From “Made in Japan” to “Checked by Japan” Business Results for the Fiscal Year Ended March 31, 2011
DIGITAL Hearts Co., Ltd. Eiichi Miyazawa, President & CEO From “Made in Japan” to “Checked by Japan”
Contents
１. Business Results for FY03/11 P 3
２. Earnings Forecast for FY03/12 P14
３. FY03/12: Future Initiatives P17 Major Moves in FY03/11 (Publicly Disclosed Information)
4/13/10 Mobile content services for Android phones launched
5/7/10 Glitch cases registered on fuguai.com surpass 10,000-mark
8/26/10 Exclusive test booth set up for Xbox 360 Kinect
9/17/10 Localized support services for Yahoo! Mobage and Mobage town launched
11/12/10 Entered into business alliance with Active Gaming Media Co., Ltd.
1/14/11 Entered into business alliance with E-Guardian Co., Ltd.
1/28/11 3D content production started
2/22/11 Selected as alliance service vendor for GREE games
3 Business Results Summary
FY03/10 FY03/11 FY03/11 Year-on-Year （\ Million） Actual Results Initial Forecast Actual Results Change Net Sales 3,416 4,068 3,957 115.8% Operating Income 521 620 528 101.3% Ordinary Income 526 618 495 94.1% Net Income 306 330 278 91.0% Ordinary Income Margin 15.4% 15.2% 12.5% △2.9 points
Net Sales: Reached 115.8% yoy growth
Operating Income: Due to higher labor and new business preparation costs, only generated 101.3% yoy growth
Ordinary Income: Market fluctuations led to 94.1% yoy decline
4 Ratio of Net Sales by Business Unit
FY03/10 FY03/11 Year-on-Year （\ Million） Actual Results Actual Results Change Consumer Games Unit 1,964 1,896 96.5%
Mobile Content Unit 493 664 134.7%
Arcade Games Unit 958 1,396 145.7%
FY03/10 FY03/11
Mobile Mobile Content Content 14.4% 16.8% Consumer Consumer Games Arcade Games Arcade 47.9% Games 57.5% Games 28.1% 35.3%
5 Full-Year Results: Consumer Games Unit
(¥ Million) FY03/10 FY03/11 Year-on-Year （\ Million） 2,500 Actual Actual Change Net Sales 1,964 1,896 96.5% 2,000
1,500
1,964 1,896 1,000
500
0 Market Environment FY03/10 Actual FY03/11 Actual （＋） Makers are increasingly relying on global initiatives as development costs soar （＋） Content for the SNS market has expanded dramatically in size with the inclusion of older, popular home video game titles （－） The market for game software in fiscal 2011 has contracted significantly, falling by 90.7% （－） Game developers have had to alter their development timetables to meet the rollout of new game consoles Digital Hearts’ Initiatives Established exclusive test booth for newly introduced Kinect unit Alliance with Active Gaming MediaReinforces localization and expands channels to overseas clients Alliance with E-GuardianStrengthened much needed operating support services for SAP Results Summary Declined by 96.5% on yoy basis due to fewer number of titles under development for market 6 Full-Year Results: Mobile Content Unit
(¥ Million) FY03/10 FY03/11 Year-on-Year （\ Million） 700 Actual Actual Change 600 Net Sales 493 664 134.7% 500 400 664 300 493 200 100 0 FY03/10 Actual FY03/11 Actual Market Environment (＋) The market for smart phones grew as mobile phone carriers began selling Android-based smart phones and tablets (＋) With Android emerging as a global OS standard, it has helped to accelerate the globalization of services and applications (＋) With the increasingly diversification of mobile content and terminals, the need to service multiple platforms has accelerated (－) The number of casual applications is rising and that, in turn, has intensified competition among content developers and adversely impacted their profit structure Digital Hearts’ Initiatives Launched debugging service for Android mobile phones from April Launched localized services for Yahoo! Mobage and Mobage town Selected as alliance service vendor for GREE Results Summary Achieved 134.7% yoy growth driven by demand for applications for smart phones and SNS 7 Full-Year Results: Arcade Games Unit
(¥ Million) FY03/10 FY03/11 Year-on-Year （\ Million） 1,600 Actual Actual Change 1,400 Net Sales 958 1,396 145.7% 1,200 1,000 800 1,396 600 958 400 200 0 FY03/10 Actual FY03/11 Actual
Market Environment (＋) The trend is for makers and developers to develop games with broader entertainment value (＋) Arcade games relying on increasingly complex LCD and lighting to enhance entertainment element Digital Hearts’ Initiatives Focused on marketing of solutions for upstream development processes Upgrading service quality by focusing on tester training in order to develop strong ties to clients Results Summary Achieved dramatic yoy growth of 145.7% due to orders surge for widely acknowledged debugging services quality for highly entertaining content
8 Cost Analysis
FY03/10 FY03/11 Year-on-Year FY03/10 FY03/11 Year-on-Year （\ Million） （\ Million） Actual Actual Change Actual Actual Change Cost of Sales 2,065 2,428 17.6% SG&A Expenses 829 1,000 20.6%
Labor Costs 1,799 2,097 16.6% Personnel Expenses 394 506 28.5%
+0.9 +1.0 CoS Ratio 60.5% 61.4% SG&A Ratio 24.3% 25.3% points points
(¥ Million) (¥ Million) 1,200 29.0% 3,000 63.0% 1,000 28.0% 2,500 62.0% 331 800 27.0% 2,000 61.4% 494 266 61.0% 600 435 26.0% 1,500 60.5% 60.0% 25.3% 2,097 400 25.0% 1,000 1,799 24.3% 506 500 59.0% 200 394 24.0% 0 58.0% 0 23.0% FY03/10 FY03/11 FY03/10 FY03/11 Labor Costs Other Costs CoS Ratio Personnel Expenses Other Costs SG&A Ratio
CoS ratio rose 0.9 points due to increase in hourly remuneration of testers SG&A ratio rose 1.0 points due to increase in personnel, primarily managers, in the previous term, as well as an increase in rent due to relocation of head office
9 Balance Sheets
YoY chg YoY chg （\ Million） FY03/10 FY03/11 （\ Million） FY03/10 FY03/11 Amount Amount Current assets 1,350 1,668 +318 Current liabilities 351 484 +133
Cash and deposits 868 1,054 +186 Noncurrent liabilities - 10 +10 Notes and accounts 431 545 +113 Total liabilities 351 494 +143 receivable - trade Noncurrent assets 599 674 +74 Shareholders' equity 1,599 1,849 +250 Property, plant and 94 138 +43 Capital stock 272 272 +0 equipment Intangible assets 57 58 +1 Capital surplus 232 232 +0 Investments and 448 477 +29 Retained earnings 1,093 1,343 +249 assets Assets 1,949 2,343 +393 Total net assets 1,598 1,848 +249 Total liabilities and 1,949 2,343 +393 net assets
Current assets: primarily an increase in cash, deposits and trade receivables Noncurrent assets: primarily an increase in property, plant and equipment due to head office relocation and laboratory relocation, the latter at lessor’s convenience Current debt: primarily an increase in accrued charge and income tax payable Current ratio: 344.6%; net worth ratio: 78.9% 10 Statement of Cash Flows
YoY chg （\ Million） FY03/10 FY03/11 Amount
Cash flows from operating activities 124 307 +183
（※ Cash flows before income taxes paid） 486 530 +44
Cash frlow from investing activities △140 △92 +47
Cash flows from financing activities △28 △28 △0
Net increase (decrease) in cash and cash equivalent △44 186 +230
Cash and cash equivalents, beginning of term 912 868 △44
Cash and cash equivalents, end of term 868 1,054 +186
Operating activities: primarily a decrease in income tax payment Investing activities: acquired noncurrent assets due to relocation of head office in response to growing business size, as well as move of laboratory at lessor’s request Financing activities: primarily payout of dividends
11 Status of Actual Results (as of the end of March 2011) Actual Results Recruitment, Training Accelerated transition to outsourcing leads to surge in clients and in the number of and Placement debugging cases Equipped with proprietary training system to train With the market moving to serialized game titles fully operational testers in a short period of time and multiplatform compatibility, the Company stands at an advantage Registered testers: 4,588 (as of March 2011) No. of Clients: 795 Companies 3,542 testers as of March 2010 (as of March 2011) 29.5％ 636 companies Title Leaders: 176 as of March 2010 25.0％ (as of March 2011) 167 leaders as of March 2010 5.4％ No. of Debugging Cases: 560,000 (as of March 2011) Fulltime Workers: 151 (as of March 2011) 460,000 cases as of March 2010 21.7％ 153 workers ％ as of March 2010 1.3
12 From “Made in Japan” to “Checked by Japan”
Contents
１. Business Results for FY03/11 P 3
２. Earnings Forecast for FY03/12 P14
３. FY03/12: Future Initiatives P17 Business Performance Trend
FY03/12 Forecast Net Sales: ¥4,509 Million (YoY increase of 13.9%) Operating Income: ¥645 Million (YoY increase of 22.3%)
Net sales Operating income （¥ Million） (¥ Million) Net sales Operating income 5,000 1,000 4,509 4,500 900 3,957 4,000 800
3,378 3,416 3,500 641 645 700
3,000 600 521 528 2,500 2,372 500
2,000 400 336 1,499 1,500 300 229 1,000 200
500 100
0 0 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 (Forecast) 14 FY03/12 Forecast
FY03/11 FY03/12 （\ Million） YoY change Actual Forecast Net sales 3,957 4,509 113.9% Operating income 528 645 122.3% Ordinary income 495 646 130.6% Net income 278 355 127.6% Ordinary income 12.5% 14.3% +1.8 points Margin
Net Sales: YoY growth of 13.9%
Ordinary Income: Ordinary income rate to improve by 1.8 points due to lower ratio of fixed costs achieved through net sales growth
15 From “Made in Japan” to “Checked by Japan”
Contents
１. Business Results for FY03/11 P 3
２. Earnings Forecast for FY03/12 P14
３. FY03/12: Future Initiatives P17 Changes in Business Organization
＜FY03/11＞ Q&A Testing Services
Consumer Games Unit Mobile Arcade Games Unit ■Consumer game software Solutions Unit ■Online games ■Pachinko parlor game ■Consumer electronics ■Mobile applications ■Pachisuro slot ■SNS applications (online PC) ■Smart phone/device machine ■Overseas operations support Applications ■Web systems (business systems) ■SNS applications (mobile based)
Consumer electronics sales to be The Mobile Solutions Business was renamed the Digital transferred to Digital Solutions Business Solutions Business in order to better respond to the rapid transition to a multiplatform environment and develop ＜FY03/12＞ solutions for it Q&A Testing Services Other Businesses Digital Solutions Consumer Games Arcade Games New Unit Unit Unit Achieving business ■Mobile applications profitability ventures, ■Smart phone/device applications for ■Consumer game software ■ ■Pachinko parlor game including SNS applications (mobile based) Fuguai.com ■Online games ■Overseas operations support ■Pachisuro slot machine 3D content ■Overseas operations support (mobile based) production ■Consumer electronics ■SNS applications (online PC) ■Web systems (business systems) 17 Prospects by Business
Q&A Testing Services
Buoyed by an industry in its up-cycle, the Company projects profit growth for every business unit Consumer Games Unit Profit growth expected due to rising demand from debugging services for software of such new consoles as 3DS and NGP Digital Solutions Unit Profit expected to surge with the expansion of the smart phone market Arcade Games Unit Profits will remain robust; will carry forward relationship of trust with clients developed in FY03/11 Other Businesses
3D Content Production Services To focus on enhancing technical expertise base by training workers To advance business framework and promote marketing activities Fuguai.com
Achieve profitability by developing new business model
18 Future Initiatives: Upgrading Service Lineup through Alliances
The Company’s goal is to upgrade its service lineup and, by collaborating with its alliance partners, acquire new clients and broaden channels to existing clients
Aim to upgrade service Through our alliance with E-Guardian Inc., Consumer lineup from upstream we can now offer a service lineup that extends Games software development to operating support processes
Through our alliance with Bit-isle Inc., we can now Mobile offer a service lineup that extends to infrastructure Solutions development operations
Arcade Upgrade our service lineup Games from upstream processes
Overseas Through our alliance with Active Gaming Media Co., Ltd., we have fortified the Games localized services we can provide
New Upgrade system services oriented to Entry of 3D market Ventures cloud computing demand fuguai.com Establish basis for profitability
Draw up Main System Develop- program plans and design ment data Q&A Testing Operation specifications integration 19 19 Future Initiatives: Looking Abroad While Creating New Demand
～ Delivering Japanese Quality to the World～ Tested from developer’s Tested from user’s perspective perspective (operation and (unintended usage exceeding processing within projected projected operating parameters) operating parameters)
Active Passive Q&A Testing Q&A Testing
Creating added value through Enhance cost competitiveness unique Japanese sensibilities through business regime reviews
Establish service regime that responds to global demand for Q&A Testing Services 20 20 Future Initiatives: New Businesses—3D Content Production
Focus on rotoscoping and establish a profit-making business platform Attract new clients Rotoscoping Technique based on cutting out outline 2D-to-3D Conversion Workflow of the targeted 3D object from a 2D Load 2D image background image Preciseness is essential so that intricate details can be readily recognized by viewers Our strength
Rotoscope process
3D video created
Left eye image Right eye image
Work calls for precision techniques as details can be lost in the © rotoscoping process 21 21 Future Initiatives: New Businesses—fuguai.com
Create demand for added value Develop a profit-making business model May 9, 2011: Redesigned website launched
Since its launch in July 2008, some 20,000 reports of glitches from released software have been reported to the website
In addition to posting information releases issued by developers, over 4,500 registered website members report on software glitches on a daily basis, providing an interactive, real-time forum for users
Developing a new business model that not only utilizes developer releases, but also glitch information posed by registered users
Established a special unit to supervise task of achieving website profitability in FY03/12
22 22 Market Maturity and Outlook by BusinessUnit
Stage 3 Q&A Testing: Q&A Testing: Q&A Testing: Fuguai.com 3D Content (Expansion Phase) Consumer Arcade Digital Production Raise outsourcing ratio to Games Unit Games Unit Solutions 80% or more; reinforce usage of other services Unit Stage 2 (Growth Phase) Continue raising outsourcing ratio
Stage 1 (Entry Phase) Promote trial use of Q&A testing services
Recovery in will continue robust Growing Continue Commence number of titles performance popularity of developing rotoscoping to be released Expanded memory smart phones user-supplied operations by capacity of new Reap reward and expanding glitch tapping the systems will prove some 4,000 from expanding beneficial social media information Forecast for registered online content, Greater demand to audience will base and FY03/12 be created by testers who SNS popularity prove a boon enhance possess the skill and product planning website focused on high sets for highly multiplatform entertainment recognition detailed work compatibility element Strengthening ties with existing clients Acquire new clients 23 23 Taking Japanese Quality to New Frontiers
To New Fields
To New Regions
24 24 From “Made in Japan” to “Checked by Japan”
DIGITAL Hearts Co., Ltd. ＜Contact＞ Management Planning Office Phone：81-3-3379-2219 Email：[email protected] http://www.digitalhearts.co.jp/en
This presentation has been developed strictly for the purposes of investor relations activities and does not in any way attempt to influence or facilitate investment decisions or represent a solicitation for investment. While the information provided herein is based on that believed to be reliable at the time of submission, the Company does not guarantee its accuracy, be it partial or overall. Furthermore, because this presentation features the views and assessments of the Company at the time of its writing, it may therefore be subject to change without prior notice due to unforeseen developments in the Company’s operating environment. The Company and its affiliated companies, as well as their executive officers, may hold positions in the securities and/or financial products featured in this presentation, and may stand to profit or incur losses from their positions. The relevant parties may also purchase or sell securities and/or financial products, either in person or by proxy. This presentation is protected under exclusive copyright of the Company. To quote, reproduce or transfer any section, either partially or in its entirety, is prohibited by law. Those who wish to quote from, reproduce or transfer the information contained herein must therefore acquire in advance the written consent of the copyright holder. 25 25 From “Made in Japan” to “Checked by Japan” Reference
• Corporate Profile and History • Our Unique Identity and Strengths, • Adopted Business Model Part 1: High Entry Barriers • Our Q&A Testing Services • Our Unique Identity and Strengths, • Three Keys Surrounding Our Company Part 2: Nationwide Business Infrastructure Corporate Profile and History
Month-Year Corporate History Registered Name DIGITAL Hearts Co., Ltd. DIGITAL Hearts Ltd. founded in Suginami Ward, Tokyo Apr-01 Founded April 19, 2001 Began offering video game and pachinko machine testing services Oct-01 Head office moved to Shibuya Ward, Tokyo February 1, 2008 (Moved from TSE Mothers to TSE 1st Section Sep-02 Obtained license to engage in general worker placement business Date Listed in February 2011) Tokyo Stock Exchange The 1st Section Jan-03 Began offering testing services for pachisuro slot machines (Securities Code 3620) Sep-03 Began offering testing services for mobile phone applications
Capitalization ¥272,820,000 (as of March 31, 2011) Oct-03 Incorporated as DIGITAL Hearts Co., Ltd. Aug-04 Became member of Computer Entertainment Suppliers Association (CESA) Shares Issued 57,885 Shares (as of March 31, 2011) Apr-05 Opened Osaka Office in Osaka prefecture Comprehensive Quality Assurance Debugging Aug-05 Opened Nagoya Office in Aichi prefecture Testing Onsite Testing Opened Yokohama Office (now the Yokohama Laboratory, or “Lab.”) Services Jul-07 Playability and Usability Testing in Kanagawa prefecture Testing Staff Placement Became the first Japanese test house approved by Microsoft for its Xbox Production of 3D Content Sep-07 video game system (Authorized Xbox Test Program) Q&A Testing Services for Consumer Games, Major Digital Solutions and Arcade Games Achieve the “PrivacyMark” certification from the Japan Information Businesses Other Businesses, including Fuguai.com and Processing Development Corporation (now renamed the Japan Institute for Oct-07 3D Content Production Promotion of Digital Economy and Community) Certification No.: A822640 (01) Head Office 3-20-2 Nishi-Shinjuku, Shinjuku-ku, Tokyo Feb-08 Listed on TSE Mothers (Securities Code: 3620) Business Osaka, Nagoya, Sapporo, Yokohama, Sasazuka, Locations Fukuoka, Los Angeles May-08 Opened Sapporo Office (now the Sapporo Lab.) in Hokkaido prefecture 4,768 Apr-09 Opened Fukuoka Lab. in Fukuoka prefecture Workforce (includes temporary staff as of March 2011) Sep-09 Opened Los Angeles Office in California, USA CAPCOM CO., LTD. Relocated head office to Shinjuku Ward DP-CORPORATION May-10 Major Clients (in Index Corporation Former head office converted to Sasazuka Lab. alphabetical Microsoft Development Co., Ltd. Opened Ueno Office order) Nintendo Co., Ltd. Feb-11 SEGA Listed on TSE 1st Section Sony Computer Entertainment Inc. Mar-11 Opened Kyoto Lab. in Kyoto prefecture 2727 Our Business Model
Objective: To provide services to verify and report glitches in pre-release software from the user’s point of view
(Q&A Testing Services)
Our Our Employees,RegisteredStaff ( Full social security coverage extended coverage Full social security Clients Video Game Request to Industry test software Q&A Testing Services Mobile Device (covering from verification Hiring Industry to end-product quality Pachinko and Input and output on assurance testing) glitch reports provided Training on daily basis Pachisuro Business manner Industry Education Consumer Quality Q&A Testing services Glitch
Electronics information Bug pattern Hardware expertise expertise Industry briefings + Others Extensive Q&A Testing data base )
28 28 Our Q&A Testing Services Our Q&A Testing Services bridge the perception gap between users and developers By testing software beyond the parameters set by developers for intended use, we identify flaws or glitches that users can find disconcerting, providing a user’s perspective of the product Enables companies to compare and verify glitches from two perspectives, allowing them to set up a framework with which to determine the severity of and remedial measures for the identified issues on a concurrent basis
Manufacturer DIGITAL Hearts The World’s Sole Provider of User-Side Q&A Testing Expertise 1) Perspective of Developer Management 2) Perspective of User Proprietary database of software bugs （560,000 cases as of March 31, 2011） Some 4,000 registered testers expert in Q&A Testing Specializes in detecting glitches from users’ perspective Quality Product User-Side Collects glitch information from Development Control Q&A Testing public through proprietary fuguai.com -Accelerating Process of Outsourcing -Cost Expertise
29 29 Three Keys Surrounding Our Company
Importance of Q&A Testing As products become increasingly reliant on computerized controls, demand for software debugging services to prevent software failures grows equally large Importance of Outsourcing As earnings deteriorate and R&D costs escalate in this economic downturn, companies are now looking more than ever to convert their fixed costs (in-house testing personnel) to variable costs By outsourcing testing needs to specialized companies, clients are able to dramatically improve verification of glitches Importance of Shifting from “Made in Japan” to “Checked by Japan” By capitalizing on the Japanese skill sets in mastering highly detailed work, we can provide the world with a unique business developed in Japan
30 30 Our Unique Identify and Strengths, Part One: High Entry Barriers
Independence Equipment Debugging games Unencumbered by outside requires special capital, we can service testing equipment that any company are licensed to us
Credibility Security Our security regime has never been breached, Our credibility is bolstered by both on a hardware basis (fingerprint authentication being a listed company, at entrance and egress points, disposal of documents by specialized companies, and other especially when handling steps) and software basis (personal references required for all 4,588 of our registered testers, pre-release products for example), due to our robust security measures.
31 31 Our Unique Identify and Strengths, Part Two: Nationwide Business Infrastructure A Business Network Spanning 10 Locations September 1, 2009: Opened Los Angeles Office May 6, 2010: Relocated head office, established Sasazuka Lab. February 15, 2011: Established Ueno Lab. March 1, 2011: Established Kyoto Lab. Los Angeles office
Sapporo Lab.
Hatsudai Head office Sasazuka Lab. Ueno Lab. Yokohama Lab. ▲External appearance at Fukuoka Lab. Nagoya office Fukuoka Osaka office Lab. Kyoto Lab.
32 32