Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 (From April 1, 2022 to  September 30, 2022) Financial Results Briefing Materials October 31,2022 Digital Arts Inc. (Securities Code: 2326) > Consolidated Results Highlights A Non-consolidated Results Highlights > By Market ▷  Full-Year financial Forecast for the Fiscal Year Ending March 2023 >  FY03/23 Initiatives ▷ Return to Shareholders for Fiscal Year Ending March 31, 2023 Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Consolidated Results Highlights
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※ * EBITDA = Operating profit + Depreciation + Tax expenses included in operating expenses 5
Consolidated contracts totaled 4,737 million yen, up +5.2% year on year. . . . Contracts for both cloud services and license sales increased year on year. Contracts for cloud service products declined due to a fall in GIGA School Concept projects in the public sector market after penetration, which was more than offset by steady orders for new projects received in the enterprise sector market, resulting in an 8.2% increase. In the category of license sales products and other, the reactionary fall from a large government office project in the public sector market in the previous fiscal year was more than offset by receiving local government projects and the steady growth of the market for enterprises, resulting in a 3.9% increase. 6
Contracts for cloud service products were strong in the enterprise sector, except for the impact of GIGA School Concept projects. e Contracts for cloud service products increased 35.2% (623 million yen in the previous fiscal year and 843 million yen in the fiscal period under review) excluding the impact of GIGA School Concept projects (798 million yen in the previous fiscal year and 690 million yen in the fiscal year under review). . Contracts for cloud service products increased, reflecting growing demand for security in the cloud environment primarily in the enterprise sector market. 7
Sales of GIGA School Concept projects were posted, and orders for cloud service projects increased. .
Trend in Order Backlog
[Million yen] ■ Sales recorded for the following fiscal year and later ■ Sales to be recorded in the next two quarters (3Q-4Q) New contracts for GIGA School Concept projects, many of which are five-year contracts, have run their course as a result of the widespread use of learning terminals*, and sales of GIGA projects will decline from the next fiscal year. The projects will be moving to a contract renewal phase gradually. Sales posted in the fiscal year under review increased due to a rise in orders for cloud service products, for which contracts are mostly one-year contracts. . Characteristics of cloud service products (please refer to supplementary information in pp. 9 and 10) Contract amount is recorded as sales on a pro rata basis, split into equal monthly amounts, over the contract period. As a result, the longer the contract period, the larger the contract amount that is deferred (order backlog). Since the contracts are renewable at fixed prices (whereas the renewal price for license sales products is half the contract price for the first year), this recurring revenue business model creates a  stable profit base. *Progress against the goal of providing a terminal to each pupil in compulsory education (Ministry of Education, Culture, Sports, Science and Technology) https://www.mext.go.jp/content/20220204-mxt_shuukyo01-00009827_001.pdf &
License fees make up a large proportion of the contract amount. This portion is recorded in a lump sum as sales in the month when the contract is obtained. Amount equivalent to maintenance fee is recorded on a pro rata basis over the contract period. Contract amount is recorded as sales on a pro rata basis over the contract period (split into equal monthly amounts). As the contract amount of cloud service products rises, the contract amount that is deferred (order backlog) increases. 9
Many projects in the public sector market are multi-year contracts, such as five-year contracts. License sales products and cloud service products both earn from contract renewals. ogijnoo ui pua The diagrams on the left show the relationships between the contract amount and sales in license sales products and cloud service products on the assumption of a five-year contract with an amount of 500 million yen. . In a multi-year contract for cloud service products, there is a large gap between the contract amount and sales. The order backlog is high. . For license sales products, a high percentage of sales is recorded at the time of contract conclusion. The amount of contract renewal is half the amount of the initial contract. That means a small gap between the contract amount and sales and a very limited order backlog.
Net sales reached a new record high for the second quarter. ※10,500 (Million yen) ■ 1Q   ■ 2Q   ■ 3Q   ■ 4Q 9,051 Net sales Operating Net sales Operating Net sales Operating profit profit profit profit profit FY March 2019 FY March 2020 FY March 2021 FY March 2022 FY March 2023 *Full-year consolidated financial forecast announced on May 10, 2022
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• Labor expenses swelled after DAC increased consultants. • Reactionary fall from the large amounts of bonuses scheduled for payment in the first half of the fiscal year under review. • Cloud server expenses will rise as a result of sales expansion of cloud products. The business entered the phase of a decrease in new contracts for GIGA School Concept projects and growth in expenses gradually decreases. 1,102 (Million yen) {" Transfer to other accounts 989 FY March 2021 FY March 2022 FY March 2023 13 Quarterly Trend in Consolidated Selling, General and Administrative Expenses ・Increase due to and press advertising. • Reactionary fall from the large amounts of bonuses scheduled for payment in the first half of the fiscal year under review. · Hiring expenses swelled after DAC increased consultants. ■ Personnel expenses ■ Advertising ■ other FY March 2021
(Million yen) FY March 2023
Despite an increase in advances received, the equity ratio increased. Financial health has improved further.
Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Non-consolidated Results Highlights
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17 Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 By Market
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Trend in Consolidated Contract Amount by Market (Million yen) . In the enterprise sector market, in addition to growth in contracts for cloud service products in response to a rise in demand for cloud services, the contract amount rose 403 million yen or 18.7% due to increased orders received resulting from the additional functions of i-FILTER and m-FILTER series, new contracts that the Group won by implementing a sales promotion strategy with to specific targets, and the growth of DAC. . In the public sector market, the contract amount decreased 166 million yen, or 7.9%, after meeting demand for GIGA School Concept projects for the time being despite growth in orders received from public agencies and local governments. FY March 2022 1H FY March 2023 1H
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. In the enterprise sector market, net sales for cloud service products increased due to a rise in contracts in response to growing demand for cloud services, in addition to growth based on new customers for DAC, resulting in an increase of 301 million yen (13.3%). . In the public sector market, net sales rose 235 million yen, or 11.5%, reflecting a high volume of orders received for the projects of public agencies and local governments, in addition to posted sales of GIGA School Concept projects that had continued since before the previous fiscal year. FY March 2022 1H FY March 2023 1H
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Net sales for the first half reached a record high, bolstered by strong (Million yen) 5,084 FY Mar. 2013   FY Mar. 2014   FY Mar. 2015   FY Mar. 2016   FY Mar. 2017   FY Mar. 2018   FY Mar. 2019   FY Mar. 2020   FY Mar. 2021   FY Mar. 2022   FY Mar. 2023 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 21
Net sales for the second quarters reached a record high, bolstered by strong (Million yen) 2,698 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q FY March 2020 FY March 2021 FY March 2022 FY March 2023 22 Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Enterprise Sector
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Trend in Net Sales in Enterprise Sector Market by Product (Million yen) m i-FILTER series   m m-FILTER series   m FinalCode   m DAC   m other FY March 2022 1H FY March 2023 1H Functions were added to products and cooperation with agencies were strengthened in response to more frequent, diverse cyber attacks. . Sales of the i-FILTER series remained strong, rising 28 million yen, 2.3%, in response to growing corporate demand for cybersecurity. . Sales of the m-FILTER series remained solid, owing to rising demand for email security and PPAP problem-solving. (+37 million yen or +8.4%) . Sales of the FinalCode series remained strong, meeting demand for responses to PPAP and the revised Act on the Protection of Personal Information. (+35 million yen or +37.9%) . DAC made good progress acquiring new clients and achieved substantial sales growth (up 195 million yen or 38.6%), reflecting growing DX needs and demand for security measures among enterprises.
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Number of consultants Security consulting sales* IT strategy consulting sales* End of FY March End of FY March 2022 2023 1H . DAC actively hired talent, focusing on those from leading consulting firms and leading systems integrators. *: DAC's non-consolidated net sales 1H 1H . Offering comprehensive services including security checkups and analysis, proposals of measures and solutions for raising the security level and support for implementation FY March 2022 FY March 2023 1H 1H . DAC proposed initiatives and solutions to promote DX at customers in consideration of security and provided comprehensive consulting services, including implementation support.
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Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Public Sector
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Trend in Net Sales of Public Sector Market by Product . In addition to posted sales of GIGA School Concept projects that had continued since before the previous fiscal year, contracts gained from public agencies and local governments increased and sales of the i-FILTER series remained strong, which offset a reactionary fall from large projects contracted by government offices in the first half of the fiscal year under review.   (+5 million yen or +0.3%) . Brisk orders were received from local governments and sales of the m-FILTER series leaped (up 220 million yen or 107.8%). FY2023   March 1H
GIGA School Status*¹ Introduction of charged filtering . The proportion of Boards of Education which have adopted paid-for filtering increased from 73% at the end of the previous fiscal year to 75%. *1 : According to our survey of 1,741boards of education (Sep 2022) Share of charged filtering introduced . i-FILTER's share grew from 51% at the end of the previous fiscal year to 54%. . Contracts increased from 6.9 billion yen at the end of the previous fiscal year to 7.6 billion yen. Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Consumer Sector
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Trend in Net Sales of Consumer Sector Market by Product ■ For mobile terminals,other   (Million yen) ■ For computers FY March 2022 1H FY March 2023 1H . In products for computers, the number of users of multiple-year package products and i-FILTER® for Multi-Device, which are available on multiple terminals, remained strong. Revenue from contract development . of products for mobile terminals for carriers decreased despite an increase in the number of users.
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Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Full-Year Financial Forecast for Fiscal Year Ending March 31, 2023
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(Million yen) Net sales that will be carried over to and posted for the fiscal year in question will increase given an increase in the number of contracts acquired in previous fiscal years in connection with the GIGA School Concept in the public sector market. New contracts of DAJ are expected to amount to 8,400 million yen after measures to expand sales of new functions and strategic sales measures for the enterprise sector market and the winning of projects to improve the resilience of municipal information systems in the public sector market. As in the previous fiscal year, DAC will increase the number of consultants and is expected to continue growing through the acquisition of new clients. *1: Sales recorded from the order backlog of contracts acquired in previous fiscal years *2: Sales deferred to subsequent fiscal years (order backlog) *3: DAJ = Digital Arts Inc. *4: DAC = Digital Arts Consulting Inc. 34
Results for FY March Forecast for FY March
2023
• In response to corporate needs for total security solutions, we will enhance the product lineup and improve links with other companies' products in order to attract new clients. . We will increase the number of DAC staff to achieve growth by acquiring new customers. . Net sales that will be carried over to and posted for the fiscal year in question will increase given an increase in the number of contracts acquired in previous fiscal years in connection with the GIGA School Concept in the public sector market. . Sales growth will be attained by winning projects for the further improvement of the resilience of municipal information systems and by expanding our market share in connection with the GIGA School Concept.
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Labor costs are expected to rise because DAC will increase the number of consultants. Communication expenses are expected to increase as a result of sales expansion of cloud products. (Million yen) FY March 2022 results Labor Depreciation
Transfer to FY March 2023 other accounts forecast 37 Recruiting expenses (in the "other" category) will increase for increasing consulting personnel at DAC.
Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 FY03/23 Initiatives
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(1)
Mounting needs for comprehensive security Diversification of cloud services and the spread of remote working and home learning meant an increase in ICT assets that need to be protected and expansion of the domain of security threats. (2)Measures against malware infections Malware threats are intensifying due to diversification and sophistication of cyberattacks from rampant ransomware, Emotet and other malware. (3) Strengthening security measures for public institutions • Local governments seek security cloud and greater security resilience. ・ Medical institutions have growing needs for cyber security measures. (4) Enhancing security measures for GIGA School devices Not only is there demand from those who have yet to introduce filtering but also demand for switching from free filtering and DNS filtering to high performance filtering software for protecting schoolchildren.
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Diversification of cloud services and the spread of remote working and home learning meant an increase in ICT assets that need to be protected and expansion of the domain of security threats. Security solutions providing broader security measures than ever before are now required.
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To meet the needs for comprehensive security, roll out Digital Arts' original next- generation secure web gateways (SWGs) featuring enhanced functions of the existing URL filtering software (i-FILTER) and a wide range of additional security solutions. (Note) Anti-Virus & Sandbox (including on-premise solutions) have been launched. Schematic of functions of next-generation SWGs
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Financial loss from ransomware and confidential information theft by targeted attacks rank high among the 10 major security threats with the diversification and sophistication of cyberattacks.

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m-FILTER and i-FILTER provide protection against infection through e-mail for Digital Arts products. FinalCode and i-FILTER prevent information theft even in the case of intrusion by any means other than e-mail. The status of zero reports on infection damage is continued.*1 Measures against infection Measures against information theft Part of the i-FILTER functions was released on May 10 as an option of the URL category linkage of m-FILTER. *1: The number of reports on damage due to malware infection from users of i-FILTER Ver. 10, m-FILTER Ver. 5, i-FILTER@Cloud and m-FILTER@Cloud as of Sep 2022 (Source: Digit
Security cloud projects for prefectural governments generally proceed as scheduled. Procurement for improving the resilience for municipal governments is making progress following completion of procurement for prefectural governments and it is expected to end in FY2023.

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All solutions shown in the outline of countermeasures for municipal information systems are possible using combinations of Digital Arts products. We won i-FILTER and m-FILTER projects for public institutions. Overview of Solutions for Municipal Information Systems Outline of countermeasures Review of "three layers of protection" (α model protection and above) Remote access security (protection against malware, etc.) Measures for shift away from PPAP (process of sending an encrypted file (with password) sttachment in an email and then sending the password to unzip the file in a second email) File encryption Anti-Virus & Sandbox functions are provided as options from May 10.
A number of cases of damage from cyber attacks sustained by medical institutions have occurred in recent years. In light of that, the security guidelines for the medical industry will be strengthened. It is possible to provide large medical institutions with proposals similar to network separation for enhancing resilience of municipal information systems. There is great potential for the adoption of Digital Arts products. management service providers and others Structure of network separation at major medical institutions * Source: Ministry of Health, Labour and Welfare; Information Security Training Material (for medical professionals; https://www.mhlw.go.jp/content/10808000/000761105.pdf
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Some boards of education that introduced free DNS filtering solutions are shifting to i- FILTER and other paid filtering solutions for purposes of strengthening security and reducing clerical workloads. Introduction of filtering by Boards of Education*1 *1: Based on interviews with 651 school boards responsible for more than 3,000 pupils and students (According to our research) 5. Solution to issues of PPAP (process of sending an encrypted file (with password) attachment in an email and then sending the password to unzip the file in a second email) The tie-up option of m-FILTER @Cloud and the file transfer solution, encrypted email for m-FILTER @Cloud, was launched to help reduce the risk of information leaks during transmission and the risk of attacks during reception. m-FILTER@Cloud automatically separates email text and attachments The text is directly sent to the recipient and the attachments can be downloaded from URL provided in a separate email message. The guest user login function of encrypted email allows file acquisition through account authorization in place of a password. An advertising campaign will be run to increase promotion at the same time as the product release.
We have started to provide Anti-Virus & Sandbox for i-FILTER and m-FILTER to meet demand for total security solutions. The Nikkei: posted on Aug. 23, 2022 Raising brand recognition and winning contracts using the media such as The Nikkei newspaper and through promotion activities using videos and online seminars.
Trend in i-FILTER v10 and m-FILTER v5 Licenses Used 12,000 Realizing safe office IT environments protected through "White Operation" The number of licenses for both i-FILTER and m-FILTER has been steadily increasing in the enterprise-sector and public-sector markets. We will broaden the product lineup and step up collaboration with other companies to further encourage the take up of White Operation. March 2019 March 2020 March 2021 March 2022 September 2023 March 2024
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We release a one-stop service encompassing sales, construction and operation of Digital Arts products. The use of D-Alert paves the way for services from the detection of incidents to recovery. *1: D-Alert has issued 1,550 reports for the current fiscal year. It notifies customers on a real-time basis to urge them to take security measures.
Expand the scope of value provided and the level of profit through DAC service, ensure continuous contact with E/U as the Group, and use it for product sales growth.
D Alert QuickIR option
> The incident response service originated from "detection with D Alert" > It covers the investigation of terminals and devices with which Digital Arts products are used, initial response and identification of causes.
Security advisory
Identify current issues through security assessment. Offer proposals on measures for improving security levels and support decision-making. > Propose and sell security products best suited to customers' environments. Operation and maintenance service > This service offers operation and maintenance concerning Digital Arts products. To be provided i-FILTER.  m-FILTER. ■ DigitalArts @ Cloud. Ver.10 Ver.5
QuickStart service
Service for installing security at a level of recommended settings in a form appropriate for customer environments Started providing i-FILTER@Cloud. To be provided m-FILTER@Cloud.
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Material on Consolidated Financial Results for the First Half of the Fiscal Year Ending March 31, 2023 Return to Shareholders for Fiscal Year Ending March 31, 2023
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We are planning to pay dividends as follows to return a portion of our earnings to our shareholders. Target payout ratio for fiscal year ending March 31, 2023: 32.4% Annual dividends of surplus forecasted for fiscal year ending March 31, 2023: 75.00 yen per share We expect to increase the annual dividend by 5.00 yen per share.
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Among the descriptions of plans, strategies and financial forecasts in this presentation material, those that are not historical facts are forward-looking statements. They reflect judgments made by the management of Digital Arts Inc. on the basis of information currently available to it. They may be subject to considerable change depending on changes in the environment and other factors, and the Company does not in any way guarantee the achievement of the projections. Digital Arts Inc. will disclose any significant changes that occur in the future as appropriate. With some exceptions, the basic figures in this presentation are rounded down to the nearest million yen. DigitalArts. -For internet convenience, safety and security -