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

Presentation Material for FY04/2020
Full Year Financial Results

June 12, 2020

HEROZ, Inc.（4382）
11. Executive Summary
2. Business Overview
3. FY04/2020 Full Year
Performance
4. FY04/2021 Forecast
5. Growth Strategy

Executive Summary of FY04/2020◼ Net sales were ¥1,544 million (+12.1% year-on-year), consisting of◼ AI (B-to-B) services: net sales of ¥817 million (+48.9% year-on-year)◼ AI (B-to-C) services: net sales of ¥727 million yen (△12.2％ year-on-year)◼ AI (B-to-B) services maintained a high growth rate of 48.9% due to a buildup of
ongoing fees and initial setup fees. With respect to AI (B-to-C) services, while“Shogi Wars” revenues increased on a year-on-year basis, total revenues decreasedby 12.2% year-on-year due to the termination of “Pokémon Duel” in October 2019
◼ EBITDA and operating profit increased to ¥523 million (+11.2% year-on-year) and¥459 million (+9.2% year-on-year), respectively. On the other hand, we reported
ordinary profit of ¥404 million (△2.5% year-on-year) due to one-time incurred
expenses associated with a capital increase described below, and net income of¥255 million (△13.9% year-on-year) due to impairment losses on investment
securities of about ¥39 million◼ In December 2019, we completed the listing market change and a capital increaseof about ¥4 billion via public offering aimed at achieving medium-to-long-term
growth3

Initiatives to Prevent Spread of COVID-19◼ The following countermeasures have been implemented to prevent spread of COVID-19
Reduced Contact through Work From Homeand Flexible Working Hours• Introduced a permit system for work fromhome and flexible hours in late February• Following the state of emergency declaredby the government on April 7, all officer andemployees were instructed to work fromhome if at all possible• Continuing a limited form of work fromhome and flexible hours after thetermination of the state of emergency,
pursuant to Tokyo’s announced roadmap

Other
•
•
•

•

Improved the work from home environment
through reinforcement of VPN (virtualprivate network)
Transitioned to online internal/external
meetings and recruiting interviews
Alcohol sterilization and temperature
measurements when entering the office
Promoted shift to paperless work

◼ No officers or employees have been infected with COVID-19 to date
◼ In light of possible long-term effects from COVID-19, we plan to minimize its negative
impact by increasing internal tools to enhance employee productivity◼ We achieved record quarterly revenues in Q4 despite the introduction of work from homeand other measures indicated above, demonstrating a minimal short-term impact on ourlabor productivity
41. Executive Summary

2. Business Overview
3. FY04/2020 Full Year
Performance
4. FY04/2021 Forecast
5. Growth Strategy

Company Overview
2019
Listed on the First Section of Tokyo Stock Exchange (TSE)
Name

HEROZ, Inc.

Location

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

Established

April 2009

Representatives

Takahiro Hayashi/Tomohiro Takahashi

Business
Description

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

MembershipJapan Deep Learning Association,
The Japanese Society for Artificial Intelligence

2018
Listed on Tokyo Stock Exchange (TSE) Mothers
Capital and business alliance with Netmarble Games Corporation

2017
Capital and business alliances with Takenaka Corporation and Koei
Tecmo Games2016
Capital and business alliance with Bandai Namco Entertainment

2013
Shogi AI, developed by HEROZ engineers, defeated a shogi
professional

2012
Launched mobile app, “Shogi Wars”

Representative Director and CEO

Takahiro Hayashi

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

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

Representative Director and COO

Director and CFO, Business Planning Manager

Tomohiro Takahashi

Daisuke Asahara

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

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

Founded HEROZ

6

Our Vision

Creating the future throughartificial intelligence (AI)revolutions

7

Global Leader in Mind Game AI

Chess AI

Shogi AI

Go AI

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

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

IBM

Google8

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

Shogi game records

Structural design data,
financial data, etc.

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

Shogi AI

Construction AI, Finance AI, etc.

MLaaS： What is Machine Learning as a Service?
Business model which provides machine learning/deep learning as service, similar to
SaaS (Software as a Service) and IaaS (Infrastructure as a Service)9

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

Client’s data sent
to HEROZ Kishin

Output after machinelearning throughdeep learning, etc.

Output applied inbusiness settings

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

Results measured and used for further
machine learning

Output precision increases throughrepeated machine learning

Achieve stable, sustained earnings andhigh switching costs

Earning structure: initial setup fee
and ongoing fees10

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

Know-how ondevelopment andservice operations

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

Mind gameengineGameprocessing
enginePlacement
Route
optimization optimizationengineenginePredictionengineFinance

Structuraldesign support

Investment
support /market forecast

Entertainment

Mind game AI,
etc.

HEROZ Kishin
Media
OptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessing
engineImage
recognitionengineOptimization,etc

HRMatching
jobseekers withcorporations

OthersRoute search,etc

We aim to create the industry standard for AI in each sector throughcollaboration with companies which own high-quality private data11

B-to-B Services:
Areas of Focus and Examples of Services Provided◼ Focusing on construction, finance, and entertainment for the foreseeable future◼ Earning structure is initial setup fee and ongoing fees
*Examples of clients served
Construc-tion

Finance

Structural design support, etc.

Entertainment

Investment support,
market forecasts, etc.

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

Depending on the types of projects,
ongoing fees in the form of revenue sharing is also introduced
12

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

Shogi Wars

Animal
Shogi Wars

Igo Wars

CHESS HEROZ(English)

BackgammonAce(English)Earning structure: monthly membership fees,
Kishin (AI) usage fees, etc.
13

1. Executive Summary
2. Business Overview

3. FY04/2020 Full Year
Performance
4. FY04/2021 Forecast
5. Growth Strategy

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

EBITDA = Operating Profit +Depreciation/Amortization
Expenses◼ In AI-related businesses, server investments, etc. are required to engage in advanced
machine learning, leading to various depreciation/amortization expenses. We aim tocontinuously enhance enterprise value/equity value via EBITDA growth, without being
concerned about fluctuations in one-time depreciation/amortization expenses.

15

FY04/2020 Full Year Financial Performance◼ In FY04/2020, net sales of 1,544 million yen (+12.1% year-on-year), EBITDA of 523 million
yen (+11.2% year-on-year) and other profits were below our forecast because some of AI(B-to-B) projects were delayed compared with the original plan and SG&A/COGS increased
as represented in page 18. In addition, non-operating expenses of ¥45 million associatedwith the listing market change/capital increase in Q3 and extraordinary losses of impairment
losses on investment securities of ¥39 million (against ¥44 million book value of Pocket
Queries, Inc.) in Q4 decreased ordinary profit and net income, respectively(Units: JPY millions)

FY04/2020
ActualFY04/2020
Forecast

Actual to
Forecast(%)(Reference)
FY04/2019
Results

Net Sales

1,544

1,630

94.8%

1,377

EBITDA*

523

570

91.8%

470

EBITDA Margin

33.9%

35.0%

－

34.2%

Operating Profit

459

520

88.3%

420

Operating Margin

29.7%

31.9%

－

30.5%

Ordinary Profit

404

510

79.3%

415

Net Income

255

350

73.0%

296

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

16Net sales and EBITDA Trends◼ Net sales of AI (B-to-B) services, which is the core pillar of our growth strategy, increased
by 48.9% compared with the previous fiscal year
◼ Net sales of AI (B-to-C) services, which terminated “Pokémon Duel” in October 2019,
decreased by 12.2% compared with the previous fiscal year. However, our on-going
services such as “Shogi Wars” has kept growing up◼ Net sales in Q4 were record-high as our company’s quarterly net sales(Units: JPY millions)

1,544
30.9%

1,377
34.2%

1,155

877

727

828
908

824

33.9%

357

10.7%
94

53
FY04/2017
Net Sales（BtoB）

523

470
817
549

247
FY04/2018

FY04/2019

Net Sales（BtoC）

EBITDA

FY04/2020
EBITDA margin

17

COGS and SG&A Trends◼ Labor cost has increased on a year-on-year basis and is expected to keep growing toincrease our engineering capacity, which will lead to our medium-to-long term growth◼ Size-based business tax and one-time incurred expenses associated with the listing market
change and capital increase in December 2019, rents by expanding office space inFebruary and depreciation cost etc. increased(Units: JPY millions)
1,085
956
800

788

417

372
339

338

8

37
191

9
4

187

21
201
63

215

49

248

235

305

381

FY04/2017

FY04/2018

FY04/2019

FY04/20202

labor costdepreciation costadvertisement expenses

others(COGS/SG&A)

app commission fees18Balance Sheet (as of April 30, 2020)◼ Cash and deposits increases via public offering in December 2019
◼ We plan to invest them in efforts to achieve the medium-to-long term growth strategy(e.g. hiring for AI engineers, in-house computing servers and external cloud computing
services, expansion of office space, investments to companies with peripheraltechnologies which can be applied to our operations, working capital)
Units: JPY millions

Current Assets
Cash and deposits

Fixed Assets
Property, plant and equipment
Intangible assets
Investments and other assets
Total Assets

Current Liabilities
Fixed Liabilities
Net Assets

As of 4/30/2020

As of 4/30/2019

5,935

1,659

5,562

1,494

473

498

131

150

6

5

334

342

6,408

2,157

226

178

-

-

6,182

1,979
19

1. Executive Overview
2. Business Overview
3. FY04/2020 Full Year
Performance

4. FY04/2021 Forecast
5. Growth Strategy

COVID-19 Impact and Assumptions for Forecasts◼ Materialized impact and potential risks relating to COVID-19 are as listed below. Whiledecreased opportunities for sales discussions may slow down growth in the first half, COVID19 has not had a significant impact on our operations to date•Materialized Impact•

Potential
Upside•Potential
Downside•

AI (B-to-B) Services
Delays in documentation (contracts, receipts,etc.) and decreased opportunities for sales•
discussions due to work from home
Some clients have suspended new projects
until the situation settles down•
Increase in the use of AI through promotionof DX (digital transformation) , etc.
Reduction in client budgets for IT
investments, etc.

•

AI (B-to-C) Services

Increased revenues from mobile
apps such as Shogi Wars
Further revenue increase in our
mobile apps due to increased useof our online contents
Troubles due to increased traffic◼ FY04/2021 forecasts have been formulated based on the following assumptions◼ External environment: The increase in COVID-19 patients will settle down in the first half
◼ Internal environment: Growth will slow down in the first half due toslowdowns/emergency declared by the government in progress of projects and reduced
opportunities for sales discussions, but will normalize in the second half21

FY04/2021 Financial Forecast◼ We plan to invest approximately ¥4 billion, proceeds from public offering in December 2019,in hiring for AI engineers, in-house computing servers and external cloud computing
services, etc. until 2022. While earnings will decrease for the foreseeable future as a result,
we expect earnings recovery after those investments are completed◼ By our investment plan above, we forecast revenues of ¥1,700 million and EBITDA of ¥290
million. While growth will slow down in the first half as presented in the previous page, we
forecast over 20% year-on-year revenue growth for AI (B-to-B) services(Units: JPY millions)(Units: JPY millions)

FY04/2020
ActualFY04/2021
Forecast

YoY(%)

Net Sales

1,544

1,700

+10.1％EBITDA*

523

290△44.6％EBITDA Margin

33.9%

17.1%

-

Operating Profit

459

230

△49.9％

Operating Margin

29.7%

13. 5%-

Ordinary Profit

404

220

△45.6％Net Income

255

150

△41.3％* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits

221. Business Overview
2. FY04/2020 Full Year
Performance
3. FY04/2021 Forecast

4. Growth Strategy

Japan:Potential AI Demand is Among the Largest Worldwide◼ Potential AI demand in Japan can be expected to be among the largest worldwide, as
the working population is expected to decrease significantly going forward
Projection of Population Age 15-64◼ When defining the working population as
those aged 15-64, the world average is
forecasted to increase by about 12%
from 2020 to 2035 and by about 21%
from 2020 to 2055. On the other hand,
the working population is expected todecrease by about 11% and about 28%
About 28%
decrease during the same periods, respectively(Median Prediction Interval, 2020=100)
140
120
100
80
60
40
20
0

2020
2020年

2025
2025年

2030
2030年

Global全世界

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

Japan
日本

米国
US

Source: Prepared by HEROZ based on United Nations,
World Population Prospects, The 2019 revision◼ Based on such forecasts, the Japaneseworking population will show the largest
decrease among leading GDP nations
24Use of Our AI in DX◼ Domestic DX (digital transformation) is expected to accelerate due to the future
decrease in the working population as well as the impact of the COVID-19 pandemic◼ AI allows for DX of a wide variety of operations including those involving decisionmaking, which were previously considered difficult to automateStandard Decision- Creative
Tasks
making Tasks, etc.
Structured
data◼ DX will begin with standard tasks based on
structured data and is expect to expand to decisionmaking and tasks which utilize unstructured data
◼ Our AI can automate a wide variety of operations
including those requiring decision-making. We havealso achieved DX for unstructured data, which weretraditionally considered difficult for DX

Unstructured
data
TraditionalIT

Our AI◼ We are promoting DX and building a track record inareas including construction, finance, andentertainment
25

Potential AI Demand in Our Areas of Focus◼ We believe there is also significant potential demand for enhancing operational
efficiency through AI in the construction industry, which is one of our areas of focus◼ There will be a shortage of 110,000 construction technicians by 2025
(source: Human Touch Research Institute, “status quo” scenario in the Proprietary
Analysis Monthly Report, December 2018)

Challenges
faced by theConstruction
Industry

Chronic
Shortageof Manpower◼ Over 1/3 of first-class registered architects are over 60 (average: 56.2 years old)(source: Report on Construction-related Administration Aimed at Securing Safety ofArchitecture, Social Infrastructure Council, August 2016)◼ The number of construction and mining industry workers is expected to decrease
from 5.05 million in 2014 to 4.16–4.24 million in 2030, with some variability
depending on future economic growth and labor market participation trends(source: JILPT, 2015 Estimated Labor Supply/Demand)

Soaring
Materials
Prices◼ The national construction materials price index has increased by 17% since 2010(source: Economic Research Association)◼ We entered into a capital and business alliance with Takenaka Corporation in2018 and became a member of i-Construction. We aim to create theindustry standard AI for the construction industry, enhancing productivity
and creating a new, attractive construction site26

Medium-to-long term Growth Strategy◼ We aim to achieve EBITDA growth by investing our cash flows and leveraging
our know-how from our AI (B-to-C) services to our AI (B-to-B) services, which
are positioned as our key medium-to-long-term pillar of growth

・EBITDA◼ In our AI (B-to-B) services, we aim to achieve more projects in the initial
setup fee phase, to complete development as rapidly as possible, and toconvert to the ongoing fee phase B-to-B

AI B-to-B
ongoing fee（profitable,
growth market） ￥Provide AI services
to businesses
B-to-C
Shogi AI,
other mind games AI
stable cash cow

Growth area
→core operation forthe medium-to-longterm

AI B-to-B
initial setup fee(growthmarket)￥￥IPO
AI B-to-C(stable CF)
Time
27

Initiatives in Construction AI◼ We commenced development of “AI learning engine for buildings and facilities” under a public callby New Energy and Industrial Technology Development Organization (NEDO)◼ Takenaka Corporation’s “Development of a Next-generation Building Control System with
Human Factors and Artificial Intelligence” was selected as a practical development phasetheme in NEDO’s 2019 Public Call #2 of its Strategic Energy Conservation Technology
Innovation Program. The project aims to achieve both energy conservation and comfort while
reducing necessary manpower by applying AI to building facilities systems◼ We were selected as the contracted developer
for the AI portion of this project.
We will optimally control building facilities
systems (lighting, air conditioning, etc.) withbuilding sensor information, etc. through the useof reinforcement learning, which is a machinelearning methodology◼ Together with Takenaka Corporation, we aim toprovide various services using state-of-the-art
AI technology to “develop AI systems which
support structural design operations” in addition
to this project

Develop generalpurpose gateway

Develop technology
to tie acquired datato space

Building
Facilities Data
Develop humanfactor measuring
technology using
camerasIot Data(extract humanfactors)
Develop economicaland highly expandable
database

Our Role
Digital Twin
(Status checks andremote control ofbuildings)

AI Devoted to
Building Facilities(learning, control)

Big Data
Processing Base(Accumulate,analyze, extract)

Develop technology toachieve both energy
conservation andcomfort using
reinforcement learning

Overview of the Next-generation Building Facilities System(Source) Strategic Energy Conservation Technology Innovation Program, 2019 Public Call #2, Thematic Overview

28Initiatives in Finance AI◼ The diagnostic performance of “AI Stock Portfolio Diagnosis” (the “Service”) provided by SMBC
Nikko Securities Inc. (“SMBC Nikko”) to date and the launch of additional functions for the Service
were announced in March 2019
◼ Capital gains (change in market cap) in “buy” recommendations by the Service outperformed “sell”
recommendations, and also outperformed the Nikkei Average. In response to various customer
needs, we launched an additional function (addition of “investment period” to proposal conditions
and allowing customers to receive “buy” recommendations only)◼ We entered into an operating allianceagreement with SMBC Nikko in December
2019.
In addition to this project, we aim to provide
various services using state-of-the-art AI
going forward by enhancing operational
efficiency and developing new financial
services for SMBC Nikko using our deeplearning and other machine learningtechnologies, in order to accelerate our digitaltransformation strategy<Investment Performance Trends>
Investment based on % gain on “buy” recommendations
Investment based on % gain on Nikkei Average
Investment based on % gain on “sell” recommendations

Out- Improvement
performance

Underperformance*Investment performance simulation indexed to 100
as of March 31, 201929

Disclaimer
The contents set out in this material are prepared based on generally acknowledged
economic, social and other conditions, and on certain assumptions deemed rational by
HEROZ, Inc. and may therefore be subject to change without prior notice due to changes
in the managerial environment or for other reasons.
The forward-looking statements set out in this material including performance outlooks
are based on information currently available to HEROZ, Inc. and on certain assumptions
deemed rational, and may therefore differ materially from actual results due touncertainties in judgements or assumptions, or for other reasons.
Such factors of uncertainty and change include both general, domestic and international
economic conditions, such as general industry and market conditions, interest rates, andforeign exchange fluctuations. HEROZ, Inc. shall not undertake any obligations to updateor revise any forward-looking information set out in this material even in the event thatnew information becomes available or certain events occur hereafter.
This material is an excerpt translation of the original Japanese material and is only forreference purposes. In the event of any discrepancy between this translated material
and the original Japanese material, the latter shall prevail.

30