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
FY04/2021 Q2 Financial Results

December 11, 2020

HEROZ, Inc.（4382）
1

1. Business Overview
2. FY04/2021 Q2
Performance
3. Growth Strategy
4. Reference Materials

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

Director and CTO, Head of Development Div.

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 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, andbackgammon worldwide◼ Shogi Wars has remained cash cow backed by increase of paid users on a YoY
basis◼ Staying home by COVID-19 and shogi event held on our mobile app led toincreased demand for our app, with an increase in our paid active user baseShogi Wars

Animal
Shogi Wars

Igo Wars

CHESS HEROZ(English)

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

1. Business Overview

2. FY04/2021 Q2
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.

12

COVID-19 Impact and Assumptions for Forecasts◼ Risks relating to COVID-19 are as listed below.
•
Materialized
Impact•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

AI (B-to-C) Services•

Increased revenues from mobile
apps such as Shogi Wars•

Further revenue increase in our
mobile apps due to increased use of
our online contents

Potential
Upside•Increase in the use of AI through promotionof DX (digital transformation) , etc.

Potential
Downside•

Reduction in client budgets for IT investments,•etc.

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 by slowdowns in progress ofprojects and reduced opportunities for sales discussions due to emergency declared by
the government, but is expected to normalize in the second half

◼ 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 cloudcomputing services, etc. until 2022. While earnings will decrease for the foreseeable
future as a result, we expect earnings recovery after those investments are completed

13Performance Overview (May-October 2020)◼ Revenues decreased as forecasted in the previous page due to emergency declared for
COVID-19 by the government, but is expected to be normalized in Q3 and thereafter◼ EBITDA and other profits made steady progress towards achievement of fiscal year
forecasts while they decreased on a year-on-year basis. We have been investingproceeds from public offering in December 2019 for our medium-to-long term growth(Units: JPY millions)

FY04/2021
Q1-Q2
Actual(Reference)
FY04/2020
Q1-Q2
ActualFY04/2021
Forecast

YoY

Progress

Net Sales

753

757

△0.5%

1,700

44.3%

EBITDA*

178

275△35.1%290

61.7%

EBITDA Margin

23.8%

36.4%

－

17.1%

-

Operating Profit

152

244

△37.5%

230

66.4%

Operating Margin

20.3%

32.3%

－

13.5%

-

Ordinary Profit

147

238

△38.4%

220

66.9%

Net Income

100

164

△39.0%

150

66.9%* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits

14

Net sales and EBITDA Trends◼ Net sales of AI (B-to-B) services, the core pillar of our growth strategy, declined in thefirst half of FY04/2021 due to reduced opportunities for business meetings by COVID-19.
For the full year, they are expected to grow compared with the previous year, based on
the assumption that the business environment will normalize in the second half
◼ Net sales of AI (B-to-C) services increased compared with the previous fiscal year led by“Shogi Wars”
1,377

30.9%

34.2%

1,155

33.9%
23.8%

727

877

828
908

824

(Units: JPY millions)

1,544

94
53
FY04/2017

523

470

357

10.7%

753

549

817

325

247
FY04/2018

Net Sales（BtoB）

FY04/2019

Net Sales（BtoC）

427
178

FY04/2020

FY04/2021 Q1-Q2

EBITDAEBITDA 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
956

800

788

(Units: JPY millions)

417
372
339

338

8

37
191

9

4

187

215

49

248

235

305

FY04/2017

FY04/2018

FY04/2019labor cost2

depreciation cost

app commission fees

600

21
201

210

63

21

120
381

223

FY04/2020

advertisement expenses

25

FY04/2021 Q1-Q2

others(COGS/SG&A)

16

Balance Sheet (as of October 31, 2020)◼ 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
Cash and deposits
Fixed Assets
Property, plant and equipment
Intangible assets
Investments and other assets
Total Assets
Current Liabilities
Fixed Liabilities
Net Assets(Reference)
As of 4/30/2020

As of 10/31/2020
6,009

5,935

5,799

5,562

438

473

110

131

6

６

321

334

6,447

6,408

164

226

-

-

6,283

6,182
17

(Reference) Initiatives to Prevent Spread of COVID-19◼ We continue to promote efforts to prevent the spread of COVID-19 and prioritize healthand safety of our stakeholders including our employees◼ There is no significant impact on operations and labor productivity◼ No officers or employees have been infected with COVID-19 to date
～April 2020

Internal

External

May

June～

・Introduced a selective system forwork from home and flexible hours in
February
・All officer and employees were
instructed to work from home if at all
possible, in April
・Set up an internal consultation desk
for COVID-19
・Improved the work from homeenvironment through reinforcement of
VPN (virtual private network)

・Adopted an optional system
for work from home andflexible hours based on
Tokyo’s roadmap against virus
・Alcohol sterilization andtemperature measurements
when entering the office・Weekly online companywide meeting・Continue an optional
system for work from homeand flexible hours
・Promote an internal DX to
improve our work
productivity

・Transitioned to online
internal/external meetings andrecruiting interviews

・Alcohol sterilization andtemperature measurements
when entering the office・Promoted shift to paperlesswork

・Held an online financial
results meeting
・Held an online recruiting
event
18

1. Business Overview
2. FY04/2021 Q2
Performance

3. Growth Strategy
4. Reference Materials

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

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
ongoing fee（profitable,
growth market） ￥AI B-to-B
initial setup fee(growthmarket)￥￥AI B-to-C(stable CF)
Time
20

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
21

Initiatives Aimed at Achieving the Growth Strategy◼ HEROZ’s Forecasting AI to Contribute to IRIS OHYAMA's Global SCM Reform◼ HEROZ began operating the sales forecasting AI for domestic products of IRISOHYAMA Inc. (Representative Executive President: Akihiro Oyama, hereinafter"IRIS OHYAMA"), which has a product lineup of over 25,000 items in total, on
October 1, 2020
◼ In the future, we will continue to develop and provide AI for automation area, etc.,
in IRIS OYAMA and promote digital transformation in its overseas business as wellas domestic business◼ Joining the “Space ICT Promotion Initiative Forum”◼ The National Institute of Information and Communications Technology (NICT) andJapan Aerospace Exploration Agency (JAXA) established the “Space ICT Promotion
Initiative Forum” on September 2, 2020
◼ We will contribute to society through the creation of new value, aiming at themultifaceted development of space communication technology and collaboration
with advanced terrestrial communication technology, with the member companiesof the "Space ICT Promotion Initiative Forum"22

1. Business Overview
2. FY04/2021 Q2
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 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 site24

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
25

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.

26