Heroz, Inc.TSE: 4382

Presentation_Material_for_FY04-2021_Q1

Sep 14, 2020 at 6:04 AM UTC · MarketScreener

Notice

This document is an excerpt translation of the original Japanese document and is only for reference purposes. In the event of any discrepancy between this translated document and the original Japanese document, the latter shall prevail.

Presentation Material for

FY04/2021 Q1 Financial Results

September 11, 2020

HEROZ, Inc.（4382）

Business Overview
FY04/2021 Q1

Performance

Growth Strategy
Reference Materials

Company Overview

				2019

				Listed on the First Section of Tokyo Stock Exchange (TSE)

Name	HEROZ, Inc.	2018

Location	PMO Tamachi 2F, 5-31-17 Shiba, Minato-ku,	Listed on Tokyo Stock Exchange (TSE) Mothers
Capital and business alliance with Netmarble Games Corporation
	Tokyo
	2017
Established	April 2009

Capital and business alliances with Takenaka Corporation and Koei

Representatives Takahiro Hayashi/Tomohiro Takahashi	Tecmo Games
Business	AI (B-to-B) services: HEROZ Kishin	2016

Capital and business alliance with Bandai Namco Entertainment
Description AI (B-to-C) services: "Shogi Wars", etc.
2013
Membership Japan Deep Learning Association,

Shogi AI, developed by HEROZ engineers, defeated a shogi
	The Japanese Society for Artificial Intelligence	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, business planning 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	Graduated from Kyoto University		Graduated from
Joined NEC as a technology engineer	MBA from Wharton School		Tokyo Institute of Technology
Experience at Business Planning Division, BIGLOBE	ex-Goldman Sachs		Joined NEC Central Research Labs
Founded HEROZ		3

Our Vision

Creating the future through artificial intelligence (AI) revolutions

Global Leader in Mind Game AI

Chess AI

Shogi AI

Go AI

Deep Blue ('97)	AI developed by our	Google acquired Deep Mind
defeated a	engineers defeated a	('14)
professional Chess	professional Shogi	AlphaGo, developed by
player	(Japanese Chess)	Deep Mind, defeated a
	player ('13)	professional Go player
		('16)
IBM		Google

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)

B-to-B Services: Profit Model and High Switching Costs

Client's data sent	Output after machine	Output applied in
learning through
to HEROZ Kishin	business settings
deep learning, etc.

Results measured and used for further

machine learning

Output precision increases through

repeated machine learning

Research/develop Shogi AI

Standardize AI technology accumulated through shogi AI

Establish "HEROZ Kishin"=MLaaS

（Machine Learning as a Service）

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 with massive servers

Achieve stable, sustained earnings and high switching costs

Earning structure: initial setup fee

and ongoing fees

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

AI-related technology and R&D capabilities

(deep learning, etc.)

Mind game	Game	Route	Placement	Prediction
processing	optimization	optimization
engine	engine	engine	engine	engine

HEROZ Kishin

Optimal	Classification	Anomaly	Text	Image
solution
recognition
search	engine	detection	processing
engine	engine	engine
engine

Know-how on

development and service operations

(massive servers, etc.)

Con-

struc Finance Entertainment

tion


Structural	Investment	Mind game AI,
	support /
design support		etc.
	market forecast

MediaHR Others


Optimization,		Matching		Route search,
	jobseekers with
etc			etc
	corporations

We aim to create the industry standard for AI in each sector through collaboration with companies which own high-quality private data

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

Construc	Fi-
-tion	nance

Structural design support, etc.	Investment support,
market forecasts, etc.

*Examples of clients served

Enter-

tainment

Creation of high-quality NPCs, game balance adjustment, etc. (In B-to-B service, HEROZ is not a game operator/publisher but a background AI provider)

Depending on the types of projects,

ongoing fees in the form of revenue sharing is also introduced

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 increase of paid users on a YoY basis
Staying home by COVID-19 and shogi boom by a new star player led to increased demand for our mobile apps, with an increase in our paid active user base

Shogi Wars	Animal	Igo Wars	CHESS HEROZ	BackgammonAce
	Shogi Wars		(English)	(English)

Earning structure: monthly membership fees,

Kishin (AI) usage fees, etc.

Business Overview
FY04/2021 Q1

Performance

Growth Strategy
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 to continuously enhance enterprise value/equity value via EBITDA growth, without being concerned about fluctuations in one-time depreciation/amortization expenses.

COVID-19 Impact and Assumptions for Forecasts

Risks relating to COVID-19 are as listed below.

		AI (B-to-B) Services		AI (B-to-C) Services
	• Delays in documentation (contracts, receipts,
Materialized		etc.) and decreased opportunities for sales	•	Increased revenues from mobile
	discussions due to work from home
Impact			apps such as Shogi Wars
•	Some clients have suspended new projects

		until the situation settles down

Potential	•	Increase in the use of AI through promotion	•	Further revenue increase in our
mobile apps due to increased use of
Upside		of DX (digital transformation) , etc.
		our online contents


Potential	•	Reduction in client budgets for IT investments,	•	Troubles due to increased traffic
Downside		etc.

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 of projects 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 cloud

computing 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-July 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 investing proceeds from public offering in December 2019 for our medium-to-long term growth

	FY04/2021 Q1	(Reference)		FY04/2021
(Units: JPY millions)	FY04/2020 Q1	YoY	Progress
	Actual	Actual		Forecast


Net Sales	367	376	△2.5%	1,700	21.6%

EBITDA*	83	126	△34.4%	290	28.7%

EBITDA Margin	22.6%	33.7%	－	17.1%	－

Operating Profit	69	111	△37.3%	230	30.3%

Operating Margin	19.0%	29.5%	－	13. 5%	－

Ordinary Profit	67	109	△37.9%	220	30.9%

Net Income	46	75	△38.5%	150	30.8%

* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits	14

Net sales and EBITDA Trends

While growth will slow down in the first half, we forecast over 20% year-on-year revenue growth for AI (B-to-B) services, the core pillar of our growth strategy, in FY04/2021
Net sales of AI (B-to-C) services increased compared with the previous fiscal year led by
"Shogi Wars" although we terminated "Pokémon Duel" in October 2019

					34.2%	1,544		(Units: JPY millions)
		30.9%	1,377	33.9%

		1,155				727	22.6%

877				828

		908			470	523
			357			367
824	10.7%				817

				549
	94	247				201	83
53						165
FY04/2017	FY04/2018	FY04/2019	FY04/2020	FY04/2021 Q1
Net Sales（BtoB）	Net Sales（BtoC）	EBITDA	EBITDA margin	15

COGS and SG&A Trends

Labor cost has increased on a year-on-year basis and is expected to keep growing to increase 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 of proceeds 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			(Units: JPY millions)

788		800		956
			417


								372
339		338			21
8		37	201


9							191	63		297
187	2	215		49				6

4								381		112	57
								305
248		235

					13		108


		FY04/2017		FY04/2018	FY04/2019	FY04/2020	FY04/2021 Q1
		labor cost					depreciation cost		app commission fees	16

		advertisement expenses			others(COGS/SG&A)

Balance Sheet (as of July 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 peripheral technologies which can be applied to our operations, working capital) until 2022

Units: JPY millions	As of 7/31/2020	(Reference)
As of 4/30/2020


Current Assets	5,922	5,935

Cash and deposits	5,715	5,562

Fixed Assets	455	473

Property, plant and equipment	119	131

Intangible assets	6	６

Investments and other assets	329	334

Total Assets	6,377	6,408

Current Liabilities	148	226

Fixed Liabilities	-	-

Net Assets	6,229	6,182

(Reference) Initiatives to Prevent Spread of COVID-19

We continue to promote efforts to prevent the spread of COVID-19 and prioritize health and 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

May

June～

Internal

External

・Introduced a selective system for work 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 home environment through reinforcement of VPN (virtual private network)

・Transitioned to online internal/external meetings and recruiting interviews

・Adopted an optional system for work from home and flexible hours based on Tokyo's roadmap against virus ・Alcohol sterilization and temperature measurements when entering the office

・Weekly online company- wide meeting

・Alcohol sterilization and temperature measurements when entering the office

・Promoted shift to paperless work

・Continue an optional system for work from home and flexible hours

・Promote an internal DX to improve our work productivity

・Held an online financial results meeting

・Held an online recruiting event

Business Overview
FY04/2021 Q1 Performance
Growth Strategy
Reference Materials

AI B-to-B

initial setup fee

(growth

market)

AI B-to-C

(stable CF)

AI B-to-B

ongoing fee （profitable, growth market）￥

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
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 to convert to the ongoing fee phase B-to-B

		Provide AI services
		to businesses

		Growth area
B-to-C	→core operation for
the medium-to-long
Shogi AI,
term
other mind games AI

￥

stable cash cow

Time

EBITDA

￥

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 decision- making, which were previously considered difficult to automate

Standard	Decision-	Creative
Tasks	making	Tasks, etc.

Structured

data

Unstructured

data

Traditional		Our AI

IT

DX will begin with standard tasks based on structured data and is expect to expand to decision- making and tasks which utilize unstructured data
Our AI can automate a wide variety of operations including those requiring decision-making. We have also achieved DX for unstructured data, which were traditionally considered difficult for DX
We are promoting DX and building a track record in areas including construction, finance, and entertainment

Initiatives in Construction and Finance AI

Joined "Super City Open Lab"
- In June 2020, we joined "Super City Open Lab" associated with "Super City Initiative", which Cabinet Office, Government of JAPAN has challenged
- By participating the Open Lab, we will gain a better understanding of challenges and trends in the whole society in Japan. We will refine our ability to provide practical AI (including DX) that goes beyond the framework of individual areas such as finance, construction and others, enabling us to enter the conceptualization phase of new urban design as well
Registered as Investment Advisory and Agency Business (Financial Instruments Business) in June 2020
- Aiming at expanding our AI (B-to-B) services in the finance industry, we were registered as Investment Advisory and Agency Business (Financial Instruments Business) in June 2020

Business Overview
FY04/2021 Q1 Performance
Growth Strategy
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

	Chronic
Challenges	Shortage
of Man-
faced by the	power
Construction
Industry

Soaring

Materials

Prices

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)

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 of Architecture, 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)
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 in 2017 and became a member of i-Construction. We aim to create the industry standard AI for the construction industry, enhancing productivity

and creating a new, attractive construction site

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

140

120

100

Projection of Population Age 15-64

(Median Prediction Interval, 2020=100)

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 to

About 28%decrease by about 11% and about 28% decrease during the same periods, respectively

2020 2025 2030 2035 2040 2045 2050 2055

Global	China		Japan	US

Source: Prepared by HEROZ based on United Nations, World Population Prospects, The 2019 revision

Based on such forecasts, the Japanese working population will show the largest decrease among leading GDP nations

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 to uncertainties 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, and foreign exchange fluctuations. HEROZ, Inc. shall not undertake any obligations to update or revise any forward-looking information set out in this material even in the event that new information becomes available or certain events occur hereafter.

This material is an excerpt translation of the original Japanese material and is only for reference purposes. In the event of any discrepancy between this translated material and the original Japanese material, the latter shall prevail.

This is an excerpt of the original content. To continue reading it, access the original document here.