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
FY04/2023 Q2 Financial Results

December ９,2022
HEROZ, Inc.（4382）

Contents
１．Financial Highlights
２．HEROZ Group Strategy
３. Initiatives for Group Synergies
４．FY04/2023 Q2 Performance

５．Revision of Earnings Forecast FY 04/2023

2

Highlights

3

Highlights➢ Net sales were 765 million yen (+5.0%), EBITDA was 94 million yen (+34.9%), and Operating
profit was 37 million yen * Figures in parentheses ( ) are YoY comparisons.

FY04/2023
1st Half
Performance Summary➢ AI (B to C) service using the world's best Shogi AI based on machine learning, in addition to thestable growth of Shogi Wars, newly released Kishin Analytics light plan on December 1st.
Expanding business by leveraging the strength of Shogi AI.

➢ With the launch of the sales organization, AI (B to B) services have exceeded the previous year’slevel. On the other hand, we plan to reconstruct our deployment areas and strengths, andpromote business according to our AI SaaS strategy.
➢ VarioSecure and StrategIT consolidated in the second quarter of this year.

Promoting of
PMI➢ To create group synergies including the above two companies, a steering committee will beformed to promote measures to create anticipated synergies in the areas of sales, technology,
and corporate.
➢ Cost reductions are expected to be achieved through office consolidation and joint procurementof various systems, etc.

➢ Revised full-year forecast for the fiscal year ending April 2023 disclosed.

Update on Full-Year
Earnings Forecasts➢ Net sales were revised from the previous forecast of 3.1 billion yen to 2.9 billion yen due to achange in the accounting period of StrategIT and an increase in internal transactions due tomutual use of engineers among group companies.
➢ The company has completed a thorough review of various consolidation issues and has revised
its earnings forecast to EBITDA of 550 million yen, Operating profit of 250 million yen, and net
income attributable to the parent company of -590 million yen➢ As an extraordinary loss, a one-time phased acquisition loss of 541 million yen was recorded inconnection with the consolidation of VarioSecure.
4

HEROZ Group Strategy

5

2022
Moved to the Tokyo Stock Exchange Prime Market
Acquires shares of VarioSecure, Inc. through third-party allotment andmakes it a consolidated subsidiary
Acquired shares of StrategIT Corporation and made it a consolidated
subsidiary.

Company Overview
Name

HEROZ, Inc.

2019

Location

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

2018

Listed on the First Section of Tokyo Stock Exchange (TSE)
Listed on Tokyo Stock Exchange (TSE) Mothers
Capital and business alliance with Netmarble Games Corporation

Established April 2009

Representatives Takahiro Hayashi/Tomohiro Takahashi
Business
AI DX service
Description AI Security service

2017
Capital and business alliances with Takenaka Corporation and Koei Tecmo
Games

2016

Membership Japan Deep Learning Association,
The Japanese Society for Artificial Intelligence

JVA2016 Small and Medium Enterprise Award
Capital and business alliance with Bandai Namco Entertainment

2013

Shogi AI, developed by engineers who was member of HEROZ at that time
formerly with HEROZ, 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, business planning
divisionFounded 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)

Director and CTO

Representative Director and Co-CEO

Tomohiro Takahashi
Graduated from Waseda University
Joined NEC as a technology engineer
Experience at Business Planning Division, BIGLOBEFounded HEROZ

Keiichi Iguchi
Operating officer and CFO

Hiroya Mori
Operating officer and CSO

Kyota Seki

Graduated from Tokyo Institute of Technology
Joined NEC Central Research Labs

Graduated from Aoyama Gakuin University. Passed the CPA Examination
After joining an auditing firm and a consulting firm, served as General
Manager of the Finance Division of PERSOL HOLDINGS CORPORATION
Graduated with a Master's degree from the University of Tokyo
Joined Panasonic Corporation and Deloitte Tohmatsu Consulting G.K.
Involved in projects such as new business strategy development

6Our Vision

Creating the future throughartificial intelligence (AI)revolutions

7

HEROZ Group Strategy ➡

To HEROZ 2.0

Based on the knowledge gained from our experience in solving individual customer issues,
we will aim for SaaS-type business management driven by intelligence such as our data utilization and
AI in the future.（HEROZ 2.0）

HEROZ 1.0

HEROZ 2.0

×●● prediction AI

clientdata

HEROZ AIHEROZ Group
Individual issue resolution

More versatile issue resolution

We will expand AI to a wider range of society by realizing intelligent SaaS,
utilizing the core technology of algorithm and AI development cultivated through Shogi AI,
and the advanced know-how accumulated through solving individual problems.
8Overall Group Strategy：AI SaaS
We will evolve the products of our company and group companies into more intelligent data-driven
software by making the most of our accumulated expertise in advanced AI implementation and ourstrength as an engineering group.
Pillars ofBusiness

AI SaaS Products

Customized AI

Mind Sports

VarioSecure Security Services

StrategIT
iPaaS

data

Advanced AI implementation
know-howUsing Deep LerningWorld’s Stongest Shogi AI

Engineers committed to"winning", cultivated by Shogi AI.

apply customer Big Data to business

Data analysis technology to

Preparation for the implementation of vision

HEROZ Group

Embodying the vision throughout the group9

Aspect of the SaaS market and our views of the major trends
While the SaaS market in Japan is expected to grow steadily, there is still room for further penetration.

To reach the approximately 10 trillion yen potential market, it is necessary to grasp thetrends in the Japanese SaaS market.
Enterprise Software
Market in Japan （SI)

SaaS Market in Japan

What we view as future trends
in the SaaS market

Diversification of needs
Diversifying market needs will accelerate SaaS
adoption,and increase demand for operational expertise

10 trillion yen
potential market

CAGR11%10.8

1.7
trillion yen

trillion yen

Integration with legacy systems
For the foreseeable future, the integration of onpremise and cloud systems is inevitable,
and the transition to zero-trust security will be donein phases.

1.1
trillion yen

Need for integrated management
Multiple SaaS deployments increase the burden ofsystem management and operations

2022

2026

(Source: IDC Japan Domestic Enterprise IT Market Forecast, Fuji Chimera Research Institute, Software Business New Market 2022 Edition)

10

Our perception of the challenges of implementing SaaS
By resolving trends that could be barriers to SaaS adoption through technology, we aim
to materialize a latent market.
Diversification of needs
Issue hypothesis
behind the trend• Rapid changes in the businessenvironment have led todiversification of issues andcircumstances faced by customers• Many high-level IT professionals are
unevenly distributed among SIersand cannot promote implementationand operation customized to thespecific needs of each company.

Integration with legacy
systems

Need for integrated
management• Traditional perimeter defenses arereaching their limits as remote workand cloud adoption accelerate• Handling multiple SaaS is becoming
the norm, and management costs
are becoming bloated• Especially, small and medium-sizedenterprises (SMEs), where "oneperson information systems" is an
issue, are unable to respond torecent security trends such as Zero
Trust.

• Therefore, there is a need for a
migration service to ensure
consistency and centralized
management of information
managed within each SaaS.

Security
Advanced AI implementation
know-how

iPaaS

Products of our group companies

Machine resources to increase the value of the product11

What we think AI SaaS should be like
We will support the provision of the ideal SaaS usage environment required by our clients by making
full use of our accumulated know-how and technology.

clientCRM

HR

Automated and optimized
SaaS-to-SaaS collaboration

SaaS Big Data
accumulated through business activities

mail

Automated operations
and maintenance

HEROZ Group

Chat

MA

Advanced Security

Learning with AI
12

Initiatives for Group Synergies

13

Group StructureWith the consolidation of VarioSecure Inc. and StrategIT Inc. as consolidated subsidiaries, we haveshifted to the group management structure.
Total net sales of the three companies are approximately 4.5 billion yen .(sum of the most recent
results)
Listed on the TSE Prime Market(Securities Code: 4382)

Owns approximately 43% of the company
Appoints majority of directors
Dispatches 3 directors

FY04/2022
・Net sales: 1,482 million yen
・Operating profit: 34 million yen;・Net income: 49 million yen

Owns approximately 86% of the company
Dispatches 2 directors
Listed on the TSE Standard Market(Securities Code: 4494)

Deemed acquisition date ：2022/8/31
FY02/2022（IFRS)・Sales revenue: 2,566 million yen
・Operating profit: 751 million yen
・Net income: 500 million yen

Venture company in its 4th year ofoperation
Deemed acquisition date ：2022/9/30
FY06/2022
・Net sales: 397 million yen
・Operating profit: 32 million yen;・Net income: 26 million yen

14

MAU：Monthly Active User
MPU：Monthly Paid User
ARPPU：Average Revenue Per Paid User

Group Business Structure
AI/DX Service
segment

BtoC

Business
Contents

Main KPI

BtoB

AI Security
Service

Shogi SaaS business forindividuals, including "Shogi
Wars," utilizing AI and othertechnological capabilities
that won the World
Computer Shogi
Championship.

Provide solutions to customer
issues through data analysis
and AI development.
Developing AI that can beutilized in practical operations
for a wide variety ofcustomers.

Support for SaaS
implementation anddevelopment of systems that
integrate APIs between SaaS.
Selling API applications on theapp market.

Managed security andintegration services forsecure Internet use,
primarily for small andmedium-sized businesses.

Recurring revenue

Recurring revenue andContracted development
revenue

Recurring revenue andContracted development
revenue

Recurring revenue

・Recurring revenue
・number of customers
・number of employees
・utilization rate/unit cost・revenue per employee

・number of customers
・number of employees
・utilization rate/unit cost・revenue per employee
・number of apps
acquired/churned
・ARPPU※3

・MAU ※1・billing rate
・MPU※2
・ARPPU※3・number of customers
・Number of customers
acquired/churned・revenue per customer

15

Pursuit of Group Synergies
With the transition to group management, establish a structure to realize group synergies.

Synergies among groups
envisioned to realize AI SaaS

Establish the following structure
to realize the anticipated group synergies.
・Group Strategy Meeting
Monitoring the realization of anticipated synergies
・Group Business Meeting

Provide mutual sales development support
Product Development
SupportDirect Sales Support
Sales Management
Support

Corporate Support

AI Development Support
M&A Support
MutualCorporate Support
Business
Cooperation

・Group Technology Meeting
Mutual technical and system support and exchangeof engineers

・Group CSE※ Meeting
Reduction of system-related costs
・Group Corporate Meeting

Support for Zero Trust
API Development※CSE: Corporate Solutions Engineering

Pursuit of cost synergies in the Group
Group Corporate Support
Group M&A Support

16

FY04/2023 1st Half Performance17

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

EBITDA = Operating Profit +Depreciation/Amortization Expenses◼ Growing AI-related business requires investment in servers for advanced machine learning, etc.,
and incurs various depreciation expenses.
◼ In addition, amortization of goodwill due to M&A implementation is expected to occur in the future.
◼ We aim to sustainably increase corporate and equity value through EBITDA growth without being
affected by various one-time amortization burdens.
◼ Depreciation of investments in servers for machine learning is mainly based on the decliningbalance method with a useful life of 5 years.
◼ Amortization period of goodwill (amount)

14 years (2,179 million yen) for VarioSecure, 9 years (219 million yen) for StrategIT.
18

Peformance Overview (May 2022-October 2022)◼ Our sales peaked in FY04/2020 and have continued to decline through the previous fiscal year, but has once again
shifted to a growth path, realizing a 5.0% increase in net sales in 1st Half FY04/2023 compared to the same period of
the previous year.
◼ Operating Profit also exceeded last year's results.

◼ Net loss attributable to owners of the parent was -513 million yen due to a one-time extraordinary loss of 541 million
yen related to the step acquisition of VarioSecure as a consolidated subsidiary.

(Units: JPY millions)（Reference）
FY04/2022
1st Half
ActualFY04/2023
1st Half
ActualYoY(%)

Net Sales

765

729

+5.0%

EBITDA*

94

70+34.9%EBITDA Margin

12.4%

9.6%

－

Operating Profit

37

-6

－

Operating Margin

4.9%

-0.8%

－

Ordinary Profit

38

-12

－

-513

-10

－

Net Income (loss)
attributable toowners of the parent* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits

19Net sales and EBITDA Trends◼ AI (BtoB) service sales increased 11.3% YoY on a Q2 standalone basis due to the effect of large project orders andincreased recurring revenue following the establishment of a new sales and marketing organization.
◼

AI (BtoC) service sales increased 0.2% yoy in the 2Q on standalone basis due to continued stable revenue from
"Shogi Wars" and expanded service offerings such as the release of "Kishin Analytics" in May 2022, which supports
Shogi AI research by professional Shogi players using Shogi AI.

1,544
1,377
30.9%

727

872

828
908

1,482

23.5%

918

523

470

357

（ Units: JPY millions ）

33.9%
34.2%

1,155

1,556

817
549

765
12.7%

366
683

476

564 188288

247
FY04/2018

12.4%

FY04/2019

Net Sales（BtoB）

FY04/2020

FY04/2021

Net Sales（BtoC）

FY04/2022

EBITDA94

FY04/2023 Q２

EBITDA margin
20

COGS and SG&A Trends◼ Until the previous fiscal year, the company had invested aggressively in cost of goods, general and administrative
expenses, including depreciation associated with the purchase of servers and other equipment for machine learning,
an increase in personnel hiring expenses, and an increase in R&D expenses, but the investments have run their course,
and costs this fiscal year are on last year's basis. (1st half 727 million yen x 2 = 1,454 million yen (full year basis))◼ Appropriate cost controls will continue to be implemented.

(Units: JPY millions)

1,262

1,085
956

800

372

8
2

37

338

215

191
49

235

305

FY04/2018

FY04/2019labor costdepreciation cost

1,448

Full year basis(1st Half×2)

495
427

417

21
201
63
381
FY04/2020
app commission fees

42
244
70

56

727

233
152

38

221
123

476

508

FY04/2021

FY04/2022

advertisement expenses

56286
FY04/2023 Q2others(COGS/SG&A)
21

Balance Sheet (as of October 31, 2022)◼ We plan to use the cash and deposits we currently hold for investments to realize our mid- to long-term growthstrategy.
◼ As part of this effort, the company invested approximately 1.1 billion yen in the acquisition of StrategIT shares andthe underwriting of a capital increase through a third-party allocation of new shares by VarioSecure.
◼ Since the subscription of 800 million yen for the capital increase of VarioSecure will increase the subsidiary's cash
and cash equivalents and will only be transferred within the consolidation, the level of cash and cash equivalents
remains almost the same as the level at the end of the last fiscal year.
Units: JPY millions

Current Assets

As of 10/31/2022

As of 4/30/2022

5,016

3,959

3,697

3,660

3,835

2,675

Property, plant andequipment

293

260

Intangible assets

2,706

25

Investments andother assets

835

2,390

Total Assets

8,851

6,635

Current Liabilities

1,043

194

Fixed Liabilities

1,758

－

Net Assets

6,049

6,440

Cash and deposits
Fixed Assets

22Revision of Earnings Forecast FY04/2023

23

Transition to Consolidated Financial Results◼ The Company shifted to consolidated accounts following the acquisition of StrategIT shares on August 31 and thesubscription to a third-party allotment of new shares by VarioSecure on September 27.
◼ In the consolidated financial results for the second quarter of the fiscal year ending April 30, 2023, the twocompanies that became consolidated subsidiaries were consolidated only on the balance sheet.
◼ Contribution to the consolidated income statement is scheduled to begin in the third quarter of the fiscal year ending
April 30, 2023.

This Financial Results
Q1
HEROZ

Non-Consolidated
Financial Results

Q2

Q3

Transition

Q4

to consolidated accounting

StrategITー

Only the balance sheet
is consolidated

Both Profit and Loss statement
and balance sheet are consolidated

VarioSecureー

Only the balance sheet
is consolidated

Both Profit and Loss statement
and balance sheet are consolidated

24

Revision of Earning Forecast for FY04/2023◼

Full-year forecasts were announced in the Sep. 9, 2022 financial results announcement in conjunction with the transition to
consolidated accounting. However, due to the change in the accounting period of StrategIT and the increase in internal transactions
through mutual use of engineers to create synergies, we have revised consolidated sales for the current fiscal year to 2.9 billion yen.

◼

EBITDA is expected to be 550 million yen, a significant increase from last year's results of 180 million yen.

◼

The acquisition of VarioSecure was done in stages and a loss of 540 million yen was recorded in accordance with the consolidationaccounting standards. It will be a one-time expense.

Forecast of Consolidated Financial Results for FY04/2023 (May 1, 2022 - April 30, 2023)(JPY millions)

Net sales

FY 04/2023(announced at this time)

2,900

FY 04/2023(announced on Sept.9,2022)

3,100（Actual）
FY 04/2022

1,482

EBITDA

550

Under
Reviewing

188

Operating
ProfitOrdinary
Profit250

Under
Reviewing

200

Under
Reviewing

34※ Actual non-consolidated results for the fiscal year ending April 30, 2022.

87

Net Income

Net Income
per share
（JPY）

-590

-39.26

Under
Reviewing

49

Under
Reviewing

3.29

25

Trends in the Group's Business Performance◼

For the current fiscal year (FY2023/4), the two consolidated companies will be consolidated only for the half-year period, and theforecasts for sales and EBITDA have been revised to 2.9 billion yen and 550 million yen, respectively.

◼

In the next fiscal year (FY24/4), the two consolidated companies will fully contribute to the consolidation, and both sales and EBITDA
are expected to increase significantly.
(Details will be disclosed at the time of the announcement in June 2023)

consolidated
EBITDA

consolidated
net sales
Significant
revenue increaseplannedSignificant
increase inprofit planned

29.0billion yen

StrategITVario

5.5 billion yen

15.5 billion yen
14.8 billion yen

3.6 billion yen

HEROZ

FY04/2021

HEROZ
FY04/2022

FY04/2023

FY04/2024

FY04/2021※ The figures are created as images and do not include any meaning to scale.

Vario
1.8 billion yen

FY04/2022

FY04/2023

FY04/2024
26

Reference Materials

27

Global Leader in Mind Game AI

Chess AI

Shogi AI

Go AI

Deep Blue (’97) defeated aprofessional Chess player

AI developed by our engineers who
was member of HEROZ at that time
defeated a professional Shogi(Japanese Chess) player (’13)

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

IBM

Google28

AI SaaS （AI Software as a Service)
Developing our AI construction capabilities cultivated through machine learning using
deep learning of vast Shogi game data in the construction, finance, entertainment, andother fields
Shogi game records

Structural design data,
financial data, etc.

AI SaaS for deep learning and other machine learning（AI Software as a Service）

ShogiAI

Construction AI
Finance AI etc

AI SaaS：AI Software as a Service is“Business model that provides models built by machine learning/deep learning as a service”

29Profitability of AI SaaS
Research/develop Shogi AI

Standardize AI technology accumulated
through shogi AI
AI SaaS（AI Software 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
Achieve stable, sustained earnings andhigh switching costs

Accumulated data to be used forfurther machine learning

Output precision increases throughrepeated machine learning

Earning structure: initial setup fee
and ongoing fees30

Potential demand for AI in the construction domain(one of our focus areas)◼ 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

Soaring
Materials
Prices◼ 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 Safetyof Architecture, 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)◼ 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 Corporationin 2017 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 site
31

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(Median Prediction Interval, 2020=100)
140
120
100
80
60
40
20
0

◼ When defining the working population as those
aged 15-64, the world average is forecasted toincrease by about 12% from 2020 to 2035 andby about 21% from 2020 to 2055. On theother hand, the working population is expected
to decrease by about 11% and about 28%
during the same periods, respectively

About 28%
decrease ◼ Based on such forecasts, the Japanese working
population will show the largest decrease
among leading GDP nations
2021
2025
2030
2035
2040
2020年
2025年
2030年 2035年
2040年 2045
2045年 2050
2050年 2055
2055年
全世界
中国
日本
米国

Source: Prepared by HEROZ based on United Nations, World
Population Prospects, The 2019 revision32

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
33

Notes◼ The forward-looking statements contained in this material are based on information
currently available to the Company, but are not guarantees of future performance andare subject to various risks and uncertainties. Actual results may differ from theforward-looking statements contained or deemed to be contained herein due to changes
in the business environment and other factors.

◼ This document contains information about our company and other companies, etc., andwe make no representations or warranties as to the accuracy or completeness of theinformation contained herein.

34