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FYE March 2019 First Quarter Financial Report Summary

Today we announced our FY19.3 first quarter financial results (PDF).
The following is a report of the financial summary of FY19.3 first quarter.

I.FYE March 2019 First Quarter Financial Report Summary

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■Overview
In 1Q of FY19.3, net sales rose 17% YOY to 15,335 million JPY, profit before income taxes rose 66% YOY to 3,039 million JPY, and net income attributable to owners of the parent rose 49% YOY to 1,887 million JPY. The Company's annual profit before income taxes forecast, which is the focus of the DG, is projected to be 9,000 million JPY, and the rate of progress is 34%, showing a high level of progress.

■Summary by business segment
The Marketing Technology (MT) segment posted a 45% decline in profit before income taxes due to strategic human resource investment and new product development, including data-related business, despite favorable performance gains in the financial industry. On the other hand, the Financial Technology (FT) segment continued to perform better than the industry, with a 22% increase in profit before income taxes due to a significant increase in transaction volume in the focus areas of face-to-face settlement, C2C settlement, and public funds. In the Incubation Technology (IT) segment, the exit progressed in foreign markets, particularly in the Asian region, and profit before income taxes was 656 million JPY, compared with -108 million JPY in 1Q of FY18.3. Long-term Incubation (LTI) segment continued to post a substantial increase in profits due to the steady performance of its equity-method affiliate, Kakaku.com, and the realization of a gain on the sale of certain shares.

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Ⅱ. Recent business highlights

The following is an overview of the major projects recently announced and their objectives.

1 <New financial business using blockchain>

In the Fintech field, where DG has a strength, we will finally begin full-fledged business development using the blockchain used in Bitcoin, which we have been promoting through collaboration with our strategic partner Blockstream Corporation.

DG Lab has participated in the Digital Currency Initiative of the MIT Media Lab and has been engaged in R&D on digital currencies. At the same time, based on a partnership between DG and Tokyo Tanshi Co., Ltd. in November 2017, we have been conducting demonstration tests utilizing the technologies of Blockstream. Building on these initial results, in July we announced that we would establish a joint venture with Tokyo Tanshi, “Crypto Garage, Inc.”, which aims to R&D and commercialize blockchain financial services. Tokyo Tanshi is a company that holds the essence of the financial trading market, which has engaged mainly in brokerage and intermediation in the interbank and open markets for more than 100 years.

Crypto Garage, which will be established as a joint venture, will use the basic technologies developed by Blockstream to accelerate R&D on advanced financial services and use cases using blockchain technology and cryptographic technology, and promote the development of technologies for the full-fledged deployment of innovative services in the emerging virtual currency and blockchain domain.

Until now, the speculative aspects of Bitcoin have been the focus of spotlights, but we feel that the business that makes use of the intrinsic characteristics of the blockchain is entering a period of commercialization. We aim to create global scale financial services from Crypto Garage that is originated in Japan and establish new markets in the blockchain industry.

2 <New Strategic Projects with KDDI>

As announced the other day, Kakaku.com, Inc., a major company in the LTI segment of DG, formed a capital and business alliance with KDDI CORPORATION. At the same time, DG and KDDI agreed on a basic policy of advancing strategic alliances with the aim of jointly developing new businesses in the KDDI and the coming 5G era. Based on this agreement, KDDI will participate as a new core partner in DG Lab, an open-innovation R&D organization.In the future, we will create new businesses in a wide range of fields by utilizing the assets of both the DG and KDDI groups and incorporating the results of DG Lab's R&D into society. Specifically, in Shibuya, Sapporo, Fukuoka, and other locations where we are currently preparing smart city projects, we will combine the research results cultivated by both groups to create a next-generation business model that will be created around the AR/VR, AI, and Blockchain, as well as a variety of application content that runs on 5G network.

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In addition, through the BI.Garage of subsidiaries that have developed their businesses centering on data science and social media marketing, and through collaboration with similar services provided by the KDDI Group, we will consider a new data marketing business that combines data related to media and services, such as Kakaku.com and Tabelog, payment data held by DG's FT segment, and data on KDDI Group communications, automobiles, and IoT data related to lifestyle infrastructures. Moreover, we are currently preparing an incubation project in collaboration with our strategic partners, including KDDI, and we plan to announce this fall.

3 <Horizontal and geographic expansion of Open Network Lab>

Open Network Lab, which is developing Seed Accelerator Program, one of Japan's leading programs to support entrepreneurs, is expanding its scope to support more entrepreneurs based on incubation know-how accumulated through eight years of programs.

In April, we launched the Open Network Lab HOKKAIDO program to support next-generation primary industries that combine agriculture, fisheries, and IoT, as well as the startup to support the tourism industry that is driven by inbound demand. Many startups within and outside of Hokkaido have submitted applications to participate in the program. Six participating teams have already been selected for the first phase, and the program has been launched for the demonstration (presentation of results) in October. In July, we established the "D2 Garage" in a joint venture with The Hokkaido Shimbun Press to further commit to open innovation in Hokkaido. We aim to revitalize the startup scene by investing in startups based in Hokkaido and supporting the operation of events to discover entrepreneurs.

4 <Two New Projects in the Biohealth Field>

(1) Establishment of a consortium with 21 major companies in the biohealth startup development business

Open Network Lab BioHealth, which aims to foster startups and promote open innovation in the biotechnology and healthcare fields, was also launched in May with the support of 21 major pharmaceutical companies and healthcare-related companies. startup programs in biotechnology and medicine have begun to bear fruit in the United States, such as San Francisco and Boston, but Open Network Lab BioHealth is now the first full-fledged biotechnology and healthcare-focused program in Japan, and will work in full scale with a number of partners. By the end of July, more than 50 teams had submitted applications, and we are currently selecting participating teams in preparation for the start of the program in September.

The following is a video introducing the Open Network Lab BioHealth.

(2) Capital participation and business collaboration in the biohealth field

In the biotechnology and healthcare field, we formed a capital and business alliance with Welby, Inc., our Open Network Lab BioHealth partners. As one of Japan's leading providers of PHR (Personal Health Record) services, Welby provides digital treatment support services for patients in various therapeutic fields. In conjunction with this capital tie-up, Joichi Ito, a DG Board of Directors Member and Co-Founder, was appointed as an advisor to Welby.

In the future, two companies will start aggregating health and medical information held by individuals while using Welby as a gateway. Specifically, we are planning to establish a PHR platform based on blockchain and AI technology with a view to providing preventive medicine and health points. In addition, we plan to establish a platform for personal health and medical information by linking PHR with local governments, national health insurance and health insurance, medical institutions, nursing care providers, pharmacies, insurance companies and pharmaceutical companies, and health-related businesses.

Through collaboration with Open Network Lab BioHealth and Welby, we aim to contribute to the development of medical care not only in Japan but also in Asia and around the world through our biotechnology and healthcare business.

We continue to aim an open innovation-oriented corporate management that resonates with DG Group as a whole in a way that optimizes the balance between these each category: the recurring revenues of FT, which has entered a period of stable growth, and MT; the new business creation of DG Lab; and the investment-oriented businesses with IT/LTI and Open Network Lab.

We look forward to the continued guidance and encouragement of our shareholders and other stakeholders.

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