NoticeThis document is an excerpt translation of the original Japanese document andis only for reference purposes. In the event of any discrepancy between thistranslated document and the original Japanese document, the latter shallprevail.

Presentation Material for FY04/2021
Full Year Financial Results

June 11, 2021

HEROZ, Inc.（4382）
11. Executive Summary
2. Business Overview
3. FY04/2021 Full Year
Performance
4. FY04/2022 Forecast
5. Growth Strategy

Executive Summary of FY04/2021◼ Net sales were ¥1,556 million (+0.8% year-on-year), consisting of◼ AI (B-to-B) services: net sales of ¥683 million (△16.3% year-on-year)◼ AI (B-to-C) services: net sales of ¥872 million yen (+20.0％ year-on-year)◼ In AI (B-to-B) services, revenues declined due to reduced opportunities for businessmeetings by COVID-19. In AI (B-to-C) services, revenues increased on a year-onyear basis because of staying home by COVID-19 and shogi events held on our app◼ EBITDA of 366 million yen (△30.0% YoY), operating profit of 294 million yen(△35.9% YoY), and ordinary profit of 285 million yen (△29.4% YoY) were lower
than the previous year. This was due to an increase in labor costs, recruiting andtraining costs and depreciation as a result of increased hiring and the purchase of
in-house compute server, etc. This will contribute to our medium-to-long term
growth and is in line with our strategy. Net income was 207 million yen (△18.9%
YoY) due to an increase in the amount of income tax deductions associated withthese increased investments/expenses◼ The actual spread of the new coronavirus infection was greater than ourassumptions at the beginning of the fiscal year for the forecast, which was the main
reason for the deviation from the forecast
3

FY04/2021
Actual vs Our Assumptions related to COVID-19◼ Actual situation was different from our assumptions regarding the new coronavirus
infection to estimate earnings forecast for FY04/2021, which was the main reason forthe deviation from the forecast
FY04/2021

External
environment

Internal
environment

Our assumptions toestimate earnings forecast

Actual situation•

The increase in COVID19 patients will settle
down in the first half•

The increase in COVID-19
patients will continue inthe second half as well•

Growth will slow downin the first half byslowdowns in progressof projects and reduced
opportunities for sales
discussions due toemergency declared by
the government, but is
expected to normalizein the second half•

Growth will slow down in
the entire fiscal year byslowdowns in progress ofprojects and reduced
opportunities for sales
discussions due toemergency declared by thegovernment4

FY04/2021
Risk Factors related to COVID-19◼ The following table analyzes the impact related to COVID19 on the financial results for
FY04/2021
Risks for FY04/2021

AI (B-to-B) Services

AI (B-to-C) Services

Delays in documentation (contracts,
receipts, etc.) and decreased
opportunities for sales discussions due • Increased revenues from mobile
to work from home
apps such as Shogi Wars
↑The impact continued during• Some clients have suspended new
projects until the situation settles down the entire fiscal year
↓The impact continued during theentire fiscal year
• Further revenue increase in our• Increase in the use of AI throughmobile apps due to increased
promotion of DX (digitaluse of our online contents
transformation) , etc.
→Limited impact other than→It has been partial and non-material
Shogi Wars
• Reduction in client budgets for IT
investments, etc.
• Troubles due to increased traffic↓The impact has become materialized →No material troubles occurred
for some clients•

Materialized Impact

Potential Upside

Potential Downside↑：Positive Impact↓：Negative Impact→：Non-material Impact
5

1. Executive Summary

2. Business Overview
3. FY04/2021 Full Year
Performance
4. FY04/2022 Forecast
5. Growth Strategy

Company Overview
Name

HEROZ, Inc.

Location

PMO Tamachi 2F, 5-31-17 Shiba, Minato-ku,
Tokyo

Established

April 2009

Representatives Takahiro Hayashi/Tomohiro Takahashi
Business
Description

AI (B-to-B) services: HEROZ Kishin
AI (B-to-C) services: “Shogi Wars”, etc.

Membership Japan Deep Learning Association,

The Japanese Society for Artificial Intelligence

2019
Listed on the First Section of Tokyo Stock Exchange (TSE)2018
Listed on Tokyo Stock Exchange (TSE) Mothers
Capital and business alliance with Netmarble Games Corporation
2017
Capital and business alliances with Takenaka Corporation and Koei
Tecmo Games2016
Capital and business alliance with Bandai Namco Entertainment
2013
Shogi AI, developed by HEROZ engineers, defeated a shogi
professional
2012
Launched mobile app, “Shogi Wars”

Representative Director and CEO

Takahiro Hayashi

Graduated from Waseda University
Joined NEC as a technology engineer
Experience at IT strategy division, businessplanning division
Founded HEROZ

Shogi Track Record
Amateur 6th dan (highest rank after becoming
national amateur champion)
7th dan, Shogi Wars
Amateur Kisen Champion (7-time title defender as national
champion)
Played against Yoshiharu Habu (permanent 7 title holder)

Representative Director and COO

Director and CFO

Director and CTO, Head of Development Div.

Tomohiro Takahashi

Daisuke Asahara

Keiichi Iguchi

Graduated from Waseda University
Joined NEC as a technology engineer
Experience at Business Planning Division, BIGLOBE

Graduated from Kyoto University
MBA from Wharton School
ex-Goldman Sachs

Graduated from
Tokyo Institute of Technology
Joined NEC Central Research Labs

Founded HEROZ

7

Our Vision

Creating the future throughartificial intelligence (AI)revolutions

8

Global Leader in Mind Game AI

Chess AI

Shogi AI

Go AI

Deep Blue (’97)
defeated aprofessional ChessplayerAI developed by ourengineers defeated aprofessional Shogi(Japanese Chess)player (’13)

Google acquired Deep Mind(’14)
AlphaGo, developed by
Deep Mind, defeated aprofessional Go player
(’16)

IBM

Google9

B-to-B Services: Machine Learning by Replacing
Shogi Game Records with Other Data

Shogi game records

Structural design data,
financial data, etc.

HEROZ Kishin
Deep learning and other machine learning:
MLaaS (Machine Learning as a Service)

Shogi AI

Construction AI, Finance AI, etc.

MLaaS： What is Machine Learning as a Service?
Provides models, developed by machine/deep learning, as a service

10

B-to-B Services: Profit Model and High Switching Costs
Research/develop Shogi AI
Standardize AI technology accumulated
through shogi AI
Establish “HEROZ Kishin”=MLaaS（Machine Learning as a Service）

Client’s data sent to HEROZ
Kishin/model developed bymachine learning

Output after machinelearning throughdeep learning, etc.

Output applied inbusiness settings

Establish an infrastructure which allows
HEROZ to provide AI services efficiently
to solve various challenges in various
industries just by changing input data
Provide comprehensive AI services withmassive servers

Accumulated data to be used forfurther machine learning

Output precision increases throughrepeated machine learning

Achieve stable, sustained earnings andhigh switching costs

Earning structure: initial setup fee
and ongoing fees11

B-to-B Services: Engines included in HEROZ Kishin
and Examples of Applications◼ Create AI products by combining engines and achieve an efficient operating structure

Know-how ondevelopment andservice operations

AI-related technology
and R&D capabilities(deep learning, etc.)(massive servers, etc.)
Construction

Mind gameengineGameprocessing
enginePlacement
Route
optimization optimizationengineenginePredictionengineStructural design
support, Control ofbuilding equipment

Finance

Market forecast,Fraud detection

Entertainment

Mind game AI

HEROZ Kishin
Media
OptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessing
engineImage
recognitionengineUser retention,
OptimizationHR

Matching
jobseekers withcorporations

OthersReal estaterevenue/logistics
optimization, Sales
forecast

We aim to create the industry standard for AI in each sector throughcollaboration with companies which own high-quality private data12

B-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 served
Construc-tion

Structural design support,
Control of building equipment,
etc

FinanceEntertainment

Market forecast, Fraud
detection, etc

Creation of high-quality NPCs,
game balance adjustment, etc.
(In B-to-B service, HEROZ is
not a game
operator/publisher but abackground AI provider)

Initial setup fees: new revenue recognition standard are applied since May 2021
Ongoing fees: mostly fixed fees recognized monthly
13

B-to-B Services:horizontal x vertical expansion across industries◼ We aim to create industry-standard AI through horizontal and vertical expansion,
applying into various industries◼ After creating the industry-standard AI, we plan to form an ecosystem based on it
Other industries
Entertainment AI
Finance AI
vertical expansion# of projects

NOW

Construction AI

horizontal expansion# of clients14

B-to-C Services: Fees from Application Users
Charging fees for B-to-C content which user AI◼ Leveraging AI-related technology to provide mind games such as shogi, chess, andbackgammon worldwide◼ Shogi Wars has remained cash cow backed by increase of paid users on a YoY
basis◼ The governmental requests to stay at home have led to increased demand for ourmobile apps, with an increase in our paid active user base in the fourth quarter

Shogi Wars

Animal
Shogi Wars

CHESS HEROZ
BackgammonAce
Igo Wars(scheduled to be(scheduled to be(scheduled to beterminated in July) terminated in July) terminated in July)

Earning structure: monthly membership fees, Kishin (AI) usage fees, etc.
15

1. Executive Summary
2. Business Overview

3. FY04/2021 Full Year
Performance
4. FY04/2022 Forecast
5. Growth Strategy

Our Key Performance Indicator◼ We believe that EBITDA, as calculated below, is our key performance indicator

EBITDA = Operating Profit +Depreciation/Amortization
Expenses◼ In AI-related businesses, investments in compute servers, etc. are required to engage inadvanced 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-balancemethod with a useful life of 5 years.
17

FY04/2021 Full Year Financial Performance◼ While revenues from AI (B-to-B) services were negatively impacted by decreased
opportunities for sales talks and the termination of gaming services in our entertainment
AI, revenues from AI (B-to-C) services increased by stay-at-home demand. As a result,overall revenues fell short of our forecast at the beginning of the fiscal year
◼ We made growth investments using capital raised in December 2019. However, profits
exceeded forecasts as investments were suppressed as revenues grew
(Units: JPY millions)

FY04/2021
Actual(Reference)
FY04/2020
Results

FY04/2021
Forecast

YoY

Actual to
Forecast(%)

Net Sales

1,556

1,544

+0.8%

1,700

91.6%

EBITDA*366

523△30.0%

290

126.3%EBITDA Margin

23.5%

33.9%

－

17.1%

－

Operating Profit

294

459

△35.9%

230

127.9%

Operating Margin

18.9%

29.7%

－

13.5%

－

Ordinary Profit

285

404

△29.4%

220

129.9%Net Income

207

255

△18.9%

150

138.1%* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits

18

Net sales and EBITDA Trends◼ While revenues from AI (B-to-B) services were negatively impacted by decreased
opportunities for sales talks, etc., revenues from AI (B-to-C) services were positively
affected by increased stay-at-home demand. As a result, total revenues in FY04/2021
increased year-on-year◼ While we reported a decrease in profits including EBITDA, this is in line with our plan to(Units: JPY millions)invest capital raised in December 2019 towards future growth
1,377

34.2%

1,544
33.9%

30.9%
1,155

23.5%

828
908

824

872

727

877

1,556

357

10.7%
94

53
FY04/2017

523

470
549

817

366
683

247
FY04/2018

Net Sales（BtoB）

FY04/2019

Net Sales（BtoC）

FY04/2020

FY04/2021

EBITDAEBITDA margin

19

COGS and SG&A Trends◼ Labor cost has increased on a year-on-year basis and is expected to keep growing next
fiscal year as well to increase our engineering capacity, which will lead to our mediumto-long term growth◼ In addition, there were an increase in app commission fees by growth of AI (B-to-C)
services, and anticipatory investments of proceeds via public offering for our growthstrategy. Although profits were down compared with the previous year, they are in linewith our strategy(Units: JPY millions)
1,262
1,085
956

800

788

372
339
9
4

187

8
2

338

37
191
49

215

427

21
201
63

244

476

FY04/2021

248

235

305

381

FY04/2017

FY04/2018

FY04/2019

FY04/2020

labor costdepreciation cost

app commission fees

42

417

advertisement expenses

70

others(COGS/SG&A)

20

Balance Sheet (as of April 30, 2021)◼ B/S remains strong backed by cash and deposits increased via public offering in 2019
◼ We plan to invest them in efforts to achieve the medium-to-long term growth strategy(e.g. hiring for AI engineers, in-house compute servers and external cloud computeservices, investments to companies with peripheral technologies which can be applied
to our operations, working capital
Units: JPY millions

Current Assets

As of 4/30/2021

As of 4/30/2020

5,786

5,935

5,554

5,562

759

473

Property, plant and equipment

424

131

Intangible assets

17

6

Investments and other assets

318

334

6,546

6,408

Current Liabilities

143

226

Fixed Liabilities

－

－

6,403

6,182

Cash and deposits
Fixed Assets

Total Assets

Net Assets

21

1. Executive Overview
2. Business Overview
3. FY04/2021 Full Year
Performance

4. FY04/2022 Forecast
5. Growth Strategy

FY04/2022 Financial Forecast◼ We keep investing proceeds from public offering in 2019, in hiring for AI engineers,
compute servers, etc. until 2022. While earnings will decrease for the foreseeable future asa result, we expect earnings recovery after those investments. The difference between
EBITDA and operating profit is mainly due to depreciation of in-house compute servers◼ As the risks with COVID-19 on page 5 have been resolved, we forecast over 20% year-on(Units: JPY millions)year revenue growth for AI (B-to-B) services(Units: JPY millions)

FY04/2021
ActualFY04/2022
Forecast

YoY*(%)

Net Sales

1,556

1,700

+9.2％

EBITDA

366

280△23.5％EBITDA Margin

23.5%

16.5%

-

Operating Profit

294

100

△66.0％

Operating Margin

18.9%

5.9%

-

Ordinary Profit

285

90

△68.5％Net Income

207

63

△69.6％*As the “new earnings recognition standard” is used from the beginning of FY04/2022, our forecasts
reflect this new standard. Thus, year-on-year changes stated herein are provided only as a reference23

1. Business Overview
2. FY04/2021 Full Year
Performance
3. FY04/2022 Forecast

4. Growth Strategy

Medium-to-long term Growth Strategy◼ We plan to expand AI (B-to-B) services by what we have cultivated in our AI(B-to-C) services. We aim to create industry-standard AI, to form an
ecosystem based on it, and to expand across industries
B-to-B
Provide AI services
to businesses

B-to-C
Shogi AI,
other mind games AI
stable cash cow

Growth area
→core operation forthe medium-to-longterm

・EBITDAAI B-to-B
ongoing fee（profitable,
growth market） ￥AI B-to-B
initial setup fee(growthmarket)￥￥AI B-to-C(stable CF)Time

Shogi AI

Refining
technology

AI (B-to-B)
business

Industry top-downIssue identification
Partnership Strategy

Industry standard AI
Horizontal expansion Ecosystem around our AI
Vertical expansion
Cross-industry expansion
25

Initiatives Aimed at Achieving the Growth Strategy ①◼ On June 11, 2021, we concluded a business alliance agreement with ToyoEngineering Corporation (TOYO)◼ HEROZ has concluded a business alliance agreement with TOYO for theutilization of AI technology and joint development of AI systems for plantdesign and construction◼ Through this business alliance with TOYO, HEROZ will develop a system toenhance EPC (engineering, procurement and construction) and introduce it to
all TOYO projects, thereby contributing to the 6-fold increase in productivity
that DXoT (Digital Transformation of TOYO) is aiming for and realizing
integrated digitalization from the sales stage to the completion of projects

26

Initiatives Aimed at Achieving the Growth Strategy ②◼ In April 2021, we enhanced in-house compute servers for machine learning tooperate a 61 PFLOPS computation environment for AI development◼ We have added nine new NVIDIA DGX A100, the world's first 5 PFLOPS AI
system with high computational density, performance and flexibility. With
existing GPUs, the theoretical peak performance is up to 61PFLOPS.
◼ Our CAPEX to these machine learning servers, which are fixed assets, ismainly depreciated based on the declining-balance method with a useful lifeof five years
History of major enhancements to our machine learning servers to date
◼ November 2018: GPU (NVIDIA V100 x 128) installed◼ Feb 2020: CPU (Supermicro blade server x 20 nodes) installed◼ November 2020: CPU (Supermicro blade server x 80 nodes) installed27

Initiatives Aimed at Achieving the Growth Strategy ③◼ "HEROZ Kishin Eye" to start on April 1, 2021
◼ HEROZ has taken over the "Ricoh Shogi AI Game Record System" developed
jointly by Ricoh Company, Ltd. and the Japan Shogi Association, which
automatically generates game records by using AI technology, and started its
operation on April 1, 2021 under the name of "HEROZ Kishin Eye"
◼ “HEROZ Kishin Eye" is a system using deep learning to analyze the images
taken by a camera of the board of a game, and book the game record
automatically, which has been done by a human recorder until now◼ This system will solve the problem of chronic shortage of human recorders
during Shogi games, and will contribute to the preservation of the gamerecords, an important asset of the Japan Shogi Federation

28

Potential 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)

Challenges
faced by theConstruction
Industry

Chronic
Shortageof Manpower◼ 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 ofArchitecture, 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)

Soaring
Materials
Prices◼ 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 in2017 and became a member of i-Construction. We aim to create theindustry standard AI for the construction industry, enhancing productivity
and creating a new, attractive construction site29

Japan: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 forward
Projection of Population Age 15-64◼ 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 todecrease by about 11% and about 28%
About 28%
decrease during the same periods, respectively(Median Prediction Interval, 2020=100)
140
120
100
80
60
40
20
0

2020
2020年

2025
2025年

2030
2030年

Global全世界

2035
2035年 2040
2040年 2045
2045年 2050
2050年 2055
2055年
China
中国

Japan
日本

米国
US

Source: Prepared by HEROZ based on United Nations,
World Population Prospects, The 2019 revision◼ Based on such forecasts, the Japaneseworking population will show the largest
decrease among leading GDP nations
30

Use 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 decisionmaking, which were previously considered difficult to automateStandard Decision- Creative
Tasks
making Tasks, etc.
Structured
data◼ DX will begin with standard tasks based on
structured data and is expect to expand to decisionmaking and tasks which utilize unstructured data
◼ Our AI can automate a wide variety of operations
including those requiring decision-making. We havealso achieved DX for unstructured data, which weretraditionally considered difficult for DX

Unstructured
data
TraditionalIT

Our AI◼ We are promoting DX and building a track record inareas including construction, finance, andentertainment
31

Disclaimer
The 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 touncertainties 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, andforeign exchange fluctuations. HEROZ, Inc. shall not undertake any obligations to updateor revise any forward-looking information set out in this material even in the event thatnew information becomes available or certain events occur hereafter.
This material is an excerpt translation of the original Japanese material and is only forreference purposes. In the event of any discrepancy between this translated material
and the original Japanese material, the latter shall prevail.

32