unable to meet the changed or newly established conditions, rules and their application, leading to the suspension of services provided by the OS providers or account usage, there may be an adverse impact on the Group’s business and financial performance, etc. It is difficult to foresee the timing of major or unforeseeable changes in existing conditions, rules and their application, or the establishment of new conditions and rules imposed by the OS providers, and it is also difficult to reasonably predict the impact they will have. The Group is working to control the possibility of these risks materializing and affecting its business performance as much as possible, by establishing a development system to build services that are compatible with the latest OSs. At the same time, the Group is keeping up with the latest conditions and rules imposed by the OS providers and establishing management and coordination systems in the administrative and business divisions to apply any changes to its services. Nevertheless, in keeping with the Group’s relationships with the OS providers, these measures may not be able to prevent the above risks from materializing, which could in turn have an adverse impact on the Group’s business performance. 2) Responding to OS Providers for Mobile Devices – 6 – 3) Competition and Consumer Trends The Group faces intense competition with other companies in all of its business fields, including the Internet- and AI-related industries. The Group strives to increase its competitiveness by creating and offering distinctive services capturing the needs of the times, taking on measures for improving users’ environment and security, and initiatives to ensure improved customer support. However, intensifying competition from companies or new market entrants offering similar services, or changes in trends of consumer demand may have an adverse impact on the Group’s business performance, etc. It is difficult to reasonably estimate the possibility, timing, and degree of impact of risks related to intensifying competition and changes in trends of consumer demand materializing. However, the Group recognizes that these risks constantly exist in its business operations, as the future potential of services with distinctive features that meet the needs of the times will inherently cause competition to intensify through the business development of new entrants. The Group is working to develop the internal environment and cultivate human resources for providing even more attractive and competitive services, based on the Company vision, which reads in part “We seek to entertain and enrich lives, and to serve and make the world a better place. Each of us harnesses our individual strengths to make our unique business succeed.” Nevertheless, due to the characteristics of the Group’s business, these measures may not be able to prevent the above risks from materializing, which could in turn have an adverse impact on the Group’s business performance. (2) Individual Business Risk 1) Businesses Utilizing Content such as Mobile Games Changes in user tastes and preferences may be rapid and extreme in businesses that use content, as typified by mobile games. In the event that, for some reason, the Group cannot accurately identify user needs and provide content that satisfies them, the appeal of the Group’s services to users may decline. As a result, the profitability of the content may also decline, or the Group may be unable to provide new content, which may have an unexpected and significant adverse impact on its business performance, etc. In addition, it is necessary to not only improve existing content but also expand its lineup by introducing new titles on a continuing basis, but in the event that content enrichment does not proceed according to plan, it may cause an adverse impact on the Group’s business performance, etc. In particular, the development costs of mobile games have been rising in recent years. It is possible that the development of new titles may not proceed as planned due to imbalances between development costs and expected revenues, which may prevent enhancement of content. Because it is not easy to accurately identify user tastes at all times, and securing the content development systems of external partner companies depends on external factors that are different from those faced by the Group, the possibility of these risks materializing always exists to a certain extent due to the nature of the business. The Group is addressing these risks by constantly working to plan and develop content that meet user needs through the establishment of internal organizations and implementation of measures to accurately understand and analyze those needs. In addition, the Group is continuously working to strengthen its development system, cultivate external partner companies, and build relationships so that it can continuously provide excellent content. However, due to the nature of these risks, it is difficult to completely eliminate them. Moreover, in the event that a serious issue occurs regarding the content provided by the Group or a third-party developer, or external partners including outsourcing companies cause serious problems, the legal responsibility of the Group may become an issue regardless of the content of contract rules and regulations and terms/conditions. Even where this is not the case, such incidents may cause a loss of trust in the Group and impairment in the Group’s brand image, and may have an adverse impact on the Group’s business performance, etc. Furthermore, in the event that changes are made to core content or the Group becomes unable to provide core content due to the change or expiration of contracts or partnership relationships with alliance partners, intellectual property (IP) providers, or companies that provide content to platforms operated by the Group, or in the event that revenues and the profitability of related content decline, this may have an adverse impact on the Group’s business performance, etc. Especially if such an event occurs in a service – 7 – related to content that is of high business importance, it may have a significant adverse impact on the Group’s business performance. The Group is working to control the possibility of these risks materializing as much as possible, by striving to minimize the possibility of issues through selection of excellent external developers and thorough management of outsourced work conducted by outsourcing companies. At the same time, the Group is strengthening coordination between its business divisions and administrative divisions, which review the details of contracts, and building a contract management system that prevents unexpected changes to the details or termination of the contracts or partnership relationships. However, if the risks materialize despite these measures, it may have a significant adverse impact on the Group’s business performance. 2) Sports Business The Group engages in the sports business including management of the professional baseball team “Yokohama DeNA BayStars” and the professional basketball club “Kawasaki Brave Thunders.” In this business, the shift in trends in the target industry of sports and the game results of the team under management may have an adverse impact on attendance at games and on the Group’s earnings, in addition to which expenditures for strengthening the team in order to improve their game results or capital investment may have an adverse impact on the Group’s business performance, etc. In addition, as a large number of spectators are in attendance for sporting events, the Group has in place requisite measures, etc., to prevent accidents such as those caused by balls hit by players. However, in the case that accidents, etc., occur despite the implementation of these measures, this may have an adverse impact on the Group’s business performance, etc. due to factors such as claims for large amounts of damages alongside a loss of trust in the Group and impairment in the Group’s brand image. Furthermore, if facilities used for sporting events are damaged, etc., and made unusable by natural disasters such as earthquakes or typhoons, or by other accidents, or if normal events cannot be held for a prolonged period of time, due to causes such as the impact of an infectious disease, etc., this may have an adverse impact on the Group’s business performance, etc. Further, the Group operates the “Yokohama Stadium” facility on the basis of a contract for preferential utilization for entertainment purposes, including holding professional baseball games, with Yokohama City, the owner of the stadium. The situation concerning renewal of this contract or changes to the terms of usage may lead to the inability to use the stadium facility, or to restrictions on said usage, which may have an adverse impact on the Group’s business performance, etc. Also, there is a similar risk associated with using facilities to hold professional basketball games. As an example of how the Group’s business performance would be impacted when these risks materialize, it would have a significant adverse impact on income from ticket sales, sponsorships, merchandise sales, food and beverage sales, and other income. The Group is working to create value in businesses that attract spectators and fans, implement safety management measures, and enhance coordination with Yokohama City, the owner of Yokohama Stadium. However, it is difficult to predict the occurrence of risk factors such as game result trends, accidents caused by balls hit by players, and natural disasters. Accordingly, the Group recognizes that the possibility of these risks materializing always exists to a certain extent due to the nature of these risks. For the impact of the spread of COVID-19, please refer to “(8) Risks Related to the Impact of the Spread of COVID-19.” 3) Live Streaming Business The Group engages in the live streaming business through the operation of the “Pococha” live communication app, the “IRIAM” anime character live streaming app, etc. Since both broadcasters and viewers transmit information through these apps, issues such as infringements of rights of third parties, laws and regulations, acts of expression including inappropriate content, and incidents caused by user behavior may arise in the contents streamed by broadcasters or the interactions between/among users. Furthermore, users and companies that use the service may engage in behavior both inside and outside the service that affects the integrity of the service. For details regarding these risks, please refer to “8) Providing Services to the General Public” and “(6) Compliance Risk 1) Maintaining Service Integrity.” – 8 – 4) Healthcare Business The Group engages in the healthcare business, such as the operation of direct-to-consumer genetic testing services, health promotion support services and cognitive function testing services that use information and communication technology (ICT), and the utilization of healthcare data. While the Group constructs its services and pursues research and development in this business in such a way that they do not come in conflict with the Act on Securing Quality, Efficacy and Safety of Pharmaceuticals and Medical Devices, etc., and the Medical Practitioner’s Law, and other regulations, future amendments to regulations regarding the application of approval processes and related regulations, as well as circumstances leading to some kinds of constraints and additional expenses involving this business or devices and other products it handles may adversely impact the Group’s business performance, etc. Additionally, as this business handles a large amount of highly-sensitive information such as personal health records, genetic information, and information obtained through anonymization and statistical processing, etc., and the amount and range of information is expected to increase as business diversifies in the future, in the event of leakage or improper handling of information, the Group may receive claims for large amounts of damages or administrative sanctions. Furthermore, technological development in the services that this business is involved in is proceeding, and competition in the market may further intensify. Additionally, whether or not the Group’s services are involved, changes in market conditions as a result of situations giving rise to social or moral questions related to the healthcare business may have an effect on business performance. Furthermore, with regard to the healthcare business, in the event of inaccuracies, defects or deficiencies in testing content or other delivered information and services, unforeseen circumstances leading to an environment in which operations such as testing are not possible, a shortage of or defects in devices required for the business, or other situations which inhibit the Group’s ability to maintain high-quality services lead to the cessation of services, a recall of products sold, or claims for large amounts of damages alongside a loss of trust in the Group and impairment in the Group’s brand image, it may cause an adverse impact on the Group’s business performance, etc. If the risks related to the Healthcare Business materialize, there may be a significant adverse impact on the Group’s overall business development due to a loss of trust in the Group and impairment in the Group’s brand image. The Group considers risks caused by information leaks and improper handling of highly sensitive information to be important management risks. Accordingly, the Group companies engaged in the said business are working to minimize the possibility of such risks materializing by promoting the establishment of a business management system, including strict information management. To this end, some Group companies have acquired ISO/IEC 27001:2013 (JIS Q27001:2014) (also known as ISMS) certification, which is a conformity assessment system for information security management systems, as well as PrivacyMark (JIS Q15001:2017) certification. However, it is difficult to completely prevent the abovementioned risks from materializing. 5) New Businesses As a part of its efforts to challenge itself to achieve growth, the Group will continue to engage in aggressive initiatives to provide new services and enter new businesses, in order to expand the scale of its business activities and diversify sources of earnings. As a result, the Group may have to make investments in systems and incur additional expenditures on advertising, personnel expenses required for development, and other items, which may result in lower profitability. In addition, in launching new services and new businesses, the risks inherent in these new activities become risk factors for the Group. Also, in unexpected situations and other circumstances, the development of new services and new businesses may not proceed as originally planned and the Group may not be able to recover its investments, possibly causing an adverse impact on the Group’s business performance, etc. It is difficult to reasonably predict the likelihood and timing of these risks materializing, as well as the impact these risks will have on the business performance, because they depend on the nature of the relevant new businesses and the scale of investments. In the process of planning and promoting new businesses, the Group is working to minimize the risks associated with the development of the said new – 9 – businesses, including the perspective of human resources development, by meticulously analyzing the degree of possibility of recouping its investment and potential risks from the managerial viewpoint. However, despite these countermeasures, it is impossible to prevent the abovementioned risks from materializing due to the nature of new businesses. 6) Investment Activity The Group invests in venture businesses and funds with the aim of providing support from an early stage for companies with a high growth potential. The unlisted companies where the Group invests may lack sufficient capabilities in areas such as development or business management to adapt to changes in the market, and there are many uncertainties regarding their future growth. These companies may not be able to realize their expected potential and may experience deterioration in performance, thus making it impossible to recover venture fund investments, and this may cause an adverse impact on the Group’s business performance, etc. Furthermore, if the companies in which the Group invests engage in illegal or inappropriate activity, even when issues of legal responsibility of the Group do not arise, such incidents may cause a loss of trust in the Group and impairment in the Group’s brand image, and may cause an adverse impact on the Group’s business performance, etc. In the fiscal year ended March 31, 2020, with an investment of approximately ¥10 billion, the Group established a fund for the purpose of investing in ventures, and various risks related to the fund may materialize within the scope of the amount invested and operating period. It is difficult to reasonably predict the likelihood and timing of these risks materializing, as well as the impact these risks will have on the business performance, because they depend on the nature of the businesses of the investees and the scale of investments. As an investor, the Group is working to reduce the possibility of such risks materializing by monitoring the investees and providing necessary advice as much as possible. However, it is difficult to completely prevent the abovementioned risks from materializing. 7) International Business As the Group is developing business operations globally, the Group faces many potential risks in its international business, including those related to the legal regulations, systems, political climate (including political in culture/religions/preferences of local users/business customs/ethics of other countries, and foreign currency risk. In the event that conducting business becomes difficult because the Group is unable to deal with these risks, or if the development of the Group’s international business activities does not proceed according to its plans, this may cause an adverse impact on the Group’s business performance, etc. trends between nations), economic/social conditions, differences Because the Group focuses on business development in China, particularly in its business policies regarding mobile games, the Group considers risks associated with its business in China to be important management risks. In order to minimize the possibility of these risks materializing as well as their impact on business performance, the Group is working to establish a management system for its international business, a management system for the Group companies, and a compliance system. Nevertheless, given the fact that changes in laws, regulations, systems, and political climate (including political trends between nations), economic/social conditions, etc. in China are difficult to predict due to the social background of the country, the Group recognizes that, with the expansion of its business in China, the possibility of these risks materializing always exists to a certain extent in its business operations. The Group also recognizes that as it expands live streaming services overseas, various risks including those mentioned above may arise in the countries where it operates. In addition, when converting financial statements of international subsidiaries from local currencies to Japanese yen for the preparation of consolidated financial statements or if transactions denominated in foreign currencies increase at the Group, fluctuations in the foreign currency market may have an adverse impact on the Group’s performance and financial position. 8) Providing Services to the General Public The Group provides services to an unspecified large number of users who make use of the services, etc., it operates, such as mobile games, game platforms, live streaming services and Internet auction services. – 10 – In services that provide functions for communication between users, issues may arise related to inappropriate behavior, such as matters related to ownership rights of others, intellectual property, personal honor, privacy, and other issues that arise from violations of the rights of others, laws and regulations. It may be difficult to fully supervise the behavior of users on the Group’s services. In the event that inappropriate behavior of users leads to trouble, regardless of the content of contract rules and regulations and terms/conditions, the legal responsibility of the Group may become an issue. In addition, even when issues of legal responsibility do not arise, the loss of trust in the Group and impairment in the Group’s brand image may have an adverse impact on the Group’s business performance, etc. The Group is working to reduce the likelihood of such risks materializing by continuously engaging in initiatives to maintain and strengthen its surveillance systems. However, it is difficult to completely prevent these risks from materializing. Because factors that cause these risks depend on users’ usage status, it is difficult to reasonably estimate the timing of these risks materializing and the impact they will have on business performance. However, in the event that the Group suspends its services or otherwise becomes unable to maintain them, there is a possibility that a significant amount of revenues and profits from those services would be lost. With respect to the Internet auction services, the Group continues to carry out inspections of the items offered for sale as the provider of a sales venue. In addition, the services’ terms and conditions include phrases that clearly absolve the Group of any responsibilities for any matters regarding the items put up for sale or transactions following the closing of the bidding and completion of the shopping transaction. Moreover, based on the Act on Specified Commercial Transactions, which regulates advertising by mail-order retailers, the Group sets its voluntary standards for advertisements it will carry for sellers according to the number of items they offer. In addition, the Group’s contracts with mail-order retailers state clearly that the responsibility for advertising content lies with the mail-order retailer. As such, the Group strives to control, to the greatest degree possible, the likelihood of risks related to Internet auction services materializing, and the Group has deemed its efforts to be reasonably effective. However, if the risks materialize despite these measures, it may have an adverse impact on the Group’s business performance, etc. 9) Internet Advertising The Group operates a number of services that contain Internet advertising. Looking ahead, the unit prices of advertising services may decline as a result of factors such as law amendments, economic trends, trends in the Internet advertising industry as a whole, competition with services of other companies, and changes in the rules imposed by OS providers. Similarly, such circumstances may also result in increases in selling fees paid to advertising agencies and the cost of winning new business from advertisers, possibly causing an adverse impact on the Group’s business performance, etc. The Group recognizes it is difficult to accurately predict the future business environment, including economic trends, overall trends in the Internet advertising market, and the status of competition with the services of other companies. When other advertisers and the media use the advertising services offered by the Group and serious problems arise because of legal violations, etc., regardless of the content of contracts and terms/conditions, the legal responsibility of the Group may become an issue. In addition, even when issues of legal responsibility do not arise, the loss of trust in the Group and impairment in the Group’s brand image may have an adverse impact on the Group’s business performance, etc. The Group has built an adequate examination system for advertisements posted on its services, and is working to prevent posting of advertisements that the Group deems inappropriate according to its business operation policies. The Group deems its efforts to be reasonably effective. However, if the risks materialize despite these measures, it may have an adverse impact on the Group’s business performance, etc. 10) Discontinued or Transferred, Etc., Businesses If illegal activities, fraudulent activities or other inappropriate activities, or unrecognized liabilities are discovered to have occurred in businesses that the Group had operated in the past and has discontinued or transferred, etc., to other companies, the Group may be held legally responsible for such activities or – 11 – liabilities, or incur loss. In addition, even when issues of legal responsibility or other liability do not arise, such incidents may cause a loss in the trust of the Group and impairment in the Group’s brand image, and may have an adverse impact on the Group’s business performance, etc. In order to prevent illegal activities, fraudulent activities, and other inappropriate activities from occurring in businesses currently operated by the Group and those that are scheduled to be discontinued or transferred, etc., to other companies, the Group has developed a business management system and compliance/risk management system that include a legal perspective. The Group deems its efforts to be reasonably effective. However, if the risks materialize despite these measures, it may have an adverse impact on the Group’s business performance, etc. depending on the nature or scale of the activity. (3) Operating Agreements, M&A, and Related Risks 1) Business Alliances, Capital Investments, and Joint Ventures, Etc. The Group is working to expand its business activities through business alliances and capital investments, the formation of joint ventures, and other activities that involve relationships with other companies. By combining the operational know-how of the Group with that of alliance and joint venture partners, the Group aims to realize major synergies. However, in the event that these relationships do not achieve the initially conceived positive benefits or these relationships are changed or dissolved, it may cause an adverse impact on the Group’s business performance, etc. In particular, if there is a change in partnership relationships with other companies related to mobile games, it may cause a significant adverse impact on the Group’s business performance, etc. There are various forms of alliances and business operations with alliance partners and joint venture partners. It is difficult to uniformly estimate the cases in which the initially expected effects cannot be achieved, the possibility and timing of changes to or termination of these relationships, and their impact on business performance. However, the Group is working to develop a business management system that supports the expansion of diversified and complex businesses, and strengthening relationships with alliance partners and joint venture partners. In addition, regarding investment securities such as shares acquired in association with capital alliances or other deals, in the event that the asset value of the investment securities changes due to the financial results of the issuing company, the financial market or any other factors, it may cause an adverse impact on the Group’s performance and financial position. Of particular importance is the 1,759,400 shares the Group holds in Nintendo Co., Ltd., which is both a business and capital alliance partner. Fluctuations in the asset value of these investment securities may have an adverse impact on the financial position of the Group. Further, as described in “3. Consolidated Financial Statements and Principal Notes (7) Notes to Consolidated Financial Statements 6. Significant subsequent events” below, going forward the Group expects to sell approximately half of Group-held common shares of Nintendo Co., Ltd. 2) Expansion through M&A (Corporate Acquisitions, Etc.) As an effective means of accelerating business expansion, the Group has adopted a policy of making use of M&A. When concluding M&A deals, the Group strives to conduct screenings, including the examination of the financial position of M&A candidate companies, their contractual relationships, and other matters, and makes decisions after considering the risks involved. However, in the event that problems arise, such as the emergence of contingent liabilities after acquisitions have been made and the discovery of unrecognized liabilities that were not found prior to the acquisition, or in the event that the post-merger integration or the development of the acquired business does not proceed as planned, the Group may have to recognize impairment losses on goodwill. These and other contingencies may have an adverse impact on the Group’s business performance, etc. Also, if an M&A deal results in the addition of business activities that are new to the Group, the risks inherent in these new activities may become risk factors for the Group. The Group recognizes the difficulty in making a reasonable prediction of the likelihood and timing of risks materializing in relation to business development after an M&A, because they are linked to the timing of the M&A and business development after a deal is completed. – 12 – As of the end of the fiscal year ended March 31, 2022, goodwill of ¥17,451 million was recorded in the consolidated statement of financial position, and there is a potential risk that the Group’s business performance, etc. may be affected for example by the impairment of the goodwill. (4) Telecommunications Network and Computer Systems Risk Many of the businesses of the Group are reliant on telecommunications networks that link computer systems such as mobile devices and PCs. In the event that these networks are disconnected as a result of natural disasters and accidents (including those caused by human factors either inside or outside the Group), it may cause an adverse impact on the Group’s business performance, etc. Also, while the Company does implement countermeasures such as decentralizing its data centers and migrating to cloud services, in the event that computer systems break down because of unpredictable developments, such as a sudden increase in the number of users accessing the Group’s services, etc., an electric power outage, a cloud service failure, or other problems, it may cause an adverse impact on the Group’s business performance, etc. The Group takes precautionary security measures to avert improper external access of its computer systems as well as other system failures and trouble from occurring, but, in the event of information leaks, etc. resulting from exploitation of vulnerability in the Company’s IT systems or unauthorized access, etc. or damage to these systems as a result of computer viruses, hacker attacks, and trouble caused by the Company, it may cause an adverse impact on the Group’s business performance, etc. Many of the risks related to telecommunications networks and information system infrastructure are caused by external and unpredictable factors, making it difficult to specifically predict the possibility and timing of their materialization. The Group recognizes that these potential risks constantly exist, as long as the Group’s business structure, which is to develop businesses centered on Internet services, is maintained. In the event of a major service suspension, it may cause a significant adverse impact on the Group’s business performance, etc. (5) Management Systems Risk 1) Human Resources To further expand and diversify its business activities going forward, the Group believes it will be necessary to enhance human resources in each of its departments. In order to respond to changes in and diversification of business activities, the Group is flexibly reviewing its human resource development policies and reexamining personnel allocations regularly, and is working to ensure that human resources do not lower competitiveness or become a limiting factor on business expansion. However, in the event that the training of personnel does not keep pace with the expansion and changes in business activities, and qualified human resources cannot be externally recruited as planned, it may not be possible to assign proper personnel. This would result in a decline in competitiveness and constrains the expansion of the business, and may cause an adverse impact on the Group’s business performance, etc. 2) Internal Control Systems With the understanding that effectively fun