Digital Garage / 4819

COVERAGE INITIATED ON: 2011.04.05 LAST UPDATE: 2021.07.16

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Digital Garage / 4819 RCoverage LAST UPDATE: 2021.07.16 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------8 Quarterly trends and results ------8 Business ------19 Business description ------19 Strengths and weaknesses ------37 Market and value chain ------38 Strategy ------44 Historical performance ------45 Summary (for reference) ------45 Income statement ------63 Cash flow statement ------67 Other information ------69 History ------69 News and topics ------71 Major shareholders ------73 Shareholder returns------73 Top management ------73 Employees ------73 Investor relations ------73 Other ------74 Company profile ------76

02/77 Digital Garage / 4819 RCoverage LAST UPDATE: 2021.07.16 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Executive summary

Business description: a unique group combining advertising, payment, and investment

◤ Digital Garage (DG) is a unique group that combines advertising, payment, and investment businesses. The company was founded in 1995 and calls itself a “context” company. It aims to bring new paradigms to the internet age. The company said it has created a number of Japan’s first internet businesses. The company is built around the concept of seamlessly combining three different types of technology—information technology (IT), marketing technology (MT), and financial technology (FT).

◤ The company’s four segments are: Financial Technology (24.1% of JPY40.5bn in FY03/21 consolidated revenue, 23.2% of JPY14.3bn in pre-tax profit), Marketing Technology (32.5%, 4.1%), Incubation Technology (28.6%, 57.8%), and Long-term Incubation (14.8%, 14.9%). Primary sources of income for internet-based businesses are advertising and payments. As such, DG views the Marketing Technology segment, which handles advertising, and the Financial Technology segment, which handles payments, as the core pillars that will benefit (gain further monetization) from expansion of internet businesses. According to the company, teamwork between these segments when investing and cultivating new internet businesses is a key strength in its Incubation Technology segment.

◤ In the Long-term Incubation business, the company is further deepening its collaboration with Kakaku.com Inc. (TSE1: 2371; an equity method affiliate of the company). In addition, it is nurturing strategic businesses with Crypto Garage, which is developing a blockchain financial services business, and Brainscan Technologies, which matches brain MRI checkups for drivers.

◤ From FY03/22, the company launched its group strategy, DG FinTech Shift, which integrates payments and data. Under the DG FinTech Shift strategy, the company will decentralize its management to recurring revenue-focused management centered on financial technology. The company has grown to process approximately JPY3.0tn in payment handling volume and JPY657mn in annual payment transactions (FY03/21). By combining the group’s diverse businesses and services with DG Financial Technology’s solid payment infrastructure backed by stable operations 24 hours a day, 365 days a year, the company plans to develop a variety of payment services and evolve into a next-generation business that utilizes data.

Business performance

◤ FY03/21 results (IFRS): DG reported consolidated revenue of JPY40.5bn (+9.6% YoY), pre-tax profit of JPY14.3bn (+43.1% YoY), profit attributable to owners of the parent of JPY9.8bn (+31.9% YoY), and comprehensive income of JPY7.6bn (-11.8% YoY). In Q1 (April-June 2020), revenue decreased by 15.5% YoY and profit before tax decreased by 81.7%. In Q2 (July- September 2020), revenue increased by 8.3% YoY and pre-tax profit increased 10.3% YoY. In Q3 (October-December), revenue increased 4.1% and pre-tax profit increased 8.6% YoY. In Q4, revenue increased 42.4% YoY and pre-tax profit was JPY5.0bn (JPY380.0mn pre-tax loss in Q4 in the previous year). Revenues and profits recovered from the second quarter onwards due to a strong performance in the Financial Technology business and valuation gains in the Incubation Technology business.

◤ The company is not providing a forecast for FY03/21, as its adoption of IFRS accounting makes it hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in unlisted companies in both domestic and overseas markets under investments/incubations.

◤ At the time of its FY03/20 results announcement (May 13, 2020), DG announced its new medium-term business plan (FY03/21–FY03/25), which will end in FY03/25. In the Financial Technology and Marketing Technology businesses, the company targets a CAGR of around 20% for pre-tax profit. In the Long-term Incubation business, it targets a CAGR of about 15% for pre-tax profit. The company anticipates a solid contribution from equity-method affiliate Kakaku.com, with the addition of longer-term earnings contributions from new businesses. In the Incubation Technology business, DG will maintain its return on investment (ROI) target of 2.5x and make new investments and cash out of existing ones with this hurdle rate in mind. To promote the improvement in corporate value, the company will maintain its return on capital (ROE) target of 20% (based on profit attributable to owners of the parent). In addition, it adopted a new indicator, a dividend payout ratio of 20% against pre-tax business cash flow.

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Strengths and weaknesses

Shared Research thinks the company’s strengths lie in its personal network of Japanese internet trailblazers, its strong business portfolio, and its independent positioning in internet advertisement and payment. On the other hand, Shared Research thinks the company’s weak drive to control the industry and its “soft” investment strategy may be sources of weakness (see the Strengths and weaknesses section for more information).

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Key financial data

FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY03/17 * FY03/17 FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 FY03/22 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. (9mo) (12mo eqv.) Cons.IFRSIFRSIFRSIFRSIFRS Est. Revenue 25,503 35,687 36,936 40,478 n.a. YoY - 39.9% 3.5% 9.6% - Expenses 17,127 22,264 26,929 26,161 n.a. YoY - 30.0% 21.0% -2.9% - Expense ratio 67.2% 62.4% 72.9% 64.6% Pre-tax profit 8,376 13,424 10,008 14,317 n.a. YoY - 60.3% -25.4% 43.1% - Pre-tax profit margin 32.8% 37.6% 27.1% 35.4% Profit attrib. to owners of the parent 6,412 9,771 7,420 9,786 n.a. YoY - 52.4% -24.1% 31.9% - Profit margin 25.1% 27.4% 20.1% 24.2% Sales 11,067 14,904 27,965 33,752 38,087 43,763 36,451 48,480 60,168 YoY 32.6% 34.7% 87.6% 20.7% 12.8% 14.9% - - 24.1% Gross profit 2,785 4,259 6,432 8,217 12,240 11,490 6,613 na 11,644 YoY 62.2% 52.9% 51.0% 27.8% 49.0% -6.1% - - - Gross profit margin 25.2% 28.6% 23.0% 24.3% 32.1% 26.3% 18.1% na 19.4% Operating profit 135 1,622 1,322 2,608 4,810 4,202 723 962 2,310 YoY - 1097.0% -18.5% 97.2% 84.4% -12.6% - - 140.1% Operating profit margin 1.2% 10.9% 4.7% 7.7% 12.6% 9.6% 2.0% 2.0% 3.8% Recurring profit 973 2,709 3,079 4,442 7,610 6,193 3,678 4,001 5,017 YoY - 178.5% 13.6% 44.3% 71.3% -18.6% - - 25.4% Recurring profit margin 8.8% 18.2% 11.0% 13.2% 20.0% 14.2% 10.1% 8.3% 8.3% Pre-tax profit 959 2,535 4,215 5,035 9,249 7,575 5,819 6,705 7,619 YoY - 164.4% 66.2% 19.5% 83.7% -18.1% - - 13.6% Net income attrib. to owners of the parent 901 2,106 2,716 2,847 5,081 5,165 4,289 4,699 5,460 YoY - 133.8% 28.9% 4.8% 78.5% 1.7% - - 16.2% Net margin 8.1% 14.1% 9.7% 8.4% 13.3% 11.8% 11.8% 9.7% 9.1% Per-share data (JPY) Shares issued (year-end; '000) 186 219 236 47,231 47,277 47,289 47,292 - 47,313 47,313 47,342 47,407 47,442 EPS 4,879.2 9,759.0 12,041.9 60.7 108.1 109.8 91.1 - 115.8 136.0 210.3 161.4212.5 EPS (fully diluted) 4,873.1 9,753.8 12,027.8 60.5 107.9 109.5 90.7 - 115.0 135.0 199.3 147.8 193.8 Dividend per share 0.0 1,000.0 1,000.0 5.0 25.0 30.0 20.0 - 24.0 24.0 28.0 38.0 32.0 Book value per share 53,120.2 93,072.2 109,707.2 648.1 609.2 640.3 713.1 - 801.1 905.2 1,014.3 1,130.8 1,348.5 Balance sheet (JPYmn) Cash and cash equivalents 39,450 48,154 32,702 37,989 Trade and other receivables 21,330 23,254 26,657 26,574 Operat ional invest ment securit ies 16,745 26,695 36,546 47,170 Other 1,251 1,083 2,947 1,815 Total current assets 78,776 99,186 98,852 113,548 T angible fixed asset s 8,495 9,421 21,367 19,478 Goodwill 7,959 6,575 7,689 7,689 Int angible asset s 2,104 2,575 3,496 4,000 Investment real estate 2,966 3,046 2,932 2,924 Investments accounted for using equity method 13,915 19,139 21,475 22,446 Other financial assets 5,010 6,662 6,319 7,878 Other 320 286 166 338 Total noncurrent assets 40,769 47,704 63,444 64,753 Total assets 119,545 146,890 162,296 178,301 Borrowings 4,623 2,211 4,927 9,768 Trade and other payables 39,407 45,799 41,203 39,911 Ot her financial liabilit ies 760 853 1,783 1,712 Other 3,254 3,557 2,925 5,474 Total current liabilities 48,044 52,420 50,838 56,865 Corporate bonds and borrowings 19,243 35,959 38,247 35,850 Ot her financial liabilit ies 5,244 5,430 13,553 12,168 Other 3,815 5,736 6,863 10,337 Tot al noncurrent liabilities 28,302 47,125 58,663 58,355 Total equity 43,199 47,345 52,795 63,082 Cash and deposits 4,785 12,308 15,329 24,295 30,956 15,704 23,029 - 32,922 Marketable securities 912 1,904 2,641 8,064 8,208 11,164 11,856 - 12,364 Accrued revenue 4,351 7,578 9,037 8,597 11,646 13,946 15,422 - 16,889 Total current assets 14,345 28,005 33,837 45,455 57,743 48,324 59,624 - 75,496 Tangible fixed assets 377 913 2,039 2,159 2,251 2,279 2,245 - 2,338 Investments and other assets 3,596 7,341 9,041 14,808 18,927 19,277 22,592 - 21,087 Intangible assets 2,103 13,080 11,094 8,588 7,574 7,456 7,224 - 9,869 Total assets 20,421 49,339 56,011 71,010 86,495 77,336 91,685 - 108,790 Accounts payable 541 1,141 1,232 1,630 2,039 2,729 3,713 - 5,018 Short-term debt 2,519 10,740 305 3,691 23,534 3,200 6,937 - 4,137 Deposits 6,169 14,956 18,230 16,434 20,999 21,876 25,127 - 36,499 Total current liabilities 9,933 28,506 21,802 25,461 50,624 30,187 38,815 - 49,540 Long-term debt 351 183 6,800 8,841 5,547 15,371 17,207 - 18,890 Total fixed liabilities 592 356 6,950 9,059 6,806 16,484 18,499 - 20,233 Total liabilities 10,526 28,862 28,752 34,520 57,430 46,671 57,315 - 69,774 Total net assets 9,896 20,477 27,259 36,490 29,065 30,664 34,371 - 39,017 Total interest-bearing debt 2,870 10,923 7,105 12,532 29,080 18,571 24,144 - 23,027 23,866 38,170 43,174 45,618 Cash flow statement (JPYmn) Cash flows from operating activities 132 2,542 3,212 -35 5,040 -2,619 4,149 - na 12,316 2,580 -12,322 7,047 Cash flows from investing activities -165 -9,411 1,515 -5,155 509 -1,072 -1,453 - na 2,883 -2,397 -5,473 -864 Cash flows from financing activities -568 15,273 -1,817 11,261 1,390 -11,638 4,176 - na 174 8,509 2,363 -914 Financial ratios ROA (RP-based) 4.8% 7.8% 5.8% 7.0% 9.7% 8.8% 7.6% - 4.4% 7.7% 10.1% 6.5% 8.4% ROE 9.7% 14.0% 11.8% 10.1% 17.2% 17.6% 13.5% - 15.3% 16.1% 21.9% 15.0% 17.1% Equity ratio 48.1% 41.1% 45.9% 42.9% 33.1% 38.9% 36.6% - 34.7% 35.7% 31.7% 32.1% 34.8% Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods. The company conducted a 200-for-1 stock split on October 1, 2013. FY03/17 has an irregular accounting period of nine months due to a change in the end of the period. As a result, this report does not include YoY comparisons and comparisons versus company forecasts. Annualized data are calculated as FY03/17 results x 1.33. YoY data for FY03/18 are compared with annualized data. The company voluntarily switched to International Financial Reporting Standards (IFRS) starting in FY03/19. For YoY comparison purposes, the figures for FY03/18 have been retroactively adjusted to IFRS standards.

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Recent updates Highlights On July 16, 2021, Shared Research updated the report following interviews with Digital Garage, Inc. (DG).

On June 29, 2021, the company announced that its subsidiary Crypto Garage completed registration as a crypto asset exchange service provider to offer new services for institutional crypto markets.

On the same day, Crypto Garage, which runs blockchain financial services in the fintech field, completed registration as a crypto asset exchange service provider under the Payment Services Act with the Kanto Local Finance Bureau.

▷ Crypto Garage has been providing blockchain-related services and products like SETTLENET to crypto asset trading businesses in Japan and overseas. The company registered as a crypto asset exchange service provider to expand its service coverage in the crypto asset trading life cycle. ▷ Having completed its registration, Crypto Garage plans to provide settlement solutions and brokerage services between Japanese crypto asset exchanges and liquidity providers with the aim of improving the efficiency and reducing the risk of settlements. ▷ Crypto Garage will be the first in Japan to support a token (L-BTC) from a Bitcoin sidechain, the Liquid Network, as a crypto asset. ▷ Digital Garage Group CEO Kaoru Hayashi commented as follows: “Having registered as a crypto asset exchange service provider, Crypto Garage’s settlement service will take advantage of the connectivity with leading Japanese and overseas crypto providers to establish itself as a crypto settlement service provider that connects overseas and Japanese institutional crypto markets. We aim to foster these services into a platform that contributes to Japan’s national interest. We are working hard to prepare for the official launch.”

On May 13, 2021, the company announced earnings results for full-year FY03/21; see the results sections for details.

On April 2, 2021, Shared Research updated the report following interviews with the company.

On March 26, 2021, the company announced a name change of one of its consolidated subsidiaries.

A subsidiary, VeriTrans Inc., which develops payment information processing services and collection agency services, decided on the name change at its Board of Directors meeting held on March 26, 2021. The change will take effect on April 1, 2021.

Reason for the Name Change

▷ Within the fintech field, the DG group has been establishing several fintech-related services and businesses, such as cryptocurrency-related businesses. DG is looking to these next-generation businesses to pace group development. To create added value in the form of an infrastructure to support a “cashless nation Japan” by leveraging VeriTrans Inc’s own payment platform and collaborating with several partner companies in fintech-related fields, the company decided to change the name of the subsidiary to DG Financial Technology (DGFT).

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▷ The company views the name change as an opportunity to redefine itself as a fintech business in both name and reality, with the payment business being the core group activity. Consequently, it is promoting its “DG tech shift” group strategy, which calls for integrating payments and data.

For previous releases and developments, please refer to the News and topics section.

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Trends and outlook

Quarterly trends and results

Quarterly results FY03/20 (IFRS) FY03/21 (IFRS) FY03/21 (IFRS) (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4% of Est. FY Est . Revenue 8,217 11,379 9,078 8,262 6,944 12,320 9,447 11,767 Undisclosed YoY -3.9% 17.6% -46.6% -55.8% -15.5% 8.3% 4.1% 42.4% Expenses 5,999 6,271 6,016 8,643 6,539 6,689 6,123 6,810 YoY 16.4% 10.6% -42.4% -26.9% 9.0% 6.7% 1.8% -21.2% Pre-tax profit 2,218 5,108 3,062 -380 405 5,632 3,324 4,956 YoY -34.6% 27.5% -53.4% -105.5% -81.7% 10.3% 8.6% - Pre-tax profit margin 27.0% 44.9% 33.7% -4.6% 5.8% 45.7% 35.2% 42.1% Profit attrib. to owners of the parent 1,624 3,647 2,254 -105 224 3,779 2,290 3,493 YoY -47.8% 39.6% -55.5% -102.2% -86.2% 3.6% 1.6% - Profit margin 19.8% 32.1% 24.8% -1.3% 3.2% 30.7% 24.2% 29.7% 前 Cumulative Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of Est. FY Est . 年 Revenue 8,217 19,596 28,674 36,936 6,944 19,264 28,711 40,478 Undisclosed YoY -3.9% 7.5% 7.4% 3.5% -15.5% -1.7% 0.1% 9.6% Expenses 5,999 12,270 18,286 26,929 6,539 13,228 19,351 26,161 YoY 16.4% 13.3% 13.5% 21.0% 9.0% 7.8% 5.8% -2.9% Pre-tax profit 2,218 7,326 10,388 10,008 405 6,037 9,361 14,317 YoY -34.6% -1.0% -1.8% -25.4% -81.7% -17.6% -9.9% 43.1% Pre-tax profit margin 27.0% 37% 36% 27% 5.8% 31% 33% 35% Profit attrib. to owners of the parent 1,624 5,271 7,525 7,420 224 4,003 6,293 9,786 YoY -47.8% -7.9% -2.0% -24.1% -86.2% -24.1% -16.4% 31.9% Profit margin 19.8% 27% 26% 20% 3.2% 21% 22% 24% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. The company switched to International Financial Reporting Standards (IFRS) starting in FY03/19.

Voluntary adoption of International Financial Reporting Standards DG voluntarily adopted International Financial Reporting Standards (IFRS) in FY03/19 with the aim of more accurately establishing fair values for group businesses. The company said its main reason for making the switch was its desire to more accurately show the true profitability of group business and more accurately show the fair value its investment business. Additional motivations for making the switch included improving the comparability of its financial figures across international capital markets, aiding the management of group business, and facilitating M&A and business restructuring.

*Voluntary adoption of International Financial Reporting Standards (IFRS) The main differences between IFRS and J-GAAP are as follows: ▷ Under IFRS accounting, when the company receives payments for sales as an agent rather than directly as the transacting party, the proceeds booked from the sale is not the gross sales price but rather the net amount received as the commission (total sales under J-GAAP). ⇒ relevant to reporting for the Financial Technology business and Marketing Technology business ▷ The valuation of operational investment securities is all on a fair value basis, and the difference in valuation is recognized as net income or loss (under J-GAAP, unlisted stocks are valued on a book-value basis). ⇒ relevant to reporting for the Incubation Technology business and Long-term Incubation business ▷ There is no goodwill amortization. ▷ Equity-method investment profit/loss is included under operating profit/loss. (Note: Depending on the company, equity-method investment profit/loss may be excluded from operating profit/loss on the grounds that the equity-method investment does not constitute an operating activity).

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Full-year FY03/21 results (out May 13, 2021) Results overview

▷ FY03/21 results (IFRS): DG reported consolidated revenue of JPY40.5bn (+9.6% YoY), pre-tax profit of JPY14.3bn (+43.1% YoY), profit attributable to owners of the parent of JPY9.8bn (+31.9% YoY), and comprehensive income of JPY7.6bn (-11.8% YoY).

 In Q1 (April‒June 2020), revenue fell 15.5% YoY and pre-tax profit fell 81.7% YoY. However, in Q2 (July‒September), revenue rose 8.3% YoY while pre-tax profit rose 10.3% YoY. In Q3 (October‒December), revenue increased by 4.1% and pre-tax profit rose 8.6%. In Q4, revenue increased 42.4% YoY and pre-tax profit was JPY5.0bn (JPY380.0mn pre-tax loss in Q4 in the previous year). Revenue and profit recovered from Q2 onwards due to strong results in the Financial Technology segment and increased valuation gains in the Incubation Technology segment. ▷ Progress versus forecast: The company did not disclose FY03/21 forecast, as it was hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in unlisted companies in both domestic and overseas markets under investments/incubations. ▷ Consolidated revenue +9.6% YoY: In the Incubation Technology business, the fair value of operational investment securities firmly increased and performance in the Financial Technology business was robust. However, revenue growth was held only to 0.1% as reduced restaurant and amusement-related consumption and business suspensions due to the COVID-19 pandemic

negatively impacted the Long-term Incubation business in particular. By segment, in the Financial Technology and Incubation Technology segments, revenue was up 12.3% YoY and 135.9% YoY respectively, but in the Marketing Technology segment revenue was down 15.1% YoY and in the Long-term Incubation segment it was down 25.2% YoY. ▷ Pre-tax profit up 43.1% YoY: Pre-tax profit fell YoY in all segments except for the Incubation Technology segment. As mentioned previously, profits declined sharply in Q1, but have recovered since Q2. In the Financial Technology segment, pre- tax profit rose 1.7% YoY absorbing the impact of a significant decrease in travel and inbound-related payments and an increase

in fixed costs. In the Marketing Technology segment, the ad volume of mainstay digital ads was robust, but pre-tax profit fell 60.3% YoY as promotions in the real estate and retail industries were postponed or cancelled. In the Incubation Technology segment, pre-tax profit increased 188.3% YoY due to higher fair value as investees financed and the sale of three domestic

holdings and some overseas listed shares. In the Long-term Incubation segment, pre-tax profit fell 43.6% YoY due to the

substantial negative impact of the pandemic, especially at equity-method affiliate Kakaku.com’s Tabelog business.

Note: Solutions offered by NaviPlus Co., Ltd., have increasing opportunities to be bundled with payment services, so the business was transferred from the Marketing Technology segment to the Financial Technology segment from Q2 FY03/20. Figures in Q1 FY03/20 have been adjusted according to the new segmentation.

Trends by segment Marketing Technology

▷ Revenue: JPY13.0bn (-15.1% YoY) ▷ Pre-tax profit: JPY735mn (-60.3% YoY)

▷ In the Marketing Technology segment, the company engages in comprehensive digital marketing combining online and offline elements and data marketing business leveraging a range of data. ▷ In FY03/21, the value of ads handled was JPY35.0bn (+9% YoY). Digital ad transaction value was JPY28.9.0bn (+9% YoY). Non- digital ad transaction value was JPY6.2bn (-9% YoY). At Marketing Technology Company (internet advertising), the mainstay

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digital advertising transactions performed robustly. However, with the impact of the COVID-19 pandemic, promotions in the real estate and retail businesses were postponed or canceled, causing a drop in non-digital ad volume. ▷ The segment also incurred upfront expenses as the company implemented measures related to optimizing its business structure, such as the consolidation of offices. ▷ As a result, both revenue and pre-tax profit fell YoY.

Financial Technology

▷ Revenue: JPY9.7bn (+12.3% YoY) ▷ Pre-tax profit: JPY4.1bn (+1.7% YoY)

▷ In the Financial Technology segment, the company provides electronic payment services via convenience stores and credit cards, key for e-commerce B2C transactions. ▷ On April 1, 2021, VeriTrans changed its trading name to DG Financial Technology, Inc. and implemented a business integration with econtext. DG Financial Technology will play a central role in accelerating and driving the group strategy of

“DG FinTech Shift.” ▷ Payment service providers VeriTrans Inc. and econtext Co., Ltd. provided various payment applications, continuing their strong growth in the e-commerce market. ▷ Recently, card payments for face-to-face and travel-related transactions by overseas tourists declined due to the spread of the COVID-19, but transactions with new payment methods such as mobile order advance online payments were solid, in addition to the increase in transactions due to the growth of e-commerce sales. As a result, payment handling volume increased about

18% YoY to JPY3.1tn and the number of transactions rose about 35% YoY to 657mn. ▷ Profit before tax reached a record high, absorbing a significant decline in travel and inbound-related payments and an increase in fixed costs.

Incubation Technology

▷ Revenue: JPY11.5bn (+135.9% YoY) ▷ Pre-tax profit: JPY10.3bn (+188.1% YoY)

Long-term Incubation

▷ Revenue: JPY5.9bn (-25.2% YoY) ▷ Pre-tax profit: JPY2.7bn (-43.6% YoY)

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▷ Among them, Brainscan Technologies K.K. is aiming to generate a new business that utilizes AI and healthcare data, such as brain MRIs, based on its brain MRI business for vehicle drivers. ▷ In FY03/21, the pandemic had a substantial negative impact, especially on equity-method affiliate Kakaku.com’s Tabelog business, resulting in YoY declines in segment revenue and pre-tax profit.

For details on previous quarterly and annual results, see the Historical Financial Statements section.

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Full-year company forecast

FY03/18 FY03/19 FY03/20 FY03/21 FY03/22 J-GAAP IFRS IFRS IFRS IFRS IFRS (JPYmn) 1H Act. 2H Act. FY Act. FY Act. FY Act. FY Act. FY Act. FY Est. Sales (Revenue) 33,356 26,812 60,168 25,503 35,687 36,936 40,478 n.a YoY 16.1% - 24.1% - 39.9% 3.5% 9.6% - Cost of sales 25,68422,84048,524 Gross profit 7,6713,97311,644 YoY 37.5%-- GPM 23.0%14.8%19.4% SG&A expenses 5,9133,4209,333 SG&A ratio 17.7%12.8%15.5% Operating profit 1,758 552 2,310 YoY 24.2%-140.1% OPM 5.3% 2.1% 3.8% Recurring profit 3,424 1,593 5,017 YoY 27.9%-25.4% RPM 10.3% 40.1% 8.3% Pre-tax profit 4,929 2,690 7,619 8,376 13,424 10,008 14,317 n.a YoY 41.1% - 13.6% - 60.3% -25.4% 43.1% - Net income (Profit) 3,140 2,320 5,460 6,412 9,771 7,420 9,786 n.a YoY 26.1% - 16.2% - 52.4% -24.1% 31.9% - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

FY03/22 company forecast

▷ DG is not providing a forecast for FY03/22, as its adoption of IFRS accounting makes it hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in

unlisted companies in both domestic and overseas markets under investments/incubations. ▷ Subsequently, the company has not disclosed its dividend forecast. ▷ The impact of the COVID-19 pandemic on results for FY03/21 has been limited. However, a more protracted impact on the economy and society in general may affect business performance in future.

Key performance indicators and management policies As explained above, the company is not providing a FY03/21 forecast at the consolidated level owing to the difficulty of making reasonable estimates. However, it will be working toward the performance targets established for individual segments under its medium-term business plan, as detailed below:

▷ In the Financial Technology and Marketing Technology businesses, the company targets a CAGR of around 20% for pre-tax profit as specified under its medium-term business plan. ▷ In the Long-term Incubation business, in addition to an increasing contribution to profits from Kakaku.com, an equity-method affiliate, the company aims to grow profits at a CAGR of about 15% through creating and developing strategic businesses in Japan and overseas. ▷ In the Incubation Technology business, DG will maintain its return on investment (ROI) target of 2.5x and make new investments and cash out of existing ones with this hurdle rate in mind.

Key initiatives

▷ Take advantage of the ongoing increase in cashless transactions to grow existing businesses; combine payment and marketing technology and use blockchain technology to take the lead in financial innovation ▷ By expanding its incubation program, under Open Network Lab Resi-Tech the company expects to bring up promising Resi- Tech startups that offer housing, real estate, and lifestyle services as an IoT cluster. Open Network Lab BioHealth will incubate a second group of companies through its startup accelerator program, this one with expanded content. Based on the results of the first batch of companies, Open Network Lab Hokkaido is looking to recruit a second batch of would-be entrepreneurs with

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plans to utilize the natural assets of Hokkaido, such as those focused on primary industries, tourism, and rich natural environment. ▷ DG is also planning the full-fledged launch of data science business that will draw on resources from across the group. Two leading data scientists in Japan have joined in our projects to launch the data science business.  One of the data scientists is currently serving as a director of BI. Garage (data science business), where he is closely working together with Japan Premium Media Consortium to develop a new advertisement platform.  The other data scientist, as Chief Data Officer, is responsible for the creation of new businesses beyond the advertising field, using data science that cuts across DG Lab’s areas of focus (including Blockchain, BioHealth, and data and next- generation technologies of AI team) with the cooperation of strategic partners as part of open innovation initiative. ▷ DG is preparing to celebrate its 25-year anniversary in 2020. Since its founding DG has been striving to find ways link marketing and technology, Japan and overseas, and the present and future, and also has been working on its “first-ever in Japan project.” Going forward, it plans to continue using DG Lab as a venue for proof-of-concept projects where it can accurately grasp the latest technological trends and work toward the next stage.

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Medium-term business plan

Five-year medium-term business plan (FY03/21–FY03/25; announced May 13, 2020) Overview

▷ DG formulated a five-year medium-term business plan (covering FY03/21–FY03/25) under the concept “Designing our New Normal Context.” The company aims to further improve its corporate value over the next five years in light of structural changes brought about by the COVID-19 pandemic.  DG promoted its previous medium-term plan under the slogan of “Open Incubation toward 2020.”  The pandemic has led to the collapse of the vertical social model and acceleration of experimental deregulation. A so- called “new normal” is being created centered on lifestyle, economy, education, and healthcare.  The DG group believes leapfrogging in the evolution of services and businesses using new technologies will drive the beginning of a new era.  The group plans to continue creating contexts that benefit the global community by accelerating collaboration with various partners on a global scale while maintaining dynamic equilibrium and neutrality. ▷ Numerical segment targets included in the medium-term business plan are as follows:  In the Financial Technology and Marketing Technology businesses, the company targets a CAGR of around 20% for pre-

tax profit.  In the Long-term Incubation business, the company targets a CAGR of about 15% for pre-tax profit. It anticipates a solid contribution from equity-method affiliate Kakaku.com, with the addition of longer-term earnings contributions from new

businesses.  In the Incubation Technology business, DG will maintain its return on investment (ROI) target of 2.5x and make new investments and cash out of existing ones with this hurdle rate in mind. ▷ To promote the improvement in corporate value, the company will maintain its return on capital (ROE) target of 20% (based on profit attributable to owners of the parent). ▷ The company adopted a new indicator, a dividend payout ratio of 20% against pre-tax business cash flow. It plans for shareholder returns with emphasis on cash flow while measuring the pure cash generating ability of the company’s businesses (for details, see “Shareholder returns” in the Other information section).

Strategic framework

▷ DG aims to create a next-generation digital transformation (DX) context under the new normal with a focus on lifestyle, economy, education, and healthcare. Specific strategies by segment are as follows.

Financial Technology (FT)

▷ The company plans to make further social contributions as a government-specified operator of critical infrastructure, provide comprehensive support for digital businesses by utilizing leading-edge payment technologies, and create leapfrogging fintech businesses by hybridizing various data. It will support the new normal era in light of key factors such as cashless payment*1, contactless services*2, and regulatory change.  Growth of cashless payment: In addition to the e-commerce market, which has been the basis of cashless payment services, DG also aims to accelerate face-to-face cashless payments.  Growing demand for contactless services: The company aims to respond to needs made apparent by the COVID-19 pandemic, based on its QR payments, biometric identification, and near-field communication (NFC) technologies.

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 Regulatory change: In response to deregulation and rapidly progressing digital transformation, DG will build the payment infrastructure to support various fields, including lifestyle, economy, education, and healthcare.

*1 According to the company’s calculations based on data from the Ministry of Economy, Trade and Industry and CardWave’s Denshi Kessai Soran, DG expects cashless payments to expand from JPY18tn in 2018, to JPY87tn in 2020 and JPY113tn in 2025, with the ratio of cashless payments rising from about 30% in 2020 to about 40% in 2025. At DG, the ratio of face-to-face payments handled in the Financial Technology segment was 0% in FY06/15, but rose to 8% in FY03/20 (actual result). The company is targeting a ratio of 20% in FY03/25. The volume of payments handled in the Financial Technology segment was JPY1.0tn in FY06/15 and JPY2.6tn in FY03/20. DG is targeting JPY10tn in FY03/25 (CAGR of 30% over five years).

*2 DG believes that within the next five years, NFC protocols will allow customers simply to hold their credit cards over a reader to make a payment, with no signature required.

Marketing Technology (MT)

▷ DG plans to further grow digital advertising for companies in the advanced DX market, develop brand advertising for companies in the developing DX market as a second pillar of the segment, and create leapfrogging MT business by hybridizing various data. ▷ The company aims to establish a digital marketing ecosystem for the new normal era. While further expanding digital advertising for companies in the advanced DX market, it will develop brand advertising marketing*3 for companies in the developing DX market as a second pillar of the MT segment. ▷ DG is currently focusing on affiliate advertising for the advanced DX market, but it believes brand advertising will also increase. Marketing that was not necessary or possible for regulatory reasons, or where the business models differed between analog and digital environments (making them incompatible), will become possible. For example, previously a real estate contract required impressions from a registered seal to be considered valid, but we have now entered an era when a cloud signature is

permissible. Online medical examinations are also becoming more common.  Growth of existing digital marketing business: With a customer base of about 1,000 companies, DG plans to offer full- funnel marketing covering all stages from advertising through purchase. Using the strength of its relationship with the

Financial Technology segment, it plans to develop payment ad data marketing (with group-wide support for the government’s cashless payment policy) in addition to advertising and customer relationship management (CRM). Further, the company aims to develop its smart contract business for the DX era, including solutions for digitizing real

estate contracts.  Development of brand advertising and marketing: DG believes that context ads will be the final form advertising takes, although that does not necessarily mean consumers will stop viewing mass media. The company thinks that we will enter

an era in which digital advertising and traditional mass media advertising will work harmoniously together to design communications with consumers. Even in such an era, DG believes that the key word will be “context.”

*3 Centered on the Japan Premium Media Consortium (boasting membership of more than 40 major media companies), for which DG has served as secretariat since 2018, efforts are proceeding to respond to ad fraud, ensure strict brand safety, and set appropriate prices for quality media with high content value. With an eye on data marketing in the cookie-less era, DG is steadily preparing to promote media design that enables communication tailored to individuals.

Incubation Technology (IT)

▷ DG aims to promote an ongoing barbell investment strategy*4 targeting companies in nascent, early, and later stages (discovering Leapfrogging businesses), utilize the Open Network Lab (marking its tenth anniversary) to further strengthen its effort to develop a community of companies in the nascent and early stages, and maximize the use of Global Incubation

Stream in the Silicon Valley in the US to realize a next-generation investment portfolio.

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▷ Coordinating with its network of global partners developed over the 25 years since its founding, DG will diversify risk using a barbell strategy to continue its flexible investment and incubation business unfettered by past conventions.

*4 Investment balance totaled JPY47.2bn at end-March 2021, with the portfolio consisting of the US (40%), Asia (30%), Japan (20%) and other countries (10%). Over the next five years, the company plans to invest domestically in businesses and technologies that have synergies with its own domestic businesses or will accelerate the growth of other businesses in which it has invested via its platform. It will look for and support a next- generation DX context, using cashless payment, contactless services, and regulatory change as selection criteria. However, DG will not limit itself to the domestic arena. Over the past 25 years, the company has realized a network it calls the Global Incubation Stream—spanning the US, Japan, Asia, and Europe—and it will work with partners in these areas to invest jointly in next-generation DX contexts around the globe.

Long-term Incubation (LTI)

▷ DG aims to begin developing a global platform business*4 using crypto-asset and blockchain technologies. It will conduct simultaneous settlement using blockchain between domestic exchanges and overseas over-the-counter companies. ▷ At the same time, in the biohealth field, the company plans to launch a magnetic resonance imaging (MRI) business targeting drivers. It will make a new business combining big data about the brain with artificial intelligence that it plans to turn into a new pillar of the segment. It aims to develop services and monetize a health examination data platform (electronic medical records, health examination results, and lifelog data).

*4 Crypto Garage, which began a proof-of-concept project regarding a service for issuing yen-denominated tokens and simultaneous settlement of crypto-assets using SETTLENET, is now preparing to commercialize the service. In 2019, it obtained the first authorization under Japan’s regulatory sandbox for a project in the financial field.

DG Lab

▷ The company launched DG Lab in 2016 and believes it is now entering its second stage.  Through the DG Lab Open Innovation Platform, the company has conducted a range of initiatives in five strategic areas:

blockchain, AI, biohealth, security, and xR (a term referring to virtual, augmented, and mixed reality technologies).  At the same time, DG formed funds for investing in these initiatives. DG Lab Fund I totals JPY6.8bn (invested in 31 companies), and DG Lab Fund II totals JPY12.5bn. A number of major Japanese companies from a range of industries,

including Sumitomo Mitsui Trust Bank, Taisho Pharmaceutical, Eisai, and Sompo Japan (there are a total of 17 companies for DG Lab Funds I and II together) are participating in these funds. In addition, DG and Daiwa Securities Group have established a joint venture, DG Daiwa Ventures.

 In DG Lab’s second phase, it worked with blockchain, biohealth, and other businesses utilizing personal data using AI to ensure privacy. In its third phase, DG developed new technologies related to smart contracts and the acceleration of processing, as well as outdoor signage using xR and data. Furthermore, in the area of biohealth, DG believes there are some interesting seeds being planted, such as the possible of transferring data directly into the brain to produce images that have the same effect as drugs.

ESG initiatives in the DG group

▷ DG assigned Executive Officer Debbie Altomonte to the New York office as the SDGs director. ▷ The company plans to cooperate on NPO activities utilizing the latest technologies that bring together industry, government, and academia.  It will provide support for NPO activities launched by Joichi Ito, a director and co-founder, together with Reid Hoffman, mostly centered on the East Coast of the US. The first project is a global initiative utilizing new algorithms to process statistical data related to COVID-19 using AI technology.

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▷ The company will also continue the following initiatives already in place:  Open Network Lab supports social entrepreneurs.  Tohoku Youth Orchestra was launched by Ryuichi Sakamoto after the 2011 Tohoku earthquake and tsunami. DG joined the project later to provide cooperation, support, and technical backup.

Reference: Previous medium-term business plan Overview At the time of its FY03/17 results announcement (May 12, 2017), DG announced its medium-term business plan (FY03/18– FY03/20). In addition to targets for return on capital and return to shareholders, the company has established targets for growth and an investment hurdle rate (see chart below). The company will promote business alliances and strategic investment in key areas such as blockchain, AI, VR/AR, security, and biotechnology (details in DG Lab section). This plan accelerated the growth of the group under the new slogan, “Open Incubation toward 2020.”

Medium-term business plan targets (FY03/18-FY03/20) Growth (CAGR of pre-tax profit) Marketing Technology (MT) CAGR 15% Financial Technology (FT) Investment hurdle rate Incubation Technology (IT) 2.5 times (ROI) Long-term Incubation (LTI) Return on capital ROE 20% Return to shareholders Dividend payout ratio (20%) Source: Shared Research based on company data

Concept and Six Actions The concept of the medium-term business plan (under the slogan “Open Incubation toward 2020”) was to incubate a new Japan by connecting new businesses resulting from technological revolutions, working with various companies from startups to major corporations with cutting-edge initiatives. The company entered the fourth stage of incubation as it looked toward 2020, the 25th anniversary of its founding. The company identified the following six actions to realize its objectives under Open Incubation:

◤ Promote the company’s open platform R&D project (DG Lab) to lead the industry toward the 4th Industrial Revolution

◤ Utilize all company group resources to develop a strong investment portfolio through a strategy of long-term holdings

◤ Design a project to lead financial reforms through the use of blockchain technology

◤ Establish joint ventures and collaborative projects with startups, major corporations, and research institutions in Japan and overseas

◤ Design projects for the towns of the future/local development utilizing AI and VR/AR

◤ Establish a Japanese-style biotech ecosystem utilizing computer science

Measures by segment Considering changes to the business environment, each segment was optimized in the following ways:

Measures by segment Incubation Technology segment Focus on exiting investments to generate 2.5x ROI Set new criteria; clearly delineate between long-term ➡ performance investments (LTI) and brands to exit short-term Marketing Technology segment Expand business focused on performance ads and ➡ Accelerate data marketing shift along with the sudden spread of smartphone ads AI technology Financial Technology segment Payment services business centered around card ➡ Hybrid fintech business which utilizes AI and blockchain payments and convenience store payments technology

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Long-term Incubation segment Promote media development and collaboration with Long-term incubation through medium to long-term holding of Kakaku.com (equity-method affiliate) ➡ assets in investment portfolio, integrating investments into company group, and developing new businesses Source: Shared Research based on company data

DG Lab DG Lab was established in July 2016 by DG, Kakaku.com, and Credit Saison as a project in which companies from various industries could cooperate to develop next-generation businesses. Both the number of companies sponsoring or participating in DG Lab and investments into the DG Lab Fund have been increasing. DG Lab has gained attention as an open incubation platform focusing on the next generation. This R&D project aimed at generating new businesses promoted the following five areas:

◤ Blockchain: DG Lab is promoting R&D projects which utilize blockchain technology. Specifically, DG Lab developed a demo program which runs on the newest blockchain platform released in April 2017 by Blockstream, and publicly released this program as an open source. The company jointly developed products with Kakaku.com and Credit Saison based on blockchain technology such as regional money by utilizing Blockstream’s technology.

◤ AI: DG Lab is promoting services linked with data science businesses. Specifically, DG Lab worked to release products and services based on the results of AI analysis of assorted data from partner companies, such as web activity data from Kakaku.com and advertising related data from Dentsu Group. DG Lab held regular seminars about AI in an effort to develop a community.

◤ VR/AR: DG Lab collaborated with studios that manage high-quality VR content. Specifically, DG Lab collaborated with Wevr, a company which delivers high-quality VR content, to increase the number of locations to experience high-definition VR and build a user base. The company also collaborated with Japanese content creators.

◤ Biotech: DG Lab built the foundation for a biotech incubation center. Specifically, DG Lab built an ecosystem which nurtures biotech startup companies. DG Lab moved forward with collaborations with the US biotech incubation center and startup development companies.

◤ Security: DG Lab aims to develop security technology under a new concept. Specifically, DG Lab is looking to develop security technology under a new concept which aims to protect the exponentially growing data generated from the spread of smartphones and IoT.

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Business

Business description

A unique group combining payment, advertising, and investment businesses

▷ Digital Garage (DG) is a unique group that combines payment, advertising, and investment businesses. ▷ The company calls itself a “context” company, and aims to bring new paradigms to the internet age. The company said it has created a number of Japan’s first internet businesses. ▷ The company is built around the concept of seamlessly combining three different types of technology—IT (information technology), MT (marketing technology), and FT (financial technology).

“The word ‘context’ is often used in describing the text that surrounds a particular passage, which determines its meaning. The academic definition, however, is that of a basic perception (shared information) for the relationship, background, culture and philosophy between two communicators. Lately, it has become a keyword across various disciplines, such as marketing, linguistics, information technology and artificial intelligence. DG was founded so we could contribute to the building of a better society by creating the internet contexts for ‘real space’ and ever-expanding ‘cyber space,’ as well as by connecting Japan with countries overseas, marketing with technology and the present with the future.” Source: Company website (http://www.garage.co.jp/en/company/)

▷ The company has incubated Japan’s leading businesses since the early days of the internet (1990s) by leveraging its two unique revenue bases (Enabling Platform): Japan’s leading digital marketing company and Japan’s leading comprehensive payment platform.

Launch of DG FinTech Shift From FY03/22, the company launched its group strategy, DG FinTech Shift, which integrates payments and data. Under the DG FinTech Shift strategy, the company will decentralize its management to recurring revenue-focused management centered on financial technology. The company’s payment business has been providing a safe and secure payment infrastructure for 20 years since the dawn of the internet, while also embarking on various “first in Japan” initiatives. The company booked approximately JPY3.0tn in payment handling volume and 657mn in annual payment transactions in FY03/21, and has grown into a nationally designated critical infrastructure provider.

By combining the group’s diverse businesses and services with DG Financial Technology’s solid payment infrastructure backed by stable operations 24 hours a day, 365 days a year, the company plans to develop a variety of payment services and evolve into a next-generation business that utilizes data.

DG Financial Technology Inc. On April 1, 2021, VeriTrans Inc. changed its name to DG Financial Technology Inc. and merged with econtext Co., Ltd. (the former VeriTrans*1 and former econtext*2 were both consolidated subsidiaries of the company engaged in the payment business). The purpose of the merger was to speed up decision-making and improve operational efficiency. The company also aims to achieve cost synergies by reducing system investment and operating costs.

Going forward, DG Financial Technology will play a central role in accelerating and driving the group strategy of “DG FinTech Shift.” In addition to exploring business synergies between the company’s segments (Marketing Technology, Incubation Technology, and Long-term Incubation; more on these later) and the Financial Technology business (more on this later), the company will also focus on building its next-generation FinTech business.

*1 Former VeriTrans: Established in 1997. In April 2012, the company acquired all outstanding shares of VeriTrans Inc. (formerly SBI VeriTrans Inc.) and made it a subsidiary, making the company one of the largest online payment service providers in Japan. As a pioneer in e-commerce payments, the company led the e-commerce payment market in Japan with a focus on credit card payments. VeriTrans provides e-commerce payment platforms while offering e-commerce infrastructure support services. Its strength lies in credit-card payments. For example, embedding the VeriTrans 3G payment

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system in IT systems enables e-commerce operators to gain access to payment services involving everything from credit cards, convenience stores, electronic money, and banks to China UnionPay and PayPal.

Its payment system is newer compared to that of the former econtext mentioned below, and the former VeriTrans appears to be handling new customers (e-commerce sites) in many cases. The former econtext handles convenience store payments, while VeriTrans handles credit card payments and new customers. VeriTrans has made inroads into the Chinese market through China UnionPay’s online payment services and online shopping mall operations.

*2 Former econtext: econtext was founded in 2000 as a joint venture with Lawson Inc. (TSE1: 2651), Toyo Information System (now IT Holdings Corp; TSE1: 3626) and Mitsubishi Corp (TSE1: 8058). In October 2008 it was merged into the parent (Digital Garage) and became a DG internal company. The company turned econtext into a consolidated subsidiary again in October 2012. econtext provides an e-commerce payment and logistics platform, as well as outsourcing solutions using the platform. It provides several payment solutions like credit card payments. Convenience stores are significant customers. According to the company convenience stores are expanding their service offering in Japan. Therefore, demand for convenience store payment services will stay strong.

Advertising and payment provide revenue foundations Business segments In line with the company’s mid-term management plan announced in August 2015, it modified its existing segment names and established new segments in FY06/16. After the change, the company’s four segments were: Incubation Technology, Marketing Technology, Financial Technology, and Media Incubation. The Media Incubation segment was reorganized and renamed as Long-term Incubation in FY03/17.

Organic synergies between segments Primary sources of income for internet-based businesses are advertising and payments. As such, DG views the Marketing Technology segment, which handles advertising, and the Financial Technology segment, which handles payments, as the core pillars that will benefit (gain further monetization) from expansion of internet businesses. According to the company, teamwork between these segments when investing and cultivating new internet businesses is a key strength in its Incubation Technology segment.

The newly established Long-term Incubation segment is utilizing the company’s expertise in media development and operations, in addition to deep ties with Kakaku.com, to create new businesses centered on media. In addition, it is nurturing strategic businesses with Crypto Garage, which is developing a blockchain financial services business, and Brainscan Technologies, which matches brain MRI checkups for drivers.

Summary of each segment A summary of each segment is provided below: Financial Technology: Provides electronic payment solutions such as credit card and convenience store payments essential for B2C transactions such as e-commerce. Centered on DG Financial Technology Inc. (econtext and VeriTrans merged in April 2021 as noted above), the company is one of the largest online payment providers in Japan. Its business is expanding beyond e- commerce payments into face-to-face payments and money transfer services that are becoming increasingly cashless. The business has expanded into Southeast Asia (Indonesia and Vietnam) and India, where e-commerce is growing fast. The company also provides comprehensive solutions that come as a package of payment services and customer transfer marketing that utilize services and networks provided by group companies.

Marketing Technology: Engages in integrated promotions that combine online and offline promotions, web marketing such as online ads, and data management business that utilizes big data. Advertising and marketing have been the company’s core businesses from the start. The company supports business partners’ advertising and promotions with a unique marketing design concept and using the latest technologies. DG leads the industry in this business, having established one-of-a-kind marketing techniques utilizing group data such as data marketing and O2O marketing that harness online and offline know-how.

Incubation Technology: Invests in, and cultivates promising startups in Japan and overseas, providing financial assistance and management support, as well as assistance in collaboration with group companies in marketing, payments, etc.

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Long-term Incubation: The company aims to generate business profit sustained over the longer term by harnessing the incubation and business development know-how it has nurtured over the years to grow content, lifestyle support, and other businesses. The Long-term Incubation segment seeks to create new value added across the above three segments to form new businesses that will follow Kakaku.com as a growth driver. In addition, it is nurturing strategic businesses with Crypto Garage, which is developing a blockchain financial services business, and Brainscan Technologies, which matches brain MRI checkups for drivers.

Summary of each segment (FY03/21)

Financial Technology Marketing Technology

Revenue composition: 24.1% Revenue composition: 32.5% Segment profit composition: 23.2% Segment profit composition: 4.1%

Provides e-commerce payment solutions through one of Asia’s Internet-based marketing that combines online and offline realms for largest payment platforms. comprehensive promotion and internet advertising

Incubation Technology Long-term Incubation

Revenue composition: 28.6% Revenue composition: 14.8% Segment profit composition: 57.8% Segment profit composition: 14.9%

Centered on operational bases in Japan and the US, invests and Creates new business through use of the company’s expertise in fosters venture firms both within and outside Japan. media development and operations. Source: Shared Research based on company data Sales compositions are based on FY03/21 results.

Segment performance

Old segments FY06/15 New segments FY06/14 FY06/15 FY06/16 FY03/17 FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn ) Old New New New New New IFRS IFRS IFRS IFRS Consolidated sales 38,087 Cons. sales (Revenue) 33,752 38,087 43,763 48,480 60,168 25,503 35,687 36,936 40,478 YoY 12.8% YoY 20.7% 12.8% 14.9% 10.8% 24.1% - 39.9% 3.5% 9.6% Incubation 7,454 Incubation Technology 5,475 7,454 6,343 2,362 3,123 2,553 8,022 4,868 11,482 % of total 19.6% % of total 16.2% 19.6% 14.5% 4.9% 5.2% 10.3% 22.6% 13.2% 28.6% Marketing 16,064 Marketing Technology 14,822 16,064 21,028 27,257 34,938 9,939 12,922 15,375 13,049 % of total 42.2% % of total 43.9% 42.2% 48.0% 56.2% 58.1% 40.2% 36.4% 41.8% 32.5% Payment 14,569 Financial Technology 13,454 14,569 16,392 18,806 20,956 5,929 7,447 8,609 9,666 % of total 38.3% % of total 39.9% 38.3% 37.5% 38.8% 34.8% 24.0% 21.0% 23.4% 24.1% Long-term Incubation - - - 54 1,150 6,301 7,133 7,929 5,931 % of total 0.0% 0.0% 0.0% 0.1% 1.9% 25.5% 20.1% 21.6% 14.8% Cons. operating profit 4,810 Cons. pre-tax profit 5,035 9,248 7,574 6,705 7,619 8,376 13,424 10,008 14,317 YoY 84.4% YoY 19.5% 83.7% -18.1% -11.5% 13.6% - 60.3% -25.4% 43.1% Incubation 3,546 Incubation Technology 1,595 2,804 3,105 1,019 1,325 1,321 6,889 3,563 10,264 % of total 59.8% % of total 27.8% 29.0% 33.3% 14.1% 14.7% 13.8% 43.5% 25.2% 57.8% Marketing 1,065 Marketing Technology 875 1,064 1,396 1,429 1,959 1,856 1,215 1,853 735 % of total 18.0% % of total 15.2% 11.0% 15.0% 19.7% 21.8% 19.3% 7.7% 13.1%4.1% Payment 1,321 Financial Technology 1,496 1,335 1,758 1,966 2,539 2,809 3,349 4,049 4,118 % of total 22.3% % of total 26.1% 13.8% 18.9% 27.2% 28.2% 29.2% 21.2% 28.6% 23.2% Long-term Incubation 1,776 4,477 3,052 2,822 3,176 3,621 4,378 4,701 2,653 % of total 30.9% 46.3% 32.8% 39.0% 35.3% 37.7% 27.7% 33.2% 14.9% Source: Shared Research, based on company data Annualized data used for FY03/17, which was a nine-month irregular accounting period. Baseline figure of 100% equal to sales/earning prior to adjustments

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Outline of business segments Financial Technology segment

Source: Shared Research, based on company data Previous segment results on an operating profit basis. Annualized data used for FY03/17, which was a nine-month irregular accounting period. Segment overview In FY03/21, the Financial Technology segment reported revenue of JPY9.7bn (24.1% of total) and pre-tax profit of JPY4.1bn (23.2%). Capital investment amounted to JPY1.8bn (+13.5% YoY) and depreciation came to JPY1.0bn (+30.9% YoY).

Payment handling volume came to JPY3.1tn (+18.1% YoY), with 657mn annual payment transactions (+34.9% YoY) and 58,445 active merchant stores (+18.9% YoY). By industry, the payment handling volume consisted of 40% for e-commerce portal sites, 35% for digital content, 13% for apparel, 9% for transportation and travel, and 3% for restaurants. Although restaurants accounted for only 3% of the total, it grew 152% YoY.

The Financial Technology segment provides one of the largest payment platforms in Asia. The core of the segment is DG Financial Technology Inc., which was formed in April 2021 through the merger of econtext, one of the largest cash payment services in Japan, and VeriTrans, one of the largest credit card payment services in Japan. The primary source of revenue for DG Financial Technology are fees collected from payment. Business has expanded in tandem with the expansion of e-commerce within Japan and abroad. At the same time, it is also working to expand its offline (face-to-face) payment business.

Going forward, DG Financial Technology will play a central role in accelerating and driving the group strategy of “DG FinTech Shift.” It will explore business synergies between the company’s segments (Marketing Technology, Incubation Technology, and Long-term Incubation) and the Financial Technology business. Specifically, the company will leverage its investment incubation network built over 25 years to further accelerate payment support for customer businesses, as well as advertising, DX, and CRM support for merchants and payment processors in the Marketing Technology business. The company plans to expand the gross transaction volume (GTV) of its Financial Technology business to boost growth and profitability while also working toward building a next-generation fintech business.

Expansion into electronic payments market The company focuses not only on e-commerce payments, but also on the offline (face-to-face) payment business. To take advantage of this opportunity, the company is planning for aggressive growth via expansion of its payment solutions and utilization of group synergies. Key industries where DG is looking to make inroads are food services (market size: JPY12tn), real estate (market size: JPY9tn), and retail. The company has built credit card payment services for companies through cooperation with Kakaku.com (for food services) and DC Communications (for real estate). As described below, the company is focusing on its non-e-commerce (face-to-face) payment business, including through its equity method affiliate TD Payment Co., Ltd.

Details of e-commerce initiatives

Target industry Solution details Providing credit card settlement services in cooperation with Kakaku.com, using sales Food services Tabelog Pay channels of the 770,000 registered restaurants on the Tabelog website.

In cooperation with DG Communications, enable credit card payment of rent and deposit Real estate SumaPAY fees for rental properties.

Convenience store Utilize expertise gained in providing payment settlement services to 47,000 convenience Retail payments stores in Japan to pursue growth in the rapidly expanding Asian market. Source: Shared Research based on company data

Earnings structure In the Financial Technology segment’s payment processing business, which covers e-commerce payments and face-to-face payments, the company provides payments received from consumers through credit card companies and convenience stores to its customers such as e-commerce businesses. The company records as revenue the net amount of commissions it receives from

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customers, less fees paid to credit card companies (IFRS). However, under the Japanese accounting standards (JGAAP), commissions received from customers were recorded as revenue, while fees paid to credit card companies were recorded as cost of sales. In other words, the revenue recorded under IFRS is approximately the equivalent of the gross profit (commissions received from customers - fees paid to credit card companies, etc.) under JGAAP.

The company handles payments on behalf of the following payment providers

▷ Credit card companies: 41 companies ▷ Banks and financial institutions: 1,051 companies ▷ Convenience stores: six companies ▷ E-money companies: 10 companies ▷ Telecom carriers: four companies ▷ ID payment/overseas payment processors: 10 companies

The company offers the following payment methods E-commerce payments

▷ Credit card, convenience store, bank (Pay-easy), electronic money, and reward point payments ▷ Telecom carrier payments, ID payments ▷ Deferred payments ▷ International payments (credit card payments in other currencies, such as through UnionPay and Alipay) ▷ Virtual currency payments Face-to-face payments

▷ Credit card, QR code, and electronic money payments

For e-commerce payments, the company’s subsidiary DG Financial Technology Inc. acts as an intermediary between merchants (customers) and payment providers. For face-to-face payments, the company has two commercial channels: store development by strategic partners (TD Payment Co., Ltd. and ANA Digital Gate, Inc. both of which are equity method affiliates of the company, along with Recruit Lifestyle Co., Ltd. and NEC Corporation) and direct development by the company. DG Financial Technology Inc. acts as an intermediary between the merchant and the payment providers or payment companies.

There are two types of contracts: a settlement proxy contract (comprehensive contract) and a payment data processing contract (direct contract).

Settlement proxy contract (comprehensive contract) For the settlement proxy contract (comprehensive contract), DG Financial Technology Inc. handles the contract procedures with the various payment providers (credit card companies, financial institutions, etc.) and deposits the sales proceeds for the customer. Merchants benefit from having a centralized service for payment management and verification. DG Financial Technology receives payment from the various payment providers after the providers’ fees have been deducted from the merchant’s sales proceeds, and DG Financial Technology pays the merchant the remaining proceeds after deducting its own payment processing fees. This method is used by many e-commerce businesses, and there are three types of revenue models: spread type, fee type, and recurring-revenue type.

Payment data processing contract (direct contract) Under the payment data processing contract (direct contract) credit card payment processing is automated by introducing a payment system provided by a PSP (Personal Service Provider) based on a merchant agreement with a credit card company concluded by the merchant. It is mainly used by major companies with large sales through credit card payments. Under this method, the credit card company pays the merchant the sales amount less the credit card company’s fee. DG Financial

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Technology receives monthly fees and processing fees from merchants for payment processing. There are two types of revenue models: fee type and recurring-revenue type, which will be discussed later.

The details of the payment processing services are shown in the table below.

Services offered Type Payment service Service name Overview ・VeriTrans4G Online Payment solutions for various industries (good, digital content such as ・OmniPAY EC/Online payment games and videos, entertainment, public transportation, travel, public sector, and so on) * ・SumaPAY Offers early payment option ・Ceremony PAY Post-settlement payment service that consumers make a payment at Post-settlement ・Veritrans Post-Payment convenience stores or post offices after receiving the purchases. Effectively used for payment ・SCORE Payment Service Non-face- online/EC product sales and services. to-face Payment remittance solution for B2C use that enables bank transfer and receiving cash at convenience stores in the shortest time, with email address only. Effective for EC Remittance solution ・CASH POST product returns, refunds for events and transportation, cashback, expense reports, and more.

Telephone order Risk-limited credit card payment solution for telephone, fax, and other orders. ・IVR Payment Solution service Useful for TV/catalog orders and payments for travel agencies and insurance companies.

・QR-code payment Multi-payment solution for store POS system. Support merchants' efficient store POS payment service solution for POS management by providing the payment service which manages various payments (credit ・TD Payment card, electronic money, domestic/national QR code payments, etc.) collectively. Multi-payment service that users a specialized card reader device and apps on Table POS/dedicated phones or tablets. Works for many payment services like credit cards and ・ｍPOS terminals domestic/overseas QR code payments. Appropriate for pay-at-the-table situations, home- visits, and events due to its portable size. Multi-QR code payment service that requires single QR code only for the user of Multi-QR code payment ・Cloud Pay Face-to- multiple domestic/ov erseas pay ments. face Bring various payment services, such as credit card payment, into store Automatic fare - automatic fare adjustment machines. Used at restaurants, hotels, theaters, fitness adjustment machine clubs, gold pars, and others.] Offers pre-order payment service that consumers complete purchase before Pre-order and mobile - arriving at stores. Achieves an efficient purchase with no waiting time by ordering and order services payment ion smartphone apps. Provide biometric authentication payment services with partners that use iris Biometric - and face verification, fingerprints, and other physical characteristics for authentication payment identification of the payer. Source: Shared Research based on company data

Revenue model The revenue models in the Financial Technology business are classified into the following five categories.

▷ Spread type (credit payments and other payments where fees linked to the payment amount become revenue) ▷ Fee type (payments where fees linked to the number of payments processed—mainly data processing—become revenue) ▷ Store payment type (payments made at terminals in convenience stores) ▷ Recurring-revenue type (fixed revenue from monthly payments) ▷ E-commerce/Digital transformation (EC/DX) business (fraud detection services and other payment-related businesses)

Spread type

▷ Spread type revenues (JPY2.7bn in FY03/21) accounted for 28.3% of the Financial Services segment revenues.

Under the spread type revenue model, credit card payments and other payments with fees linked to the payment amount become revenue. The settlement proxy contract (comprehensive contract) is used for e-commerce payments and face-to-face payments. The revenue structure is based on payment handling volume x commission rate. The commission rate varies depending on the payment methods implemented and the products used. The spread type commission rate was 0.32% in FY03/19, 0.34% in FY03/20, and 0.31% in FY03/21. For reference, the average commission rate for the entire payment business was 0.28% in FY03/19, 0.26% in FY03/20, and 0.24% in FY03/21.

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Fee type

▷ Fee type revenues (JPY2.1bn in FY03/21) accounted for 21.8% of the Financial Services segment revenues.

Under the fee type revenue model, fees linked to the number of payments processed—mainly data processing where one payment processed between the merchant’s server and the PSP (Payment Service Provider) server is considered as a single payment transaction—become revenue. The payment data processing contract (direct contract) is used for e-commerce payments and face-to-face payments. The revenue structure is based on number of payments processed x transaction fees. The fee per transaction was JPY9.6 in FY03/19, JPY8.0 in FY03/20, and JPY6.9 in FY03/21.

Store payment type

▷ Store payment type revenues (JPY1.5bn in FY03/21) accounted for 15.9% of the Financial Services segment revenues.

The store payment type revenue model refers to payments made at multimedia stations installed at convenience stores, and includes payments for e-commerce purchases, tickets, and services at convenience stores. The company sells convenience store payment services to competing domestic payment processing companies and merchants. The revenue structure is based on the number of payments processed x transaction fees. The fee per transaction was JPY43.4 in FY03/19, JPY40.4 in FY03/20, and JPY37.8 in FY03/21.

Recurring-revenue type

▷ Recurring-revenue type revenues (JPY876mn in FY03/21) accounted for 9.1% of the Financial Services segment revenues.

The recurring-revenue type revenue model consists of fixed revenue from monthly payments, including basic fees, payment system OEM fees, and payment system operations and support fees. Fixed monthly fees are collected from merchants regardless of the payment methods used. The revenue structure is based on the number of active merchants x fixed monthly fee.

E-commerce/Digital transformation (EC/DX) business

▷ Revenues from the e-commerce/digital transformation (EC/DX) business (JPY2.4bn in FY03/21) accounted for 25.1% of the Financial Services segment revenues.

E-commerce/digital transformation (EC/DX) revenues consist of gains on equity-method investments of three equity method affiliates and revenue from businesses other than payment processing (fraud detection services, remittance services for refunds, e-commerce optimization business, and other payment-related businesses).

▷ Gains on equity-method investments from ANA Digital Gate Inc. and TD Payment Co., Ltd. ▷ Revenue from subsidiary NaviPlus Co., Ltd., fraud detection services, etc. ▷ CASH POST, deferred payment business, gains on equity-method investments (Score)

Cost structure In FY03/21, the company’s costs included personnel costs of JPY1.5bn (15.7% of revenue), depreciation of JPY1.0bn (10.5%), system operation costs of JPY741mn (7.7%), rent of JPY338mn (3.5%), other fixed costs of JPY346mn (3.6%), and variable costs of JPY1.4bn (14.1%), with a contribution margin of 85.9%.

Key segment companies The following are key companies in the Financial Technology business.

▷ DG Financial Technology Inc.: Wholly owned subsidiary formed following a merger between the former VeriTrans Inc. and former econtext Co., Ltd. in April 2021. One of Japan’s leading payment providers. ▷ NaviPlus Co., Ltd.: subsidiary of DG Financial Technology Inc. that provides recommendation engines for e-commerce sites.

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▷ TD Payment Co., Ltd.: Equity-method affiliate (investment ratio of 49%). A joint venture with Toshiba TEC Corporation, the largest POS company in Japan, offering multi-payment solutions for POS systems. ▷ ANA Digital Gate Inc.: Equity-method affiliate (49% stake). A joint venture with All Nippon Airways Trading Company Co., Ltd. that develops and provides new solutions using FinTech. ▷ Score Co., Ltd.: Equity-method affiliate (49% stake). A joint venture with Nissen Corporation providing deferred payment services and various financial services using payment data.

Key segment companies Segment and main associates Business description Stake Financial Technology DG Financial Technology, Inc. Formed out of a merger between VeriTrans, Inc. and econtext, Inc. 100.0% NaviPlus Co., Ltd. Subsidiary of VeriTrans; provides recommendation engine for e-commerce websites 100.0% TD Payment Corporation Operates multiple payment solutions for POS systems; equity-method affiliate 49.0% ANA Digital Gate, Inc. Develops and provides FinTech-related payment solutions; equity-method affiliate 49.0% Score, Inc. Operates deferred payment service and financial services using payment data; equity-method affiliate 49.0% Source: Shared Research based on company data DG Financial Technology Inc. is a wholly owned subsidiary formed following a merger between the former VeriTrans Inc. and former econtext Co., Ltd. in April 2021.

DG Financial Technology Inc. DG Financial Technology’s revenue structure is as mentioned earlier. The company targets a range of customers, including e- commerce businesses, catalog retailers and online gaming companies. For these customers, the main benefit of using DG Financial Technology’s services is a more streamlined payment-transaction process. Customers deal only with DG Financial Technology rather than with many payment companies.

DG Financial Technology also began offering payment services aimed at smartphone users in May 2011. The service supports smartphones running the iPhone, Android, and Windows Mobile operating systems.

NaviPlus NaviPlus, a subsidiary of VeriTrans, offers recommendation and search tools for e-commerce sites that aim to increase site profitability by raising the ratio of purchases per visitor. In the long term NaviPlus is looking to participate in the big data project to optimize advertising.

NaviPlus details

Source: Shared Research based on company data

TD Payment Co., Ltd. Established in December 2018, TD Payment Co., Ltd. is a joint venture created between Toshiba TEC Corporation, which operates a POS system business, and VeriTrans Inc. (now DG Financial Technology Inc.), which operates a payment business, to develop multi-payment solutions for POS systems. It is an equity-method affiliate of DG Financial Technology Inc (49% stake).

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TD Payment implements multi-payment solutions for POS systems at major drugstores, supermarkets, and other stores. It offers DG Financial Technology’s payment infrastructure to stores that use POS systems provided by Toshiba TEC, which has a 58% share of the domestic POS system market (source: DG). It has an installation base of about 15,000 units (as of end-FY03/21), and targets large stores as part of the company’s non-e-commerce (face-to-face) payment business.

Alliance strategy for face-to-face payments As part of the alliance strategy in face-to-face payments (non-e-commerce payments), Toshiba TEC and DG Financial Technology have rolled out POS multi-payment solutions for large stores through TD Payment (see above).

For medium-sized stores, the company provides a multi-QR code payment service using a mobile POS and multi-payment terminal (mPOS) through a tie-up with Recruit Lifestyle Co., Ltd., which is a top player in the domestic mobile POS market (536,000 AirRegi accounts as of December 2020). It promotes cashless payment adoption among small and medium-sized businesses by providing a low-cost, simple multi-QR code payment service.

Furthermore, for small- and medium-sized stores, the company started offering CloudPay, a multi-QR code payment solution, in May 2019. CloudPay enables stores to accept a variety of QR code payment methods by simply installing a single QR code reading panel (a multi-QR solution that integrates various MPM-type* payment methods into a single QR code). It connects to domestic telecom carrier QR code payment services such as d-pay, LinePay, and auPay, as well as overseas QR code payment services such as Alipay and WeChat Pay, and is installed at approximately 390,000 stores as of March 31, 2021. The company has grown into a major player in the QR code payment network.

*MPM (Merchant Presented Mode): A method in which consumers pay by scanning QR codes placed in stores with their smartphones.

In the non-e-commerce (face-to-face) payment business, for medium-sized stores, the company provides mobile POS providers such as Recruit Lifestyle with multi-payment solutions that cover overseas QR code payment providers such as Alipay and WeChat Pay, as well as domestic QR code payments such as those offered by telecom carriers.

For small-sized stores, the company uses its own brand solution, Cloud Pay (multi-QR payment). In addition to docomo d- payment○R , the connections to LinePay, and auPay has been completed. This is a solution that standardizes various types of payment, including inbound-related payment, into a single QR code.

Target market According to the Ministry of Economy, Trade and Industry’s Survey of Electronic Commerce (released on July 22, 2020), Japan’s BtoC e-commerce market size was JPY19.4tn (+7.7% YoY) in 2019. The company estimates the size of the BtoC e-commerce market to be about JPY22.0tn in 2020, and its payment handling volume of JPY3.6tn equates to about a 14% market share.

According to the Ministry of Economy, Trade and Industry (METI), the cashless ratio in Japan was only about 20% in 2016, lower than about 96% in South Korea, 69% in the UK, and 66% in China. In 2019, the cashless ratio was 26.8%. The government aims to raise the cashless ratio to about 40% by June 2025. Taking into account that Japan’s private-sector consumer spending is approximately JPY286tn in FY2020, multiplying this amount by 40% gives the company a target market of over JPY100tn.

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Marketing Technology segment FY06/13 FY06/14 FY06/15 FY06/14 FY06/15 FY06/16 FY03/17 FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Old seg Old seg Old seg New seg New seg New seg New seg New seg IFRS IFRS IFRS IFRS Sales 11,043 14,822 16,064 14,822 16,064 21,028 27,257 34,938 9,939 12,922 15,375 13,049 % of total sales 39.5% 43.9% 42.2% 43.9% 42.2% 48.0% 56.2% 58.1% 40.2% 36.4% 41.8% 32.5% Pre-tax profit 473 854 1,065 874 1,064 1,396 1,429 1,959 1,856 1,215 1,853 735 Pre-tax profit margin 4.3% 5.8% 6.6% 5.9% 6.6% 6.6% 5.2% 5.6% 18.7% 9.4% 12.1% 5.6% % of total pre-tax profit 22.9% 23.1% 18.0% 15.2% 11.0% 15.0% 19.7% 21.8% 19.3% 7.7% 13.1% 4.1% Segment sales breakdown (JPYbn) Performance-based ads 5.6 9.5 10.2 9.5 10.2 15.1 20.4 27.7 na na na na Source: Shared Research based on company data Previous segment results on an operating profit basis. Annualized data used for FY03/17, which was a nine-month irregular accounting period.

Segment overview In FY03/21, the Marketing Technology segment reported revenue of JPY13.0bn (32.5% of total) and pre-tax profit of JPY735mn (5.6%). Segment revenue consisted of JPY4.7bn for real estate (36.0% of segment revenue), JPY1.8bn for financial sector (14.2%), JPY1.2bn for cosmetics/HR (9.0%), JPY905mn for smartphones/apps (6.9%), and JPY4.4bn for CRM (33.9%). Among these categories, the company collectively refers to revenues for financial sector, cosmetics/HR, and smartphone/app online advertising as digital ads (total of JPY3.9bn; 30.1% of segment revenue). Gross margin for digital ads was 12.3% in FY03/21 (average for FY06/16-FY03/21: 12.2%).

Advertising volume for FY03/21 was roughly flat YoY at approximately JPY35.0bn. Of this, approximately JPY15.9bn (45.4% of total) was for the financial sector, JPY7.5bn (21.4%) for cosmetics/HR, JPY5.4bn (15.4%) for smartphone/app, and JPY6.2bn (17.7%) for real estate. Digital ads accounted for 82.3% of total ad volume.

Outline of Marketing Technology segment In the Marketing Technology segment, which has been a mainstay business from the company’s beginnings, the company provides corporate clients with online marketing that combines the online and offline realms for comprehensive promotion and internet advertising and data management service that utilizes big data. According to the company, it has worked to accumulate operational expertise in increasing advertising client satisfaction by placing focus on specific industries, as well as strict implementation of the PDCA* process. While making use of new technologies for delivering advertisements, DG looks to use these capabilities to differentiate itself from competitors.

Previously, the Marketing segment was centered on sales promotion, but the company is focusing on performance-based ads to serve as the core of this segment. Performance-based advertising aims to maximize the cost effectiveness of ads through analysis of the volume, time, medium, and effects that advertisements have on the target audience. Advertising agencies manage ads by taking control of clients’ advertising budgets. As a result, the ability of the advertising agency to effectively manage campaigns becomes an even larger differentiating factor when compared to previous models of buying advertisement slots. According to the company, its expertise plays a vital role in the efficacy of performance-based ads. The company is also looking to strengthen ties with other group companies to enter the big data business.

*PDCA refers to the plan-do-check-act cycle to create continuous business improvement.

Revenue model Digital ads In the digital ads business, the company develops and plans online advertising strategies for clients (advertisers), makes arrangements for ad operations, and measures and analyzes ad performance. The client (advertiser) pays the company an advertising fee and a commission, and the company pays the media an advertising fee. Under IFRS, the commissions the company receives from clients (advertisers) are recorded as revenue. Under Japanese GAAP (JGAAP), advertising costs and commissions received by the company are recorded as revenue, while advertising costs are recorded as cost of sales (gross profit is the commission the company receives from customers). In other words, IFRS revenue is approximately equivalent to gross profit under JGAAP.

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Real estate advertising In the physical advertising business centered on real estate advertising, the company receives requests from clients (advertisers) to produce real estate ads and produces ads according to the clients’ specifications. The clients (advertisers) pay the company an ad fee, from which the company receives its production costs and commissions, and the company pays the media the amount deducted. Under both IFRS and JGAAP, the company records advertising fees received from clients as revenue.

Key segment companies The main entities in the segment are Marketing Technology Company (an internal company; formerly DG & Ibex, Inc.) and BI. Garage (a consolidated subsidiary).

▷ Marketing Technology Company (internal company) is primarily involved in promotional activities and internet-based marketing. In web marketing, marketing budgets are received from clients, and target areas are identified. Marketing Technology Company also handles operations for the advertising campaigns, receiving revenue based on campaign performance. ▷ BI. Garage provides data science, social marketing, leading edge ad technologies. The company is paying particular focus on promotion of new businesses based on leading edge ad technologies.

Key segment companies Segment and main associates Business description Stake Marketing Technology Marketing Technology Company Provides performance-based ads, O2O, and online marketing Internal company B.I. Garage, Inc. Operates data science business, providing social marketing and cutting-edge ad tech 70.8% DG Communications Co., Ltd. Mainly operates real estate ad business, providing solutions for making lifestyle more comfortable 81.5% Qoil, Inc. Provides marketing services utilizing creation design, data science, and digital technology 20.0% Renamed from DG Marketing Design in April 2021 (equity-method affiliate) CyberBuzz, Inc. Operates social media marketing services, focusing on influencers; 20.7% equity-method affiliate Source: Shared Research based on company data *DG Marketing Design was renamed to Qoil Inc. on April 1, 2021.

Overview of key segment companies are as follows.

Marketing Technology Company (formerly DG & Ibex) Marketing Technology Company was formed in 2008 after the in-house merger of DG & Ibex Co, Creative Garage Co, and DG Media Marketing Co.

It operates a diverse group of business, including a general promotions business (combining online and offline promotions), a data management business (making use of web marketing data and big data), and an advertising product development and marketing business for social media.

Marketing solutions is divided into outsourced contracts for corporate promotion-related solutions (general promotions), and web marketing. Promotions account for around 30% of sales while the growing web marketing business brings in the remaining 70%. In web marketing operations, Marketing Technology Company manages an advertising budget on behalf of a client company and makes media-buying decisions (advertising optimization). There are already many competitors in this field, including CyberAgent Inc. (TSE1: 4751), and the company believes still more companies will enter this field in the future.

The company believes Marketing Technology Company’s edge is its collaborative approach to creating solutions that maximize client revenues. Clients are generally large corporations in such industries as financial services and cosmetics. In media, Marketing Technology Company operates an online shopping mall on behalf of a credit card issuing company, where cardholders can spend their loyalty-program points. Income is derived from a fixed monthly operations fee plus affiliate income. Marketing Technology Company also launched an online-to-offline (O2O) service to steer customers from the point mall to brick- and-mortar stores in fall 2013.

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O2O service: if a customer visits, within a certain period, a physical store after seeing a promotion in the “Point Up Mall” (a shopping site used exclusively by Sumitomo Mitsui Card Co Ltd cardholders) and uses their credit card at the store, the customer qualifies for additional loyalty points.

In AdTechnology, under a strategic alliance with Dentsu Inc. (TSE1: 4324), Marketing Technology Company will analyze big data and sell targeted advertising as part of a new audience data business that the company is positioning as a strategic growth driver.

BI. Garage, Inc. BI. Garage was founded in 2006 by DG, Dentsu Inc., Cyber Communications Inc. (a subsidiary of Carta Holdings [TSE1: 3688]), and Asatsu-DK Inc. (unlisted) to create and develop new media. The company provides social marketing and the latest advertising technology. The company aims for advanced advertising technologies to aid in establishing a next-generation advertising network platform.

In cooperation with the DG Group, Dentsu, and Kakaku.com, BI. Garage began a data science business in November 2013, with the aim to optimize marketing activities for client companies. Beginning in April 2014, the business utilized big data from group companies such as Kakaku.com and restaurant review site Tabelog to begin sales of BIG MINING (a corporate marketing- optimization solutions package).

BI. Garage analyzes characteristics of products that have high user interest on its websites to enable client firms to provide more effective advertising for potential customers.

Incubation Technology segment FY06/13 FY06/14 FY06/15 FY06/14 FY06/15 FY06/16 FY03/17 FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Old seg Old seg Old seg New seg New seg New seg New seg New seg IFRS IFRS IFRS IFRS Sales 2,509 5,475 7,454 5,475 7,454 6,343 2,362 3,123 2,553 8,022 4,868 11,482 % of total sales 9.0% 16.2% 19.6% 16.2% 19.6% 14.5% 4.9% 5.2% - 214.2% -39.3% 135.9% Pre-tax profit 290 1,646 3,546 1,595 2,804 3,105 1,019 1,325 1,321 6,889 3,563 10,264 Pre-tax profit margin 11.6% 30.1% 47.6% 29.1% 37.6% 49.0% 43.1% 42.4% 51.7% 85.9% 73.2% 89.4% % of total pre-tax profit 14.0% 44.5% 59.8% 27.8% 29.0% 33.3% 14.1% 14.7% 13.8% 43.5% 25.2% 57.8% Investment balance 2,906 8,694 9,011 8,694 9,011 11,100 12,000 12,300 16,745 26,695 36,546 47,170 Equity 2,473 8,208 8,490 8,208 8,490 10,400 11,300 11,500 na na na na Domestic companies 1,061 4,385 1,784 4,385 1,784 1,800 1,900 1,800 na na na na Overseas companies 1,412 3,822 6,706 3,822 6,706 8,500 9,300 9,700 na na na na Funds 433 486 521 486 521 700 700 800 na na na na No. of companies (businesses) 64 82 94 82 94 116 130 154 na na na na Source: Shared Research based on company data Previous segment results on an operating profit basis. Annualized data used for FY03/17, which was a nine-month irregular accounting period.

Segment overview

▷ In the Incubation Technology segment, the company mainly invests in startups in Japan and overseas and fosters investees through cooperation with other segments. ▷ Key firms under its control include DG Ventures Inc., Digital Garage US, Inc., Open Network Lab, Inc., and DG Technologies, Inc. ▷ Primary sources of earnings are dividends and gains on sales of shares in investees of DG Ventures, and increases in fair value estimates for portfolio companies at the end of the fiscal year. As of end-FY03/21, the company reported operational investment securities of JPY47.2bn, an increase of JPY10.6bn over the end of FY03/20 (increased by 2.5x over the three-year period from end-Q1 FY03/19). ▷ Investments (as of end-FY03/21): 38.6% in North America, 30.5% in Asia, 20.2% in Japan, 0.4% in Europe, and 10.3% in other countries. ▷ In FY03/21, the company’s ROI was 3.5x (average ROI of 2.6x for the five years through FY03/21).

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Segment and main associates Business description Stake Incubation Technology DG Ventures Inc. Operates investment and incubation for venture companies 100.0% Digital Garage US, Inc. Headquarters of global strategies based in the US 100.0% Digital Garage Development LLC Holds and leases real estate for investment 100.0% DK Gate, Inc. Operates global investment and consulting for next-generation content (jointly with Kodansha) 66.0% DG Technologies, Inc. Promotes strategic technological development in cooperation with DG Lab 80.0% D2 Garage, Inc. Develops promising startups in the Hokkaido region 51.0% DG Incuvation Manages and operates investment limited partnerships 100.0% econtext ASIA EC Fund Supports fundraising for e-commerce markets in Asia 33.1% Investment LP (equity-method affiliate) DG Daiwa Ventures, Inc. Operates DG Lab Fund targeting start-ups with next generation technologies; 50.0% (equity-method affiliate) DG Lab No. 1 Investment LP Invests in start-ups with next generation technologies, in cooperation with R&D entity DG Lab; 14.7% (equity-method affiliate) DG Lab Fund Ⅱ E.L.P. Cayman Invests in start-ups with next generation technologies, in cooperation with R&D entity DG Lab; 18.2% equity-method affiliate

Source: Shared Research based on company data

Fair value of operational investment securities

▷ Market price of shares in an active market (method 1) ▷ Fair value is estimated based on the most recent transaction price if information on the most recent arm’s length transaction or financing price is available (method 2 is used if method 1 is not applicable. It is assumed that the most recent transaction price is valid for a certain period of time after the transaction occurs). ▷ Fair value is estimated based on the most recent transaction price with adjustments* or the net assets on the balance sheet of the relevant company (method 3 is used if method 1 and 2 are not applicable).

* Calculated using financial figures of the relevant company as well as adjustment multiples to the corporate value and earnings of comparable companies with the most recent transaction price.

Overview of key companies

DG Ventures Inc. (name changed from DG Incubation, Inc. in January 2020) DG Ventures’ operations are for investment purposes. Its objective is to earn capital gains or dividend income. The company also introduces its targets to the Japanese market so its operations are closely linked to the rest of the DG group. As of end-FY03/21, DG Ventures is invested in 235 companies with a fair value of JPY39.2bn.

The exposure of the incubation business is shown on the company’s balance sheet under operational investment securities (which under IFRS accounting represent fair value estimates). According to the company, internet businesses can start up with little cash, so investments at the nascent or early stage can avoid large investment outlays.

The company’s publicly announced investments are shown below. Shared Research thinks that Joichi Ito’s network of contacts played an important role in discovering new investments for the period up to FY06/11. From FY06/12 Ito’s network will stay important but the company can also leverage its own network among prominent Silicon Valley investors and its Incubation Center. Traditionally DG has made the majority of its investments in early-stage startups, but the company has adopted a more aggressive approach to additional investments in late-stage startups from FY06/14.

The company invests in funds, one of which is the SV Angel fund. Silicon Valley investor Ron Conway, known for investing in companies such Google, PayPal, and Twitter, founded and runs this early-stage fund which invests in social media and mobile businesses. DG has also invested in the 500 Startups venture capital fund run by Dave McClure. Whereas SV Angel is technology- oriented, 500 Startups is a design-oriented fund and many of the startups it backs have completed products. It also has networks in Asia and South America.

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DG Daiwa Ventures, Inc. DG Daiwa Ventures is a venture capital company established in July 2016 as a joint venture between DG and Daiwa Securities Group, which operate the DG Lab Fund targeting start-up companies with next-generation technologies. It is an equity-method affiliate of the company (50% stake). The DG Lab Fund is a new type of VC fund that combines the investment network and incubation capabilities of the company with the fund management know-how of the Daiwa Securities Group. It works with the DG Lab, an open innovation R&D organization established by the company, Kakaku.com, Inc. (TSE1: 2371), and Credit Saison (TSE1: 8253), as well as investees of the DG Lab Fund. DG Lab promotes research and development in five strategic areas: blockchain, AI, xR, security, and biohealth.

The company operates a total of approximately JPY20.0bn, which consists of DG Lab Fund I’s approximately JPY6.8bn and DG Lab Fund II’s approximately JPY12.5bn (as of end-FY03/21).

The company completed the formation of DG Lab Fund I in September 2017 after investing in 12 startup companies with next- generation technologies in the fields of blockchain, AI, and biotech. Through the DG Lab, it works with some of its investees on technology development. Multiple companies including Eisai Co., Ltd, Kakaku.com Inc, KDDI Corporation, Sompo Japan Insurance Inc, Taisho Pharmaceutical Co., Ltd., Takenaka Corporation, TSI Holdings Co., Ltd., Hanwha Asset Management Co. Ltd., and Sumitomo Mitsui Trust Bank, Limited are participating in the DG Lab Fund II as LPs. Since its inception, DG Lab Fund II has invested in 13 companies and completed its formation by November 2020. Combined with DG Lab Fund I, the funds have invested in over 40 companies.

Portfolio overview by region (based on book value as of end-March 2020)

Europe 0.4% Other 10.3% Japan 20.2%

Asia 30.5%

US 38.6%

Source: Shared Research based on company data

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Key portfolio companies Fair v alue Investee Overview Region Stake (JPYmn) Operates Sendo, a marketplace for C2C and B2C in Vietnam, Sen Do Technology Vietnam 12.7% 7,400 and provides Electronic wallet services Offers a personal financial management (PFM) tool for financial MX Technologies US 3.5% 6,700 institutions in the US Provider of a mobile application intended to offer a HTML5 Playco Global US 2.0% 2,300 game development plat form Operates Droom, India's largest automotive buy and selling Droom Technology India 3.2% 2,000 online market place ThredUp The largest apparel resale EC platform in the US US 0.6% 1,500 Bandwidth cloud solution that allows PCs and mobile devices SV Angel Ⅲ US 36.2% 1,000 with OpenGarden installed to share their Internet lines Developed Sidechain, a technology for using Blockchain, BlockStream US 8.4% 1,000 Bitcoin's core technology, in various applications Grubmarket Grocery B2B and B2C e-commerce US 1.9% 800 Provides quantitative and qualitative analysis tools on SDK for Repro Japan 5.9% 800 app service providers Peatix Plans and operates Peatix, an online ticketing service US 9.0% 800 Source: Shared Research based on company data

Open Network Lab Open Network Lab is a joint program between DG, BEENOS Inc. (TSE1: 3328), and Kakaku.com, Inc. (TSE1: 2371; a DG equity- method affiliate). Open Network Lab began operating in April 2010 and supports engineers starting internet businesses. The company supports startups targeting a global business in collaboration with partners in the US, Japan, Europe, and Asia. As of end-FY03/21, the program has supported a total of over 150 companies, and has raised 58.2% of the total required funding. The 23rd phase of the Seed Accelerator Program is currently underway.

DG and BEENOS Inc. capitalized and incorporated the venture in September 2011 (DG took a 70.0% equity stake). The business has been expanding globally since 2016. The DG717 Incubation Center in San Francisco holds events to match quality Japanese startups with local investors.

So far, Open Network Lab has cultivated and supported more than 150 startups through its Seed Accelerator Program. Application for the program is open to companies and unregistered teams of entrepreneurs with superior technologies and promising business plans, and those selected receive funding and facilities such as office space. Program participants are also mentored by experienced engineers, entrepreneurs, and investors in Japan and elsewhere to grow their businesses. Specifically, Open Network Lab provides infrastructure, such as offices, to companies and teams of entrepreneurs who after a development cycle of about three months can showcase their businesses to venture capitalists, or entrepreneurs in Japan and abroad. Open Network Lab’s three backers (DG, BEENOS, and Kakaku.com) have preferential rights to invest in any startups founded by Open Network Lab participants that use technologies developed during the program.

Open Network Lab has been developing specialized startup accelerator programs for different areas and regions, and as of the end of March 2021 had the following four programs in operation:

▷ Open Network Lab Resi-Tech: Launched in November 2018 as a specialized area program for real estate-related startups. ▷ Open Network Lab BioHealth: Japan’s first full-scale program specializing in biotechnology and healthcare; it is supported by 22 companies, including major pharmaceutical and healthcare-related companies both Japanese and overseas. ▷ Open Network Lab Hokkaido: A regional specialization program established to work together with industry, government, and academia to help the company identify and nurture promising entrepreneurs in Hokkaido; the effort is headed by D2 Garage, a joint venture with Hokkaido Shimbun Press (with DG taking a 51.0% stake).

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▷ Open Network Lab Fukuoka: A regional specialization program based at Fukuoka Growth Next, the city of Fukuoka’s startup support facility through public-private cooperation; the goal for the program is to accelerate innovation in the Fukuoka region through the joint planning and implementation of proof-of-concepts by startups and major companies.

Digital Garage US, Inc. The company established Digital Garage US, Inc. (DGUS), a US holding company, in July 2011 (based in San Francisco). DGUS holds Digital Garage Development LLC and New Context Services Inc. under its umbrella. DG will strengthen cooperation with these group companies.

Upon the establishment of DGUS, the company immediately appointed Ian McFarland to be responsible for its core business activities, and he began work at DGUS on August 1, 2011. He previously served as principal and VP of technology for Pivotal Labs, providing software development consulting services to major internet companies like Google or Twitter.

According to the company DGUS has a business goal of strengthening the company’s overseas investment operations. By leveraging both the San Francisco/Silicon Valley investor network and McFarland’s engineering network, the company thinks it can gather a range of information quickly on investment opportunities.

Digital Garage Development LLC (headquartered in San Francisco; DGD) acquired an eight-story office building in San Francisco. The building is near Union Square and faces Market Street. DGD completely renovated the first two floors for the DG717 Incubation Center which opened in fall 2013. The building will welcome DGUS. The DG717 Incubation Center functions as a hub for communicating information on new technologies and entrepreneurs, and for providing various resources to startups.

Long-term Incubation segment FY06/13 FY06/14 FY06/15 FY06/14 FY06/15 FY06/16 FY03/17 FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Old seg Old seg Old seg New seg New seg New seg New seg New seg IFRS IFRS IFRS IFRS Sales - - - 0 0 41 54 1,150 6,301 7,133 7,929 5,931 % of total sales -- - - - 0.1% 0.1% 1.9% 25.5% 20.1% 21.6% 14.8% Pre-tax profit -- - 1,776 4,477 3,053 2,822 3,176 3,621 4,378 4,701 2,653 Pre-tax profit margin ------57.5% 61.4% 59.3% 44.7% % of total pre-tax profit -- - 30.9% 46.3% 32.8% 39.0% 35.3% 37.7% 27.7% 33.2% 14.9% Kakaku.com group unique users

(mn; monthly) kakaku.com -- - 44.83 47.45 46.26 52.75 61.88 - 56.15 63.09 70.40 tablelog -- - 56.11 67.22 72.65 104.29 142.91 - 119.17 106.47 115.86 Source: Shared Research, based on company data and data from Kakaku.com, Inc. Old segment results on an operating profit basis. Annualized data used for FY03/17, which was a nine-month irregular accounting period. Monthly unique user figures in years prior to and in FY03/18 are not perfectly comparable to the figures shown for subsequent years. Because of the accelerated speed of web page views on mobile devices, the estimates for the number of unique users per month included some double-counting; data collection methods were changed to avoid such double- counting starting in September 2018.

Outline of Long-term Incubation segment

▷ The Media Incubation segment was established in FY06/16 (segment name changed to Long-term Incubation from FY03/18). The segment is utilizing the company’s expertise in media development and operations, in addition to deepening ties with Kakaku.com, and creating new businesses. The Long-term Incubation segment seeks to create new value added across the above three segments to form new businesses that will follow Kakaku.com as a growth driver. ▷ As of end-FY03/21, the five businesses in the Long-term Incubation segment were Kakaku.com, Inc. (20.56% equity stake; equity-method affiliate), Crypto Garage, Inc. (59.64% equity stake, consolidated subsidiary), Academie Du Vin Co., Ltd. (100%; consolidated subsidiary), Brainscan Technologies K.K.(100%, consolidated subsidiary), and Dentsu ScienceJam Inc. (33.33%, equity-method affiliate). ▷ Kakaku.com operates a content business such as the price comparison web site kakaku.com and the restaurant website Tabelog. Crypto Garage operates a blockchain financial services business. Brainscan Technologies K.K. matches brain MRI checkups for drivers. Dentsu ScienceJam plans and develops products and services applying state-of-the-art science.

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▷ The profits of equity method affiliates are reflected in operating profit/loss under IFRS. Under J-GAAP accounting, these are not reflected in consolidated sales and operating profit, but are included in pre-tax profit as equity-method investment profit/loss.

Key segment companies Segment and main associates Business description Stake Long-term Incubation Academie du Vin Co., Ltd. Operates wine school business; wholesales wines; consolidated subsidiary 100.0% Brainscan Technologies, Inc. Mediates brain MRI services to transportation operators 100.0% Crypto Garage, Inc. Operates financial services using blockchain technology and other services; consolidated subsidiary 59.3% Kakaku.com, Inc. Operates websites kakaku.com (price comparison) and tabelog.com (restaurant review); equity-method affiliate 20.6% Dentsu ScienceJam Inc. Plans and develops products and services applying cutting-edge science 33.3% Source: Shared Research based on company data

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Main group companies (equity stake at end-FY03/21 in parenthesis) Consolidated subsidiaries

▷ BI. Garage, Inc. (70.08%): develops advertising products using social media. ▷ DG Ventures Inc. (100%): invests in and develops startups. ▷ Digital Garage US, Inc. (100%): US corporation established in July 2011 and based in San Francisco. ▷ econtext Asia Ltd. (100%): headquarters of the payment business, incorporated in Hong Kong. ▷ econtext Co., Ltd. (100%): one of Japan’s largest cash-based payment service providers. ▷ VeriTrans Inc. (100%): provides e-commerce operators with payment systems and services and offers payment agency services. ▷ Brainscan Technologies K.K. (100%): operates a brain MRI matching business for drivers.

Equity-method affiliates

▷ Kakaku.com, Inc. (20.56%) runs the price comparison site kakaku.com and the restaurant review site tabelog.com. Kakaku.com is a social media pioneer in Japan. It provides consumers with pricing information, specifications, and buzz for each product.

Traditionally it has focused on information about durable consumer goods but has been expanding into areas that include daily items like consumables, big box discounters and e-commerce sites. Affiliate and advertising income make up the bulk of their revenue, so revenue tends to expand as the total value of the distribution generated through kakaku.com increases. ▷ Dentsu ScienceJam Inc. (33.33%): planning and development of original products and services using the results of cutting- edge scientific research and provision of ideas and planning for corporate clients developing new products.

Global Headquarters

The company has three headquarters in Tokyo (DG Group HQ), San Francisco (Incubation Center HQ), and Hong Kong. DG aims to conduct speedy management decision making in cooperation between the headquarters.

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Strengths and weaknesses

Strengths

◤ Unparalleled personal network of the company’s founders and employees reinforced by reputation as a respected Japanese internet pioneer: The company’s founders were internet trailblazers in Japan, which has given DG clout and a network to draw on as it searches for the next stage of growth. The company is one of the few, if not the only, venture capitalist with strong connections both in Silicon Valley and its home market of Japan. Its ability to identify and invest in both Twitter Inc. and Kakaku.com early on is testament to this. Skeptics may argue that DG needs to beef up its venture capital efforts to be a serious player and should stick to small, early-stage investments because none of its more expensive adventures has been as successful. DG does seem to have refocused on what it does best—early-stage commitments.

◤ Strong business portfolio: The company initiates investments in companies by recognizing the latest trends at an early stage. It also has the operational infrastructure necessary to turn its investments into commercially viable entities through promotional, marketing, and payment activities, which support its incubation business (the final goal is to profit from exiting out of such investments). Thus, the company’s various operations could create synergies if they can be integrated.

◤ Relatively independent positioning in internet advertising and payments: Although DG has business partnerships with several companies, it is not defined by any core business that directly competes with businesses of other important internet market players, such as online gaming or search-engine operators. This position gives DG an opportunity to become a core provider of e-commerce payment infrastructure, enhanced by its ability to offer marketing services and social media functions.

Weaknesses

◤ Weak drive to control: Shared Research thinks this could be DG’s main weakness from a value-creation perspective. Many well-known global companies became large because of their drive to control their ecosystem. Though such drive can be a double-edged sword, control scares away competition, allows new projects to grow “inside the fence,” and breeds staying power. In contrast to successful “control freaks” such as Microsoft Corp (NASDAQ: MSFT), Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG), or in Japan advertising giant Dentsu Inc. (TSE1: 4324) and staffing group Recruit Co (unlisted), DG seems more focused on partnership, cooperation and creating a dynamic ecosystem rather than killing off competitors.

◤ Historically less focus on continuous earnings growth, “soft investment strategy” in the business: Though similar to the first weakness this problem is a distinct issue. As a self-styled experimental laboratory of ideas rather than an aggressive, capitalist, money-making machine, tinkering with the possibilities of the internet and various business models is a part of the company’s DNA.

◤ Selling the winners?: Shared Research questions the wisdom of selling Kakaku.com shares at such an early stage and reducing its stake. One of the cardinal rules of trading and long-term investing is to cut your losers and let your winners run. The idea is that it is hard to find true winners so it is wrong to let them go. Venture capital firms do divest their stakes but normally to return money to investors as part of the fund management process. (Note: many venture capital firms are not listed.) Shared Research doubts whether selling the crown jewels should be part of the incubation process.

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Market and value chain

Market overview Internet use and internet advertising in Japan

Percent of internet users in Japan relative to total population

100.0% 89.8% 90.0% 83.5% 82.8% 82.8% 80.9% 78.0% 79.1% 80.0% 70.8% 73.0% 83.0% 78.2% 79.5% 79.8% 70.0% 75.3% 72.6% 64.3% 66.0% 60.0% 57.8% 50.0% 46.3% 40.0% 37.1% 30.0% 20.0% 21.4%

10.0% 13.4% 9.2% 0.0%

Source: Shared Research, based on Ministry of Internal Affairs and Communications data

According to the Ministry of Internal Affairs and Communications, Japan’s internet users (PC and mobile) made up 89.8% of the total population in 2019. This was about the same level as in the US and UK.

According to the Japan’s Advertising Spending study by Dentsu, the size of the internet advertising market in Japan was JPY2.2tn in 2020 (with media spending of JPY1.8tn and production costs of JPY472.3bn). Internet advertising surpassed radio advertising in 2004, magazine advertising in 2006, newspaper advertising in 2009, and television advertising in 2019. At the time of the Dentsu study, internet advertising had a 36.2% share of total advertising spending. While advertising spending has been falling for the four traditional mass media formats of television, newspapers, radio and magazines, internet advertising spending is growing.

Advertisement spending by media format

Ad spending (JPYbn) Yo Y (%) % of total ad spending 2018 2019 2020 2018 2019 2020 2018 2019 2020 Total advertising spending 6,530.0 6,938.1 6,159.4 102.2 106.2 88.8 100.0 100.0 100.0 Four mass media ad expenses 2,702.6 2,609.4 2,253.6 96.7 96.6 86.4 41.4 37.6 36.6 Newspapers 478.4 454.7 368.8 92.9 95.0 81.1 7.3 6.6 6.0 Magazines 184.1 167.5 122.3 91.0 91.0 73.0 2.8 2.4 2.0 Radio 127.8 126.0 106.6 99.1 98.6 84.6 2.0 1.8 1.7 TV 1,912.3 1,861.2 1,655.9 98.2 97.3 89.0 29.3 26.8 26.9 Internet ad expenses 1,758.9 2,104.8 2,229.0 116.5 119.7 105.9 26.9 30.3 36.2 Media expenses 1,448.0 1,663.0 1,756.7 118.6 114.8 105.6 22.2 24.0 28.5 Ad production expenses 310.9 441.8 472.3 107.7 142.1 106.9 4.8 6.4 7.7

Promotional media expenses 2,068.5 2,223.9 1,676.8 99.1 107.5 75.4 31.7 32.1 27.2 Source: Shared Research based on Dentsu’s Japan’s Advertising Spending study

Changes in media exposure time are behind this growth trend in internet advertising. Exposure time to the four mass media has been on a downward trend, whereas exposure time to the internet continues to increase. Hakuhodo DY Media Partners’ Time Series Analysis from the Annual Media Consumption Report 2021 (survey period: January 21–February 5, 2021) shows that in the past 10 years, contact time with television, radio, newspapers, and magazines has declined by CAGRs of 0.7%, 1.4%, 4.8%, and 6.7% respectively, whereas contact time with the internet has been increasing at a CAGR of 8.1%. As consumers spend more time (or at least increase the proportion of the total time spent) viewing and using the internet, advertisers will likely continue to allocate more of their budgets to internet advertising.

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Breakdown of time spent on various media

Use of four mass media and internet 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (minutes per day) Total 350.0 351.4 353.1 385.6 383.7 393.8 378.0 396.0 411.6 411.7 450.9 (YoY) 0.6%0.4%0.5%9.2%-0.5%2.6%-4.0%4.8%3.9%0.0%9.5% Television 161.4 161.4 151.5 156.9 152.9 153.0 147.3 144.0 153.9 144.2 150.0 (YoY) -6.6% 0.0% -6.1% 3.6% -2.5% 0.1% -3.7% -2.2% 6.9% -6.3% 4.0% (% of total) 46.1% 45.9% 42.9% 40.7% 39.8% 38.9% 39.0% 36.4% 37.4% 35.0% 33.3% Radio 33.0 31.9 35.2 30.5 28.9 30.1 24.5 24.2 25.0 28.9 28.7 (YoY) 15.0% -3.3% 10.3% -13.4% -5.2% 4.2% -18.6% -1.2% 3.3% 15.6% -0.7% (% of total) 9.4%9.1%10.0%7.9%7.5%7.6%6.5%6.1%6.1%7.0%6.4% Newspaper 23.3 24.0 27.1 23.4 19.9 20.4 19.8 15.9 16.6 14.9 14.3 (YoY) -16.2% 3.0% 12.9% -13.7% -15.0% 2.5% -2.9% -19.7% 4.4% -10.2% -4.0% (% of total) 6.7% 6.8% 7.7% 6.1% 5.2% 5.2% 5.2% 4.0% 4.0% 3.6% 3.2% Magazine 18.6 16.6 16.0 13.6 13.0 13.8 11.9 12.3 10.7 11.2 9.3 (YoY) 16.3% -10.8% -3.6% -15.0% -4.4% 6.2% -13.8% 3.4% -13.0% 4.7% -17.0% (% of total) 5.3% 4.7% 4.5% 3.5% 3.4% 3.5% 3.1% 3.1% 2.6% 2.7% 2.1% Internet 113.7 117.5 123.4 161.3 169.0 176.6 174.5 199.6 205.4 212.5 248.6 (YoY) 10.8% 3.3% 5.0% 30.7% 4.8% 4.5% -1.2% 14.4% 2.9% 3.5% 17.0% (% of total) 32.5% 33.4% 34.9% 41.8% 44.0% 44.8% 46.2% 50.4% 49.9% 51.6% 55.1% PC 81.7 77.1 72.8 69.1 68.1 61.0 59.3 66.6 59.0 64.9 73.3 (YoY) 5.6% -5.6% -5.6% -5.1% -1.4% -10.4% -2.8% 12.3% -11.4% 10.0% 12.9% (% of total) 23.3% 21.9% 20.6% 17.9% 17.7% 15.5% 15.7% 16.8% 14.3% 15.8% 16.3% Tablet na na na 18.2 20.6 24.9 25.0 29.9 28.8 26.4 36.1 (YoY) na na na na 13.2% 20.9% 0.4% 19.6% -3.7% -8.3% 36.7% (% of total) na na na 4.7% 5.4% 6.3% 6.6% 7.6% 7.0% 6.4% 8.0% Mobile 32.0 40.4 50.6 74.0 80.3 90.7 90.2 103.1 117.6 121.2 139.2 (YoY) 27.0% 26.3% 25.2% 46.2% 8.5% 13.0% -0.6% 14.3% 14.1% 3.1% 14.9% (% of total) 9.1% 11.5% 14.3% 19.2% 20.9% 23.0% 23.9% 26.0% 28.6% 29.4% 30.9% Source: Shared Research based on Hakuhodo DY Media Partners data

Shared Research thinks that the penetration of internet advertising will continue to rise as consumers spend more of their waking hours online (via PCs, smartphones or other devices).

Shared Research also thinks that one driver of growth in internet advertising is a greater emphasis on cost effectiveness. As companies look to market more effectively, they are likely to become increasingly open to flexible solutions, combining traditional mass-media advertising with other methods and approaches.

The value of payments made online has mushroomed. The table below shows changes in the size of the e-commerce market for B-to-C (business-to-consumer) transactions in Japan, based on Ministry of Economy, Trade and Industry (METI) statistics. E- commerce has continued to grow steadily and the ratio of e-commerce to the overall B2C market increased to 6.2% in 2018 and 6.8% in 2019.

B2C e-commerce market in Japan

B2C market size in Japan 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (JPYbn) B2C e-commerce market size 6,696 7,788 8,459 9,513 11,166 12,797 13,775 15,136 16,505 17,985 19,361 YoY 10.0% 16.3% 8.6% 12.5% 17.4% 14.6% 7.6% 9.9% 9.0% 9.0% 7.7% E-commerce ratio 2.1%2.8%3.2%3.4%3.9%3.9%4.8%5.4%5.8%6.2%6.8% Source: Shared Research based on METI data

According to IT Navigator 2021published by the Nomura Research Institute in December 2020 the e-commerce market should reach JPY29.4tn (about 1.5 times the FY2019 market size of JPY19.5tn) by FY2026. Although consumer spending fell in 2020, the online shift progressed. The publication also estimates that the Japanese smart payment market, which was JPY95.3tn in FY2019, will reach JPY147.8tn in FY2026 thanks to steady expansion backed by major campaigns from various payment providers and the Japanese government’s cashless reward point program, as well as progress in digital technology adoption by stores as a way to support new lifestyles brought on by the COVID-19 pandemic.

Internet advertising models: from search engine to social media Japanese advertising agency Dentsu developed the Attention-Interest-Search-Action-Share (AISASTM) framework to improve the traditional Attention-Interest-Desire-(Memory)-Action (AIDMA) model and capture the purchasing behavior of internet consumers. AISASTM attempts to understand how internet consumers buy and interact, and in turn how these consumers react to advertising. With the spread of social media (e.g., Twitter, Facebook, mixi), Dentsu advocates a new Sympathize-Identify- Participate-Share & Spread (SIPS) model.

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Customer purchasing model proposed by Dentsu AIDMA Framework (advocated in the U.S. in 1920s)

Attention Interest Desire Memory Action

AISAS Framework (advocated by Dentsu in 2004)

Attention Interest Search Action Share

SIPS Framework (advocated by Dentsu in 2011)

Sympathize Identify Participate Share & Spread

Source: Shared Research based on Dentsu data

Roland Hall advocated the AIDMA marketing law, arguing that consumers pay attention to a product after seeing a TV commercial or magazine ad. Interest in the product leads to the desire to buy it. They remember that desire and buy the product. With traditional purchasing behavior, mass-media advertising raises consumer awareness of goods and services and has specific effects on buying behavior. However, this has changed with the rise of the internet. Consumers, for example, now normally search online for products or services that appeal and then publish comments or reviews on social media platforms. By sharing information with other consumers, they affect the consumption behavior of those around them. Dentsu reports that television and other forms of mass media still exert an effect on the attention and interest components of the above models but internet advertising and social media now affect the search, Action (purchase) and Share functions. Thus, advertising that combines the internet and social media has expanded.

Early internet advertising models focused on banners and direct response but struggled with relevance issues while lacking the reach and audiovisual power of then-dominant TV advertising. Advertising based on consumers’ search preferences started with catalogue-type and crawler-type search portals such as Yahoo! and Infoseek. Google, however, with its revolutionary search engine, took the search-linked advertising model to the major league. Starting in 2008 search started changing with the rise of social media. User access figures of Facebook—a leader in social media—surpassed Google’s for the first time in March 2010. Twitter Inc. is another social media leader. Traditional mass media, such as television and newspapers, distribute information in a one-way, top-down method. In contrast, social media allows individuals to distribute information from the bottom up and exchange such information freely.

Information generated by social media is easier to access, create and update than for any traditional media; social media has allowed consumers to share information at an unprecedented level, changing all kinds of behavior, including consumption.

In 2011 Dentsu came up with the SIPS model explaining consumption behaviors in the social media age. The SIPS model starts with consumers sympathizing with the information and idea of a person or a company. This is followed by participation, though this may not involve purchasing. Then consumers share information with friends and information spreads, stimulating sympathy among a wider range of consumers.

Electronic payments (e-payments) The 2019–2020 Denshi Kessai Soran (e-payments guide) published by CardWave (co-written by ePayments Laboratory Inc. and Yamamoto International Consultants) put the value of Japan’s e-payment services market at JPY86.7tn in 2019 as a total of credit card, debit card, and prepaid card payments. The survey estimates that the market will be worth JPY128.8tn (1.5 times vs 2019) in 2025. E-payments as a share of private final consumption expenditure was 22.8% in 2017 and forecast to increase to 28.9% in 2019 and 42.9% in 2025. In addition, the market for code payments using QR codes and barcodes, which have been gaining ground rapidly in recent years, is estimated to reach JPY12.0tn by 2025. In its Future Investment Strategy 2017, the government announced its goal of raising the share of cashless payments in Japan to 40% in 10 years (by 2027). According to the 2017–2018 Denshi Kessai Soran, the spread of cashless payments is likely to accelerate in many industries to improve services for the growing number of foreign visitors leading up to the Tokyo Olympics in 2021. With service enhancements in sight, the development of the cashless environment is expected to accelerate further in various fields going forward.

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Size of e-payments market in Japan

2011 2015 2017 2019 2025F (JPYtn) Cash, other 232.3 231.3 226.6 213.0 171.7 Electronic payments 55.6 55.7 66.8 86.7 128.8 Credit card 49.8 47.0 56.2 73.4 103.9 Debit card 0.90.71.01.64.8 Prepaid card 4.9 8.0 9.6 11.8 20.2 Total 282.1 287.0 293.4 299.7 300.5 Electronic payment ratio 17.7% 19.4% 22.8% 28.9% 42.9%

2011 2015 2017 2019 2025F % of total Cash, other 82.3% 80.6% 77.2% 71.1% 57.3% Electronic payments 19.7% 19.4% 22.8% 28.9% 42.7% Credit card 17.7% 16.4% 19.2% 24.5% 34.7% Debit card 0.3% 0.3% 0.3% 0.5% 1.3% Prepaid card 1.8% 2.8% 3.3% 3.9% 6.7% Total 100.0% 100.0% 100.0% 100.0% 100.0% Source: Shared Research based on ePayments Laboratory Inc., Yamamoto International Consulting, and CardWave’s Denshi Kessai Soran (2011-2012, 2015-2016, 2017- 2018, and 2019-2020 editions) data

Government promotes cashless payments The Japanese government targeted improved convenience and efficiency through cashless payments in its Japan Revitalization Strategy revised in 2014. In Japan Revitalization Strategy 2016, the government promotes cashless payments with the 2021 Tokyo Olympics and Paralympics in its sights. In “FinTech Vision” released in May 2017, it argues that promoting cashless payments holds the key to electronic payment records necessary to create value added using fintech. The document presents the share of cashless payments as a policy KPI, while emphasizing the need for ongoing analysis and discussion of problems and solutions for promoting cashless payments. As noted above, the government targets around 40% share of cashless payments by 2027.

The government lists advantages of cashless payments such as unmanned, labor-saving stores, improved convenience of consumption through the use of utilizing payment data, and uptick in consumption, as well as a rise in tax revenue by discouraging opaque cash trades. API* links between card companies and fintech firms are also under discussion. Another reason for promoting cashless payments is anticipation of business models that create new services by gathering and analyzing payment information.

* Application Program Interface: Connection and other specifications for extracting features of an application, or data managed by the application from another application.

Spread of cashless payments despite roadblocks unique to Japan Cashless Vision released by the Ministry of Economy, Trade and Industry (METI) in April 2018 posits that the reason for the smaller share of cashless payments in Japan versus other countries*1 is found in social context: Japanese prefer cash. Cash in circulation as a share of GDP is around 10% in countries in North America and Europe versus approximately 20% in Japan.

Reasons that discourage greater use of cashless payment services by stores include the cost of installing equipment (terminals, space, phone lines), commissions that are not paid for cash transactions, additional workload of issuing receipts, and the time lag between the e-payment and actually receiving the money. For consumers, the existence of many stores that do not offer cashless payments and concerns regarding e-payments (fear of overspending, losing track of day-to-day spending, security issues, and fear that personal information such as private preferences and health information may be unwittingly leaked to third parties) are deterrents to increased use.

Japanese business customs also play a part. Unlike most other countries, Japan has a multi-acquirer system, with one merchant having multiple acquirers. This may be a reason*2 for cashless payments being slow to spread among bars and restaurants, which are mostly small businesses.

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*1 Japan 18.4%, South Korea 89.1%, China 60.0%, UK 54.9%, and US 45.0% (2015)

*2 In a multi-acquiring system, merchant commissions remain relatively high for small and mid-size businesses unlikely to generate large transaction volume, because acquirers cannot sign an exclusive agreement with a merchant. The business is not very profitable for acquirers overall because merchants break down into large businesses (large transaction volume, low commission rate) and small and mid-size businesses (small transaction volume, high commission rate). The government concludes that low profitability does not encourage aggressive investment in cultivating merchants, which is a factor that inhibits growth in the number of merchants.

Although these factors unique to Japan are roadblocks, cashless payments are in fact on the increase. Cashless payments have become a cost reduction method for banks and retailers (i.e., cutting operational costs for the transportation, management, and counting of cash) to improve profitability (raise productivity). It is also a way to deal with labor shortages. An estimated 40% of foreign visitors to Japan are dissatisfied with the lack of cashless payment options in Japan, which is accelerating the uptake of cashless payments in retail stores and other businesses under pressure to attract fast-increasing inbound tourists.

A questionnaire survey by Nomura Research Institute found that credit card usage rates among Japanese consumers have been stable at around 60% since 2010, while the use of loyalty programs and e-money has increase sharply. The use of loyalty points at payment increased from 21% in 2010 to 40% in 2016, while e-money usage rose from 11% to 29% in the same period.

The spread of smartphones has made it easier for consumers to access information about products and services, and buy goods and services online anytime, anywhere. Companies are working on O2O and omni-channel marketing that leverage physical stores. Many online payment services that use smartphone apps and internet such as Apple Pay, Google Pay, and LINE Pay have appeared, increasingly integrated with credit cards, e-money, and mobile phone services. Internet service providers and mobile phone operators are building a cashless economic bloc using customer IDs. Payment services are also diversifying, with services such as ID payments that do not require the user to enter credit card information, but simply log in with user ID and password, and carrier payments that add the payment amount to the monthly subscription.

Growth of convenience store payments (cash payments for online transactions at convenience stores) Online transactions paid for in cash at convenience stores is also on the increase. Users are minors and students unable to have credit cards, consumers who seek to make payments while shopping at convenience stores, older consumers who prefer to pay cash, and those who feel uncomfortable entering their credit card information in e-commerce transactions. Consumers are also increasingly using convenience stores instead of banks and Japan Post to pay utility bills and taxes (there were more than 55,000 convenience stores nationwide as of end-December 2020). As a result, demand is growing for payment services like econtext that offer convenience store payments.

Barriers to entry

Anyone can start an online business with a small initial investment, which keeps barriers to entry low. However, the network effect typical for internet businesses means their values rise rapidly as more users join. This leads to a positive spiral of user growth and business competitiveness, creating a winner takes all effect. Nonetheless the rate at which disruptive business models arrive is high and even winners can be displaced quickly.

Financial Technology (payments) is a business that demands economies of scale, which presents a high hurdle to becoming the de facto standard, but once the barrier is up, it is high enough to deter competition.

Incubation is a business in which building personal networks, experience, and know-how is essential to attract information, people, and funds.

Competition

In marketing including promotion and internet advertising, the company faces competition from many firms. If customers choose marketing-solution providers based on their abilities to use and deploy a variety of online and offline promotional tools skillfully, then the company should see accelerating growth. Judging from its recent profitability the business has yet to find its optimal,

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differentiated and competitive form. Therefore, Shared Research thinks the company’s success will rest on whether it can use the assets it has built up as Japan’s internet business pioneer (e.g., sound relationship with Twitter Inc., the network necessary to develop the big data business).

In the Financial Technology segment DG faces competitors such as GMO Payment Gateway Inc. (TSE1: 3769), Softbank Payment Service (subsidiary of Softbank Corp; TSE1: 9984), Smartlink Network Inc. (unlisted), Wellnet Corp TSE1: 2428), and Paygent Co (subsidiary of DeNA Co; TSE1: 2432). The top-ranked payment service provider, Sagawa Financial Co Ltd, is not considered a direct competitor due to its unique structure. However, the company is not a telecom carrier, an online gaming company, or a search service provider. Also, it does not belong to a large corporate group. So, the company can probably stay neutral and its core businesses may not face harsh competition from large players in the internet arena. Therefore, the company looks in a good position to easily increase its presence as an e-commerce payment infrastructure. The VeriTrans acquisition provided the company with Japan’s largest payment service platform. Leveraging such a scale advantage, the company intends to expand its domestic market share.

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Strategy

Organic intersegment connections characterize the company’s strategy. The Incubation segment invests in innovative businesses overseas and imports these businesses to Japan or develops them in Asia. To develop such businesses either in Japan or overseas, promotion and marketing activities as well as payment and other infrastructures are required. This is where the Marketing and Payment segments come in. After these businesses achieve growth, the Incubation segment will likely receive revenues (probably dividends) from them, sell their shares and secure capital gains. This scenario can be reversed if things go bad.

As for its incubation business DG is aiming to be half a step ahead in developing new opportunities while pursuing internet- related businesses according to the company. This means not being too dependent on a particular internet business but always looking ahead for attractive investment opportunities and existing after the deal bears fruit. DG has no interest in being operationally engaged in the business. The company focuses on becoming an incubator for promising social media businesses. Whether the company will continue on a steady growth path depends on its success at developing companies, as it did with Kakaku.com.

Through its tie-up with Dentsu, DG is using big data services gained from its operational support for Twitter and Kakaku.com. By protecting this type of personal information, DG can use this database in product recommendations and targeted advertising, and develop these activities into growth drivers in its new audience data and marketing segments. Solid marketing technology (data processing and analysis) is needed to use big data in advertising and marketing. DG is accumulating data and building an infrastructure capable of handling data processing and analysis, investing in hardware and developing software that is needed to handle such functions.

Another aim of DG’s business tie-up with Dentsu is to use its global network to find promising marketing technologies particularly originating from Silicon Valley, adapting these findings to Japan and in turn launching businesses in Japan and elsewhere in Asian. The joint venture company aims to develop a global payment platform, where DG is responsible for payment services while Dentsu handles advertising. DG is not just simply importing business opportunities from the US to Japan but is cultivating businesses through its network spanning the US, Japan and Asia. For instance, Open Network Lab Inc. plays a role in global expansion from Japan. Plus, the company established a payment arm in Hong Kong aiming to expand payment services in Asia and discover promising startups through payment service offerings, and in turn make early-stage investments.

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Historical performance

Summary (for reference)

Cumulative Q3 FY03/21 results (out February 10, 2021) Results overview

▷ Cumulative Q3 FY03/21 results (IFRS): DG reported consolidated revenue of JPY28.7bn (+0.1% YoY), pre-tax profit of JPY9.4bn (-9.9% YoY), profit attributable to owners of the parent of JPY6.3bn (-16.4% YoY), and comprehensive income of JPY7.6bn (- 11.8% YoY).

 In Q1 (April‒June 2020), revenue fell 15.5% YoY and pre-tax profit fell 81.7% YoY. However, in Q2 (July‒September 2020), revenue rose 8.3% YoY while pre-tax profit rose 10.3% YoY. Revenue and profit continued to improve in Q3

(October‒December 2020), with revenue increasing by 4.1% YoY and pre-tax profit rising by 8.6% YoY. Revenue and profit recovered from Q2 onward due to strong results in the Financial Technology segment and increased valuation

gains in the Incubation Technology segment. In Q3 (October‒December 2020), payment handling volume rose 32% YoY and the number of transactions grew by 42% YoY in the Financial Technology segment, while fair value in the Incubation

Technology segment rose due to the success of strategic investment in the DX advanced companies in Japan and overseas. ▷ Progress versus forecast: The company did not disclose FY03/21 forecast, as it was hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in unlisted companies in both domestic and overseas markets under investments/incubations. ▷ Consolidated revenue +0.1% YoY: In the Incubation Technology business, the fair value of operational investment securities firmly increased and performance in the Financial Technology business was robust. However, revenue growth was held only to 0.1% as reduced restaurant and amusement-related consumption and business suspensions due to the COVID-19 pandemic negatively impacted the Long-term Incubation business in particular.

 By segment, in the Financial Technology and Incubation Technology segments, revenue was up 12.4% YoY and 46.7% YoY respectively. However, in the Marketing Technology segment, revenue was down 13.7% YoY and in the Long-term Incubation segment it was down 33.9% YoY. ▷ Pre-tax profit down 9.9% YoY: Pre-tax profit fell YoY in all segments except for the Incubation Technology segment. As mentioned previously, profits declined sharply in Q1, but have recovered since Q2.  In the Financial Technology segment, payment handling volume grew by double digits (as described above), but pre-tax profit declined 1.8% YoY due to spending including upfront investment in systems to prepare for medium-term growth.  In the Marketing Technology segment, the ad volume of mainstay digital ads was robust, but pre-tax profit fell 69.8% YoY as promotions in the real estate and retail industries were postponed or cancelled.  In the Incubation Technology segment, pre-tax profit increased 55.7% YoY due to higher fair value as investees financed.  In the Long-term Incubation segment, pre-tax profit fell 56.3% YoY due to the substantial negative impact of the pandemic, especially at equity-method affiliate Kakaku.com’s Tabelog business.

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Trends by segment Financial Technology Revenue: JPY7.3bn (+12.4% YoY) Pre-tax profit: JPY3.2bn (-1.8% YoY)

▷ In the Financial Technology segment, the company provides electronic payment services via convenience stores and credit cards, key for e-commerce B2C transactions. ▷ Payment service providers VeriTrans Inc. and econtext Co., Ltd. provided various payment applications, continuing their strong growth in the e-commerce market. ▷ Card payments for face-to-face and travel-related transactions by overseas tourists declined due to the spread of the COVID-19, but transactions at existing member stores were solid. In cumulative Q3 FY03/21, payment handling volume increased about 24% YoY to JPY2.3tn and the number of transactions rose about 37% YoY to 485mn, leading to revenue growth of 12.4% YoY. ▷ Q3 (October‒December 2020) revenue saw an increase of 15.6% YoY to JPY2.5bn, and pre-tax profit grew 1.0% YoY to JPY1.1bn. The most significant contributing factors are as follows.  Spread type (credit payments and other payments where fees linked to the payment amount become revenue): Revenue for the three months of Q3 rose 13% YoY. The pandemic negatively impacted travel and inbound demand, for which individual transactions are typically larger, but card payments increased due to a steady expansion of e-commerce, and

domestic QR code payments rose (handling volume of domestic QR code payments increased by a factor of four YoY). Payment handling volume under this category grew 22.2% YoY in Q3.  Fee type (payments where fees linked to the number of payments processed—mainly data processing—become revenue):

Revenue rose 24% YoY. This was largely due to an increase in e-commerce purchasing from people staying home and substantial growth in the number of transactions for digital content such as games and videos and in the number of transactions for takeout (fast food)/delivery. The number of transactions in Q3 increased by 52.0% YoY.  Store payment type (payments made at terminals in convenience stores): Revenue increased by approximately 11% YoY. The number of transactions in Q3 rose 18.4% YoY.  E-commerce/DX businesses: Revenues increased by approximately 16% YoY. There was growth in peripheral businesses

such as fraud detection services and e-commerce optimization businesses. ▷ Cumulative Q3 pre-tax profit declined slightly (-1.8% YoY) due to upfront spending including investment in systems to prepare for medium-term growth (capex spending to diversify payment methods and enhance payment system functions).

The company invested in system integration for two key subsidiaries (VeriTrans Inc. and econtext Co., Ltd.) and, as part of its efforts to achieve its medium-term plan, is working to realize even more stable operations through complete system redundancy as a nationally designated critical infrastructure provider operating 24 hours a day and 365 days a year. Specific factors leading to increased costs are as follows:

 Commencement of the development of a next-generation core system (increase in depreciation)

 Response to diversification of methods for mobile ordering and QR code payment (increase in development costs)

 Establishment of new operations center (to realize full redundancy in customer support and other operations)

 Expansion of Tokyo office and Yokohama business center (increase in fixed costs)

Marketing Technology Revenue: JPY9.5bn (-13.7% YoY) Pre-tax profit: JPY458mn (-69.8% YoY)

▷ In the Marketing Technology segment, the company engages in comprehensive digital marketing combining online and offline elements and data marketing business leveraging a range of data.

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▷ In Q3 (October‒December 2020), advertisement volume was JPY8.4bn (flat YoY). Digital ad volume was JPY7.0bn (+8% YoY). Non-digital ad volume was JPY1.4bn (-26% YoY). At Marketing Technology Company (internet advertising), the mainstay digital advertising business performed robustly, with revenue growth of 12% YoY (ad volume was strong mainly for the financial sector including credit cards and the like as well as telecoms). Meanwhile, with the impact of the COVID-19 pandemic, promotions in the real estate and retail businesses were postponed or canceled, causing a drop in non-digital ad volume (revenue from real estate ads declined 29% YoY). ▷ The segment also incurred upfront expenses as the company implemented measures related to optimizing its business structure, such as the consolidation of offices. ▷ As a result, revenue decreased by 13.7% YoY, and pre-tax profit by 69.8% YoY. On a quarterly basis, however, pre-tax profit reached its lowest point of JPY78mn in Q2 (July‒September 2020), and improved to JPY202mn in Q3 (October‒December 2020). Even though investment in new strategic businesses is being prioritized, profit is recovering. The company believes that recovery will accelerate from Q3 to Q4, and that the segment will return to normal levels from FY03/22. Additionally, the company expects that its cost reduction measures will have the effect of reducing annual expenditure by approximately JPY300mn in FY03/22.

Incubation Technology Revenue: JPY7.9bn (+46.7% YoY) Pre-tax profit: JPY6.8bn (+55.7% YoY)

▷ In the Incubation Technology segment, the company nurtures both domestic and overseas startups by investing capital and offering collaboration with company group businesses. ▷ The segment booked JPY7.5bn in revenue related to operational investment securities as fair value increased due to investees financing. ▷ The balance of operational investment securities rose JPY7.2bn or 19.8% versus end-FY03/20 to JPY43.8bn. The fair value rose in the Incubation Technology segment, through careful investment in selected projects (namely strategic investment in DX advanced companies) in Europe, the US, and Asia (including Japan). ▷ On June 30, 2020, one of the company’s investees, Goodpatch Inc. (TSE Mothers: 7351), was listed. The company sold a portion of its shareholdings in connection with the IPO and booked valuation gains in Q2 FY03/21. The investee business Stamen Co., Ltd. (TSE Mothers: 4019) was listed on December 15, 2020, and QD Laser Co., Ltd. (TSE Mothers: 6613) was

listed on February 5, 2021. The company sold its equity in Stamen and recorded a gain on the sale of shares in Q3 FY03/21.

Long-term Incubation Revenue: JPY3.8bn (-33.9% YoY) Pre-tax profit: JPY1.4bn (-56.3% YoY)

▷ In the Long-term Incubation segment, the company is striving to generate stable medium- to long-term profits by expanding its content and lifestyle support businesses through the use of its investment and business development know-how accumulated over many years. ▷ Among them, Brainscan Technologies K.K. is aiming to generate a new business that utilizes AI and healthcare data, such as brain MRIs, based on its brain MRI business for vehicle drivers. ▷ In cumulative Q3, the pandemic had a substantial negative impact, especially on equity-method affiliate Kakaku.com’s Tabelog business, resulting in YoY declines in segment revenue and pre-tax profit. However, Kakaku.com revenue and pre-tax profit are both improving quarterly. More specifically, revenue and pre-tax profit reached their lowest respective levels, of JPY9.5bn (-

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33.2% YoY) and JPY2.2bn (-68.6% YoY), in Q1 (April‒June 2020); in Q3 (October‒December 2020) revenue recovered to JPY16.0bn (+1.9% YoY) and pre-tax profit to JPY6.5bn (-8.9% YoY).

1H FY03/21 results (out November 13, 2020) Results overview

▷ 1H FY03/21 results (IFRS): DG reported consolidated revenue of JPY19.3bn (-1.7% YoY), pre-tax profit of JPY6.0bn (-17.6% YoY), profit attributable to owners of the parent of JPY4.0bn (-24.1% YoY), and comprehensive income of JPY5.4bn (-23.4% YoY).

 In Q1 (April to June 2020), revenue fell 15.5% YoY and pre-tax profit fell 81.7% YoY. However, in Q2 (July to September 2020), revenue rose 8.3% YoY while pre-tax profit rose 10.3% YoY.

 Revenue and profit recovered in Q2 due to strong results in the Financial Technology segment and increased valuation gains in the Incubation Technology segment.

 In Q2, pre-tax profit was JPY5.6bn (+10.3% YoY), a record high for a quarter since the company adopted IFRS.

 The Marketing Technology and Long-term Incubation businesses seem to be emerging from the worst phase of negative impact from the COVID-19 pandemic, although some of this negative impact still remains. Earnings reached a nadir in Q4 FY03/20 (January–March 2020) with pre-tax loss of JPY380mn, and the company has achieved some recovery in pre-tax profit each quarter thereafter (profit of JPY405mn in Q1 FY03/21 and JPY5.6bn in Q2). DG considers its progress to be solid overall.

▷ Progress versus forecast: The company did not disclose a FY03/21 forecast, as it was hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in

unlisted companies in both domestic and overseas markets under investments/incubations. ▷ Consolidated revenue down 1.7% YoY: In the Incubation Technology business, the fair value of operational investment securities firmly increased and performance in the Financial Technology business was robust. However, revenue declined YoY

as reduced restaurant and amusement-related consumption and business suspensions caused by the pandemic negatively impacted the Long-term Incubation business in particular. By segment, in the Financial Technology and Incubation Technology segments, revenue was up 10.8% YoY and 42.6% YoY respectively, but in the Marketing Technology segment revenue was

down 10.4% YoY and in the Long-term Incubation segment it was down 46.4% YoY. ▷ Pre-tax profit down 17.6% YoY: Pre-tax profit fell YoY in all segments except for the Incubation Technology segment. However, it increased JPY5.2bn versus Q1 FY03/21, setting a record high for a quarter since the company adopted IFRS, as previously mentioned.

 In the Financial Technology segment, payment handling volume grew again by double digits, but pre-tax profit declined 3.3% YoY due to spending including investment in systems to prepare for medium-term growth.

 In the Marketing Technology segment, the ad volume of mainstay digital ads was robust, but pre-tax profit fell 74.5% YoY due to postponements or cancelations of promotional campaigns in the real estate and retail businesses.

 In the Incubation Technology segment, pre-tax profit rose 51.9% YoY as the fair values of its investees rose due to changes in their financial resources.

 In the Long-term Incubation segment, pre-tax profit fell 75.1% due to the substantial negative impact of the pandemic, especially at equity-method affiliate Kakaku.com’s Tabelog business.

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Trends by segment Marketing Technology

▷ Revenue: JPY6.6bn (-10.4% YoY) ▷ Pre-tax profit: JPY256mn (-74.5% YoY)

▷ In the Marketing Technology segment, the company engages in comprehensive digital marketing combining online and offline elements and data marketing business leveraging a range of data. ▷ Ad volume was JPY15.6bn (-7% YoY). Transaction volume for other than ads was JPY3.3bn (+17% YoY). At Marketing Technology Company (internet advertising), the mainstay digital ad business performed robustly despite the pandemic, particularly in the financial field (digital ad revenue was flat YoY). In the CRM business, the development of apps and customer relations services using member databases progressed smoothly (CRM business revenue rose 18% YoY, driven by the Cloud Pay service). However, with the impact of the pandemic, promotions in the real estate and retail businesses were postponed or canceled, causing a drop in ad volume (real estate ad business revenue declined 32% YoY). ▷ In addition to upfront spending on strategic businesses, the company booked restructuring expenses in the real estate field. It is now implementing large-scale optimization as it targets a V-shaped recovery beginning in FY03/22. Specifically, it plans to

optimize staffing and structure and consolidate offices at DG Communications, which is mainly engaged in the real estate advertising business. ▷ As a result, both revenue and pre-tax profit fell YoY.

Financial Technology

▷ Revenue: JPY4.7bn (+10.8% YoY) ▷ Pre-tax profit: JPY2.1bn (-3.3% YoY)

 Spread type (credit payments and other payments where fees linked to the payment amount become revenue): Revenue declined YoY. The pandemic negatively impacted travel and inbound demand, for which individual transactions are typically larger (in 1H FY03/21, payment handling volume declined 2.1% YoY). However, payment handling volume related to travel began to recover in Q2. Due to the government’s cashless rebate measures, the handling volume of credit card payments and domestic QR code payments increased (in 1H, the number of transactions rose by 37.6% YoY).

 Fee type (payments where fees linked to the number of payments processed—mainly data processing—become revenue): Revenue rose YoY. This was largely due to an increase in e-commerce purchasing from people staying home and substantial growth in the number of payment transactions for digital content such as games and videos (in 1H, payment handling volume rose 39.5% YoY and the number of transactions rose by 36.1% YoY).

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 Store payment type (payments made at terminals in convenience stores): Revenue was flat. In 1H, payment handling volume declined 4.2% YoY, but the number of transactions rose by 11.8% YoY. Payment handling volume declined on a downturn in travel and ticket purchases.

 Recurring-revenue type and payment-related businesses: Revenue rose YoY. There was growth in e-commerce-oriented SaaS and fraud detection services.

▷ Pre-tax profit declined slightly YoY due to upfront spending including investment in systems to prepare for medium-term growth (capex spending to diversify payment methods and enhance payment system functions). The company invested in system integration for two key subsidiaries (VeriTrans Inc. and econtext Co., Ltd.) and, as part of its efforts to achieve its medium-term plan, is working to realize even more stable operations through complete system redundancy as a nationally designated critical infrastructure provider operating 24 hours a day and 365 days a year. Specific factors leading to increased costs are as follows:

 Commencement of the development of a next-generation core system (increase in depreciation)

 Response to diversification of methods for mobile ordering and QR code payment (increase in development costs)

 Establishment of new operations center (to realize full redundancy in customer support and other operations)

 Expansion of Tokyo office and Yokohama business center (increase in fixed costs)

Incubation Technology

▷ Revenue: JPY5.7bn (+42.6% YoY) ▷ Pre-tax profit: JPY5.0bn (+51.9% YoY)

▷ In the Incubation Technology segment, the company nurtures both domestic and overseas startups by investing capital and offering collaboration with company group businesses. ▷ Although DG recognized drops in fair value at some of its investees on the impact of the COVID-19 pandemic, the segment booked JPY5.3bn in revenue related to operational investment securities as fair value increased due to investees’ financing. In addition, on June 30, 2020, one of the company’s investees, Goodpatch Inc. (TSE Mothers: 7351), was listed. The company sold a portion of its shareholdings in connection with the IPO and booked valuation gains in Q2 FY03/21. Globally, stock

markets and IPO environments have normalized and the financing environment for startups is on a recovery track, with the value of digital transformation (DX) and fintech companies in the US in particular rising substantially. The growth of Asian companies involved in e-commerce also continues. ▷ The balance of operational investment securities rose JPY4.0bn (11.1%) versus end-FY03/20 to JPY40.6bn (breakdown by currency: USD: 69.6%, JPY: 24.8%, INR: 3.7%, GBP: 1.0%, other: 1.0%). The fair value of DX companies rose, primarily in Europe, the US, and Asia. ▷ Looking at investees (DG Ventures, DK Gate, D2 Garage, and econtext Asia portfolios) by region, 35.5% are in North America, 31.3% in Asia, 24.3% in Japan, 0.5% in Europe, and 8.3% in other regions.

 Asian investees include Sendo, tokopedia, and two companies in India (Ralali.com and droom). With regard to its investment in Asia, the company is focusing on e-commerce markets. The Asian investee with the highest valuation is tokopedia (one of Indonesia’s largest online marketplaces), which has received funds from Google. Since soon after it launched its payment business, VeriTrans has been working with tokopedia, and that relationship continues today. Sendo (Vietnamese marketplace targeting C2C and B2C) is growing in Vietnam. DG has lately turned its attention to India, which is growing faster than any other country in Asia and is likely to become China’s next big competitor. It believes India has exciting potential.

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 Among North American investees, MX Technologies (which provides US banks and other financial institutions with personal asset management tools for customer accounts) is labeled as a unicorn (unlisted but valued at more than USD1bn), and DG believes it will be the next big thing in fintech. Playco Global (formerly Game Closure, an HTML5 game platform) is also a unicorn, and DG is a long-time investor, so it is watching developments with interest. Themes of focus in North America are DX and security.

 After Goodpatch, the next company of interest in Japan is WHILL (which provides a platform for short-distance transportation). Investment in WHILL started with its sound lab, but WHILL has now developed into a global startup in the field of electric wheelchairs. Moneytree (which provides a personal asset management service that compiles information on multiple bank accounts, credit cards, and reward point services into a single statement) is another company of interest.

Long-term Incubation

▷ Revenue: JPY2.1n (-46.4% YoY) ▷ Pre-tax profit: JPY605mn (-75.1% YoY)

▷ In the Long-term Incubation segment, the company is striving to generate stable medium- to long-term profits through the use of its investment and business development know-how accumulated over many years.

▷ Among them, Brainscan Technologies K.K. is aiming to generate a new business that utilizes AI and healthcare data, such as brain MRIs, based on its brain MRI business for vehicle drivers. ▷ In 1H, the pandemic had a substantial negative impact, especially on equity-method affiliate Kakaku.com’s Tabelog business, resulting in YoY declines in segment revenue and pre-tax profit.

 Gain on equity-method investments was JPY1.1bn (-32.5% YoY).

 At Kakaku.com, revenue fell 33.2% YoY and pre-tax profit declined 66.0% YoY in Q1 (April–June 2020), in part because services in the Tabelog business were made free in response to the COVID-19 pandemic. In the spirit of providing support to the restaurant industry, Kakaku.com decided not to collect any user fees from member restaurants in April and May 2020, and also did not collect usage volume-based fees in June.

 In Q2 (July–September 2020), Kakaku.com had recovered to the point that its revenue was down just 20.0% YoY and pre- tax profit was down just 34.5% YoY. Starting from July 2020, the Tabelog business resumed invoicing for both fixed fees and usage volume-based fees. The pandemic has not yet ended, but restaurant use is slowly returning to normal, helped by the launch of the government’s Go To Eat program. Reservations through Tabelog approximately tripled from Q1 to Q2. DG expects further recovery in Q3.

Medium-term strategy and topics Marketing Technology

▷ The advertising industry is going through major changes due in part to the pandemic. DG is pursuing a strategy that takes into account issues relating to the use of cookies and personal information, the rapid pace of DX progress (for example, in regard to contracts), and the fact that contact with media is changing in the context of the “new normal” era.

 Cross-media advertising solution: BI.Garage is developing a cross-sectional content media consortium comprising 28 leading media companies, the first of its kind in Japan. This project is a global action being launched simultaneously around the world to counter GAFA (the big four: Google, Amazon, Facebook, and Apple). It is a next-generation advertising platform that has already become a de facto standard in Germany, the country with the strictest privacy

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policy, using the latest technology to realize marketing in context (matching user interests and cluster context) across participating content media. The service is set for full launch in the winter of 2020, using new technologies such as machine learning to build a system that does not rely solely on GAFA.

 Musubell real estate e-contract solution: As part of its effort to facilitate DX in the real estate industry, DG has been promoting real estate advertising, including digital ads, and investing in startups that are involved in residential technology (Resi-Tech) and smart houses. In July 2020, it entered the sphere of real estate legal tech and launched Musubell as a real estate legal tech gateway. Musubell automates (digitalizes) all the extremely complex tasks involved in real estate trade contracts, including matters related to documents, revenue stamps, seals, mailing, and document management. The first action was to digitize Nomura Real Estate Development’s contracts for new real estate, using an application programming interface (API) linking to the Cloud Sign e-contract solution offered by Bengo4.com, Inc. (TSE Mothers: 6027). DG has already informally confirmed further adoption by major real estate companies and developers, and the entire group is working on a project aimed at realizing an open API connection that is properly suited for SaaS solutions adopted by each company as it strives the de facto standard in the real estate industry.

 Next-generation Digital Out of Home (DOOH) business: DG is developing its Sakizaki Teruko™ digital signage media specializing in beauty salons and is promoting the installation of 18,000 digital signage terminals at about 3,000 beauty salons nationwide.

Financial Technology

▷ Aiming for payment handling volume of JPY10tn (five-year CAGR of 30%) by 2025, DG plans to maintain continuous growth based on strategic capex. It will seek to accelerate growth in e-commerce and face-to-face payments by strengthening its response to diversification of payment methods amid deregulation and a shift to cashless and contactless transactions. In

addition, it will put its energy into building an advanced and secure next-generation system that functions 24 hours per day and 365 days per year, as well as an operating framework. ▷ DG is also looking to support face-to-face payments, which it expects to account for some JPY2tn of the targeted payment handling volume of JPY10tn by 2025. The needs of retail stores vary depending on their size, so DG is developing payment methods and Online to Offline (O2O) business solutions suited to the needs of different retail store sizes.

 With regard to large stores, the company’s direct sales of payment systems have led to a steady rise in installations at some of the largest fast food chains, department stores, electronics retailers, and station buildings. In addition, the company provides multi-channel payment services through TD Payment Co., Ltd., a joint venture between VeriTrans and Toshiba Tec Corporation (TSE1: 6588), which has the largest POS share in Japan. Major retailers and drugstore chains are adopting the services, and the number of payments handled is now in the tens of millions.

 For medium-size stores, DG provides multi-channel payment services for mobile POS for Recruit Holdings and other companies. In addition, there has been growth in member store development at ANA Digital Gate, Inc., a joint venture with ANA Group. Multi-channel payment terminals are being deployed in retail stores nationwide. Although airports and other facilities have been affected by the COVID-19 pandemic, there are signs of recovery thanks to the government’s Go To Travel program.

 As for small stores, DG is mainly promoting its own-brand solution, Cloud Pay (for multi-QR code payment), which already supports Docomo’s d Barai®, along with LINE Pay, au Pay, and a range of overseas services. Member stores using this solution already number in the hundreds of thousands, and DG aims to expand this even further.

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Incubation Technology

▷ DG established an investment ecosystem based on a focused strategy (barbell strategy: investment emphasizing startups and seed companies on one end and solidly established companies on the other) tailored to the growth of companies and a global portfolio (Japan, Asia, and the US) that permits the decentralization of geopolitical risk. As of end-September 2020, investments totaled JPY40.6bn. ▷ In November 2020, the company completed formation of DG Lab Fund II (official name: DG Lab Fund II E.L.P. Cayman; totaling about JPY12.5bn; 10-year term), an investment fund targeting global startups possessing next-generation technologies. DG Daiwa Ventures, a joint venture with Daiwa Securities Group Inc. (TSE1: 8601), operates this fund along with DG Lab Fund I (official name: DG Lab Fund I Investment Limited Partnership), which together total about JPY20.0bn.

 Like DG Lab Fund I, DG Lab Fund II will collaborate with open innovation R&D organization DG Lab and its investees. DG Lab promotes research and development in five strategic areas: blockchain, AI, xR, security, and biohealth.

 Several companies are participating in DG Lab Fund II as limited partners, including Eisai Co. Ltd. (TSE1: 4523), Kakaku.com, Inc. (TSE1: 2371), KDDI Corporation (TSE1: 9433), Sompo Japan Insurance Inc., Taisho Pharmaceutical Co. Ltd. (TSE1: 4581), Takenaka Corporation, TSI Holdings Co. Ltd. (TSE1: 3608), Hanwha Asset Management Co., Ltd., and Sumitomo Mitsui Trust Bank, Limited.

Long-term Incubation

▷ Biohealth business: Brainscan Technologies K.K. (wholly owned subsidiary) is developing services using brain-related big data and AI, based on its brain MRI business targeting MRI operators. It has been promoting the brain MRI business centered on

operators since 2015, and cumulative brain MRI examinations surpassed 30,000 in October 2020. The company expects to generate profit during FY03/21. ▷ Crypto Garage: DG obtained the first authorization under Japan’s regulatory sandbox system for a project in the financial field and conducted a proof-of-concept project; completed system connections with leading domestic and international crypto- asset exchanges in preparation for the start of official commercialization; and expects a grand opening in the near future. In addition, a proof-of-concept project in the security token offering (STO) field is set to begin.

DG Lab

▷ Launched in 2016, DG Lab has now progressed to its second stage.

 In the blockchain field, DG Lab continues to build a global crypto-asset payment system and crypto-asset systems for the financial industry.

 In the biohealth field, Brainscan Technologies is promoting the development of a data linking business using brain-related big data and AI, based on its brain MRI business targeting MRI operators.

 In the AI field, DG Lab is creating next-generation businesses based on data held by its partners. From a DX perspective, it envisions a next-generation data distribution platform through the use of deep learning-based clustering technology to promote linkage of data from different industries.

 In addition, DG Daiwa Ventures, which is investing in DG Lab’s five R&D technology fields, operates funding of about JPY20.0bn in total across two funds.

 DG Lab aims to grow into a leading domestic technology lab with both practical R&D and investment functions.

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Q1 FY03/21 results (out August 14, 2020) Results overview

▷ Q1 FY03/21 results (IFRS): DG reported consolidated revenue of JPY6.9bn (-15.5% YoY), pre-tax profit of JPY405mn (-81.7% YoY), profit attributable to owners of the parent of JPY224mn (-86.2% YoY), and comprehensive income of JPY1.5bn (-68.3% YoY).

 Although all segments have been affected by the COVID-19 pandemic, Financial Technology has continued to grow, even surpassing forecast targets. However, a decline in demand in the restaurant industry due to the pandemic affected Long-term Incubation, and lower real estate ad demand impacted Marketing Technology. The negative impact on both segments was fairly substantial. In addition, the strong yen had a negative impact of JPY380mn on profit.

 In the Incubation Technology segment, the negative impact (impairment) on the fair value of securities was initially estimated at 10%, but ended up being only about 1%.

 In addition to lower revenue, growth investment based on the medium-term business plan (FY03/21‒FY03/25: refer to “Medium-term business plan” section) began in earnest, further weighing on profit. Subsidiary Crypto Garage, which is involved with crypto-asset technology, booked loss due to startup costs.

 An initial share price for investee Goodpatch Inc. (TSE Mothers: 7351) could not be established at the time of the IPO (last day of Q1). The price was established on the next business day (first day of Q2), so gain on the sale of shares ended up being booked in Q2.

 From pre-tax loss of JPY380mn in Q4 FY03/20, the company improved to a pre-tax profit of JPY405mn in Q1 FY03/21.

▷ Progress versus forecast: The company did not disclose FY03/21 forecast, as its adoption of IFRS accounting makes it hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in unlisted companies in both domestic and overseas markets under investments/incubations. ▷ Consolidated revenue down 15.5% YoY: Performance in recurring-revenue businesses such as the Financial Technology and Marketing Technology businesses was robust. However, revenue declined YoY as reduced restaurant and amusement-related consumption and business suspensions due to the COVID-19 pandemic negatively impacted the Long-term Incubation business in particular.

 At the Financial Technology segment, revenue was up 12.3% YoY, but at the Marketing Technology segment it was down 1.2% YoY, at the Incubation Technology segment it was down 23.3% YoY, and at the Long-term Incubation segment it was down 64.1% YoY.

▷ Pre-tax profit down 81.7% YoY: Pre-tax profit fell in all segments. However, it actually improved JPY785mn versus Q4 FY03/20 despite the impact of the pandemic as each segment responded optimally to changes in the business environment.

 At the Financial Technology segment, payment handling volume grew again by double digits, but pre-tax profit declined 4.0% YoY due to spending including investment in systems to prepare for medium-term growth. At the Marketing Technology segment, the ad volume of mainstay digital ads was robust, but pre-tax profit fell 45.6% YoY on a drop in real estate ad volume. At the Incubation Technology segment, pre-tax profit declined 51.1% YoY despite robust growth in the fair value of its investees. At the Long-term Incubation segment, pre-tax profit fell 92.0% due to the substantial negative impact of the pandemic, especially at equity-method affiliate Kakaku.com’s Tabelog business.

 As mentioned previously, pre-tax loss of JPY380mn in Q4 FY03/20 improved to a pre-tax profit of JPY405mn in Q1 FY03/21.

▷ Outlook: Although the restaurant, travel, inbound tourism, and real estate industries have been negatively impacted by the COVID-19 pandemic, DG believes its earnings reached a nadir in Q4 FY03/20 and are now steadily recovering.

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Note: Solutions offered by NaviPlus Co., Ltd., have increasing opportunities to be bundled with payment services, so the business was transferred from the Marketing Technology segment to the Financial Technology segment from Q2 FY03/20. Figures displayed in connection with Q1 FY03/20 have been adjusted according to the new segmentation.

Change in categories within Financial Technology

▷ As payment methods diversify, the disclosure categories DG used previously will begin to diverge from actual conditions, so from FY03/21, the company has switched to the following categories in its management approach.

 Spread type: Credit payments and other payments where fees linked to the payment amount become revenue

 Fee type: Payments where fees linked to the number of payments processed (mainly data processing) become revenue

 Store payment type: Payments made at terminals in convenience stores

 Recurring-revenue type: Fixed revenue from monthly payments, including basic fees and payment system OEM fees

 Payment-related business: Group company revenue derived from refund remittance services and other payment-related business

▷ The old categories were card, data processing, convenience store, basic monthly fees/payment OEM, and other.

Trends by segment Financial Technology

▷ Revenue: JPY2.3bn (+12.3% YoY) ▷ Pre-tax profit: JPY1.0bn (-4.0% YoY)

▷ Q1 results exceeded company targets. ▷ In the Financial Technology segment, the company provides electronic payment services via convenience stores and credit cards, key for e-commerce B2C transactions. ▷ Payment service providers VeriTrans Inc. and econtext Co., Ltd. provided various payment applications, continuing their strong growth in the e-commerce market. ▷ Recently, card payments for face-to-face and travel-related transactions by overseas tourists declined due to the spread of the novel coronavirus disease (COVID-19), but transactions at existing member stores were solid on consumption by people

staying home to avoid COVID-19. In addition, transactions rose through the government’s cashless rebate measures. As a result, payment handling volume increased about 19% YoY to JPY689.8bn and transaction volume rose about 36% YoY to JPY144mn).

 Fee type (payments where fees linked to the number of payments processed [mainly data processing] become revenue): In Q1, payment handling volume grew 38.7% YoY and transaction volume rose 32.2% YoY. With greater at-home consumption, there has been an increase in transactions related to digital content, such as games and videos. In addition, handling of national pension premiums has increased. At-home consumption has proven to be a tailwind to the Japanese government promotion of cashless transactions.

 Spread type (credit payments and other payments where fees linked to the payment amount become revenue): In Q1, payment handling volume fell 5.5% YoY, but transaction volume grew 43.0% YoY. With the ongoing move toward cashless settlement, transaction volume increased on growth in credit card payments and domestic QR code payments. However, there have been fewer travel-related payments and QR code payments by inbound tourists, both of which tend to be larger per transaction, resulting in a drop in total payment handling volume. In particular, payment handling

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volume for inbound tourists decreased 95% YoY due to the drastic drop in tourists visiting Japan (-99.9% YoY in April‒ June 2020; source: Japan National Tourism Organization). The number of domestic QR code payments is growing rapidly but the average amount per transaction is smaller than in the case of QR code payments by inbound tourists, so growth in the former has not made up for decline in the latter.

▷ Pre-tax profit declined YoY due to spending including investment in systems to prepare for medium-term growth (spending included infrastructure-related investment in order to achieve the 20% profit CAGR targeted under the medium-term business plan covering the five years from FY03/21 to FY03/25 and the cost of office consolidation). ▷ DG is conducting strategic investment intended to increase the sophistication of the company’s 24-hour/365-day systems and completely streamline operations in anticipation of a payment handling volume of JPY10tn in FY03/25 (about 4× the JPY2.6tn achieved in FY03/20). In addition, the company is making progress on developing payment-related fields (marketing, fraud detection, and data usage).

Marketing Technology

▷ Revenue: JPY3.3bn (-1.2% YoY) ▷ Pre-tax profit: JPY178mn (-45.6% YoY)

▷ Revenue from comprehensive digital marketing (digital ads and solutions, including CRM, development, and consulting) grew 47% YoY. However, revenue from real estate ads declined 45% due to the COVID-19 pandemic. Lower real estate ad revenue, office expansion expenses, and increase fixed costs caused pre-tax profit to fall YoY. ▷ In the Marketing Technology segment, the company engages in comprehensive digital marketing combining online and offline elements and data marketing business leveraging a range of data. ▷ The value of ads handled was JPY7.3bn (-11% YoY). Excluding ads, the transaction value was JPY1.8bn (+75% YoY).

 At Marketing Technology Company (internet advertising), the mainstay digital ad business performed robustly (digital ad volume was flat YoY).

 Credit card-related ad volume grew in light of the government’s cashless rebate measures.

 However, with the impact of the COVID-19 pandemic, promotions in the real estate and retail businesses were postponed or canceled, causing a drop in ad volume (real estate ad volume fell approximately 40% YoY) and lower segment revenue and pre-tax profit.

▷ Even though advertisement volume was down YoY, CRM and solutions for the financial sector remained robust. DG will proceed with measures to optimize costs in the real estate ad business by the end of 2020. It will also develop a new marketing strategy related to the content media consortium business, which it aims to build into an earnings pillar hereafter.

Incubation Technology

▷ Revenue: JPY389mn (-23.3% YoY) ▷ Pre-tax profit: JPY72mn (-51.1% YoY)

▷ In the Incubation Technology segment, the company nurtures both domestic and overseas startups by investing capital and offering collaboration with company group businesses in areas such as marketing and payments. ▷ The investment environment in Q1 was one of global risk-off momentum, which DG believes was not a good environment for increasing share valuation. However, although the company recognized drops in fair value at some of its investees on the

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impact of the COVID-19 pandemic, there was actually a solid increase of about JPY500mn in fair value once the forex impact is excluded. As a result, DG booked revenue of JPY389mn. ▷ The balance of operational investment securities fell JPY243mn versus end-FY03/20 to JPY36.3bn. ▷ A careful examination of projections of investees’ post-pandemic status indicates that, despite initial estimates of impairment risk (10% estimated impairment: JPY3.0‒4.0bn), the actual impact in Q1 was just 1%. The company also anticipates limited impact hereafter. The market is recovering, and investors are moving forward on fund formation and investment. ▷ One of the company’s investees, Goodpatch Inc. (TSE Mothers: 7351), was listed on June 30, 2020, but its initial share price was not determined until the next day, July 1. As a result, although DG sold a portion of its shareholdings in connection with the IPO, gains on sale and on valuation were booked in Q2.

 According to Goodpatch’s prospectus, prior to the IPO, DG Lab Fund No. 1 held 792,920 shares in Goodpatch (10.57% of total issued shares excluding treasury shares; in addition, it held 12,500 shares of class A preferred stock and 5,264 shares of class B preferred stock) and DG Ventures Inc. held 792,840 shares (10.57%; in addition, it held 12,500 shares of class A preferred stock and 5,263 shares of class B preferred stock). As of end-Q1, Goodpatch shares were valued at JPY690 per share (public offering price). In contrast, the initial share price (July 1, 2020) was JPY2,757 per share (the August 27, 2020, closing price was JPY2,426).

 According to a Statement of Large-Volume Holdings submitted on July 15, 2020, by DG Daiwa Ventures Inc. (pure investment from DG Lab Fund No. 1), the fund held 341,420 of its shares as of the report date (4.76% of issued shares). According to a Statement of Large-Volume Holdings submitted on July 13, 2020, by DG Ventures Inc., the fund held 356,840 of its shares as of the report date (4.97% of issued shares).

▷ The company’s strategy for going global with its investment incubation in the age of COVID-19 and thereafter is to concentrate on Asia—Japan, India, and Vietnam in particular—where it expects to see greater vitality as financing shifts away

from China. Business sectors of focus will be healthcare, fintech, and AI.

Long-term Incubation

▷ Revenue: JPY801mn (-64.1% YoY) ▷ Pre-tax profit: JPY120mn (-92.0% YoY)

▷ In Q1, the pandemic had a substantial negative impact, especially on equity-method affiliate Kakaku.com’s Tabelog business, resulting in YoY declines in segment revenue and pre-tax profit.

 Gain on equity-method investments was JPY300mn (-62.6% YoY).

 At Kakaku.com, revenue fell 33.2% YoY and pre-tax profit declined 66.0% YoY, in part because services in the Tabelog business were made free in response to the COVID-19 pandemic. DG’s own gain on equity-method investment in Kakaku.com dropped 67% YoY as the pandemic had a substantial impact on the Tabelog business. In the spirit of providing support to the restaurant industry, Kakaku.com decided not to collect any user fees from member restaurants in April and May 2020, and also did not collect usage volume-based fees in June. However, from July, it again started collecting both fixed fees and usage volume-based fees. Significant uncertainty remains regarding the impact the pandemic may have hereafter, but DG believes we are escaping the worst period. Restaurant use is picking up. Fixed fees have returned to normal, but the company says it will take some time for the usage volume-based fees to return to normal.

 In June 2020, Crypto Garage launched a commercial service for the simultaneous settlement of crypto-assets and yen- denominated funds (details follow).

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▷ In the Long-term Incubation segment, the company is striving to generate stable medium- to long-term profits by expanding its content and lifestyle support businesses through the use of its investment and business development know-how accumulated over many years. ▷ Crypto Garage is promoting the development of applications using blockchain technology, aiming for the practical application of advanced financial services. In 2019, it obtained the first authorization under Japan’s regulatory sandbox system for a project in the financial field and conducted a proof-of-concept project regarding a service for issuing yen-denominated tokens and simultaneous settlement of crypto-assets using SETTLENET. It connected with multiple trading partners inside and outside Japan and in June 2020, launched a commercial service for the simultaneous settlement of crypto-assets and yen-denominated funds. This next-generation financial business launched in Japan for the global market is up and running in earnest.

Outlook

Although the restaurant, travel, inbound tourism, and real estate industries have been negatively impacted by the COVID-19 pandemic, DG believes its earnings reached a nadir in Q4 FY03/20 and are now steadily recovering. Initiatives in the various segments are as follows. ▷ Financial Technology: DG aims to steadily expand its mainstay e-commerce payments, and plans to provide cashless solutions through a range of alliances in the strategic focus area of face-to-face payment. ▷ Marketing Technology: The company plans to promote optimization of the sluggish real estate ad business, grow the digital ad business, and take a technology-driven approach to developing new media and advertising value for the post-cookie era. It also plans to provide uniform management services, including contract digitization, to real estate developers and to launch a

mega-consortium business in earnest. ▷ Incubation Technology: By increasing the value of its existing portfolio (the balance of operational investment securities at end- Q1 was JPY36.3bn) and combining it with the DG Lab Fund, which has strategic R&D functionality, the company plans to

achieve incubation results that support the growth of the businesses in which it invests.

Full-year FY03/20 results (out May 13, 2020) Results overview

▷ FY03/20 results (IFRS): DG reported consolidated revenue of JPY36.9bn (+3.5% YoY), pre-tax profit of JPY10.0bn (-25.4% YoY), profit attributable to owners of the parent of JPY7.4bn (-24.1% YoY), and comprehensive income of JPY6.3bn (-33.3% YoY). ▷ Progress versus forecast: The company did not disclose FY03/20 forecast, as its adoption of IFRS accounting makes it hard to arrive at a reasonable fair value estimate for the fiscal year-end for securities held in connection with its Incubation Technology business, which has holdings in unlisted companies in both domestic and overseas markets under investments/incubations. The company had quantitative targets in its medium-term plan (FY03/18–FY03/20). The CAGR of pre-tax profit in the recurring-revenue businesses (Financial Technology and Marketing Technology) was 16.2%, achieving the target of over 15%. Return on investment (ROI) was 2.2x, largely in line with the 2.5x hurdle rate. ▷ Consolidated revenue up 3.5% YoY: Revenue from recurring-revenue businesses such as the Financial Technology and Marketing Technology businesses were up 17.5% YoY to JPY26.7bn. This was offset by a 34.0% drop in gains from operational investment securities (to JPY4.0bn), resulting in a single-digit YoY increase in consolidated revenue. Gains from operational

investment securities was negatively affected by a YoY decline in (fair value) valuation gains on revaluation at the time of sale and the appreciation of the yen.

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 At the Financial Technology segment, revenue was up 15.6% YoY, at the Marketing Technology segment up 19.0% YoY, and at the Long-term Incubation segment up 11.2% YoY. On the minus side, revenue at the Incubation Technology segment was down 39.3% YoY due in part to lower (fair value) valuation gains on revaluation at the time of sale and forex impact due to the appreciation of the yen. ▷ Pre-tax profit down 25.4% YoY: Pre-tax profit fell in the Incubation Technology segment. The other three segments posted profit growth.  At the Financial Technology segment, pre-tax profit was up 20.9% YoY and at the Marketing Technology segment up 52.5% YoY. On the minus side, pre-tax profit at the Incubation Technology segment was down 48.3% YoY, due to lower (fair value) valuation gains on revaluation at the time of sale, and a decline in fair value estimates resulting from the appreciation of the yen. Pre-tax profit in the Long-term Incubation segment was up 7.4% YoY. Equity-method investment profit was JPY3.7bn (+9.3% YoY), with a contribution from equity-method affiliate Kakaku.com.  Note: Solutions offered by NaviPlus Co., Ltd. have increasing opportunities to be bundled with payment services, so the business was transferred from the Marketing Technology segment to the Financial Technology segment from FY03/20. DG retrospectively adjusted FY03/19 revenue and pre-tax profit for the business. The company judged that evaluating the business’ performance and allocating resources as part of the payments business would improve corporate value.

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Trends by segment

Earnings by segment FY03/18 FY03/19 FY03/20 (JPYmn) IFRS IFRS IFRS Total revenue (external) 25,503 35,687 36,936 YoY - 39.9% 3.5% Financial Technology 5,929 7,447 8,609 YoY - 25.6% 15.6% % of total revenue 24.0% 21.0% 23.4% Marketing Technology 9,939 12,922 15,375 YoY - 30.0% 19.0% % of total revenue 40.2% 36.4% 41.8% Incubation Technology 2,553 8,022 4,868 YoY - 214.2% -39.3% % of total revenue 10.3% 22.6% 13.2% Long-term Incubation 6,301 7,133 7,929 YoY - 13.2% 11.2% % of total revenue 25.5% 20.1% 21.6% Adjustments 781 164 155 Pre-tax profit 8,376 13,424 10,008 YoY - 60.3% -25.4% Pre-tax profit margin 32.8% 37.6% 27.1% Financial Technology 2,809 3,349 4,049 YoY - 19.2% 20.9% % of pre-tax profit 29.2% 21.2% 28.6% Profit margin 47.4% 45.0% 47.0% Marketing Technology 1,856 1,215 1,853 YoY - -34.5% 52.5% % of pre-tax profit 19.3% 7.7% 13.1% Profit margin 18.7% 9.4% 12.1% Incubation Technology 1,321 6,889 3,563 YoY - 421.5% -48.3% % of pre-tax profit 13.8% 43.5% 25.2% Profit margin 51.7% 85.9% 73.2% Long-term Incubation 3,621 4,378 4,701 YoY - 20.9% 7.4% % of pre-tax profit 37.7% 27.7% 33.2% Profit margin 57.5% 61.4% 59.3% Adjustments -1,231 -2,408 -4,158 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Segment pre-tax profit is before elimination of intra-segment transactions, and company-wide revenue and expenses. FY03/19 segment results retrospectively adjusted to reflect transfer of NaviPlus from the Marketing Technology to Financial Technology segment.

Marketing Technology

▷ Revenue: JPY15.4bn (+19.0% YoY) ▷ Pre-tax profit: JPY1.9bn (+52.5% YoY)

In the Marketing Technology segment, the company provides web marketing solutions such as integrated web-based promotions combining online and offline elements and online advertising, and also provides data management services that leverage big data.

The value of ads handled declined 5% YoY to JPY34.9bn. Excluding ads, the transaction value was JPY7.1bn (+77% YoY). At Marketing Technology Company (internet advertising), its app development and mall businesses continued to deliver solid results following investment in the development of payment apps in FY03/19 in conjunction with the Financial Technology segment. The company handled more credit card ads due to the government’s cashless rebate measures. Growth of the proprietary influencer marketing business of equity-method affiliate CyberBuzz (shares listed on TSE Mothers market in September 2019) also contributed. As a result, revenue was up 19.0% YoY and pre-tax profit was up 52.5%, benefited from a focus on more profitable projects.

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Financial Technology

▷ Revenue: JPY8.6bn (+15.6% YoY) ▷ Pre-tax profit: JPY4.0bn (+20.9% YoY)

In the Financial Technology segment, the company provides electronic payment services via convenience stores and credit cards, key for e-commerce B2C transactions.

Payment service providers VeriTrans Inc. and econtext Co., Ltd. provided various payment applications, continuing their strong growth in the e-commerce market. Recently, card payments for face-to-face transactions by overseas tourists declined due to the spread of the novel coronavirus disease, but transactions at existing member stores were solid. In addition, transactions rose through the government’s cashless rebate measures. As a result, payment handling volume increased 24.0% YoY (to JPY2.6tn), transaction volume rose 23.9% YoY (to 487mn), and pre-tax profit grew 20.9% YoY to a record high.

In Q4 FY03/20 (January‒March 2020), revenue was JPY2.1bn (+5.1% YoY) and pre-tax profit was JPY746mn (+7.6% YoY), representing smaller growth than in Q1‒Q3, when in each quarter revenue rose 18–22% YoY and pre-tax profit rose 19–30% YoY. However, the slower pace of growth in Q4 was due to changes in valuation gains/losses on equity-method investments. Revenue from recurring-revenue businesses rose 19% YoY, so revenue growth in the segment’s core businesses is not decelerating.

Incubation Technology

▷ Revenue: JPY4.9bn (-39.3% YoY) ▷ Pre-tax profit: JPY3.6bn (-48.3% YoY)

In the Incubation Technology segment, the company nurtures both domestic and overseas startups by investing capital and offering collaboration with company group businesses in areas such as marketing and payments.

Valuation gains on the sale of operational investment securities declined YoY. Furthermore, swings in currency translation rates resulting from the appreciation of yen affected the (fair value) valuation of overseas investments (JPY1.2bn negative factor). On the other hand, fair value estimates rose, primarily in investments in the Asia region (excluding the impact of swings in forex rates), up approximately JPY4.5bn compared to end-FY03/19. The balance of operational investment securities rose JPY9.9bn versus end-FY03/19 to JPY36.6bn due to the progress of new domestic and overseas investments.

Long-term Incubation

▷ Revenue: JPY7.9bn (+11.2% YoY) ▷ Pre-tax profit: JPY4.7bn (+7.4% YoY)

In the Long-term Incubation segment, the company is striving to generate stable medium- to long-term profits by expanding its content and lifestyle support businesses through the use of its investment and business development know-how accumulated over many years.

Having previously established Crypto Garage as a joint venture with Tokyo Tanshi Co., Ltd., the company pushed ahead with development of blockchain technology-based applications in the fintech field with the aim of commercializing blockchain financial services.

Despite investment expenses for businesses in which the company is investing and cultivating, equity-method affiliate Kakaku.com continued to perform well, contributing to results.

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Results versus medium-term plan (FY03/18‒FY03/20) Growth targets (pre-tax profit CAGR)

▷ Financial Technology: +27.0% YoY in FY03/18, +19.2% YoY in FY03/19, +20.9% YoY in FY03/20, CAGR of 20.3% versus target of at least 15% ▷ Marketing Technology: +37.3% YoY in FY03/18, -34.5% YoY in FY03/19, +52.5% YoY in FY03/20, CAGR of 9.3% versus target of at least 15% ▷ Reference: Aggregate figures for above recurring-revenue businesses: +31.1% YoY in FY03/18, -2.2% YoY in FY03/19, +29.3% YoY in FY03/20, CAGR of 16.2%

Investment hurdle rate (ROI)

▷ ROI of 2.2x in Incubation Technology and Long-term Incubation, versus target of 2.5x

Return on capital

▷ ROE of 15.3% in FY03/18, 21.9% in FY03/19, 15.0% in FY03/20, versus target of at least 20%

Shareholder returns

▷ Dividend payout ratio of 20.7% in FY03/18, 13.3% in FY03/19, 23.5% in FY03/20, versus target of at least 20%

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Income statement

FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY03/17 * FY03/17 FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. (9mo) (12mo eqv.) Co ns. IFRS IFRS IFRS IFRS Revenue 25,50335,68736,93640,478 YoY -39.9%3.5%9.6% Expenses 17,12722,26426,92926,161 YoY -30.0%21.0%-2.9% Expense ratio 67.2%62.4%72.9%64.6% Pre-tax profit 8,37613,42410,00814,317 YoY -60.3%-25.4%43.1% Pre-tax profit margin 32.8%37.6%27.1%35.4% Profit attrib. to owners of the parent 6,4129,7717,4209,786 YoY -52.4%-24.1%31.9% Profit margin 25.1%27.4%20.1%24.2% Sales 11,06714,90427,96533,75238,08743,76336,45148,48060,168 YoY 32.6%34.7%87.6%20.7%12.8%14.9%--24.1% Gross profit 2,7854,2596,4328,21712,24011,4906,613na11,644 YoY 62.2%52.9%51.0%27.8%49.0%-6.1%--- Gross profit margin 25.2% 28.6% 23.0% 24.3% 32.1% 26.3% 18.1% na 19.4% Operating profit 1351,6221,3222,6084,8104,2027239622,310 YoY - 1097.0% -18.5% 97.2% 84.4% -12.6% - - 140.1% Operating profit margin 1.2% 10.9% 4.7% 7.7% 12.6% 9.6% 2.0% 2.0% 3.8% Recurring profit 9732,7093,0794,4427,6106,1933,6784,0015,017 YoY - 178.5% 13.6% 44.3% 71.3% -18.6% - - 25.4% Recurring profit margin 8.8% 18.2% 11.0% 13.2% 20.0% 14.2% 10.1% 8.3% 8.3% Pre-tax profit 9592,5354,2155,0359,2497,5755,8196,7057,619 YoY - 164.4% 66.2% 19.5% 83.7% -18.1% - - 13.6% Net income attrib. to owners of the parent 9012,1062,7162,8475,0815,1654,2894,6995,460 YoY - 133.8% 28.9% 4.8% 78.5% 1.7% - - 16.2% Net margin 8.1%14.1%9.7%8.4%13.3%11.8%11.8%9.7%9.1% Per-share data (JPY) Shares issued (year-end; '000) 186 219 236 47,231 47,277 47,289 47,292 - 47,313 47,313 47,342 47,407 47,442 EPS 4,879.2 9,759.0 12,041.9 60.7 108.1 109.8 91.1 - 136.0 136.0 210.3 161.4 212.5 EPS (fully diluted) 4,873.1 9,753.8 12,027.8 60.5 107.9 109.5 90.7 - 135.0 135.0 199.3 147.8 193.8 Dividend per share 0.0 1,000.0 1,000.0 5.0 25.0 30.0 20.0 - 24.0 24.0 28.0 38.0 32.0 Book value per share 53,120.2 93,072.2 109,707.2 648.1 609.2 640.3 713.1 - 905.2 905.2 1,014.3 1,130.8 1,348.5 Balance sheet (JPYmn) Cash and cash equivalents 39,45048,15432,70237,989 Trade and other receivables 21,33023,25426,65726,574 Operational investment securities 16,74526,69536,54647,170 Other 1,2511,0832,9471,815 Total current assets 78,77699,18698,852113,548 T angible fixed asset s 8,495 9,421 21,367 19,478 Goodwill 7,959 6,575 7,689 7,689 Int angible asset s 2,104 2,575 3,496 4,000 Investment real estate 2,966 3,046 2,932 2,924 Investments accounted for using equity method 13,915 19,139 21,475 22,446 Other financial assets 5,010 6,662 6,319 7,878 Other 320 286 166 338 Total noncurrent assets 40,76947,70463,44464,753 Total assets 119,545146,890162,296178,301 Borrowings 4,623 2,211 4,927 9,768 Trade and other payables 39,407 45,799 41,203 39,911 Ot her financial liabilit ies 760 853 1,783 1,712 Other 3,254 3,557 2,925 5,474 Total current liabilities 48,04452,42050,83856,865 Corporate bonds and borrowings 19,243 35,959 38,247 35,850 Ot her financial liabilit ies 5,244 5,430 13,553 12,168 Other 3,815 5,736 6,863 10,337 Total noncurrent liabilit ies 28,30247,12558,66358,355 Total equity 43,19947,34552,79563,082 Cash and deposits 4,785 12,308 15,329 24,295 30,956 15,704 23,029 - 32,922 Marketable securities 912 1,904 2,641 8,064 8,208 11,164 11,856 - 12,364 Accrued revenue 4,351 7,578 9,037 8,597 11,646 13,946 15,422 - 16,889 Total current assets 14,345 28,005 33,837 45,455 57,743 48,324 59,624 - 75,496 Tangible fixed assets 3779132,0392,1592,2512,2792,245-2,338 Investments and other assets 3,596 7,341 9,041 14,808 18,927 19,277 22,592-21,087 Intangible assets 2,103 13,080 11,094 8,588 7,574 7,456 7,224 - 9,869 Total assets 20,421 49,339 56,011 71,010 86,495 77,336 91,685 - 108,790 Accounts payable 5411,1411,2321,6302,0392,7293,713-5,018 Short-term debt 2,51910,7403053,69123,5343,2006,937-4,137 Deposits 6,16914,95618,23016,43420,99921,87625,127-36,499 Total current liabilities 9,933 28,506 21,802 25,461 50,624 30,187 38,815-49,540 Long-term debt 3511836,8008,8415,54715,37117,207-18,890 Total fixed liabilit ies 592 356 6,950 9,059 6,806 16,484 18,499 - 20,233 Total liabilit ies 10,526 28,862 28,752 34,520 57,430 46,671 57,315 - 69,774 Total net assets 9,896 20,477 27,259 36,490 29,065 30,664 34,371 - 39,017 Total interest-bearing debt 2,870 10,923 7,105 12,532 29,080 18,571 24,144 - 23,027 23,866 38,170 43,174 45,618 Cash flow statement (JPYmn) Cash flows from operating activities 132 2,542 3,212 -35 5,040 -2,619 4,149 - na 12,316 2,580 -12,322 7,047 Cash flows from investing activities -165 -9,411 1,515 -5,155 509 -1,072 -1,453 - na 2,883 -2,397 -5,473 -864 Cash flows from financing activities -568 15,273 -1,817 11,261 1,390 -11,638 4,176 - na 174 8,509 2,363 -914 Financial rat io s ROA (RP-based) 4.8% 7.8% 5.8% 7.0% 9.7% 8.8% 7.6% - 4.4% 7.7% 10.1% 6.5% 8.4% ROE 9.7% 14.0% 11.8% 10.1% 17.2% 17.6% 13.5% - 15.3% 16.1% 21.9% 15.0% 17.1% Equity ratio 48.1% 41.1% 45.9% 42.9% 33.1% 38.9% 36.6% - 34.7% 35.7% 31.7% 32.1% 34.8% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. FY03/17: 9-month irregular accounting due to change in financial year in FY03/17

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Profitability snapshot and financial ratios

Profitability and profit margins FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY03/17 (*) FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. IFRS IFRS IFRS IFRS Gross profit 2,785 4,259 6,432 8,217 12,24011,4906,61311,644---- GPM 25.2% 28.6% 23.0% 24.3% 32.1%26.3%18.1%19.4%---- Operating profit 135 1,622 1,322 2,608 4,8104,2027232,310---- OPM 1.2% 10.9% 4.7% 7.7% 12.6%9.6%2.0%3.8%---- EBITDA 506 2,017 2,880 3,995 6,9335,4341,7334,006---- EBITDA margin 4.6% 13.5% 10.3% 11.8% 18.2%12.4%4.8%6.7%---- Net margin 8.1% 14.1% 9.7% 8.4% 13.3% 11.8% 11.8% 9.1% 22.7% 25.3% 19.8% 23.5% Financial ratios ROA (RP-based) 4.8% 7.8% 5.8% 7.0% 9.7% 8.8% 7.6% 4.4% 5.0% 7.3% 4.7% 5.6% ROE 9.7% 14.0% 11.8% 10.1% 17.2% 17.6% 13.5% 15.3% 16.1% 21.9% 15.0% 17.1% Total asset turnover 0.55 0.43 0.53 0.53 0.48 0.44 0.53 0.43 0.23 0.27 0.24 0.24 Working capital 996 1,375 1,474 2,050 1,875 2,782 3,550 3,221 -17,794 -22,313 -14,227 -13,073 Current ratio 144.4% 98.2% 155.2% 178.5% 114.1% 160.1% 153.6% 152.4% 164.0% 189.2% 194.4% 199.7% Quick ratio 141.1% 97.1% 153.5% 178.7% 114.1% 161.7% 153.6% 151.8% 162.4% 188.0% 191.9% 198.1% OCF / Current liabilities 0.01 0.13 0.13 0.00 0.13 -0.05 0.10 0.36 0.26 0.05 -0.24 0.12 Net debt / Equity -19.3% -6.8% -30.2% -32.2% -6.5% -6.5% 9.4% 3.2% -36.1% -21.1% 19.8% 12.1% OCF / T ot al liabilit ies 0.0 0.1 0.1 0.0 0.1 0.0 0.1 0.2 0.2 0.0 -0.1 0.1 Cash conversion cycle (days) 53.4 37.3 20.5 17.0 19.6 15.7 40.0 21.1 -175.1 -198.7 -174.9 -115.8 Change in working capital -301 379 100 576 -175 898 1,675 439 -10,392 -4,519 8,086 1,154 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. FY03/17: 9-month irregular accounting due to change in financial year in FY03/17

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Balance sheet

Balance sheet FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/15 FY06/16 FY03/17 * FY03/18 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Old. Seg. Cons. Cons. Con. (9mo) Cons.IFRSIFRSIFRSIFRSIFRS ASSETS Cash and cash equivalents ------27,035 39,450 48,154 32,702 37,989 Trade and other receivables ------18,634 21,330 23,254 26,657 26,574 Inventories ------2 283 232 319 264 Operational investment securities ------15,902 16,745 26,695 36,546 47,170 Other financial assets ------14 442 451 1,323 912 Income taxes receivable ------144 44 6 324 21 Other current assets ------386 482 394 980 618 Current assets ------62,117 78,776 99,186 98,852 113,548 Tangible fixed assets ------8,076 8,495 9,421 21,367 19,478 Goodwill ------5,434 7,959 6,575 7,689 7,689 Intangible assets ------1,812 2,104 2,575 3,496 4,000 Real estate for investment ------3,141 2,966 3,046 2,932 2,924 Assets accounted for by equity method ------13,637 13,915 19,139 21,475 22,446 Other financial assets ------5,006 5,010 6,662 6,319 7,878 Deferred tax assets ------80 195 137 45 60 Total other noncurrent assets ------99 124 148 120 278 Total noncurrent assets ------37,286 40,769 47,704 63,443 64,753 Total assets ------99,403 119,545 146,890 162,295 178,301 LIABILITIES Borrowings ------6,937 4,623 2,211 4,927 9,768 Trade and other payables ------26,038 39,407 45,799 41,203 39,911 Other financial liabilities ------555 760 853 1,783 1,712 Income taxes payable ------435 1,010 1,076 207 1,328 Other current liabilities ------1,520 2,244 2,482 2,717 4,146 Total current liabilities ------35,486 48,044 52,421 50,838 56,865 Bonds and borrowings ------17,207 19,243 35,959 38,247 35,850 Other financial liabilities ------5,089 5,244 5,430 13,553 12,168 Net defined benefit liability ------544 565 571 452 Provisions ------149 326 321 589 485 Deferred tax liabilities ------2,723 2,754 4,744 5,426 8,515 Other noncurrent liabilities ------216 191 106 278 885 Total noncurrent assets ------25,384 28,302 47,125 58,663 58,355 Total liabilities ------60,870 76,346 99,545 109,501 115,220 Equity Capital stock ------7,437 7,465 7,504 7,591 7,637 Capital surplus ------3,524 3,748 4,235 4,409 4,566 Shareholders' equity ------51 -26 -5,026 -5,012 -4,915 Other components of equity ------1,789 1,575 1,303 324 2,062 Retained earnings ------24,251 29,955 38,593 44,721 52,785 Total equity attributable to owners of the parent ------36,951 42,717 46,609 52,033 62,135 Non-controlling interests ------1,583 483 736 762 947 Total equity ------38,534 43,199 47,345 52,795 63,082 Total liabilities and equity ------99,403 119,545 146,890 162,296 178,302 ASSETS Cash and deposits 4,785 12,308 15,329 24,295 30,956 30,956 15,704 23,029 32,922 - - - - - Money held in trust 2,501 3,405 3,768 889 3,120 3,120 2,593 2,264 5,307 - ---- Operational investment securities 912 1,904 2,641 8,064 8,208 8,208 11,164 11,856 12,364 - - - - - Accounts receivable 1,466 2,480 2,689 3,659 3,824 3,824 5,412 7,056 7,741----- Inventories 70361821999099207498- - - - - Accrued revenue 4,351 7,578 9,037 8,597 11,646 11,646 13,946 15,422 16,889----- Other 259 294 355 -69 -102 -102 -594 -210 -225 - - - - - Total current assets 14,345 28,005 33,837 45,455 57,752 57,743 48,324 59,624 75,496 - - - - - Total tangible fixed assets 377 913 2,039 2,159 2,251 2,251 2,279 2,245 2,338 - - - - - Investment securities 3,306 4,300 5,521 10,644 14,220 14,220 14,844 18,357 16,552 - - - - - Real estate for investment 2,677 3,103 3,619 4,201 4,201 3,894 3,830 3,617----- Investments and other assets 3,596 7,341 9,041 14,808 18,927 18,927 19,277 22,592 21,087 - - - - - Goodwill 1,769 12,105 9,968 7,355 6,237 6,237 5,766 5,411 7,822 - - - - - Total intangible assets 2,103 13,080 11,094 8,588 7,574 7,574 7,456 7,224 9,869 - - - - - Total fixed assets 6,076 21,333 22,173 25,554 28,752 28,752 29,012 32,061 33,295 - - - - - Total assets 20,421 49,339 56,011 71,010 86,504 86,495 77,336 91,686 108,791----- LIA BILITIES Accounts payable 541 1,141 1,232 1,630 2,039 2,039 2,729 3,713 5,018 - - - - - Short-term debt 2,519 10,740 305 3,691 23,534 23,534 3,200 6,937 4,137 - - --- Deposits 6,169 14,956 18,230 16,434 20,999 20,999 21,876 25,127 36,499 - - --- Other current liabilities 705 1,669 2,035 3,706 4,052 4,052 2,381 3,038 3,886 - - - - - Total current liabilities 9,933 28,506 21,802 25,461 50,624 50,624 30,187 38,815 49,540 - - - - - Long-term debt 351 183 6,800 8,841 5,547 5,547 15,371 17,207 18,890 - - - - - Other fixed liabilities 241 173 150 218 1,259 1,259 1,114 1,292 1,343 - - - -- Total fixed liabilities 592 356 6,950 9,059 6,806 6,806 16,484 18,499 20,233----- Total liabilities 10,526 28,862 28,752 34,520 57,430 57,430 46,671 57,315 69,774 - - - - - NET A SSETS Capital stock 1,872 6,017 7,330 7,399 7,426 7,426 7,435 7,437 7,464 - - - - - Capital surplus 5,558 9,703 11,016 10,817 2,854 2,854 2,825 2,946 3,104 - ---- Retained earnings 2,399 4,505 7,003 9,616 14,439 14,430 18,420 21,300 25,819----- Total net assets 9,896 20,477 27,259 36,490 29,075 29,065 30,664 34,371 39,017 - - - - - Working capital 996 1,375 1,474 2,050 1,884 1,875 2,782 3,550 3,221 -7,402 -17,794 -22,313 -14,227 -13,073 Total interest-bearing debt 2,870 10,923 7,105 12,532 29,080 29,080 18,571 24,144 23,027 24,144 23,866 38,170 43,174 45,618 Net debt -1,914 -1,385 -8,224 -11,763 -1,876 -1,876 2,868 1,115 -9,895 -2,891 -15,584 -9,984 10,472 7,629 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. FY03/17: 9-month irregular accounting due to change in financial year in FY03/17 The IFRS balance sheet figures shown for FY03/17 are actually the figures from the first day of FY03/18 (i.e., April 1, 2018)

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Assets

▷ DG’s asset base has changed over time, mostly due to the addition and removal of consolidated subsidiaries. Total assets at end-FY03/21 came to JPY178.3bn. Compared with J-GAAP, under IFRS accounting goodwill is not amortized and operational investment securities are valued at estimated fair value. ▷ For the four years through FY03/21, total assets increased every year, with the total increase for the four-year period being JPY58.8bn. In FY03/18, there were increases in cash and cash equivalents, trade receivables, and goodwill. In FY03/19, cash and cash equivalents, trade receivable, and operational investment securities increased. In FY03/21, the balances of cash and cash equivalents, operational investment securities, and trade receivables increased.

Liabilities

▷ Total liabilities at end-FY03/21 stood at JPY115.2bn. ▷ For the four years through FY03/21, total liabilities trended upward. In FY03/18, total liabilities grew due to an increase in deposits (funds received from the point of settlement, but not paid to the e-commerce business) related to growth of the Financial Technology business. In FY03/19, trade payables continued to grow, as did interest-bearing debt and deferred tax liabilities. In FY03/20, trade payables decreased, but interest-bearing debt increased. In FY03/21, trade payables decreased, but

interest-bearing debt and deferred tax liabilities grew.

Equity

▷ Total equity at end-FY03/21 was JPY63.1bn, The company had treasury shares worth JPY4.9bn at end-FY03/21. ▷ Total equity increased over the four years through FY03/21 a cumulative JPY19.9bn, mainly on an increase in retained earnings.

Other Balance sheet includes:

◤ Investments in the Incubation segment are reflected in operational investment securities (current assets).

◤ The company has bought overseas real estate (JPY2.7bn) in San Francisco to establish an Incubation Center.

◤ DG (parent company) investments are reflected in the investment securities section (fixed assets).

◤ The company provides payment services. Funds that are booked but not yet received from the points of payment (credit card and convenience store companies) are recorded as accrued revenue in the current asset portion of the balance sheet. Money received but not yet paid to e-commerce vendors is classified as deposits payable under current liabilities.

Per share data Per-share data FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY03/17 * FY03/18 FY03/18 FY03/19 FY03/20 FY03/21 (JPY) Cons. Cons. Cons. Cons. Cons. Cons. Cons. (9mo) Cons. IFRS Cons. IFRS Cons. IFRS Cons. IFRS Cons. Shares issued (year-end; '000) 186.2 219.1 235.6 47,230.8 47,277.2 47,289.2 47,291.8 47,312.8 47,312.8 47,341.6 47,406.8 47,441.9 EPS 4,879.2 9,759.0 12,041.9 60.7 108.1 109.8 91.1 115.8 136.0 210.3 161.4 212.5 EPS (fully diluted) 4,873.1 9,753.8 12,027.8 60.5 107.9 109.5 90.7 115.0 135.0 199.3 147.8 193.8 Dividend per share 0.0 1,000.0 1,000.0 5.0 25.0 30.0 20.0 24.0 24.0 28.0 38.0 32.0 Book value per share 53,120.2 93,072.2 109,707.2 648.1 609.2 640.3 713.1 801.1 905.2 1,014.3 1,130.8 1,348.5 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods FY03/17: 9-month irregular accounting due to change in financial year in FY03/17

▷ The company conducted a 2-for-1 stock split in January 2007. The increase in the number of shares in FY06/09 came from the absorption of econtext. In FY06/12 and FY06/13, the number of outstanding shares increased after new share issuances, some through third-party allotments. The company also performed a 200-for-1 stock split on October 1, 2013.

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Cash flow statement

Cash flow statement FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY03/17 * FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. (9mo) IFRS IFRS IFRS IFRS Cash flows from operating activities (1) 132 2,542 3,212 -35 5,040 -2,619 4,149 12,316 2,580 -12,322 7,047 Cash flows from investing activities (2) -165 -9,411 1,515 -5,155 509 -1,072 -1,453 2,883 -2,397 -5,473 -864 Free cash flow (1+2) -33 -6,869 4,726 -5,190 5,549 -3,690 2,696 15,199 183 -17,795 6,183 Cash flows from financing activities -568 15,273 -1,817 11,261 1,390 -11,638 4,176 174 8,509 2,363 -914 Depreciation and amortization (A) 370 396 1,557 1,387 2,123 1,233 1,010 1,696 1,952 2,369 3,637 Capital expenditures (B) -32 -829 -1,936 -816 -746 -1,038 -854 -1,142 -2,478 -5,243 -3,207 Working capital change (C) -301 379 100 576 -175 908 768 -10,392 -4,519 8,086 1,154 Simple FCF (NI + A + B - C) 1,540 1,295 2,238 2,843 6,634 4,452 3,678 17,358 13,764 -3,540 9,062 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods FY03/17: 9-month irregular accounting due to change in financial year in FY03/17

Cash flows from operating activities

▷ Changes in pre-tax profit and working capital are the primary influences on net cash flow from operating activities. ▷ Over the past five years, there were net cash outflows from operating activities in FY06/16 and FY03/20. In both years, the company acquired operational investment securities.

Cash flows from investing activities

▷ Over the past five years, there were net cash outflows from investing activities with the exception of FY03/18. In FY06/16, primary factors leading to outflows were the acquisition of investment securities (JPY1.2bn) and intangible fixed assets (JPY1.0bn). ▷ In FY03/17, the largest expenditure was the acquisition of affiliates (JPY2.3bn). ▷ In FY03/18, net cash inflows resulted from the sale of investment securities and shares in affiliates. ▷ In FY03/19, the company spent more than JPY1.0bn on acquisitions of tangible fixed assets as well as another JPY1.0bn-plus on the acquisition of intangible fixed assets. ▷ In FY03/20, it spent JPY3.5bn on acquisitions of tangible fixed assets and JPY1.7bn on acquisitions of intangible fixed assets, along with JPY1.0bn on the acquisition of subsidiaries. ▷ In FY03/21, the company spent JPY1.5bn on acquisitions of tangible fixed assets and JPY1.7bn on acquisitions of intangible fixed assets.

Cash flows from financing activities

▷ There were net cash inflows from financing activities over the past five years, with the exception of FY06/16 and FY03/21. ▷ In FY06/14, the public listing of a subsidiary, inflows of JPY6.4bn from minority shareholders in association with a public offering, and long-term and short-term debts (JPY5.3bn) to finance the acquisition of investment securities were all contributors to positive financial cash flow of JPY11.3bn. ▷ The primary factor leading to negative flows in FY06/16 was a decrease in short-term debts. In 03/17, cash flow became positive due to an increase in long and short-term debts. Cash flow turned negative in FY03/18 because of repayment of long- term and short-term debts. ▷ In FY03/19, net cash flow from financing activities was positive, with new funds from the issuance of warrant bonds offsetting outlays for dividends, share buybacks, and repayments of long-term loans. ▷ In FY03/20, cash outflows included dividend payments and repayment of lease obligations, and inflows from long-term borrowings, resulting in net cash inflows. ▷ Net cash flow from financing activities turned negative in FY03/21, with large outflows for lease obligations and repayment of long-term debt on top of dividend payments.

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Simple free cash flow

▷ The company does not require large facilities, so simple free cash flow tracks changes in net income and working capital needs. ▷ With an exception of FY03/20 when operating cash flow was significantly negative, the company’s cash flow has been positive for past 10 years.

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▷ Other information History Corporate timeline August 1995 Founded Digital Garage (DG) with the objective of advertising, planning and production on the internet (co- representatives: Kaoru Hayashi and Joichi Ito)

October 1996 Started business partnership with Infoseek Corp of the US. Infoseek Japan operations in Japan. (Partnership with Infoseek ended in June 1999; Infoseek Japan was absorbed by Rakuten Inc. in December 2000.)

December 1996 Set up Digital Advertising Consortium together with Hakuhodo DY Holdings Inc. (TSE1: 2433), Asahi Communications (now Asatsu- DK Inc. [TSE1: 9747]), Yomiuri Advertising, and I&S (now I&S BBDO Inc.)

May 1997 to Merged Garage, Studio Garage, and Ecosys

May 2000 Jointly invested in and founded econtext, a company providing e-commerce distribution/payment platforms, by DG, Lawson Inc. (TSE1: 2651), Toyo Information System (now a subsidiary of IT Holdings Corp [TSE1: 3626]), and Mitsubishi Corp (TSE1: 8058)

December 2000 Listed on OTC market (now Jasdaq)

June 2002 Acquired 45% of Kakaku.com shares, making it a consolidated subsidiary

January 2003 Made econtext a consolidated subsidiary through a third-party allotment

January 2005 Founded Technorati Japan as consolidated subsidiary to run blog search site

August 2006 Developed advertising products using social media; BI. Garage (founded jointly with Asatsu-DK, Cyber Communications Inc., and Dentsu Inc. [TSE1: 4324]) becomes consolidated subsidiary matching bloggers with advertisers

April 2007 Consolidated subsidiary DG Solutions acquired all shares of Discovery Arts (now DG Communications) and made it a consolidated subsidiary

October 2008 Merged and absorbed DG Solutions, DG&Ibex, Creative Garage, DG Media Marketing, and econtext

May 2009 Transferred 20.3% of Kakaku.com shares to Culture Convenience Club Co (TSE1: 4756); Kakaku.com became an affiliate

June 2009 Transferred all shares of DG Incubations to IT Holdings; DG Incubation founded as new consolidated subsidiary

June 2009 Sold some shares of DG Communications (formerly Discovery Arts); DG Communications is no longer a consolidated subsidiary

August 2009 Announced business and capital partnership with Culture Convenience Club

May 2010 Signed basic business tie-up agreement with Twitter Inc. to expand Twitter-related operations in Japan

June 2010 Established equity-method affiliate NEXDG Co Ltd through joint investment with Nippon Express Co Ltd (TSE1: 9062)

May 2011 Partnered with business networking service provider LinkedIn Corp (NYSE: LNKD)

June 2011 Invested in in Silicon Valley Angel Fund

July 2011 Issued new shares and secondary offering

November 2011 Started capital and business tie-up with US company Memolane Inc.

April 2012 Acquired SBI VeriTrans Co Ltd (now VeriTrans Inc.)

September 2012 Established consolidated subsidiary econtext Asia Limited to handle global expansion of the payment business and e- commerce platform

October 2012 Split and transferred the payment services business to newly established consolidated subsidiary econtext

July 2013 Listed in the Tokyo Stock Exchange’s JASDAQ Standard following the merger of the Tokyo Stock Exchange and the Osaka Securities Exchange

August 2013 Co-established Dentsu ScienceJam Inc. with Dentsu for commercializing cutting-edge scientific research

September 2014 Invested in global community website Wikia Inc. to support its Japan operations as an equity-method affiliate

May 2015 Invested in MX Technologies Inc., a major US-based personal asset management tool company for financial institutions

June 2015 Acquired all shares of consolidated subsidiary econtext Asia Limited to make it a wholly owned subsidiary

June 2015 Established DK Gate, a joint venture with Kodansha, to collaborate on making Japanese content available globally and on raising funds for new businesses

February 2016 Invested in Blockstream for developing blockchain technologies.

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May 2016 Moved to the First Section of the Tokyo Stock Exchange

July 2016 Along with Kakaku.com and Credit Saison, launched DG Lab, an open innovation R&D organization

July 2016 Established DG Daiwa Ventures with Daiwa Securities to operate DG Lab Fund, a fund which targets startup companies that possess next-generation technology. DG Daiwa Ventures was made into an equity-method affiliate

August 2016 Established DK Media with Kodansha to operate an internet media business that utilizes women’s fashion magazines. DK Media was made into an equity-method affiliate.

September 2016 Established the consolidated subsidiary DG Technologies as a joint venture with TIS in order to develop strategic technology in the fintech-related industry

October 2016 Subsidiary VeriTrans established ANA Digital Gate with All Nippon Airways Trading Company Co., Ltd. to develop and provide payment solutions utilizing fintech. ANA Digital Gate was made into an equity-method affiliate

April 2017 Acquired shares in DG Communications, which operates a real estate advertising business, and made it into an equity- method affiliate

July 2017 Acquired additional shares in equity-method affiliate DG Life Design. DG Life Design and its subsidiaries Academie Du Vin and Hampstead were made into consolidated subsidiaries.

September 2017 Made DG Communications Co., Ltd., a real estate advertising solutions provider, a consolidated subsidiary by acquiring a controlling interest

June 2018 Spun off the marketing business operated by Business Design Company to newly established DG Marketing Design, and retained a stake large enough to count DG Marketing Design as an equity-method affiliate

July 2018 Established consolidated subsidiary D2 Garage as joint venture with Hokkaido Shimbun Press to operate startup accelerator program for promising startup companies in the Hokkaido region

September 2018 Established consolidated subsidiary Crypto Garage as joint venture with Tokyo Tanshi Co., Ltd. to develop blockchain technology-based financial services business.

October 2018 Established equity-method affiliate Score as joint venture with Nissen Co., Ltd. to operate deferred payment business

December 2018 Acquired a stake in equity-method affiliate CyberBuzz, Inc., a social media market business built around influencers

January 2019 Established equity-method affiliate TD Payment Co., Ltd. as joint venture with Toshiba Tec Corporation to develop multi- payment solutions for POS systems.

April 2019 Made DG Lab Fund II E.L.P. Cayman (DG Lab No. 2 Fund) an equity-method affiliate through investing in the fund

June 2019 Made DBSC Marketing K.K. (operates as an intermediary, encouraging vehicle drivers to get brain MRIs; currently Brainscan Technologies K.K.) a consolidated subsidiary by acquiring all shares in it

January 2021 Established DG Incubation, Inc. as a consolidated subsidiary to manage and operate investment limited partnerships.

DG history Early years through 1990s After Representative Director Kaoru Hayashi graduated from college, he founded From Garage in 1983, an advertising and marketing planning company. In 1993, Hayashi met Joichi Ito; the two hit it off and in 1995 they founded DG. In 1996 they partnered with Infoseek Corp and set up Infoseek Japan (Infoseek was a robot-style search service, a server and system that searched web pages for specific user input). Infoseek Corporation was bought by Walt Disney Co (NYSE: DIS) in 1999 leading to a termination of the partnership agreement. According to the company, the network created in those years with West Coast venture capitalists and entrepreneurs contributed to DG’s later development.

From 2000 The company listed on the OTC market (now JASDAQ) in 2000. In 2002 it invested in Kakaku.com and made it into a consolidated subsidiary, a move that turned out to be a successful investment given Kakaku.com’s subsequent growth. However, DG subsequently made two less shrewd investments. In January 2005 it established Technorati Japan, a company providing a search service for blogs, while in April 2007 it acquired Discovery Arts (now DG Communications). At Technorati Japan, the demand for blog search turned out to be below company expectations, eventually forcing an exit and termination of services. Discovery Arts was a real estate advertising firm that was expected to benefit from a recovering real estate market. However, rapid deterioration of the real estate market after it was purchased left the company with large losses. Discovery Arts was eventually bought out by management. In 2008 DG invested in and signed a business partnership agreement with Twitter Inc. This investment, while small, was a pivotal point leading to what DG is today.

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News and topics February 2021 On February 26, 2021, the company announced a revision to its dividend forecast.

▷ At a board meeting held on February 26, 2021, the company resolved to revise its dividend forecast for surplus funds, which it had not disclosed previously, with a record date of March 31, 2021. ▷ The company has set shareholder returns as an important management issue, and in its new medium-term management plan starting in FY03/21, it will measure the cash-generating capacity of the group and return profits to shareholders through cash flow-conscious management. The dividend amount will be determined based on the company’s financial position, industry trends, and future capital needs. ▷ Based on the above, the company has decided to pay a year-end dividend of JPY32 per share for FY03/21 (JPY38 in FY03/20; ordinary dividend of JPY28 and commemorative dividend of JPY10).

On the same day, the company announced the appointment of executive officers and organizational changes.

Organizational changes Establishment of a Group CEO Headquarters

▷ The company will establish a new Group CEO Headquarters, integrate the President’s Office, transfer the Open Innovation department, and establish new departments.  The Open Innovation department will be renamed the Next Generation Fintech department and transferred from the DG Lab Headquarters to the Group CEO Headquarters to promote the Next Generation Fintech business.

 The DX Promotion department will be newly established in the Group CEO Headquarters to promote the Digital Transformation (DX) business.  The Digital Health department will be newly established in the Group CEO Headquarters and integrated with the

Biomedical Business Promotion department to promote the Digital Health business.  The Group Data Strategy department will be newly established in the Group CEO Headquarters to promote the utilization of data held by Digital Garage Group companies.

Other organizational changes

▷ The Smart City Promotion department will be transferred from the DG Lab Headquarters to the Open Network Lab Promotion department to boost operational synergies. ▷ The DG Lab Headquarters will be renamed DG Lab following the transfer of the Open Innovation department and Smart City Promotion department.

On February 3, 2021, the company announced a capital and business alliance with 1plusX AG, a prominent European data platform provider.

▷ The company will form a capital and business alliance with Swiss data platform provider 1plusX AG (headquarters: Zurich, Switzerland; below, “1plusX”). Along with subsidiary and data-related solutions provider BI.Garage, Inc., the company will

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leverage this capital and business alliance to jointly develop a next-generation advertising business that will provide service for the post-cookie era in Japan and other parts of Asia. ▷ This capital and business alliance will grant the company and BI.Garage exclusive handling rights for 1plusX’s post-cookie age- compatible data platform in Japan, as well as preferential handling rights in Asia. Investment associated with this alliance will be conducted through DG Daiwa Ventures, Inc., a joint venture established between the company, BI.Garage, and Daiwa Securities Group Inc. (TSE1: 8601). ▷ 1plusX’s data platform is equipped with features that ensure compliance with strict privacy regulations in Europe and America, including GDPR and CCPA. In addition, its independently developed machine learning engine enables the analysis of customer data and content without the use of third-party cookies, which makes targeting possible. ▷ The data platform is being used on an expanding scale primarily in Europe as an advertising platform for the post-cookie era, and organizations such as the German publishers’ alliance Ad Alliance have already adopted this platform. Along with 1plusX, the company aims to popularize next-generation advertising platforms in Japan and the rest of Asia as demand for privacy protection, caution regarding advertiser brand safety, and countermeasures in response to new regulations has risen higher than ever. This demand is also high in Japan due to factors such as the enactment of the revised Act on the Protection of Personal Information and the expansion of ad fraud measures. ▷ In connection with this capital and business alliance, BI.Garage will develop new post-cookie age-compatible advertising products for the Content Media Consortium, which comprises 28 prominent media companies. It will also make use of the

privacy protection and cookieless data management features included in 1plusX’s data platform as it rolls out original advertising products that are applicable across a wide variety of influential media.

January 2021 On January 28, 2021, the company announced the establishment of an investment fund, Hamagin DG Innovation Fund, with The Bank of Yokohama, Ltd.

▷ The company will establish an investment fund, Hamagin DG Innovation Investment Limited Partnership (below, “Hamagin DG Innovation Fund”), with The Bank of Yokohama, Ltd. (a subsidiary of Concordia Financial Group, Ltd.; TSE1:7186) ▷ The fund will invest in startups with technologies and services that contribute to open innovation in the financial sector while also promoting the creation of services and solutions that apply new technologies within fields such as payment and digital

marketing. ▷ Hamagin DG Innovation Fund will support accelerated growth at investees and encourage open innovation at financial institutions primarily by providing innovation platforms aimed at revitalizing economic activity in Kanagawa and Tokyo. ▷ DG Incubation, Inc., a subsidiary of Digital Garage and an investment business operator, will handle the fund’s administration. The fund will have a scale of JPY3.0bn and will operate for eight years.

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Major shareholders

Shareholding Top shareholders Shares held ratio Kaoru Hayashi 6,830,300 14.82% The Master Trust Bank of Japan, Ltd. (Trust account) 3,509,200 7.62% Dentsu Inc. 3,300,000 7.16% TIS Inc. 2,634,500 5.13% Custody Bank of Japan, Ltd. (Trust account 9) 1,818,000 3.95% Custody Bank of Japan, Ltd. (Trust account) 1,724,400 3.74% JP Morgan Bank Luxembourg SA 384513 1,166,300 2.53% The Bank of New York Mellon 140051 790,300 1.72% State Street Bank and Trust Company 505225 751,074 1.63% Credit Saison Co., Ltd. 655,200 1.42% SUM 22,909,274 49.72% Source: Shared Research based on company data As of March 31, 2021

Shareholder returns

From FY03/21, DG has changed from its conventional indicator (dividend payout ratio of 20% against profit attributable to owners of the parent) to a new indicator (payout ratio of 20% against pre-tax business cash flow*). The company adopted IFRS in FY03/19, giving fair value valuation gain/loss (which does not affect cash flows) a larger impact on profit, so it decided to set the payout ratio against cash flow as a new indicator for shareholder returns.

* The key differences between profit attributable to owners of the parent and pre-tax business cash flow lie in fair value valuation gain/loss in Incubation Technology (±), equity-method investment profit (-), depreciation and software amortization expenses (+), and income taxes (+).

Pre-tax business cash flow (pure cash flow generated from business) is calculated by adjusting pre-tax profit for depreciation and amortization, equity in earnings of affiliates, gain on sales of investments in affiliates, and income from operating investment securities (excluding gain on sales).

Top management

Kaoru Hayashi, Representative Director, President Executive Officer and Group CEO Kaoru Hayashi is a key figure in the development of the internet in Japan. Born in 1959 Hayashi started From Garage, an advertising and marketing planning firm in 1983, fresh from college. In 1994 he created the first individual home page in Japan and began a homepage development business. In 1995, he co-founded DG becoming its president and representative director. He serves as the representative director and CEO of DG as well as the CEO of the entire DG Group.

Employees

The company had 898 employees (-56 YoY) on a consolidated basis at end-FY03/21. By segment, Marketing Technology had 468 employees (-19 YoY), Financial Technology had 181 employees (+8 YoY), Incubation Technology had 19 employees (+3 YoY), Long-term Incubation had 71 employees (-41 YoY), and there were 159 employees (-7 YoY) that support all the segments. The parent company had 471 employees, with an average age of 36.0 years and an average length of time at the company of four years and six months.

Investor relations

The company holds semi-annual results presentations in Tokyo and maintains IR information in both English and Japanese (including presentation materials and financial statements). To access the English-language IR webpage please click here.

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Other Glossary AI (artificial intelligence) Software or a system whereby the computer emulates intellectual work conducted by human brain.

AR (augmented reality) Computer technology to display real landscapes overlapped with relevant information.

Affiliate revenue A system whereby compensation is paid to the owner a web page that has a link to another website where visitors can make purchases. When visitors follow the link and make a purchase, the owner of the referring website is paid a portion of the revenue earned by the site making the sale.

ASP (application service provider) A business that provides computer-based services to customers over a network. Software offered using an ASP model is sometimes called on-demand software or software as a service (SaaS). The most limited sense of this business is that of providing access to a particular application program (such as customer relationship management) using a standard protocol such as HTTP.

Banner ads A type of internet advertising where images and/or text are inserted on a web page. Usually, ads that use images are called banner ads while text-only ads are called text banner ads. Advertisers typically pay by the page view or impression for ads, so more page views/impressions mean higher advertising revenues. In addition to banner ads that base their fees on page views or impressions, there are also pay-for-performance banner ads where advertisers only pay for a viewer’s click on their ad (or click through the ad and make a final purchase or some other goal like requesting information).

Big data Big data usually includes data sets with sizes beyond the ability of commonly used software tools to capture, manage and process within a tolerable length of time. In addition to the large data volume, big data often contains non-structured and non- programed data sets of chronological and real-time nature. It is believed that recording, storing and analyzing big data enables the discovery of knowledge that is usable in business.

Block chain A distributed network system that has no central computer and distributes data into computers all over the world. As the computers reciprocally monitor changes in data, it is difficult to destroy or alter the data. Accordingly, even if an indefinite number of networks are connected, it is able to handle highly credible data.

Drop shipping A system where individual internet vendors can make sales without holding inventory, acting as an information transfer agent. When a customer places an order, the seller sends the order to a manufacturer or wholesaler (who holds inventory), who then drop ships the order to the customer. This service means that vendors do not need to be involved with order fulfillment.

E-Commerce (electronic commercial transactions) Any transaction entered into or settled using the internet, or other network. The type or variety of network or transaction is unrestricted and the term has a broad sense. E-commerce can be divided into three types: transactions between businesses (B- to-B, business-to-business), transactions between a business and a consumer (B-to-C or business-to-consumer) and transactions between consumers (C-to-C, consumer-to-consumer).

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Exit A means or strategy for recovering investment funds or other venture capital funds. Generally, this takes the form of an initial public offering (IPO) or a sale to another acquirer.

Fintech A word made from “finance” and “technology,” indicating moves that use information technologies to create and review financial services.

Fulfillment Fulfillment refers to all operations in mail-order sales and e-commerce sales, from merchandise orders to payment, packaging products together that make an order and delivery.

Online-to-offline (O2O) A marketing scheme to encourage consumers to go from online activities (e.g., find information) to offline (physical) activities (e.g., purchase).

Open innovation A method of creating innovative business models and research achievements and developing innovative products and services not on a single company basis but by combining technologies, ideas, and services of other companies, universities, municipalities, and social entrepreneurs.

Performance-based advertising In contrast to the traditional purchase of advertising space by an advertiser, much internet advertising is now purchased on behalf of advertisers by specialist service providers who manage an advertising budget to enable the optimization of the client’s media purchasing.

PV (page views) An internet statistic that describes a user looking at a web page.

SNS (social networking service) Services that build social networks on the internet. Typical SNSs include overseas sites like Facebook and MySpace, and Japanese sites like mixi, GREE and Mobage Town.

Social media Websites that do more than simply publish information, these sites allow two-way communication (interaction) between a user and a website or between two or more users. Blogs, SNS, user review sites and Q&A sites are types of social media.

UU (unique users) The number of people that have visited a website or a particular page at a website. Even if a person visits the same website (or page) repeatedly he or she will be counted as a single user.

VR (virtual reality) Technology for experiencing cyberspace created by computers and others as if it were a real world.

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Company profile

Company Name Head Office Daikanyama DG Bldg. Digital Garage, Inc. 3-5-7 Ebisu Minami, Shibuya-ku Tokyo, Japan 150-0022 Phone Listed On +81-3-6367-1111 Tokyo Stock Exchange First Section Established Exchange Listing August 17, 1995 December 14, 2000 Website Financial Year-End https://www.garage.co.jp/en/ March IR Web https://www.garage.co.jp/en/ir/

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