CEO Comments

Kaoru Hayashi

Representative Director,
President Executive Officer and Group CEO,
Digital Garage, Inc.

CEO Comment Vol.65 “FYE March 2018 Financial Report Summary”

Today we announced our FY18.3 financial results. The following is the summary of financial results for FY18.3.

I. FYE March 2018 financial report summary

In FY18.3, we posted net sales of 60,168 million JPY, profit before income taxes of 7,619 million JPY, and profit attributable to parent company shareholders of 5,460 million JPY. Net income reached a record high for the first time in nine fiscal years. In FY18.3, sales rose 24%, operating profit rose 2.4 times, profit before income taxes rose 14%, and profit attributable to owners of parent rose 16% compared to the previous fiscal year’s YoY figures because the previous fiscal year had irregular nine month results due to a change in the fiscal term.

■Summary by business segment

In the Marketing Technology (MT) segment, performance-based ads drove strongly mainly in the smartphone/app fields. In the fourth quarter particularly, sales to financial institutions was strong and rose 50% YoY. As MT segment, profit before income taxes grew by 37% YoY and continued high growth. In Financial Technology (FT) segment, transaction volume, the KPI of this segment, continued to grow faster than the overall EC market, and grew by 20% YoY to 1.5 trillion JPY. Not only in the mainstay EC field but also in non-EC business areas which we have focused on strategically such as face-to-face settlements, charging/ cryptocurrency exchange settlements etc. The incubation technology (IT) segment rose 30% YoY, despite not reaching the initial forecast due to slipped deals in portfolios. The Long-Term Incubation (LTI) segment has achieved steady growth in the performance of as a result of long-term investment and continued pursuit of profitability. In addition, preparation for new businesses in the life design and healthcare fields are in progress.

Below is Business Highlights.

II. Forecast for FYE March 2019 consolidated results

~Begin applying the IFRS~

As disclosed, we will shift to voluntary application of IFRS from the consolidated financial statements of fiscal year ending March 2019. The DG Group believes that investment value will be appropriately posted to the B/S by conducting fair value evaluations in IT segment, and that the actual profit situation will be more clearly reflected in MT and FT segments by presenting net revenue amounts, and that the transition will be made from the viewpoint of international comparability of earnings.

For the fiscal year ending March 2019 (IFRS), we forecast revenue of 33,500 million JPY, profit before tax of 9,000 million JPY, and profit attributable to owners of parent of 6,200 million JPY. Although we cannot make a simple comparison because the accounting standards differ from the fiscal year ended March 2018, we expect revenue to decline in all MT, FT, and IT because revenue will change to a net presentation. On the profit side, IT assumes that the gains on the sale of shares commensurate with the gain on valuation, even though the fair value at the end of the period is uncertain. Both MT and FT forecast double-digit real growth as in the previous fiscal year. Regarding dividends, we forecast a dividend of 28 JPY, up 4 JPY from the previous year.

Here I will describe recent developments and future directions that are milestones for the DG Group.

III.Business segments and strategic project highlights

<IT Segment: Full-fledged Start of Global Expansion of Investment Development Business>

In the IT segment, we will further strengthen the incubation stream linking North America, Japan, Europe and Asia, and expand DG overseas investment business. In addition to supporting AI Technology Startup Studio All Turtles Corporation, which connects San Francisco, Tokyo, and Paris, and Mind Fund, a Hong Kong-based startup support company with Asian networks, we have also started collaborating with byFounders, a fund formed by founders of leading Nordic startup companies. We are building a Global Incubation Stream that connects Japan, the U.S., Europe, Asia, and Northern Europe. We are building a structure that will enable us to discover, invest, and cultivate the next generation of startup companies as soon as possible.

In Japan, we will also strengthen startup and development projects in regional cities through nationwide expansion of the “Seed Accelerator Program” Open Network Lab, which has been recognized as one of the leading seed accelerator programs in Japan. In April 2018, we launched the Open Network Lab HOKKAIDO in cooperation with The Hokkaido Shimbun Press.

Here is the Open Network Lab HOKKAIDO video.

While leveraging the know-how Open Network Lab has accumulated through its eight-year activities as well as the global network of entrepreneurs, and the Hokkaido Shimbun’s media network, we aim to revitalize the startup scene in Hokkaido by collaborating with universities and companies in Hokkaido.

In the fall of 2018, we plan to hold an event to celebrate the 5th anniversary of the opening of the San Francisco Incubation Center DG717, where investors will be presented with the best startup companies selected from around the world through the Incubation Stream. In the future, Open Network Lab will contribute to the startup and nurturing of new businesses from Tokyo to other regions and around the world in cooperation with the Global Incubation Stream, and will accelerate the development of new businesses on a variety of axes that transcend barriers between regions and fields.

<FT Segment: Expanding Public Money Settlement Business>

As noted earlier, the FT segment posted a 29% year-on-year increase in profit before income taxes. In the fiscal year under review, we will continue to focus on the payment and settlement business, which handles public funds such as taxes and insurance premiums, while maintaining this strong performance. econtext, Inc. enters into a discretionary agreement with the National Tax Agency on “The consignment payment of national taxes using QR Code in convenience stores”. At convenience stores nationwide, we provide a service system that uses QR codes to pay national taxes without registering in advance.

DG launched econtext in 2000 as a pioneer in cash payments using kiosk terminals at convenience stores. econtext has already been entrusted with the convenience store payment of various administrative fees in Osaka Prefecture, and VeriTrans Inc. has provided the Ministry of Health, Labour and Welfare with a card payment service for the payment of national pension premium cards. I was reminded of the fact that convenience store payment services have become an indispensable infrastructure for people’s lives through this time’s discretionary agreement with the National Tax Agency. As a company that plays a part in this infrastructure, we intend to work even harder than ever to ensure the stable operation of our services and to improve the usability of our services.

<MT Segment: Based on Performance Ad and O2O Marketing>

The MT segment continues to grow at a high rate of 37% year-on-year growth in profit before income taxes, based on performance ads. In the data marketing business, sales of advertising products crossed over data from the Group and social media are steadily expanding. In the future, we will work with other data providers to develop a stronger service.

Today, we also announced a capital business alliance with iRidge, Inc. DG became the largest outside shareholder of iRidge (second only to President Oda of iRidge), and at the same time, the Business Design Company of the MT Segment is to be incorporated into a joint shareholding company with iRidge. By combining iRidge’s many application development experiences (push notifications, coupons, points, analysis, and collaboration) with the comprehensive promotion know-how that the Business Design Company has accumulated over the years by fusing the Web with real, we will be able to promote O2O (online to offline) such as the application X distribution channel, the application X location information, and the application X settlement, thereby opening up a new horizon for digital marketing. Through its 14% stake in DG Communications, a group company, iRidge will collaborate in applications and marketing in the real estate field, which is undergoing dramatic changes due to the advancement of digital technology.

<DG Lab: Preparing for the First Year of Blockchain Dissemination>

DG Lab, a joint R&D organization established by DG,, Inc., and Credit Saison Co., Ltd. in 2016, are now in full swing in their efforts in the business phase. In the area of the blockchain, we have begun demonstration experiment of a smart contract system in cooperation with to improve services for Resona Bank personal loan operations. This demonstration experiment is the first development case in Japan to feature the same blockchain technology that is used for the Bitcoin cryptocurrency. We also formed an alliance with Tokyo Tanshi Co., Ltd., which provides intermediation and intermediation services in interbank markets and open markets, to create a new Fintech business that utilizes blockchains and artificial intelligence.

A feature of the blockchain is that incentive mechanisms are embedded and there is no concern that resources will be depleted as long as there is an ecosystem that maintains this mechanism adequately. Derived technologies from these ideas are emerging in a variety of blockchain industries, and I am convinced that the essence is the blockchain technology that has been demonstrated with Bitcoin. That is why we chose Blockstream Corporation as a strategic business partner to develop platforms that leverage Bitcoin blockchain technologies.

In fact, Blockstream’s business is steadily expanding. In January 2018, they entered into an alliance with the Intercontinental Exchange, which has the New York Stock Exchange and other affiliates, to provide cryptocurrency data. Based on this alliance, Blockstream gathers a wide range of information from more than 15 cryptocurrency exchanges worldwide, including Bitcoins and other key cryptocurrency prices and order books, and provides it to the InterContinental Exchange in real time. From the latter half of this year to next year, the launch of a variety of businesses in collaboration with Blockstream and DG Lab will be the first year for the dissemination of Bitcoin blockchain technologies.

In preparation for the advent of this era, DG continues to work to raise the level of Japan’s block chain technologies. As a global leader in the development of technologies related to the blockchain, DG will participate as Local Support Organization in the operation of the Scaling Bitcoin, an international conference on Bitcoin to be held in Tokyo in October 2018. DG will continue to contribute to the growth of the block chain industry from all aspects.

DG Lab will host THE NEW CONTEXT CONFERENCE 2018 TOKYO on June 19, 2018. Hosted by Digital Garage co-founder and Director of MIT Media Lab Joi Ito, the conference is aimed at those interested in cutting-edge internet technology and the businesses that emerge from it. This will be the 17th conference since the first one in 2005.

At this year’s conference on the theme of “Governance of Regulations and Innovations,” globally acclaimed leading researchers, entrepreneurs, and experts of the field will come together to discuss how startups and companies that produce technological innovation are dealing with regulations and also how regulatory agencies are handling continually evolving technologies. Speakers from companies with new technologies and regulatory agencies will be invited to consider the future creation of rules to widely promote new technologies in society–such as Artificial Intelligence (AI), Blockchain, Biotechnology, and 5G–from various fields including finance, healthcare, and media. Other topics of discussion will include personal data management and utilization in fields such as marketing and healthcare, as well as the creation of rules to ensure media neutrality.

Below is the updated NEW CONTEXT CONFERENCE video.

Two years later, in 2020, DG will celebrate its 25th anniversary. This is the year in which the Tokyo Olympics are held and the world’s attention is drawn to Tokyo. The DG Group will continue to act as a first penguin and contribute to make a better society through incubation know-how, global networks, and research results in DG Lab.

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

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