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 FY04/2019
Full Year Financial Results

June 12, 2019

HEROZ, Inc.（4382）
1

1. Business Overview
2. FY04/2019 Full Year
Performance
3. FY04/2020 Forecast
4. Growth Strategy

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.

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

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?
Business model which provides machine learning/deep learning as service, similar to
SaaS (Software as a Service) and IaaS (Infrastructure 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

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 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 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 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

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
9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, and backgammon worldwide◼ Shogi Wars has remained cash cow backed by organic increase of
paid users

Shogi Wars

Animal
Shogi Wars

Igo Wars

CHESS HEROZ(English)

BackgammonAce(English)Pokémon Comaster(Pokémon Duel）

Earning structure: monthly membership fees,
Kishin (AI) usage fees, etc.
10

1. Business Overview

2. FY04/2019 Full Year
Performance
3. FY04/2020 Forecast
4. 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.

12

FY04/2019 Full Year Financial Performance◼ In FY04/2019, net sales of 1,377 million yen (+19.2% year-on-year) and EBITDA of
470 million yen (+31.7% year-on-year) exceeded our forecast because of revenue
contributions from AI (B-to-B) projects not included in our original pipeline, etc◼ Net sales, EBITDA, operating profit, ordinary profit and net income in FY04/2019 wererecord-high, respectively(Units: JPY millions)

FY04/2019
ActualFY04/2019
Forecast

Actual to
Forecast(%)(Reference)
FY04/2018
Results

Net Sales

1,377

1,300

105.9%

1,155

EBITDA*

470

450

104.6%357

EBITDA Margin

34.2%

34.6%

－

30.9%

Operating Profit

420

400

105.1%

354

Operating Margin

30.5%

30.8%

－

30.6%

Ordinary Profit

415

400

103.8%

338

Net Income

296

280

106.0%

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

13Net sales and EBITDA Trends◼ Net sales from AI (B-to-B) services and AI (B-to-C) services in FY04/2019 were about+120% and about -10% respectively on a year-on-year basis. (Revenues from AI (B-toC) services decreased due to no revenue contributions from several unprofitable services
terminated during the previous fiscal year. However, Revenues from Shogi Wars
increased during this fiscal year)◼ Revenues in FY04/2019 Q4 decreased on a quarter-on-quarter basis because deliveries
of initial setup projects for AI (B-to-B) services were concentrated in the previous quarter
1,377

1,155

30.9%

(Units: JPY millions)

34.2%

878

470
357

10.7%

94

FY04/2017
Net Sales

FY04/2018
EBITDA

FY04/2019
EBITDA margin

14

COGS and SG&A Trends◼ Labor cost in FY04/2019 increased by about 30% because of newly hired engineers, etc◼ COGS and SG&A increased in FY04/2019 Q4 because of a one time cost increase byproactive efforts to standardize development tools and to step up our advertising andpublicity efforts
956(Units: JPY millions)
788

800

339

338

372
37

8
191

9
187
4

2

215

248

235

FY04/2017

FY04/2018

labor costdepreciation costadvertisement expenses

others(COGS/SG&A)

49
305

FY04/2019app commission fees
15Service Overview and Marginal Profit◼ Characteristics of AI (B-to-B) and AI (B-to-C) services are summarized below
Service
Summary
Input Data

AI（B-to-B) Services
B-to-B machine learning service
HEROZ Kishin
Structural Design data, financial data,etc.

Earning Structure Initial setup and ongoing fees
Major Costs ofGoods/Services(Fixed) labor cost, server related cost

◼ HEROZ’s overall marginal profit ratio,
defined as “(net sales – app
commission fees – royalties)/net sales,”is as shown on the right.

AI（B-to-C） Services
Shogi Wars, etc.
Shogi game records
Monthly membership fees, Kishin (AI)usage fees, etc.
(Fixed) labor cost, server related cost
(Variable) app commission fees,
royalties
marginal profit ratio
76.3%

83.8%

67.6%

◼ Note that marginal profit ratio
improves as the composition of AI (Bto-B) services increases.
FY04/2017

FY04/2018

FY04/201916

Balance Sheet (as of April 30, 2019)◼ We have continued to invest cash and deposits in efforts to achieve the medium-to-longterm growth strategy (computing servers, R&D, etc.)◼ Increased PP&E, computing servers for about 200 million yen adopting 5-year decliningbalance method, have enabled us to process larger, more complicated data (e.g. CAD or
BIM data) for machine learning. Investments and other assets also increased as a resultof the capital/business alliance and other strategic investments
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 4/30/2019

As of 4/30/2018

1,659

1,684

1,494

1,555

498

63

150

30

5

0

342

32

2,157

1,748

178

243

-

-

1,979

1,504
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1. Business Overview
2. FY04/2019 Full Year
Performance

3. FY04/2020 Forecast
4. Growth Strategy

FY04/2020 Financial Forecast◼ Net sales of AI (B-to-B) services are forecasted to exceed those of AI (B-to-C) services
in FY04/2020.
◼ We forecast revenues of ¥1,630 million, EBITDA of ¥570 million and an EBITDA marginof 35.0%. We expect each figure to increase relative to the previous year, through the
expansion of AI (B-to-B) services（単位：百万円）(Units: JPY millions)

FY04/2019
ActualFY04/2020
Forecast

YoY(%)

Net Sales

1,377

1,630

+18.3％EBITDA*

470

570＋21.1％EBITDA Margin

34.2%

35.0%

Operating Profit

420

520

Operating Margin

30.5%

31.9%

Ordinary Profit

415

510

＋22.9％Net Income

296

350

＋18.0％＋23.7％* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits
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1. Business Overview
2. FY04/2019 Full Year
Performance
3. FY04/2020 Forecast

4. Growth Strategy

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
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Global Market Forecasts: AI Software (B-to-B)◼ AI demand is accelerating globally in each industry, leading us to believe that our AI(B-to-B) service carries strong growth potential◼ AI software market in Japan is also required to grow so rapidly due to the decrease of
the domestic working population that AI will support to increase labor productivity.

◼ Our AI (B-to-B) service is growing up faster than the overall market. In FY04/2020,
revenues from our AI (B-to-B) service are forecasted to grow up by more than 43%,
the expected market growth
Annual AI Software）

Revenue, World Markets

US$ billion（

Expected market growth in global AI software

118.6

CAGR: about 43% from 2025(E) to 2018(A)

9.5

2018(A)2025(E)
Source: Tractica, Artificial Intelligence Market Forecasts (1Q 2019)22

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, 2015=100)◼ When defining the working population as
those aged 15-64, the world average is
forecasted to increase by about 14%
from 2015 to 2030 and by about 27%
from 2015 to 2050. On the other hand,
the working population is expected to
About 29%
decrease by about 10% and about 29%
decreaseduring the same periods, respectively

140
120
100
80

60
40
20
0

2015
2020
2025
2030
2035
2040
2045
2050
2015年 2020年
2025年 2030年
2035年
2040年 2045年
2050年
Global
全世界

Japan
日本

US
米国

China
中国

◼ Based on such forecasts, the Japaneseworking population will show the largest
decrease among leading GDP nations

Source: Prepared by HEROZ based on United Nations,
World Population Prospects, The 2017 revision23

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 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 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 site

24

Initiatives in Finance AI◼ Launched AI Equity Portfolio Diagnosis (patented), co-developed with SMBC
Nikko Securities, for individual customers◼ AI makes proposals on equity portfolios for each retail investor
AI proposes a more efficient portfolio individually based on each investors’
available cash, stocks owned, and tolerance for risk

◼ AI forecasts expected returns
AI forecasts expected returns from each stock, learned through deep learning◼ SMBC Nikko Securities and HEROZ willcontinue to create various services using
the latest AI technology going forward,
including “AI Stock Price Watch Service”,
which is expected to be launched in thefirst half of fiscal year 201925

Initiatives in Entertainment AI◼ We cooperated in the development of ZENONZARD, the first title in the new
digital card game brand AI CARDDASS developed by Bandai Co., Ltd., bydeveloping AI devoted to card games which leverages HEROZ Kishin◼ AI to support players (= Partner AI)
The partner AI provides recommendations
for players on the next move during battles,
post-battle analyses, and advice on deck
composition(illustrative screenshots)◼ AI to evolve
The partner AI grows by learning theuser’s preferences and thought processes
through deep learnings and other types ofmachine learning◼ AI to battle
AI has been set at various levels, allowing
users to enjoy battles with AI at the level
most suited for them

“AI Support” function “Battle Analysis” function
Advice from AI
Battle report26

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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