DIGITAL GARAGE ANNUAL REPORT 2018

DIGITAL GARAGE
ANNUAL REPORT 2018
Digital Garage, Inc.
DG Bldg., 3-5-7 Ebisu Minami, Shibuya-ku, Tokyo 150-0022, Japanwww.garage.co.jp

03 MISSIONCONTEXT COMPANY

05 HIGHLIGHTS
07 Message from the CEO
11 Message from the Executive in Charge of Finance13 Consolidated Financial Highlights
15 Special Conversation
The Two Co-Founders Discuss Future Focus
Business Fields
23 PHILOSOPHY
25 HISTORY
27 FOUR SEGMENTS
28 BUSINESS MODEL
29 BUSINESS OVERVIEW
31 Financial Technology Segment
35 Marketing Technology Segment
39 Incubation Technology Segment
41 Long-term Incubation Segment
43 Feature: DG Lab
45 Management System
47 Corporate Governance
51 Financial Information
59 Company & Stock Information
Cautionary Statement
Discussions of Digital Garageʼs current plans and strategies, and outlooks for future
performance, included in this annual report are based on information available as of the
preparation of this report. Digital Garage believes the views expressed are reasonable
as of the time this report was prepared. Nevertheless, risk and uncertainty are inherent
in discussions of the future. Users of this report should bear in mind that various factors
may cause actual results to differ from expectations or outlooks expressed in thisannual report.

01| DIGITAL GARAGE

DIGITAL GARAGE |02

MISSION

Annual Report 2018

MISSIONCONTEXTCOMPANY

10xbattery life forlow power devices

1000x
mobile data
volumes

5G

5xlower latency

data rates

&

CYBER
INTERNATIONALTECHNOLOGY
FUTURE

Since its establishment 23 years ago, Digital Garage has
put itself forward as a company that creates contexts for

4G

10x-100x

REAL
LOCAL
MARKETINGPRESENT

the internet era. In using the word, “context,” we mean
shared understanding based on relationships, environments,

3G

culture, and ideas. We established DG as a company

2G

incorporating real space and cyberspace ̶ which is set to

SINCE 1994

that would explore ways for creating internet contexts

10x-100x
connected devices

expand by leaps and bounds̶and linking Japan with the restof the world, marketing with technology, and the present
with the future. We also established DG to be a company
that would create contexts useful for the world. And, indeed,
DG has built a solid track record of constantly being at the
cutting edge of internet development, and taking on “firstin-Japan” projects. We are proud that the history of DG isthe history of the internet in Japan. Looking to the future,
we will remain steadfast in our efforts to add a new pageto the history of the internet by creating new services that
contribute to society. We aim to accomplish much andwelcome anticipation of our results.

03| DIGITAL GARAGE

DIGITAL GARAGE |04

HIGHLIGHTS

Annual Report 2018

FY 2018 Highlights

HIGHLIGHTS

Recorded an all-time high forprofit for the first time in nine periods

All business segments realize
increased sales and earnings

Entering the 4th stage of incubation toward our 25th anniversary in 2020

The Marketing Technology Segment and Financial Technology Segment
achieve substantial increase in profits, growth accelerates

Consolidated profit

Consolidated profit before taxes by segment
DIGITAL GARAGE GROUP

2018

2017

2015
Bengo4.com
CrowdWorks
Public listing2016
DG Lab established

Amount oftransactions breaks
1 trillion JPY
for FT Segment
business

Recurring businessmodel realized
for FT Segment and
MT Segment

FT

2013
Incubation centerestablished

5,081

1,959

2,000

2,539
1,500

1,396

1,496

1,758

1,478

1,335

1,000

1,074

500

0

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3(change of closing date)(JPY in Millions)

2,847

1,061

500
0

4,289

874

1,000

IT
3,000

MARKETING TECHNOLOGY SEGMENT

2,000

5,460

5,165

MT

FINANCIAL TECHNOLOGY SEGMENT

3,000

1,500

6,000

(JPY in Millions)

2,500(JPY in Millions)

4,500(JPY in Millions)

FY 14.6

FY 15.6

FY 16.6(JPY in Millions)

LTI

INCUBATION TECHNOLOGY SEGMENT

FY 17.3

LONG-TERM INCUBATION SEGMENT

5,000

3,500
3,000

2,804

4,477

3,105
4,000

2,500

1,500

1,595

1,325

1,000

766

0

FY 14.6

FY 15.6

FY 16.6

FY 17.3(change of closing date)

FY 18.3

2,000

2,899

3,176

1,776

1,000

500

0

3,052

3,000

2,000

1,500

FY 18.3(change of closing date)0

FY 14.6

FY 15.6

FY 16.6

FY 17.3(change of closing date)

FY 18.3

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3(change of closing date)* In FY 18.3, the MI (Media Incubation) Segment was renamed to the Long-term
Incubation Segment.

05| DIGITAL GARAGE

DIGITAL GARAGE |06

Message from the CEOEntering the 4th

MESSAGE FROM THE CEO

OPEN
INCUBATIONTOWARD
2020
07| DIGITAL GARAGE

Annual Report 2018

Stage of Incubation
toward our 25th
Kaoru Hayashi
Representative Director, President
Executive Officer and Group CEO
Digital Garage, Inc.

Anniversary in 2020

Mid-term Business Plan First Year (FY 2018) Financial Summary
Digital Garage Group launched the Mid-term Business
Plan in FY 2018 (ended March 31, 2018) based on theslogan of “ Open Incubation,” which aims to further
advance the technological innovation taking placethrough the cooperation with various companies in theform of “Open Innovation,” and to develop businesses
with future potential through an open ecosystemfacilitated by collaboration with other companies.
The breakdown and creation of the existing businessenvironment brought about by the emergent rapid
technological innovation offer a chance, and while
going beyond the boundaries of business areas, weare collaborating openly with all companies taking aforward-thinking approach, from startups to major
companies.
In FY 2018, the first year of the Mid-term Business
Plan, net sales were 60.1 billion JPY, while profit before
income taxes was 7.6 billion JPY, and profit attributableto owners of parent was 5.4 billion JPY. Profit
attributable to owners of parent recorded an all-timehigh for the first time in nine periods. In FY 2018, because
we used a nine-month irregular account settlement as aresult of the change of the closing date for the previous
fiscal year, we have compared annualized figures fromthe previous fiscal year (YoY), resulting in a 24% increasein net sales, 2.4-fold increase in operating profit, a
14% increase in profit before income taxes, and a 16%
increase in profit attributable to owners of parent.
Financial Technology (FT) Segment continued growththat largely exceeded the overall e-commerce market,
as total amount of payments handled, one of the KPIs*,rose 20% YoY to 1.5 trillion JPY. In addition to the main
e-commerce sector, the non-e-commerce sector,

on which we are placing strategic focus, is rapidly
expanding in the forms of face-to-face payments, cash
charges, and transfers for virtual currency exchanges.
Marketing Technology (MT) Segment continued its strong
growth driven by performance-based ads centered on
the smartphone and app sectors, with profit before
income taxes rising 37% YoY and particularly strong
fourth quarter sales to financial institutions, which rose
50% YoY. These results in both the FT and MT segments
largely surpassed the 15% growth in profit before income
taxes that was set as one of the KPIs in the Mid-term
Business Plan.
While Incubation Technology (IT) Segment did notachieve initial forecasts due to some planned sales inthe divestment portfolio being postponed, it still rose
30% YoY. In Long-term Incubation (LTI) Segment, results
at Kakaku com, Inc., an equity-method affiliate, grewsteadily as a result of pursuing long-term investment
development and continuous cash inflow, and interms of new businesses, we are moving forward withpreparations in the life design field and healthcare
sector.
In the IT and LTI segments, we have set plans for 2.5
× ROI (return on investment) as a KPI in the Midterm Business Plan and believe we have implemented
investment schemes in line with that KPI.
Each segment made a favorable start and exceeded
each KPI in the first year of the Mid-term Business Plan.
Furthermore, we also believe we were able to implement
the various policies forming the first step toward future
growth at in the IT segment, LTI segment, and DG lab,
our R&D platform.
＊ Key Performance Indicator

DIGITAL GARAGE |08

Message from the CEO

Expanding our earnings bases centered on the payment businessLooking broadly at our individual businesses, regarding
FT (Financial Technology Segment), this year we createda foothold toward further growth in our earnings bases.
Specifically, toward the cashless society that we will
welcome in the near future, the development of ourpublic-funds payment services started in full swing. In
October 2017, we were contracted to provide a service
allowing for the payment of national pension premiums
with credit cards. In October 2018, we began providing
convenience store payment services for administrative
processing fees to Osaka Prefecture. Additionally, in
April 2018, we decided to begin providing a system for aservice allowing national taxes to be paid at convenience
stores nationwide using a QR code without priorregistration starting with 2019 tax returns. Moreover,in February 2018, we formed a business alliance withTOSHIBA TEC CORPORATION, which has the largest
share in POS systems both in Japan and overseas, andare promoting multi-payment solutions for real stores.
Regarding the payment business, with a view tocommercialization in a few years, DG Lab is leading ourdevelopment of new payment solutions using blockchain.
As one of those core technologies, in October 2017, weannounced the “DG Lab DVEP (Digital Value Exchange
Platform)” TM, a universal framework aimed at a payment
system that can issue independent virtual currencies
on the blockchain used for Bitcoin. We are using thecore technology of our strategic investee Blockstream.
Going forward, we plan to use DVEP to allow credit card

points to be easily exchanged for a range of products andservices, thereby using it in a system that encourages
the fluidization of points. Additionally, in March 2018,
in partnership with Bengo4.com, Inc., we began trial
operations of a smart contract system to realize thestreamlining of personal loan operations with Resona
Bank, Limited using blockchain. This was the firstexample in Japan of development utilizing the blockchain
used in Bitcoin. Furthermore, as the first step with aview toward the commercialization of smart contracts,
in May 2017, we began providing the cloud service“ CloudSign Payment, ” which allows simultaneouscontract conclusion and payments for corporate clientsin partnership with Bengo4.com, Inc.
Going forward, we plan to use blockchain to enter thecompany-to-company payment business. As such,
we formed an alliance with the Tokyo Tanshi Co., Ltd.,
which provides intermediary and brokerage services
in the interbank transaction and open markets, tocreate new Fintech businesses using blockchain andartificial intelligence (AI). To accelerate activities
toward commercialization, in September 2018, weestablished Crypto Garage, Inc. as a joint-venturecompany with the Tokyo Tanshi Co., Ltd. for the R&D
and commercialization of blockchain financial services
in the Fintech field. Crypto Garage, Inc. is accelerating
R&D in use cases of advanced financial services
leveraging blockchain and encryption technology while
using the core technology developed by Blockstream.
It is promoting technological development for the real
expansion of innovative services in the emergent virtual
currency and blockchain fields.
While the speculative element of Bitcoin has stolen the
spotlight thus far, through the evolution of this kind of
business development, we are convinced that we will
welcome the age of commercialization of businesses
using the real attributes of blockchain. We aim to create
Japanese-developed, world-leading financial services at
Crypto Garage, Inc. and to establish new markets in theblockchain industry.

Promoting “Open Incubation”
In IT (Incubation Technology Segment), which identifies,
invests in, and carries out business development forpromising startups represented by Blockstream, we are
expanding DGʼs overseas investment business to further
strengthen the incubation stream connecting North
America, Japan, Asia, and Europe. In addition to an AIrelated startup support studio All Turtles Corporation
connecting the San Francisco, Tokyo, and Paris locations
and a Hong Kong–based startup support company Mind
Fund and its Asian network, we began collaboration
with byFounders, a fund formed by a group of foundersof promising northern European startups. We have built
Global Incubation Stream connecting Japan, America,
western Europe, Asia, and northern Europe, and createdan even stronger system to quickly identify, invest in, and09| DIGITAL GARAGE

carry out business development for startups that willlead the next generation.
In Japan, through the nationwide development ofOpen Network Lab, which runs the Seed Accelerator
Program recognized as one of the country ʼ s top
entrepreneur support programs, we will also enhance
our startup development business in regional cities.
As the first step, in April
2018, we launched OpenNetwork Lab HOKKAIDO
in partnership with The
Hokkaido Shimbun Press.
Using the strengths of theknowhow and global entrepreneur network cultivatedby Open Network Lab in its eight years of activity andthe media network of The Hokkaido Shimbun Press, bypartnering with universities and companies in Hokkaido,
we aim to invigorate the Hokkaido startup scene.
Moreover, we also began strengthening our startup
development business specialized for specific sectors.
In May 2018, with the cooperation of more than 20
major pharmaceutical manufacturers and medical
device companies, we established “Open Network Lab
BioHealth,” an accelerator program aimed at promoting
startup development
and open innovation in
the bio te c hnolo g y andhealthcare field, one of DG
Labʼs focus fields. We are in
the middle of implementing
a 4.5-month development
program that began in September 2018.
Going forward, Open Network Lab will work with the
Global Incubation Stream built by DG, contribute to
the development of startups in Tokyo, regional cities inJapan, and regions worldwide, and further accelerate
development on a range of cross-area and cross-fieldaxes.

Annual Report 2018

As we expand the payment and marketing businesses
that form DG ʼ s earnings bases and develop thebusinesses of startups in which we invest, one of ourstrengths will be our partnerships with companies
providing the social infrastructure essential in providing
products and services. As such, in August 2018, DG
concluded a basic agreement with KDDI CORPORATION
to pursue a strategic alliance aimed at the codevelopment of new businesses with a view on the
coming 5G (fifth-generation telecommunications) era. At
the same time, KDDI CORPORATION and Kakaku.com,
Inc., one of DGʼs main companies in the LTI Segment,
entered into a capital and business alliance agreement.
Based on this basic agreement, KDDI CORPORATION will
join DG Lab as a new core partner.
Going forward, leveraging the assets of both the DG
and KDDI group, by implementing the research resultsof DG Lab in society, we will create new businesses ina range of fields. Specifically, in areas such as Shibuya,
Sapporo, and Fukuoka, which are now preparing to
implement smart city projects, by combining the
research results cultivated by both groups, we aim tobuild a next-generation business model born from thevarious applications running on the 5G network, as wellas content, AR/VR, AI, and blockchain.
Furthermore, through collaboration between BI.Garage,
Inc., our subsidiary developing businesses on the twoaxes of “data science” and “social media marketing,”and similar services being offered by the KDDI Group,
we will evaluate a new data marketing business thatcombines the media- and service-related data owned by
Kakaku.com, Inc. on its sites, kakaku.com and tabelog.
com, the payment data owned by the FT Segment of DG,
and KDDIʼs IoT data on communications, automobiles,
and basic infrastructure. In addition, we will promote
incubation projects in collaboration with strategic
partners including KDDI CORPORATION.

Shareholder Returns
DG views shareholder returns as one of its principal
management concerns. We make decisions onshareholder returns based on considerations of factors
such as financial condition, business performanceoutlook, and capital needs for growth investments. The
Mid-term Business Plan calls for us to achieve morethan 20% of dividend payout ratio. Based on this policy,
we paid an ordinary dividend of 24 JPY per share as ayear-end dividend in FY 2018. This resulted in a dividend
payout ratio of 20.7%. We plan to pay a dividend of 28 JPY
per share in FY 2019, for a dividend payout ratio of 21.3%.
In two years, in 2020, Digital Garage will welcome the25th anniversary of its founding. This is also the year the
Tokyo Olympic and Paralympic Games will be held, andTokyo will attract international attention. The DG Groupwill maintain its spirit of the “First Penguin,” and throughfurther technological innovation utilizing the incubation
knowhow, global network, and research results at DG lab
accumulated up until now, it will work to contribute tosociety.
I would like to take this opportunity to ask all our
stakeholders, including our shareholders, for an evengreater level of support and encouragement.

Shareholder Returns

27.3%
15 JPY

23.1%

5 JPY

FY 14.6

FY 15.6

24 JPY

20 JPY

4.5%
FY 16.6■ Commemorative ■ Ordinary
dividend

22.0%

13.7%
15 JPY

5 JPY

21.3%

28 JPY

20 JPY
8.2%

20.7%

dividend

FY 17.3(Change of FY end)

FY 18.3

Dividend
payout ratio

FY 19.3(Forecast)Ordinary dividend
payout ratio

DIGITAL GARAGE |10

Message from the Executive in Charge of Finance“Sum of the parts” as a Method for Evaluation of Corporate Value

Message from the Executive in Charge of FinanceIntroducing Management
Indicators that Accurately
Reflect Business Value in Our
Financial Statements andIntroducing IFRSMember, Board of Directors,
Senior Executive Officer
and Senior Executive Vice
President

MAKOTO SODA

Set an all-time high for profit attributable to owners of parent in FY 2018
In FY 2018, we posted net sales of 60.1 billion JPY(+24.1% YoY), ordinary profit of 5.0 billion JPY (+25.4%
YoY), profit before income taxes of 7.6 billion JPY (+13.6%
YoY), and profit attributable to owners of parent of 5.4
billion JPY (+16.2% YoY). Net sales, profit before income
taxes, and profit attributable to owners of parent all
greatly exceeded prior year figures (annualized figures
for FY 2017). We recorded an all-time high for net sales
for the first time in two periods and an all-time high forprofit attributable to owners of parent for the first time innine periods. Furthermore, when compared to the initialplans, net sales were 102.9% of the initial forecast of 58.5

billion JPY, and profit before income taxes, an indicator
DG places significant weight on, was 95.2% of the initial
forecast of 8.0 billion JPY, while profit attributable toowners of parent was 99.3% of the initial forecast of
5.5 billion JPY, meaning results were mostly in linewith initial forecasts. Looking at individual segments
as well, all business segments achieved higher sales
and earnings, and the FT Segment and MT Segment,
two continuing operations, were particularly strong,recording large earnings increases of +29.1% YoY and+37.1% YoY, respectively, in profit before income taxes.

FY17.3(Full Year Act)

(Initial
Forecast)(Apr-Mar)(Full Year Act)

(Jul-Mar)(12 months
Conversion)(Reference)

36,451

48,48058,50060,168+24.1+11,687

723

962

2,310

2.4 X

+1,347

Non-operating income

3,246

3,427

3,305

-3.6

-122

Share of profit of entities accounted
for using equity method

2,528

2,479

2,768

Foreign exchange gain

171

227

-

Non-operating expenses

292

388

597

+53.9

+209

Foreign exchange loss

-

-

160

-

-

Ordinary profit

3,678

4,001

5,017

+25.4

+1,016Extraordinary income

2,265

2,869

Profit before income taxes

5,819

6,705

Income taxes

1,525

1,999

Profit attributable toowners of parent

4,289

4,699

Net sales
Operating profit

FY18.3

8,000

5,500

YoY

(Apr-Mar)(%)

The DG Groupʼs business is composed of four businesssegments, and because the stock valuation method
differs depending on the business, it is difficult to value
DG on its consolidated financial statements alone.
Furthermore, in DGʼs case, it is often pointed out that theapproach to DGʼs corporate valuation is inconsistent anddifficult to understand due to the large results producedby our equity-method affiliate Kakaku.com, Inc. andTwitter in the incubation business and the value of ourholdings in Kakaku.com, a consolidated subsidiary.
Given these current conditions, in the Mid-term
Business Plan that began in the previous period, rather
than disclosing the financial goals of the consolidated
financial statements as in the past, instead we havedisclosed KPI values for each segment. Our goal
here was first to allow for a deep understanding of
the business structure of the DG Group, as well as anunderstanding of the value of each business sector.
Then, through the Mid-term Business Plan, by using
the so-called “Sum-of-the-parts” valuation method inwhich “the value of each business segment (each part)is calculated using the optimal valuation method forthat business, and the individual results are totaled to
calculate the overall value,” we believe we have provided
the raw materials for our investors to discuss DGʼs
corporate value.

Voluntary application of the International Financial Reporting Standards (IFRS)FY17.3
JPY in Millions

Annual Report 2018

Act vs Fcst
(Amount)

2,669

-7.0

-200

7,619

+13.6

+913

2,133

+6.7

+133

5,460

+16.2

+761

(%)

(Amount)+2.9+1,668

-4.8

-0.7

-380

-39

Note: Due to the change of the fiscal year end last year, the YoY comparisons here are between annualized FY17.3 (nine months accounting) and FY18.3 full year. The annualized valueof FY17.3 is 1.33 times the FY17.3 results (nine months accounting). However, equity method affiliate Kakaku.com, Inc.ʼs fiscal year end has been March 31, therefore annualized

Starting from the consolidated financial statements inthe quarterly financial results reports for FY 2019, we
have decided to change from the previous Japanesestandards and to voluntarily apply the International
Financial Reporting Standards (IFRS). The goal of
introducing IFRS was to more appropriately reflect the
DG Groupʼs business in our corporate value. Specifically,
we changed the valuation of our investment targets
in the IT segment from the previous book value to themarket value (fair value), leading to a more suitablevaluation of our holdings. Furthermore, in the FT and
MT segments, we changed part of our net sales to net
recording, a change that bases the revenue structure
disclosed for each segment more closely on our
JPY in Millions

FY18.3Full Year Act

business structure.
Moreover, because foreign investors account for nearly
40% of DGʼs shareholder composition, the backgroundbehind the introduction of IFRS was also the reality ofpressure to increase our international comparability inthe capital market and the DG Groupʼs preparedness toflexibly make organizational changes in the future.
We believe that the introduction of IFRS will contribute to
DGʼs business value being more suitably reflected in its
financial statements, and going forward, we will continue
to promote a financial and IR strategy that leads to the
maximization of the DG Groupʼs stock value.

JPY in Millions

J-GAAP

FY19.3Full Year Forecast

IFRS

Net sales

60,168

Revenue

33,500

FT

Financial Technology

20,956

FT

Financial Technology

6,500

MT

Marketing Technology

34,938MT

Marketing Technology

14,500IT

Incubation Technology

3,123

IT

Incubation Technology

3,100

LTI

Long Term Incubation

1,150

LTI

Long Term Incubation

6,500

Profit before income taxes

7,619

Profit before tax

9,000

FT

Financial Technology

2,539

FT

Financial Technology

3,200

MT

Marketing Technology

1,959

MT

Marketing Technology

2,250

IT

Incubation Technology

1,325

IT

Incubation Technology

1,350

LTI

Long Term Incubation

3,176

LTI

Long Term Incubation

3,450

Profit attributable to owners of parent

5,460

Profit attributable to owners of parent

6,200

Note: The main effects of the voluntary application of IFRS are expected to be the net presentation of income, the recording of unrealized gains/losses on the fair value of operational
investment securities, a decrease in amortization of goodwill, and reclassification of equity in earnings of affiliates.

adjustment is not applicable. Kakaku.com, Inc. started to apply IFRS from FY18.3. The figures on FY17.3 has been applied retrospectively.

11| DIGITAL GARAGE

DIGITAL GARAGE |12Consolidated Financial Highlights

Annual Report 2018

Key Performance Indicators
Net Sales

Ordinary Profit

60,168(JPY in Millions)

60,00050,000Equity Ratio(JPY in Millions)(Times)

8,000

5,017

6,000

20,000FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

45%

4,000

40%

2,000

35%

10,000
0

0

4.00

50%

40,00030,000Asset/Equity Ratio

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

Net sales rose 24.1% YoY, to 60.1 billion JPY

Ordinary profit rose 25.4% YoY, to 5.0 billion JPY

in FY 2018. In the most recent five fiscal years,
strong growth continued with a CAGR of 16.6%,
recording an all-time high. The FT Segment,
which continued to achieve results exceeding the
e-commerce market, as well as the MT Segment,
which continued its strong growth centered on

30%

2.88

3.00

34.7%

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

2.00

1.00

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

The equity ratio fell 1.9 percentage points YoY, toIn FY 2018, the asset/equity ratio rose 0.1

in FY 2018. In the most recent five fiscal years, we

34.7% in FY 2018. In FY 2018, due to strong businesspercentage points YoY, to 2.88. In FY 2018, without

realized a CAGR of 10.3%, returning to double-digit

growth in the FT segment, FT-related-businessrelying on interest-bearing bonds, we conducted

growth. In addition to recording high profit growth

assets and liabilities both increased. Specifically, thisinvestment within the scope of our cash flow. As aexceeding 20% in the FT and MT Segments, ourincludes money held in trust, accounts receivable -result, our asset/equity ratio was around the same

recurring businesses, the LTI Segment remained

other, and deposits received. As the increase in theselevel as the previous fiscal year. Going forward,

strong, allowing us to record around 2.7 billion JPY

items exceeded the increase in net assets, as a result,

we will continue to maintain financial health while

performance-based ads, both stably posted double-

in share of profit of entities accounted for using

our equity ratio declined. However, this decline did notconducting management utilizing some level ofdigit gains, driving growth in sales for the entire

equity method, contributing to growth.

affect our financial health, and the current level poses

asset/equity ratio.

company.

no problems whatsoever in terms of our financial
condition.

Profit Before Income Taxes

Profit attributable to owners of parent(JPY in Millions)(JPY in Millions)

10,000

7,619

8,000

5,460

6,000
4,500

ROA

ROE

10%

20%

8%

18%

5.4％

6%

6,000

14%

3,000
4%

4,000
1,500

2,000
0

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

0

15.3%

16%

12%

2%

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

Profit before income taxes rose 13.6% YoY, to 7.6

In FY 2018, profit attributable to owners of parent

billion JPY in FY 2018. In the most recent five fiscal
years, we maintained double-digit growth with a0%10%
FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

8%

FY 14.6

FY 15.6

FY 16.6

FY 17.3

FY 18.3

In FY 2018, ROA rose 0.3 percentage points YoY to

In FY 2018, ROE rose 1.7 percentage points YoY,

rose 16.2% YoY to 5.4 billion JPY, recording an all-

5.4%. This was due to a significant YoY improvement

to 15.3%. While net assets increased due to antime high for the first time in nine periods. Growthin asset efficiency following an increase in net sales

increase in retained earnings, every segment was

CAGR of 12.6%. In addition to strong growth in thecontinues, with a 15.0% CAGR in the most recent

that exceeded the increase in total assets, despite

strong, contributing to the recording of an all-time

FT Segment and MT Segment, in the IT Segment asfive fiscal years. In addition to recurring businessdecreased profitability caused by the impact ofhigh in profit attributable to owners of parent. Going

well, we maintained steady sales of securities held

growth in the FT Segment, MT Segment, and LTI

extraordinary income and losses, which was, inin Japan and overseas, contributing to 30% growth

Segment, we believe this was also the result of

turn, in spite of an increased operating margin.

YoY.

building a structure to create stable incubation
results in the IT Segment.

forward, DG will place every effort into achieving
the 20% ROE set forth as a target in the Mid-term
Business Plan, taking into account profitability andcapital efficiency.

*All YoY comparisons of key performance indicators use annualized figures from FY 2017.

13| DIGITAL GARAGE

DIGITAL GARAGE |14SPECIAL
CROSS
TALK

The Two Co-Founders Discuss
KAORU HAYASHI
Here, DG’s co-founders, Kaoru Hayashi (Representative Director, President Executive Officer
discuss the current state and future of

Hayashi
DG is working with its strategic business partner
Blockstream*1 to pursue the application of the publicblockchain*2 technology used in Bitcoin in various uses, but
we also see many attempts throughout the world using“private blockchains*3,” to which only limited users canconnect. Some of these efforts appear only to be attracting
attention, despite lacking real substance. As the wheat andchaff is being separated, proper blockchains could face
reputational damage through complaints that “security
is not maintained despite taking the trouble to use

blockchain,” and that “costs did not decline whatsoever.”
Ito
Personally, I believe that “private blockchains” are “pseudo
blockchains” and not real blockchains. The reality is thateven simple distributed databases*4 are being called
private blockchains. “Blockchain” has spread like wildfire
just like other buzzwords such as “IoT*5” and “cloud*6,”
and I believe a gap is emerging between what is being
advertised throughout the world as “blockchain” and“blockchain” properly defined in technological terms. This

*1 Blockstream: Company engaged in the technological development of the blockchain used in Bitcoin for use in a range of applications. DG has a capital and business alliance with
Blockstream.
*2 Public blockchain: Blockchain with no restrictions on network participants (nodes).Comparable to the Internet.
*3 Private blockchain: Blockchain in which only restricted participants (nodes) can join the network. Comparable to a dedicated line.
*4 Distributed database: Centrally managed system that allows multiple databases managed on a network to function as one database.

15| DIGITAL GARAGE

Future Focus Business Fields
JOI ITOand Group CEO) and Joi Ito (Director, Digital Garage, Inc.; Director, MIT Media Lab)focus fields for DG’s continued growth.

is like the “multimedia boom” in the early 1990s. At thetime, telephone companies and cable television companies
used pre-internet online services and set-top boxes*7 todevelop a range of independent services.
HayashiSome even placed the “CAPTAIN System*8” and preinternet online services of that time on equal footing with
the Internet.
Ito

If we look under the surface, the positioning of applications
being pursued by various companies using private
blockchains is like that of the pre-internet online services
that came before the Internet. By doing so, we get a better
image of new applications. However, we cannot say that
if pre-internet online services had never existed, theInternet would not have been born. The Internet, which
gained popularity later, was clearly superior to the preinternet online services and led to the creation of a range
of applications.

*5 IoT: Internet of Things. The IoT allows not only PCs and smart phones, but also a range of devices to be connected to the Internet and managed.
*6 Cloud: Refers to an environment that allows computing resources distributed on a network to be used when necessary.
*7 Set-top box: A multimedia terminal connected to the television set that uses CD-ROMs as recording media. Gained attention in the mid-1990s.
*8 CAPTAIN System: A multimedia service launched by the then Nippon Telegraph and Telephone Public Corporation in 1984. Using analog telephone lines, the system displayed images
and texts on television screens.

DIGITAL GARAGE |16SPECIAL CROSS TALKThe Two Co-Founders Discuss Future Focus Business Fields
Kaoru Hayashi × Joi Ito

To create systems with worldwide interoperability,
it is essential to be involved not only with theapplication layer development, but also with the
Bitcoin Core development.
Ito
I believe there is a possibility. If we think back to theearly days of the Internet, because engineers extremely
familiar with network protocol gathered at the researchlab of Professor Jun Murai at the Faculty of Environment
and Information Studies, Keio University is exactly why
the lab was a worldwide leader in IPv6*10, for example.
With blockchain as well, if we assemble Bitcoin Core
developers and can carry out technological development
considering not the Japanese market but the global
market, I believe Japan can lead the world.

KAORU HAYASHI
Representative Director, President
Executive Officer and Group CEO

HayashiIn the Fintech field, which is increasingly expected to be atarget for the application of blockchain, coordination withregulatory authorities is essential in commercialization.
Regarding this point as well, I feel that momentum isincreasing in Japan as well, but how do you see it Joi?

Digital Garage, Inc.

HayashiThat said, there are decisive differences between
the Internet and blockchain. In the initial Internet,
the only effect of bugs was that contents would notdisplay well, but as blockchain handles the values forcryptocurrencies, experimental testing is difficult.
Ito
That is the real reason that star tups such as
Blockstream applying the blockchain used in Bitcoin
in other applications are rare. We have to proceed very
carefully as we begin to extend the functionality ofblockchain since its original function is the platform forbitcoin. Startups that wish to make aggressive moves
quickly are avoiding this situation and tending to focus
on the development of private blockchains. Be that as it
may, there are separate risks there too.
Hayashi
Ultimately, when do you think the public blockchain will
be used in a range of applications as a form of social

infrastructure? Personally, I am interested in whether itwill be ready for the Tokyo Olympics.
Ito
It appears that it will take several years for the Bitcoin
blockchain to be able to be used safely in otherapplications. Furthermore, at that time applications will
likely be limited. It appears that it will take time for theblockchain to be stably used in a range of applications associal infrastructure like the current Internet.

Establishing blockchain as a coretechnology is the top priority
Hayashi
DG is now working with domestic financial companies todevelop globally unprecedented revolutionary financial
infrastructure*9, but do you believe there is a possibilityof a world-leading blockchain business being created inJapan?

*9 Globally unprecedented revolutionary financial infrastructure: In September 2018, DG and Tokyo Tanshi established a joint-venture company for blockchain financial service R&D andbusiness in the Fintech field.

17| DIGITAL GARAGE

Ito
In the 1990s in Japan, cutting-edge initiatives were
underway, such as experiments with digital cash by the
Bank of Japan and NTT DATA Corporation. The skill levelof the people involved with these experiments was higheven on a global level. To the extent that this knowhow
has been accumulated, the Japanese authorities shouldhave a slight advantage.
Hayashi
How do you feel about ICOs *11, which have gained
attention as a new funding method for startups?
Ito
From a medium- to long-term perspective, I feel thatthe idea of ICOs itself is interesting. However currently,
because the issuing companies do not want ICOs to
be regulated as securities, they are trying to avoid
regulations by not marketing them as such, which isproblematic. I personally believe that ICO regulations
should be properly established as a simpler version of
the Securities and Exchange Act and that ICOs should be
handled similarly to securities.

HayashiIt appears we will need an idea to link the value of thetokens to the value of what actually exists.
Ito
That is also one way of doing things. At the very least, if
investors are attracted by arbitrarily changing the price,ultimately those who bought at a high price will facelosses. While we can think of schemes to prevent token
prices from rising above actual prices, the ICO market
itself is now becoming a bubble that will be hard to
slow down. On Wall Street, we often see products being
created where someone is guaranteed to lose, but I do
not think this is a good thing. I think that if the market
can create a scheme to prevent token prices from spiking
above real prices, ICOs could be a good tool.
HayashiWhat will be required for Japanese blockchain
applications to lead the world?
Ito
Like the Internet, I think naturally what will be important
are technological capabilities. To create systems withworldwide interoperability, it is essential to be involved
not only with the application layer development, but alsowith the Bitcoin Core*12 development. We must assemble
a team of engineers whose development capabilities
are on par with the worldʼs top-level engineers andproactively engage in Bitcoin Core development. When
blockchain begins to truly spread, the deciding factor incompetition will be the presence of reliable, world-classengineers.
HayashiExactly ̶ when the Internet was being developed, thecompanies that included individuals who participated in
the WIDE Project*13 with Professor Muraiʼs group werelater competitive on a global stage.
ItoWith blockchain, I think DG should play that role.

*10 IPv6: Internet Protocol version 6. As opposed to the existing IPv4 which defines 32-bit IP addresses, as IPv6 can define 128-bit IP addresses, it is suitable for the age in which a range
of devices will be connected to the Internet.
*11 ICO: initial coin offering. A fundraising method that issues dedicated cryptocurrency in place of stock.
*12 Bitcoin Core: Refers to Bitcoinʼs core software. Requires sophisticated knowledge and skills.
*13 WIDE Project: Research project to build a large-scale distributed computing environment. Began in 1988 by connecting multiple universities through the Internet.

DIGITAL GARAGE |18

SPECIAL CROSS TALKThe Two Co-Founders Discuss Future Focus Business Fields
Kaoru Hayashi × Joi Ito

The wave of technologyʼs rapid advancement thatwas born from the Internet spread to the BioHealthfield and led to the beginning of innovations unlike
anything that came before.
Launch startup development in the
BioHealth field
HayashiIn the biotechnology and healthcare fields as well,recently there has been an active move toward new
business development. Open Network Lab BioHealth*14,
the BioHealth field startup accelerator program
launched by DG, has gathered more than 20 participatingcompanies including major pharmaceutical companies.
Ito
Part of the background for this is that the research anddevelopment of major pharmaceutical companies isstarting to level off. While more and more money is being
invested into research and development, the number of
medicines created as a result is declining. This type ofbusiness model will be unsustainable five years fromnow. The issue for major pharmaceutical companies is
how to break out of this situation. They are introducing AI
to the drug creation process and working to streamline
the testing process but are beginning to realize that
it will be difficult to pursue internal innovation for themeasures they have taken thus far. This is occurring
not only in Japan but also worldwide. This is like how
newspaper companies, which have a lot of printingpresses, cannot easily change over when quickly trying
to shift to digital. Additionally, the new knowledge
being created in the field of biology is forcing innovationin existing ways of creating drugs. For example,
we have come to understand that the systems of
immunity, microorganisms, and the brain are complexlyinterconnected. This means that there are manyillnesses for which we cannot simply take medicine tocure and which only resolve if changes are also made to
the living environment. In other words, we are coming
to see the limits to health that can be brought about
by doctors, pharmaceutical companies and medicine
alone. A new model and approach are required. I believethat this new approach will require different innovationand investment methods than those that major

pharmaceutical companies have pursued thus far.
Therefore, an increasing number of pharmaceuticalcompanies are placing hopes on cooperation withstartups where free thinking is possible. For example,
there are professors at Japanese universities withideas for allergy medications using microorganisms
who wish to pursue commercialization. However,major pharmaceutical companies lack the conceptof treatment using microorganisms and have neither
the facilities nor the personnel to cultivate and test
microorganisms. To breakthrough these conditions,our business alliance partner PureTech is assemblinghuman resources from around the world and focusing
on new concept drug creation.
HayashiIf that is the case, I wonder how startups with new
approaches to drug creation and major pharmaceuticalcompanies will cooperate.
Ito
I think startups will bring the new drugs they havedeveloped to major pharmaceutical companies, whowill handle the manufacturing and distribution. This isbecause it is almost impossible for startups to globally
distribute drugs they have developed themselves.
When a new idea is born among major pharmaceuticalcompanies, because development has not progressedwith the existing internal process, there has been an
increasing pattern of spinning out a team externally,
and where development is successful, once again
reincorporating the team internally.

Protecting personal information with
the Japanese GDPR
HayashiThe GDPR *15 was enacted in Europe in May 2018,
meaning we now live in an age where service providers
will be held strictly accountable for their personal
information protection initiatives.

JOI ITO
Member of the Board of Directors and Co-*14 Open Network Lab BioHealth: Accelerator program started at DG Lab, an R&D organization operated jointly by Digital Garage, Kakaku.com and Credit Saison. Its purpose is tonurture startup companies in the fields of biotechnology and health.
*15 GDPR: General Data Protection Regulation. It is a framework for protecting personal information that the European Union (EU) began applying from May 2018. Its purpose is tostrengthen and unify measures to protect personal information in EU countries.

19| DIGITAL GARAGE

Founder,
Digital Garage, Inc.
Director, MIT Media Lab

DIGITAL GARAGE |20SPECIAL CROSS TALKThe Two Co-Founders Discuss Future Focus Business Fields
Kaoru Hayashi × Joi Ito

Ito
I see GDPR as a positive trend. This is because the world
has undervalued protection of personal information thus
far. All advertisements should be good both for the buyer
and the seller, but with current online advertisement, it
looks as if there is fierce competition over how to makepeople feel like buying something they do not want.
Hayashi
You see the same advertisements no matter which
website you visit. It is exactly like stalking.
Ito
For example, we see poisonous advertisements
targeting the weaknesses of people visiting the site andpolitically leading advertisements. We need to returnto the starting point and reconsider what purpose
advertisements serve in the first place. For example, oldtelevision advertisements were fun to watch.
Hayashi
How do you think Japan should respond to GDPR? It looks
like the response guidelines differ by service provider.
Ito
The basic approach of GDPR is not wrong. I believethat Japan should organize its laws, create a Japaneseversion of the GDPR, and protect personal information.
Hayashi
Fake news has become an issue, and more people arecalling for neutrality in media. However, the reality isalso that even if you continue to post fantastic content on
online media, you cannot make money with the current
advertising model. As an outside director at the New
York Times, do you have a real sense of the difficulty inbalancing the neutrality and earning potential of media?
Ito
The New York times and Washington Post are wellknown, but they are actually small compared to major
Japanese newspapers in terms of circulation. However,their small readership is also extremely loyal. Just as
newspaper reports were the starting point*16 forcing
the resignation of President Nixon, because everyone inAmerica realizes that the news media has an extremely
important political role, a certain group feels extremely
strongly that it is essential to society.

have in the page, rather than the “pageviews” currently
being widely used, and a scheme to appropriately set
advertising fees for articles with strong engagement.
By popularizing a scheme that, instead of attracting
sites posting fake news, attracts quality advertisements
to media that posts articles with value earned throughjournalistsʼ work, i.e. quality media, we could give a boost
to Japanʼs contents industry.

HayashiThere have been many Hollywood movies depicting theactivities of newspaper reporters.

Ito
I think those kinds of ideas are extremely interestingand should be actively pursued. Surprisingly, in America
these kinds of initiatives are not pursued in consortiums,
but rather by individual media outlets. However,engagement is also given as an important metric in
America. Also, in America, Facebook has an extremely
large presence as a news platform, and how to interact
with Facebook is becoming an issue. Major media outlets

Ito
Everyone believes that the media has an importantfunction in democracy. In reality, since Donald Trump
became president, the New York times has experienced
a substantial increase in sales. Sales have been boosted
by public opinion supporting media that confronts theadministration. On the point of whether “democracy
will not function without mass media,” more liberal
Americans strongly believe this, but I think this point
is unclear in Japan. Recently, my friend made adocumentary on the doping problem in Russia, but toprotect himself, he involved the New York Times andhired lawyers and security. To put your life on the line
as a reporter like my friend is something you cannot
necessarily do as a freelancer. The role of major media
outlets like newspaper companies is to support this typeof reporting.

fear a situation in which there are only platforms andcompanies issuing news information.
HayashiA move is also underway in France involving major
publishers to review advertising fees with engagement
as a metric. People are saying the same thing
everywhere. Not limited to the Japan Premium Media
Consortium, DG will continue to contribute to the world
while creating businesses that play a role throughout
society.
ItoThis is because DGʼs strength is that, for a company
welcoming the 25th anniversary of its founding, it has
not lost its venture-company-like approach to facing newchallenges.

Hayashi
DG offered its cooperation as the organizing office toEstablish the “Japan Premium Media Consortium*17,”of which more than 20 major media companies are
members. The aim is to break out of the current
reality in which Japanese online media prices are
the lowest among developed countries. We areconsidering introducing a tool to measure the metricof “engagement,” which shows the interest site visitors

DG will continue to contribute to theworld while creating businesses thatplay a role throughout society.

*16 Newspaper reports were the starting point: In the “Watergate Scandal” that forced the resignation of then president Nixon in 1974, the scoop from the Washington Post played a large
role.
*17 Japan Premium Media Consortium: A voluntary consortium of quality media outlets that aims to evaluate and appeal for media content value and have that content value reflected inadvertising prices.

21| DIGITAL GARAGE

DIGITAL GARAGE |22

PHILOSOPHY

Annual Report 2018

PHILOSOPHYFIRST PENGUINSPIRITFor a colony of penguins to survive, they require their staple food:
fish. However, the deep ocean where fish thrive is also home todangerous predators such as killer whales and leopard seals that preyon penguins. The penguin that courageously decides to be the first to
take the plunge, despite the possibility of encountering such predators,
is referred to as the “First Penguin.” The Digital Garage Group was
founded on the creed of being the “First Penguin”̶having the courage
and unshakeable will to be the first to step forward and take up achallenge.
With all of our employees guided by the spirit of leading and being
the “First Penguin,” we will move forward to provide services that are
useful to the world.

Entering the 4th Stage of Incubation toward
our 25th Anniversary in 2020
In the two years leading up to the Tokyo 2020 Olympic and Paralympic
Games, the business environment is expected to experience the end of someexisting businesses and the creation of new businesses, brought about byunprecedented rapid technological innovation. To respond to these major shifts,
DG started a new Mid-term Business Plan with the slogan “Open Incubation,”
which is the next step for “Open Innovation.”With DG Lab, an open innovation platform for R&D established in July
2016, at the core, DG will support the creation of a new Japan and further
expand business. We will accomplish this by using context to connect new
businesses created by technological innovation while collaborating with various
corporations, from startups to major corporations, engaged in progressive
initiatives.

THINK FOR YOURSELF AND QUESTION AUTHORITY- Timothy Leary23| DIGITAL GARAGE

DIGITAL GARAGE |24

HISTORY

DG HISTORY

Annual Report 2018

Starting with the creation of Japan’s ﬁrst personal home page in 1994, Digital Garage’s history has always beenahead of the times, paralleling the growth of the internet. Over this period, our efforts include not only Japanese
localization of crawler-based search services, building e-commerce sites, provision of payment platforms, andcommercialization of blog search, but also fusion of CGM and advertisements, support for social media operations,and the Asian development of payment platforms. Our accumulated experience and track record through constantinvolvement with these kinds of cutting-edge internet businesses are Digital Garage Group’s strength and the source of
our ability to create high value-added context.

1995

2000

2005

2008

2011

2012

2013

2016

2016

2018

Created Japan’s first
personal homepage“Tomigaya,” andestablished Digital Garage
to create internet-based
advertising.

Digital Garage was listedon the OTC (now theTokyo Stock Exchange
JASDAQ).

Made DG&Ibex, a company
providing advertising andpromotion services byfusing real space andcyberspace, into a
consolidated subsidiary.

Entered into a businessalliance with Twitter, Inc.
and provided localization
support.

Established the OpenNetwork Lab to support
next-generation startups.

Made VeriTrans Inc. into a
consolidated subsidiary inorder to become Japan’slargest payment platform.

BI. Garage, a joint venturewith the Dentsu Group,
embarked on a big data
operations mission.

Launched an R&D platform
by DG, Kakaku.com, andCredit Saison to create
new businesses.

Invested in Blockstream,Inc., which develops
blockchain technology.

Established Crypto Garage,
Inc. as a joint venture with
Tokyo Tanshi for the R&D
and commercialization ofblockchain financial
services.

1995

2000

2003

2005

2011

2012

2013

2016

2018

Established econtext, Inc.
to provide payment andother e-commerce
solutions.

Kakaku.com was listed on
the Tokyo Stock Exchange
Mothers Index.

Established DG Incubation
to invest in and provide
business support toventure companies.

Established DGUS, the DG
Group’s US base ofoperations, to accelerate
US incubation activities.

Entered into a capital andbusiness tie-up with
Dentsu Inc. and begancollaborating in all aspects
of digital marketing.

Established the incubation
center, DG717, in theheart of San Francisco.

Established ANA Digital Gate,
Inc., a joint venture between
VeriTrans Inc. and ALL
NIPPON AIRWAYS TRADING
CO., LTD. developing new
payment solutions.

DG Lab developed DG LabDVEPTM, an all-purpose
framework to issue
unique virtual currencies
on the Bitcoin’s
blockchain.

’95-’00
PORTAL SEARCH

Established an internet advertisingbusiness with a high-traffic portal site andcrawler-based search engine at its core.

2000

’O0
E-COMMERCE DESTINATION SITE

Established an operational base through bydeveloping a settlement service targeting
e-commerce sites, and by investing in
Kakaku.com, a company developing a
price- comparison site.

Hybrid Solution

2008

’O8
SOCIAL MEDIA

Expanded advertising/marketingbusinesses for a new era of users utilizing
blogs, Twitter, and other forms of social
media.

2016

Established “DG Lab,” an R&D platform,
with the aim of developing technology that
supports next-generation businesses.

2017

In anticipation of the business environment
in the year 2020 and beyond, starting
preparations to develop new businesses
through open incubation.

IT/MT/FT × Open Innovation

Social Media Incubator

2018

’18
FUTURE…

Recorded an all-time high for profit for
the first time in nine periods, and DG Lab
began full-scale initiatives aimed atcommercialization.

Open Incubation toward 2020

Key Web Milestones

1995

Microsoft introduces
Windows 95

25| DIGITAL GARAGE

1998

Number of internet users
in Japan surpasses
10 million

2000

Google introduces aJapanese language
search service

2007

2008

Apple introduces Number of fiber-optic
the iPhone
service users exceeds
number of ADSL users in Japan2014

Number of smartphone
subscribers exceeds numberof feature phone subscribers

2017

AI program called “AlphaGo”
beats the best professional
Go player in the world

2020

Tokyo Olympic andParalympic GamesDIGITAL GARAGE |26

FOUR SEGMENTS / BUSINESS MODEL

FOUR SEGMENTS
FOUR SEGMENTS and BUSINESS CONCEPTS

Annual Report 2018

BUSINESS MODEL
THE DIGITAL GARAGE GROUPʼS THREE EARNINGS BASES

Business ModelWe create innovative internet
services with open innovation
in four s egment s. A dding tosustainable growth in marketing(MT) and payment services (FT),
which are indispensable for the
profitability of internet-related
businesses, we will discern the
future of technology evolution andcreate new businesses through DG
Lab, an open innovation platform.

IT

Incubation Technology
Segment

LTI

MT

E-COMMERCE
DESTINATION SITE

SOCIAL MEDIA

1995-2000

2000-

2008-

2016 -

POINT 01

Long-term Incubation
Segment

Marketing Technology
Segment

PORTALSEARCHFT

Financial Technology
Segment

Organic growth in the IT, MT, and
FT Segments.

ADVERTISINGPAYMENT
環亞智富有限公司

POINT 02
Acceleration of incubation with DGʼsunique cross-segment platform.

POINT 03

Advertising | Promotion

Big data businesse-Commerce | Online Settlement Platform

ENABLING PLATFORM | 2 EARNINGS BASES

Achievement of long-term benefits
from business incubation bybringing incubated businesses into
the DG Group.

Connecting diverse business areas with contexts, discerning the evolution oftechnology, and building a system capable of ongoing business growth

Incubation model applying the enabling platform

DG applies three fundamental technologies – IT (Information Technology), MT (Marketing Technology) and FT (Financial

The Marketing Technology Segment and Financial Technology Segment are generating stable earnings as two earnings

Technology) – to create new contexts for the internet era. These new contexts, projected onto business areas, have given

bases (enabling platform). Digital Garageʼs incubation model uses this enabling platform to invest in and nurture

rise to our Incubation Technology Segment, Marketing Technology Segment, Financial Technology Segment, and Long-

companies in Japan and abroad. Adding DG Lab to this incubation model, we are striving to continue contributing toterm Incubation Segment.

society by further accelerating incubation, and developing and providing useful services.

27| DIGITAL GARAGE

DIGITAL GARAGE |28

BUSINESS OVERVIEW

BUSINESS OVERVIEW
FTFINANCIAL TECHNOLOGYSEGMENTMT
MARKETING TECHNOLOGYSEGMENT
P.26

IT
INCUBATION TECHNOLOGYSEGMENTLTI
LONG-TERM INCUBATIONSEGMENT

29| DIGITAL GARAGE

Our handling of transactions in the public-funds
sector has increased, in addition to e-commerce
and face-to-face retail store payments, and wegrew our position in social infrastructure
In addition to e-commerce, development into the non-EC market, including faceto-face payments in response to inbound consumption by foreign visitors to Japan,
is expanding, and we are continuing to realize growth exceeding the market.
Furthermore, this fiscal year we began handling transactions for national pension
premiums, as the role of DGʼs payment business as a form of social infrastructure
grows in importance each year.

As a “Business Strategy Partner” leading clients
toward growth, we support marketing activities
centering on programmatic advertising
Against the backdrop of growth in the Japanese internet advertising market, doubledigit growth has continued, with net sales rising 28% and profit before taxes rising
37% from the previous fiscal year. The segment will continue to apply the mostadvanced technologies and collaborate with DG Lab to create next-generation
marketing solutions.

Real start to the global promotion of investing inand nurturing businesses
We have further strengthened the global incubation stream connecting North
America, Japan, Asia, and Europe, and expanded DGʼs overseas investment business.
Also, by gradually selling off our investment portfolio in Japan and overseas, werecorded strong YoY growth in profit before taxes. In addition, in line with our Midterm Business Plan, we are implementing investment schemes with ROI 2.5× as aninvestment criterion.

New segment launched to create long-term,
continuous cash inflow
In FY 2018, the segment name was changed to the Long-term Incubation Segment(LTI). In addition to our equity-method affiliate Kakaku.com, Inc., by making
companies receiving DG investment group companies, we are promoting a style which
continuously realizes incubation results. Going forward, in addition to the above, wewill establish joint ventures with other alliance partners and aim to create long-term,
continuous cash inflow.

Principal Companies

Annual Report 2018

FY 2018 Highlights■ Growth continues to top the e-commercemarket, total amount of payments handledgrew 20% YoY to more than 1.5 trillion JPY■ Developing new fields in the non-EC
market. Business alliance launchedwith major Japanese POS manufacturer
TOSHIBA TEC CORPORATION■ Performance-based ads drove a large
increase in both sales and earnings, as net
sales rose 28% YoY and profit before taxes
rose 37% YoY■ Collaborating with Kakaku.com, Inc. tostrengthen the data marketing business.
Promoting operational streamlining andlaunching work-style reforms■ Supporting the global development ofstartup companies “ Global Incubation
Stream”■ Launching the accelerator program “Open
Network Lab HOKKAIDO”■ Kakaku.com, Inc. ʼ s investment profit onequity method remains strong, profit
before taxes of 3.1 billion JPY■ E n h a n c i n g i n i t i a t i ve s i n l i fe d e s i g nbusinesses

DIGITAL GARAGE |30

Financial Technology Segment

FT

FINANCIAL TECHNOLOGYSEGMENT

Segment
Sales Ratio
FY 2018

34.8%

Our handling of transactions in the public-funds sector
has increased, in addition to e-commerce and face-toface retail store payments, and we grew our position insocial infrastructure
In addition to e-commerce (EC), development into the non-EC market, including
face-to-face payments in response to inbound consumption by foreign visitors toJapan, is expanding, and we are continuing to realize growth exceeding the market.
Furthermore, this fiscal year we began handling transactions for national pension
premiums, as the role of DGʼs payment business as a form of social infrastructure
grows in importance each year.

KEY FIGURES FY 2018
Segment net sales

Segment profit before taxes

20.9

billion JPY

2.5

billion JPY

Amount of annual transactions

1.5

trillion JPY

Business Model
As one of Japanʼs largest payment service providers with more than 1.5 trillion JPY in annual transactions,
we provide diverse, comprehensive payment platforms including credit card and convenience store
payments, and QR and bar code payments
Business model and stakeholders
Credit card
payments

Convenience store
payments

Annual Report 2018

Bank
payments

Electronic money/
point payments

Carrier
payments

ID payments

International
payments

Cryptocurrency
payments

Post-settlement
payments

SCORE(Affiliate of VeriTrans Inc.)The Financial Technology Segment
is responsible for payment, one ofDigital Garage ʼ s earnings bases(enabling platform).
As a payment service provider(PSP), in addition to credit card
payments and convenience store payments, we collectively
provide an ever-increasing number of diverse payment
methods including digital money services starting withApple Pay, LINE Pay, Alipay, Wechat Pay, and Suica to EC
businesses and face-to-face retail stores.
With cashless payments also being promoted as national
policy, various payment methods such as electronicmoney and QR payments are continuing to increase.
For EC businesses and face-to-face retail stores, while
introducing the wide variety of payment methods demandedby consumers is important, individually carrying out
system development, managing personal information
including payment data, and conducting payment receiving
operations is a large challenge due to the complexity ofthese processes. Furthermore, recently it has becomecommonplace to conduct sales promotions based on
payment and purchasing data analysis. The Financial
Technology Segmentʼs business is to collectively provide

comprehensive payment platforms to those types of retailbusinesses.
The basic business model is to record the payment
commissions resulting from multiplying the amount of
payments handled by retail businesses by the commission
rate as sales, and to record the commissions paid to thecredit card companies and convenience store chainsproviding the individual payment methods as base costs.
Recently, transaction types are diversifying, as commissions
are being collected by the number of payments through theprovision of capabilities such as fraud detection systems and
QR code issuing systems.

Market Environment and Business Overview
Growth continues to top the EC market, total amount of payments handled grew 20% YoY to more than 1.5
trillion JPY

OnlineRealEC businesses

Member stores Face-to-face retail stores

Alliance strategy

・Recruit(mobile POS)

・Toshiba TEC
(POS)

Users

31

| DIGITAL GARAGE

・ANA GroupIn FY 2018, the Financial Technology Segment reported
net sales of 20.9 billion JPY (+11.4% YoY) and profit before
income taxes of 2.5 billion JPY (+29.1% YoY) (compared to FY
2017 [annualized value for the nine-month irregular accountsettlement period {reference value}]). These results largely
surpassed the 15% growth in profit before income taxes set
as one KPI in the Mid-term Business Plan.
In calendar year 2017, Japan ʼ s BtoC EC market grew
by a solid 9.1%, to 16.5 trillion JPY, according to the“e-commerce market survey results” of the Ministry of
Economy, Trade and Industry (METI). However, the entire
electronic payment market including EC is 68 trillion
JPY, and going forward, rapid growth is expected with theevolution of a cashless society.
Operating subsidiaries in the segment VeriTrans Inc. andecontext Inc. grew their total amount of payments handled
by 20% YoY (April 2016 – March 2017) to 1.5 trillion JPY,
achieving growth that largely exceeded the growth rate of

the overall market. In addition to growth in the EC market,
increased transactions in the non-EC market including faceto-face payments contributed to this growth.

DIGITAL GARAGE |32

Financial Technology Segment

Japan’s EC market

Growth Strategy

CAGR

12 %

( 2012-2017 )(1.0 billion JPY)

18,00012,000

9,513

11,166

12,797

13,775

16,505

15,1366,000

As a payment platformer, use the tailwind provided by the governmentʼs cashless promotion policies to expand
various payment methods in diverse fields, and create a Fintech business to handle social infrastructure
Japanʼs ratio of cashless payments is low compared toforeign countries, at 19.8% in 2016. To also respond toinbound demand ahead of the 2020 Tokyo Olympics, in its“Cashless Vision” released in April 2018, the Ministry of
Economy, Trade and Industry aims to achieve a cashless
payment ratio of 40% by June 2025. Furthermore, with thelegal amendments in June 2018, face-to-face retail storesare required not to maintain credit card information andto accept IC cards by March 2020. Additionally, verification
testing has begun for unstaffed stores and unstaffed
registers due to the issue of spiking personnel costs frompersonnel shortages.
The progressing shift to a cashless society is a tailwind
for DGʼs payment business, and because the economies ofscale from increased transaction volume and transaction
numbers will lead to increased profitability, we are focusing
on the following initiatives.

payments for various administrative processing fees for
Osaka Prefecture, we concluded a contract with the National
Tax Agency, and starting with 2019 tax returns, we will also
provide a service system allowing national taxes to be paid atconvenience stores nationwide using a QR code without priorregistration. Of the numerous payment service providers,
only the DG Group exclusively provides these payment
services. Going forward, we will continue to focus on thegovernment service sector, including public funds.

Ⅲ Promoting alliances
Furthermore, as our alliance strategy, we will promotebusiness expansion through system collaboration orbusiness alliances with business partners with large-scalecustomers or core systems. While we already have alliances
mainly in face-to-face payments with the ANA Group and
Recruit Group, in February 2018, we formed a businessalliance to develop multi-payment solutions for face-toface retail stores with TOSHIBA TEC CORPORATION, which
has the largest share in POS systems both in Japan andoverseas. Additionally, initiatives are also expanding to linkbiometric authentication such as fingerprint authenticationand facial authentication with payment systems.
As we handle personal and confidential information related
to payments and purchases and move forward with the
response to real demand for cryptocurrencies, we willcontinue to maintain close cooperation with government.
Based on longstanding knowledge and technologicalcapabilities, we are accelerating the growth of payment
systems, which have become an extremely important part ofsocial infrastructure, as a new Fintech platform.

Ⅰ Non-EC payment growth

0

2012

2013

2014

2015

2016

2017

FY 2018 Key Initiatives

As our main initiatives, we are focusing on the developmentof payments to face-to-face retail stores and cryptocurrency
exchanges, and payments for specific markets (realestate, funeral services), and have increased our amountof payments in the non-EC sector by 2.4× YoY. Of that, theamount of face-to-face payments handled including Alipayrose by 4.9× YoY due to growth in inbound consumption, anddeposit charge payments to various electronic money andFirstly, while of course expanding our share in the EC
market, one of our main sectors, with the legal groundwork
being laid to promote cashless payments due to the sharp
increase in foreign visitors to Japan, we will work to further
develop the non-EC market, which still has ample room for
growth. In addition to initiatives in specific markets where
digitalization is not progressing such as real estate andfunerals, we will work to expand international paymentsby responding to the globally expanding QR, bar code, andcontactless payments of various countries.

Ⅱ Growth in public-funds sector payments

Developing new fields in the non-EC market
cryptocurrency exchange accounts grew by 5.2×.
Furthermore, public funds transactions including taxes andinsurance premiums rose, and we began providing services
for credit card payment clearing for national pension
premiums to the Ministry of Health, Labour and Welfare andconvenience store payments of administrative processing
fees to Osaka Prefecture.

Next, public-funds sector payments are also steadily
growing. After providing the service for convenience store

Target sectors and market scale
Non-face-to-faceEC

Non-EC

Amount of transactions in focus fields (non-EC sector)

BtoC EC

Face-to-face

16.5 trillion JPY

CtoC EC 1.1 trillion JPY

Electronic payment market

68.8 trillion JPY(Cashless payment ratio ≈ 20%)

Government target
Cashless payment ratio

FY 17.3

Annual Report 2018

FY 18.3

2.4×
Specific markets+ 53%
Person-to-person payments+ 1%
Charges to cryptocurrency exchange
5.2×
accounts and electronic money
Face-to-face payments
4.9×(2025)

Private-sector final
consumption expenditure

12-month comparison

Overall

40 %303.3 trillion JPY

Source: BtoC/CtoC EC market scale: METI “FY2017 E-Commerce Market Survey” Electronic payment market: CardWave “Electronic Payment Overview 2017-2018”
Private-sector final consumption expenditure: Cabinet Office “SNA (National Accounts of Japan)”(real estate, funeral services)

Overview of convenience store payments of national taxes using QR codes(remittance payments)❶ Taxes filed by e-tax or at tax office

Taxpayer

Nationwide
524 locations❷ QR code with tax payment information created and provided to taxpayer

Tax items covered(mobile payments)

Convenience stores❸ Store terminal reads QR code and provides payment form ❹ Taxes paid at register2016.4-2017.3

2017.3-2018.3

Tax offices

National taxes, amountof taxes collected*1

National taxes, number ofpayments
92.7trillion JPY FYtax2018
budget*2

Income tax
Corporate tax
Inheritance tax

Consumption tax
Liquor tax
Cigarette tax

etc...

Applied to all national taxes

44.07million

FY 2018 budget*1 Source: Estimated based on Ministry of Finance Tax and Stamp Revenues breakdown.
*2 Source: National Tax Agency “Tax Administration: Current Status and Issues” (January 2018)33| DIGITAL GARAGE

Initiatives and progress in the public-funds sector
Ministry of Health, Labour and Welfare: card
payments of national pension premiums
Osaka Prefecture: convenience store payments ofadministrative processing fees
Japan Patent Office: card payments of fees including patent fees
Based on the government’s “Japan Revitalization
Strategy,” the expanded use of electronic
payments in the public sector is being promoted by
the relevant government agencies as “Policies forthe shift to a cashless society”

Electronic payments will continue to increasein various public-funds sectors in the future
DIGITAL GARAGE |34

Marketing Technology Segment

MT

MARKETING TECHNOLOGYSEGMENT

Segment
Sales Ratio
FY 2018

58.0%

As a “Business Strategy Partner” leading clients toward
growth, we support marketing activities centering on
programmatic advertising
Against the backdrop of growth in the Japanese internet advertising market,
double-digit growth has continued, with net sales rising 28% and profit before
taxes rising 37% from the prior year. The segment will continue to apply the mostadvanced technologies and collaborate with DG Lab to create next-generation
marketing solutions.

Market Environment and Business Overview

KEY FIGURES FY 2018
Segment net sales

34.9

billion JPY

Segment profit before taxes

1.9

billion JPY

Amount of annual transactions

27.7

billion JPY

Business ModelAs an internet advertising agency, we will support the maximization of our clientsʼ marketing ROIThe Marketing Technology Segment is responsible foradvertising, one of Digital Garageʼs enabling platforms.
As an internet advertising agency, we support our clientsʼ
businesses by providing comprehensive promotions
fusing real space and cyberspace as well as internet
advertising. Specifically, by providing optimal solutions forour clientsʼ needs and challenges in a range of industries
including financial, cosmetics, human resources, foods,
entertainment/game and manufacturing, we maximize ourclientsʼ marketing ROI (cost-effectiveness).
This segment is characterized by the provision of optimal
solutions to clients from a neutral standpoint withoutbias toward specific technologies or media, sophisticatedadvertising operational capabilities backed by the resultsof our core performance-based ads*, and the provisionof solutions utilizing the big data owned by the DG Group,
realizing improved marketing ROI.

Cosmetics/HR/Others

FY 17.3

Listing

46
Users/
Audience

Implement the advertising strategy
based on the advertisers needs

Affiliate

Internet media/
Ad network

Order

Advertisers

Maximizing
Customer ROI

Financial

FY 18.3

79
63

DSP
TargetingSearch/Recommendation| DIGITAL GARAGE

Sales by sector (performance-based ads)

（JPY in 100 Millions）

DG Group(Performance ads)

The Marketing Technology Segment posted net sales of 34.9
billion JPY (+28.2% YoY) and profit before income taxes of
1.9 billion JPY (+37.1% YoY). These results largely surpassed
the 15% target CAGR based on profit before income taxes
set as one KPI in the Mid-term Business Plan. Furthermore,
operating margin, an indicator of profitability, rose 0.4
percentage points YoY, to 35.5%, realizing growth balancing
further growth potential and increased profitability following
the previous fiscal year. Performance-based ads continued
to see increased sales in all sectors, with sales to thesmartphone and app sector experiencing large sales growthin the second quarter and sales to the financial sector risinglargely in the fourth quarter.

FY 16.6

Business model and stakeholders

Internet AD
AgencyPerformance-based ads drove a large increase in both sales and earnings, as net sales rose 28% YoY andprofit before income taxes rose 37% YoY

Smartphone/app*Actively managed ads that maximize advertising cost-effectiveness by changing and improving bid amounts, targets, and creative elements, etc. in real time.

35

Annual Report 2018

12

51
14

53
16

54

72
63
19

35
19

22

All
sectorsSmartphone/app

YoY(FY17.3 3Q vs FY18.3 4Q) Client mix+ 33%Entertainment/games+ 11% 26%

19

17
17

Main sector

20

22

Cosmetics/
Cosmetics/ pharmaceuticals/
HR/
Others HR/
food, etc.

+ 29% 31%

30

Banks (city banks/regional banks)/
Financial securities/
insurance/
credit card, etc.

+ 50% 42%

19

13

14

16

20

21

21

20

21

23

24

4Q

1Q

2Q

3Q

1Q

2Q

3Q

4Q

DIGITAL GARAGE |36

Marketing Technology Segment

In terms of the market environment, internet advertisingexpenditures in Japan* grew by 15.2% to 1.50 trillion JPY in
calendar year 2017, and internet advertisingʼs share of total
advertising expenditures continued its expansion, rising
2.8 percentage points YoY, to 23.6%. In terms of trends inrecent years, the shift to actively managed ads and thegrowth in mobile video ads with the consumer shift to mobile
stand out. Given that internet advertisingʼs share of total
advertising expenditures in the U.S. is just less than 50%,
the Japanese internet advertising market still has room for
growth.

*Dentsu Inc., 2017 Advertising Expenditures in Japan

Internet Advertising Expenditures
Advertising expenditure in Japan（JPY in Billions）

6,000

Internet advertising expenditures

6,391
5,891 5,976 6,152 6,171 6,288

4,000

2%

( 2012-2017 )

CAGR

1,509

2,000

0

CAGR

15%

16%

17%

19%

21%

24%

2012

2013

2014

2015

2016

2017

12 %

( 2012-2017 )Growth Strategy
Promoting new digital marketing that integrates Digital/RealIn the existing internet advertising and promotions
business, in addition to pursuing initiatives aimed atdiversifying advertising approaches and developing newservices, by expanding the scope of our business byenhancing upstream marketing consulting, we are aiming
for further business growth.
In the data marketing business, there are opportunities
to utilize the range of data owned by the DG Group inmarketing. As a key field, we are working to expand ourcollaborative advertising platform with Kakaku.com.
Furthermore, aiming to improve advertising effectivenessand media value, we will promote initiatives in the media
consortium.
In terms of initiatives as part of our global response, wewill proactively promote mainly Asian development. Startingwith support for our Japanese clientsʼ expansion into Asia,
we will work to strengthen our response to cross-border EC
malls and inbound demand.
In May 2018, we formed a capital business alliance with
iRidge, Inc. By fusing iRidge, Inc.ʼs app development resultswith DG Groupʼs marketing knowhow, we will now be able
to promote end-to-end marketing solutions that integrate
Digital/Real.
The transition to the 5G era is expected to take place in
2020, along with changes in clients and media. To continue
responding to needs that change with dizzying speed, we will
work to create next-generation marketing solutions throughcollaboration with DG Lab and the utilization of the mostadvanced technologies.

Value creation for 5th generation of mobile communication system utilizing the latest technology

Internet ads ratio in
total ads expenditure

FY 2018 Key Initiatives
Collaborating with Kakaku.com to strengthen the data marketing business
Promoting operational streamlining and launching work-style reforms
With our core performance-based ads trending strongly,
we are focusing on the data marketing business as apillar supporting future growth in the segment. Sales are
expanding steadily for advertising products combining data
owned by the Kakaku.com Group and social media data.
We will grow this business into an even stronger service byworking with other data providers. Furthermore, to increase
advertising effectiveness and media value, we have jointly
established a media consortium with major Japanese media
companies and launched initiatives in new fields.
Amid rapid business growth with continued double-digit
sales and earnings growth, operational streamlining andAnnual Report 2018

work-style reforms are becoming important themes. We see
this trend as an opportunity and have worked to systematize
routine operations and begun preparations to establish
near-shore development sites within the DG Group. In April
2018, we opened the “Digital Marketing center“ (Sapporo,
Hokkaido) as a near-shore site. With the progressing
automation and commodification of routine operations,going forward we will need to shift to higher value-added
operations. Looking ahead several years, to connect toenhanced competitiveness, we have focused on enhancing
our acquisition of excellent human resources and improving
our training programs.

Product development

Expansion ofmedia value

Performancebased ads

CRM

Web
StrategyLatest technology

App×
Payment
Payment application
linked to FT segment

Capital and businessalliance with iRidge, Inc.
BD C ( B u s in e s s D e s i gn
Company) is incorporated
into a joint venture with
iRidge, Inc.

Global expansion

Main approaches
Internet ads/
promotion■ Strengthen upstream marketing consultant■ Considering work style reform, operational efficiency, and cost optimization■ Established a digital marketing center in Sapporo as a near-shore center (Cooperatewith Sapporo Electronics and Industries Cultivation Foundation)Data
science■ Aiming to build an ad tech platform in collaboration with Kakaku.com■ Implement “Media Consortium” targeting to improve media value and brand value■ Consulting clients to support their business to expand overseas. First opening up in

GlobalTaiwan and Thailand■ Before launching cross-border EC malls in Asian countries, preparations started in

Taiwan37| DIGITAL GARAGE

DIGITAL GARAGE |38

Incubation Technology Segment

IT

INCUBATION TECHNOLOGYSEGMENT

Segment
Sales Ratio
FY 2018

5.2%

Real start to the global promotion of investing in andnurturing businesses
We expanded Digital Garage ʼ s overseas investment business to further
strengthen the global incubation stream connecting North America, Japan,
Asia, and Europe. By gradually selling off our investment portfolio in Japan andoverseas, we recorded strong YoY growth in profit before taxes. Furthermore, inline with our Mid-term Business Plan, we are implementing investment schemeswith ROI 2.5× as an investment criterion.

3.1

billion JPY

Segment profit before taxes

1.3

billion JPY

Investment balance

12.3

billion JPY

Market Environment and Business Overview
The investment market environment remained strong
For F Y 2018, the Incubation
Technology Segment achieved
net sales of 3.1 billion JPY(+32.3% YoY) and profit before income taxes of 1.3 billion
JPY (+30.0% YoY). Furthermore, the investment balance
totaled 12.3 billion JPY as of March 31, 2018.
In the investment business, we maintained steady salesof securities held in Japan and overseas, leading tomore than 30% growth YoY in sales and earnings. In
particular, overseas, we sold the major Indonesian online
payment company PT Midtrans to an Indonesian unicorn
venture company through M&A and executed the sales ofmultiple companies in Japan as well through M&A andother means. We believe we were able to build a stablesales system not dependent on the success of IPOs ofcompanies receiving DG investment.

Additionally, as an open innovation initiative, welaunched a joint business with The Hokkaido Shimbun
Press to develop startups and promote open innovationin Hokkaido. In addition to the knowhow and global
community cultivated at Open Network Lab and Hokkaido
Shimbunʼs media networks, through collaboration with
university organizations, local governments, and groupsin Hokkaido, we aim to build a Hokkaido–based innovation
ecosystem utilizing the resources of Hokkaido such as
primary industry, tourism, and its abundant nature, and todevelop an accelerator program to identify and cultivate
startups active on the global stage.

Growth Strategy

KEY FIGURES FY 2018
Segment net sales

In terms of the market environment, annual investment(Japan and overseas) for Japanese VCs and CVCs in FY
2017 totaled 188.3 billion JPY (+26% YoY)*, as robust
funding demand from startups continued from theprevious fiscal year, but a sense of overheating is starting
to be pointed out. However, the number of IPOs in Japan
in 2017 rose by seven companies YoY to 90 companies.
Furthermore, against the backdrop of more stringent
listing standards, increased comfort among investors
toward the IPO market led to a noticeable trend of firm
stock prices following new listings. While there is apositive exit environment, a sense of overheating is being
felt in the investment environment, and as the market
environment has a large effect on results, continuing tokeep a close eye on the industry environment is essential.

Through a positive cycle of high ROI and reinvestment, realize continuous incubation results
With the formulation of the new
Mid-term Business Plan in May
2017, we have established newinvestment criteria for the investment business andfurther clarified the investment standards to create aplatform that produces more stable returns. We have set
a 2.5× target for ROI in the new Mid-term Business Plan.
Amid an increasing sense of overheating in theinvestment environment for startups, going forward we
will continue to utilize our global network to carefully
advance investment schemes in line with the criteria

Promoting global collaboration with the seed accelerator “Open Network Lab”
By strengthening collaboration in the US, Japan, Europe, and Asia, support globally focused startups
Collaborate with worldwide programs and evaluate alliances to allow the common use of office spaceby entrepreneurs in each region
Plan events in San Francisco to gather top startups and match them with local investors

39| DIGITAL GARAGEFUKUOKA

INDIA

Supporting the global development of startup companies “Global Incubation Stream”
Launching the accelerator program “Open Network Lab HOKKAIDO”

BOSTONSAPPOROFY 2018 Key Initiatives

collaboration with these companies, we planned events
gathering top startups at the San Francisco–based
incubation center DG717 to match startups with local
investors, collaborated with worldwide programs, andevaluated alliances to allow the common use of officespace by entrepreneurs in each region, enhancing our
support of startups utilizing the global network of OpenNetwork Lab, a development program for globally focusedstartups that is now expanding into the US, Japan, Europe,and Asia.

listed in the Mid-term Business Plan. Furthermore, bysolidifying a stable exit system unaffected by IPOs, wehave expanded our investment balance to 12.3 billion
JPY, and while maintaining our policy of aggressive newinvestments, we will rotate our portfolio, maintain ourinvestment balance, and establish an investment cyclethat realizes stable annual investment returns.
Through these initiatives, we will establish high ROI anda reinvestment cycle, realizing continuous incubation
results.

Supporting the global development of startup companies “Global Incubation Stream”

EUROPE*Source: Venture Enterprise Center “Quarterly Trend”

As one of our main initiatives, we
expanded Digital Garage ʼ s overseas
investment business to further
strengthen the global incubation stream connecting North
America, Japan, Asia, and Europe. In addition to a North
American AI-related startup support studio All Turtles
and a Hong Kong–based startup support company Mind
Fund and its network in Asia, we began collaboration
with byFounders, a fund formed by a group of foundersof promising northern European startups. In addition to

Annual Report 2018TOKYO

SAN FRANCISCONEW YORKHONG KONG
SINGAPORE
INDONESIAEUROPEASIA / HONG KONGTOKYO

SAN FRANCISCO / NEW YORK / BOSTON

Collaboration with DG in FY18.3

DIGITAL GARAGE |40

Long-term Incubation Segment

LTI

New segment launched to create long-term, continuous
cash inflow
In FY 2018, the segment name was changed to the Long-term Incubation Segment(LTI). In addition to our equity-method affiliate Kakaku.com, Inc., by making
companies receiving DG investment group companies, we are promoting a stylewhich continuously realizes incubation results. Going forward, in addition to theabove, we will establish joint ventures with other alliance partners and aim to create
long-term, continuous cash inflow.

LONG-TERM INCUBATIONSEGMENT

Annual Report 2018

Kakaku.com, Inc.’s main business progress

YoY[Kakaku.com, Inc. Group Accumulated Traffic]
Monthly users for the overall group are increasing year by year, totaling 288.21 million
users, a 31.5% YoY increase (March 2018)+31.5%(Millions of people)

300
icottoKyujin Box
recipom200+ CLAP Men
Kinarino
webCG
eiga.com
Sumaity

100
Segment
Sales Ratio
FY 2018

1.8%

4travelKEY FIGURES FY 2018

priceprice.com

Segment net sales

Tabelog

Segment profit before taxes

1.1

billion JPY

3.1

billion JPY

Kakaku.com
Other

0
Mar

Jun

Sep

Dec

Mar

2015

Jun

Sep

Dec

Mar

Jun

2016

Sep
2017

Dec

Mar
2018

*Extracted from Kakaku.com, Inc.’s Results Brieﬁng for FY2018/3

Market Environment and Business Overview
Kakaku.com, Inc.ʼs investment profit on equity method remains strong, profit before taxes of 3.1 billion JPY
For FY 2018, the Long-term Incubation Segment achieved
profit before income taxes of 3.1 billion JPY (+12.6% YoY).
This was due mainly to steady progress in Kakaku.com,
Inc.ʼ s business and strong investment profit on equity
method, as well as a YoY increase in gain on sales of sharesof subsidiaries and associates. Furthermore, in July 2017,

equity-method affiliate DG Life Design, Inc. was made a
consolidated subsidiary through the additional acquisitionof shares. As a result, DG Life Design, Inc. Groupʼs sales arerecorded in the LTI Segment from the third quarter of FY
2018.

Profit before taxes(JPY in Billions)

Gain on sales of shares ofsubsidiaries and associates
Gain on change in equity

2.89
0.38
0.04

3.17
0.67
0.03

FY 2018 Key Initiatives
Strengthened initiatives in life design businesses
In FY 2018, equity-method affiliate DG Life Design, Inc.
was made a consolidated subsidiary through the additional
acquisition of shares in July 2017, strengthening the DG
Groupʼs support system. Affluent customers are the initial
target market of DG Life Design, Inc., and we will makebroad “Valuable Life” proposals to customers by offering
new life designs through collaboration inside and outside
the Group in fields such as life care and sports marketing.
Additionally, while there were no new companies receiving
DG investment entering the segment in FY 2018, we arepromoting capital and business alliances with multiple
companies and strengthening our initiatives to continuously
realize incubation results in the medium- to long-term.

Growth Strategy

Kakaku.com, Inc.’sinvestment profit onequity method

2.70

2.78

New businesses▲ 0.23▲ 0.31FY 17.3 (change of closing date)

FY 18.3*Twelve months’ worth of Kakaku.com’s results, which make up a large part of the LTI Segment, are included in FY 17.3.

41| DIGITAL GARAGE

For the creation of medium- to long-term, continuous cash inflow
In formulating our new Mid-term Business Plan, we changed
the MI (Media Incubation) Segment, mainly active Kakaku.
com, Inc.ʼs investment profit on equity method and media
development businesses, to the LTI (Long-term Incubation)
Segment starting in FY 2018.
DG is known as an internet incubator, and to realize oneof its missions of creating new businesses, in addition toshort-term incubation results (gains on sales of shares), we
believe it is important to create long-term, continuous cash
inflow as we did in the past with our investment and businessdevelopment at Kakaku.com, Inc.
Furthermore, DG Lab welcomed its third year ofoperations, and is transitioning from the R&D phase to thecommercialization phase. Going forward, in the phase where
we commercialize the business seeds born from DG Lab, we
expect to see the increasing establishment of alliance-type
joint ventures with other companies. These joint ventures
will be subject to business development in the LTI Segmentfrom a medium- to long-term standpoint, aiming to create
long-term, continuous cash inflow.
Through these businesses, we will pursue continuous cash
inflow including investing in and nurturing businesses andbusiness alliances, and in the incubation field as well, we
will work to expand a recurring earnings model.

DIGITAL GARAGE |42

FEATURE

Business Development Born from an Open Innovation Platform with a View to the Next Generation
Starts in Full Swing“DG Lab,” an R&D platform established by DG to develop thetechnological seeds of what promise to become new corebusinesses in collaboration with Kakaku.com, Inc. and Credit
Saison Co., Ltd., is producing results in basic research in five

top priority areas of research. Going forward, we will start
initiatives in full swing aimed at developing specific products
and services, creating a series of businesses that play roles
in society from a global perspective.

OPEN NETWORK LAB BIOHEALTH

Cloud AR Platform

We are developing an accelerator program
centered on the development and support ofstartups developing businesses in fields where
biotechnology and healthcare intersect with IT.
Through this program, DG will play the centerrole in the ecosystem that promotes innovationin the global biotechnology and healthcare field,
and going forward, we will further promote new
business development in this field.

We introduced patent-pending video processing
technology to the “Cloud AR Platform,” built
independently by DG Lab. We are developing“ Web AR ” technology built into web pages
to provide a new user experience. Web AR
offers lower barriers to entry than developing
applications from scratch and can be embedded
into existing services and applications. We
are also promoting collaboration with various
services including O2O businesses.

Partners

New customer experiences
O2O approaches

Initiatives involving DG Lab

Real-time
marketing

Inbound
response

Gamification

Partner business alliances

Joint funds with Daiwa Securities
Group Inc. to invest in startups thathave next-generation technologies
relevant to DG Lab ʼ s five priority
research areas, and to work with
DG Lab to promote increases in thecorporate value of investee companies

Core Partners

and 8 others, 21 companies in total as of August 10, 2018

Powered byBusinesses involved with location-based services, campaign planning, and new development
Content
businesses

Businesses providing
Localsales support
governments
to restaurants

Other

WEB ARGLOBAL INCUBATION STREAM
An independent R&D platform
established with TIS Inc. to engage in
rapid development in each of DG Labʼspriority research areasMediabusinesses

EUROPEFUKUOKA

INDIA

EUROPETOKYO

CLOUD AR PLATFORM
CLOUD AR API GATEWAYBOSTONSAPPOROSAN FRANCISCONEW YORKPowered by

CONTEXT MANAGEMENT SYSTEM

Participating
partners
Content DB

HONG KONG

SINGAPORE
INDONESIAASIA / HONG KONGDATABASE GEOLOCATIONTOKYOSAN FRANCISCO / NEW YORK / BOSTON

CORE TECH LIBRARY

The HAUS website provides information
regarding innovation happening aroundthe world through introductions tovarious events related to DG Labʼs fivepriority research areas, interviews withfamous individuals, and more
http://media.dglab.com

Projects being pursued by DG Lab towardcommercialization (partial excerpt)

43

DVEP

Smart contract

We promote businesses using “DG Lab DVEP” TM
developed by DG Lab. As a highly reliable digitalvalue exchange platform, DVEP has technology torealize “digital money point issuance” and “point
exchange,” and has begun collaboration with the FT
Segment, DG Lab partners, local governments, andpoint vendors, etc.

Together with Bengo4.com, Inc., we began trial
operations of a smart contract system to realize
the streamlining of personal loan operations withResona Bank, Limited. Based on the results ofthese trial operations using blockchain technology
in the bank operating system, in the future, wewill work to realize the large-scale streamliningof various contract-related operations within
the bank as well as cost cutting and increased
customer convenience.

| DIGITAL GARAGE

SMART CITY PROJECT
We are expanding projects to boost local business by establishing various areas across Japan as strategic
development hubs that are test-beds for technology from DG Labʼs five priority research areas and for technology
from companies the DG Lab Fund invests in.

SAPPORODG and Hokkaido Shimbun launched a joint
business to develop startups and promote open
innovation in Hokkaido.

[Boosting Local Businesses]
We plan to develop Smart City
Project nationwide

SapporoFUKUOKA
In two large projects being developed in Fukuoka,“Tenjin Big Bang Project” and “Land Use Plan for
the Former Hakozaki Campus, Kyushu University,”
we will provide our knowhow regarding thetransition to smart cities, plan and promote
projects with local Fukuoka companies, andestablish designated areas in collaboration with thelocal government to conduct trial operations of
cutting-edge technologies.

Fukuoka
Tokyo (Shibuya)

DIGITAL GARAGE |44

Management System

Annual Report 2018

Directors

Kaoru
HayashiJoi
Ito

Makoto
Soda

Keizo
Odori

Emi
Omura

Representative Director

Member, Board of Directors and CoFounder

JOICHI ITO

MAKOTO SODA

KEIZO ODORIEMI OMURA

Apr 1983

Representative Director, From
Garage, Inc.

Aug 1995

Jun 1994

Oct 2002

Aug 1995

Founded Digital Garage, Inc.
Representative Director,
Digital Garage, Inc.
Chairman of the Board,
Kakaku.com, Inc. (current)
Representative Director,
President and Group CEO,
Digital Garage, Inc.
Representative Director andChairman, DG Incubation, Inc.
(current)
Director, Credit Saison Co.,
Ltd. (current)
Director Chairman andCEO, Digital Garage US, Inc.
(current)
Representative Director,
President
Executive Officer and Group
CEO, Digital Garage, Inc.
(current)
Representative Director,
Chairman and President, DG
Incubation, Inc. (current)

Sep 2006

Apr 2000
Jun 2005
Sep 2010
Sep 2012

KAORU HAYASHI

Jun 2003
Nov 2004
Jun 2009
Jun 2016
Jul 2016
Sep 2016

May 2017

Apr 2011
Jun 2012
Jun 2017

Founded Digital Garage, Inc.
Representative Director,
Digital Garage, Inc.
Director, Digital Garage, Inc.
(current)
Director, MIT Media Lab(current)
Director, The New York Times
Company (current)
Strategic Adviser, Sony
Corporation (current)

Jun 1997
Apr 2000
Mar 2007

Sep 2009
Jan 2012
Sep 2016

Apr 2017

Apr 2018

MasashiTanakaMember, Board of Directors

Member, Board of Directors

Joined Dresdner Kleinwort
Benson Securities, Ltd.
Joined Daiwa Institute of
Research Ltd.
Joined Monex Securities Inc.
Joined Digital Garage, Inc.
Executive Officer in chargeof the Corporate Strategy
Division, Digital Garage, Inc.
Director, Head of the GroupCEO Office, Digital Garage,
Inc.
Director, in charge of the
Corporate Strategy Division,
Digital Garage, Inc.
Member, Board of Directors,
Senior Executive Officer,
in charge of the Corporate
Strategy Division and theMedia Incubation Technology
Segment, Digital Garage, Inc.
Member, Board of Directors,
Senior Executive Officer,
in charge of the Corporate
Strategy Division, Digital
Garage, Inc.
Member, Board of Directors,
Senior Executive Officer,
in charge of the Corporate
Strategy Division and theLong-term Incubation
Segment, Digital Garage, Inc.
(current)

Hideo
Edasawa

Member, Board of Directors

Member, Board of Directors

Oct 2013
Aug 2016
Sep 2016

Jun 2017

Joined Faith, Inc.
Director, Faith, Inc.
Director, Digital Garage, Inc.
Director, Digital Garage, Inc.,in charge of the Payment
Segment (now the Financial
Technology Segment)
Representative Director andPresident, econtext, Inc.
(current)
Representative Director andPresident, DK Media, Inc.
(current)
Member, Board of Directors,
Senior Executive Officer,
in charge of the Financial
Technology Segment, Digital
Garage, Inc. (current)
Representative Director
and President, DK Gate, Inc.
(current)

Masahito
Okuma

Outside Director

Jul 2008
Sep 2010

Jan 2014

Sep 2014

Outside Director

Apr 1969

Outside Director, Audit and Supervisory
Committee Member

Dec 1995
Mar 2011

Apr 1986

Apr 1974
Apr 2003

YASUYUKI ROKUYATA MAKOTO SAKAI

Admitted to practice law inJapan (Tokyo Bar Association)
Partner, Athena Law Office(current)
Associate Expert,
International Labour Officein Geneva, the International
Labour Organization (ILO)
Director, the Office ofInternational Affairs,
Japan Federation of Bar
Associations
Outside Director, Digital
Garage, Inc. (current)

Jul 2011
Sep 2012

Jul 2013
Sep 2016

Jun 2018

Director, Digital Garage, Inc.
Representative Director andPresident, DG Incubation, Inc.
Director and COO, Digital
Garage, Inc.
Director and Vice President,
in charge of the Incubation
Segment (now the Incubation
Technology Segment), Digital
Garage, Inc.
Director, Digital Garage US,
Inc.
Member, Board of Directors,
Vice President Executive
Officer, in charge of the
Incubation Technology
Segment, Digital Garage, Inc.
Member, Board of Directors,
Vice President Executive
Officer, Digital Garage, Inc.
Director, Audit andSupervisory Committee
Member, Digital Garage, Inc.
(current)

Koji
MakinoMinoruOhno

Outside Director, Audit and Supervisory
Committee Member

Outside Director, Audit and Supervisory
Committee Member

HIDEO EDASAWA

MASAHITO OKUMA KENJI FUJIWARA

KOJI MAKINOMINORU OHNO

Aug 2001
Jul 2006

Apr 1984

Apr 1999

Oct 1988

Jan 1977

Jan 2011

Sep 2012

Jul 2016
Sep 2016
May 2017
May 2018

45| DIGITAL GARAGE

Oct 1999
Sep 2002
Nov 2008
Jun 2009
Jun 2017

Joined Recruit Co., Ltd. (nowRecruit Holdings Co., Ltd.)
Joined Digital Garage, Inc.
Director, Digital Garage, Inc.
Vice President, DG
Communications Co., Ltd.
President, DG
Communications Co., Ltd.
Director, Senior Executive
Officer, in charge of theMarketing Technology
Segment, Digital Garage, Inc.
(current)

Mar 2011
Dec 2015
Nov 2016
Apr 2017
May 2017
Dec 2017
Apr 2018
Jun 2018

Joined Mitsubishi
Corporation
Joined FAST RETAILING CO.,LTD.
Vice President, UNIQLO USA
LLC
Joined Digital Garage, Inc.
Executive Officer and COO of
DG Lab, Digital Garage, Inc.
Director, DG Incubation, Inc.
(current)
Director COO, Digital Garage
US, Inc. (current)
Executive Officer and COO of
DG Lab, Digital Garage, Inc.
Director, Executive Officer,
COO of DG Lab, Head of GroupCEO Division, Digital Garage,
Inc. (current)

Jun 1994

Jun 2003
Sep 2008
Jun 2009

Joined Shufu-no-mise Daiei,
Inc. (now The Daiei, Inc.)
Representative Director &President, Daiei Convenience
Systems, Co. Ltd. (nowLawson, Inc.)
President, Representative
Director, FANCLCORPORATION
Outside Director, Digital
Garage, Inc. (current)
Director, Kakaku.com, Inc.
(current)

Aug 1992
Jan 2006

Feb 2009
Sep 2012
Sep 2016

Joined KPMG Minato Audit
Firm (now KPMG AZSA LLC)
Tokyo OfficeBecame a Certified Public
Accountant
Established andRepresentative, Makino Koji
Certified Public Accountant
Office (current)
Director, BE1 Accounting
Office (current)
Outside Auditor, Digital
Garage, Inc.
Outside Director, Audit andSupervisory Committee
Member, Digital Garage, Inc.
(current)

Junji
Inoue

Outside Director, Audit and Supervisory
Committee Member

MASASHI TANAKA
Joined Digital Garage, Inc.
Director, DG&Ibex Company(now Marketing Technology
Company)
Senior Operating Officer,
Digital Garage, Inc.
Executive Vice President,
DG&Ibex Company (nowMarketing Technology
Company)
Director, Digital Garage, Inc.
Head of Corporate Strategy
Division
Executive Vice Presidentof DG&Ibex Company (nowMarketing Technology
Company)
Director and President,
Digital Garage US, Inc.
(current)
Representative Director, DG
Technologies, Inc. (current)
Director, Vice President and
COO, DG Incubation, Inc.
(current)
Member, Board of Directors,
Senior Executive Officer,
in charge of DG Lab, theIncubation Technology
Segment and Group CEO
Division, Digital Garage, Inc.
(current)

MakotoSakai

Director, Audit and Supervisory
Committee Member

Apr 2017

Kenji
Fujiwara

Member, Board of Directors

YasuyukiRokuyata

Apr 2003
Sep 2003
Jun 2015
Jun 2017

Jun 2017

Jun 2017

Apr 1988
Aug 2000
Mar 2005
Sep 2010
Sep 2016

Admitted to practice law
in Japan (Nagoya Bar
Association)
Registered to the Tokyo Bar
Association
Established the Sakai Makoto
Law Office
Established the Sirius Law
Office (current)
Outside Auditor, Digital
Garage, Inc.
Outside Director, Audit andSupervisory Committee
Member, Digital Garage, Inc.
(current)

JUNJI INOUE
Jun 2003

Jun 2007
Sep 2012
Sep 2016

Joined Mitsubishi Corporation
Executive Officer, Mitsubishi
Corporation
Director, Executive Officer &President, IT Frontier Corp.
Director, e-Access Ltd.
Outside Auditor, Digital
Garage, Inc.
Outside Director, Audit andSupervisory Committee
Member, Digital Garage, Inc.
(current)

Established Labor
Consultants Ohno Office
Representative Member,Labor Consultants Ohno
Office (current)
Outside Auditor, Digital
Garage, Inc.
Advisor, Japan Federationof Labor and Social Security
Attorneyʼs Associations
President, Labor andSocial Security Attorneyʼs
Associations of Tokyo(current)
Outside Director, Audit andSupervisory Committee
Member, Digital Garage, Inc.
(current)
Vice President, Japan
Federation of Labor andSocial Security Attorneyʼs
Associations (current)(as of July 1, 2018)
DIGITAL GARAGE |46

Corporate Governance

Annual Report 2018

Corporate Governance
Basic Concepts
term increases in corporate value, by enhancing andstrengthening corporate governance that emphasizes
transparency, fairness, and speedy, resolute decisionmaking.

Consistent with our philosophy and credo, as described
below, Digital Garage, Inc. (DG) is committed to living up to
the faith of our shareholders and all other stakeholders,
and to achieving ongoing growth and medium- to long-＜Philosophy＞

Board of Directors
The Board of Directors of DG consists of 14 members.
Five of the 14 members are also Audit and Supervisory
Committee members, and four of these five members
are outside directors. Of the nine members who are
not Audit and Supervisory Committee members, twoare outside directors. In addition to its regular monthly
meetings, the Board of Directors meets at other times, asnecessary. In FY 2018, meetings of the Board of Directors
were held a total of 16 times. The Board of Directors
makes decisions on important matters set forth in laws
and regulations, the Articles of Incorporation, and Boardof Directors Provisions. It also oversees the activities ofboard members as they perform their duties. Outside
directors perform governance functions by drawing on
their individual expertise, management experience andinsight, to oversee board activities and contribute advice,from an independent perspective. Six of the 14 membersof the Board of Directors are outside directors, making up
more than one third of all members, and these six outside＜Credo＞
TENACITY

We contribute new value to society by using

OPENNESS

the internet and other resources to link

INTEGRITY

developments across different fields and create

AGILITY

contexts that are useful for the world.

COURAGE

Corporate Governance
Shareholdersʼ General Meeting, convened on September
29, 2016. Under the “company with audit and supervisorycommittee” form of organization, directors who are Audit
and Supervisory Committee members perform oversightfor management decision making and the performance of
duties by directors in meetings of the Board of Directors.
The Audit and Supervisory Committee, meanwhile,
oversees the performance of duties by directors more
broadly. While realizing a greater strengthening of

DG has always viewed corporate governance as a
critical management concern and striven to take thesteps necessary to ensure strong governance. However,given the adoption of Japanʼ s Corporate Governance
Code, we switched to the “ company with audit andsupervisory committee” form of organization to achieve
the “growth-oriented governance” called for by the code.
This organizational change was formalized following
the approval of a resolution to that effect at the 21st

Corporate Governance Organization Chart

corporate governance through ensuring no less than a
1-to-3 ratio of outside directors in the Board of Directors,
DG has introduced an executive officer system to clearly
separate the business execution function from thedecision making and supervisory functions with the aim ofbringing greater speed and efficiency to the execution ofbusiness.

Elect/Dismiss

Propose/Reportaccordance with the fundamental principles of the Corporate Governance Code established by the Tokyo Stock Exchange.
Outline of initiatives based on the fundamental principles of the Corporate Governance Code

Audit/Report

Audit and Supervisory Committee

Submit forconsideration/
ReportCooperate

DirectReportSelect/Oversee
Delegate decisionmaking
for important operational
matters

Elect/Dismiss

ReportInternal Audit Office
Audit

Cooperate

Independently
Audit
audit

Independent Auditor

Board of Directors

General Shareholder Meetings

Report/Express opinions

President, Executive Officer
Delegate certain
management
authority andresponsibility

ReportReportExecutive Officers

47| DIGITAL GARAGE

Deliberate

Management
Committee

Individual DG segments, departments, offices,and group companies

Consult

Cooperate

Compliance Committee
Information Security Committee, etc.

Internal Control System
To provide an environment that supports appropriate risktaking by directors and others, the Board of Directors
has acted to build and maintain proper internal control
and risk management systems. The Board of Directors
supervises these systems to ensure their effective
operation. It has also approved resolutions for theformulation of the Basic Policies on the Construction of
an Internal Control System, in accordance with JapanʼsCompanies Act, Ordinance for Enforcement of theCompanies Act, and Financial Instruments and ExchangeAct.

During the fiscal year ended March 2018, we addressed the following points by taking steps to strengthen our governance in

Exercise Shareholder Rights at

Elect/Dismiss

Audit and Supervisory Committee
DGʼs Audit and Supervisory Committee consists of fivemembers - one director and four outside directors. Audit
and Supervisory Committee members attend Audit andSupervisory Committee meetings held after regularmonthly meetings of the Board of Directors. They attend
other important meetings, including those of the Board of
Directors, as well, and are free to express their opinions
and contribute in other ways to enhance the effectivenessof corporate governance.

Stronger Governance from Compliance with the Corporate Governance Code(as of March 31, 2018)

Shareholdersʼ General Meeting

directors are independent directors in accordance with theregulations of the Tokyo Stock Exchange. In this way, we
believe a system is in place at the Board of Directors to
conduct highly effective oversight.

Director Remuneration

To provide shareholders enough time to consider the general meeting agenda, the following decisions weremade at the 23rd Ordinary Shareholdersʼ General Meeting. (Supplementary principle 1-2 (2))
・Convening notices will be sent promptly by postal mail 18 days prior to the general meeting date.
・Convening notices will be posted on the web 22 days prior to the general meeting date.
Scheduling the general meeting to avoid the peak day (Supplementary principle 1-2 (3))
・The 23rd Ordinary Shareholdersʼ General Meeting was scheduled to be held on June 22, 2018 to avoid theso-called general meeting peak day.
Promoting disclosure and provision of information in English in consideration of the share of overseas investors,
etc. (Supplementary principle 3-1 (2))
・Operation of an English language version of the Companyʼs website
・Creation of English language versions of convocation notices, financial results and important press
releases
Establishment of optional advisory committees (Supplementary principle 4-10 (1))
To enhance the transparency of the remuneration determination process, the following actions were taken.
・Evaluating directors on the performance of their duties and contributions to the company based on a
director grading system
・Implementation of reporting by an advisory committee consisting of the representative director(s) and at
least one outside director on proposed remuneration for the representative director(s)The following steps were taken as measures related to provision of incentives to Directors.
・Performance-based remuneration plan
・Stock option plan

Implemented the evaluation and analysis of overall board effectiveness. Evaluations and analyses are based on
self-evaluations by individual directors and cover matters such as the composition of the board, operation of theboard, matters concerning board deliberations, and the role and duties of the board.
The evaluation and analysis confirmed that the effectiveness of the board is functioning and that it is improving
Evaluation, Analysis, and Disclosurecompared with FY 2017. In particular, the evaluation and analysis recognized that the board has an appropriate
of Board Effectivenesssize and composition, including the number and ratio of outside directors, from the perspective of the natureand size of business operations, and that the management of boardʼs agenda items, such as proposals of thedirection of corporate strategy and the like, is appropriately being carried out. (Supplementary principle 4-11
(3))

DIGITAL GARAGE |48

Corporate Governance

Annual Report 2018

Compliance and Risk Management
DG’s Corporate Governance System as Seen by Chair of the Audit andSupervisory Committee
Director (Chair of Audit and Supervisory Committee)

Yasuyuki Rokuyata

I recognize that for DG, which aspires to an open-innovation style of corporate
management, the functions of speedy business execution and appropriate auditing are
equally important for maximizing corporate value. To this end, DG aims to constantly stay
one step ahead in this ever-changing world and to realize an auditing system that is able torespond to such changes with agility in order to meet the expectations of our shareholders.

Functions and Roles of Outside Directors
The six outside directors actively express opinions from a position independent of management.
Outside Director

Kenji Fujiwara
Recently, there has been a stringof misconduc t at well-known
companies. At the time of theseincidents, the dysfunction of outside
directors has been pointed out.
Since our founding, DG has enjoyed steady growth basedon our philosophy of being a company that contributes
to the betterment of society. Now is precisely the timethat we must carefully ask ourselves “Can we explain
this project to society?” I believe we have an important
responsibility to fulfill from this standpoint as outside
directors going forward.

Outside Director (Audit andSupervisory Committee
Member)Makoto Sakai

I feel that quick and bold decisionm a k i n g i s re q u i re d o f D G a s
we stand at the threshold of atransformative age. As an Audit andSupervisory Committee member, I wish to exercise myexpertise and contribute to the realization of a corporate
governance system that meets these demands.

Outside Director (Audit andSupervisory Committee
Member)Koji Makino

To succeed in DG ʼ s mission of“ Creating New Contexts for a
Better Society,” I, together with the

management team, who are fighting
hard with the spirit of the “first penguin,” will contribute
through an outside perspective toward the increased trustand sound development of DG.

49| DIGITAL GARAGE

Outside Director

Emi Omura
Especially now when contributions
to SDGs and sustainability are being
called for, the importance of DGʼsphilosophy to create context among
different fields is growing more
important. To further respond to the demand for increased
corporate value, I will support initiatives to promote thehiring of women to director and management positions
and to promote diversity.

Outside Director (Audit andSupervisory Committee
Member)Junji Inoue

E ver yone is expec ting DG tocontinue to stand at the crests of
two large waves: the globalizationof the capital market, and evolutionof digital information technology. I will constantly consider
and make suggestions from the standpoint of an Audit
and Supervisory Committee member as to what we as theBoard of Directors should do toward these ends.

Outside Director (Audit andSupervisory Committee
Member)Minoru Ohno

As my experience lies with “people,”an area I have been involved in formany years, I believe it is my role touse this perspective to support therealization of our corporate philosophy through focusing
on the core of our corporate activities, namely, DGʼ sstrength of utilizing different technologies in a one-stop,
seamless manner.

Compliance Statement
The corporate philosophy of Digital Garage is to create new
business opportunities and contribute to the bettermentof society through providing digital contexts that connect
multiple elements from various domains via internet
business.
In order to achieve this and ensure our sustainable growth,each and every employee is called upon to understandchanges in society and ensure that our actions resonate
with our environment, in the spirit of the “first penguin.”
We recognize the irreplaceable roles that our employees
play in our efforts and the importance of providing them
1. Hold high ethical standards and conduct business in compliancewith laws
2. Respect fundamental individual rights and diversity and maintaina healthy work environment free from discrimination andharassment
3. Promote harmonious co-existence with society and conduct
environmentally-responsible business activities
4. Foster transparency of business and fair and free competition

with a rewarding working environment that they are proud
to be a part of. In addition, individuals must also commit toregulatory compliance.
DG has established a compliance program outlining
standards for individual business conduct with integrity andefficiency based on our shared ethical values.
In order to exercise the aforementioned corporate
philosophy, every staff member at DG is committed toadhering to the compliance program guidelines as detailed
in the following seven articles in our code of conduct.

5. Maintain fair and healthy relationships with governmentand other public offices
6. Disclose necessary corporate information to stakeholders
fairly and openly
7. Manage and utilize corporate assets and information
appropriately and effectively

DGʼs Compliance Statement can be viewed on the following webpage.
https://www.garage.co.jp/en/compliance/

Basic Information Security Policy
DG believes that achieving sustained growth of DG
requires that each employee contributes to the bettermentof society by creating new business opportunities. We
recognize the role our information systems (e.g., data,
computers and networks) play toward that end and strive to
make the most of them as information assets.
DG recognizes the value and importance of its information
assets and believes maintaining the completeness,confidentiality and availability of information by
establishing effective security measures is critical forclients, business partners and ourselves. To offer better
services and foster trust, every employee must fullyrecognize and understand the importance of information

security in protecting our assets, brand image and the trustthat our clients and business partners have in us. Against
this backdrop, we established the Basic Information
Security Policy to properly secure our information assets
against various threats. We have also established an
information security system and will work to further
enhance its management and operation as necessary going
forward.
DG employees strictly adhere to all information security
provisions and practice stringent compliance managementin accordance with the protocols of applicable regulations,industry business norms and our code of conduct, as wellas contractual security obligations.

For information on the Basic Information Security Policy, please refer to the webpage below.
https://www.garage.co.jp/en/compliance/security/

Disclosure Policy
Emphasizing transparency, fairness, and continuity, DG
endeavors to provide information in a timely manner toall of its shareholders, investors and other stakeholders.
Our basic policy is to disclose information in compliancewith the regulations on timely disclosure establishedunder the Financial Instruments and Exchange Act andby Tokyo Stock Exchange, Inc. DG also strives to disclose
as proactively and quickly as possible even information towhich the timely disclosure regulations do not apply, if we
consider it useful in promoting understanding of DG.

For information on the Disclosure Policy, please refer to the webpage below.
https://www.garage.co.jp/en/ir/disclosurepolicy/

DIGITAL GARAGE |50

Financial Information

Annual Report 2018

15-Year Summary of Consolidated Business Performance Indicators
Key Performance Indicators
FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

FY 17 (9 months)

FY 18

Net sales

6,217

7,846

12,476

17,33839,582

34,4998,346

11,067

14,90327,96433,751

38,08743,76336,45160,168Operating profit

-319

442

1,703

1,613

-172

981

-960

135

1,621

1,322

2,608

4,810

4,201

723

2,310

Profit before income taxes

929

1,426

1,451

2,606

-336

12,259-2,183

958

2,535

4,215

5,035

9,248

7,574

5,819

7,619

Profit attributable to owners of parent

380

633

338

588

-2,4305,450-2,207

901

2,106

2,715

2,847

5,081

5,165

4,289

5,460

Total assets

14,742

24,25927,77442,40740,05730,275

19,706

20,42149,33856,01071,00986,504

77,33591,686

108,791

Net assets

3,576

9,330

10,668

11,743

9,716

11,989

8,829

9,895

20,47627,25836,48929,07430,664

31,37139,017

Cash flows from operating activities-1,647

2,295

1,898

779

-1,0491,963-5,163

131

2,542

3,211

-34

5,040

-2,618

4,148

14,293

Cash flows from investing activities-3,795-165-3,305

3,355

486

7,346

1,233

-165

-9,411

1,514-5,155508-1,071-1,452

1,008

Cash flows from financial activities

6,850

573

2,806

-203

1

-5,152-3,294-568

15,273-1,816

11,2601,390-11,637

4,176-2,307

Cash and cash equivalents at end of year

3,369

6,072

7,471

11,50910,951

15,100

7,875

7,271

15,75819,09025,18334,07718,321

25,33538,248(JPY in Millions)

Changedlisting to the TSEFirst Section on

May 9,
2016

Trends in Share Price

Listed on

Dec. 14,
2000

51| DIGITAL GARAGE

DIGITAL GARAGE |52

Financial Information

Annual Report 2018

Consolidated Balance Sheet(JPY in Millions)
Current assets

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

FY 17 (9 months)

FY 18

8,114

13,60017,523

31,91829,85524,00014,20814,34528,00533,83745,45557,752

48,324

59,62475,496

Cash and deposits

4,622

6,815

7,575

13,499

9,898

13,133

4,799

4,784

12,30815,32924,29430,956

15,70323,02932,922

Notes and accounts receivable

7,741

1,298

2,069

2,662

9,546

9,379

2,850

2,238

1,466

2,479

2,688

3,658

3,824

5,441

7,056

Money held in trust

-

-

-

-

4,431

2,048

3,155

2,501

3,404

3,768

889

3,120

2,592

2,264

5,307

Operational investment securities

-

-

4,528

3,769

1,730

89

323

912

1,904

2,641

8,063

8,208

11,164

11,856

12,364

1,623

4,021

2,542

3,100

3,591

5,449

3,413

4,351

7,577

9,037

8,596

11,646

13,946

15,422

16,889

570

694

213

2,002

823

429

277

329

329

372

-48

-2

-524

-5

270

6,356

10,631

10,250

10,48910,202

6,274

5,497

6,075

21,333

22,17325,55428,75229,011

32,06133,295

Receivables
Other
Non-current assets
Tangible fixed assets

140

233

300

360

408

56

429

377

912

2,038

2,158

2,250

2,279

2,245

2,338

Intangible assets

612

6,146

6,119

7,543

6,910

3,899

2,248

2,102

13,08011,093

8,587

7,574

7,455

7,224

9,869

Software

215

242

790

880

936

293

283

316

959

1,106

1,210

1,314

1,664

1,784

2,019

Goodwill

388

5,715

5,186

6,645

5,956

3,590

1,945

1,768

12,104

9,968

7,354

6,237

5,765

5,411

7,822

Other

9

188

142

17

17

15

19

17

16

18

23

22

25

27

28

5,873

4,279

3,830

2,584

2,883

2,319

2,818

3,595

7,340

9,041

14,80818,927

19,276

22,592

21,087

Investment securities

4,716

3,843

3,168

536

1,192

2,081

2,504

3,305

4,299

5,521

10,644

14,22014,844

18,357

16,552

Other

1,156

435

662

2,048

1,690

237

314

290

3,040

3,519

4,163

4,706

4,432

4,235

4,535

Total assets

14,742

24,25927,77442,40740,05730,275

19,706

20,42149,33856,01071,00986,504

77,33591,686

108,791
49,540Investments and other assets

Current liabilities

6,469

14,37913,784

26,384

27,635

17,360

9,941

9,933

28,50521,801

25,461

50,62330,18738,815

Notes and accounts payable

118

1,123

1,238

10,640

7,249

1,237

1,021

540

1,154

1,232

1,629

2,039

2,728

3,713

5,018

Short-term borrowing

272

1,365

1,541

5,870

8,210

4,947

2,809

2,519

10,740305

3,690

23,533

3,200

6,937

4,137

Income taxes payable

430

248

819

893

1,045

3,775

4

46

740

810

1,241

2,147

720

435

1,008

4,907

10,237

9,542

6,399

9,143

6,691

5,743

6,168

14,956

18,22916,43420,99821,87625,12736,499

741

1,404

641

2,581

1,987

708

362

658

914

1,224

2,464

1,904

1,660

2,601

2,876

4,696

549

3,321

4,279

2,704

925

935

592

355

6,950

9,058

6,805

16,484

18,49920,233

3,956

220

420

816

440

-

-

-

-

-

-

-

-

-

-

Long-term borrowing

300

281

2,870

2,630

1,630

845

670

351

183

6,799

8,841

5,546

15,37017,207

18,890

Deferred tax liabilities

-

0

-

146

69

41

5

30

-

20

43

938

596

488

551

440

47

31

687

565

38

259

210

172

129

174

321

517

803

792

11,165

14,92917,10630,66330,34018,286

10,876

10,52528,861

28,752

34,51957,42946,671

57,31569,774

Deposits
Other
Non-current liabilities
Bonds payable

Other
Total liabilities
Shareholders’ equity

2,801

6,646

7,041

7,452

5,066

11,924

8,785

9,759

20,15525,27927,762

24,65028,61031,63336,363

Common stock

1,390

1,769

1,798

1,809

1,831

1,835

1,835

1,872

6,017

7,330

7,399

7,426

7,435

7,437

7,464

Capital surplus

1,483

4,303

4,331

4,152

4,174

5,521

5,521

5,558

9,703

11,016

10,817

2,854

2,825

2,946

3,104

Retained earnings

-71

575

913

1,492

-937

4,637

1,497

2,398

4,505

7,003

9,615

14,43918,41921,30025,819Treasury stock

-1

-1

-1

-1

-1

-69

-69

-69

-69

-69

-69

-69

-69

-50

-26

Accumulated other comprehensive income

-168

37

206

-157

-275

64

-17

64

115

426

2,679

4,002

1,502

1,956

1,440

Valuation difference on available-for-sale securities

-168

37

206

-157

-275

64

-17

64

-76

31

2,193

2,585

138

644

339

-

-

-

-

-

-

-

-

191

394

485

1,416

1,363

1,312

1,100

943

2,646

3,419

4,445

4,921

0

61

71

174

1,468

5,906

126

119

132

369

-

-

-

3

4

-

-

-

31

84

141

295

431

648

844

3,576

9,330

10,668

11,743

9,716

11,989

8,829

9,895

20,47627,25836,48929,07430,66434,37139,017

14,742

24,25927,77442,40740,05730,275

19,706

20,42149,33856,01071,00986,504

77,33591,686

108,791

Foreign currency translation adjustment
Minority interests
Share acquisition rights
Total net assets
Total liabilities/net assets

53

FY 04

| DIGITAL GARAGE

DIGITAL GARAGE |54

Financial Information

Annual Report 2018

Consolidated statement of Profit or Loss
(JPY in Millions)

FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

FY 17 (9 months)

Net sales
Cost of sales

6,217
4,476

7,846
4,664

12,476
6,627

17,33810,046

39,582
28,73334,49922,058

8,346
6,630

11,067
8,282

14,903
10,64427,964
21,53333,751
25,53438,08727,301

43,76332,27336,451
29,83860,16848,524Gross profit

1,741

3,182

5,849

7,291

10,84912,441

1,716

2,784

4,258

6,431

8,216

10,785

11,4906,613

11,644

Selling, general and administrative expenses
Directors’ compensation
Salaries
Bonuses
Legal welfare expenses
Welfare expenses
Retirement benefit expenses
Advertising expenses
Travel and transportation expenses
Taxes and dues
Commission fees
Business consignment expenses
Research and development expenses
Rent expenses
Depreciation
Amortization of goodwill
Other

2,060
249
565
42
82
8
3
191
46
10
97
51
132
145
23
134
275

2,739
281
734
42
110
9
6
236
63
34
141
42
43
184
19
279
508

4,145
452
1,000
44
146
13
3
501
80
59
200
132
41
245
27
526
668

5,665
609
1,298
75
189
21
3
898
111
84
255
189
49
302
37
624
914

11,014
768
3,345
507
430
117
175
1,288
275
106
413
401
38
743
52
635
1,713

11,459
632
3,422
626
475
91
169
1,105
253
196
763
224
20
724
66
627
2,214

2,676
247
911
11
113
23
7
20
55
30
132
95
39
219
59
249
461

2,649
286
851
40
128
21
6
31
52
34
137
75
29
269
66
177
439

2,637
287
825
77
128
25
9
39
84
58
124
76
52
274
39
188
343

5,109
403
1,319
65
162
48
33
95
157
111
203
291
38
404
99
940
731

5,608
458
1,428
85
199
82
34
190
200
91
277
241
59
430
107
756
962

5,975
523
1,509
90
211
101
52
100
188
128
285
288
79
433
122
754
1,105

7,288
466
2,599
171
381
99
66
194
167
143
317
306
56
644
140
471
1,062

5,889
330
1,998
181
306
74
49
127
125
131
228
258
114
447
120
353
1,039

9,333
481
3,178
276
496
105
72
180
212
217
478
416
252
658
153
570
1,581

Operating profit
Operating profit rate

-319
-5.1%

442
5.6%

1,703
13.7%

1,613
9.3%

-172
-0.4%

981
2.8%

-960
-11.5%

135
1.2%

1,621
10.9%

1,322
4.7%

2,608
7.7%

4,810
12.6%

4,201
9.6%

723
2.0%

2,310
3.8%

474
8
0
465
364
49
124
191

272
26
11
234
606
108
320
177

133
8
0
124
332
131
144
56

1,032
15
0
1,016
170
139
30

142
59
18
64
345
201
72
71

110
57
20
31
553
222
41
290

616
24
11
547
33
113
84
6
22

925
17
11
866
30
88
43
6
30
0

1,215
8
42
1,004
112
32
15
128
49
1
13
62

2,179
14
43
1,361
499
222
38
423
102
50
127
94
48

2,307
7
30
1,741
143
278
105
472
88
0
189
191
3

3,736
18
0
2,080
1,090
337
209
936
97
554
275
8

3,031
18
0
2,406
371
236
1,040
85
689
248
16

3,246
5
29
2,528
331
352
292
56
0
223
10

3,305
9
0
2,768
359
167
597
79
66
160
259
31

Ordinary profit
Ordinary profit rate

-210
-3.4%

108
1.4%

1,505
12.1%

2,475
14.3%

-375
-0.9%

537
1.6%

-457
-5.5%

972
8.8%

2,708
18.2%

3,078
11.0%

4,442
13.2%

7,610
20.0%

6,193
14.2%

3,678
10.1%

5,017
8.3%

Extraordinary income
Gain on change in equity
Gain on sales of investment securities
Gain on sales of shares of subsidiaries and associates
Other
Extraordinary losses
Loss on retirement of non-current assets
Loss on liquidation of subsidiaries and associates
Impairment loss
Loss on valuation of investment securities
Other

1,355
323
1,027
4
215
73
141

1,437
848
484
104
119
0
9
109

7
5
2
61
2
59

236
113
122
0
105
10
37
57

473
15
417
41
435
5
62
170
197

16,147106
16,031
8
4,424
144
1,759
787
1,732

49
30
15
3
1,775
4
1,435
332
1

58
46
0
0
71
9
22
0

63
20
42
0
236
3
222
8
2

1,304
18
153
1,131
1
168
22
88
33
23

630
374
220
35
38
7
0
30

2,463
2,363
99
824
27
77
657
62

1,392
157
521
713
10
8
1

2,265
47
1,829
386
2
124
16
104
3

2,669
33
1,032
1,471
131
67
31
25
10
0

Profit before income taxes
Profit before income taxes rate

929
15.0%

1,426
18.2%

1,451
11.6%

2,606
15.0%

-336
-0.8%

12,25935.5%-2,183-26.2%

958
8.7%

2,535
17.0%

4,215
15.1%

5,035
14.9%

9,248
24.3%

7,574
17.3%

5,819
16.0%

7,619
12.7%

481
-19
87

327
152
313

875
-290
528

1,202
256
558

1,560
-114
648

5,506
0
1,301

3
3

47
9

409
19

1,520
-9
-11

1,919
-32
300

3,699
155
312

2,241
143
24

1,647
-121
4

2,028
104
25

380
6.1%

633
8.1%

338
2.7%

588
3.4%

-2,430
-6.1%

5,450
15.8%

-2,207-26.5%

901
8.1%

2,106
14.1%

2,715
9.7%

2,847
8.4%

5,081
13.3%

5,165
11.8%

4,289
11.8%

5,460
9.1%

Non-operating income
Interest income
Dividends income
Investment profit on equity method
Foreign exchange gains
Rent expenses on real estates
Other
Non-operating expenses
Interest expenses
Commission fees
Foreign exchange losses
Rent cost of real estate
Listed expenses
Investment loss on equity method
Other

Income taxes–current
Income taxes–deferred
Profit attributable to non-controlling interests
Profit attributable to owners of parent
Profit rate55

| DIGITAL GARAGEFY 18

DIGITAL GARAGE |56

Financial Information

Annual Report 2018

Consolidated Statement of Cash Flows
FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

-1,647
929
46
33
134
-8
49
0
194
-323
-1,027
-455
-117
-491
-738
-215
385
-1,605

2,295
1,426
54
77
279
-37
108
-0
320
-848
-484
-126
-57
-2,300
774
3,701
7
2,896

1,898
1,451
83
125
526
-22
131
-0
144
14
-5
-632
136
979
135
-598
-142
2,328

779
2,606
107
269
624
-32
139
-1
-63
-122
-1,983
177
-282
-551
1,112
1,574
-1,4342,139-1,049
-336
136
361
635
-89
201
2
-7
-417
170
180
1,360
265
-492
-3,390
423
1,406
408

1,963
12,259
223
401
1,759
627
-78
222
20
-95
-15,936
157
787
1,690
1,445
-491
309
-1,180
607
826
3,556

-5,163-2,183
75
97
1,435
249
-35
84
1
-547
-30
-15
332
639
-250
0
-113
-257
-947
-56
-1,520

131
958
90
102
22
177
-28
43
2
-866
-46
15
19
0
732
-529
9
-992
-505
430
296
-68

2,542
2,535
86
119
222
188
-50
49
-36
-1,004
-20
0
-42
8
-275
-1,01884-2,377
130
3,542
187
2,328

3,211
4,215
209
407
88
940
-58
102
-468
-1,361-18-1,131
-153
33
-34
-582
156
-1,456
15
3,269
156
4,329

-34
5,035
229
401
0
756
-37
88
-153
-1,741
-374
0
-220
0
-960
-1,971267
444
459-1,751
417
888

5,040
9,248
291
419
657
754
-18
97
-1,102-2,080-2,363
0
-68
55
-148
-1,437-49-3,016
489
4,612
403
6,746

-2,618
7,574
307
453
471
-18
85
699
-2,406-157-521-1,526-4,239531-2,338
710
975
-495
105

4,148
5,819
264
392
104
353
-34
56
-222
-2,528-47-386-1,829-808-66
45-1,025
950
3,247
1,122
5,407

14,293
7,619
351
612
25
570
-9
79
139
-2,768-33-1,471-1,032-907-1,100
189
-411
1,126
11,365-32
14,312

9
-42
-131
121

34
-103
-532
-

11
-128
-314
2

-144
-1,2237

19-205-1,422
151

219
-235
-1,62448

168-77-3,733
0

234
-41
-2
10

313
-61
-55
16

420
-82
-1,4560517-102-1,39657

629-102-2,2417824-83-3,4650528-49-1,789
51

1,145
-89
-1,228153

Cash flows from investing activities
Payments into time deposits
Proceeds from withdrawal of time deposits
Payments for acquisition of tangible fixed assets
Payments for acquisition of intangible assets
Proceeds from purchase of shares of subsidiaries
resulting in change in scope of consolidation
Purchase of investments in subsidiaries
resulting in change in scope of consolidation
Proceeds from sales of investments in subsidiaries
resulting in change in scope of consolidation
Payments for sales of investments in subsidiaries
resulting in change in scope of consolidation
Purchase of investment securities
Purchase of stocks of subsidiaries and affiliates
Proceeds from sales of investment securities
Proceeds from sales of stocks of subsidiaries and affiliates
Proceeds from withdrawal of investments in silent partnership
Payments for investments in real estates
Other-3,795-1,150
-84
-96

-165
-640
1,243
-82
-354

-3,305
-16
656
-171
-692

3,355
-300
360
-165
-379

486
-60
855
-191
-472

7,346
169
-193
-378

1,233
-362
-116

-165
-32
-134

-9,411
-559
-269

1,514
-1,247-688-5,155
-303
-512

508
-164
-581

-1,071-315-721-1,452
-223
-630

1,008
-308
-833

-

678

-

1,307

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-5,678

-447

-

-

-

-

-538

-

-

-

-

14

11,402

2,090

-

-

-

-

-

-

-

-

-1

-765

-

-

-

-2,754

-

-3

-

-

-

-

-

-

-

-1,945-1,717
460
1,165
-426

-268
-871
352
234
309

-3,115
-500
22
489
20

-468
-560
3
181
3,000
377

-88
-73
0
610
4
-112

-84
-178
141
-777

-662
-142
8
32
386

-75
6
73

-370
66
-2,549
-51

-418
-51
211
4,303
-48
-98

-4,189
-214
893
-249
-580

-951
-332
0
2,613
-43
-32

-1,195
-204
549
816

-223
-2,334
2,427
-19
-447

-1,190
-14
2,863
1,763
-57
-674

Cash flows from financing activities
Net increase (decrease) in short-term borrowing
Net increase (decrease) in long-term borrowing
Proceeds from issuance of bonds
Redemption of bonds
Payments for retirement by purchase of bonds
Proceeds from issuance of common shares
Cash dividends paid
Proceeds from stock issuance to minority shareholders
Cash dividends paid to minority shareholders
Proceeds from deposits received
Repayments of deposits received
Payments from changes in ownership interests in subsidiaries
that do not result in change in scope of consolidation
Other

6,850
-903
356
3,394
-48
175
897
-20
3,001
-

573
77
-611
194
-96
-2,576
33
1,750
-28
2,137
-302

2,806
270
2,494
300
-436
54
269
-25
2,840
-2,937

-203
-331
-411
-100
18
672
-50
-

1
262
1,077
-988
43
94
-113
-

-5,152-1,168-2,678
-376
7
-908
221
-44
-

-3,294-2,122
-191
-40
-923
-

-568
-110
-499
72
-6
-

15,273
7,440
-387
8,244
-0
-

-1,816-10,640
6,586
2,611
-216
-

11,260
3,300
1,952
136
-233
6,371
-

1,390
12,245
3,986
54
-233
3
-404
-

-11,637-14,545
4,163
17-1,174
-

4,176
2,800
2,786
0
-1,4077--2,307-2,200
720
38
-943
81
-

-

-

-

-

-

-

-

-

-

-

-

-14,087

-85

-

-

-1

-5

-22

0

-374

-205

-17

-25

-23

-157

-265

-172

-13

-10

-4

Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Increase in cash and cash equivalents fromnewly consolidated subsidiary
Decrease in cash and cash equivalents resulting
from exclusion of subsidiaries from consolidation
Cash and cash equivalents at end of period

-1
1,405
1,963

-0
2,702
3,369

0
1,399
6,072

0
3,932
7,471

2
-558
11,509-2
4,155
10,951-0-7,224
15,100

-2
-604
7,875

82
8,487
7,271

422
3,332
15,75821
6,092
19,0901,954
8,893
25,183-427-15,755
34,077141
7,013
18,321-81
12,91325,335

-

-

-

105

-

-

-

-

-

-

-

-

-

-

-

(JPY in Millions)
Cash flows from operating activities
Income before income taxes and minority interests
Depreciation
Amortization of software
Impairment loss
Amortization of goodwill (2003–)
Amortization of goodwill (–2003)
Interest or dividends income
Interest expenses
Foreign exchange gains (losses)
Investment profit (loss) on equity method
Loss (gain) on change in equity
Loss (gain) on sales of shares of subsidiaries and associates
Loss (gain) on sales of investment securities
Loss (gain) on valuation of investment securities
Increase (decrease) in accounts receivable-trade
Increase (decrease) in investment securities for sale
Increase (decrease) in allowance for investment loss
Increase (decrease) in receivables–other
Increase (decrease) in notes and accounts payable-trade
Increase (decrease) in deposits
Other
SubtotalInterest and dividends income received
Interest expenses paid
Income taxes paid
Income taxes refund

57| DIGITAL GARAGEFY 17 (9 months)

FY 18

-

-

-

-

-

-6

-

-

-

-

-

-

-

-

-

3,369

6,072

7,471

11,50910,951

15,100

7,875

7,271

15,75819,09025,18334,07718,321

25,33538,248

DIGITAL GARAGE |58

Company & Stock Information

COMPANY INFORMATION(as of March 31, 2018)

Basic Information

Annual Report 2018

STOCK INFORMATION
Stock Information(as of March 31, 2018)

Company Name

Digital Garage, Inc.

Authorized shares

120,000,000

Head Office

DG Bldg., 3-5-7 Ebisu Minami, Shibuya-ku, Tokyo 150-0022, Japan

Issued shares

47,312,800

Established

August 17th, 1995

Voting rights

471,847

Phone

03-6367-1111 (Main)

Shareholders

6,174

Fax

03-6367-1119

Stock listings

Tokyo Stock Exchange 1st section (4819)

Fiscal year end

March 31

Stock Capitalization

7,464 million yen

Total number of shares issued
Number of employees

Major Shareholders(as of March 31, 2018)

Shares Owned

Ownership Percentage

Kaoru Hayashi

6,812,200

14.44

47,312,800

Dentsu Inc.

3,300,000

6.99

744 [consolidated] / 436 [non-consolidated]

The Master Trust Bank of Japan, Ltd. (Trust accounts)

2,709,300

5.74

The Bank of New York 133524

2,446,000

5.18

TIS Inc.

2,364,500

5.01Japan Trustee Services Bank, Ltd. (Trust accounts)

1,343,600

2.85Japan Trustee Services Bank, Ltd. (Trust accounts 9)

1,161,900

2.46

JPMorgan Chase Bank Luxembourg SA 380578

983,000

2.08

JPMorgan Chase Bank Luxembourg SA 385576

969,300

2.05

State Street Bank and Trust Company 505025

890,700

1.89

DIGITAL GARAGE GROUP CHART(as of July 1, 2018)

Organization Chart
Shareholdersʼ General Meeting* Share ownership percentages were calculated based on issued shares net of treasury shares (123,821 shares).

Board of Directors Audit and Supervisory Committee

Internal Audit Office

Number of Shareholders

Representative Director

19,00017,821

17,000Management Committee
Context Design Div.

Presidentʼs Office
Corporate Communication Dept.

Open Network Lab Promotion Dept.
Business Innovation Dept.
Biomedical Project Office

11,085

10,87911,0009,621
10,127

7,892

7,000

9,408

8,595

8,610
6,174

7,680

5,000
3,000

Group CEO Div.

14,836
13,066 12,235

13,0009,000

Creative Dept.

15,917

15,06915,0002010.122011.62011.122012.62012.122013.62013.122014.62014.12

Share Ownership Distribution

2015.62015.122016.62016.122017.32017.92018.3(as of March 31, 2018)

Smart City Planning Dept.
DG Lab
Corporate Strategy Div.

Corporate Strategy Dept.

Treasury shares
0.26%(123,821)

Investment securities firms
0.83%(390,149)

Accounting Dept.
Legal Dept.
Working Engagement Dept.
Human Resources Dept.
Marketing Technology Company

Performance Marketing Div.
CRM Strategy Div.
Business Strategy Div.

59

| DIGITAL GARAGE

Non-Japanese individuals
39.48%(18,679,887)

Other Japanese institutions
14.41%(6,817,700)

SharesIndividuals/other26.09%(12,345,143)

47,312,800

Financial institutions
18.93%(8,956,100)

DIGITAL GARAGE |60

GROUP BUSINESS ACTIVITIESFINANCIAL TECHNOLOGY SEGMENT
econtext Asia Limited
Consolidated subsidiary

econtext Inc.
Consolidated subsidiary

VeriTrans Inc.
Consolidated subsidiary

econtext Asia is a holding company for payment businesses for the global use of EC
platforms of all types.

econtext Inc. pioneered cash payments using kiosk terminals at convenience storesand has promoted the provision of online payment services to EC businesses
centered on convenience store payments. As a money transfer business, it also
operates a money sending service.

Since its establishment in 1997, VeriTrans Inc. has provided a credit card payment
system incorporating the latest security technology in the US, and been a leader
in the payment aspect of e-commerce in Japan. Going forward, VeriTrans Inc.
will focus on developing, and introducing credit card payment systems, in major
markets where electronic payment has yet to be adopted.

INCUBATION TECHNOLOGY SEGMENT
DG Incubation, Inc.
Consolidated subsidiary

Open Network Lab, Inc.
Consolidated subsidiary

Digital Garage US, Inc.
Consolidated subsidiary

DK Gate, Inc.
ANA Digital Gate, Inc.
Affiliate

ANA Digital Gate is a joint venture between VeriTrans Inc. and the ANA Groupʼs ALL
NIPPON AIRWAYS TRADING CO., LTD., that is developing a corporation-oriented
payment solution business that uses FinTech.

Consolidated subsidiary

New Context Services, Inc.
Consolidated subsidiary

MARKETING TECHNOLOGY SEGMENT
Digital Garage MarketingTechnology Company
Company

DG Communications Co., Ltd.
Consolidated subsidiary

BI.Garage, Inc.
Consolidated subsidiary

Provides integrated overall digital marketing services including online promotions,
online strategies, and CRM solutions. Utilizing cutting-edge technology, Digital
Garage Marketing Technology Company responds to full funnel marketing anddiversifying advertising methods, while also working to develop new services andsupporting marketing activities as a “business strategy partner” leading clientsʼ
businesses to growth.
Utilizing the real-estate-advertisement-related knowhow cultivated andaccumulated over many years including knowledge, experience, and data, as wellas the DG Groupʼs advanced technology and sophisticated strategy management,
DG Communicationsʼ business does not stop at property sales in the real estate
field, but uses real estate as a gateway to provide solutions to help people live more
comfortable lives.
BI.Garage ― based on the philosophy that data creates new marketing context ―combines, processes, and analyzes payment data accumulated by the Digital
Garage Group, purchase behavior data owned by Kakaku.com, Inc., and advertisingrelated data of the Dentsu Group―a major DG shareholder―to optimize customer
communications for company marketing activities.

DG Technologies, Inc.
Consolidated subsidiary

DG Daiwa Ventures
Affiliate

Consolidated subsidiary

Based on its proprietary technology, provides marketing solutions to optimize thecontent and navigation of EC sites and effective security solutions to prevent andavoid risk in websites and various systems.

Kakaku.com, Inc.

Dentsu ScienceJam Inc.
Affiliate

DG Marketing Design, Inc.
Affiliate

Inamoto & Co.
Capital allianceOpen Network Lab was established in April 2010 for the purpose of cultivating
startups that build world-class products. Through its Seed Accelerator Program,Open Network Lab has already nurtured and supported several dozen startups.

Digital Garage US is the DG Groupʼs US-based global strategy headquarters. It
operates the DG717 incubation center established in the heart of San Francisco in2013, supporting entrepreneurs and engineers from around the world.

A joint venture of Digital Garage and Kodansha Ltd., the purpose of DK Gate is tomake strategic investments in content businesses. DK Gate focuses on identifying
and nurturing companies pursuing next-generation content businesses throughout
the world.

New Context Services provides security systems for all manner of services,
including infrastructure, for daily life.

As a strategic company that supports the technological aspects of DG Lab, DG
Technologies engages in research and development with an eye toward businessapplication and promotes the development of cutting-edge technology by combining
the technological capabilities, etc. of Digital Garage and TIS Inc.
DG Daiwa Ventures operates DG Lab First Investment Limited Partnership (DG
Lab Fund), which was established with the merger between Digital Garage, Inc.
and Daiwa Securities Group Inc. The purpose of this fund is to promote investmentin promising Japanese and overseas startups with advanced technologies in the
research areas DG Lab has designated as high priorities.

LONG-TERM INCUBATION SEGMENT
Affiliate

NaviPlus Co., Ltd.

As the investment arm of the Digital Garage Group, DG Incubation supports Internet
entrepreneurs throughout the world. Targeting startup companies that can be
expected to give rise to synergies with the DG Groupʼs various businesses, DG
Incubation, going beyond simple investment, focuses on being an incubator thatengages in collaborative business creation.

Provides integrated marketing solutions from planning, to creative, todata analysis that surpass the barriers of real and digital in promotions,conversions, and relations in the marketing field.

DK Media, Inc.

Inamoto & Co. was established by internationally renowned digital creator Rei
Inamoto. Inamoto & Co. creates hybrid businesses for global incubation by
combining its world-class creative ability with the data science business, etc.
that Digital Garage operates.

DG Life Design, Inc.

Affiliate

Consolidated subsidiary

Kakaku.com, Inc. operates a price comparison site (kakaku.com) and a restaurant
review and advertising site (tabelog.com).

Dentsu ScienceJam commercializes scientific research results.

DK Media operates an internet media business using womenʼs fashion magazine
content by Kodansha Ltd.

With its mission of providing “Valuable Life,” DG Life Design creates new businesses
that go beyond business integration synergies while expanding the existing life carebusiness, sports marketing business and wine school business.

(as of July 1, 2018)61| DIGITAL GARAGE

DIGITAL GARAGE |62