DIGITAL HEARTS : Presentation Material for the Three Months Ended June 30, 2020

Presentation Material

for the Three Months Ended June 30, 2020

August 11, 2020

Tokyo Stock Exchange First Section: Code 3676

https://www.digitalhearts-hd.com/

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

Q1 FY2020 Financial Results

(The three months ended June 30, 2020)

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

1

Summary of Q1 FY2020

Point of Q1	The Enterprise Business shows significant improvement
Financial Result	in net sales and profitability as YoY base.
(Mln yen)
	Net Sales of Enterprise Business		➢ Sales of Enterprise Business grew
1,800
		EBITDA of Enterprise Business 1,523		significantly due to the growth of existing
	954						operations and the contribution of LogiGear
						acquired in the previous fiscal year.
800									➢ Existing Enterprise Business improved its
	-155			66		profitability significantly due to better gross
				margin and more efficient operations.
-200
		Q1 FY2019		Q1 FY2020	*EBITDA＝ Operating (Segment) income + Depreciation + Amortization of trademarks, software,
				and goodwill + Asset retirement related expenses
Full-year		Despite the impact of COVID-19 in 1H,
Financial Forecast		aim to shift to an upward trend in sales and profits from 2H
									➢ The impact of COVID-19 in the game
								industry is limited, and stable earnings are
	Net sales			Operating income
	(Forecast)			(Forecast)		expected to continue in Entertainment
23,080Mln yen		1,600Mln yen	Business.
	➢ Enterprise Business aims to achieve full
(YoY 109.2％)		(YoY 114.8％)		year profitability by accelerating its growth.
									➢ Focusing on "With COVID-19" era, we are
									promoting new services related to "WFH"
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved. or "Remote work".	2

Summary of Financial Results for

the Three Months Ended June 30, 2020

EBITDA increased due to improved profitability in Enterprise Business, while operating income decreased due to the impact of lower sales in Entertainment Business.

(Mln Yen) FY2019 Q1 FY2020 Q1 YoY Change

Net sales	4,988	5,093	104	102.1%
Cost of sales	3,772	3,819	47	101.3%
Cost of sales (%)
75.6%	75.0%		-0.6points
Gross profit
1,215	1,273	57	104.7%
SG&A
1,026	1,115	88	108.7%
Operating income	189	158	-31	83.6%
Operating income
3.8%	3.1%		-0.7points
margin
Ordinary income	189	194	4	102.5％
Profit attributable to	112	99	-13	88.2%
owners of parent
EBITDA	275	283	8	102.9%

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

3

Analysis of Changes in Operating income

Sales and gross profit margin of Debugging div. declined due to the impact of COVID-19. On the other hand, Enterprise Business, which is focusing on business expansion, achieved a substantial improvement in profitability.

Q1 FY2019
Operating
Income
189		Decrease in
		gross profit
		due to lower
		sales
		-128
		Lower gross margin
		due to decrease in
		net sales of
		Debugging div.

-109 Decrease

in SG&A

+28

	+51	-39
	Decrease
	in SG&A
	Impact of
+124	consolidation of
LogiGear group

Increase in gross profit due to higher sales

+26	Improve gross margin due
	to increase working rate of
	test engineers

(Mln Yen)

Q1 FY2020

Operating

Income +15 158

Company-wide common cost

人件費

Entertainment Business	Enterprise Business
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.	4

Trend in net sales and operating income

Aim to increase in both sales and profits as full year,

by making full year profit of Enterprise Business with rapid sales growth and recovering the trend of Entertainment Business in the second half.

Net sales

(Mln yen)

Operating income

(Mln yen)

25,000	Q4							23,080	4,800
	Q3					21,138
20,000	Q2			19,254					4,000
Q1
		17,353			5,460
	15,444			4,861					3,200
15,000			4,393
	3,828					5,455
								2,400
				5,059
10,000	4,023	1,906	4,696	1,735	1,605			1,600
	506		184			1,600
				5,234	1,394
				4,882	363
			4,223		327
	3,782	522	547
5,000			464
						547		800
		396		463
			4,450	475	4,988		5,093
	3,810	481	4,039	328
			539	302		189	158
0						0

Net	Operating	Net	Operating	Net	Operating	Net	Operating	Net	Operating
sales	income	sales	income	sales	income	sales	income	sales	income
FY2016	FY2017	FY2018	FY2019	FY2020
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.					5

Consolidated Balance Sheets

（Mln Yen）	Q4 FY2019	Q1 FY2020	YoY Change
(As of March 31, 2020)	(As of June 30, 2020)
Total assets	10,637	9,854	-782
Current assets	7,453	6,648	-804
Cash and deposits	3,739	3,027	-711
Notes and accounts receivable-trade	2,985	2,889	-95
Noncurrent assets	3,183	3,205	21
Property, plant and equipment	579	560	-19
Intangible assets	1,379	1,445	66
Investments and other assets	1,225	1,199	-25
Total liabilities	5,198	4,513	-685
Current liabilities	5,134	4,450	-684
Short-term loans	2,546	2,546	0
Noncurrent liabilities	63	62	-0
Total net assets	5,438	5,340	-97
Shareholders' equity	4,898	4,841	-56
Accumulated other comprehensive	24	20	-3
income
Subscription rights to shares	13	13	ー
Non-controlling interests	502	465	-37
Total liabilities and net assets	10,637	9,854	-782
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.		6

Q1 FY2020 Financial results by Segment

and Full year Forecast of FY2020

【Notice regarding Earnings by Segment】

・Net sales by segment include inter‐segment sales or transfers. Segment income is based on operating income.

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

7

Summary of Financial Results by Segment

（Mln Yen）Q1 FY2019 Q1 FY2020 YoY Change

Net sales	4,988	5,093	102.1%
	Entertainment	4,033	3,569	88.5%
	Enterprise	954	1,523	159.6%
	Adjustments	ー	ー	ー
Operating income	189	158	83.6%
	Entertainment	727	517	71.1%
	Enterprise	-184	-21	ー
	Adjustments	-352	-337	ー
EBITDA	275	283	102.9%
	Entertainment	775	547	70.6％
	Enterprise	-155	66	ー
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.		8

Financial Results of Entertainment Business

• As the impact of COVID-19, sales and profits decreased due to some delays in game title development and a decline in demand from overseas clients.
• Strengthening cost control by launching of remote debugging service and restructuring the domestic Lab. network including the closure of a Lab.

（Mln Yen）Q1 FY2019 Q1 FY2020 YoY Change

Net sales		4,033	3,569	88.5%
	Debugging		3,444	3,023	87.8%
	Game Console (GC)		1,186	1,023	86.3%
	Mobile Solutions (MS)		2,013	1,819	90.4%
	Amusement (AM)		245	179	73.1%
	Creative		350	311	88.8%
	Media and others		238	234	98.5%
Segment income		727	517	71.1%
EBITDA		775	547	70.6％
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.			9

Entertainment Business - Debugging div.

• Weaker Gross margin with lower working rate at Lab. caused by COVID-19.
• Demand for Debugging will recover gradually toward the year-end sales season.
• Gross margin ratio is expected to improve to nearly 30% in 2H due to the strengthening of cost-control measures and others.

Quarterly results of Debugging div.

（Mln yen）		FY2019 full year	FY2020 full year
	Gross margin ratio (Actual)	Gross margin ratio (Forecast)
5,000			35.0%
28.7%	27.1%
4,500
	Net sales

4,000	Gross margin ratio	3,730				3,505	3,377
	3,444	3,480				3,196
3,500		3,167
				30.0%
			3,023
3,000		30.1%	30.0%
2,500	28.4%					25.8%	29.2%	28.6%
2,000				26.2%	24.6%			25.0%
1,500
1,000
500
0								20.0%
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
			FY2019				FY2020
Copyright© 2020	DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.			10

Entertainment Business - Debugging div.

• Game Console dept. (GC)

Revenue fell sharply from the previous Q1 when we recorded higher sales with some large- scale title projects.

• Mobile Solutions dept. (MS)

Demand shrank temporarily due to the impact of COVID-19 and other factors.

• Amusement dept. (AM)

Market conditions remain challenging, and regulatory and client trends need to be watched closely.

Quarterly sales

Game Console dept. (GC)			Mobile Solutions dept. (MS)			Amusement dept. (AM)
(Mln yen)									(Mln yen)															(Mln yen)
5,000		4,156	4,709					9,000			8,172	8,173							1,000			775		939
																									800					193
	1,126
											1,944				1,848
4,000
		1,017								6,000
3,000																										600				255			247
																	2,141
					1,340									2,098																	YoY
		1,157				YoY												YoY
																																73%
2,000								86%		Q4	3,000				2,135				2,171		90%		Q4	400				237			252					Q4
					1,056
			1,002					Q3									Q3															Q3
1,000																										200				144
										Q2																	Q2						245							Q2
					1,186										1,993				2,013
0			979					1,023		Q1	0										1,819			Q1	0				138					179				Q1
																FY2018		FY2019		FY2020							FY2018	FY2019	FY2020
		FY2018	FY2019	FY2020
Copyright© 2020	DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.																	11

Entertainment Business - Creative div.

Media and others div.

• Creative div.

Revenues continued to decline due to the impact of the market environment for mobile games, but profits increased by strengthening of cost control.

• Media and others div.

While advertising revenue from foreign companies declined at 4Gamer.net, customer support services and other services performed well.

	Quarterly sales
					Creative div.
（Mln yen）
2,000			1,891
	395
1,500					1,226
422
1,000					285	YoY
						89%
	561	282

500307

511 350 311

0

FY2018 FY2019 FY2020

Media and others div.

（Mln yen） 1,500

		956		1,066
	1,000
				212
				264				YoY
							308
Q4									99%			Q4
			284
500
Q3						306							Q3
			231
Q2													Q2
Q1								238				234			Q1
0			176
			FY2018		FY2019		FY2020

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12

Financial Result of Enterprise Business

• Segment income of Q1 improved significantly as year-on-year base. EBITDA has remained positive since Q2 of FY2019.

(Mln Yen）			Q1 FY2019	Q1 FY2020	YoY Change
Net sales					954	1,523	159.6%
	System Testing					430	788	183.1%
	IT service / Security			523	735	140.4%
Segment loss					-184	-21	ー
EBITDA					-155	66	ー
Quarterly results of Enterprise Biz		Significant EBITDA growth
	thanks to the positive impact of investing
(Mln Yen）
200	Segment income	EBITDA				139
								100	66
100				24			35
	-184	-155	2		14		-21
0
-100
-200					FY2019				FY2020
	Q1		Q2			Q3	Q4	Q1
Copyright© 2020	DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.		13

Enterprise Business - System Testing div.

• Net sales and Gross margin improved significantly year on year due to growth of existing business and contribution from LogiGear which has been consolidated since Q4 FY2019.
• Weaker Q1 sales compared to Q4 FY2019 due to seasonality of this service and Q2 and later sales are expected to recover to grow steadily.
• Gross profit is expected to improve in 2H due to higher sales, with aiming to make full year Gross margin 34.5%.

Quarterly results of System Testing div.

（Mln yen）		FY2019 full year
1,500
	Gross margin ratio (Actual)
		25.7%	38.6%
		Net sales
1,000		Gross margin ratio		924
		570	488
500	430
	13.6%	21.9%
		17.3%
0
	Q1	Q2	Q3	Q4
		FY2019

	FY2020 full year		50.0%
Gross margin ratio (Forecast)
	34.5%		1,181
		1,013	40.0%
788	813	36.3%	39.1%
			30.0%
30.8%	29.1%
			20.0%
			10.0%
Q1	Q2	Q3	Q4
	FY2020

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

14

Enterprise Business

• System Testing div.

Despite stagnant economic activities due to the impact of COVID-19, we have steadily captured demand by providing services with ensuring safety of operations.

• IT service / Security div.

Increased revenues from various services such as systems development, maintenance, operation support, and security services.

Quarterly sales

					System Testing div.					IT service / Security div.
（Mln yen）													（Mln yen）
3,000						2,414								2,800					2,608
2,500													2,400
												1,907		869
														2,000
2,000
						924
																			500
1,500			1,395					YoY		1,600					645		YoY
								183%					1,200							140%
						488					Q4			493						Q4
1,000				483
											800
										Q3						569						Q3
500				366			570							Q2	400			520									Q2
					286						788				Q1						523			735			Q1
						430								392
0				259								0
				FY2018	FY2019	FY2020					FY2018	FY2019	FY2020
	Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.											15

FY2020 Consolidated Financial Forecast

• Aiming to increase sales and profits due to growth in Enterprise Business.
• Despite the impact of COVID-19, Entertainment Business remained at the same sales level as FY2019.

（Mln Yen）	Full year FY2019	Full year FY2020	YoY Change
(Actual)	(Forecast)
Net sales	21,138	23,080	109.2%
Entertainment	16,115	15,885	98.6%
Enterprise	5,022	7,195	143.3%
Operating income	1,394	1,600	114.8%
Operating income	6.6%	6.9%	+0.3points
margin
Ordinary income	1,372	1,600	116.6%
Profit attributable to	792	1,100	138.9%
owners of parent
EBITDA	1,732	1,927	111.2%
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.		16

1H/2H in FY2020

Consolidated Financial Forecast

The First Half : Increase in sales but decrease in profits

The Second Half : Increase in both sales and profits

• 1H Forecast
• Sales are expected to increase due to the high growth in Enterprise Business, but profits are expected to decline mainly due to the decrease in sales in Entertainment Business due to the impact of COVID-19.
• In the U.S. heavily affected by the COVID-19, LogiGear started cost-cutting efforts.
• Creating corporate system that can provide services remotely in anticipation of "With COVID-19" era.
• 2H Forecast
• The impact of COVID-19 is expected to settle down and revenue and profit growth trends will recover.
• In Entertainment Business, segment profit margin is expected to recover to 20% due to the busy period in the Debugging div.
• In Enterprise Business, aiming to make profits as a full-year base by continuing to expand its sales.

Image of FY2020

Consolidated Financial Forecast

Entertainment Business

Enterprise Business

（Mln Yen）

（Mln Yen）

（Mln Yen）

15,000

Net sales

Operating income

10,000

Net sales

Segment income

5,000

Net sales

Segment income

8,000

4,000

10,000

6,000

3,000

2,000

5,000

OP margin

OP margin

OP margin

OP margin

OP margin

OP margin

3.4％

9.9％

4,000

15.2％

20.6％

1,000

ー％

6.2％

2,000

0

0

1H

2H

0

-1,000

1H

2H

1H

2H

Copyright© 2020

DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

17

Financial and Dividends Forecast of FY2020

Annual dividend per share is expected to be ¥14.0,

unchanged from the previous fiscal year

Basic Policy to Return Profits to Shareholder

While securing sufficient internal reserves to invest in business growth and strengthen our management structure, stable dividends to shareholders with a payout ratio of 20% as the minimum target

(yen)	FY2016	FY2017	FY2018	FY2019	FY2020
（Forecast）
Annual dividends	11.5	11.5	13.0	14.0	14.0
(Interim dividends)	5.5	5.5	6.5	7.0	7.0
(Year‐end dividends)	6.0	6.0	6.5	7.0	7.0

60.0%	Dividend Payout Ratio	ROE
		40.0%	38.6%	38.6%
40.0%
32.3%				27.4%
	29.2%	20.9%		16.4%
20.0%
			18.0%		20.7%
0.0%
	FY2016	FY2017	FY2018	FY2019	FY2020(Forecast)

*As the company conducted a 2‐for‐1 common stock split, effective on October 1, 2016, dividends before the interim dividends for FY2016 are accordingly adjusted retroactively to reflect the share splits impact.

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18

Actions in 'Second Founding' Period

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19

Target During the 'Second Founding' Period

To be the Asia's No.1 Comprehensive

Testing Solution Provider

Human Capital × Technology

Debugging	System	Cyber
Testing	Security
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.	20

Progress of the 'Second Founding' Period

Strengthen human capital, services,			Cyber Security
and business foundations since the start of
the 'Second Founding' Period
			Established JV		System Testing
			with LAC Co., Ltd.
Began increasing the number of
management members and engineers	Number of certified software		Started new service for SAP's
		test technicians exceeded 300		integrated ERP system in collaboration
	Established "DH-SOC"		with Pasona Tech, Inc.
Started the collaboration
	LogiGear, which has
with a U.S. security venture
	strengths in test automation,
Launched educational programs to		become a subsidiary
	Acquired ANET Corporation
train testers to become engineers		specializing in system testing	Launched new "Remote Debugging"

Started development of talent management system

Started structural reforms of Lab.

Started to restructure the Debugging network of Lab. including

the closure of Lab.

Orgosoft, which conduct translation and localization in Korea, became a subsidiary

2017	2020
the 'Second Founding' Period
Foundation Building phase	Expansion phase	Leaping
phase
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.		21

Topics for the Q1 FY2020

Themes of Debugging for FY2020		Themes of System Testing for FY2020		Themes of Cyber Security for FY2020
Maximizing		Developing supply systems		Challenging to develop
cash generation capacity		in response to rising demand		the 3rd pillar of our business

Launched new service,	Launched "DH-Tech",
"Remote Debugging"	a new service utilizing
Number of	Number of projects	external resources
active employees

To lead the market

of monitoring devices by

"DH-SOC"

Number of monitoring devices

As of June 2020 As of October 2020 (Est.)

160people 31projects

(As of June 30, 2020)

Promoting the restructuring

the network of "Lab."

(test centers)

• Completed closure of Shinjuku Lab.
• Considering floor reductions at other sites by promoting Remote Debugging

Number of active employees of external resources

158people

(As of June 30, 2020)

To increase orders

for SAP-related projects

Examples of client

Global cosmetics	Automobile-
company	parts supplier
	※Including PoC

Appx. Appx.

160,000 200,000

vehicles vehicles

Leading the market in Japan

Continued double-digit

sales growth

YoY

(Mln yen) 145％ 120

80

40

0

Q1 FY2019

Q1 FY2020

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22

The Prospect on "After COVID-19"

DebuggingSystem Testing

Outlook of markets

Cyber Security

Stable development of titles thanks to the launch of new hardware and expansion of 5G.

• Continued strong outsourcing demand

Outlook of our business

Increasing corporate

IT investment

due to progress in IoT and DX.

• Shortage of IT human resources and expansion of outsourcing demand

The importance of security increases

by promoting of remote work.

• Needs for cyber security measure in all kinds of companies and expansion of cyber security demand

Maintaining the leading position in Japan and developing the overseas markets.

Keep its stable cash generation

Providing testing services with high efficiency and accuracy by leveraging our expertise and automation technologies as a specialist testing company.

Make profit and

keep high growth

Establishing the system to provide diverse security services from entrance to exit management for both SMEs and large corporations.

Expand the size of

business

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

23

(Ref.) Mid-term Roadmap

To achieve net sales of 50 billion yen and EBITDA of 10 billion yen.

Smartphone

Revolution

Native Game

Applications

Browser Game

Applications

Console Game

Consumer

Electronics

IoT

Revolution WEB Systems Operation

Systems

AV Devices

Cloud

Applications

WEB	Human Capital
Applications	Investment

Enterprise Business

(1.8Bln yen)

Entertainment

Business

（15.5Bln yen）

Autonomous

Driving

Industrial

Devices

Technology Investment

Sales 50Bln yen EBITDA 10Bln yen

Oversea Business	5Bln yen
			10Bln yen
		IT service/
Enterprise		Security
Business			10Bln yen
TestingSystem

Entertainment	25Bln yen
Business

2001	2013	2017	'Second Founding' period	5 years later
Copyright© 2020	DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.	24

Appendix

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25

Why Invest in DIGITAL HEARTS

Employment creation		One of the few
Ratio of	testing focusing companies
for more than	in Japan
external officers of
8,000testers	40.0%

Foreign staff	High market growth rate* with
members of more
than	CAGR at 12%
20nationalities

Business that supports

Digital security

*Data on the growth rate of the market of software testing services for 2019 to 2023

(References)Websites related to "Global Software Testing Services Market 2019-2023"

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26

Corporate Profile

Market

environment

Growth of		Growth of		Expansion		Shift to
game console		mobile game
		of IoT		5G
market		market

Our vision

To be the Japanese No.1 Game Debugging Provider

To be the Asia's No.1 Comprehensive Testing Solution Provider

History

						Shifted to a holding			Shifted to a new
						company structure			management team
			Listed on TSE		and listed on TSE
			1st Section		1st Section
	Listed on
	TSE Mothers							2017
							2014			Fully entered the enterprise field
Established				2012 2013
			2011	Started Creative business
			2008			Started Media business	Started 'Second Founding' Period
2001						Accelerating	Promoting the industrial shift of
Started Debugging business	"debugging" business
diversification in the

'First Founding' Period	game industry

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27

Business Segment

Debugging and System Testing are our core business

IT service, etc.	Game Console
	12.3%		（GC）
System			22.3%
Testing
11.5%	Net sales
Media, etc.
¥21,138 Mln
5.0%
Creative
5.8%		Mobile Solutions
Amusement (AM)
	(MS）
4.4%		38.7%

Sales breakdown by segment

(FY2019)

※Sales of each segment and unit include inter-company sales and/or transfers.

Business Entertainment

Business Enterprise

Debugging

65.4%

Creative

Media and

others

System

Testing

IT service /

Security

22.3%

38.7%

4.4%

5.8％

5.0%

11.5％

12.3％

Game Console (GC)

Debugging for console games, online games, and arcade games

Mobile Solutions (MS）

Debugging for mobile games

Amusement (AM)

Debugging for pachinko/slot machines

Game development and

CG content development

Managing one of Japan's largest game information site "4Gamer.net", customer support, etc.

Testing for enterprise system and

Automobile driving test

System development, IT support,

Customer support , Security, etc.

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

28

Outline of Debugging and System Testing

Our Services

Develop

Test Design

• Test consulting
• Planning for test and schedule
• Supporting for test automation

Test

Running various tests

• Functional test
• Performance test
• Stress test
• Acceptance test
• Usability Test, etc.

Maintain after a product release

Continuation test

• Operations management
• Evaluation and improvement
• Update

	Outline of Services			Outsourced
						Projects
	Service		Description	Main client	Barriers to entry
		Ratio
					High
					↑A license for purchasing
					dedicated equipment for
	Debugging	Detection of bugs in games	− Game makers	debugging is required.	High
	↑Knowledge and expertise on
	from a player's perspective.
			human resource management
					to accommodate changeable
					development schedules are
					required.
		Detection of bugs in enterprise	− SIers
		systems from a test-engineers'	− Development	Middle
	System Testing	knowledge.	vendors	↑Human resource shortage	Low
				− Core system	in IT Industry
				enterprises
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.		29

Growth Strategy

Pursue the growth of the mainstay Entertainment Business and make the Enterprise Business another primary source of revenue

Entertainment Business

Enterprise Business

• The game market is growing steadily

• Strengthen collaboration within the Group to provide comprehensive support for game development, including not only debugging but also the development of outsourced services and localization
• Continue expanding the business, targeting net sales of 25.0 billion yen

• The outsourcing of test processes is accelerated, due in part to the serious human resources shortage in the IT industry

• Accelerate investment in human capital and technologies for business expansion
• Position this field as the growth driver and aim for net sales of 20.0 billion yen

Continuous Rapid

growth growth

Net sales (target)			Net sales (target)
25.0	FY2019	FY2019	20.0
Bln yen	net sales	net sales	Bln yen
16.1 Bln yen	5.0 Bln yen

Human Capital and Technologies

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

30

Business Risks

Major risks

1. Leakage of confidential information
   Obsolescence of existing
2. services by technological innovation
3. Reduction of productive population in Japan
   Expansion of corporate
4. acquisition and new businesses

Countermeasures

• Prohibiting staff members from bringing personal items into the test room
• Physical security measures including access control with fingerprint authentication and the installation of security cameras
• Introduction of a personal reference system that applies to all registered testers
• Focusing on the application of the latest technologies, including a test automation project
• Focusing on the development of new services to improve added value
• Developing internal training programs that will enable the active participation of members with diverse generational, racial, and other backgrounds
• Securing human resources strategically by using overseas offices as well
• In-depthmarket research and due diligence
• Reducing risks by building a system for appropriate business management after acquisition

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

31

Summary of Earnings by Segment

（Mln yen）	FY2015	FY2016	FY2017	FY2018	FY2019

				Net sales	12,696	13,544	15,568	15,951	16,115
	Entertainment Business
				Segment income	2,379	2,453	2,966	3,086	2,964
		Debugging	Net sales	10,455	11,524	13,186	13,103	13,823
			Game Console (GC)	Net sales	3,449	3,483	4,174	4,156	4,709
			Mobile Solutions (MS)	Net sales	4,994	6,262	7,399	8,172	8,173
			Amusement (AM)	Net sales	2,012	1,778	1,612	775	939
		Creative	Net sales	1,729	1,465	1,743	1,891	1,226
		Media and others	Net sales	512	554	638	956	1,066
				Net sales	2,382	1,952	1,892	3,302	5,022
	Enterprise Business
				Segment income	71	203	-14	-226	-67
		System Testing	Net sales	681	758	1,084	1,395	2,414
		IT service / Security	Net sales	1,701	1,193	808	1,907	2,608
				Net sales	-70	-52	-108	-0	―
		Inter‐segments adjustments
				Segment income	-486	-750	-1,215	-1,254	-1,503
				Net sales	15,011	15,444	17,353	19,254	21,138
		Consolidated total
				Operating income	1,963	1,906	1,735	1,605	1,394

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

32

Shareholder Returns

Basic Policy to Return Profits to Shareholders

While securing sufficient internal reserves to invest in business growth and strengthen our management structure, stable dividends to shareholders with a payout ratio of 20% as the minimum target

Changes in dividends

(yen)	Interim dividends	Year-end dividends	Dividend payout ratio
			13.0	14.0	14.0
15.0				80.0%
	11.5	11.5
	9.5				7.0	7.0	60.0%
10.0				6.5
60.4%	6.0
6.0	38.6%		40.0%
	5.0	32.3%
	20.9%
5.0			27.4%
		6.5
				20.0%
		5.5	5.5	7.0	7.0
	4.5
	18.0%
0.0						0.0%
	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020
Recent treasury stock acquisition			(Forecast)

We acquire treasury shares flexibly by considering the necessity in light of our capital policy, the impact on our financial strength, and other factors, after securing funds for investment in growth.

Acquisition period	Acquired shares	Total Purchase Amount
November 12, 2019 - February 6, 2020	474,700 shares	499 Mln yen
February 20, 2017 - April 28, 2017	664,500 shares	999 Mln yen
Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.	33

Group Companies

(As of June 30, 2020)

DIGITAL HEARTS Co., Ltd.

Entertainment Business		Enterprise Business

Business Activities : Game debugging, Localization,

System testing, System development, Security, etc.

[Strengths]

• Over 8,000 registered testers ➢Over 2.0 million bug data

➢14 test centers (Lab.)

➢Over 4,000 equipment for testing

■Test centers in Japan

Sapporo Lab.
Sapporo 2nd Lab.
Sapporo 3rd Lab.
Hakodate Lab.
Osaka Lab.	Sendai Lab.
Kyoto Lab.

Fukuoka Lab.

Hakata Lab.Hatsudai

Sasazuka Lab.

Asakusa Lab.

Matsuyama Lab.		Nagoya Lab.

DIGITAL HEARTS (Shanghai) Co., Ltd.		Orgosoft Co., Ltd.
	Entertainment Business				Entertainment Business
	Business Activities : Game debugging,			Business Activities : Game debugging,
	Localization, etc.			Localization, etc.

ANET Corporation

Enterprise Business

Business Activities : System testing, System development, etc.

LOGIGEAR CORPORATION

Enterprise Business

Business Activities : System Testing,

Test Automation Support

Aetas, Inc.

Entertainment Business

Business Activities : Operation of a game information site, "4Gamer.net", etc.

LOGIGEAR VIETNAM CO., LTD.

Enterprise Business

Business Activities : System Testing,

Test Automation Support

Red Team Technologies Co., Ltd.

Enterprise Business

Business Activities : White hacker service and technical support

FLAME Hearts Co., Ltd.

Entertainment Business

Business Activities : Game development and CG content development

ZEG Inc.

(Affiliated company)

Enterprise Business

Business Activities : Driving test and data collection for the automotive industry

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

34

＜Contact＞

Investor and Public Relations Division

Phone：+81‐3‐3373‐0081

Email：[e-mail]

HP：https://www.digitalhearts-hd.com

This presentation has been developed strictly for the purposes of investor relations activities and does not in any way attempt to influence or facilitate

investment decisions or represent a solicitation for investment. While the information provided herein is based on that believed to be reliable at the time of submission, the Company does not guarantee its accuracy, be it partial or overall. Furthermore, because this presentation features the views and assessments of the Company at the time of its writing, it may therefore be subject to change without prior notice due to unforeseen developments in the Company's operating environment. The Company and its affiliated companies, as well as their executive officers, may hold positions in the securities and/or financial products featured in this presentation, and may stand to profit or incur losses from their positions. The relevant parties may also purchase or sell securities and/or financial products, either in person or by proxy. This presentation is protected under exclusive copyright of the Company. To quote, reproduce or transfer any section, either partially or in its entirety, is prohibited by law. Those who wish to quote from, reproduce or transfer the information contained herein must therefore acquire in advance the written consent of the copyright holder.

Copyright© 2020 DIGITAL HEARTS HOLDINGS Co., Ltd. All Rights Reserved.

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