Digital Arts Inc. (2326)

FY03/19 Consolidated Financial Results
For the Second Quarter ended 30
September 2018
Reference Slides
30 September 2018

Copyright © 2015 Digital Arts Inc.

FY03/19

Second Quarter Financial Results

KEY FINANCIAL POINTS

Copyright © 2018 Digital Arts Inc.

Financial Results – Key Points①

Increased acknowledgement as a total security solution provider in thepublic sector market, leading to record sales
Cultivated sales channels that were able to provide a more comprehensive security solutions, when the localgovernments were implementing security measures as part of the Ministry of Internal Affairs andCommunications measures the year before last

As a result of partnering and selling “i-FILTER” ver.10 and “m-FILTER” Ver.5 with such sales channels, not only
were we able to increase our sales but were also able to increase our presence in the market②

There was an increase in new demand, and by actively pursuing sales
promotion activities via strategic upfront investment, potential projects
have been obtained

In domestic business, we continue to aggressively promote sales activities in response to expanding demandIn overseas operations, despite our efforts to strengthen the organizational structure, etc., due to the revisionof our mid- to long-term product strategy and sales strategy, we reorganized our group. Although costs wereincurred ahead of schedule in the first half of the year, the cost is expected to shrink in the second half due tothe group restructuring effect.

③

Continual growth of Digital Arts ConsultingContributing to the growth of group sales, driven by the growing awareness of security human resources
shortage and strengthening of information security measures

3Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter Financial Results

CONSOLIDATED RESULTSHIGHLIGHTS

Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter Highlights (Consolidated)

Consolidated
Net Sales

Operating
IncomeOrdinary
IncomeNet Income

Attributable toOwners of Parent

JPY 2,764 million（YoY +JPY 296million/＋12.0％）

Significant growth due to the increased recognition in the public sector as acomprehensive security solution provider and a favorable consumer market

JPY 1,036 million（YoY＋JPY 113 million/＋12.4％）

Despite the costs in association with overseas sales initiatives and group
restructuring, the increase in sales outweighed the costs and resulted in a higher
operating income compared to the previous year

JPY 1,040 million（YoY＋JPY 107 million/＋11.5％ ）With the increase in operating income, the ordinary income also increased

JPY 992 million（YoY＋JPY 373 million/＋60.4％）

Due to the tax reducing effect of the US subsidiary closure, the quarter’s results
have increased significantly
5Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter Summary
Consolidated Results（million JPY）
FY03/18 SecondQuarter

FY03/19 SecondQuarter

Net Sales

2,468

2,764+12.0%

5,800

Gross Profit

2,000

2,237+11.8%

4,700

Selling, GeneralandAdministration
Expense

1,078

1,201+11.4%

2,200

Operating
Income922

1,036+12.4%

2,500

Ordinary Income

932

1,040

+11.5%

2,500

Net Income
Attributable to Ownersof Parent

618

992

+60.4%

1,619

11.3%

15.0%

ROE

YoY Growth―

FY03/19 Forecast―※ “FY03/19 Forecast” is the forecast announced on 8 May 2018
6Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter SummaryNon-Consolidated Results（million JPY）
FY03/18

FY03/19 SecondQuarter

YoY Growth

FY03/19 Forecast

Net Sales

2,474

2,739+10.7%

5,600

Gross Profit

1,9782,233+12.9%

4,250

Selling, GeneralandAdministration
Expense

956

1,046

9.4%

1,900

Operating
Income1,021

1,186+16.2%

2,350

Ordinary Income

1,030

1,190+15.5%

2,350

Net Income

734

818+11.4%

1,598

12.0%

12.1％

―

ROE

7+

―

Copyright © 2018 Digital Arts Inc.

Consolidated Net Sales Trend

Record High sales achieved（million JPY）

2,764
2,420（125%）

2,468（112%）（102%）

1,935

1,328917

FY03/09 2Q

1,010（110%）

FY03/10 2Q

1,1031,351（120%）（102%）

FY03/12 2Q

FY03/13 2Q

1,481

1,610（120%）（109%）（110%）（109%）

FY03/11 2Q

FY03/14 2Q

FY03/15 2Q

FY03/16 2Q

FY03/17 2Q

FY03/18 2Q

FY03/19 2Q※ Percentages indicate YoY net sales

8Copyright © 2018 Digital Arts Inc.

Consolidated Net Sales Trend (by Quarter)
Increased acknowledgement as a total security solution provider
in the public sector market, leading to growth in sales
1,565

1,5401,503（133%）（118%）

1,309

1,253

1,217（87%）（116%）

1,131

1,546（102%）（123%）（million JPY）

1,158

1,098（121%）（105%）

1,083（126%）（99%）（135%）

916803811（119%）（113%）

1Q

2Q

3Q（114%）

4Q

FY03/16

1Q

2Q

3Q

4Q

1Q

FY03/17

2Q

3Q

FY03/18※ Percentages indicate YoY net sales

94Q

1Q

2Q

3Q

4Q

FY03/19

Current FY
Copyright © 2018 Digital Arts Inc.

COS and SG&A

In Japan, we actively promoted sales promotion targeting new demand. In the overseas
market, SG&A expenses temporarily increased due to organizational expansion centered on
US subsidiaries and group restructuring due to revisions to medium- to long-term productand sales strategies.
（million JPY）
FY03/18 SecondQuarter

FY03/19 SecondQuarter

467

526+59Labor

200

213+12Due to the growth ofconsulting subsidiary

Depreciation

137

170+32

Depreciation
attributable to release ofnew products

Transfer to other accounts
Misc production cost

128

142+13

Selling, General andAdministrative Expenses

1,078

1,201+122

Personnel Expenses

540

540

△0163

183+19

Caused mainly by theaggressive sales promotion
targeting domestic market+103

Costs due to theorganizational growthcentered on US
subsidiary and group
restructuring costs

Cost of Sales

Publicity
Others

477

373
10

YoYKey Factors

Copyright © 2018 Digital Arts Inc.

Cost of Sales (by Quarter)
Despite the temporary increase in depreciation due to therelease of a new product, the second quarter costs were onpar with the previous FY
Labor

Depreciation

306

Misc production cost

（125%）

264
（93%）

211

227
（96%）

（93%）

54

67

222
（99%）

72

（113%）（114%）

77
65

71

265
244

（100%）（110%）

65

232

8687

1Q

2Q

3Q

79

68

66

72

72

109

1031121064Q

1Q

2Q

3Q

FY03/16

121

4Q

FY03/1768

6911（125%）

236
75

98

102

1Q

2Q

（101%）

90

93
77

131

3Q

FY03/18※ Percentages indicate YoY cost of sales

90

289

66

78
69（114%）

62
94

67

90

235（97%） （92%）

64
78

70

240

256

301（million JPY）

121

120

4Q

1Q

92

2Q

3Q

4Q

FY03/19

Current FY
Copyright © 2018 Digital Arts Inc.

Selling, General and Administrative Expenses (by Quarter)

SG&A expenses temporarily increased due to strategic
upfront investment and group restructuringLaborPublicity

586
510（125%）

58Others

576（148%） （113%）

488

482

92

71（123%） （133%）

73

Overseas596

556（114%）68（102%）498

632
569（99%）8853（103%）

4972
164

180

151

80
34148
56

83

5939219

208

221

1Q

2Q

3Q

273

4Q

FY03/16

243

1Q

2Q

3Q

（107%） （88%）

67

285

4Q

FY03/17
1294
69

190
201

194
109

59

464040243

229

224

230

237

240

1Q

2Q

3Q

4Q

1Q

2Q

FY03/18※ Percentages indicate YoY SG&A

（112%）

60

89

51

257

526

568

200
163

56

241（92%）

533

182

154
172

509
69

166

176（111%）（million JPY）

3Q

4Q

FY03/19

Current FY
Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter Financial Results

BY MARKETCopyright © 2018 Digital Arts Inc.

Summary: Net Sales by Market
 +12.0% YoY growth in consolidated net sales

 Enterprise : +3.9% growth due to the concentration of large projects due inthe second half of the FY

 Public: +20.2% growth due to strong demand for new products

 Consumer : +31.7% growth due to favorable market in the MNVO sphere, etc.
Consolidated
Net Sales

Net Sales： JPY 2,764 million（JPY+296 million/ +12.0％ YoY）

EnterpriseNet Sales： JPY 1,419 million（JPY +52 million/+3.9％ YoY）

PublicNet Sales： JPY 1,108 million（JPY +186 million/+20.2％ YoY）

235 million（JPY +56 million/ +31.7％YoY）

Consumer

Net Sales： JPY14

Copyright © 2018 Digital Arts Inc.

Sales Trend by Market

Increased acknowledgement as a total security solution
provider in the public sector market, driving growth inoverall sales
2,420Enterprise

PublicConsumer（125%）

1,935

1,328

917
131381404
FY03/09 2Q

1,010（110%）

144384481

FY03/10 2Q

1,103（109%）

132（120%）1305851,351（102%）

140527

1,481（110%）

1,610612

FY03/11 2Q

FY03/12 2Q

684

FY03/13 2Q

2,468（102%）（112%）

2351791,108

170

1,096922

175
7546094155552,764（120%）（109%）

186536174（million JPY）

758

824

FY03/14 2Q

FY03/15 2Q

1,010

FY03/16 2Q

1,149

FY03/17 2Q

1,366

1,419

FY03/18 2Q

FY03/19 2Q※ Percentage indicates YoY net sales

15Copyright © 2018 Digital Arts Inc.

Quarterly Net Sales by Market
Record sales achieved due to the growth in sales in both public and（million JPY）
consumer markets
1,565Enterprise

PublicConsumer

1,540

1,503（123%）（133%）

1,253（116%）

1,131（135%）

80

916

803

811（119%）（113%）

89498

403（114%）799

89602（126%）

80

497
424

427

78

1,083

484（99%）92

115

1,217（87%）

86（118%）

103

1,309
1,158

1,098

93

（121%）

105

84

1,546（102%）（105%）

120
699

92
408

324

296
259

256

833

756
457

1Q

552

2Q

530

473

3Q

4Q

FY03/16

977

1Q

619

590

2Q

3Q

640

4Q

1Q

FY03/17

726

2Q

665

3Q

FY03/18※ Percentage indicates YoY net sales

164Q688731

1Q

2Q

3Q

4Q

FY03/19

Current FY
Copyright © 2018 Digital Arts Inc.

FY03/19

Second Quarter Financial Results

ENTERPRISE SECTOR

Copyright © 2018 Digital Arts Inc.

Enterprise Sector
 Due to the abundance of large projects, much of the sales have beendeferred to the second half of the FY, however centered on ongoingprojects from the previous FY, sales for popular products i-FILTER andm-FILTER were solid For FinalCode, the large project gained in the previous FY contributed
to a growth in sales
SeriesSeries

YoY

97.9 ％

YoY

104.3 ％

YoY

134.2 ％
18Copyright © 2018 Digital Arts Inc.

FY03/17

Second Quarter Financial Results

PUBLIC SECTOR

Copyright © 2018 Digital Arts Inc.

Public Sector
 When developing municipal information security measures led by the Ministry ofInternal Affairs and Communications two years ago, development of sales channels thatcan make more advanced and comprehensive security proposals progressed As a result of promoting the sales of i-FILTER Ver. 10 and m-FILTER Ver. 5 under theleadership of the powerful dealership, recognition of both products’ capabilities has
increased and the acquisition of projects is progressing Due to large FinalCode projects in the previous fiscal year, FinalCode was negative YoY,
but demand continues to be strongSeriesSeries

YoY

109.4 ％

YoY

195.2 ％

YoY

61.5 ％
20

Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter Financial Results

CONSUMER SECTOR

Copyright © 2018 Digital Arts Inc.

Consumer Sector
 Promoted partnerships with mobile phone companies and MNVOs, aswell as sales of i-FILTER for Multi Device, which allows the usage onmultiple devices with one serial number
 Despite the decrease in personal computer shipments, steady growth inmultiple-year packages as well as i-FILTER for Multi Device contributed
to net sales

PC

YoY

117.9 ％

Game Console/TV

YoY

104.1 ％

Mobile Device

YoY

161.8 ％

22Copyright © 2018 Digital Arts Inc.

FY03/19 Second Quarter Financial Results

FY 03/19 FORECAST

Copyright © 2018 Digital Arts Inc.

FY03/19 Earnings Forecast
On the revision of the FY03/19 Forecast
 Revision of the mid-to long-term product and sales strategies, group
restructuring were carried out Highly-likely cost-curbing effect of group restructuring factored into forecast
 Despite the turn to favorable market conditions, the sales and dividend amounts
have been conservatively left unchanged(million JPY, except Dividend per share)

FY03/19 OriginalForecast

FY03/19 Revised
Forecast

Difference

5,8004,700―

Gross Profit

5,800
4,700

Selling, General and
Administration Expense

2,2002,100

- 100

2,500
2,500
1,619
JPY 36

2,600
2,600
2,000
JPY 36+100+100+381

Net Sales

Operating Income
Ordinary Income
Net Income

Attributable to Owners of ParentDividend per Share

24――Copyright © 2018 Digital Arts Inc.

FY 03/19 Earnings Forecast
Reasons for the revision of the forecast
The Group aims to become a comprehensive security countermeasure manufacturer, and has
first been promoting higher-quality product development by integrating new functions and theexisting product lineup in the domestic market.
We have acquired strong recognition and market share in the area of internal information
leakage prevention measures, but as a result of sales promotion activities with which the Groupand dealerships were united, the new global view and solutions provided by the Group have been
increasingly appreciated by the market, leading to an acceleration of sales, and our presence as acomprehensive security countermeasure manufacturer in Japan has grown.
In the overseas market, we had only deployed FinalCode, but going forward we plan to rollout the "DigitalArts" brand worldwide as a comprehensive security countermeasure manufacturer,
similar to our approach in the domestic market.
Accordingly, FinalCode, Inc., a North American subsidiary, will be liquidated and business inNorth America will continue as Digital Arts America, Inc. For the Asia-Pacific region, business willcontinue as Digital Arts Asia Pacific Pte. Ltd. (name change planned from FinalCode Asia PacificPte. Ltd.) and Digital Arts Europe Ltd. (name change planned from FinalCode Europe Limited).
In terms of consolidated earnings, selling, general and administrative expenses are expected
to shrink due to the selection and concentration effect of management resources resulting fromthe group restructuring as described above, and the almost certain cost reduction effectaccompanying the group restructuring has been accounted for in our budgets and included in ourrevised forecasts.
Although the market environment is improving, sales and dividend forecasts have beenconservatively left unchanged.
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Copyright © 2018 Digital Arts Inc.

FY03/19 Earnings Forecast
FY03/19 Consolidated Earnings Forecast Due to the cost-curbing impact of the group restructuring, costs are
forecast to remain at the same level as the previous FY(million JPY, except Dividend per share)

FY03/18 Actual

FY03/19 RevisedForecast

Growth Rate

Net Sales

5,116

5,800

13.3 %

Gross Profit

4,041

4,700

16.3 %

Selling, General and
Administration Expense

2,138

2,100-1.8 %Operating Income

1,902

2,600

36.6 %

Ordinary Income

1,909

2,600

36.2 %Net Income

1,281

2,000

56.0 %

Dividends per ShareJPY 28

JPY 36

Attributable to Owners of Parent

26―Copyright © 2018 Digital Arts Inc.

FY03/19 Earnings Forecast
FY03/19 Non-Consolidated Earnings Forecast

 In the domestic market, bolster sales of new products released in
September 2017
 In addition, we released a cloud-based service in May, which isaccelerating growth in this area

(million JPY)

FY03/18 Actual

FY03/19 Forecast

Growth Rate

Net Sales

5,046

5,600

11.0 %

Gross Profit

3,986

4,250

6.6 %

Selling, General and
Administration Expense

1,8981,9000.1 %Operating Income

2,087

2,350

12.6 %

Ordinary Income

2,097

2,350

12.0 %

860

1,598

85.7 %Net Income

27Copyright © 2018 Digital Arts Inc.

FY03/19 Return to Shareholders■Dividend Distribution
Digital Arts plans to return profit to its shareholders as follows:
Projected dividend payout ratio for FY03/19:
25.0％ of consolidated net income for current period
The annual dividend amount for the period ending March 2019:
Estimated at JPY 36.00 per share

Interim

Dividend per share (JPY)Fiscal year end
AnnualFY03/1814.00

FY03/1918.00

FY03/19 (Forecast)

Consolidated
Payout Ratio

14.00

28.00

30.3％

18.00

36.00

25.0％

※ As stated in the “Notice on the Revision of the FY03/19 Forecast” released today,
although the (consolidated) earnings forecast has been revised, the dividend
payment forecast has been conservatively left unchanged

28Copyright © 2018 Digital Arts Inc.

Forward-Looking Statements

All statements herein, other than historical facts, contain forwardlooing statements and are based on DA’s current plans, strategies
and financial forecasts. These forward–looking statements arebased upon the management’s current assumptions and beliefs inlight of the information currently available to it. However,environmental changes and other important factors may cause
actual results to differ materially from those expressed herein. Allstatements herein are not intended to express DA’s commitment tofulfil any forward-looking statements. Updated information, ifapplicable, will be disclosed in a timely manner.
All numerical indications in this statement, unless stated otherwise,
are rounded to the nearest million JPY.
・DIGITAL ARTS, SBRAIN, 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 the respective companies.

29

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