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
FY04/2019 Q2 Financial Results

December 7, 2018

HEROZ, Inc.（4382）
1

1. Business Overview
2. FY04/2019 Q2
Performance
3. Growth Strategy
4. Reference Materials

Our Vision

Creating the future throughartificial intelligence (AI)revolutions

3

Global Leader in Mind Game AI

Chess AI

Shogi AIGo AI

Deep Blue (’97)
defeated a humanbeing champion

AI developed by ourengineers defeated aprofessional shogi(Japanese Chess)player (’13)

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

IBMGoogle4

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

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 variousindustries just by changing input data
Provide comprehensive AI services withmassive servers

Results measured and used for further
machine learning

Output precision increases throughrepeated machine learning

Achieve stable, sustained earnings andhigh switching costs

Earning structure: initial setup fee
and ongoing fees5

B-to-B Services: Provide Services by Replacing
Shogi Game Records with Corporate 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?
Business model which provides machine learning/deep learning as service, similar to
SaaS (Software as a Service) and IaaS (Infrastructure as a Service)6

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 optimizationengineenginePredictionengineStructuraldesign supportHRQC

Matching
jobseekers withcorporations

Automated
testing

HEROZ Kishin
Finance
OptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessing
engineImage
recognitionengineInvestment
support /market forecast

Entertainment

Robot

Route search

Mind game AI,etc.

 In construction AI, which is one area of our focus, we entered into a
capital and business alliance with Takenaka Corporation in 2017 andbecame a member of i-Construction, aiming to create a new,productive and attractive construction site using AI7

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, etc.

FinanceEntertainment

Investment support,
market forecasts, etc.

Creation of high-quality NPCs,
game balance adjustment, etc.

In addition to fixed ongoing fees, ongoing fees in the form of revenue
sharing will be introduced in FY04/20198

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, and backgammon worldwide
 Shogi Wars has become cash cow backed by increasing # of paidusers

Shogi Wars

Animal
Shogi Wars

Igo Wars

CHESS HEROZ(English)

BackgammonAce(English)

Pokémon Comaster(Pokémon Duel）

Earning structure: monthly membership fees,
Kishin (AI) usage fees, etc.
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1. Business Overview

2. FY04/2019 Q2Performance
3. Growth Strategy
4. Reference Materials

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, server investments, etc. are required to engage in advanced
machine learning, leading to various depreciation/amortization expenses. We aim tocontinuously enhance enterprise value/equity value via EBITDA growth, without being
concerned about fluctuations in one-time depreciation/amortization expenses.

11Performance Overview (May-October 2018)
 We made steady progress towards achievement of fiscal year forecasts in the second
quarter, driven by an increase in new and ongoing AI (B-to-B) projects and steady
performance of Shogi Wars in AI (B-to-C) services(Units: JPY millions)

FY04/2019
Q1-Q2
ActualFY04/2019
Forecast

Progress (%)(Reference)
FY04/2018
Results

Net Sales

646

1,300

49.7%

1,155

EBITDA*

239

450

53.2%

357

EBITDA Margin

37.1%

34.6%

Operating Profit

229

400

Operating Margin

35.5%

30.8%

Ordinary Profit

229

400

57.3%

338

Net Income

158

280

56.8%

247

30.9%
354

57.4%

30.6%

* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits
12Performance Trends
 We forecast that revenues from AI (B-to-B) services, which is the core pillar of ourgrowth strategy, will more than double on a year-on-year basis in FY04/2019
 On the other hand, we expect revenues from AI (B-to-C) services to decrease on a yearon-year basis as full year revenue contributions will not be recorded from several
unprofitable services terminated during the last fiscal year. We expect a slight increase in(Units: JPY millions)revenues from Shogi Wars, etc.
37.1%

1,155

30.9%

878
646
357

10.7%

239

94

FY04/2017

FY04/2018
Net Sales

EBITDA

FY04/2019 Q1-Q2
EBITDA margin

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Service Overview and Marginal Profit
 Characteristics of AI (B-to-B) and AI (B-to-C) services are summarized below
ServiceSummaryInput Data

AI（B-to-B) Services
B-to-B machine learning service
HEROZ Kishin
Structural Design data, financial data,etc.

Earning Structure Initial setup and ongoing fees
Major Costs ofGoods/Services(Fixed) labor cost, server related cost

 HEROZ’s overall marginal profit ratio,
defined as “(net sales – app
commission fees – royalties)/net sales,”is as shown on the right.

AI（B-to-C） Services
Shogi Wars, etc.
Shogi game records
Monthly membership fees, Kishin (AI)usage fees, etc.
(Fixed) labor cost, server related cost
(Variable) app commission fees,royalties
marginal profit ratio
76.3%

83.4%

67.6%

 Note that marginal profit ratio
improves as the composition of AI (Bto-B) services increases.
FY04/2017

FY04/2018

FY04/2019 Q1-Q214

Balance Sheet (as of October 31, 2018)
 We expect to continue to invest cash and deposits in efforts to achieve the medium-tolong-term growth strategy (computing servers, R&D, etc.)
 Tangible fixed assets increased by the second quarter due to the purchase of computing
servers for about 50 million yen. Investments and other assets are also increasing as aresult of the capital/business alliance and other strategic investments
Units: JPY millions

Current Assets

As of 10/31/2018

As of 4/30/2018

1,673

1,684

1,475

1,555

282

63

Property, plant and equipment

4830

Intangible assets

00233

32

1,955

1,748

161

243--1,794

1,504

Cash and deposits
Fixed Assets

Investments and other assets
Total Assets
Current Liabilities
Fixed Liabilities
Net Assets

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1. Business Overview
2. FY04/2019 Q2Performance

3. Growth Strategy
4. Reference Materials

Medium-to-long-term Growth Strategy
B-to-B

・Net Sales
・EBITDA

Provide AI services
to businesses

AI B-to-B(Growthmarket)

Growth area
→core operation forthe medium-to-longterm￥

B-to-C
Shogi AI,
other mid games AI

IPO

cash cow→stable growth• Focus on partnership strategy, IPstrategy, and recruiting• Enhance competitiveness throughinvestments in servers, etc.
• Aggressive development in coretechnology areas: construction,finance, entertainment, etc.

￥• Develop/operate world-leading Smartphone shogi application
Shogi Wars (over 4.5 million members)• Leverage AI-related technology to deliver other brain games
such as chess and backgammon

AI B-to-C(Stable CF)

Time17

Initiatives Aimed at Achieving the Growth Strategy (1) Commenced joint efforts with Sumitomo Mitsui
Financial Group, Inc. and SMBC Nikko Securities
Inc. towards the commercialization of financial
services using HEROZ Kishin (internationalpatent pending) Planning to commence services in the firsthalf of 2019 towards SMBC Nikko Securities
retail customers
 AI equity portfolio diagnostic service
 AI helps to pick up securities which may
enhance the performance of customers’
portfolios, taking customers’ appetite forrisk into account AI stock price watch service
 AI’s analysis of stock price trends is used at
SMBC Nikko Securities’ investment
methodology “LC-PH (loss cut-profit hold)strategy”

18Initiatives Aimed at Achieving the Growth Strategy (2) Launch of AI CARDDASS, a new digital card game brand developed with Bandai Co.,
Ltd. which leverages HEROZ Kishin The first series titled “ZENONZARD” expected to be released as a Smartphone
application in 2019
 Initiatives relating to strategic investments
 Invested in Pocket Queries, Inc. in October 2018 and entered into a capital andbusiness alliance agreement

 Successively engaging in strategic investments in order to expand HEROZ Kishinclientele and to stay current on state-of-the-art technological trends
 Stock Split

 Split Ratio: Two-for-one
 Reference Date: December 31, 2018（Note that the last business day until thereference date is December 28, 2018）
 Effective Date: January 1, 201919

1. Business Overview
2. FY04/2019 Q2
Performance
3. Growth Strategy

4. Reference Materials

Company Overview
Name

HEROZ, Inc.

Location

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

EstablishedApril 2009

Representatives

Takahiro Hayashi/Tomohiro Takahashi

Business
Description

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

MembershipJapan Deep Learning Association,
The Japanese Society for Artificial Intelligence2018Listed on Tokyo Stock Exchange (TSE) Mothers
Capital and business alliance with Netmarble Games Corporation

2017
Capital and business alliances with Takenaka Corporation, Hearts
United Group, 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 RecordAmateur 6th dan (highest rank after becoming
national amateur champion)
7th dan, Shogi Wars
Amateur Kisen Champion (7-time title defender as nationalchampion)
Played against Yoshiharu Habu (permanent 7 title holder)

Representative Director and COO

Director and CFO, Business Planning Manager

Tomohiro Takahashi

Daisuke Asahara

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

Graduated from Kyoto University Graduate School
MBO from Wharton School, University of Pennsylvania(delivered graduation speech as student body representative)
Investment Banking Division, Goldman Sachs

Founded HEROZ21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 byHEROZ, Inc. and may therefore be subject to change without prior notice due tochanges 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 theevent that new 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.
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