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
FY04/2022 Q1 Financial Results

September 10, 2021

HEROZ, Inc.（4382）
1

1. Business Overview
2. FY04/2022 Q1
Performance
3. Growth Strategy
4. Reference Materials

Company Overview
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.

Membership Japan Deep Learning Association,

The Japanese Society for Artificial Intelligence

2019
Listed on the First Section of Tokyo Stock Exchange (TSE)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 Co-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 Co-CEO

Director, COO and CFO

Director and CTO

Tomohiro Takahashi

Daisuke Asahara

Keiichi Iguchi

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

Graduated from Kyoto University
MBA from Wharton School
ex-Goldman Sachs

Graduated from
Tokyo Institute of Technology
Joined NEC Central Research Labs

Founded HEROZ

3

Our Vision

Creating the future throughartificial intelligence (AI)revolutions

4

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

Google5

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?
Provides models, developed by machine/deep learning, as a service

6

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/model developed bymachine learning

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

Accumulated data to be used forfurther machine learning

Output precision increases throughrepeated machine learning

Achieve stable, sustained earnings andhigh switching costs

Earning structure: initial setup fee
and ongoing fees7

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 optimizationengineenginePredictionengineStructural design
support, Control ofbuilding equipment

Finance

Market forecast,Fraud detection

Entertainment

Mind game AI

HEROZ Kishin
Media
OptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessing
engineImage
recognitionengineUser retention,
OptimizationHR

Matching
jobseekers withcorporations

OthersReal estaterevenue/logistics
optimization, Sales
forecast

We aim to create the industry standard for AI in each sector throughcollaboration with companies which own high-quality private data8

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

Structural design support,
Construction support, Control ofbuilding equipment, etc

FinanceEntertainment

Market forecast, Fraud
detection, etc

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

Initial setup fees: new revenue recognition standard are applied since May 2021
Ongoing fees: mostly fixed fees recognized monthly
9B-to-B Services:horizontal x vertical expansion across industries◼ We aim to create industry-standard AI through horizontal and vertical expansion,
applying into various industries◼ After creating the industry-standard AI, we plan to form an ecosystem based on it
Other industries
Entertainment AI
Finance AI
vertical expansion# of projects

NOW

Construction AI

horizontal expansion# of clients10

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 game mobile apps such as shogi◼ Shogi Wars has remained cash cow backed by increase of paid users on a YoY
basis◼ Staying longer at home due to Covid-19 has led to increased demand for ourmobile apps, with an increase in our paid active user baseShogi Wars

Animal Shogi Wars

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

2. FY04/2022 Q1
Performance
3. Growth Strategy
4. Reference Materials

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

EBITDA = Operating Profit +Depreciation/Amortization
Expenses◼ In AI-related businesses, server investments, etc. are required to engage in advanced
machine learning, leading to various depreciation/amortization expenses. We aim tocontinuously enhance enterprise value/equity value via EBITDA growth, without being
concerned about fluctuations in one-time depreciation/amortization expenses.
◼ In-house compute servers are mainly depreciated based on the declining-balancemethod with a useful life of 5 years.
13Performance Overview (May-July 2021)◼ Revenues of AI (B-to-B) decreased due to the termination of gaming services in ourentertainment AI etc. Revenues of AI (B-to-C) increased by stay-at-home demand◼ EBITDA and other profits made progress as forecasted while they decreased on a yearon-year basis by our investment for the medium-to-long term growth
FY04/2022 Q1
Actual(Reference)
FY04/2021 Q1
Actual(Reference)
YoY**

FY04/2022
Forecast

Net Sales

354

367

△3.3%

1,700

20.9%

EBITDA*4783△42.8%280

17.0%

EBITDA Margin

13.4%

22.6%

－

16.5%

－

Operating Profit

969△86.8%

100

9.2%

2.6%

19.0%

－

5.9%

－

Ordinary Profit

6

67△90.5%

90

7.2%

Net Income

3

46△92.3%

63

5.7%(Units: JPY millions)Operating Margin

Progress* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits**As the revenue recognition accounting standard has been applied from the current fiscal year,
comparisons with the previous year (under previous standard) are for reference only
14

Net sales and EBITDA Trends◼ We forecast over 20% year-on-year revenue growth for AI (B-to-B) services, the corepillar of our growth strategy, in FY04/2022 as our business risks associated with Covid19 are being resolved◼ Net sales of AI (B-to-C) services increased compared with our forecast and the previous
fiscal year led by “Shogi Wars”(Units: JPY millions)

30.9%

1,556
1,544
34.2%
1,377
33.9%

1,155
877

23.5%

828
908

824

872

727

10.7%
94

53
FY04/2017

470

357

13.4%

523

366

817

683

549

222

247
FY04/2018

Net Sales(BtoB)

354

132
FY04/2019
Net Sales(BtoC)

FY04/2020

FY04/2021

EBITDA47

FY04/2022 Q1

EBITDA margin
15

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◼ In addition, there were expenses to improve the workplace environment to counter
COVID-19, an increase in size-based business tax, and anticipatory investments ofproceeds via public offering for our growth strategy. Although profits were down
compared with the previous year, they are in line with our forecast.
1,085
800

788

956

9
4

8

338

417
21
201
63

215

37
191
49

248

235

305

381

FY04/2017

FY04/2018

FY04/2019

FY04/2020

labor costdepreciation cost

187

2

(Units: JPY millions)

427

372
339

1,262

app commission fees

42
244
70

345

476

118
58
117

FY04/2021

FY04/2022 Q1

advertisement expenses

13
38

others(COGS/SG&A)
16

Balance Sheet (as of July 31, 2021)◼ B/S remains strong backed by cash and deposits increased via public offering in 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) until 2022
Units: JPY millions

Current Assets(Reference)
As of 4/30/2021

As of 7/31/2021
5,763

5,786

5,555

5,554

796

759

Property, plant and equipment

383

424

Intangible assets

16

17

Investments and other assets

396

318

6,560

6,546

Current Liabilities

169

143

Fixed Liabilities

－

－

6,390

6,403

Cash and deposits
Fixed Assets

Total Assets

Net Assets17

1. Business Overview
2. FY04/2022 Q1
Performance

3. Growth Strategy
4. Reference Materials

Medium-to-long term Growth Strategy◼ We plan to expand AI (B-to-B) services by what we have cultivated in our AI(B-to-C) services. We aim to create industry-standard AI, to form an
ecosystem based on it, and to expand across industries
B-to-B
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

・EBITDAAI B-to-B
ongoing fee（profitable,
growth market） ￥AI B-to-B
initial setup fee(growthmarket)￥￥AI B-to-C(stable CF)Time

Shogi AI

Refining
technology

AI (B-to-B)
business

Industry top-downIssue identification
Partnership Strategy

Industry standard AI
Horizontal expansion Ecosystem around our AI
Vertical expansion
Cross-industry expansion
19

成長戦略実現に向けた取り組み◼ HEROZ entered into a capital and business alliance agreement with Vario Secure(4494) on September 10, 2021
◼ Business Alliance
HEROZ and Vario Secure aim to generate new products and services,maximizing synergies to increase the corporate value of both companies bymutually providing and collaborating on management resourcesx
AI Engineers

Industry domain
knowledge and data

◼ Capital Alliance
HEROZ plans to acquire 1,224,000 shares of common stock of Vario Secure(32.31% of the total number of shares issued and outstanding as of August 31,2021) held by iSigma Business Advancement Fund No. 2 and i-Sigma BAF
Officers' and Employees' Fund 5i Partnership for 1,958,400 thousand yen
20

1. Business Overview
2. FY04/2022 Q1
Performance
3. Growth Strategy

4. Reference Materials

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 2017)

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 2006)◼ 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 in2017 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 site22

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

2021
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
23

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
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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.

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