ＨＥＲＯＺ（4382） – [Delayed]Presentation Material for FY04-2022 Full Year

NoticeThis document is an excerpt translation of the original Japanese document and is only for reference purposes. In the event of any discrepancy between this translated document and the original Japanese document, the latter shall prevail.Presentation Material for FY04/2022 Full Year Financial ResultsJune 10, 2022HEROZ, Inc.（4382）11. Executive Summary2. Business Overview3. FY04/2022 Full Year Performance4. FY04/2023 Forecast5. Growth Strategy6. Reference MaterialsExecutive Summary of FY04/2022◼ Net sales were 1,482 million yen (-4.7% YoY), consisting of◼ AI (B-to-B) services: net sales of 564 million yen(-17.4% YoY)◼ AI (B-to-C) services: net sales of 918 million yen (+5.2％ YoY)◼ In the AI (B-to-B) service, sales decreased 17.4% YoY due to the termination of services for game operations with our AI and delays in acquiring initial setup fees, etc. In the AI (B-to-C) service, sales increased 5.2% YoY due to the effects of “Shogi Wars”, including increased attention to Shogi following the achievement of SotaFujii’s fifth championship and events held in the application.◼ EBITDA was 188 million yen (-48.4% YoY), operating profit was 34 million yen (-88.2% YoY), ordinary profit was 87 million yen(-69.3% YoY).This was due to increases in labor costs, depreciation and amortization, and recruiting and training expenses, but the investments were generally within the scope of the plan, as they contribute to our medium-term growth. Net income was 49 million yen (-76.2% YoY),due to the impact of the expansion of income tax credits associated with these increased expenses, etc.◼ Difference from forecast mainly due to lower sales in AI (B-to-B) services.3Strategy of FY04/2023◼ In FY4/2023, in addition to stable growth of AI (B-to-C) services, we will strengthen sales and marketing functions for growth of AI (B-to-B) services, and as a growth investment, we will strengthen promotion of collaboration with VarioSecure Inc.AI（B-to-C）servicesAI（B-to-B）services◼ Stable business growth mainly by Shogi Wars◼ In May 2022, dlshogi with HEROZ won the World Computer Shogi Championship. We launched “Kishin Analytics,” which supports professional Shogi AI research using our Shogi AI, for professional Shogi players through AI SaaS model.◼ Although the company has not focused on customer acquisition activities due to its focus on its highly skilled engineering team, the company will launch a sales and marketing organization by May 2022 and strengthen our customer acquisition activities for our future growth.◼ Several AI products under development will be available by the end of FY04/2023.InvestmentFor Growth◼ Collaboration with VarioSecure Inc., to establish an “AI Security Company” between the two companies.◼ As a first step, we will incorporate our AI into the managed security services provided by VarioSecure to strengthen product attraction.41. Executive Summary2. Business Overview3. FY04/2022 Full Year Performance4. FY04/2023 Forecast5. Growth Strategy6. Reference MaterialsCompany OverviewNameHEROZ, Inc.LocationPMO Tamachi 2F, 5-31-17 Shiba, Minato-ku, TokyoEstablished April 2009Representatives Takahiro Hayashi/Tomohiro TakahashiBusinessDescription AI (B-to-C) services: “Shogi Wars”, etc.AI (B-to-B) services: HEROZ KishinMembership Japan Deep Learning Association, Moved to the Tokyo Stock Exchange Prime MarketCapital and business alliance with VarioSecure Inc.Listed on the First Section of Tokyo Stock Exchange (TSE)Listed on Tokyo Stock Exchange (TSE) MothersCapital and business alliance with Netmarble Games CorporationCapital and business alliances with Takenaka Corporation and Koei Tecmo GamesThe Japanese Society for Artificial IntelligenceCapital and business alliance with Bandai Namco Entertainment20222021201920182017201620132012Shogi AI, developed by engineers who was member of Heroz at that time formerly with HEROZ, defeated a shogi professionalRepresentative Director and Co-CEOTakahiro HayashiGraduated from Waseda UniversityJoined NEC as a technology engineerExperience at IT strategy division, business planning divisionFounded HEROZRepresentative Director and Co-CEOTomohiro TakahashiLaunched mobile app, “Shogi Wars”Shogi Track RecordAmateur 6th dan (highest rank after becomingnational amateur champion)7th dan, Shogi WarsAmateur Kisen Champion (7-time title defender as national champion)Played against Yoshiharu Habu (permanent 7 title holder)Director, and COODaisuke AsaharaDirector and CTOKeiichi IguchiGraduated from Waseda UniversityJoined NEC as a technology engineerExperience at Business Planning Division, BIGLOBEGraduated from Kyoto UniversityMBA from Wharton Schoolex-Goldman SachsGraduated from Tokyo Institute of TechnologyJoined NEC Central Research Labs6Founded HEROZOur VisionCreating the future throughartificial intelligence (AI) revolutions7Global Leader in Mind Game AIChess AIShogi AIGo AIDeep Blue (’97) defeated a professional Chess playerAI developed by our engineers who was member of HEROZ at that time defeated a professional Shogi (Japanese Chess) player (’13)Google acquired Deep Mind (’14)AlphaGo, developed by Deep Mind, defeated a professional Go player (’16)IBMGoogle8B-to-B Services: Machine Learning by ReplacingShogi Game Records with Other DataShogi game recordsStructural design data,financial data, etc.HEROZ KishinDeep learning and other machine learning:AI SaaS (AI Software as a Service)Shogi AIConstruction AI, Finance AI, etc.AI Software：What is AI Software as a Service?Provides models, developed by machine/deep learning, as a service9B-to-B Services: Profit Model and High Switching CostsResearch/develop Shogi AIStandardize AI technology accumulated through shogi AIEstablish “HEROZ Kishin”=AI SaaS（AI Software as a Service）Establish an infrastructure which allows HEROZ to provide AI services efficiently to solve various challenges in various industries just by changing input dataProvide comprehensive AI services with massive serversAchieve stable, sustained earnings and high switching costsClient’s data sent to HEROZKishin/model developed by machine learningOutput after machine learning through deep learning, etc.Output applied in business settingsAccumulated data to be used for further machine learningOutput precision increases through repeated machine learningEarning structure: initial setup fee and ongoing fees10B-to-B Services: Engines included in HEROZ Kishinand Examples of Applications◼ Create AI products by combining engines and achieve an efficient operating structureAI-related technology and R&D capabilities(deep learning, etc.)Mind gameengineGameprocessingengineRouteoptimizationenginePlacementoptimizationenginePredictionengineHEROZ KishinOptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessingengineImagerecognitionengineKnow-how on development and service operations(massive servers, etc.)Con-structionFinanceEnter-tainmentStructural design support, Control of building equipmentMarket forecast, Fraud detectionMind game AIMediaHROthersUser retention, OptimizationMatching jobseekers withcorporationsReal estate revenue/logistics optimization, Sales forecastWe aim to create the industry standard for AI in each sector through collaboration with companies which own high-quality private data11B-to-B Services: Areas of Focus and Examples of Services Provided◼ Focusing on construction, finance, and entertainment for the foreseeable future◼ Earning structure is initial setup fee and ongoing fees*Examples of clients servedConstruc-tionFi-nanceEnter-tainmentStructural design support, Construction support, Control of building equipment, etcMarket forecast, Fraud use detection, etcCreation of high-quality NPCs,game balance adjustment, etc.(In B-to-B service, HEROZ is not a game operator/publisher but a background AI provider)Initial setup fees: new revenue recognition standard are applied since May 2021Ongoing fees: mostly fixed fees recognized monthly12B-to-C Services: Fees from Application UsersCharging fees for B-to-C content which user AI◼ Shogi Wars has grown into a solid revenue base through the distribution of brain games such as Shogi that utilize AI-related technologies.◼ Shogi Wars is a platform that matches users with each other in real time, and the number of paying active users for Shogi Wars has exceeded both the previous year and the initial plan.◼ The number of paid active users is on an upward trend due to the increased attention to Shogi by Sota Fujii’s fifth championships, and events held in Shogi Wars.◼ In May 2022, Shogi AI service “Kishin Analytics” launched, initially for professional Shogi players, with plans to introduce for general users in the future. Earning structure: monthly membership fees, Kishin (AI) usage fees, etc.Shogi WarsAnimal Shogi Wars131. Executive Summary2. Business Overview3. FY04/2022 Full Year Performance4. FY04/2023 Forecast5. Growth Strategy6. Reference MaterialsOur Key Performance Indicator◼ We believe that EBITDA, as calculated below, is our key performance indicatorEBITDA = Operating Profit + Depreciation/Amortization Expenses◼ In AI-related businesses, investments in compute servers, etc. are required to engage in advanced machine learning, leading to various depreciation/amortization expenses. We aim to continuously enhance enterprise value/equity value via EBITDA growth, without being concerned about fluctuations in one-time depreciation/amortization expenses.◼ In-house compute servers are mainly depreciated based on the declining-balance method with a useful life of 5 years.15FY04/2022 Full Year Financial Performance◼ Net sales: AI (B-to-B) service decreased from the previous year due to the termination of game operations with our AI and delays in acquiring initial setup fees. AI (B-to-C) service continued to generate stable growth from the previous year due to increased attention to Shogi and events held in “Shogi Wars”.◼ EBITDA: Decreased due to depreciation and amortization associated with the purchase equipment for machine learning, telecommunication expenses, human resource-related expenses, and an increase in product development expenses.(Units: JPY millions)Net SalesEBITDA*EBITDA MarginOperating ProfitOperating MarginOrdinary ProfitNet IncomeFY04/2022Actual(Reference)FY04/2021ResultsYoYFY04/2022ForecastActual to Forecast(%)1,48218812.7%3487491,55636623.5%-4.7%-48.4%－－294-88.2%285207-69.3%-76.2%1,70028016.5%1005.9%90632.3%18.9%87.2%67.4%34.8%－－97.5%78.4%* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits16Net sales and EBITDA Trends◼ Sales of AI (B-to-B) services decreased due to the termination of some existing projects.However, the business is gradually recovering toward the end of the period, including a new project related to data analysis for future introduction of AI.◼ Sales in AI (B-to-C) services exceeded the previous year’s sales due to continued stable sales growth of “Shogi Wars” and other services.30.9%1,15534.2%7271,5441,55633.9%1,482(Units: JPY millions)87223.5%91812.7%1,37782854987790835782410.7%9453247470523817366683188564FY04/2017FY04/2018 FY04/2019FY04/2020FY04/2021FY04/2022Net Sales（BtoB）Net Sales（BtoC）EBITDAEBITDA margin17COGS and SG&A Trends◼ Aggressive investments were made in SG&A, including an increase in depreciation and communication expenses (121 million yen) due to the purchase of equipment such as servers for machine learning, etc., an increase in personnel recruitment expenses (16 million yen), and an increase in R&D expenses (42 million yen).◼ In FY4/2023, plan to increase personnel expenses by forming a sales and marketing team, aiming to grow sales of AI (B-to-B) services.788339187248829480033821523595637237191493051,0854172120163381(Units: JPY millions)1,448561524952335081,2624274224470476FY04/2017FY04/2018FY04/2019FY04/2020FY04/2021FY04/2022labor costdepreciation costapp commission feesadvertisement expensesothers(COGS/SG&A)18Balance Sheet (End of April 2022)◼ On September 10, 2021, we concluded a capital and business contract with VarioSecure Inc. and acquired its affiliated company shares (1,995 million yen (including related costs)).◼ Cash and deposits will be used for investments to realize our Medium-term growth As of 4/30/2022As of 4/30/2021strategy.Units: JPY millionsCurrent AssetsCash and depositsFixed AssetsProperty, plant and equipmentIntangible assetsInvestments and other assetsTotal AssetsCurrent LiabilitiesFixed LiabilitiesNet Assets3,9593,6602,675260252,3906,635194－6,4405,7865,55475942417318143－6,5466,403191. Executive Overview2. Business Overview3. FY04/2022 Full Year Performance4. FY04/2023 Forecast5. Growth Strategy6. Reference MaterialsFY04/2023 Financial Forecast◼ Recognizing that demand is expected to continue to grow in the AI-related market◼ We will continue to invest aggressively for the growth of AI (B-to-B) services by establishing a sales and marketing organization.◼ we expect net sales of 1.7 billion yen and EBITDA of 200 million yen. The company expects to receive approximately 50 million yen in dividends from VarioSecure Inc. The plan does not include the contribution to sales of “Kishin Analytics,” a new service to be launched.(Units: JPY millions)Net SalesEBITDAEBITDA MarginOperating ProfitOperating MarginOrdinary ProfitNet IncomeFY04/2022ActualFY04/2023ForecastYoY(%)(Units: JPY millions)1,48218812.7%2.3%3487491,70020011.8%502.9%10060+14.6％+5.9％+43.7％－－+13.9％+21.4％21AI（B-to-C）Services Strategy◼ Stable business growth centered on Shogi Wars◼ The service was launched on May 21, 2012. The number of users is steadily increasing and the number of games played between users exceed 700 million by April 2022.◼ In addition to acquiring monthly users, our Shogi AI (Kishin) has been widely used, providing experiences where users can generally experience the use of AI in the world of Shogi.◼ In May 2022, dlshogi with HEROZ won the World Computer Shogi Championship.◼ Started providing “Kishin Analytics,” which supports professional Shogi AI research using our Shogi AI for professional Shogi players through AI SaaS model.Shogi Wars Related Sales TrendsKijin Analytics Screen(Units: JPY millions)1,00090080070060050040030020010002013 2014 2015 2016 2017 2018 2019 2020 2021 202222AI（B-to-B）Services Strategy◼ As a group of highly skilled engineers, we promote AI (B-to-B) services to solve various problems of our clients.◼ On the other hand, since the company has not focused on customer acquisition activities due to its focus on its group of highly skilled engineers, sales growth peaked in FY04/2020, and sales have been declining due to the termination of existing projects.◼ The company aims to achieve sales growth by strengthening client acquisition activities in conjunction with the launch of a sales and marketing organization by May 2022, focusing on cultivating existing clients and developing new clients.◼ Currently working to promote AI/DX in the industry by deploying AI products, some of them are scheduled to be available by the end of FY04/2023.deepen cultivation of existing customers X cultivation of new customers)Other IndustryEntertainment AIFinancial AIConstraction AIAI Product DeploymentAutomatic design support AI service (in cooperation with Draft Co., Ltd.)AI for automatic creation of architectural plans (in cooperation with Tusk Inc.), etc.# of Projects# of Clinets231. Executive Overview2. Business Overview3. FY04/2022 Full Year Performance4. FY04/2023 Forecast5. Growth Strategy6. Reference MaterialsMedium-to-long term Growth Strategy◼ We plan to expand AI (B-to-B) services by what we have cultivated in our AI ・EBITDA(B-to-C) services. We aim to create industry-standard AI, to form an ecosystem based on it, and to expand across industriesB-to-BProvide AI servicesto businessesGrowth area→core operation for the medium-to-long termB-to-CShogi AI,other mind games AIstable cash cow￥AI B-to-Bongoing fee（profitable, growth market）AI B-to-Binitial setup fee(growthmarket)￥￥AI B-to-C(stable CF)Time25Shogi AI Refining AI (B-to-B)technology businessIndustry top-downIssue identificationPartnership StrategyHorizontal expansionVertical expansionIndustry standard AIEcosystem around our AICross-industry expansionInitiatives Aimed at Achieving the Growth Strategy Ⅰ～ Collaboration with VarioSecure Inc. to Realize AI Security ～By utilizing a variety of corporate data, we will provide customers with a new level of safety and security in the age of zero trust through the power of AI.And aiming to support corporate safety and security, and supporting digital transformationdevice dataVarious hardware usage data stored in the company’s networktransmission dataUser behavior data collected via the networkSaaS usage dataUsage data for multiple SaaS accountspersonalized dataData varies by individual and individual companyAggregation of a wide variety of dataInsight Extraction Advanced and semi-automated operationssystem developmentdata scienceAI developmentBasic AI TechnologyAutomation of one-stop service for customers✓ AI replaces complicated security settings and operations✓ Anyone can easily implement advanced securityTurning Non-IT Professionals into IT Professionals✓ Setting up and maintaining a security environment on the same level as large organizationsReproduction of the professional skills of a master craftsman✓ Identifying and handling irregularities that only an experienced veteran would notice.26Initiatives Aimed at Achieving the Growth Strategy Ⅰ～ Implementation of our AI in VarioSecure’s VSR ～◼ Capital and business alliance with VarioSecure Inc, and joint development of services◼ Through this alliance, we aim for further growth by establishing a system for continuous creation of new services that can only be achieved by a group of technology specialists, based on “HEROZ’s AI human resources” and “VarioSecure’s domain knowledge of rare security personnel”. xAI人材domain knowledge of rare security personnel◼ From May 2022, a closed beta version of a traffic prediction monitor and VSR resource monitoring monitor based on AI analysis using HEROZ Kishin is included in the VSR “n Series” of managed security services sold by VarioSecure Inc.27Initiatives Aimed at Achieving the Growth Strategy Ⅱ～ Shogi AI utilization platform “Kishin Analytics” launched～◼ “Kishin Analytics” is available from May 2022.The company launches “KishinAnalytics,” a platform to support professional Shogi AI research using Shogi AI.◼ Kishin Analytics” is a service that allows users to easily analyze the latest Shogi AI using a browser. The service supports Shogi AI research by providing a UI/UX environment that can be easily operated by anyone at the touch of a button, without expensive initial investment.◼ The scope of the service will be expanded in stages, and in the future, the service will be offered to all Shogi fans.KishinAnalytics screen on PC (smartphone version also provided)28Initiatives Aimed at Achieving the Growth Strategy Ⅲ～ Won the World Computer Shogi Championship “Developing the world’s strongest AI ～◼ Team “dlshogi with HEROZ”, consisting of HEROZ AI engineers, won the 32nd World Computer Shogi Championship in May 2022.◼ The World Computer Shogi Championship is held once a year by the Computer Shogi Association of Japan with the aim of improving the skills of Shogi software. 51 teams participated in this year’s tournament.◼ Through the development of brain games, we will continue to accumulate AI-related methods based on machine learning that can be applied to other fields and provide them to various industries.◼ “dlshogi with HEROZ” team members Kaoru Kawashima (HEROZ AI engineer, pen name: Tadao Yamaoka)Kunihiko Kano (HEROZ AI engineer) Yuhei Omori (HEROZ AI engineer) Yu YamaguchiInterview with the winnerLIVE Report: Final LeagueThe 32nd World Computer Shogi ChampionshipFrom the official YouTube channel291. Executive Overview2. Business Overview3. FY04/2022 Full Year Performance4. FY04/2023 Forecast5. Growth Strategy6. Reference MaterialsPotential AI Demand in Our Areas of Focus◼ We believe there is also significant potential demand for enhancing operational efficiency through AI in the construction industry, which is one of our areas of focus◼ There will be a shortage of 110,000 construction technicians by 2025 (source: Human Touch Research Institute, “status quo” scenario in the Proprietary Analysis Monthly Report, December 2017)Challengesfaced by theConstructionIndustryChronic Shortage of Man-powerSoaring Materials Prices◼ Over 1/3 of first-class registered architects are over 60 (average: 56.2 years old)(source: Report on Construction-related Administration Aimed at Securing Safety of Architecture, Social Infrastructure Council, August 2006)◼ The number of construction and mining industry workers is expected to decrease from 5.05 million in 2014 to 4.16–4.24 million in 2030, with some variability depending on future economic growth and labor market participation trends(source: JILPT, 2015 Estimated Labor Supply/Demand)◼ The national construction materials price index has increased by 17% since 2010(source: Economic Research Association)◼ We entered into a capital and business alliance with Takenaka Corporation in 2017 and became a member of i-Construction. We aim to create the industry standard AI for the construction industry, enhancing productivity and creating a new, attractive construction site31Japan: Potential AI Demand is Among the Largest Worldwide◼ Potential AI demand in Japan can be expected to be among the largest worldwide, as the working population is expected to decrease significantly going forwardProjection of Population Age 15-64(Median Prediction Interval, 2020=100) 140 120 100 80 60 40 2002021 2025 2030 2035 2040 2045 2050 20552020年 2025年 2030年 2035年 2040年 2045年 2050年 2055年全世界Global中国ChinaSource: Prepared by HEROZ based on United Nations, World Population Prospects, The 2019 revision日本Japan米国US◼ When defining the working population as those aged 15-64, the world average is forecasted to increase by about 12% from 2020 to 2035 and by about 21% from 2020 to 2055. On the other hand, the working population is expected to decrease by about 11% and about 28% during the same periods, respectivelyAbout 28% decrease◼ Based on such forecasts, the Japanese working population will show the largest decrease among leading GDP nations32Use of Our AI in DX◼ Domestic DX (digital transformation) is expected to accelerate due to the future decrease in the working population as well as the impact of the COVID-19 pandemic◼ AI allows for DX of a wide variety of operations including those involving decision-making, which were previously considered difficult to automateStandard TasksDecision-makingCreative Tasks, etc.◼ DX will begin with standard tasks based on structured data and is expect to expand to decision-making and tasks which utilize unstructured dataStructured dataUnstructured dataTraditional ITOur AI◼ Our AI can automate a wide variety of operations including those requiring decision-making. We have also achieved DX for unstructured data, which were traditionally considered difficult for DX◼ We are promoting DX and building a track record in areas including construction, finance, and entertainment33DisclaimerThe contents set out in this material are prepared based on generally acknowledged economic, social and other conditions, and on certain assumptions deemed rational by HEROZ, Inc. and may therefore be subject to change without prior notice due to changes in the managerial environment or for other reasons.The forward-looking statements set out in this material including performance outlooks are based on information currently available to HEROZ, Inc. and on certain assumptions deemed rational, and may therefore differ materially from actual results due to uncertainties in judgements or assumptions, or for other reasons.Such factors of uncertainty and change include both general, domestic and international economic conditions, such as general industry and market conditions, interest rates, and foreign exchange fluctuations. HEROZ, Inc. shall not undertake any obligations to update or revise any forward-looking information set out in this material even in the event that new information becomes available or certain events occur hereafter.This material is an excerpt translation of the original Japanese material and is only for reference purposes. In the event of any discrepancy between this translated material and the original Japanese material, the latter shall prevail.34