Digital Arts Inc. (2326)

FY03/17 Consolidated Financial Resultsfor Second Quarter Ended September 30, 2016
（April 1, 2016 through September 30, 2016)

Supplemental Material
October 27, 2016

Copyright © 2015 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

KEY FINANCIAL POINTS

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Copyright © 2016 Digital Arts Inc.

Key Financial Points① Increase in acquisition of contracts due to dramatic increase in demands
related to “cloud solutions for local government data security” and “localgovernment data security enhancement measures”• Mainstay i-FILTER (or D-SPA) and m-FILTER sales soared in the public sector:
Government agencies at the prefectural and local levels performed measures toenhance cyber security in accordance to a guideline issued by the Ministry ofInternal Affairs and Communications to fundamentally enhance information
security in local municipalities.

② FinalCode continues rapid growth• Increase in sales of FinalCode Ver. 5, providing advanced files security forcompanies and organizations that handle large volumes of customer data.
• Steady increase in deployment of FinalCode Limited Edition for Local
Government,
an edition that responds to needs specific to prefectural, city and local
municipality governments.

③ Sales results in the US and Asia Pacific• US subsidiary FinalCode, Inc. and Asia-Pacific subsidiary FinalCode Asia PacificPte. Ltd. began to produce concrete sales results thanks to progress inpartnerships with local sales partners.
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Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

CONSOLIDATED RESULTSHIGHLIGHTS

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Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Highlights (Consolidated)
Consolidated
Net SalesOperating
IncomeOrdinaryIncome

Net Income

Attributable toOwners of Parent¥ 2,420 million（YoY+¥484 million／+25.0％）

Significant growth in mainstay i-FILTER and m-FILTER by capturing the needs of clientsadhering to guidelines issued by Ministry of Internal Affairs and Communications¥789 million（YoY+¥292 million／+58.9％）

Surge in sales absorbed costs, such as increase in domestic personnel expenses,
for a considerable increase in operating income¥

767 million（YoY+¥267 million／+53.6％）

Secured substantial earnings growth despite forex fluctuation with the rapidappreciation of the yen, while loss remained at the same level as Q1¥454 million（YoY+¥139 million／+44.5％）

Achieved extensive increase in revenue with domestic sales absorbing increase intax expenses as a result of advance investment to overseas subsidiaries
5Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Summary
Consolidated Results(million yen)

FY03/16
Second Quarter

FY03/17
Second Quarter

YoY Growth

FY03/17
Forecast

Net Sales

1,935

2,420

+25.0%

4,600

Gross Profit

1,496

1,922

+28.5%

3,652

Selling, General andAdministration
Expense

999

1,132

+13.4%

2,252

Operating Income

497

789

+58.9%

1,400

Ordinary
Income499

767+53.6%

1,400

314

454

+44.5%

870

7.3%

9.6%

―

Net Income

Attributable to Owners ofParent

ROE

6―

Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Summary
Non-Consolidated Results(million yen)

FY03/16
Second Quarter

FY03/17
Second Quarter

YoY Growth

FY03/17
Forecast

Net Sales

1,933

2,465

+27.5%

4,598

Gross Profit

1,532

1,938

+26.5%

3,555

Selling, General andAdministration
Expense

875

1,001

+14.4%

1,843

Operating Income

656936+42.7%

1,712

Ordinary
Income659918+39.4%

1,712

Net Income

437619+41.5%

1,182

ROE

9.7%

11.8%

7―

―Copyright © 2016 Digital Arts Inc.

Consolidated Net Sales Trend
Continue to mark RECORD HIGH sales!!

（million yen）

2,420（125%）

1,935

1,328

917

1,010（110%）

1,103（120%）

1,351

1,481

1,610（120%）（109%）（110%）（102%）（109%）

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

2Q

2Q

2Q

2Q

2Q

2Q

2Q

2Q

2Q

※ Percentages indicate YoY net sales

8Copyright © 2016 Digital Arts Inc.

Consolidated Net Sales Trend (by Quarter)（million yen）

Second quarter net sales substantially exceeded
beginning-of-period forecast

1,503（133%）

1,253
1,077

831
650

643

（114%）（103%）

1Q

2Q

3Q

715673

FY ended March 2014

1Q

803

811

（119%）（113%）（114%）（111%）（103%）

4Q

916（113%）（97%）（106%）（121%）（119%）

937

902（116%）

1,131

2Q

3Q

4Q

1Q

FY ended March 2015

2Q

3Q

4Q

FY ended March 2016

※ Percentages indicate YoY net sales

91Q

2Q

3Q

4Q

FY ending March 2017
Current FY
Copyright © 2016 Digital Arts Inc.

COS and SG&A COS and SG&A increased slightly due to increased personnel expenses in Japan
However, COS and SG&A trends remain largely according to period start forecast（million yen）

FY03/16
Second Quarter

FY03/17
Second Quarter

Cost of Sales

439

497+58Labor

174

215+41

Depreciation

142

144+2

Transfer to other accounts
Misc production cost122

137+14

Selling, General and
Administrative Expenses

999

1,132+133

Labor

517

585+68Publicity

139

174+35Others342

372+2910

YoY GrowthKey FactorsIncl. domestic personnel
expenses (+70 M)

Server replacement,hiring employees inJapan, etc.
Copyright © 2016 Digital Arts Inc.

Cost of Sales (by Quarter)（million yen）

No significant changes in the breakdown of cost of sales
Labor

Depreciation

226
201

（128%）

219（120%）

283

Other Accounts & Misc.

229

228

（118%） （113%）

238（105%）

264（123%）（93%）

224（102%）72

227

211（96%）

222

64
44

54

56

52

59

77
65

48
54

67

79

85

60

67

70

96

94

93

94

93

93

96

101

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

FY ended March 2014

7880

FY ended March 2015707267868790

1Q

2Q

3Q

117272

109

103

112

4Q

1Q

2Q

FY ended March 2016

※ Percentages indicate YoY cost of sales

7164

109
82（113%）

（99%）

（93%）

（113%）

240（114%）

256

3Q

4Q

FY ending March 2017
Current FY
Copyright © 2016 Digital Arts Inc.

Selling, General and Administrative Expenses(by Quarter)

SG&A increased due to increase in domestic personnel
Labor

Publicity

Others586

Overseas（125%）

431

408

365（109%）343（96%）

149

356

123

363

（100%）

133

161

130

214

1Q

31488

73

3961

3727

194

188

182

189

197

205

2Q

3Q

4Q

1Q2Q

3Q

FY ended March 2014

556（114%）482（123%） （133%）

9271

164

180

6872
176

151
172

149
80

67
40（111%）（106%）

158
130

58

394

396（95%） （108%）（million yen）

（148%） （113%）

510（111%）

576

32

34

212

219

4Q

1Q

FY ended March 2015

148
56

1259

241

257

1Q

2Q

39

208

221

2Q

3Q

273

4Q

FY ended March 2016

※ Percentages indicate YoY cost of sales

83

3Q

4Q

FY ending March 2017
Current FY
Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

BY MARKET

13Copyright © 2016 Digital Arts Inc.

Summary: Net Sales by Market
 +25.0% growth in consolidated sales
 Enterprise: continue steady sales trends at +13.8%

 Public: dramatic increase of +45.2% in providing cloud solutions for data security
in local municipalities Consumer: held firm despite steep decline in domestic consumer PC shipments
Consolidated
Net Sales

Net sales: ¥ 2,420 million（+484 million／+25.0％ YoY）

Enterprise

Net sales:¥ 1,149 million（+139 million ／+13.8％ YoY ）PublicNet sales:¥ 1,096 million（+341 million ／+45.2％ YoY ）ConsumerNet sales:¥

174 million （+４ million ／ +2.4％ YoY ）14

Copyright © 2016 Digital Arts Inc.

Sales Trend by Market
Public sector dramatically grew with solutions that satisfy the level ofsecurity demanded in the Ministry of internal Affairs andCommunications’ guidelines on strengthening local government security（million yen）

2,420（125%）

174
Enterprise

Public

1,935

Consumer（120%）

1,481

917
131
381

1,010
（110%）

144
384

1,103（109%）

1,328

1,351

（120%）（102%）

130

140

132
585

527（110%）1,610

1,096（109%）

175

186

536

170

754
609

415

684

758

824

1,0101,149404

481555612

FY03/09

FY03/10

FY03/11

FY03/12

FY03/13

FY03/14

FY03/15

FY03/16

FY03/17

2Q

2Q

2Q

2Q

2Q

2Q

2Q

2Q

2Q

※ Percentage indicates YoY net sales

15Copyright © 2016 Digital Arts Inc.

Quarterly Net Sales by Market（million yen）

Significant growth in Public sector drove overall performanceEnterprise

Public

1,503

Consumer（133%）

84

1,253
1,131

1,077

831
650

（97%）

（106%）

85643（114%）（103%）

101

79

319

1Q

278

426

2Q

673
85

3Q

402

380

4Q

FY ended March 2014

313

811

（119%）（113%）

891Q

498

2Q

3Q

（114%）

799

89

78
259

256

216

409

403

296

89

444

916

803

756

665

529
349

715（111%）（103%）

207

214

216

331

94

90

80

97

（113%）

93（121%）（119%）

937

902（116%）

457

4Q

1Q

FY ended March 2015

552

2Q

530

473

3Q

4Q

FY ended March 2016

※ Percentage indicates YoY net sales

16

1Q

619

2Q

3Q

4Q

FY ending March 2017
Current FY
Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

ENTERPRISE SECTOR

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Copyright © 2016 Digital Arts Inc.

Enterprise Sector
 Robust sales in mainstay i-FILTER and FinalCode.
 m-FILTER sales fell YoY due to a special procurement demand in the previous Q2,
however with steady accumulation of orders, secured a foundation of growth for Q3and on.
 Amid a series of incidents with leaks of important information, FinalCode Ver. 5 sales
firmly increased by providing company-wide advanced file security, meeting the needsof corporations that handle large volume of customer data.

+ 12.6 ％－5.6 ％+ 34.2 ％+ 151.9 ％18Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

PUBLIC SECTOR

19Copyright © 2016 Digital Arts Inc.

Public Sector
 i-FILTER (or D-SPA) and m-FILTER, main offerings for the public sector, soared asgovernment in prefectural and local levels improving cyber security under the Ministry ofInternal Affairs and Communications’ guidelines on fundamental strengthening of local
government security.
 Robust implementation of FinalCode’s limited edition for local government, providing
simple functions that public organizations want.

+ 36.0 ％+ 111.7 ％+79.6 ％
+ 609.3 ％20Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

CONSUMER SECTOR

21Copyright © 2016 Digital Arts Inc.

Consumer Sector
 Continued to enter tie-ups with mobile operators and MVNO operators to expand sales
and increase collaboration for the mobile device version of i-FILTER (Consumer) for
Smartphones.
 Firm sales for the PC version of i-FILTER (Consumer) due to OEM-driven sales androbust shipments of multi-year packaged products, despite a decline in the number ofdomestic consumer PC shipments.
 Sales expanded for i-FILTER (Consumer) for Multi-Device, which can be used onmultiple OS with a single serial ID.
PC－0.8 ％Game Console/TV－0.6 ％Mobile Device+11.8 ％

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Copyright © 2016 Digital Arts Inc.

FY03/17 Second Quarter Financial Results

FY03/17 FORECAST

23

Copyright © 2016 Digital Arts Inc.

FY03/17 Earnings Forecast
FY03/17 Consolidated Forecast
During the cumulative second quarter ended September 30, 2016 (consolidated and nonconsolidated), demand for the Company’s main offerings in the public-sector market,
i-FILTER (and/or D-SPA) and m-FILTER, increased dramatically as a result of government
agencies in the prefectural and local levels performing measures to enhance cyber securityin accordance to a guideline issued by the Ministry of Internal Affairs and Communications
to fundamentally enhance information security in local municipalities. Therefore, net sales
and incomes have exceeded beginning-of-the-year forecasts.
Favorable environment is anticipated to continue mainly in the public-sector market.
Consolidated forecast for FY03/17 (April 1, 2016 through March 31, 2017) is currently
under review and will be released and announced accordingly.

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Copyright © 2016 Digital Arts Inc.

FY03/17 Forecast
FY03/17 Consolidated Forecast
 FY03/16 favorable domestic market conditions are expected to continue
 Conservative guidance for overseas operations although has started to produce
concrete sales results
 Expects increase in margins as overseas investment will be limited to a slight increase（million yen）

FY03/16
ActualFY03/17
Forecast

GrowthRate

Net sales

4,000

4,600

15.0 %

Gross Profit

3,074

3,652

18.8 %

Selling, General and
Administration Expense

2,067

2,252

9.0 %

Operating Income

1,006

1,400

39.1 %

Ordinary Income

994

1,400

40.8 %Net Income

54587059.5 %15 yen20 yenAttributable to Owners of Parent

Dividends per Share

25―Copyright © 2016 Digital Arts Inc.

FY03/17 Earnings Forecast
FY03/17 Non-Consolidated Earnings Forecast
 Favorable domestic market environment in FY03/16 is expected to continue（million yen）

FY03/16
ActualFY03/17Forecast

GrowthRate

Net Sales

4,018

4,598

14.4 %

Gross Profit

3,123

3,555

13.8 %

Selling, General and
Administration Expense

1,788

1,843

3.0 %

Operating Income

1,335

1,712

28.3 %

Ordinary Income

1,328

1,712

28.9 %

840

1,182

40.7 %Net Income26Copyright © 2016 Digital Arts Inc.

FY03/17 Return to Shareholder■ Dividend Distribution
Digital Arts plans to return profit to its shareholders as follows:
Projected dividend payout ratio for FY03/17:
32.0% of consolidated net income of the current period
The amount of annual dividends for the period ending March 2017:
Estimated at 20.00 yen per share.
Dividends per share (in yen)Interim

FY03/16

7.00

FY03/17

10.00

Fiscal year-end

FY03/17 (forecast)

27

AnnualConsolidated
Payout Ratio

8.00

15.00

38.2％

10.00

20.00

32.0％

Copyright © 2016 Digital Arts Inc.

Forward Looking Statements

All statements herein, other than historical facts, contain forward-looking statements and are based on
DA’s current plans, strategies and financial forecasts. These forward-looking statements are based upon
management’s current assumptions and beliefs in light of the information currently available to it,
however environmental changes and other important factors could cause actual results to differ
materially from those expressed in our forward-looking statements. All statements herein are notintended to express DA’s commitment to fulfill any forward-looking statements. Updated information, ifapplicable, will be disclosed in a timely manner.
All numerical indications in this statement, unless noted, are rounded to the nearest million yen.

・ DIGITAL ARTS, ZBRAIN, /i-FILTER/i-FILTER EndPoint Controller, m-FILTER/m-FILTER MailFilter/m-FILTER Archive/m-FILTER AntiSpam/m-FILTER File Scan, and D-SPA are registered trademarks of Digital Arts Inc.
・ FinalCode is a registered trademark of Digital Arts Group.
・ Other corporate and product names are trademarks or registered trademarks of those companies.

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Copyright © 2016 Digital Arts Inc.

‐Contributing to a more convenient, comfortable and safe internet‐Copyright © 2015 Digital Arts Inc.