Voltage / 3639

COVERAGE INITIATED ON: 2021.04.27 LAST UPDATE: 2021.05.10

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. Voltage / 3639 RCoverage LAST UPDATE: 2021.05.10 Research Coverage Report by Shared Research Inc. | https://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 ------7 Quarterly trends and results ------7 Business ------18 Business model ------18 E-books, video, and consumer operations business ------27 Analysis of profitability ------30 Market and value chain------31 Main competitors ------34 Strengths and weaknesses ------38 Historical performance and financial statements ------41 Income statement ------41 Balance sheet ------44 Cash flow statement ------45 Historical performance ------46 Other information ------51 History ------51 News and topics ------52 Top management and corporate governance ------53 Dividend policy ------54 Major shareholders ------55 Employees ------55 Terminology (alphabetical) ------57 Profile ------57

02/58 Voltage / 3639 RCoverage LAST UPDATE: 2021.05.10 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Executive summary

Business overview

◤ Voltage’s business centers on entertainment content, chiefly stories about love and the challenges associated with it. The company plans, produces, develops, sells, and manages this content. The core platform is smartphone apps that distribute romance stories for women. The company classifies its businesses by target audience. The majority of its revenue comes from the distribution of smartphone game apps for Japanese-speaking women. In FY06/20, this business generated revenue of JPY4.0bn (60.3% of total revenue).

◤ Voltage’s romance apps for women are interactive. In the mainstay written story apps, the player herself is the heroine, and she chooses the storyline and character, building her own romance adventure. The company also provides avatar-based apps (game-like apps, the player dresses up her avatar) and card-based apps (players build up card collections and cultivate the characters). Some content is available for free, but the company charges for higher-end content and information services. Players purchase stories, gacha (lottery) prizes, and in-game items, then create virtual romances by choosing a side story and paying to move events along in a favorable way.

◤ The company produces all its own content. Nearly 50% of revenue comes from three core titles: (1) 100 Love Scenes+ (written story, average monthly revenue of around JPY70mn, launched in 2017, with the underlying romance story app launched in 2006); (2) Tenka Touitsu Koi no Ran‒Love Ballad (avatar-based, around JPY80mn, launched in 2014); and (3) Roppongi Sadistic Night (card-based, around JPY90mn, launched in 2015). The company sustains readership of its main titles by offering daily, complete-in-one issues and longer, serial pieces.

◤ In addition to its smartphone game apps offering content for Japanese-speaking women, the company distributes content for English-speaking and Asian women (revenue of JPY1.5bn in FY06/20), and content for men (JPY1.0bn). Voltage also concentrates on building up its intellectual property used in in-person events and merchandise (JPY82mn), as well as console games and videos. In 2019, the company moved into a new genre: e-books. The company runs its own e-comics label and stores (in FY06/20, JPY41mn in revenue from e-books, videos, and consumer operations).

◤ The company’s billing model in Japan is to provide free-to-play mobile content, charging for in-game items mainly on a pay-as-you-go basis (more than 80% of revenue). The remainder (less than 20% of revenue) comes from unit billing, by the story. Voltage says more than 100,000 people download its apps each month, and on average 60,000 of these (in Japan) become paying users. Average revenue per paying user (ARPPU) amounts to JPY7,000 to JPY8,000 per month. Shared Research calculates the company’s average monthly revenue at nearly JPY550mn (JPY6.6bn in FY06/20), including content for English-speaking and Asian women.

◤ Voltage’s target customers are women who enjoy fictional stories (aged 19–44, about 20mn people in Japan). The company estimates its potential market in Japan at around JPY100bn (around 2016–2017). The company breaks down this market into casual customers (market value of JPY10.0bn, monthly average ARPPU of several thousand JPY), casual core customers (JPY40.0bn, several thousand JPY to JPY10,000), and core customers (JPY50.0bn, JPY10,000 to tens of thousands of JPY). Including overseas customers, the company estimates that casual customers (players of written story apps) account for more than 30% of total revenue, casual core customers (avatar-based and card-based apps) for more than 40%, core customers (card-based and voice actor-type apps) for around 20%, and others (in-person events, e-books, consumer operations, and others) for less than 5%.

◤ The company aims to generate sustainable growth by cycling earnings from existing titles back into recently released titles and new areas. By “existing titles,” the company refers to the story apps business (excluding content for Asian women). “Recently released titles” means content for Asian women. “New areas” are videos, consumer operations, e-books, and in-person events.

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The company generates average monthly revenue of more than JPY500mn from existing titles. The corresponding figure for recently released titles and new areas is around JPY50mn (Q1 FY06/21).

◤ As a percentage of FY06/20 revenue, cost of revenue was 35.9% and SG&A expenses amounted to 65.4%. Collectively, the company refers to advertising expenses (23.2% of FY06/20 revenue) and sales commissions (30.4%) as “platform & advertising” (P&A) expenses (53.6%). The company considers P&A expenses to be variable costs, as they fluctuate according to revenue. Conversely, Voltage defines labor costs (17.0% of FY06/20 revenue), outsourcing costs (11.8%), and other costs (18.9%) as fixed costs (47.7%). The company pays sales commissions to platform operators, mainly Apple and Google. Personnel expenses (labor costs, salaries and allowances) are around 20% of revenue. Of personnel expenses, 60% go toward production, 20% to programming, 10% to design, and 10% to admin.

◤ Female employees are central to content planning and development (66% of employees are women, as of June 30, 2020). The company outsources artwork, writing, and programming to creative talent working on a contract basis. To become profitable at the operating level, the company is working to hold down labor costs and other expenses, raise revenue per employee (JPY22.5mn in FY06/20, +JPY2.4mn YoY), and improve productivity and efficiency.

Earnings trends

◤ In Q2 FY06/21, revenue from content for English-speaking and Asian women declined. However, revenue from content for Japanese-speaking women and content for men grew, pushing up total revenue 8.6% YoY, to JPY3.5bn. The company reduced overall fixed costs (-7.3% YoY) by lowering rent expenses (less office space and lower leasing expenses) and lessening labor costs as personnel numbers fell due to suppressed recruiting. As a result, in Q2 FY06/21 operating profit amounted to JPY170mn (operating loss of JPY125mn in Q2 FY06/20), recurring profit was JPY152mn (recurring loss of JPY117mn), and net income attributable to owners of the parent was JPY136mn (net loss of JPY160mn).

◤ Voltage does not disclose earnings forecasts; the company says the operating environment is too volatile for it to predict performance with a high degree of confidence. The company also provides no medium-term management plan or numeric targets.

◤ In Q4 FY06/20, the company posted profits for the first time in 12 quarters. Profitability has continued through Q2 FY06/21. The company attributes some of this increase to higher demand as people stayed at home amid the COVID-19 pandemic, but also believes CEO Tsutani’s three-year strategy (improving earnings through organizational restructuring and the revision of business categories) is beginning to bear fruit. In December 2019, the company raised JPY616mn in the stock market. Voltage has invested this cash in existing titles, new titles, and new areas. In FY06/21, the company plans to shift its priority from profitability to investment.

Strengths and weaknesses

◤ Strengths: 1) by serializing story games, has established a structure that allows customers to enjoy content over an extended period, 2) female employees leading the development of content for women, and 3) global development capabilities, with a local development hub in the massive US market

◤ Weaknesses: 1) Has not moved away from a development system reliant on major titles (a legacy of past successes), 2) still feeling the aftereffects of a period when both the founding CEO and COO were absent (damage due to new market entrants and deterioration in the customer base), and 3) fixed costs to provide new stories every year (new in-app titles) accounting for a large percentage of revenue

Note: Please see the Terminology section at the end of the report.

04/58 Voltage / 3639 RCoverage LAST UPDATE: 2021.05.10 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Key financial data

Income statement FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenue 4,436 6,346 8,067 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 YoY 29.3% 43.1% 27.1% - 10.9% 5.1% 5.8% -21.4% -16.2% -3.7% -7.5% Gross profit 3,363 4,931 6,318 6,344 6,700 6,697 6,855 4,922 4,052 4,512 4,220 YoY 35.9% 46.6% 28.1% - 5.6% 0.0% 2.4% -28.2% -17.7% 11.4% -6.5% Gross profit margin 75.8% 77.7% 78.3% 69.8% 66.4% 63.2% 61.1% 55.8% 54.8% 63.4% 64.1% Operating profit 547 766 857 295 616 467 531 141 -1,042 -199 -86 YoY 77.2% 40.2% 11.9% - 108.7% -24.2% 13.6% -73.4% - - - Operating profit margin 12.3% 12.1% 10.6% 3.2% 6.1% 4.4% 4.7% 1.6% -14.1%-2.8%-1.3% Recurring profit 544 762 860 344 646 485 488 159 -1,068 -237 -88 YoY 78.7% 40.0% 12.9% - 88.1% -24.9% 0.6% -67.5% - - - Recurring profit margin 12.3% 12.0% 10.7% 3.8% 6.4% 4.6% 4.4% 1.8% -14.4%-3.3%-1.3% Ne t in c o me 3 29 444 511 141 292 233 210 24 -1,328 -356 -161 YoY 93.8% 35.2% 15.2% - 107.0% -20.3% -9.5% -88.5% - - - Net margin 7.4% 7.0% 6.3% 1.6% 2.9% 2.2% 1.9% 0.3% -18.0% -5.0% -2.4% Per-share data (split-adjusted; JPY) Shares issued (year-end; '000) 1,460 4,910 4,973 5,034 5,116 5,155 5,196 5,198 5,230 5,234 6,134 Treasury shares ('000) - 0 0 0 0 0 0 92 92 92 92 EPS 86.2 33.4 34.5 28.2 57.4 45.3 40.7 4.8 -259.8 -69.3 -28.6 EPS (fully diluted) 85.9 31.8 33.3 27.6 56.5 44.8 40.4 4.7 - - - Dividend per share - 12.7 6.3 19.0 19.0 15.0 15.0 10.0 - - - Book value per share 339 192 217 661 701 732 744 732 460 390 377 Balance sheet (JPYmn) Cash and cash equivalents 896 2,010 1,931 1,784 2,201 1,821 2,238 2,132 1,108 1,346 1,531 Total current assets 2,015 3,563 3,836 3,574 4,123 3,688 3,706 3,406 2,361 2,365 2,653 Tangible fixed assets 46 39 64 224 241 343 210 146 83 5 3 Investments and other assets 170 200 383 276 302 412 516 510 460 374 348 Intangible fixed assets 53 95 120 248 365 556 473 368 185 40 1 Total assets 2,283 3,897 4,403 4,322 5,032 4,999 4,905 4,430 3,089 2,784 3,004 Short-term debt 73 38 ------Total current liabilities 753 1,069 1,160 994 1,446 1,210 1,037 693 724 779 719 Long-term debt 44 6 ------Total fixed liabilities 44 6 - 1 ------Total liabilities 797 1,075 1,160 995 1,446 1,210 1,037 693 724 779 719 Shareholders' equity 1,486 2,823 3,242 3,327 3,563 3,772 3,868 3,737 2,365 2,005 2,277 Total net assets 1,486 2,823 3,242 3,327 3,586 3,790 3,868 3,737 2,365 2,005 2,285 Total liabilities and net assets 2,283 3,897 4,403 4,322 5,032 4,999 4,905 4,430 3,089 2,784 3,004 Total interest-bearing debt 117 44 ------Cash flow statement (JPYmn) Cash flows from operating activities 580 428 410 259 894 425 920 407 -695 220 -224 Cash flows from investing activities -113 -134 -354 -573 -414 -764 -372 -207 -262 26 -32 Cash flows from financing activities 314 820 -135 -74 -75 -90 -70 -177 -40 1 441 Financial ratios ROA (RP-based) 29.3% 24.6% 20.7% 7.9% 13.8% 9.7% 9.9% 3.4% -28.4% -8.1% -3.0% ROE 29.6% 20.6% 16.9% 4.3% 8.5% 6.3% 5.5% 0.6% -43.5% -16.3% -7.5% Equity ratio 65.1% 72.4% 73.6% 77.0% 70.8% 75.4% 78.9% 84.4% 76.6% 72.0% 75.8% Total asset turnover 239.1% 205.4% 194.4% 208.3% 215.6% 211.3% 226.5% 189.0% 196.6% 242.5% 227.6% Net margin 7.4% 7.0% 6.3% 1.6% 2.9% 2.2% 1.9% 0.3% -18.0% -5.0% -2.4% Employee metrics No. of employees (ex. temporary workers) 120 149 178 298 322 384 387 389 324 251 231 Temporary workers (average) 56 73 97 142 166 177 174 149 108 66 52 Revenue per employee 26.6 30.6 31.0 23.9 21.2 20.0 20.1 16.4 15.9 20.1 22.5 Operating profit per employee 3.27 3.69 3.29 0.78 1.29 0.88 0.95 0.26 -2.24 -0.56 -0.29 Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

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Recent updates

Highlights

On May 10, 2021, Voltage announced results for Q3 FY06/21; see the Results section for details.

On April 19, 2021, the company announced the launch of Voltage Passport, a comprehensive reward-points-program website for its game apps, e-commerce, in-person events, and e-books offerings.

▷ Voltage launched Voltage Passport (Vol Pass), a website for its reward points program (free membership), on April 19, 2021.

▷ The company positions Vol Pass as an initiative to drive its fandom strategy (creating synergies between the story apps and in-person events businesses) and diversification strategy (leveraging story-creation expertise to expand into growth markets including e-books). Vol Pass members can earn reward points based on their service usage across the lineup of game apps, e-commerce, in-person events, and e-books; the collected points can be redeemed for digital content (illustrations featuring company IP, etc.) and other prizes. The company sees Vol Pass as a tool to encourage broad access to its content, and thereby increase page views per visit, improve customer loyalty, and enhance KPIs such as paying user rate.

▷ The launch marked a grand opening of the website, integrating almost all of the company’s services. The number of registered Vol Pass members has already exceeded 30,000. The company intends to add more prizes and offer campaigns to boost customer satisfaction and LTV.

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

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Trends and outlook Quarterly trends and results

Cumulative FY06/19 FY06/20 FY06/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Revenue 1,827 3,678 5,414 7,120 1,652 3,248 4,774 6,587 1,763 3,527 5,210 YoY -2.1% -1.6% -2.8% -3.7% -9.6% -11.7% -11.8% -7.5% 6.7% 8.6% 9.1% Gross profit 1,138 2,358 3,445 4,512 1,039 2,033 2,983 4,220 1,191 2,399 3,460 YoY 18.8% 19.5% 17.3% 11.4% -8.7% -13.8% -13.4% -6.5% 14.6% 18.0% 16.0% Gross profit margin 62.3% 64.1% 63.6% 63.4% 62.9% 62.6% 62.5% 64.1% 67.6% 68.0% 66.4% SG&A expenses 1,228 2,452 3,559 4,711 1,114 2,157 3,193 4,306 1,123 2,229 3,319 YoY -17.1% -10.9% -9.8% -7.5% -9.3% -12.0% -10.3% -8.6% 0.9% 3.3% 4.0% SG&A ratio 67.2% 66.7% 65.7% 66.2% 67.4% 66.4% 66.9% 65.4% 63.7% 63.2% 63.7% Operating profit -90 -94 -115 -199 -74 -125 -210 -86 68 170 141 YoY ------Operating profit margin ------3.9%4.8%2.7% Recurring profit -92 -108 -133 -237 -76 -117 -207 -88 62 152 148 YoY ------Recurring profit margin ------3.5%4.3%2.8% Net income -100 -116 -142 -356 -119 -160 -252 -161 45 136 119 YoY ------Net margin ------2.5%3.9%2.3% Quart erly FY06/19 FY06/20 FY06/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Revenue 1,827 1,851 1,736 1,706 1,652 1,596 1,526 1,814 1,763 1,764 1,684 YoY -2.1% -1.1% -5.3% -6.3% -9.6% -13.8% -12.1% 6.3% 6.7% 10.5% 10.3% Gross profit 1,138 1,220 1,086 1,068 1,039 993 951 1,237 1,191 1,208 1,061 YoY 18.8% 20.1% 12.8% -4.2% -8.7% -18.6% -12.5% 15.8% 14.6% 21.6% 11.6% Gross profit margin 62.3% 65.9% 62.6% 62.6% 62.9% 62.3% 62.3% 68.2% 67.6% 68.5% 63.0% SG&A expenses 1,228 1,224 1,107 1,152 1,114 1,044 1,036 1,113 1,123 1,106 1,091 YoY -17.1% -3.7% -7.2% 0.4% -9.3% -14.7% -6.5% -3.4% 0.9% 5.9% 5.3% SG&A ratio 67.2% 66.1% 63.8% 67.5% 67.4% 65.4% 67.9% 61.4% 63.7% 62.7% 64.8% Operating profit -90 -4 -21 -84 -74 -50 -85 123 68 102 -30 YoY ------Operating profit margin ------6.8%3.9%5.8%- Recurring profit -92 -16 -25 -104 -76 -41 -91 120 62 90 -4 YoY ------Recurring profit margin ------6.6% 3.5% 5.1% - Net income -100 -17 -26 -214 -119 -41 -92 91 45 91 -17 YoY ------Net margin ------5.0%2.5%5.2%- Cost of revenue + SG&A expenses 1,917 1,855 1,756 1,790 1,726 1,646 1,611 1,690 1,695 1,662 1,713 Platform & Advertising expenses 984 997 874 925 913 850 840 926 939 925 - Advertising expenses 418 429 341 406 409 365 371 381 411 400 - Sales commissions 566 568 533 519 504 485 469 545 528 525 - Fixed costs 930 856 880 863 810 793 768 763 754 735 - Labor costs 344 303 311 270 282 271 292 274 268 266 - Outsourcing costs 164 166 206 218 203 192 178 202 207 204 - Other 422 387 363 375 325 330 298 287 279 265 - YoY -19.8% -12.8% -14.8% -3.4% -9.9% -11.3% -8.3% -5.6% -1.8% 1.0% 6.4% Platform & Advertising expenses -13.8% 4.1% -2.7% 1.8% -7.2% -14.7% -3.9% 0.1% 2.8% 8.8% - Advertising expenses -25.5% 12.6% 4.0% 19.4% -2.2% -14.9% 8.8% -6.2% 0.5%9.6%- Sales commissions -2.6% -1.6% -6.5% -8.8% -11.0% -14.6% -12.0% 5.0% 4.8% 8.2% - Fixed costs -25.4% -26.6% -24.2% -8.4% -12.9% -7.4% -12.7% -11.6% -6.9% -7.3% - Labor costs -20.9% -25.6% -27.2% 0.7% -18.0% -10.6% -6.1% 1.5% -5.0% -1.8%- Outsourcing costs -33.6% -25.2% -7.6% 3.3% 23.8% 15.7% -13.6% -7.3% 2.0% 6.3% - Other -25.2% -28.1% -29.0% -19.0% -23.0% -14.7% -17.9% -23.5% -14.2% -19.7% - QoQ 3.4% -3.2% -5.3% 1.9% -3.6% -4.7% -2.1% 4.9% 0.3% -2.0% 3.1% Platform & Advertising expenses 8.3% 1.3% -12.3% 5.8% -1.3% -6.9% -1.2% 10.2% 1.4% -1.5% - Advertising expenses 22.9% 2.6% -20.5% 19.1% 0.7% -10.8% 1.6% 2.7% 7.9% -2.7% - Sales commissions -0.5% 0.4% -6.2% -2.6% -2.9% -3.8% -3.3% 16.2% -3.1% -0.6% - Fixed costs -1.3% -8.0% 2.8% -1.9% -6.1% -2.1% -3.2% -0.7% -1.2% -2.5% - Labor costs 28.4% -11.9% 2.6% -13.2% 4.4% -3.9% 7.7% -6.2% -2.2% -0.7% - Outsourcing costs -22.3% 1.2% 24.1% 5.8% -6.9% -5.4% -7.3% 13.5% 2.5% -1.4% - Other -8.9% -8.3% -6.2% 3.3% -13.3% 1.5% -9.7% -3.7% -2.8% -5.0% - Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

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Business segments FY06/19 FY06/20 FY06/21 Cumulat ive (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Total revenue 1,827 3,678 5,414 7,120 1,652 3,248 4,774 6,587 1,763 3,527 5,210 YoY -2.1% -1.6% -2.8% -3.7% -9.6% -11.7% -11.8% -7.5% 6.7% 8.6% 9.1% For Japanese-speaking women 1,089 2,233 3,356 4,432 1,004 1,965 2,872 3,972 1,079 2,154 3,101 YoY -22.6% -16.4% -13.2% -11.1% -7.9% -12.0% -14.4% -10.4% 7.5% 9.6% 8.0% For English-speaking and Asian women 461 895 1,270 1,621 369 710 1,057 1,457 306 626 982 YoY 6.6% 0.4% -9.2% -14.5% -20.0% -20.6% -16.8% -10.1% -17.2% -11.8% -7.1% For Men 264 514 723 955 250 505 761 1,035 321 639 945 YoY - - - - -5.4% -1.8% 5.2% 8.4% 28.5% 26.6% 24.2% In-person events 12 36 65 110 24 52 63 82 40 76 120 YoY ------2.2% -24.9% 67.6% 45.3% 90.0% E-books, video, consumer operations 3 6162041183262 YoY ------1244.2% 212.9% 105.5% 209.4% Business segments FY06/19 FY06/20 FY06/21 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Total revenue 1,827 1,851 1,736 1,706 1,652 1,596 1,526 1,814 1,763 1,764 1,684 YoY -2.1% -1.1% -5.3% -6.3% -9.6% -13.8% -12.1% 6.3% 6.7% 10.5% 10.3% For Japanese-speaking women 1,089 1,144 1,122 1,076 1,004 962 907 1,100 1,079 1,075 948 YoY - - - - -7.9% -15.9% -19.2% 2.2% 7.5% 11.8% 4.5% For English-speaking and Asian women 461 433 376 350 369 341 347 400 306 320 356 YoY - - - - -20.0% -21.3% -7.5% 14.1% -17.2% -6.0% 2.5% For Men 264 250 209 231 250 255 256 274 321 318 306 YoY - - - - -5.4% 2.0% 22.5% 18.6% 28.5% 24.6% 19.5% In-person events 12 24 28 45 24 28 10 19 40 35 45 YoY ------64.8% -57.6% 67.6% 26.1% 345.7% E-books, video, consumer operations - - - 2 4 10 5 21 18 15 29 YoY ------940.8% 338.6% 49.5% 482.3% Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

Revenue and operating profit by quarter (past 10 years)

(JPYmn) Revenue Operating profit (RHS) (JPYmn) 3,500 500 377 400 3,000 2,918 300 230 200 2,500 123 2,544 102 75 68 100 2,000 1,963 0 1,867 1,814 1,764 1,763 -100 1,500 -200

1,000 -300

-400 500 -500 -524 0 -600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 FY06/21

Source: Shared Research based on company data Seasonality

▷ Quarterly operating losses demonstrated seasonality in the past, with the company generating losses in Q1 since FY06/13. This seasonality was due to large-scale expenditure on TV commercials in Q1.

▷ However, around 2019 the company began curtailing expenditures. The seasonality disappeared once the company suspended TV commercials in the aim of using its advertising expenses more efficiently.

▷ The company generated losses for 12 consecutive quarters, from Q1 FY06/18. Breaking this trend in Q4 FY06/20, the company had remained profitable at the operating level as of Q2 FY06/21.

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Cumulative Q3 FY06/21 results Summary

▷ In cumulative Q3 FY06/21, the company reported revenue of JPY5.2bn (+9.1% YoY), operating profit of JPY141mn (vs. operating loss of JPY210mn in cumulative Q3 FY06/20), recurring profit of JPY148mn (vs. recurring loss of JPY207mn), and net income attributable to owners of the parent of JPY119mn (vs. net loss of JPY252mn). ▷ Progress versus plan: The company has not disclosed earnings forecasts for FY06/21, citing the inability to rationally formulate earnings targets under the current operating environment. ▷ Revenue rose 9.1% YoY: Revenue from content for Japanese-speaking women was up 8.0% YoY, while revenue from content for English-speaking and Asian women fell 7.1% YoY. Content for men and in-person events saw a 24.2% and 90.0% YoY revenue growth, respectively. In E-books, videos, and consumer operations, revenue soared 209.4% YoY. ▷ Operating profit of JPY141mn (vs. a JPY210mn operating loss in cumulative Q3 FY06/20): With the gross profit margin improving 3.9pp YoY to 66.4% and the SG&A ratio dropping 3.2pp YoY to 63.7%, the company returned to profitability in the cumulative Q3 period after posting an operating loss for cumulative Q3 FY06/20. Rent expenses fell thanks to reduced office space and leasing fees. However, sales commissions paid to platform operators increased in tandem with revenue growth, as did events-related expenses and outsourced labor costs (temporary staff and resources working on contract). SG&A expenses were

up JPY126mn YoY as a result, but the SG&A ratio improved nonetheless due to higher revenue. ▷ Market: Looking at the mobile content industry, consumer spending in app store purchases reached a record USD143.0bn in 2020, up 20% YoY (source: “The State of Mobile 2021,” by App Annie Inc. released on January 13, 2021). ▷ Q4 FY06/21 onward: Based on its assessment that some progress was made in the business diversification front as of end-Q3, Voltage will focus on bringing content for Japanese-speaking women back on a growth trajectory and investing more in new areas from Q4 onward. To do so, it will further leverage its strength underpinned by multi-title, multi-category service offerings.

Efforts toward achieving renewed growth in content for Japanese-speaking women were manifested in the Vol Koi and Vol Pass rollout in April 2021. The company named the collection of its romance story series as Vol Koi with a view to enhancing popularity of its content as an ensemble. With Vol Pass, a membership-based reward points program covering the range of

Voltage service offerings, the company will work to improve the customer experience and boost LTV. Voltage also plans to expand investment in new business domains such as in-person events, e-books, and consumer operations. Using the IPs from its original story apps in areas other than app content, the company aims to promote new means of

entertainment. In terms of content pipeline, scheduled releases for FY06/21 include four new titles (of which three have already launched) and eight new in-app titles (of which seven have already launched). In April 2021, the company also relaunched the app, Joushi to Himitsu no 2LDK Love Happening (“2LDK”; content for Japanese-speaking women), renewing the content after temporary suspension.

Performance by business Content for Japanese-speaking women

▷ Revenue was JPY3.1bn (+8.0% YoY).

▷ In this category, the company classifies content as written story, avatar-based, card-based, and voice actor-type. Revenue from avatar-based and card-based content increased.

Content for English-speaking and Asian women

▷ Revenue was JPY982mn (-7.1% YoY).

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▷ Content for English-speaking and Asian women includes such titles as Love365 and Lovestruck. Revenue was down, mainly for Lovestruck.

Content for men

▷ Revenue was JPY945mn (+24.2% YoY).

▷ Revenue was up mainly for Roppongi.

In-person events

▷ Revenue was JPY120mn (+90.0% YoY).

▷ Revenue from events and rights operations (such as sales of merchandise at events) increased.

E-books, videos, and consumer operations

▷ Revenue was JPY62mn (+209.4% YoY).

▷ This segment includes e-book titles (KISSMILLe, Vol-Com, and OC Label) and consumer operations (content for Nintendo Switch).

▷ Revenue rose mainly from consumer operations.

Existing titles, recently released titles, and new areas

▷ The company aims to generate sustainable growth by cycling earnings from existing titles back into recently released titles and new areas. By “existing titles,” the company refers to the story apps business (excluding content for Asian women). “Recently released titles” means content for Asian women that are being launched and nurtured. “New areas” are e-books, in-person events, videos, and consumer operations.

▷ Existing titles generate average monthly revenue of more than JPY500mn, while recently released titles and new areas generate more than JPY60mn (Q2 FY06/21). The company reported consecutive quarterly operating losses from Q1 FY06/18 through Q3 FY06/20, with profit on existing titles being eaten up by losses in recently released titles and new areas. Thereafter the company marked an operating profit for three consecutive quarters starting Q4 FY06/20, but was back in the red in Q3 FY06/21.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

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Full-year company forecasts

▷ Voltage does not disclose earnings forecasts; the company says the operating environment is too volatile for it to predict performance with a high degree of confidence.

▷ For the foreseeable future, the company aims to achieve underlying profitability and enter a new phase of growth centered on its current core business, in story apps.

 Specifically, the company has outlined an app evolution strategy, a fandom strategy, and a diversification strategy.

 In Q2 FY06/20, the company introduced a “virtual-holding-company system” on an experimental basis to accelerate diversification. Under this system, each business department is positioned as a virtual operating company, with the head of each department called a “V president.”

 In FY06/21, the company established the “VH Board,” an executive committee comprising the company CEO and COO, V presidents, and department general managers. The VH Board is tasked with setting groupwide policies.

▷ The FY06/21 pipeline includes four new titles (two of which have already launched) and seven new in-app titles (of which four have launched.)

App evolution strategy The company plans to refine its apps in three content categories (written story, avatar-based, and card-based). Beginning with Japanese-speaking women, the company intends to roll out these categories to other target audiences including English-speaking and Asian women, and men. Specifically, this management strategy targets diversification; the company aims to expand story apps in two directions: technology (more refined format) and customer base (languages, genders).

Fandom strategy The company aims to benefit from synergies between story apps and in-person events. For the time being, the company will concentrate on building up expertise in 2.5 dimensional stage shows (theater production based on anime/games, etc.), online events, collaborative cafes, and e-commerce. The fandom strategy has two objectives. The first aim is to encourage interaction among users and make the experience more enjoyable for them by going beyond in-app interaction and holding physical events and developing merchandise. The second aim is to strengthen fans’ attachment to in-app characters by providing more ways to interact with them. This fandom strategy uses classical augmented reality techniques, layering experiences in the physical world atop story-world realities.

Diversification strategy The company aims to enter the rapidly growing markets for e-comics, web videos, and console games. The e-comics market is valued at JPY298.0bn (FY2019, source: Impress Corporation) and continues to grow. In this market, consumption levels are low (average monthly ARPPU of less than JPY3,000), but the company sees it as a promising market where it can solicit potential casual core customers to its written story apps. To date, the company has grown organically through original content; in e-comics Voltage is considering M&A and other forms of inorganic growth. Sensitive to the potential for rushed diversification efforts to generate losses (operating loss of JPY1.0bn in FY06/18), the company plans to monitor these initiatives closely, evaluating them every six months and withdrawing promptly from unsuccessful areas.

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Differences between initial company forecast and results

Results vs. Initial Est. FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenue (Initial Est.) 5,396 7,800 9,600 9,500 11,500 11,500 11,300 10,000 - - Revenue (Results) 4,436 6,346 8,067 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 Results vs. Initial Est. - 17.6% 3.4% -5.3% 6.1% -7.8% -2.4% -21.9% -26.1% - - Operating profit (Initial Est.) 587 800 1,000 300 600 800 600 300 - - Operating profit (Results) 547 766 857 295 616 467 531 141 -1,042 -199 -86 Results vs. Initial Est. - 30.5% 7.1% -70.5% 105.4% -22.1% -33.6% -76.5% -447.5% - - Recurring profit (Initial Est.) 586 798 998 300 600 800 600 300 - - Recurring profit (Results) 544 762 860 344 646 485 488 159 -1,068 -237 -88 Results vs. Initial Est. - 30.0% 7.7% -65.6% 115.4% -19.1% -39.0% -73.5% -455.9% - - Net income (Initial Est.) 347 472 618 80 300 400 340 190 - - Net income (Results) 329 444 511 141 292 233 210 24 -1,328 -356 -161 Results vs. Initial Est. - 28.0% 8.4% -77.2% 264.6% -22.5% -47.4% -92.9% -799.0% - - Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

FY06/13 was the first time the company had failed to meet its initial forecasts, and OPM was in the single digits (3.2%). This period coincided with the 2013 relocation to the US of founder/CEO Tsutani and his spouse (the company’s COO) following the launch of a subsidiary there in May 2012. In the meantime, a new management team was put in place in July 2013 to run the main company in Japan.

Performance exceeded expectations in FY06/14 but fell below the initial forecast in FY06/15. Even after Mr. Tsutani resumed the post of Voltage CEO in July 2016, the company failed to hit its performance targets. Since FY06/19, the company has not disclosed forecasts; the company says the operating environment is too volatile for it to predict performance with a high degree of confidence.

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Medium-term management plan Three-year strategy (FY06/17 to FY06/19, announced August 1, 2016 and revised each year since)

▷ The company does not disclose medium-term management plans or numeric targets.

▷ However, after Yuzi Tsutani resumed the post of Voltage CEO in July 2016 (he stepped down as CEO in July 2013 and was appointed chairman in September of that year), the company established a three-year strategy (FY06/17 to FY06/19). Attributing the company’s stagnation to the aftereffects of its IPO, CEO Tsutani concluded that the company’s core earnings model (processes and manuals) was growing obsolete and being reduced to mere formality. As problem areas, he identified a lack of management system dedicated to new models, means to prevent losses from ballooning, and expertise in continuous creation. Anticipating a gradual decline of the company’s core model (existing operation), CEO Tsutani set targets for new development and new models.

▷ The company revised its organization and introduced matrix management, plotting the technological development of businesses (vertical axis) against the customer base (horizontal axis). On this basis, the company proposed a three-year strategy comprising four reforms. The company has continued to revise its core strategies each year, collectively redefining them each time as a “three-year strategy.” The current “three-year strategy” refers to the outlook for FY06/21 and the management strategies outlined below.

Creating 15 autonomous organizations The company believes the cultivation of numerous young leaders is essential to autonomous and sustainable growth. To foster this leadership, the company is creating 15 autonomous organizations, each overseen by a leader with a defined operational scope. In this way, the company will develop leaders who have experience in launching businesses and creating earning power.

Creating organizations that generate new developments and models The company will respond to increasingly severe market environments by adopting a simultaneous big-picture/small-picture focus in developing multiple new series. Specifically, the company will revamp its proposal-making committees, develop ideas using groupware, create inexpensive prototypes, quickly apply market responses, and swiftly make go/no-go decisions at each business phase.

Creating organizations that cultivate businesses and earnings The company will cultivate businesses by setting clear targets and implementing a trial-and-selection scheme. The company will set a clear pass/fail line for new models. Aiming to cultivate businesses with values of around JPY10.0bn, the company will confirm business feasibility and conduct regular cost management, making small course corrections as necessary.

Reinforcing the group structure Voltage will pursue a group structure, based on the concept of “small, autonomous organizations that are loosely connected.” By establishing multiple strategic subsidiaries corresponding to different target categories and areas of content expertise, the company aims to optimize its target approaches and increase scale.

Shifting from a priority on profit to investment mode (from FY06/20)

▷ In December 2019, the company raised money in the stock market for the first time since listing. The company raised JPY616mn through a third-party placement of stock acquisition rights (to Milestone Capital Management, Ltd.). The company identified three areas for the use of funds, with JPY200mn going to each category: strengthening the promotion of existing titles, cultivating and developing new titles, and developing new areas (e-books, etc.).

▷ The company returned to profitability in Q4 FY06/20 for the first time in 12 quarters, and this profitability has continued through Q2 FY06/21. In FY06/21, the company is transitioning from a priority on profit to investment mode.

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Management strategy The company’s management strategy is outlined below.

Fundamental philosophy Contribute to society in areas where art meets business The “art” in Voltage’s corporate philosophy of “art meets business” refers to the desire to create content that inspires customers. As these efforts lead to business success, the company will direct earnings toward the development of new works. The company aims to form an organization capable of creating a wealth of innovative ideas that it turns into reality, thereby generating a steady stream of hits. The company also plans to cultivate its own unique style of content.

Share a unique style with the world: “stories about love and the challenges associated with it” When he was studying at UCLA’s film school, company founder and CEO Yuzi Tsutani concluded that heroes and heroines ultimately pursue “love and battles” as they work to overcome their own weaknesses. “Love” does not always refer to the love between men and women; it can also indicate the relationship between people accepting and supporting each other. “Battle” includes competitions between rivals, but also struggling to overcome one’s own weaknesses and challenging conventional social paradigms. As they read these stories, audiences feel empathy and cheer on the characters. Audiences are also encouraged to know they are not the only ones experiencing difficulty.

Foster individuals and an organization that grows organically To foster growth among its employees, the company first works to ascertain individual capabilities and environmental circumstances, and then to set goals that are slightly beyond their reach. Meeting these stretch goals requires employees to adopt strategies and set plans. In the process, they must compete and cooperate with others, becoming companions as they do so.

Management policy: Create an organization capable of becoming a niche market leader and producing successive hits In accordance with the corporate philosophy of “art meets business,” the company’s management policy is to provide inspiring content themed on “stories about love and the challenges associated with it.” The company defines “art” as the planning and creating of highly original content and “business” as the creation of organizations to deliver this content as successive hits to be enjoyed by many people.

“Art” content is diverse. In game genres alone, it spans such popular lines as story games/adventures, first-person shooter games, strategy games, role-playing games (RPGs), horizontal scrolling, falling block puzzles/music- or rhythm-based games, and ball games. After trying a variety of genres, the company decided to concentrate on story games targeting young women and themed on “love and conflicts.” The company explains that this genre took advantage of its expertise in film production. At the same time, the genre had few competitors, as the large game companies were not active there. The company also saw an unmet need among the numerous female smartphone users who enjoyed stories. It therefore determined it had an opportunity to succeed in this niche market.

At the same time, the company worked to develop an organization capable of producing a series of consecutive hits. CEO Tsutani refers back to an instructive comment by Bob Rosen, one of his professors at UCLA: “for films, think about format and content separately.” Theatrical film content is diverse, spanning interpersonal drama, action, science fiction, and horror. Formats are stylized: protagonist/villain, three-act structure, two-hour duration, and designed to fit a 1:1.75 screen (height to width). Game content is also diverse, containing characters, dungeons, and so forth, but formats are unstylized and might include RPGs, strategy games, horizontal scrolling, or shooting.

The company’s format focuses on story games, serializing diverse story content. Large game companies similarly may have a single hit series, but they invest large amounts in engine development. The company locks in users by allowing them to continue enjoying genres they like, successfully attracting customers by serializing diverse stories within story games. The company’s major stories include 100 Love Scenes+ (“100 Koi+;” Japan, US, Nintendo Switch), with 2mn customers; Tenka Touitsu Koi no Ran‒Love Ballad (“Koiran;” Japan, US), 1.5mn; Doubt: Usotsuki Otoko wa Dare? (“Doubt;” Japan, US, China), 1mn; and Roppongi Sadistic

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Night (“Roppongi”), 200,000. The company also provides four categories aimed at guiding users to become casual, casual core, and core customers: written story (33 titles), avatar-based (six titles), card-based (four titles), and voice actor-type.

Management targets The company uses revenue and OPM as key management indicators. Voltage targets OPM above a certain level (around 10%). CEO Tsutani explains, however, that companies should focus on “creating customers, and creating value to satisfy them,” and that revenue and profits follow on from success in creating customers. In this comment, Mr. Tsutani references Peter Drucker’s comments (The Changing World of the Executive) that “A company’s objective is not profits. Profits are merely one standard for verifying the validity of a business. There is only one way to define the validity of a business: its creation of customers.” He explains that “customer creation” is “creating a market, an aggregation of customers.” In being a company that continues to “create customers” Mr. Tsutani aims to “meet customer needs,” while at the same time becoming a “good company” that “creates value” in keeping with its phase of growth and the changing times. He emphasizes qualitative growth rather than corporate scale.

Management strategies The company’s three management strategies (app evolution strategy, fandom strategy, and diversification strategy) aim to realize “underlying profitability and the next growth phase” by incorporating growth elements in its current core business, story apps.

App evolution strategy The company plans to refine its apps in the written story, avatar-based, and card-based content categories. Beginning with Japanese-speaking women, the company intends to roll out these categories to other target audiences including English-speaking and Asian women, and men. Specifically, this management strategy targets diversification; the company aims to expand story apps in two directions: technology (more refined format) and customer base (languages, genders).

100 Love Scenes+, the company’s written story app targeting Japanese-speaking women, has gained a wide audience among Japanese women who had little previous involvement with games. Whereas content for men tends to attract core customers among mainstream gamers, the company has cultivated a new market among female casual customers. When creating story content, the company combines the movie-director perspective Mr. Tsutani acquired during his study at UCLA’s film school with the female employees’ understanding of how to induce butterflies-in-the-stomach feelings among their audience. The company seeks to set the story from a variety of angles, similar to the way camera work is used in films, so the reader becomes the heroine and has a very real sense of personal involvement.

Evoking beyond-real-life settings and scenarios, the production team works to create stories that entice the reader and elicit a sense of in-app reality, along with heart-pounding romance. The company’s aim is to add a 15-minute dash of spice to the routine lives of female students and office workers while commuting or just before going to sleep at night.

The company explains that initially the core target was women in their teens to early 30s, but this range has shifted to women aged 19–44 as much of the core readership has remained loyal over the years or returned to the fold after a break. Although content has usually assumed readers were young, single women, the company is considering the addition of content designed to attract women who are married or in the 45–50 age range. The company has run television commercials with the tag line “Fall in love with your ‘other boyfriend,’” cultivating the desire for a lighthearted side relationship.

The company commenced its global expansion effort with the distribution of English-language smartphone apps in July 2011, actively following up this move by establishing Voltage Entertainment USA, Inc. as a subsidiary in May 2012. Leveraging the local familiarity he gained while studying in the US, CEO Tsutani spent three years at the US subsidiary. The company says this subsidiary benefits from the growing global popularity of Japanese anime and games and other elements of Japanese popular culture in the US and Europe (cosplay and otaku culture).

The company explains that adaptation of Japanese-language games is relatively smooth in China, Taiwan, and other parts of Asia, but the same is not the case in Europe and the US. Except for some pockets of Japanese cultural aficionados, preferences for heterosexual partners generally differ from those in Asia. According to the company, young women in Japan and other parts of Asia

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are attracted by exaggerated characters and fanciful countries and settings, whereas young US/European women prefer more realistic, manly characters and settings in real-life cities. Voltage says it leaves content creation for the US in the hands of employees at its subsidiary there.

The company explains that in games for men, market competition is fierce, and becoming profitable has involved repeated trial and error. Voltage’s ARPPU among male users is around JPY15,000, nearly double the amount for women, but paying user rate (PUR) is low (less than 10%), and billing durations are relatively short. The company explains that rapidly collecting the cards of numerous female characters provides a sense of satisfaction for men, who also tend to be more easily drawn away to other games. The company’s male user base is relatively small (at around 200,000 people), but Voltage believes potential demand is substantial among so-called “herbivore” men (young men who express little interest in getting married or being assertive in relationships with women), which it says are numerous in Japan.

Fandom strategy The company aims to benefit from synergies between story apps and in-person events. For the time being, it will concentrate on building up expertise in 2.5 dimensional stage shows (theater production based on anime/games, etc.), online events, collaborative cafes, and e-commerce. The fandom strategy has two objectives. The first aim is to encourage interaction among users and make the experience more enjoyable for them by going beyond in-app interaction and holding physical events and developing merchandise. The second aim is to strengthen fans’ attachment to in-app characters by providing more ways to interact with them. This fandom strategy uses classical augmented reality techniques, layering experiences in the physical world atop story-world realities.

With the progress of digital transformation (DX) and advent of the so-called XR phenomenon—a catch-all for virtual reality (VR), augmented reality (AR), and mixed reality (MR)—along with digital twins and the mirror world, many companies are exploring the potential of technology that takes audiences further into virtual territory. To date, they have sought to replicate reality in the virtual world. Going forward, the focus will be on “offering new experiences that surpass reality,” which requires a shift in the mindset, namely an approach that begins from the virtual world and looking onto the real world. In the post-COVID-19 era, airline companies and the travel industry will begin using VR to cultivate customers for real experiences. Some synergies between VR and the physical are already in evidence, such as the emergence of e-sports, the use of AI by professional Go players, and cockpit simulations for aircraft, trains, and race cars. The success of Pokemon Go has also made general audiences aware of AR.

The company has rolled out AR and VR strategies in the past. For instance, Intimate VR, a VR experience that drew attention at Tokyo Game Show 2016, featured the popular egotistical billionaire character Eisuke Ichinomiya who appears in the smartphone app Kissed by the Baddest Bidder. Audience members could don a head-mounted display (HTC Vive) and headphones to experience Eisuke appearing in the room, whispering sweet words, approaching near enough to touch the member’s face, and drawing close to the member sitting in a chair. The company followed Intimate VR by introducing other content, such as Wedding VR and Pocket Kareshi AR, but these offerings were not commercially successful. The company thinks this is because the female customers it targets remain unfamiliar with VR and AR story games. Although they may be able to enjoy one-time experiences during events, the company recognizes that few members of its female audience are dedicated enough to don head-mounted displays and headphones for casual enjoyment.

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Management structure To accelerate diversification, the company is trialing a “virtual holding company” system. Although not a holding company under Japan’s Commercial Code, Voltage seeks to reap some of a holding company’s benefits by mimicking the organizational structure. Under the Board of Directors, the company has established the “VH Board” as an executive committee, comprising the company CEO, COO, the presidents of virtual operating companies (V1 to V6), and the heads of individual departments (marketing, development, and design). The VH Board is responsible for determining groupwide policies. The presidents of virtual operating companies also lead executive committees of their respective companies to formulate their own individual policies.

Voltage’s goals in adopting this virtual holding company system were to raise awareness of each business’s profitability, improve growth and profitability among currently profitable operations (V1 to V4), and accelerate the move to profitability among new operations (V5 and V6). The various virtual operating companies, the V’s, are V1 (written story content for Japanese-speaking women), V2 (avatar-based content for Japanese-speaking women), V3 (content for English-speaking women), V4 (card-based content for men), V5 (in-person events), and V6 (e-books).

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Business Business model Company profile

▷ Voltage’s business centers on entertainment content, chiefly stories about love and the challenges associated with it. The company plans, produces, develops, sells, and manages this content.

▷ Smartphone apps featuring romance stories for women are the company’s main business driver.

▷ The company also distributes content for English-speaking and Asian women overseas, and aggressively leverages its intellectual property through in-person events and character merchandise, console games, and films.

▷ In addition, the company has a suspense drama app, providing content for men. In 2019, Voltage entered the business of e-books, operating its own e-comics label and store.

▷ The company has five business categories: content for Japanese-speaking women; content for English-speaking and Asian women; content for men; in-person events; and e-books, videos, and consumer operations. The commentary below describes the content for Japanese-speaking women, content for English-speaking and Asian women, and content for men collectively as the “mobile content business.”

By business category FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Total revenue 6,346 8,067 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 YoY 43.1% 27.1% 12.7% 10.9% 5.1% 5.8% -21.4% -16.2% -3.7% -7.5% Mobile content 10,393 11,147 8,577 7,351 7,007 6,464 YoY - - - - - 7.3% -23.1% -14.3% -4.7% -7.7% % of total revenue - - - - 98.1% 99.4% 97.2% 99.4% 98.4% 98.1% Japanese; women 8,900 9,467 7,169 4,986 4,432 3,972 YoY - - - - - 6.4% -24.3% -30.5% -11.1% -10.4% % of total revenue ------81.3% 67.5% 62.2% 60.3% English-speaking, Asian women 1,493 1,680 1,408 1,897 1,621 1,457 YoY - - - - - 12.5% -16.2% 34.7% -14.5% -10.1% % of total revenue ------16.0% 25.7% 22.8% 22.1% Men 468 955 1,035 YoY ------103.8%8.4% % of total revenue ------6.3% 13.4% 15.7% In-person events 41 110 82 YoY ------170.3%-25.5% % of total revenue ------0.6% 1.6% 1.2% E-books, video, consumer operations 2 41 YoY ------% of total revenue ------0.0%0.6% Other 207 72 244 0 0 0 Operating profit 766 857 295 616 467 531 141 -1,042 -199 -86 Operating profit margin 12.1% 10.6% 3.2% 6.1% 4.4% 4.7% 1.6% -14.1% -2.8% -1.3% Japanese; women 1,204 1,356 Operating profit margin 13.5% 14.3% English-speaking, Asian women -218 -384 Operating profit margin - Other -517 -441 Operating profit margin - Number of new titles 22 37 3 2 Japanese; women 22 22 1 2 English-speaking, Asian women 15 1 Men 1 No. of in-app new titles 11 11 Japanese; women 4 4 English-speaking, Asian women 7 7 Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

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By business category FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Revenue by region 6,346 8,067 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 YoY 43.1% 27.1% 12.7% 10.9% 5.1% 5.8% -21.4% -16.2% -3.7% -7.5% Japan 9,081 9,529 7,397 5,477 5,484 5,113 YoY - - - - - 4.9% -22.4% -26.0% 0.1% -6.8% % of total revenue - - - - 85.7% 84.9% 83.9% 74.1% 77.0% 77.6% North America 910 1,046 926 1,236 1,065 967 YoY - - - - - 14.9% -11.4% 33.5% -13.9% -9.2% % of total revenue - - - - 8.6% 9.3% 10.5% 16.7% 15.0% 14.7% Other 608 645 498 679 571 508 YoY - - - - - 6.0% -22.9% 36.4% -15.9% -11.0% % of total revenue - - - - 5.7% 5.7% 5.6% 9.2% 8.0% 7.7% Voltage Entertainment USA, Inc. (cons. Sub) Revenue 757764757 Recurring profit 483540 Recurring profit margin 6.3% 4.6% 5.3% Net income 483540 Net margin 6.3%4.6%5.3% Net assets 183203237 Total assets 258261304 Tangible fixed assets by region FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Tangible fixed assets 83 5 3 Japan 74 0 0 North America 9 5 3 % of total tangible fixed assets Japan 89.0% 0.0% 0.0% North America 11.0% 100.0% 100.0% Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

Mobile content business Business model

▷ Voltage plans, produces, develops, and manages mobile content, which it provides to customers on apps via platform operators (operating system platforms, social media platforms, and carriers). The company plans and develops content itself, outsourcing artwork, writing, and programming to creative talent working on a contract basis. Upon receipt of outsourced elements, the company pays production fees to outsourced providers. It then edits and polishes the content and conducts a final check. The company says the production cycle averages 1–1.5 years.

▷ Voltage provides mobile content in three categories: for Japanese-speaking women, for English-speaking and Asian women, and for men. The company began offering content for Japanese-speaking women in 2006, content for English-speaking women in 2011, and content for men in 2017. Altogether, it distributes more than 100 titles (end-FY06/20). All mobile content is original, and the company produces more than 10 new and in-app titles each year.

▷ Some content is available for free, but the company charges for higher-end content and information services. Players pay fees to platform operators to purchase stories, gacha (lottery) prizes, and in-game items, then create virtual romances by choosing a side story and paying to move events along in a favorable way.

▷ Principal costs are personnel expenses (labor costs, salaries and allowances), outsourcing costs, advertising expenses, sales commissions (collection fees paid to platform operators: 30% of the information charges collected), and rent expenses. The company recognizes advertising expenses and sales commissions as variable costs, as they fluctuate in line with revenue. Fixed costs, which exclude these, amount to nearly 50% of revenue. Personnel expenses are around 20%. Of personnel expenses, 60% go toward production, 20% to programming, 10% to design, and 10% to admin. The company plans and develops content itself, outsourcing artwork, writing, and programming to creative talent working on a contract basis.

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New titles, new in-app titles (as of February 4, 2021) No. of new titles FY06/19 FY06/20 FY 06/ 21 by business category Launched Launched Launched Scheduled For Japanese-speaking women 1211 For English-speaking and Asian women 1 - 1 1 For Men 1--- No. of new in-app titles For Japanese-speaking women 4 4 - 1 For English-speaking and Asian women7742 Source: Shared Research based on company data Content for Japanese-speaking women: revenue of JPY4.0bn, average monthly revenue of JPY331mn (FY06/20) Overview

▷ The player herself becomes the heroine, selecting a situation and characters (“ikemen,” a Japanese term for attractive, good-looking men) she likes, and creating an idealized romance story. In 2006, the company began offering this content, its largest category, under which it distributes more than 100 titles.

▷ The company classifies this content as written story, avatar-based, card-based, and voice actor-type app content.

▷ In written story apps, typically the player herself becomes the heroine, choosing situations and characters she likes, and enjoying the story. A core title in this category is 100 Love Scenes+ (“100 Koi+”) . Average monthly ARPPU (average revenue per paying user) is JPY4,000–5,000, and the title generates average monthly revenue of JPY70mn. This equates to between 14,000 and 17,500 paying users per month.

▷ The avatar-based app category also centers on enjoying the story, but it incorporates avatars to impart a game-like atmosphere. The main title in this category is Tenka Touitsu Koi no RanLove Ballad (“Koiran”). Average monthly ARPPU is JPY10,000, and the title generates average monthly revenue of around JPY80mn (8,000 paying users per month). This title is top in the category in terms of revenue and KPIs. The other five avatar-based titles each generate average monthly ARPPU of JPY5,000–6,000, producing tens of millions of JPY in average monthly revenue. Altogether, the six titles produce average monthly revenue of JPY200–300mn.

▷ Card-based apps center on collecting character cards and developing these characters. Revenue from the main title, Ayakashi Koimeguri (“Ayakoi”), is relatively low, but average ARPPU is higher than for avatar-based apps, and the paying user rate (PUR; ratio of paying users to all active users) is about the same as for avatar-based apps.

▷ The voice actor-type app actively incorporates the physical world, with real-life events and web media exposure that feature the voice actors appearing in the app. The only app, Anidol Colors (“Anidol”), is small in terms of revenue, but the company uses the app to multiply the value of its IP and revenue generation through in-person events that utilize voice actors.

Major game titles 100 Love Scenes+ (“100 Koi+”; launched in 2017, with the underlying romance story app launched in 2006)

▷ This major app title is a popular long seller, providing written stories designed to induce a “pounding-heart” sensation among the female players. The title consolidates Voltage’s popular romance stories, with a steady stream of new characters and stories.

Tenka Touitsu Koi no Ran‒Love Ballad (“Koiran”; launched in 2014)

▷ A major title for Voltage, this story is set in Japan’s Warring States period (1467 to 1615), and allows players to enjoy life-risking virtual romances with the period’s warlords. The title has popular characters that the company leverages through merchandise, events, and other out-of-app offerings. Ayakashi Koimeguri (“Ayakoi”; launched in 2018)

▷ This is a card-based romance story app incorporating a new game play. The story is set in Japan’s vibrant Meiji era (1868 to 1912) and portrays 1,000-year romances involving the heroine, characters with supernatural powers, and events spanning their previous lives. According to the company, the title stands out for its cast of 15 unique characters played by popular voice actors.

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Anidol Colors (“Anidol”; launched in 2017)

▷ Voltage’s first voice actor-type app for female players, Anidol is a school drama in which rising young talents with animal powers seek to achieve anidol (portmanteau of animal and idol) stardom. In addition to the release of a sequel to the main story, the company also provides stage shows, merchandise, and other out-of-app offerings.

Characters in major titles (content for Japanese-speaking women)

100 Love Scenes+ (written story) Tenka Touitsu Koi no Ran‒Love Ballad (avatar-based)

Ayakashi Koimeguri (card-based) Anidol Colors (voice actor-type)

Source: Company data

Major titles (since Q3 FY06/21) in the mobile content business (content for Japanese-speaking women)

Mobile business category Classification Major titles Contraction 100 Love Scenes+ 100 Koi+ Written story Doubt: Usotsuki Otoko wa Dare? Doubt Tenka Touitsu Koi no Ran - Love Ballad Koiran Chikai no Kiss wa Totsuzen ni - Love Ring Chikai Nemuranu Machi no Cinderella Cinde Content for Japanese- Avatar-based Kagami no Naka no Princess - Love Palace Mirapuri speaking women Shin Oujisama no Propose - Eternal Kiss Ouji Makai Ouji to Miwaku no Naitomea Makai Bakumatsu Ishin Amakakeru Koi Bakuten Card-based Ayakashi Koimeguri Ayakoi Voice actor type Anidol Colors Anidol Source: Shared Research based on company data

Content IP categories Classification Explanation Written story A type of application in which users focus on enjoying the written story. A type of application in which the main contents are stories, combined with Avatar-based gameplay elements such as avatars. Card-based An application where players focus on collecting and developing cards. A type of app that actively incorporates the physical world, with real-life events and Voice actor-type web media exposure featuring the voice actors appearing in the app.

Source: Shared Research based on company data

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Customers

▷ Voltage’s target customers are women who enjoy fictional stories (aged 19–44, approx. 20mn people in Japan). The company estimates its potential market in Japan at around JPY100bn (around 2016–2017). The company segments this market into casual customers (market value of JPY10.0bn), casual core customers (JPY40.0bn), and core customers (JPY50.0bn). Core customers tend to be deeply immersed in games (average monthly ARPPU from JPY10,000 to tens of thousands of JPY). Casual customers enjoy dipping into games they like (average monthly ARPPU of several thousand JPY), while casual core customers are positioned between the two other categories (average monthly ARPPU of several thousand JPY to JPY10,000).

▷ In the “content for Japanese-speaking women” business, written stories target casual customers, avatar-based content targets casual core customers, card-based content targets casual core customers and core customers, and voice actor-type content targets core customers. These categories are listed on a continuum, from those that focus specifically on a story element to those featuring game elements. Including overseas sales, the company estimates that casual customers (written story) account for more than 30% of total revenue, casual core customers (avatar-based, card-based) for more than 40%, core customers (card-based, voice actor-type) for around 20%, and others (in-person events, e-books, consumer operations, and others) for less than 5%. Among its mainstay titles, the company says 100 Koi+ has a customer base of 2mn people, Doubt: Usotsuki Otoko wa Dare? (“Doubt”) has a base of 1mn, and Koiran has a base of 1.5mn.

Billing model

▷ The billing model for mobile content is free-to-play, charging for in-game items mainly on a pay-as-you-go basis (more than 80% of Voltage’s revenue). The remainder (less than 20% of revenue) comes from unit billing, by the story.

▷ The company says that for female players, the paying user rate (PUR; ratio of paying users to all active users) is high but ARPPU is small, and the billing duration is long. According to the company, female players tend to be long-term contributors to a particular male character they take a liking to.

▷ 100 Koi+ (written story content) uses two in-app currencies, points (1 point = JPY1) and hearts (1 heart = around JPY10). Points can be used to purchase stories, while hearts are used to pay for storyline options, which allow players to read more well-developed stories. Those paying for storyline options also need to purchase the stories. In-game items sell for JPY120 to JPY2,440. A monthly plan (JPY1,000) with bonuses such as access to a certain number of stories or previews to a wide variety of stories is also available. Average monthly ARPPU is JPY4,000–5,000.

In-app currency Use Rate Points Purchase stories JPY1 Hearts Purchase storyline options Approx. JPY10

Source: Shared Research based on company data

▷ The avatar-based app, Koiran, uses two in-app currencies, pearls (1 pearl = approx. JPY120) and love passes (1 love pass = approx. JPY120, partly recharged over time). Pearls can be used for gacha (lottery) prizes, to make in-app purchases, and to recover strength, while love passes are used to read stories. Pearls can also be used to help events play out in advantageous ways. In-game items sell for JPY120 to JPY6,000. Average monthly ARPPU is JPY10,000.

In-app currency Use Rate Gacha (lottery) prizes, in- Pearls game item purchases, Approx. JPY120 recover strength Approx. JPY120 (partly Love passes Read stories renewed over time) Source: Shared Research based on company data

▷ The avatar-based app, Chikai no Kiss wa Totsuzen ni (“Chikai”), uses two in-app currencies, coins (1 coin = JPY1) and love passes (1 love pass = approx. 75 coins, partly recharged over time). Coins can be used for gacha (lottery) prizes, to make in-app purchases, and to recover strength, while love passes are used to read stories. Coins can also be used to help events play out in advantageous ways. In-game items sell for JPY120 to JPY6,000. Average monthly ARPPU is JPY5,000–6,000.

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In-app currency Use Rate Gacha (lottery ) prizes, in- Coins game item purchases, JPY1 recover strength Approx. 75 coins (partly Love passes Read stories renewed over time) Source: Shared Research based on company data Content for English-speaking and Asian women: revenue of JPY1.5bn, average monthly revenue of JPY121mn (FY06/20)

▷ In this business, the company offers romance story apps for English-speaking and Asian women.

▷ In addition to titles translated from the “content for Japanese-speaking women” business, the company distributes original titles produced by its subsidiary at the San Francisco studio.

▷ Under the major title Love365: Find Your Story (“Love 365”; launched in 2017), translations of 100 Koi+ stories are available. Average monthly ARPPU is around JPY3,000. The in-app user interface and billing model follow those of 100 Koi+.

Characters in major title Love365: Find Your Story

Source: Company data

Major titles (since Q3 FY06/21) in the mobile content business (content for English-speaking and Asian women) Mobile business category Classification Major titles Contraction, notes Love365: Find Your Story Love365 Lovestruck: Choose Your Romance Lovestruck Content for English-speaking Written story Simplified Chinese version of Doubt: Usotsuki Otoko wa Dare? Doubt (for China) and Asian women Mandarin Chinese version of Doubt: Usotsuki Otoko wa Dare? Doubt (for Taiwan) Card-based Ayakashi: Romance Reborn Ayakashi (for Thailand) Source: Shared Research based on company data Content for men: revenue of JPY1.0bn, average monthly revenue of JPY86mn (FY06/20)

▷ In this business, the company offers apps that differ from romance story apps. It distributes titles containing elements that allow male players to attract and cultivate female characters.

▷ In Roppongi Sadistic Night (“Roppongi”), a major title, players collect cards mainly through gacha (lottery) prizes. As they move through the game, players complete certain elements of the main story and engage in repeated card battles and missions. Average monthly ARPPU is more than JPY15,000, nearly twice that of content for women. Average monthly revenue is JPY86mn (FY06/20), near that of major titles for women. This amount calculates to 5,000–6,000 paying users per month, around 1/10th that of content for women.

Major game title Roppongi Sadistic Night (“Roppongi”; launched 2015) ▷ This title, targeting men, an altogether new story-based title for Voltage, contains elements that allow players to attract and cultivate female characters. Players can select from among multiple endings (available when clearing a certain level within the game).

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Characters in major title Roppongi Sadistic Night

Source: Company data

Major titles (since Q3 FY06/21) in the mobile business (content for men) Mobile business category Classification Major titles Contraction Content for men Card-based Roppongi Sadistic Night Roppongi Source: Shared Research based on company data Customers

▷ In this business, Voltage targets young male customers. The company is cultivating casual core customers and core customers with the card-based Roppongi app.

▷ The company has cultivated a relatively small market (around 200,000 people), but ARPPU is nearly double that of content for women (JPY15,000 per month), producing average monthly revenue of JPY86mn (FY06/20), and contributing to earnings among Voltage’s major titles.

▷ Among male players, the paying user rate (PUR) tends to be low, ARPPU large, and billing durations relatively short. By comparison, among female players the PUR tends to be high, but with small ARPPU and long billing durations. According to the company, most male players tend to expand their female character card collection, while female players tend to cultivate a particular male character for long periods of time.

Billing model

▷ Roppongi uses two in-app currencies: story passes (1 story pass = JPY1, partly recharged over time) and crystals (1 crystal = JPY1, can also be earned when clearing a story level or as a login bonus).

▷ Story passes can be used to buy stories, while crystals can be used for gacha (lottery) prizes and to recover battle points. In-game items sell for JPY120 to JPY10,000. Average monthly ARPPU is more than JPY15,000.

In-app currency Use Rate JPY1 (partly renewed over Story passes Purchase stories time)

Gacha (lottery) prizes, JPY1 (can be obtained by Crystals recover battle points clearing a story or as a login bonus) Source: Shared Research based on company data KPIs

▷ The company checks its performance data on a daily basis, and works to continue improving its performance based on these data.

▷ As key performance indicators (KPIs), the company quantifies the number of users (cumulative), ad views (page views, or PVs), the installation rate for its apps (conversion rate, or CV), in-app purchase rate at initial play, paying user rate (PUR), retention rate, lifetime value (LTV), ARPPU, diffusion rate, and cost per install (CPI).

▷ The company does not disclose numeric values for these KPIs on an ongoing basis, although we were able to get a sense of ARPPU values during management interviews. With regard to the measurement of KPIs and trends, from the company’s

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fragmented disclosure of the figures and qualitative comments, we were able to piece together the considerations and consistency checks outlined below.

Considerations, consistency checks

▷ The company says it has 70mn cumulative users (source: Materials from a company lecture at Bunkyo University on October 29, 2020). This figure is the total number of registered users via the monthly fee-based official sites of mobile carriers (Docomo, au, and SoftBank [TSE1: 9434]); the number of registered social app users on social media platforms (GREE, Mobage, dgame, Ameba, DMM GAMES, Amazon (Kindle), and Voltage’s own platform, called Joshige); and app installations via the App Store and GooglePlay, and totals for individual titles. Separately, the company introduces the number of users per year as 700,000 (source: Materials from a company lecture at Bunkyo University, November 28, 2019). Assuming this figure is for paying users, we calculate the monthly average number of paying users to be under 60,000. These figures also suggest that the cumulative figure of 70mn people represents potential users (most being non-active users or users who play for free), and that of this figure, each year around 1% (70,000 people) are active users who pay to play.

▷ Voltage says that more than 100,000 people download its apps each month, that it averages 60,000 paying users each month (in Japan), and that average monthly ARPPU is JPY7,000–8,000. Including content for English-speaking and Asian women, average monthly revenue calculates to just under JPY550mn (revenue of JPY6.6bn in FY06/20).

▷ The company revealed some KPI figures in the past including an installation rate of 3%, an in-app purchase rate at initial play of 35%, and a retention rate (follow-on in-app purchase) of 70%, based on the number of ad views (page views, or PV) indexed to 100 (source: Materials from a company lecture at Bunkyo University, October 29, 2020). However, the company says these data were from the time a monthly membership fee-based billing model (linked to official mobile carrier sites) was mainstream and are therefore “just estimates.” Under the current pay-as-you-go model, it says the in-app purchase rate at initial play is 5–10%. According to the company, more than 100,000 people download its apps each month and monthly paying users in Japan (people who purchase content or pay to play) average around 60,000 people per month. If around 120,000 people in Japan download the apps each month (Shared Research’s assumption), the annual number would be 1.4mn people (FY06/20). Taking the installation rate to be 3%, total monthly ad views (PVs) can be calculated to be around 4mn (120,000 / 3%). As the company’s main content is written stories for women, at 70%, its retention rate is high relative to the average (games for men).

▷ The table below shows KPIs by business category. In written stories for women, unit prices (ARPPU) are low, while the number of users (downloads), paying user rate (PUR; ratio of paying users to all active users), and retention rate tend to be high. Conversely, in content for men unit prices are high, but the number of users, PUR, and retention rate are low. Average figures for the KPIs shown in the table are broadly in line with the considerations and inferences outlined above and appear to be generally in accordance with actual conditions at the company. The company says general statistics (source: “Survey of In-App Purchases,” by Values, Inc.) indicate that on average between 25% and 35% of female players spend money in apps. The PUR for the company’s written story app, 100 Koi+, is generally in line with the PUR for e-comics (a similar model in which users buy stories to read).

KPIs by business category

In-app purchase rate Downloads ARPPU Retention rate at initial play Japanese-speaking women Many High JPY4,000–5,000 High (written story) Japanese-speaking women Moderate Medium JPY5,000–10,000 Medium (avatar-based) English-speaking women Many Medium JPY3,000–5,000 High (written story) Men Few Low At least JPY15,000 Low Over 100,000 Average 5–10% JPY7,000-8,000 10% plus (30 days) downloads/month

Source: Shared Research based on company data

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Platform operators

▷ The company provides its content to users in the form of apps distributed via platform operators (operating system platforms, social media platforms, and carriers).

▷ When the company was established in 1999, content was distributed mainly via carriers, centered on NTT Docomo’s i-mode (for around seven years). The period from 2006 (around three years) was characterized by operators of social media on feature phones, such as DeNA (TSE1: 2432) and GREE (TSE1: 3632). Smartphone apps became mainstream around 2012, and since then US operating system platforms (Apple and Google) have dominated on the distribution side (around eight years). Keeping pace with these platform developments, the company launched its official mobile carrier site business in March 2000, began distributing social apps in June 2010, and launched smartphone apps in June 2011.

▷ Looking at revenue from platform operators, revenue via NTT Docomo peaked in FY06/12, while revenue via GREE peaked in FY06/13. Revenue via Apple and Google peaked in FY06/16 and plateaued from FY06/18 to FY06/20. The company expects revenue to remain dominated by the US operating system operators until around 2022, when 5G becomes mainstream.

▷ The company pays platform operators a percentage of revenue as sales commissions. These commissions were 16–17% of revenue between FY06/09 and FY06/10, 19–24% between FY06/11 and FY06/12, and around 30% between FY06/14 and FY06/20. Percentage sales commissions have risen over time along with the shift from carriers to social media platforms to operating system platforms.

Revenue by platform operator

Platform operator (JPYmn) FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Consolidated revenue 3,431 4,436 6,346 8,067 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 Apple Inc. 705 2,164 3,351 4,322 3,478 3,078 3,172 2,780 Google Payment G.K. 338 1,331 2,449 3,369 2,945 2,701 2,733 2,731 Gree, Inc. 0 0 1,873 3,137 3,194 2,926 2,212 1,644 1,127 730 512 408 NTT Docomo, Inc. 1,626 2,270 2,420 2,572 2,284 1,758 1,412 925 610 411 302 233 KDDI Corporation 760 954 930 1,079 1,171 SoftBank Corp. 374 543 583 Kyocera Communication Systems Co., Ltd. 290 295 Sum 3,050 4,062 5,806 6,787 7,693 8,179 9,425 10,259 8,160 6,921 6,720 6,152 Other 381 374 540 1,279 1,396 1,904 1,175 960 660 471 400 436 % of consolidated revenue Apple Inc. - - - - 7.8% 21.5% 31.6% 38.5% 39.4% 41.6% 44.6% 42.2% Google Payment G.K. - - - - 3.7% 13.2% 23.1% 30.0% 33.4% 36.5% 38.4% 41.5% Gree, Inc. - - 29.5% 38.9% 35.1% 29.0% 20.9% 14.6% 12.8% 9.9% 7.2% 6.2% NTT Docomo, Inc. 47.4% 51.2% 38.1% 31.9% 25.1% 17.4% 13.3% 8.2% 6.9% 5.6% 4.2% 3.5% KDDI Corporation 22.1%21.5%14.7%13.4%12.9%------SoftBank Corp. 10.9%12.2%9.2%------Kyocera Communication Systems Co., Ltd.8.5%6.7%------Sum 88.9% 91.6% 91.5% 84.1% 84.6% 81.1% 88.9% 91.4% 92.5% 93.6% 94.4% 93.4% Other 11.1% 8.4% 8.5% 15.9% 15.4% 18.9% 11.1% 8.6% 7.5% 6.4% 5.6% 6.6% Sales commissions (parent) 584 699 1,181 1,914 2,485 2,993 3,189 3,374 2,611 2,023 1,932 1,743 As % of parent revenue 17.0% 15.8% 18.6% 23.7% 27.3% 29.8% 30.2% 30.3% 30.6% 30.7% 30.4% 30.0% Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

In-person events business

Overview

▷ The company divides its in-person events business into fandom and events/rights development. Fandom occurs when users become fans (people with a deep positive emotional connection to the works). Fandom activities target the group of fans who go beyond purchasing the company’s titles to empathize with and support them. In events/rights development, the company conducts activities and develops businesses that leverage title content outside of apps. In this category, the company holds in-person events—mainly stage events and collaborative cafes—as well as selling merchandise, creating films, selling CDs, and engaging in other video/music-related activities.

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Classification Explanation Fan culture based on a deep and positive emotional connection to titles. Refers to a Fandom community of fans who are more than consumers, sharing in the love of the titles and supporting their success. Non-app activities using the intellectual property from game titles. Categories Events, rights operations include physical events, such as stage shows and collaborative cafes, merchandise sales, cinematic adaptations, and video/music activities (CD sales).

Source: Shared Research based on company data In-person events: revenue of JPY82mn, average monthly revenue of JPY6.8mn (FY06/20)

▷ The company plans and holds in-person events, plans and produces merchandise, operates an online shop, and produces and sells videos and music, all in an effort to help customers establish deeper ties with the worldview and characters that appear in Voltage’s mobile content.

In-person events categories (from Q3 FY06/21) Business category Classification Major names Contraction User interactive (Vol Fes, collaborative cafes) In-person events Events, rights operations, fandom In-person events Live type (2.5D stage shows, fan meetings) Source: Shared Research based on company data

E-books, video, and consumer operations business

Overview

▷ E-books are digitized, book-style renditions of the company’s stories and comics. The e-books are formatted for reading on smartphones and tablets. Videos include TV programs and YouTube videos. In consumer operations, the company offers adaptations of its content as software for sale via Nintendo Switch.

Classification Explanation

E-books Stories and comics digitized to be displayed and read on electronic readers.

Video TV programs, YouTube Consumer operations For Nintendo Switch Source: Shared Research based on company data E-books, videos, and consumer operations: revenue of JPY41mn, average monthly revenue of JPY3.4mn (FY06/20)

▷ In the e-books business, the company operates an e-comics store, as well as producing and selling own-label products. On December 24, 2019, the company began distributing a user-posting chat novel app, KISSMILLe: 100 Love Scenes Chat Fiction. In addition to offering the company’s original chat romance novels, this platform-based app allows users to post their own novels and photos, which are shared and supported within the user community. As a revenue model, in addition to conventional pay-as-you-go billing the company has introduced subscription billing. The company aims to turn this business into a social communication platform where users can enjoy reading, creating, and posting content. The company is also preparing to incorporate video and new technology in anticipation of the move to 5G.

▷ August 6, 2020 marked the grand opening of Vol-Com, an e-comics store for adult women. Simultaneously, the company launched its own e-comics label, otona Cinderella. From the grand opening date, the company began handling some 85,000 works (25,000 publications) from more than 20 publishers, including large companies. The company also provided advance releases from otona Cinderella.

▷ The e-comics market is valued at JPY298.0bn (FY2019, source: Impress Corporation) and continues to grow. In this market, consumption levels are low (average monthly ARPPU of less than JPY3,000), but the company sees it as a promising market where it can solicit potential casual core customers to its written story apps. To date, the company has grown organically through original content; in e-comics Voltage is considering M&A and other forms of inorganic growth.

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Categories within e-books, videos, and consumer operations (from Q3 FY06/21) Business category Classification Major names Contraction KISSMILLe: 100 Love Scenes Chat Fiction KISSMILLe E-books Vol-Com Vol-Com E-books, videos, and otona Cinderella OC Label consumer operations Video Anidol TV programs, YouTube — For Nintendo Switch (steady introduction of popular titles from Consumer operations — the past) Source: Shared Research based on company data

Existing titles, recently released titles, and new areas

The company aims to generate sustainable growth by cycling earnings from existing titles back into recently released titles and new areas. By “existing titles,” the company refers to the story apps business (excluding content for Asian women). “Recently released titles” means content for Asian women that are being launched and nurtured. “New areas” are e-books, in-person events, videos, and consumer operations. Existing titles generate average monthly revenue of more than JPY500mn, while recently released titles and new areas generate more than JPY60mn (Q2 FY06/21).

The company reported consecutive quarterly operating losses from Q1 FY06/18 through Q3 FY06/20, with operating profit on existing titles being eaten up by losses in recently released titles and new areas. However, it returned to the black in Q4 FY06/20. As they become profitable, the company aims to move 20–30% of new titles into recently released titles (allocating the remaining 70–80% to existing titles). The company intends for new titles to become profitable on a monthly basis within two years of release and to recover its investment within four years. The company says its rate of success on new titles is around 30%.

For each of its existing titles, the company introduces several new in-app titles each year to ensure ongoing revenue. In the period when annual revenue exceeded JPY10.0bn (FY06/14 to FY06/16), a single title contributed significantly to earnings. In FY06/15 and FY06/16, Doubt was the company’s biggest hit, but the mystery-solver content failed to maintain hit status, and caused the company performance to stall from FY06/17. Rather than depending on specific hits in order to grow, now the company is trying to foster steady and sustained growth by diversifying its business portfolio and benefiting from synergies.

Monthly average revenue and operating profit for existing titles Monthly average revenue and operating profit for recently released titles

Revenue Operating profit (RHS) Operating expenses (RHS) (JPYmn) Revenue Operating profit (RHS) Operating expenses (RHS) (JPYmn) (JPYmn) (JPYmn) 700 700 70 100 600 600 60 80 60 500 500 50 40 400 400 40 20 300 300 30 0 -20 200 200 20 -40 100 100 10 -60

- - 0 -80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY06/19 FY06/20 FY06/21 FY06/19 FY06/20 FY06/21 Source: Shared Research based on company data Source: Shared Research based on company data Note: Management accounting basis Note: Management accounting basis

Group companies

In May 2012, the company established Voltage Entertainment USA, Inc. as a subsidiary. Performance was steady from FY06/18 to FY06/20, with revenue of around JPY760mn, recurring profit of approximately JPY40mn, and a recurring profit margin of approximately 5%. President Tsutani became CEO of the subsidiary in May 2012. He and COO Higashi (President Tsutani’s spouse) moved to the US to manage the subsidiary from then until July 2016, when Mr. Tsutani returned to his post as CEO of Voltage.

VoltageVR Inc. and Volpictures Inc. were established as strategic subsidiaries to drive new businesses. VoltageVR is spearheading the use of virtual reality, augmented reality, and artificial intelligence in the mobile content business. Volpictures plans, produces, and sells video content, such as Anidol TV programs and YouTube videos.

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Affiliated companies Company (cons. subsidiary) Location Capital Main businesses Voting rights Voltage Entertainment USA, Inc. California, US USD12mn Mobile content 100.0% Mobile content using VR, AR, VoltageVR Inc. Shibuya, Tokyo JPY30mn 100.0% and AI technologies

Planning, production, and sale Volpictures Inc. Shibuya, Tokyo JPY30mn 100.0% of video content

Source: Shared Research based on company data

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Analysis of profitability

Profit margins FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Gross profit 3,363 4,931 6,318 6,344 6,700 6,697 6,855 4,922 4,052 4,512 4,220 Gross profit margin 75.8% 77.7% 78.3% 69.8% 66.4% 63.2% 61.1% 55.8% 54.8% 63.4% 64.1% Operating profit 547 766 857 295 616 467 531 141 -1,042 -199 -86 Operating profit margin 12.3% 12.1% 10.6% 3.2% 6.1% 4.4% 4.7% 1.6% - - - EBITDA 578 797 895 422 751 634 706 269 -965 -134 -82 EBITDA margin 13.0% 12.6% 11.1% 4.6% 7.5% 6.0% 6.3% 3.0% -13.1% -1.9% -1.2% Net margin 7.4% 7.0% 6.3% 1.6% 2.9% 2.2% 1.9% 0.3% - - - Financial ratios ROA (RP-based) 29.3% 24.6% 20.7% 7.9% 13.8% 9.7% 9.9% 3.4% -28.4% -8.1% -3.0% ROE 29.6% 20.6% 16.9% 4.3% 8.5% 6.3% 5.5% 0.6% -43.5% -16.3% -7.5% Total asset turnover 2.39 2.05 1.94 2.08 2.16 2.11 2.27 1.89 1.97 2.42 2.28 Working capital 1,015 1,400 1,759 1,626 1,681 1,528 1,102 1,006 916 831 922 Current ratio 267.7% 333.4% 330.6% 359.5% 285.2% 304.9% 357.2% 491.4% 326.0% 303.7% 368.8% Quick ratio 265.9% 330.8% 330.5% 359.3% 284.6% 304.2% 356.9% 488.6% 304.0% 301.5% 363.1% OCF / Current liabilities 0.87 0.47 0.37 0.24 0.73 0.32 0.82 0.47 -0.98 0.29 -0.30 OCF / Total liabilities 0.73 0.40 0.35 0.26 0.62 0.35 0.89 0.59 -0.96 0.28-0.31 Cash conversion cycle (days) 60 52 56 60 51 45 33 35 41 36 39 Change in working capital 160 385 359 -133 55 -153 -426 -95 -90 -85 91 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Accounts receivable turnover 4.5 5.0 4.9 5.1 5.7 6.0 7.4 7.3 6.9 7.3 6.8 Days in accounts receivable 81.2 72.9 75.0 71.5 64.3 61.3 49.0 50.1 53.0 50.0 53.9 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Inventory turnover 97.8 70.6 128.9 ------Days in inventory 3.75.22.8------FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Accounts payable turnover 16.9 17.6 19.0 30.7 27.5 22.3 22.8 24.9 29.8 25.9 24.7 Days in accounts payable 21.6 20.8 19.2 11.9 13.3 16.4 16.0 14.6 12.2 14.1 14.8 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Tangible fixed asset turnover 95.3 149.3 156.8 63.1 43.3 36.3 40.6 49.5 64.4 161.3 1,691.4 Days in tangible fixed assets 3.8 2.4 2.3 5.8 8.4 10.1 9.0 7.4 5.7 2.3 0.2 Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

Voltage’s gross profit margin has declined by around 10pp from the 70% range (average; FY06/09 to FY06/12) to the 60% range (FY06/13 to FY06/20). Meanwhile, SG&A expenses have been relatively steady as a percentage of revenue, remaining in the 60% range (FY06/09 to FY06/20). As a result, OPM has fallen from the 10% range (FY06/09 to FY06/12) to single-digit percentages (FY06/13 to FY06/17), and then into operating losses (FY06/18 to FY06/20).

As a percentage of FY06/20 revenue, cost of revenue was 35.9% and SG&A expenses amounted to 65.4%. Collectively, the company refers to advertising expenses (23.2% of FY06/20 revenue) and sales commissions (30.4%) as “platform & advertising” (P&A) expenses (53.6%). The company considers P&A expenses to be variable costs, as they fluctuate according to revenue. Conversely, Voltage defines labor costs (17.0% of FY06/20 revenue), outsourcing costs (11.8%), and other expenses (18.9%) as fixed costs (47.7%). Personnel expenses (labor costs, salaries and allowances) are around 20% of revenue. Of personnel expenses, 60% go toward production, 20% to programming, 10% to design, and 10% to admin. The company pays sales commissions to platform operators, mainly Apple and Google.

To return to operating profitability, the company has worked to curtail labor costs, raise revenue per employee, and improve productivity and efficiency. In the past, the company operated an in-house server, but now essentially all operations have been migrated to the cloud. The company has 231 employees (FY06/20), less than 60% of its peak number of 389 (FY06/17). Similarly, by FY06/20 the average number of temporary workers had fallen to 52, less than 30% of the peak number of 177 (FY06/15). The company says it has little room left to reduce employee numbers, as long as it plans to continue introducing multiple new in-app titles per app each year.

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Market and value chain

Game market The Japanese game market has been growing steadily, reaching a value of JPY1.7tn in 2019 (+3.8% YoY, source: Famitsu Game White Paper 2020). The global market is nearly 9x the size of Japan’s (USD146.2bn in 2019, source: Newzoo, note: comparisons of scale based on Newzoo’s standards). The global market is expected to continue growing as the world’s population increases and the mobile device diffusion rate increases. In North America, a major gaming market, demand is healthy both for home video game consoles and PCs. In areas where populations are highly concentrated (China, other parts of Asia, and Africa), a growing adoption rate for mobile devices is driving market demand.

Size of the global game market Size of the global game market (by category, 2020 estimate: USD174.9bn)

(USDbn) 250 217.9

200 174.9 Console Games 146.2 138.8 51.2 150 29% 121.7 Mobile Games 106.5 86.3 93.1 49% 100 84.8 76.5 PC Games 70.6 37.4 22% 50

0 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2023E

Source: Shared Research based on Newzoo data Source: Shared Research based on Newzoo data

Size of the global game market (by Size of the Japanese game market region, 2018: USD138.8bn)

Source: Shared Research based on Famitsu Game White Paper 2020 Source: Shared Research based on Newzoo data Annual consumer spending According to the Family Income and Expenditure Survey by the Ministry of Internal Affairs and Communications, household telephone communication charges (annual expenditure per household) edged up from 3% of total consumer spending in 2010 to 4% in 2017. Fixed-line telephone communication charges have fallen each year, whereas mobile telephone communication charges have grown, even exceeding the decline in fixed-line telephony. Content-related spending has fallen gradually, mainly due to lower spending on books and other printed work, as well as music, video, and other recorded media. As a percentage of content-related expenditure, spending on video games has hovered between 2.5% to 3.9%. Although the Japanese population continues to shrink, mobile telephone communication charges have risen, driven by high-end smartphones. Gaming has transitioned from TVs to PCs, from home video game consoles to mobile phones and then on to smartphones. Along with this shift in platforms, game software and player characteristics have also changed, creating a dynamic market.

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Content-related annual consumer spending per Japanese household (JPY) (JPY) 2010 2011 2012 2013 2014 2015 2016 2017 Telecom charges 110,771 111,372 111,906 112,453 113,775 117,720 120,392 122,207 Fixed-line phones 30,853 30,806 30,429 29,354 27,536 26,414 24,086 21,957 Mobile phones 79,918 80,566 81,477 83,099 86,239 91,306 96,306 100,250 Consumption expenditures 3,027,938 2,966,673 2,971,816 3,018,910 3,017,778 2,965,515 2,909,095 2,921,476 % of consumption expenditures 3.66% 3.75% 3.77% 3.72% 3.77% 3.97% 4.14%4.18% Content 83,098 81,586 80,567 78,994 78,305 75,226 77,548 77,644 Movie and theater admission 6,677 5,843 6,138 6,112 6,453 5,786 6,504 6,818 TV reception fee 22,723 23,537 23,651 23,620 23,966 24,130 25,112 25,692 Video games 3,259 2,637 2,922 2,432 2,229 1,846 1,978 2,771 Book and other publications 46,214 45,411 44,339 43,364 42,646 40,795 40,281 39,303 Media with music and video 4,225 4,158 3,517 3,466 3,011 2,669 3,673 3,060 % of consumption expenditures 2.74% 2.75% 2.71% 2.62% 2.59% 2.54% 2.67%2.66% Movie and theater admission 8.0% 7.2% 7.6% 7.7% 8.2% 7.7% 8.4% 8.8% TV reception fee 27.3% 28.8% 29.4% 29.9% 30.6% 32.1% 32.4% 33.1% Video games 3.9% 3.2% 3.6% 3.1% 2.8% 2.5% 2.6% 3.6% Book and other publications 55.6% 55.7% 55.0% 54.9% 54.5% 54.2% 51.9% 50.6% Media with music and video 5.1% 5.1% 4.4% 4.4% 3.8% 3.5% 4.7% 3.9% Source: Shared Research based on data from the Ministry of Internal Affairs and Communications (2018) Note: “Video games” is the total of video game consoles and game software units. The competition for free time The average amount of time Japanese people spend on the internet is highest, by far, among people aged 10–19 and in their 20s. Those age groups also spend the most time playing online and social games (particularly on holidays). At the same time, the amount of time these people spend on video posting and sharing services and on viewing and posting on social media exceeds the time they spend playing online and social games. People in their 30s and older spend more time reading and writing email, but on holidays this time is spent instead on viewing and posting on social media and on video posting and sharing services. Time spent playing online and social games also increases.

Men spend 2–3x more time than women in playing online and social games. By contrast, women tend to spend more time viewing and posting on social media than men do. As internet content and services grow more diverse, the cost of free time is rising. In an era when free-to-play has become the norm, people are becoming less likely to spend entire days on role-playing games.

Average time spent on the internet in Japan, by category (minutes, 2019)

(weekday; minutes) All 10s 20s 30s 40s 50s 60s Men Women Read and write emails 34.6 16.0 25.9 45.3 34.1 45.8 30.5 36.8 32.3 Read/write blogs and browse websites 22.4 14.2 28.8 30.9 22.9 24.1 12.125.419.3 Read and write social media 32.3 64.1 71.4 35.3 19.5 23.9 8.2 26.6 38.1 View and share video 25.9 74.2 46.6 30.6 16.2 12.2 7.0 31.7 20.0 View video-on-demand 5.410.79.57.23.64.01.54.76.0 Play online/social games 15.5 33.8 29.8 19.9 11.2 10.5 2.2 21.6 9.4 Make online phone calls 3.1 9.2 7.8 2.2 1.3 0.9 1.7 3.7 2.6 Simple aggregation 139.2 222.2 219.8 171.4 108.8 121.4 63.2 150.5 127.7 (holiday; minutes) All 10s 20s 30s 40s 50s 60s Men Women Read and write emails 22.4 20.6 20.5 26.4 19.3 21.6 25.3 19.3 25.5 Read/write blogs and browse websites 22.9 12.2 36.5 23.8 25.4 27.7 9.9 26.5 19.2 Read and write social media 36.2 83.4 81.1 38.4 19.5 24.0 9.1 29.5 43.0 View and share video 37.2 114.8 69.0 44.1 19.5 17.2 8.9 49.2 24.9 View video-on-demand 7.413.211.610.45.05.92.98.66.1 Play online/social games 23.7 58.1 48.1 28.5 13.0 18.3 2.2 33.5 13.7 Make online phone calls 3.7 13.8 10.7 2.1 0.6 0.6 1.3 5.4 1.9 Simple aggregation 153.5 316.1 277.5 173.7 102.3 115.3 59.6 172.0 134.3 Source: Shared Research based on data from the Ministry of Internal Affairs and Communications (September 2020) Rates of use of social media Looking at rates of use of major social media services/apps in Japan, across all age groups and genders, usage rates are 80–90% for LINE and YouTube (slightly lower among people in their 60s). By comparison, rates of use for Twitter (NYSE: TWTR), Facebook (NASDAQ: FB), and Instagram are generally in the high 30% to the high 40% range. More men use Twitter, while women prefer Instagram. People in the 10–20s use Twitter and Instagram more, while Facebook use is relatively more widespread among people

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in the 40s and older. Among people in their 30s, usage is split evenly across Twitter, Facebook, and Instagram. Usage of TikTok and Snapchat is markedly higher among teenagers than in other age groups, possibly edging out Facebook. The changing social media preferences of this cohort over the next decade as these teenagers become adults is worth monitoring.

Usage rates in Japan for social media services/apps (2019) Social media usage ratio All 10s 20s 30s 40s 50s 60s Men Women LINE 86.9% 94.4% 95.7% 94.9% 89.3% 86.3% 67.9% 85.1% 88.8% Twitter 38.7% 69.0% 69.7% 47.8% 33.4% 28.1% 9.3% 41.8% 35.4% Facebook 32.7% 28.9% 39.3% 48.2% 35.9% 33.5% 12.1% 33.4% 32.1% Instagram 37.8% 63.4% 64.0% 48.6% 32.5% 30.9% 9.3% 31.9% 43.8% mixi 4.1% 1.4% 6.6% 5.1% 4.0% 4.7% 2.1% 4.0% 4.2% GREE 2.1% 1.4% 4.3% 1.2% 3.7% 1.1% 0.7% 2.5% 1.6% Mobage 4.2% 7.7% 8.1% 4.7% 3.7% 2.2% 1.7% 5.9% 2.4% Snapchat 2.9% 12.7% 2.8% 3.2% 1.8% 0.7% 1.4% 3.0% 2.8% TikTok 12.5% 47.9% 20.4% 12.6% 5.5% 6.5% 2.8% 11.3% 13.6% YouTube 76.4% 93.7% 91.5% 85.4% 81.3% 75.2% 44.8% 79.7% 93.0% niconico 17.4% 30.3% 33.2% 20.6% 12.3% 14.4% 5.5% 20.4% 14.3% Source: Shared Research based on data from the Ministry of Internal Affairs and Communications (September 2020) Global consumer spending on apps and games In 2019, spending at apps stores around the world reached USD120bn, 2.1x the 2016 level. Games accounted for 72% of this spending. Driving overall growth has been subscriptions within non-game apps, rising from 18% of total non-game app spending in 2016 to 28% in 2019. China remains the largest market, accounting for 40% of global spending. Higher spending in the mature markets of the US, Japan, South Korea, and the UK has driven a rise in spending on both game and non-game apps. By 2023, the mobile market is forecast to contribute USD4.8tn to global GDP.

Looking at global rankings of the top 10 apps by total consumer spending, all of the top apps are audiovisual (video, movies, music) except Tinder (dating app), LINE (social media), and LINE Manga (comics). US and Chinese companies each account for four of the top app spots, with South Korean companies occupying two. In game apps, Japanese companies occupy four of the top 10 spots by total consumer spending, Chinese companies account for three, US companies account for two, and a South Korean company accounts for one.

Top 10 global apps and games (2019, total consumer spending) Leading apps Leading games Ranking App Type Company Country Game Company Country 1 Tinder Matchmaking IAC Interactivecorp US Fate/Grand Order Sony Japan 2 Netflix Movie Netflix US Honour of Kings Tencent China 3 Tencent Video Video Tencent China Candy Crush Saga Activision Blizzard US 4iQIYIVideoBaiduChina Monster Strike mixi Japan 5 YouTube Video Google US Lineage M NCSOFT S. Korea 6 Pandora Music Music SIRIUS XM Radio US Pokemon Go Niantic US 7 Youku Video Alibaba Group China Fantasy Westward Journey NetEase China 8 LINE Social media LINE S. Korea Clash of Clans Supercell Japan 9 Kwai Video OneSmile China PUBG MOBILE Tencent China

10 LINE Manga Comic LINE S. Korea Dragon Ball Z Dokkan Battle BANDAI NAMCO Japan Source: Shared Research, based on The State of Mobile 2020, by App Annie Note: Figures are totals for iOS and Google Play.

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Main competitors Local rivals Ranking Japan’s largest game-related companies (35 companies, by revenue in 2019 to 2020), the top two are Sony (TSE1: 6758) and Nintendo (TSE1: 7974), each with revenue of more than JPY1tn. Eight companies have revenue of JPY100–399bn, 13 have revenue of JPY10–100bn, and 12 have revenue of less than JPY10bn. Profitability tends to be problematic at companies with revenue of less than JPY10bn, including Voltage. A distribution map charting revenue and net income margins shows that companies with revenue of JPY100bn or more tend to be in the 10–20% range on net income margins. Sony and Nexon (TSE1: 3659) exceed this range, while CyberAgent (TSE1: 4751) is below it. Among companies with revenue of less than JPY100bn, Koei Tecmo Holdings (TSE1: 3635) and Capcom (TSE1: 9697) are highly profitable, with net income margins of 39.2% and 26.5%. Most others in this category have single-digit margins. The data indicate that this is a growth industry (for the 35 companies, total revenue of JPY5.3tn, +9.7% YoY), but many are resorting to alliances. Koei Tecmo Holdings is the only large entrant into the games-for-women market, while Capcom and Konami Holdings (TSE1: 9766) have withdrawn from this category. Even large gaming companies appear to be having second thoughts about the market for women, with its demand for diverse content.

Revenue ranking and distribution map (revenue, net income margin) of major game-related companies (2019 to 2020)

Revenue Net income Ne t ma r g in 50.0% Ranking Company (JPYbn) (JPYbn) 1 Sony 1,920 582 30.3% Nexon 2 Nintendo 1,309 259 19.8% Nihon Falcom 40.0% 3 Bandai Namco Holdings 323 58 17.8% Koei Tecmo Holdings 4 Square Enix Holdings 261 21 8.2% 5 Nexon 249 116 46.5% 30.0% 6 Sega Sammy Holdings 248 14 5.5% Capcom 7 Konami Holdings 153 20 12.9% 8 CyberAgent 152 2 1.1% 20.0% Akatsuki Bandai Namco Holdings 9 mixi 107 11 10.0% GungHo Online Entertainment 10 GungHo Online Entertainment 101 18 17.9% Konami Holdings 11 DeNA 84 -40 -48.0% 10.0% mixi Square Enix Holdings 12 Gree 63 3 4.3% Marvelous 13 Capcom 60 16 26.5% Aeria Gree Sega Sammy Holdings ((JPYbn) 14 Koei Tecmo Holdings 39 15 39.2% 0.0% CyberAgent 15 colopl 39 1 2.6% 0Voltage 50 100 150 200 250 300 350 16 Akatsuki 32 7 20.6%

17 KLab 31 0 1.2% -10.0% 18 Aeria 28 2 5.3% 19 Marvelous 25 2 6.7% 20 Digital Hearts Holdings 21 1 3.7% -20.0% 21 gumi 20 2 8.6% 22 CyberStep 13 1 4.0% 23 Mynet 12 -2 -20.7% -30.0% 24 Voltage 7 -0 -2.4% 25 Mobcast Holdings 7 -1 -21.2% 26 Aiming 6 -1 -21.4% -40.0% 27 Tose 5 0 4.7%

28 Bank of Innovation 4 0 8.8% DeNA 29 Yoox 4 -1 -16.4% -50.0% 30 Nippon Ichi Software 3 0 7.9% 31 Nihon Falcom 2 1 41.7% 32 Edia 2 -0 -8.3% 33 Kayac 2 -0 -13.0% 34 Extreme 1 1 80.0% 35 Gala 0 -0 -104.9% Total (35 companies) 5,332 1,103 20.7% Source: Shared Research based on data from GyokaiDokoSearch.com Comparisons with competitors and benchmark companies Here, we present Aeria (JASDAQ: 3758) as a competitor, Marvelous (TSE1: 7844) as a benchmark company, and Koei Tecmo Holdings (TSE1: 3635) and Edia (Mothers: 3935) as reference companies. The benchmark company already operates a profitable business in areas that are new for Voltage. The reference companies differ from Voltage in scale and profitability, but one has similar management characteristics and the other has adopted an M&A strategy, whereas Voltage has not.

Competitor Aeria (JASDAQ: 3758) Aeria has grown through numerous acquisitions. A notable contribution to earnings was Liber Entertainment, which Aeria purchased in June 2015. Liber’s A3!, a game for women, was a major hit, topping 6.5mn downloads in its third year after launch. Soen no Kantai, a game for men, was also popular, reaching more than 1mn downloads in the second year after launch. In June 2018, Aeria acquired Cybird, whose Ikemen series generates steady earnings. Purchasing these two companies allowed Aeria to

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establish a firm position in the games-for-women market, and its revenue has surged since 2017. Aeria’s sudden rise and Voltage’s downturn in earnings highlights the increasingly stringent competition in the games-for-women market.

Benchmark company Marvelous (TSE1: 7844) Marvelous has three business segments: online (32% of revenue), consumer operations (45%), and music and video (23%). In the online business, Marvelous distributes online games; in consumer operations it sells game software; in the music/video segment, it sells stage performance packages and related merchandise. We include Marvelous as a benchmark company because it has already established a profitable business in areas that are new for Voltage: consumer operations, in-person events, and video.

Reference companies Koei Tecmo Holdings (TSE1: 3635) Koei Tecmo Holdings is headed by Koei’s founding couple, Keiko Erikawa (chair) and Yoichi Erikawa (president). In addition to his role as CEO, Yoichi develops games under the alias Ko Shibusawa. Koei Tecmo Holdings has a number of long-selling series, such as Nobunaga’s Ambition and Romance of the Three Kingdoms, which have strong followings in Japan and overseas. Koei Tecmo Holdings’ OPM is among the highest in the game industry, at 33.1% (FY03/20), and the company is a good example of balance between content and format. Koei Tecmo Holdings was established in April 2009 through the management integration of Koei and Tecmo. This company is substantially larger than Voltage, both in scale and profitability. We have presented it as a reference company because it has points in common with Voltage: it is currently run by the founding couple and is cultivating a secure fan base by serializing hit content.

Mei Erikawa, director and eldest daughter of the chairman and president, is in charge* of developing games for women. (*She heads the Ruby Party brand, which is set up as a separate organization within the entertainment business.) With the 1994 launch of Angelique, Koei Techmo Holdings took the global lead in pioneering the genre of “romance games for women.”

Edia (Mothers: 3935) Edia is relatively small in scale and has generated operating losses in each of the past four years (since FY02/17), but in August 2020 it acquired Hifumi Shobo to enhance its anime content. Hifumi Shobo attracted attention for its sale of merchandise related to the major hit comic and movie title Demon Slayer: Kimetsuno Yaiba. We present Edia as a reference company because of its shift in focus from games to the e-comic and book categories; Voltage is similarly moving into e-books.

Latest full-year results Ticker Company Revenue OPM ROE Equity Main businesses (% of total revenue) ratio (JPYmn) For Japanese-speaking Women (60), For English-speakng/Asian Women (22), for Men 3639 Voltage 6,587 -1.3% -7.5% 75.8% (16), In-person Events (1) 3758 Aeria 28,347 8.0% 11.5% 48.4% IT services (18), Content (59), Asset Management (22) 7844 Marvelous 25,365 9.7% 8.9% 76.6% Online Game (32), Consumer Game (45), Audio & Visual (23) Games (47), Life Entertainment (8), Music Label (9), Good Collaboration Café (10), 3935 Edia 2,454 -7.2% -32.3% 44.4% Publication (15), Other (11) 3635 Koei Tecmo Holdings 42,645 33.1% 12.7% 82.5% Entertainment (92), Amusement (7), Real Estate (2), Other (0) Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

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Comparison of revenues among four competitors

(JPYmn) Voltage Koei Techmo Aeria Marvelous 60,000

50,000

40,000

30,000

20,000

10,000

Source: Shared Research based on company data Notes: Each label on the horizontal axis collectively represents the companies’ different fiscal year-ends. For example, FY2020 revenue is for FY06/20 for Voltage, FY03/20 for Koei Tecmo and Marvelous, and FY12/20 for Aeria. Figures include company forecasts (FY03/21 for Koei Tecmo and Marvelous, FY12/20 for Aeria).

Comparison of operating/recurring profit among four competitors

(JPYmn) Voltage Koei Techmo Aeria Marvelous

30,000

25,000

20,000

15,000

10,000

5,000

-5,000

Source: Shared Research based on company data Notes: Each label on the horizontal axis collectively represents the companies’ different fiscal year-ends. For example, FY2020 profit is for FY06/20 for Voltage, FY03/20 for Koei Tecmo and Marvelous, and FY12/20 for Aeria. Operating profit is indicated for Voltage and Aeria, while recurring profit is indicated for Aeria and Marvelous. Figures include company forecasts (FY03/21 for Koei Tecmo and Marvelous, FY12/20 for Aeria).

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Voltage (3639) Koei Tecmo Holdings (3635) Tecmo Aeria (3758) Marvelous (7844) Revenue OP OPM Revenue RP RPM Revenue RP RPM Revenue OP OPM Revenue RP RPM Te r m FY FY FY FY FY (JPYmn) (JPYmn) (JPYmn) (JPYmn) (JPYmn) (JPYmn) (JPYmn) (JPYmn) (JPYmn) (JPYmn) 1 06/00 10 - 0.0% 03/00 12/00 9,545 1,181 12.4% 12/00 03/00 2 06/01 130 -44 -33.8% 03/01 20,077 7,606 37.9% 12/01 11,017 2,220 20.2% 12/01 03/01 3 06/02 162 -32 -19.8% 03/02 24,037 9,897 41.2% 12/02 10,517 1,720 16.4% 12/02 03/02 4 06/03 218 -56 -25.7% 03/03 26,805 11,894 44.4% 12/03 12,157 2,590 21.3% 12/03 03/03 5 06/04 485 45 9.3% 03/04 27,708 12,661 45.7% 12/04 7,926 1,202 15.2% 12/04 874 383 43.8% 03/04 6 06/05 893 8 0.9% 03/05 28,140 12,270 43.6% 12/05 12,278 1,220 9.9% 12/05 2,075 597 28.8% 03/05 7 06/06 1,342 34 2.5% 03/06 26,224 11,981 45.7% 12/06 11,628 1,364 11.7% 12/06 3,573 587 16.4% 03/06 8 06/07 1,988 124 6.2% 03/07 24,359 9,186 37.7% 12/07 12,048 1,976 16.4% 12/07 7,377 399 5.4% 03/07 9 06/08 2,815 299 10.6% 03/08 29,112 10,274 35.3% 12/08 11,917 954 8.0% 12/08 11,931 -2,455 -20.6% 03/08 12,388 327 2.6% 10 06/09 3,431 309 9.0% 03/09 28,087 6,981 24.9% 03/09 1,668 -873 -52.3% 12/09 8,208 -1,084 -13.2% 03/09 10,140 -1,308 -12.9% 11 06/10 4,436 547 12.3% 03/10 34,502 3,023 8.8% 12/10 6,361 66 1.0% 03/10 8,285 -1,726 -20.8% 12 06/11 6,346 766 12.1% 03/11 32,081 4,788 14.9% 12/11 7,404 21 0.3% 03/11 6,965 148 2.1% 13 06/12 8,067 857 10.6% 03/12 35,525 7,472 21.0% 12/12 6,160 -835 -13.6% 03/12 10,423 1,025 9.8% 14 06/13 9,089 295 3.2% 03/13 34,639 8,835 25.5% 12/13 848 -686 -80.9% 03/13 17,579 2,325 13.2% 15 06/14 10,083 616 6.1% 03/14 37,576 10,728 28.6% 12/14 1,142 -861 -75.4% 03/14 20,330 3,041 15.0% 16 06/15 10,600 467 4.4% 03/15 37,799 13,568 35.9% 12/15 4,188 -612 -14.6% 03/15 26,441 4,583 17.3% 17 06/16 11,219 531 4.7% 03/16 38,332 15,755 41.1% 12/16 5,907 -1,605 -27.2% 03/16 31,820 5,228 16.4% 18 06/17 8,820 141 1.6% 03/17 37,034 15,211 41.1% 12/17 15,872 2,691 17.0% 03/17 29,387 5,810 19.8% 19 06/18 7,392 -1,042 -14.1% 03/18 38,926 18,293 47.0% 12/18 31,471 1,876 6.0% 03/18 25,291 5,105 20.2% 20 06/19 7,120 -199 -2.8% 03/19 38,968 18,307 47.0% 12/19 28,347 2,265 8.0% 03/19 26,777 4,791 17.9% 21 06/20 6,587 -86 -1.3% 03/20 42,645 18,869 44.2% 12/20 26,000 500 1.9% 03/20 25,365 2,502 9.9% 22 06/21 03/21 51,000 25,000 49.0% 12/21 03/21 22,200 2,725 12.3% Source: Shared Research based on company data Notes: Figures include company forecasts (FY03/21 for Koei Tecmo and Marvelous, FY12/20 for Aeria). Figures may differ from company materials due to differences in rounding methods.

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Strengths and weaknesses

Strengths

By serializing story games, has established a structure that allows customers to enjoy content over an extended period Voltage has put in place a system to serialize content in the aim of continuously generating hits. Each year, the company adds several new in-app titles to existing titles, ensuring ongoing revenue. The company specializes in the story game format and concentrates on serializing diverse story content within this genre. Even large game companies often produce hits that require major investments in engine development but last only a single series. As a result, many companies think twice about producing content targeting women, which tends to require diversity. Voltage provides a detailed range of services, such as offering daily complete-in-one-issue stories and arranging for attractive in-game characters to send personal messages to users. The system the company has established encourages casual, long-term enjoyment.

As KPIs, the company tracks the in-app purchase rate at initial play (5–10%) and retention rate (70%) among people who download its apps. The company says that for men, paying user rate (PUR) tends to be low, average revenue per paying user (ARPPU) large, and retention rate low. By contrast, for women PUR is high, ARPPU small, and retention rate high. The company explains that men are more likely to gather large numbers of female character cards at once, whereas female customers tend to support a particular male character over a longer term.

Female employees leading the development of content for women After trying a variety of genres, the company decided to concentrate on story games targeting young women and themed on “love and the challenges associated with it.” The company explains that this genre took advantage of Voltage’s expertise in film production. At the same time, the genre had few competitors, as the large game companies were not active there, and the company saw an unmet need among the numerous female smartphone users who enjoyed stories. The company therefore determined it had an opportunity to succeed in this niche market.

Voltage’s target customers are women who enjoy stories (aged 19–44, around 20mn people in Japan). The company estimates its potential market in Japan at around JPY100bn. To consistently satisfy demand among a female audience, women are central to the company’s development team. (As of June 30, 2020, women accounted for 66% of permanent, full-time employees and occupied 46% of management positions.) Voltage recalls many examples of enthusiastic fans who join the company and become part of the development team. The company has also codified its development expertise, creating a system whereby even new graduates and other young employees can become developers. The company pioneered the genre of romance game content targeting women, growing rapidly for a decade between becoming profitable in FY06/04 and generating annual revenue of more than JPY10.0bn in FY06/14 (market share of more than 10%).

Global development capabilities, with a local development hub in the massive US market The company commenced its global expansion effort with the distribution of English-language smartphone apps in July 2011, actively following up this move by establishing Voltage Entertainment USA, Inc. as a subsidiary in May 2012. Leveraging the local familiarity he gained while studying in the US, CEO Tsutani spent three years at the US subsidiary. The company says this subsidiary benefits from the growing global popularity of Japanese anime and games and other elements of Japanese popular culture in the US and Europe (cosplay and otaku culture).

The company explains that adaptation of Japanese-language games is relatively smooth in China, Taiwan, and other parts of Asia, but the same is not the case in the US, so it relies on local employees to create characters and scenarios that better suit the preferences of women there. The US subsidiary’s performance has been relatively stable for the three years from FY06/18 to FY06/20 (in FY06/20, generated 11.5% of consolidated revenue and had a recurring profit margin of 5.3%). With the global population continuing to grow, Shared Research believes the early launch of English-language apps and the establishment of a development hub in the US are strengths, as they could be a steppingstone to global development.

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Weaknesses

Has not moved away from a development system reliant on major titles (a legacy of past successes) After launching the genre of romance game content targeting women, the company listed its shares on the Mothers index of the Tokyo Stock Exchange in 2010. In less than a year, its listing was upgraded to the TSE’s First Section. At the time, this was the fastest such upgrade in history. The company grew rapidly until FY06/14, when revenue topped JPY10.0bn, but in FY06/15 revenue growth had slowed to the single digits and the company posted a double-digit decline in profit. Foreshadowing this trend, in FY06/13 the company fell short of its initial targets for the year, and OPM dropped into the single digits (3.2%). The company undershot its initial performance targets in each of the four years from FY06/15. Since FY06/19, Voltage has not disclosed forecasts; it says the operating environment is too volatile for it to predict performance with a high degree of confidence.

Attributing the company’s stagnation to the aftereffects of its IPO, CEO Tsutani concluded that the company’s core earnings model (processes and manuals) was growing obsolete and being reduced to mere formality. As problem areas, he identified a lack of management system dedicated to new models, means to prevent losses from ballooning, and expertise in continuous creation. Shared Research understands that the main reason for the stagnation is that the company has not moved away from a development system reliant on major titles (a legacy of past successes).

Still feeling the aftereffects of a period when both the founding CEO and COO were absent (damage due to new market entrants and deterioration in the customer base) In 2013, the founding couple (CEO Tsutani and his spouse, who is COO) relocated to the US to direct the subsidiary there. In July 2013, they put in place a new management team to run the main company in Japan. By FY06/15, revenue growth had slowed to single digits, and the company posted a double-digit decline in profit.

Around that time (June 2015), a competitor named Aeria acquired Liber Entertainment, which was distributing A3!, a game title targeting women. A3! was a major hit, with downloads reaching 6.5mn in its third year and boosting Aeria’s earnings. In June 2018, Aeria also acquired Cybird, whose Ikemen series was producing steady earnings. With these two acquisitions, Aeria established a firm position in the games-for-women market, and revenue has grown rapidly since 2017.

Even after Mr. Tsutani resumed the post of Voltage’s CEO in July 2016, the company fell short of its performance targets, and remained unprofitable for three years (FY06/18 to FY06/20). In Shared Research’s view, the company is still feeling the aftereffects of a period when both the founding CEO and COO were absent (damage due to new market entrants and deterioration in the customer base).

Fixed costs to provide new stories every year (new in-app titles) accounting for a large percentage of revenue Despite being unprofitable for three straight years (FY06/18 to FY06/20), each year the company has continued to invest in 10 or more new and in-app titles in an effort to retain customers and sustain revenue. The company’s mainstay titles are written stories, and ARPPU is low (similar to the buy-to-read model for e-comics). Meanwhile, developing and managing a range of diverse content, such as daily complete-in-one-issue stories, require time and effort.

As a percentage of FY06/20 revenue, cost of revenue was 35.9% and SG&A expenses amounted to 65.4%. Collectively, the company refers to advertising expenses (23.2% of FY06/20 revenue) and sales commissions (30.4%) as “platform & advertising” (P&A) expenses (53.6%). It considers P&A expenses to be variable costs, as they fluctuate according to revenue. Conversely, Voltage defines labor costs (17.0% of FY06/20 revenue), outsourcing costs (11.8%), and other costs (18.9%) as fixed costs (47.7%). Personnel expenses (labor costs, salaries and allowances) are around 20% of revenue. Of personnel expenses, 60% go toward production, 20% to programming, 10% to design, and 10% to admin.

For content production, the company plans and develops content internally and outsources artwork, writing, and programming to creative talent working on a contract basis. The company pays sales commissions to platform operators, mainly Apple and Google. To become profitable at the operating level, the company is working to hold down labor costs and other expenses, raise revenue per employee (JPY22.5mn in FY06/20, +JPY2.4mn YoY), and improve productivity and efficiency. The company has 231 employees

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(FY06/20), less than 60% of its peak number of 389 (FY06/17). Similarly, by FY06/20 the number of temporary workers had fallen to 52, less than 30% of the peak number of 177 (FY06/15). The company says it has little room left to reduce employee numbers, as long as it plans to continue introducing multiple new in-app titles per app each year.

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Historical performance and financial statements Income statement

Income statement FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Parent Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenue 3,431 4,436 6,346 8,067 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 YoY 29.3% 43.1% 27.1% - 10.9% 5.1% 5.8% -21.4% -16.2% -3.7% -7.5% Cost of revenue 955 1,073 1,415 1,749 2,745 3,383 3,902 4,364 3,898 3,340 2,607 2,367 Cost ratio 27.8% 24.2% 22.3% 21.7% 30.2% 33.6% 36.8% 38.9% 44.2% 45.2% 36.6% 35.9% Gross profit 2,475 3,363 4,931 6,318 6,344 6,700 6,697 6,855 4,922 4,052 4,512 4,220 Gross profit margin 72.2% 75.8% 77.7% 78.3% 69.8% 66.4% 63.2% 61.1% 55.8% 54.8% 63.4% 64.1% SG&A expenses 2,167 2,816 4,165 5,461 6,049 6,083 6,230 6,324 4,781 5,094 4,711 4,306 SG&A ratio 63.2% 63.5% 65.6% 67.7% 66.6% 60.3% 58.8% 56.4% 54.2% 68.9% 66.2% 65.4% Operating profit 309 547 766 857 295 616 467 531 141 -1,042 -199 -86 YoY 77.2% 40.2% 11.9% - 108.7% -24.2% 13.6% -73.4% - - - Operating profit margin 9.0% 12.3% 12.1% 10.6% 3.2% 6.1% 4.4% 4.7% 1.6% - -- Non-operating income 2 1 0 3 48 30 18 18 18 5 6 7 Interest income 0 0 0 0 1 1 1 1 1 2 3 5 Dividend income 0 0 0 0 0 - 0 Subsidy 3 16 Gain on foreign exchange 39 20 12 10 Gain on sale of investment securities 01 Gain on sale of fixed assets 01 Miscellaneous income 1 1 0389217331 Non-operating expenses 6 4 5 1 0 0 60 0 30 44 8 Interest expenses 6 3 1 0 Donations 3 - Loss on foreign exchange 0 0 60 30 21 7 Loss on valuation of investment securities 8 1 Equity in losses of affiliates 6 - Other 10 0 Miscellaneous losses - 0 0 0 - 0 0 0 0 0 0 0 Recurring profit 304 544 762 860 344 646 485 488 159 -1,068 -237 -88 YoY 78.7% 40.0% 12.9% - 88.1% -24.9% 0.6% -67.5% - - - Recurring profit margin 8.9% 12.3% 12.0% 10.7% 3.8% 6.4% 4.6% 4.4% 1.8% - -- Extraordinary gains 130 63 Gain on sale of investment securities 63 Reversal of allowance for doubtful accounts 130 Extraordinary losses 027116064711211570 Loss on disposal of fixed assets 58 Loss on retirement of fixed assets 0211 0721 Impairment losses 10311570 Other 0060160560000 Income taxes 135 227 311 348 202 348 253 214 134 151 4 4 Implied tax rate 44.2% 40.8% 41.2% 40.5% 58.9% 54.4% 52.1% 50.4% 84.7% -12.8% -1.1% -2.2% Net income attributable to owners of the parent 170 329 444 511 141 292 233 210 24 -1,328 -356 -161 YoY 93.8% 35.2% 15.2% - 107.0% -20.3% -9.5% -88.5% - - - Net margin 4.9% 7.4% 7.0% 6.3% 1.6% 2.9% 2.2% 1.9% 0.3% - - - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Cost of revenue (parent) FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Parent Parent Parent Parent Parent Parent Parent Parent Parent Revenue 3,431 4,436 6,346 8,067 9,097 10,043 10,573 11,136 8,537 6,581 6,352 5,820 Cost of revenue 955 1,073 1,415 1,749 2,638 3,241 3,778 4,189 3,615 2,967 2,320 2,048 Cost ratio 27.8% 24.2% 22.3% 21.7% 29.0% 32.3% 35.7% 37.6% 42.3% 45.1% 36.5% 35.2% Personnel expenses 438 507 502 656 1,144 1,474 1,673 1,739 1,454 1,301 1,061 956 % of revenue 12.8% 11.4% 7.9% 8.1% 12.6% 14.7% 15.8% 15.6% 17.0% 19.8% 16.7% 16.4% Outsourcing expenses 338 369 435 539 949 1,056 1,328 1,506 1,162 832 694 701 % of revenue 9.9% 8.3% 6.9% 6.7% 10.4% 10.5% 12.6% 13.5% 13.6% 12.6% 10.9% 12.0% Other expenses 84 96 385 486 637 770 932 986 921 753 510 371 Transportation 493730 Depreciation 19 17 14 22 62 91 107 101 84 39 21 1 Rents 24 37 317 383 434 526 651 713 689 596 407 305 Other 41425481141153174172147694535 Total manufacturing cost 861 971 1,322 1,681 2,730 3,300 3,933 4,230 3,537 2,886 2,266 2,028 Starting merchandise inventory 391327 312 Merchandise purchase 96 102 146 68 9 25 18 Total manufacturing cost 960 1,082 1,481 1,775 2,730 3,300 3,933 4,230 3,537 2,894 2,294 2,059 Ending inventory 91327 31216 Transfer to other accounts 22 20 69 75 183 180 313 273 124 93 49 3 Amortization of software 24 23 30 48 91 120 157 232 202 169 79 6 Amortization of content 72 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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SG&A expenses (parent) FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Parent Parent Parent Parent Parent Parent Parent Parent Parent SG&A expenses 2,167 2,816 4,165 5,461 5,948 5,904 6,113 6,173 4,528 4,629 4,263 3,877 SG&A ratio 63.2% 63.5% 65.6% 67.7% 65.4% 58.8% 57.8% 55.4% 53.0% 70.3% 67.1% 66.6% Advertising expenses 501 775 1,871 2,427 2,201 1,709 1,476 1,248 508 1,501 1,473 1,430 % of revenue 14.6% 17.5% 29.5% 30.1% 24.2% 17.0% 14.0% 11.2% 6.0% 22.8% 23.2% 24.6% Sales commissions 584 699 1,181 1,914 2,485 2,993 3,189 3,374 2,611 2,023 1,932 1,743 % of revenue 17.0% 15.8% 18.6% 23.7% 27.3% 29.8% 30.2% 30.3% 30.6% 30.7% 30.4% 30.0% Salaries and allowances 224 224 222 248 259 289 291 296 219 181 Depreciation 14 14 16 16 27 32 43 54 26 31 21 R&D expenses 151229137 Carrier fees 318430 Rents 133163 Directors' remunerations 102137 Provision for doubtful accounts 7 Other 508 598 872 880 1,013 922 1,130 1,196 1,063 766 613 522 SG&A expenses (consolidated) FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. SG&A expenses 6,049 6,083 6,230 6,324 4,781 5,094 4,711 4,306 SG&A ratio 66.6% 60.3% 58.8% 56.4% 54.2% 68.9% 66.2% 65.4% Advertising expenses 2,223 1,791 1,492 1,277 555 1,611 1,596 1,529 % of revenue 24.5% 17.8% 14.1% 11.4% 6.3% 21.8% 22.4% 23.2% Sales commissions 2,490 3,020 3,200 3,405 2,723 2,299 2,187 2,004 % of revenue 27.4% 29.9% 30.2% 30.3% 30.9% 31.1% 30.7% 30.4% Salaries and allowances 239 276 289 332 338 332 252 204 Depreciation 28 33 45 56 27 32 21 1 R&D expenses 1 15 12 29 13 7 Other 1,069 963 1,190 1,243 1,109 807 648 568 PA costs and fixed costs FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Platform & Advertising (PA) expenses 4,713 4,811 4,692 4,682 3,278 3,911 3,783 3,533 PA expense ratio 51.9% 47.7% 44.3% 41.7% 37.2% 52.9% 53.1% 53.6% Advertising expenses 2,223 1,791 1,492 1,277 555 1,611 1,596 1,529 % of revenue 24.5% 17.8% 14.1% 11.4% 6.3% 21.8% 22.4% 23.2% Sales commissions 2,490 3,020 3,200 3,405 2,723 2,299 2,187 2,004 % of revenue 27.4% 29.9% 30.2% 30.3% 30.9% 31.1% 30.7% 30.4% Fixed costs 4,656 5,440 6,006 5,401 4,523 3,536 3,140 Fixed cost ratio 46.2% 51.3% 53.5% 61.2% 61.2% 49.7% 47.7% Labor costs 1,599 1,877 1,936 1,690 1,539 1,229 1,119 % of revenue 15.9% 17.7% 17.3% 19.2% 20.8% 17.3% 17.0% Outsourcing costs 1,050 1,254 1,390 1,138 904 755 775 % of revenue 10.4% 11.8% 12.4% 12.9% 12.2% 10.6% 11.8% Other costs 2,007 2,309 2,680 2,573 2,080 1,552 1,246 % of revenue 19.9% 21.8% 23.9% 29.2% 28.1% 21.8% 18.9% YoY Platform & Advertising (PA) expenses 2.1% -2.5% -0.2% -30.0% 19.3% -3.3% -6.6% Advertising expenses -19.4% -16.7% -14.4% -56.5% 190.1% -0.9% -4.2% Sales commissions 21.3% 6.0% 6.4% -20.0% -15.6% -4.9% -8.3% Fixed costs 16.8% 10.4% -10.1% -16.2% -21.8% -11.2% Labor costs 17.4% 3.1% -12.7% -8.9% -20.1% -9.0% Outsourcing costs 19.4% 10.8% -18.1% -20.6% -16.5% 2.6% Other costs 15.1% 16.1% -4.0% -19.1% -25.4% -19.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Profitability Voltage’s gross profit margin has declined by around 10pp from the 70% range (average; FY06/09 to FY06/12) to the 60% range (FY06/13 to FY06/20). Meanwhile, SG&A expenses have been relatively steady as a percentage of revenue, remaining in the 60% range (FY06/09 to FY06/20). As a result, OPM has fallen from the 10% range (FY06/09 to FY06/12) to single-digit percentages (FY06/13 to FY06/17), and then into operating losses (FY06/18 to FY06/20).

Cost structure As a percentage of FY06/20 revenue, cost of revenue was 35.9% and SG&A expenses amounted to 65.4%. Collectively, the company refers to advertising expenses (23.2% of FY06/20 revenue) and sales commissions (30.4%) as “platform & advertising” (P&A) expenses (53.6%). The company considers P&A expenses to be variable costs, as they fluctuate according to revenue. Conversely, Voltage defines labor costs (17.0% of FY06/20 revenue), outsourcing costs (11.8%), and other costs (18.9%) as fixed costs (47.7%).

Personnel expenses (labor costs, salaries and allowances) are around 20% of revenue. Of personnel expenses, 60% go toward production, 20% to programming, 10% to design, and 10% to admin. A high percentage of female employees are involved in production, such as the creation of rough drawings and artwork of characters and situations, and the development of various scenes and stories. Designers and the production team engage in content creation. Male employees prevail in programing, where engineers systematically turn content into games.

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Voltage plans and develops content itself, outsourcing artwork, writing, and programming to creative talent working on a contract basis. Upon receipt of outsourced elements, the company pays production fees to outsourced providers. It then edits and polishes the content and conducts a final check. The company says the production cycle averages 1–1.5 years.

The company pays sales commissions to platform operators, mainly Apple and Google. Advertising expenses are variable costs, fluctuating in line with revenue. To measure advertising results, the company focuses on lifetime value (LTV), which is the amount of revenue a user generates over a fixed period of time, and cost per install (CPI).

To return to operating profitability, the company has worked to curtail labor costs, raise revenue per employee (up JPY2.4mn YoY to JPY22.5mn in FY06/20), and improve productivity and efficiency. In the past, the company operated an in-house server, but now essentially all operations have been migrated to the cloud. The company has 231 employees (FY06/20), less than 60% of its peak number of 389 (FY06/17). Similarly, by FY06/20 the average number of temporary workers had fallen to 52, less than 30% of the peak number of 177 (FY06/15). The company says it has little room left to reduce employee numbers, as long as it plans to continue introducing multiple new in-app titles per app each year.

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Balance sheet

Balance sheet FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Parent Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and deposits 275 896 2,010 1,931 1,784 2,201 1,821 2,238 2,132 1,108 1,346 1,531 Notes and accounts receivable 907 1,067 1,469 1,847 1,716 1,837 1,722 1,291 1,130 1,017 932 1,013 Advances payments 61 Prepaid expenses 18 23 28 35 68 41 69 81 100 77 70 68 Inventories 9 13 27 ------Deferred tax assets 21 26 38 46 16 40 69 32 25 Other 1 0 0 1 1 9 8 3 19 160 17 41 Consumption taxes receivable 18 109 Other 1 0 0 1 1 9 8 3 2 51 17 41 Allowance for doubtful assets -24 -11 -11 -24 -12 -4 -1 -1 -1 -0 -0 -0 Total current assets 1,207 2,015 3,563 3,836 3,574 4,123 3,688 3,706 3,406 2,361 2,365 2,653 Buildings and structures 4 10 9 4 55 35 29 9 19 11 0 - Machinery, equipment, and vehicles 43 36 30 60 169 207 314 201 127 72 5 3 Total tangible fixed assets 47 46 39 64 224 241 343 210 146 83 5 3 Other 56 53 95 120 248 365 556 473 368 185 40 1 Software 56 53 95 120 248 365 556 473 368 181 40 1 Content 4 0 - Total intangible assets 56 53 95 120 248 365 556 473 368 185 40 1 Investment securities 199 12 17 15 23 121 116 117 Long-term prepaid expenses 15 11 10 7 Other 119 170 200 184 277 290 395 501 472 328 247 224 Investments in capital 0 0 Leasehold deposits 103 152 176 162 223 215 263 288 245 219 138 108 Guarantee deposits 42 85 109 109 109 116 Deferred tax assets 15 18 24 23 54 75 90 128 119 Investments and other assets 119 170 200 383 276 302 412 516 510 460 374 348 Total fixed assets 222 268 335 567 749 908 1,311 1,199 1,024 728 419 352 Total assets 1,428 2,283 3,897 4,403 4,322 5,032 4,999 4,905 4,430 3,089 2,784 3,004

LIA BILITIES Accounts payable 62 65 96 89 90 156 194 189 124 100 101 91 Short-term debt 109 73 38 ------Current portion of long-term borrowing 109 73 38 Accounts payable–other 3 4 14 6 7 21 6 5 0 3 1 3 Accrued expenses 281 386 644 808 798 795 757 604 500 562 527 520 Income taxes payable 87 173 221 195 34 308 109 97 41 8 14 16 Consumption taxes payable 18 32 31 29 12 113 84 79 Deposits received 18 20 25 33 51 52 59 62 26 39 44 37 Provision for bonuses 10 6 7 Other - - 0 1 1 2 2 2 2 1 85 46 Total current liabilities 577 753 1,069 1,160 994 1,446 1,210 1,037 693 724 779 719 Long-term debt 117 44 6 ------Long-term borrowings 117 44 6 Long-term accrued expenses 1 Total fixed liabilities 117 44 6 - 1 ------Total liabilities 694 797 1,075 1,160 995 1,446 1,210 1,037 693 724 779 719 NET A SSETS Capital stock 198 410 867 877 888 909 922 936 936 942 943 1,159 Capital surplus 164 375 833 843 853 874 888 902 902 907 908 1,125 Retained earnings 373 702 1,124 1,522 1,567 1,763 1,898 2,031 1,977 598 242 82 Treasury stock -0 -0 -0 -0 -0 -0 -100 -100 -100 -100 Accumulated other comprehensive income - - - - 20 17 64 -1 21 17 12 12 Valuation difference on marketable secur - 1 3 1 2 -0 -0 Foreign currency translation adjustments 2 0 18 61 -2 19 17 12 12 Share subscription rights 23 18 8 Total net assets 735 1,486 2,823 3,242 3,327 3,586 3,790 3,868 3,737 2,365 2,005 2,285 Total liabilities and net assets 1,429 2,283 3,897 4,403 4,322 5,032 4,999 4,905 4,430 3,089 2,784 3,004 Working capital 855 1,015 1,400 1,759 1,626 1,681 1,528 1,102 1,006 916 831 922 Total interest-bearing debt 226 117 44 ------Net debt -49 -779 -1,966 -1,931 -1,784 -2,201 -1,821 -2,238 -2,132 -1,108 -1,346 -1,531 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

The company has held no interest-bearing debt since FY06/12, maintaining negative net debt (approximately equal to the full amount of cash and deposits being subtracted). Cash and deposits account for around half of total assets. Intangible assets (mostly software) have decreased, while investment securities have increased.

Funding In December 2019, the company raised money in the stock market for the first time since listing. The company raised JPY616mn through a third-party placement of stock acquisition rights (to Milestone Capital Management, Ltd.). The company identified three areas for the use of funds, with JPY200mn going to each category: strengthening the promotion of existing titles, cultivating and developing new titles, and developing new areas (e-books, etc.). As of end-FY06/20, capital stock and the capital surplus were up from the previous fiscal year-end.

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Cash flow statement

Cash flow statement FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Parent Parent Parent Parent Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 266 580 428 410 259 894 425 920 407 -695 220 -224 Pre-tax profit 304 555 755 859 343 640 485 425 158 -1,177 -352 -157 Depreciation 34 31 31 38 126 135 166 175 127 77 65 5 Amortization of software 37 37 44 59 101 147 204 270 259 216 111 10 Impairment losses 56 103 115 70 Gains (losses) on sale of fixed assets 0 2 1 1 1 6 0 7 7 9 15 -0 Change in working capital -216 -160 -371 -386 133 -55 155 423 98 89 83 -91 Decrease (increase) in trade receivables -218 -160 -402 -379 131 -121 118 427 163 113 82 -81 Decrease (increase) in inventories -6 -4 Increase (decrease) in trade payables 8 3 31 -7 2 66 38 -5 -65 -24 1 -10 Cash flows from investing activities (2) -63 -113 -134 -354 -573 -414 -764 -372 -207 -262 26 -32 Purchase of int angible/t angible fixed asset s -63 -65 -101 -155 -481 -401 -665 -289 -219 -157 -69 -40 Proceeds from sale of intangible/tangible fixed assets 1 2 2 1 Free cash flow (1+2) 203 468 294 56 -314 480 -339 548 200 -957 246 -256 Cash flows from financing activities 69 314 820 -135 -74 -75 -90 -70 -177 -40 1 441 Net increase in long-term borrowings 9 -109 -73 -44 ------Proceeds from long-term borrowings 140 Repayment of long-term borrowings -131 -109 -73 -44 Proceeds from issuance of stock 60 423 915 21 21 21 6 7 1 11 1 441 Dividends paid -22 -112 -94 -95 -97 -77 -78 -51 -0 -0 Depreciation and amortization (A) 34 31 31 38 126 135 166 175 127 77 65 5 Capital expenditures (B) 42 Change in working capital (C) -216 -160 -371 -386 133 -55 155 423 98 89 83 -91 Simple FCF (NI + A + B - C) 419 520 846 935 135 482 244 -37 54 -1,340 -374 -23 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Cash and cash equivalents came to JPY1.5bn as of end-FY06/20, up JPY185mn YoY. Cash flows during FY06/20 are outlined below.

Cash flows from operating activities Operating activities used JPY224mn in cash. This was a JPY444mn difference from the net cash inflow at end-FY06/19, including YoY differences of JPY224mn in accrued consumption tax and JPY163mn in trade receivables.

Cash flows from investing activities Net cash used in investing activities amounted to JPY32mn (a JPY58mn difference from the net cash inflow at end-FY06/19). A key reason for the difference was a JPY83mn reduction in proceeds from the refund of security deposits.

Cash flows from financing activities Net cash provided by financing activities was JPY441mn (up JPY440mn from the previous year). The main source of cash was a JPY440mn increase in proceeds from the issuance of shares.

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Historical performance

1H FY06/21 results Summary

▷ Revenue: JPY3.5bn (+8.6% YoY)

 Revenue from content for English-speaking and Asian women was down. However, revenue from content for Japanese-speaking women and content for men increased.

▷ Operating profit: JPY170mn (operating loss of JPY125mn in 1H FY06/20)

 The main reason for the improvement was a 7.3% YoY reduction in fixed costs, stemming from lower rent expenses (less office space and lower leasing fees) and reduced labor costs (curtailment of new hires).

▷ Recurring profit: JPY152mn (recurring loss of JPY117mn in 1H FY06/20)

▷ Net income attributable to owners of the parent: JPY136mn (net loss of JPY160mn in 1H FY06/20)

Performance by business Content for Japanese-speaking women

▷ Revenue was JPY2.2bn (+9.6% YoY).

▷ In this category, the company classifies content as written story, avatar-based, card-based, and voice actor-type. Revenue from avatar-based and card-based content increased.

Content for English-speaking and Asian women

▷ Revenue was JPY626mn (-11.8% YoY).

▷ Content for English-speaking and Asian women includes such titles as Love365 and Lovestruck. Revenue was down, mainly for Lovestruck.

Content for men

▷ Revenue was JPY639mn (+26.6% YoY).

▷ Revenue was up mainly for Roppongi.

In-person events

▷ Revenue was JPY76mn (+42.1% YoY).

▷ Revenue from events and rights operations (such as sales of merchandise at events) increased.

E-books, videos, and consumer operations

▷ Revenue was JPY32mn (+121.1% YoY).

▷ Revenue rose mainly from consumer operations.

▷ This segment includes e-book titles (KISSMILLe, Vol-Com, and OC Label) and consumer operations (content for Nintendo Switch).

Existing titles, recently released titles, and new areas

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released titles” means content for Asian women that are being launched and nurtured. “New areas” are e-books, in-person events, videos, and consumer operations.

▷ Existing titles generate average monthly revenue of more than JPY500mn, while recently released titles and new areas generate more than JPY60mn (Q2 FY06/21). The company reported consecutive quarterly operating losses from Q1 FY06/18 through Q3 FY06/20, with operating profit on existing titles being eaten up by losses in recently released titles and new areas. However, overall performance has remained in the black at the operating level since Q4 FY06/20.

▷ In Q2, revenue from existing titles was down slightly QoQ, while revenue from recently released titles and in new areas rose substantially. (The company discloses this information only graphically). The decline from existing titles was affected by production delays at the San Francisco studio, which resulted in the delayed introduction of in-app titles within Lovestruck, for English-speaking women. However, recently released titles and new areas benefited from favorable performance of Court of Darkness, a new title for English-speaking women launched in October 2020.

▷ In Q2, operating profit from existing titles rose substantially QoQ, and losses narrowed QoQ on recently released titles and in new areas. Within existing titles, revenue fell slightly QoQ in content for Japanese-speaking women and content for men, but profitability rose as the company reduced expenses. Recently released titles and new areas became profitable in November 2020, the month following the Court of Darkness launch.

Q1 FY06/21 results Overview

▷ Revenue: JPY1.8bn (+6.7% YoY)

 Revenue was down in the “Content for English-speaking and Asian women” business but up in the “Content for Japanese-speaking women” and “Content for men” businesses.

▷ Operating profit: JPY68mn (operating loss of JPY74mn in Q1 FY06/20)

 The main reason for the improvement was a 6.9% YoY reduction in fixed costs, stemming from lower rent expenses (less office space and lower leasing fees) and reduced labor costs (fewer personnel).

▷ Recurring profit: JPY62mn (recurring loss of JPY76mn in Q1 FY06/20)

▷ Net income attributable to owners of the parent: JPY45mn (net loss of JPY119mn in Q1 FY06/20)

Performance by business Content for Japanese-speaking women

▷ Revenue was JPY1.1bn (+7.5% YoY).

▷ In this business, the company categorizes content as written story, avatar-based, card-based, and voice actor-type content. Revenue was mainly up for avatar-based content.

Content for English-speaking and Asian women

▷ Revenue was JPY306mn (-17.2% YoY).

▷ Titles in this business include Love365 and Lovestruck. Revenue was down mainly from Lovestruck.

Content for men

▷ Revenue was JPY321mn (+28.5% YoY).

▷ Revenue was mainly up for Roppongi .

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In-person events

▷ Revenue was JPY40mn (+61.2% YoY).

▷ Revenue from events/rights operations (such as sales of merchandise at events) increased.

E-books, videos, and consumer operations

▷ Revenue was JPY18mn (+277.1% YoY).

▷ The primary increase in revenue was from consumer operations.

▷ This category includes e-books (KISSMILLe, Vol-Com) and consumer operations (content for Nintendo Switch).

Full-year FY06/20 results Overview

▷ Revenue: JPY6.6bn (-7.5% YoY)

 Revenue increased in the “Content for men” business but fell in the “Content for Japanese-speaking women” and “Content for English-speaking and Asian women” businesses.

▷ Operating loss: JPY86mn (operating loss of JPY199mn in FY06/19)

 The operating loss narrowed as the result of lower sales commission on reduced revenue and an 11.2% decline in fixed costs (substantially lower labor costs due to recruiting cutbacks and a decline in rent expenses as the company transitioned from an on-site server to the cloud and reduced office space).

▷ Recurring loss: JPY88mn (recurring loss of JPY237mn in FY06/19)

▷ Net loss attributable to owners of the parent: JPY161mn (net loss of JPY356mn in FY06/19)

 Losses included JPY70mn in extraordinary losses stemming from impairment losses on software and companywide assets.

Performance by business Content for Japanese-speaking women

▷ Revenue was JPY4.0bn (-10.4% YoY).

▷ In this business, the company categorizes content as written story, avatar-based, card-based, and voice actor-type content. Revenue was down mainly for avatar-based and written story content.

Content for English-speaking and Asian women

▷ Revenue was JPY1.5bn (-10.1% YoY).

▷ Titles in this segment include Love365 and Lovestruck. Revenue was down mainly from Love365.

Content for men

▷ Revenue was JPY1.0bn (+8.4% YoY).

▷ Revenue was mainly up for Roppongi.

In-person events

▷ Revenue was JPY82mn (-25.5% YoY).

▷ Revenue from events/rights operations decreased.

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E-books, videos, and consumer operations

▷ Revenue was JPY41mn (+1,727.8% YoY).

▷ The primary increase in revenue was from consumer operations.

▷ This category includes e-books (KISSMILLe) and consumer operations (content for Nintendo Switch).

Financial condition Assets

▷ Total assets were JPY3.0bn at end-FY06/20 (+JPY221mn YoY).

▷ Current assets were JPY2.7bn (+JPY288mn YoY). The increase was mainly due to a JPY185mn rise in cash and deposits, JPY81mn higher trade receivable, and a JPY13mn increase in accounts receivable associated with security deposit reimbursements from the vacation of office space.

▷ Fixed assets were JPY352mn (-JPY67mn YoY). Key factors included a JPY39mn decrease in intangible assets due to impairment on software, JPY26mn lower investments and other assets on the decline in security deposits (due to the vacation of office space), and a JPY2mn decline in tangible fixed assets due to asset impairment and the retirement/sale of on-site server.

Liabilities

▷ Total liabilities were JPY719mn (-JPY59mn YoY).

▷ Current liabilities came to JPY719mn (-JPY59mn YoY). Chief factors were a JPY37mn decrease in consumption taxes payable and JPY10mn lower accounts payable resulting from lower outsourcing costs.

Net assets

▷ Net assets at year-end were JPY2.3bn (+JPY280mn). The exercise of stock acquisition rights led to JPY217mn increases in capital stock and the legal capital surplus. However, the company recorded a net loss attributable to owners of the parent, which reduced retained earnings by JPY161mn.

Cash flows Cash and cash equivalents came to JPY1.5bn as of end-FY06/20, up JPY185mn YoY.

Cash flows from financing activities Net cash provided by financing activities was JPY441mn (up JPY440mn from the previous year). The main source of cash was JPY440mn increase in proceeds from the issuance of shares.

Cumulative Q3 FY06/20 results Overview

▷ Revenue: JPY4.8bn (-11.8% YoY)

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 Revenue was up in the “Content for men” and “E-books and videos” business, but down in the “Content for Japanese-speaking women” and “Content for English-speaking women” businesses.

▷ Operating loss: JPY210mn (operating loss of JPY115mn in cumulative Q3 FY06/19)

 Among key factors, sales commissions decreased as the result of lower revenue, and fixed costs fell 12.7%. (Labor costs were down substantially due to recruiting cutbacks, and rent expenses declined as the company transitioned from an on-site server to the cloud and reduced office space.)

▷ Recurring loss: JPY207mn (recurring loss of JPY133mn in cumulative Q3 FY06/19)

▷ Net loss attributable to owners of the parent: JPY252mn (net loss of JPY142mn in cumulative Q3 FY06/19)

 In Q1, the company posted an extraordinary loss of JPY42mn due to impairment on software.

Performance by business Content for Japanese-speaking women

▷ Revenue was JPY2.9bn (-14.4% YoY).

▷ Revenue decreased principally in the categories of avatar-based and written story content.

Content for English-speaking women

▷ Revenue was JPY1.1bn (-16.8% YoY).

▷ Titles in this segment include Love365 and Lovestruck. Revenue was down mainly from Love365.

Content for men

▷ Revenue was JPY761mn (+5.2% YoY).

▷ Revenue was mainly up for Roppongi.

In-person events

▷ Revenue was JPY63mn (-2.2% YoY).

▷ Revenue from events/rights operations decreased.

E-books, videos, and consumer operations

▷ Revenue was JPY20mn.

▷ The primary increase in revenue was from consumer operations.

▷ This category includes e-books (KISSMILLe) and consumer operations (content for Nintendo Switch).

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Other information

History

Month Year Description Sep. 1999 Voltage YK established in Takatsu-ku, Kawasaki, Kanagawa Prefecture, to produce movies, distribute web content and sell media planning tools. Capital stock: JPY3mn.

Feb. 2000 Reorganization to Voltage Inc.; capital stock increased to JPY10mn. Mar. 2000 Launched the Mobile Carrier Official Site business (now, the Mobile Content business). Dec. 2006 Launched the dating sim game series (now romance story app series), content for official mobile carrier sites. Jun. 2010 Listed on the Mothers market of the Tokyo Stock Exchange. Jun. 2010 Began distributing social apps. Jun. 2011 Transferred from Mothers to the First Section of the Tokyo Stock Exchange. Jun. 2011 Began distributing smartphone apps. May 2012 Establishment of Voltage Entertainment USA, Inc. as a subsidiary. May 2013 Launched a suspense drama app. May 2017 Full-fledged operation of events, merchandise, video/music and other IP businesses. Dec. 2019 Launched the e-books business. Aug. 2020 Launched an e-comics store and e-comics label.

Source: Shared Research based on company data The first 20 years after establishment September 2019 marked the company’s 20th anniversary of establishment, in 1999. The company generated consecutive losses in the first four years, becoming profitable in FY06/04. Performance was relatively smooth over the next decade, with revenue topping JPY10.0bn in FY06/14. Rapid growth won the company a ranking in the Japan Technology Fast 50 (a corporate growth ranking by Deloitte Touche Tohmatsu, an accounting auditor) from 2006 through 2014. At the time, earning this ranking for eight consecutive years was a historic first. Voltage established “romance games for women” as a genre, and listed on the TSE Mothers index in 2010. Less than a year later, the company was upgraded to the TSE First Section at a record pace at the time.

In FY06/15, revenue expansion slowed to single-digit growth, while profit fell by double digits. Foreshadowing this trend, in FY06/13 the company fell short of its initial targets for the year, and OPM dropped into the single digits (3.2%). In May 2012, the company established Voltage Entertainment USA, Inc. as a subsidiary. In 2013, founder/CEO Tsutani and his spouse (the company’s COO) had relocated to the US to spearhead the subsidiary. In the meantime, they put in place a new management team to run the main company in Japan.

During its earnings announcement for FY06/13, the new management team announced medium-term targets for FY06/19 (revenue of JPY20.0bn, operating profit of JPY2.0bn). Performance exceeded expectations in FY06/14 but fell below forecast in FY06/15. Even after Mr. Tsutani resumed the post of CEO in July 2016, the company fell short of its performance targets. Since FY06/19, the company has not disclosed forecasts; the company says the operating environment is too volatile for it to predict performance with a high degree of confidence.

In Q4 FY06/20, the company was profitable for the first time in 12 quarters; profitability has continued through Q2 FY06/21. The company attributes some of this increase to higher demand as people stayed at home amid the COVID-19 pandemic, but also believes CEO Tsutani’s three-year strategy is beginning to bear fruit. CEO Tsutani likens the turnaround to Sylvester Stallone in the film Rocky. He says the company is responding to adversity and preparing for a phase 2 growth sequel over the medium to long term.

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Revenue, operating profit, and OPM since establishment

(JPYmn) Revenue Operating profit OPM (RHS) 12,000 20.0% 11,219 10,600 12.3%12.1% 10.6% 10.6% 10,083 10,000 9.3% 9.0% 9,089 10.0% 6.2% 6.1% 8,820 4.4% 4.7% 8,067 3.2% 2.5% 1.6% 8,000 0.0% 7,392 7,120 0.0% 6,587 0.9% 6,346 -2.8% -1.3% 6,000

4,436 -10.0%

4,000 3,431 -19.8% 2,815 -14.1% -20.0% 1,988 2,000 1,342 -25.7% 893 766 857 485 547 616 467 531 130 162 218 124 299 309 295 141 10 - 45 8 34 -30.0% 0 -44 -32 -56 -86 -33.8% -199 -1,042 -2,000 -40.0%

Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Performance and key events since establishment

Medium-term targets as of FY06/14 Revenue OP OPM Revenue OP OPM Main events Term FY (JPYmn) (JPYmn) (JPYmn) (JPYmn) 1 06/00 10 - 0.0% Established in Sep. 1999 2 06/01 130 -44 -33.8% 3 06/02 162 -32 -19.8% 4 06/03 218 -56 -25.7% 5 06/04 485 45 9.3% 6 06/05 893 8 0.9% 7 06/06 1,342 34 2.5% Launched the dating sim game series in Dec. 2006 8 06/07 1,988 124 6.2% 9 06/08 2,815 299 10.6% 10 06/09 3,431 309 9.0% 11 06/10 4,436 547 12.3% Listed on TSE Mothers in Jun. 2010 12 06/11 6,346 766 12.1% Listed on TSE1 in Jun. 2011 13 06/12 8,067 857 10.6% Established US subsidiary in May 2012 14 06/13 9,089 295 3.2% 9,600 1,000 10.4% Missed initial company forecasts 15 06/14 10,083 616 6.1% 9,500 300 3.2% Mr. Yokota became CEO in Jul. 2013 16 06/15 10,600 467 4.4% 11,500 600 5.2% 17 06/16 11,219 531 4.7% 13,000 800 6.2% Mr. Tsutani resumed CEO in Jul. 2016 18 06/17 8,820 141 1.6% 15,000 Formed the three-year strategies 19 06/18 7,392 -1,042 -14.1% 17,500 20 06/19 7,120 -199 -2.8% 20,000 2,000 10.0% 21 06/20 6,587 -86 -1.3% Turned profitable from Q4 22 06/21 Stayed in the black in Q1 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

News and topics

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Top management and corporate governance Top management Chief Executive Officer Yuzi Tsutani (born March 10, 1963) Mar. 1985 Graduated from the Department of Urban Engineering, Faculty of Engineering, University of Tokyo Apr. 1985 Entered Hakuhodo Inc.; worked mainly in interior space design 1993 Studied in the US in a director course in the graduate program of UCLA’s film school (graduated in 2002) 1997 Launched Odekake Navi as an internet business under Hakuhodo’s internal venture program Sep. 1999 Founded Voltage and assumed office as CEO May 2012 Established Voltage Entertainment USA, Inc. in San Francisco, and assumed office as CEO Sep. 2013 Director and chairperson of Voltage Inc. Sep. 2014 Representative director and chairperson of Voltage Inc. Jul. 2016 Representative director, chairperson, and CEO of Voltage Inc. Feb. 2017 Director of VoltageVR Inc. (current position) Oct. 2017 Representative director and CEO of Volpictures Inc. (current position) Nov. 2019 Director of Voltage Entertainment USA, Inc. (current position) Sep. 2020 Representative director and CEO of Voltage Inc. (current position)

Chief Operating Officer Nanako Higashi (born June 21, 1969) Mar. 1992 Graduated from the Department of Mathematics, Tsuda University Apr. 1992 Entered Hakuhodo Inc. Apr. 2000 Became director of Voltage Inc. Oct. 2007 COO of Voltage Inc. May 2012 COO of Voltage Entertainment USA, Inc. Sep. 2013 Vice-chairperson of Voltage Inc. Feb. 2017 Director of VoltageVR Inc. (current position) Oct. 2017 Director of Volpictures Inc. (current position) Nov. 2019 Director of Voltage Entertainment USA, Inc. (current position) Sep. 2020 Representative director and COO of Voltage Inc. (current position) Source: Shared Research based on company data

CEO Tsutani was born in Fukui Prefecture to a family that had been running a textile factory for 60 years. As a child who enjoyed crafts, he went on to study urban engineering at the University of Tokyo. Following his interest in making things, he hoped to find work where he could express himself. Being interested in the exhibition-related business, he entered Hakuhodo (a large advertising agency). However, his work at the agency mainly involved planning (production was outsourced to other companies), which failed to fulfill his creative desires. He thus decided to go overseas and study film. He applied for a director course in the graduate program at the film school of UCLA. After being turned down twice, he gained admission on the third try. After studying abroad for three years, he returned to Hakuhodo, where he proposed and launched a new business. When this business was closed down, Mr. Tsutani left Hakuhodo and struck out on his own.

Mr. Tsutani incorporated filmmaking methods into the creation of mobile games, which were well received. The company obtained JPY300mn in investment from a venture capital firm but failed to produce results for four years. Taking what seemed a final chance, in its fourth year the company entered the business of mobile phone ringtone melodies, which became a hit. Lyrics-heavy melodies from dramas were a successful intersection between industry trends and the company’s strengths. Surviving the company’s problematic initial period, Mr. Tsutani decided that the three core business elements were products, sales, and organization. He became convinced that the keys to business success were to “narrow down customer segments and business categories” and to “build one’s own expertise in collecting revenue.” The company began hiring new university graduates, placing a recruiting priority on highly qualified female candidates. He found female university students to be relatively disinterested in large companies but attracted to Voltage’s open, results-oriented culture. The concept of romance simulation games, which would later become central to the company’s business, was the brainchild of a female employee just one year out of university.

COO and co-founder Nanako Higashi is married to Mr. Tsutani. Ms. Higashi studied mathematics at Tsuda University. Subscribing to the philosophy that public and private lives are intertwined, she says she chose to share the same work/private environment and apply the same rules as her partner. Herself an aficionado of romance novels, manga, movies, and dramas, she has a strong

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connection with company’s female employees (who make up more than 60% of the total), as well as a background in mathematics. The company believes this combination helps make her an integral part of the management team alongside CEO Tsutani.

Corporate governance Form of organization and capital structure Form of organization Company with Audit & Supervisory Committee Controlling shareholder and parent company None Directors and Audit & Supervisory Board members Number of directors under Articles of Incorporation 10 Number of directors 6 Directors' terms under Articles of Incorporation 1 Chairman of the Board of Directors CEO Number of outside directors 3 Number of independent outside directors 3 Number of members of Audit & Supervisory Committee under Articles of Incorporation 3 or more Number of members of Audit & Supervisory Committee 3 Number of outside members of Audit & Supervisory Committee 3 Number of independent outside members of Audit & Supervisory Committee 3 Other Participation in electronic voting platform No Providing convocation notice in English No Implementation of measures regarding director incentives Stock option

Eligible for stock option Inside and outside directors, and employees

Disclosure of individual director's compensation None Policy on determining amount of compensation and calculation methodology In place Corporate takeover defenses None Source: Shared Research based on company data

The company strives to maintain and enhance management efficiency through a board whose directors are closely familiar with its business. As CEO Tsutani and COO Higashi are family members, the company has also selected a non-family member as directors to create an organization for executing business fairly and faithfully.

Dividend policy

FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPY) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. EPS 28.2 57.4 45.3 40.7 4.8 -259.8 -69.3 -28.6 Dividend per share 19.0 19.0 15.0 15.0 10.0 0.0 0.0 0.0 Book value per share 661.0 701.0 731.7 744.5 731.8 460.2 389.9 376.9 Payout ratio 67.4% 33.1% 33.1% 36.9% 210.5% - - - DOE 2.8% 2.8% 2.1% 2.0% 1.4% - - - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

The company generated net losses from FY06/18 to FY06/20, so did not pay dividends for that period.

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(JPY) Dividend per share Payout ratio (RHS) 20.0 19.0 250% 18.0 210.5% 16.0 15.0 15.0 200% 14.0 12.0 150% 10.0 10.0 8.0 100% 6.0 36.9% 4.0 33.1% 33.1% 50% 2.0 0.0 0.0 0.0 0.0 0% Cons. Cons. Cons. Cons. Cons. Cons. Cons. FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20

Shared Research based on company data

Major shareholders

Shares held Shareholding Top shareholders (as of end December 2020) ('000) ratio Yuzi Tsutani 668 10.40% Third Street Co., Ltd. 400 6.23% Nanako Tsutani 368 5.73% The Master Trust Bank of Japan, Ltd. (Trust account) 202 3.14% Trustee of Regulated Securities in Trust, SMBC Trust Bank Ltd. 200 3.11% GMO Click Securities, Inc. 90 1.40% THE BANK OF NEW YORK MELON 140040 (Standing proxy: Mizuho Bank, Ltd.) 85 1.32% Custody Bank of Japan, Ltd. (Trust account 5) 83 1.30% SBI Securities Co., Ltd. 71 1.10% Custody Bank of Japan, Ltd. (Trust account 6) 70 1.09% SUM 2,236 34.82% Shared Research based on company data

CEO Tsutani (Yuzi Tsutani) and COO Higashi (Nanako Tsutani) are effective owners of the company shares held by the SMBC Trust Bank Ltd. Regulated Securities Trust and Third Street Co., Ltd. Accordingly, the family effectively controls 25.5% of the company’s shares.

Employees

Employee metrics (cons.) FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Revenue (JPYmn) 9,089 10,083 10,600 11,219 8,820 7,392 7,120 6,587 Recurring profit (JPYmn) 344 646 485 488 159 -1,068 -237 -88 No. of employees (ex. temp.) 298322384387389324251231 (Temporary workers) 1421661771741491086652 Revenue per employee (JPYmn) 21.220.020.116.415.920.122.5 RP per employee (JPYmn) 1.40.90.90.3-2.3-0.7-0.3 Employee metrics (parent) FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Revenue (JPYmn) 2,816 3,431 4,436 6,346 8,067 9,097 10,043 10,573 11,136 8,537 6,581 6,352 5,820 Recurring profit (JPYmn) 294 304 544 762 860 559 928 699 734 420 -1,087 -255-104 No. of employees (ex. temp.) 113 125 148 149 178 282 300 361 363 364 301 227207 (Temporary workers) 17192873971411631751731491086652 Revenue per employee (JPYmn) 24.927.028.731.024.522.120.920.816.7 14.9 19.2 21.6 RP per employee (JPYmn) 2.2 3.3 3.4 3.3 1.5 2.0 1.4 1.4 0.8 -2.5 -0.8 -0.4 Average age 27.227.727.527.427.728.028.328.729.630.330.9 Average years of service 2.32.52.52.22.72.83.33.64.34.85.5 Average annual salary (JPY'000) 4,414 5,082 4,931 4,841 4,861 4,775 4,691 4,166 4,244 4,379 4,782 Cons. - Parent FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Revenue (JPYmn) -9392684283811767767 Recurring profit (JPYmn) -215-282-214-245-261191816 No. of employees (ex. temp.) 1622232425232424 (Temporary workers) 13210000 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

The company has 231 employees (FY06/20), less than 60% of its peak of 389 (FY06/17). Similarly, by FY06/20 the number of temporary workers had fallen to 52, less than a third of the peak number of 177 (FY06/15). Per employee, revenue was JPY22.5mn

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(FY06/20, +JPY2.4mn YoY), and the recurring loss was JPY0.3mn (JPY0.7mn in FY06/19). These figures are an improvement from the company’s lows in FY06/18 (per-employee revenue of JPY15.9mn and recurring loss of JPY2.3mn).

Female employees (non-consolidated) Female employee ratio FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Female 210 219 186 142 137 Total 363 364 301 227 207 Female ratio 58% 60% 62% 63% 66%

Female manager ratio (year-end) FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Female 14 21 19 14 13 Total 3947463228 Female ratio 36% 45% 41% 44% 46%

Female new hires FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Female 28 27 14 8 4 Total 434123128 Female ratio 65% 66% 61% 67% 50%

New manager promotion FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Female 69322 Total 9 16 9 3 2 Female ratio 67% 56% 33% 67% 100%

Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Among full-time employees (non-consolidated basis), the percentage of women is rising each year, reaching 66% as of June 30, 2020. The percentage of female managers has risen similarly, to more than 46%. Although FY06/18 was an exception (33%), the percentage of women newly promoted to management positions averages more than 60% (100% in FY06/20).

By job type, 60% of employees are involved in production, 20% in programming, 10% in design, and 10% in admin. A high percentage of women are involved in production, such as the creation of rough drawings and artwork of characters and situations, and the development of various scenes and stories. Designers and the production team are in charge of content creation. Men prevail in programing, where engineers systematically turn content into games.

Each year, the company hires around 10 new university graduates. The company has codified its development expertise, creating a system whereby even new graduates and other young employees can become developers. There are also many cases where avid fans of the Voltage apps join the company and take part in the development process. The company says annual employee turnover is around 20%, in line with the industry average.

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Terminology (alphabetical)

Term Explanation App Short for “application,” an app refers to software such as game, email, and music player that run on an operating system. Avatar A character adopted to represent the user. Digital twin This type of technology is used to “twin” physical items in cyber (virtual) space, replicating them on the basis of data acquired via IoT and other means. The idea is to create a virtual environment that mirrors the physical one. Dungeon These underground jails or cellars are typically rooms located below castles. Role-playing games often use underground labyrinths. Falling block puzzle A type of game in which the player tries to eliminate blocks falling from the top of the screen. First-person shooter This videogame genre, which takes a first-person perspective, gets its name from the typical focus on gun and other weapons-based combat. Gacha (lottery) prizes A game mechanism by which users can obtain in-game items, etc. that are randomly selected for them via a lottery system. Horizontal scrolling In video games, horizontal scrolling describes the act of changing the camera angle to look at game action from the side, moving characters left or right on the screen. In-game item In computer games and tabletop role-playing games, players’ characters obtain items in various ways. These items may be used as tools to benefit characters in some way. Ikemen A Japanese colloquialism referring to an attractive man, particularly one with an attractive face. Intellectual property (IP) Content with usage rights (mainly copyrights). In the world of social gaming, IP can refer to content (under copyright) from manga, anime, etc. Mirror world A one-for-one representation of the real world in digital form. Mune-kyun A Japanese reference to butterflies in the stomach or a pounding heart. "Mune-kyun" happens, for instance, when one reminisces of sweet memories with a childhood sweetheart or discovers an unexpectedly attractive quality in a potential love interest. Music- or rhythm-based game In this type of game, players perform some action in time with music (such as pressing on-screen buttons, moving the feet, or controlling instruments). Betsu-kare Japanese term for "other boyfriend." Refers to a virtual romantic interest in a romance simulation game. Role-playing game (RPG) A type of game in which the players each assume a game character role. The players generally cooperate with each other to overcome challenges set in a virtual world (adventures, problems, searches, battles, etc.) to eventually reach the final goal. Social media A service providing membership-based online community to promote/support networking and communication among its members. Strategy game In this computer game genre, players focus on carefully laying out a plan to win the game.

Source: Shared Research based on company data

Profile

Company Name Head Office Voltage Inc. 4-20-3, Ebisu, Shibuya-ku, Tokyo Phone Listed On +81-3-5475-8141 First Section of the Tokyo Stock Exchange Established Exchange Listing September 17, 1999 June 9, 2011 Website Fiscal Year-End https://www-en.voltage.co.jp/ June IR Contact IR Web https://www-en.voltage.co.jp/contact/ https://www-en.voltage.co.jp/ir/

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