PiPEDO HD, Inc. · [Company Name] PiPEDO HD, Inc. [Event Type] Earnings Announcement ... There was...

PiPEDO HD, Inc. Financial Briefing for Analysts for the Q2 of the Fiscal Year ending February

October 3, 2018

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Event Summary

[Company Name] PiPEDO HD, Inc.

[Event Type] Earnings Announcement

[Event Name] Financial Briefing for Analysts for the Q2 of the Fiscal Year ending February

[Fiscal Period] FY2018 Q2

[Date] October 3, 2018

[Number of Pages] 40

[Time] 10:00 – 10:58

(Total: 58 minutes, Presentation: 48 minutes, Q&A: 10 minutes)

[Venue] Kabutocho Heiwa Building 3F, 3-3 Nihonbashi Kabutocho, Chuo-ku, Tokyo

[Venue Size] 145m2

[Participants]

[Number of Speakers] 1

Oya Shigeyuki Director & CFO



Presentation

Moderator: Good morning everyone. We will now begin the financial briefing for PiPEDO Holdings. Before we begin, there is a questionnaire among the materials from the company. Please fill it out and turn it in at the reception desk after the seminar. Now, please allow me to introduce the representative from the company here with us today. This is Mr. Shigeyuki Oya, CFO. After Mr. Oya’s presentation there will be time to ask questions. Mr. Oya, if you please.

Oya: Good morning everyone. I am Oya, CFO at PiPEDO Holdings. First, please allow me to give a brief explanation and apology. Previously, we informed everyone that today’s briefing would be presented by the CEO, Mr. Satani. However, he is unable to be with us today due to unforeseen circumstances despite the fact that he had planned to be, so I will be making the presentation today. I’m sure those of you who have heard Mr. Satani’s presentations before were looking forward to hearing him speak today, but I ask for your understanding in this matter. We will plan better and ensure that he will be present at the next financial briefing for the annual financial results. Your understanding of his absence today is appreciated.



Please allow me to begin the briefing. As you can see, we are now a holdings firm, so I will speak from that perspective. First of all, as there has been a major change in the way accounts are settled and the method of disclosing the accounts so I will explain that briefly first. This has already been explained in the summary, but I will give a simple explanation here. The segments have been reorganized. Traditionally we have only disclosed three segments, but to give our investors greater transparency from this term, and in consideration of the future as we are now a holdings firm and will create various companies and are starting various businesses, and in consideration of the future businesses we will develop, we have decided to reorganize the segments at this juncture and disclose the results to everyone. In actuality, there are many companies that have only recently been launched with very small amounts of money that are not yet of a scale worth disclosing. However, we reorganized the segments looking toward the future. I will not go into a detailed explanation of the new segments, but as you can see we have separated them by function and field.



The segments are separated by function, just as with any company, in order to provide a system to improve operational efficiency in conducting that business. The segments separated by fields belong to particular specified fields. For example, particular industries or areas, or where IT development is delayed and there are hopes of innovations through systems like those which we provide, we have established these kinds of new business groups by field where they could be narrowed down to specific fields.



The comparison to our traditional organization is listed here so I hope you will take a closer look at this later. There are various products separated by product in the conventional organization, but this document shows how the new segments were separated.



I will now explain the information related to our financial results. First of all, I will discuss the highlights of our performance. The term we are currently in is the end of the first half of the middle term, of the mid-term management plan we are currently undertaking. Our totals at this point are as we announced, approximately 2.6 billion yen in sales, 170 million yen in operating profits, 170 million yen in ordinary income, and the net income for this term was 75 million yen.

On the right side is the comparison with the previous term. There was an increase in sales of 100 million yen, but in terms of operating profit and ordinary income, it appears that profits have declined by a significant margin. The explanation of this was provided when we reported on the progress of our mid-term management plan this year on April 10, and we explained why this middle term has declined to this degree. Some of these explanations will be repeated later on, and I will touch on this again, but as I said we are in the second year of the mid-term plan and last year, which was the first year, we were extremely proactive with investment activities and put the majority of our efforts into recruiting talent and investing in our labor force. Those we hired in the first term and those we hired in the second term are now working in the company. We hired 90 people in the previous term and 76 people in the current term for a total of 166 people. At the end of the first half of the year the personnel expenses for those 90 people we hired in the first term increased by 76 people in the second term, and the personnel expenses for the 90 people hired in the first term accrued in the second period as well, so as we explained on April 10, revenue showing the biggest dip in the second term is an unavoidable phenomenon and we are currently in that middle period. As a result of this impact, when compared to the previous term there appears to be a major divergence in figures, but just as I explained, all of this is an investment toward improving performance in the latter half of the year and for next term. We, as a company, recognize this as the most difficult period with the greatest decline.



Additionally, this is a finer point, but our initial performance forecast for the first term was announced on April 10 as 2.8 billion yen in sales and 250 million yen in operating profits, but when we reviewed our situation at the August 30 mark we realized we would not reach those numbers and adjusted our performance forecast. We wrote the various reasons for this as well, but basically something was skewed in our initial assumptions and that resulted in skewed numbers. There is almost no deviation from the revised forecast, in fact operating profit and recurring profit have come in above the forecasted figures. Sales and net income were slightly less than the revised forecast but very near to the exact forecasted numbers, but there were various other disparities that occurred. There was a fairly major investment, so I think there was a gap in the initial assumption, and that gap appeared in the first half. Ultimately, I will explain at the end, but we are working on ensuring that our performance balances at the end of the fiscal year, and that includes working on our system of internal management.

Here we have the sales trends for the last five terms for your reference. The final target for this term, as I said earlier is 5.8 billion yen. The colored portion below is the first half trend. The last year of the previous mid-term management plan was 4.8 billion yen, but from that 4.8 billion we are aiming to land at 7.3 billion in the final year of the mid-term management plan we are currently in. From the perspective of average annual growth, we are aiming for 15% growth and we are currently right in the middle of that. This is the trend regarding sales.



This is a comparison of our year-on-year first term sales, and from a segment perspective this diagram shows what did well and what didn’t. Our company’s main business, in that the scale of sales and ratio of profits are extremely large, is our information asset platform. Our information asset platform business is quite strong. This is a comparison of year-on-year first term sales, but the trend is solid. There is an increase of 94 million yen and sales are approximately 1.8 billion yen. Next is advertising at 115 million on a monetary scale, and as a segment, sales were 200 million yen, which is a growth of roughly 100 million yen from last year, so among the segments in our company, in the first period of this fiscal year the advertising business did very well. The latter half seems to be continuing on this trend, so our advertising business is growing well. The information asset platform business is solid, and our advertising business is also doing well.

In terms of our innovation business, it is not yet a big enough amount to have that much of an impact on the P/L statement, but it has grown slightly. Our marketing solutions business has had a significant decline, but there are several reasons for that. This was also written in the explanation, but last year we were able to get a large-scale spot and that had an impact on the way this term’s financials appear to have decreased. That was the biggest factor.

We also have our xTech (Cross Tech) business. This has declined a little. There is no major monetary impact here, so it is just a slight decline. The final performance number for the first half is 2.623 billion.



Next, I will discuss operating profits trends. This includes forecasts slightly into the future for a total of 6 terms, but I need to add some additional information as I think a fully-detailed explanation is necessary here. As I discussed earlier when I spoke about the mid-term management plan, we have been investing in human resources. In particular, we hired a large number of people in the previous term and this term. As I said before, we hired 90 people last term, and we have already hired 76 people this term. I explained the background behind hiring to many people before, but I will explain it again. When we formulated the mid-term plan, we calculated a profit of 845 million yen in the previous mid-term plan. At that time, if I were to describe the in-house situation, we were working extremely tightly with major shortage of labor. We were somehow able to manage to produce 845 million yen in profits, but speaking from the on-site point of view, it would basically be impossible to expand any further and maintaining the existing line would require all of our efforts as we were overwhelmingly short on manpower. As a company, there is also the line of thinking that in order to produce bigger profits we shouldn’t hire that many people. However, if we don’t hire more people we cannot expand our scope any further and there is an awareness that in order to expand the company in the final year of the next mid-term management plan, we must hire a good number of salespeople and people to work on-site. In the current, mid-term management plan 2020, we wanted to hire talent as early as possible to become a substantial part of our workforce. This was the plan we moved forward with, which is the current mid-term management plan.

So based on that plan, we hired 90 people in the previous term and 76 employees this term, and for the next term the latter half still remains, but the following year will be the last year and we are working on a model that will produce the biggest profits, and that is what we have been working on now for an extended time. As in the previous mid-term plan, we are planning on producing the biggest profits in the third year. Of course, as a listed company, we feel it is important to turn out steady profits every year, but we also feel it was



necessary in this mid-term management plan to invest in order to grow the company at each milestone, while we aim for even further, bigger development.

Regarding the investment in personnel, they do not become a significant part of the workforce right away. People must be trained and become accustomed to the actual working conditions and it takes some time before they can make a real contribution, so we recognize that if you are going to hire new people it should be done as early as possible. Therefore, when we began this mid-term management plan, we felt it would be very dangerous to hire people a little at a time as needed, and then hitting the accelerator only if we thought all would go well because it takes time to train people. If we were going to do this we needed to hire them early on, provide them with proper training, and get them in the field to produce profits in the final year. This was our strategy behind the investment we made in human resources this time.

In that sense, it was unavoidable that the personnel costs from last term’s hires and this term’s hires are all added onto this middle term for this fiscal year ending in February 2019, so this is the biggest dip we will see. As I mentioned earlier, we will not be hiring anymore. To be exact, we stopped hiring in the first half. In short, this is because we provide a training period of approximately six months, so if we want them to be prepared to contribute to the workforce from the next term, anyone we hire after this point we cannot expect to be prepared from the beginning of the next term. Our company is no longer hiring as of the first half. We are stopping at 166 people. Therefore, these 166 people have not all been placed yet, but they will all be assigned to departments within the second half so by the fiscal year ending February 2020 they will all be making contributions to the workforce, which is what we envision as we manage the company right now. When I say we won’t be hiring anymore, we will supplement any holes that need filling with new hires, but the mass recruitment plan based on our mid-term management plan is finished at this point so our performance for February in year 2019 will see the biggest decline.



By the way, the decline in terms of monetary amounts from a rough P/L impact, the profits from the last fiscal year 2018 ending in February were 750 million yen, but the cost of the salaries associated with hiring 90 people was approximately 250 million yen. This fiscal year we are working towards the goal of 500 million in operating profits. The hiring and personnel costs this term from those hired in the previous term and this term are approximately 700 million yen altogether. The burden in the next term will not surpass this amount. Additionally, there may be costs regarding the upsell portion, but when we look at the business trends right now our calculations suggest that we will see more contributions to profits. I thought this supplementary information was necessary, so I took this time to explain.

The other trend is the top line operating profit. I don’t need to explain again, but because the number of people increased, the decrease in revenue is almost all due to group hiring, which was an increase of 115 people. In a top line comparison, there was an increase of 115 people at the very end. In addition, along with the increase in personnel comes expansion of sales and an increase in SG&A expenses so the increase of all of these costs means we have arrived at this point for the first half.



This is the composition of sales by segment for the first half. As I said earlier, our business to be honest is still very much information asset platforms. The composition still relies quite a bit on the business that was originally done by PIPED BITS, but as we gradually launch other businesses, we expect them to become our second and third major pillars.

In terms of composition ratio, the information asset platform accounts for just under 70%, and this is nearly the same as last year. Conversely, a large-scale project no longer exists in marketing solutions, which slightly weakened its composition ratio decreasing its share. However, advertising is doing well so its shares have gone up a little. The share among the segments is still of this scale though there is some movement, but we would like to grow it bigger in the future.



This is the sales trend by segment divided by quarter, which makes it a little difficult to see. We hired 90 people last year, and of those already assigned initially in this term, there were only 28 people operating from the beginning of this term. There were some people assigned here and there during the first half of this term, but most will be assigned in the latter term and later. Regarding net sales, we have yet to see contributions to sales from the newly hired people in this first half though they are on track for growth. And of course, there are some cases where sales do not increase immediately after they are placed. For example, we are shortening the training period and working a little at a time on improvements as we move forward. Though in terms of the first half, we are not yet seeing a lot of contributions to sales yet. However, as the number of people actually increases, the people going on customer calls, but as a factor there are no visible numbers yet, but we have been following the number of business deals being managed internally as an internal KPI. In looking at that, we can see that compared to the beginning of the term, business deals have increased by a significant number. There has been an increase in business talks by somewhere around 1.5 times. In terms of lead time, if these agreements go well, in the later term we expect that we will see visible contributions.



The operating profit trend by segment is the same. We have not yet seen any contributions to sales as the burden of labor expenses affects each segment. In this first half situation it appears to decline slightly, but in the latter half and beyond, or more accurately from next year we will recover under our current management method, and I think this is crucial.



As you can see, this is the balance sheet from the first half of the term. In particular, there is nothing that really needs to be explained here. We are also increasing the loans we borrow, and by increasing our cash on hand, we can respond immediately in cash when various situations arise, including new M & A in this period of investment so part of our borrowing is to increase the amount of cash we have on hand. In particular, there is nothing to worry about on the balance sheet.



Next, we have cash flow, and as you can see there are no major amounts of cash moving. Regarding investment activity, there have been some minor investments, including investment in unlisted companies, business synergies, future capital gains, etc. What we are doing now is the standard.



This is the employee trend. As you can see, when comparing the top line as I said earlier there are 343 people. There were 343 people at the end of the fiscal year that ended February 2018, and this time there are 458 people at the end of the second quarter for the fiscal year ending in February 2019. At the same time in the previous year there were 115 people. In the final year of the previous mid-term management plan, the fourth quarter of the fiscal year ending in February 2017, there were 326 people so when compared to the 452 people now there has been an increase of 132 people. In other words, between Q’s 1 and 2 of the fiscal year ending in February 2018, there was no major increase. The increase began in the third quarter of the fiscal year ending in February 2018. In other words, last year we began seeing major usage of personnel from the latter half of the previous term and hiring began to show up in the figures. We actually wanted to begin the plan a little sooner, but as I said earlier, from the final year of the previous mid-term management plan, it had already been said that society was facing a major labor shortage and the hiring environment was also very tough. Therefore, we felt it would be better to have a rocket launch start from the first or second quarter as early as possible to get people assigned in the field as early as possible, but we came across some hurdles. Finally, from the latter half we were able to partner with a variety of recruiting companies and implement various measures to finally catch up with our hiring. And as a result, the delay is causing a delay in field placements, and that is one major reason why there has been a delay in contributions to sales.

Again, all people will be given site assignments in this latter half. The last people will be assigned next year in January, so all people will receive assignments within this fiscal year so none of them will still be in training in the beginning of the new fiscal year, and we will not be doing anymore new hires. So, including SG&A expenses, there will be no additional burden. The rest of the game is dependent on how much upsell we can obtain.



That concludes the explanation of our business results though my explanation may have been a bit rushed. Now I will give a simple explanation of some important initiatives our company undertook in the first half of the year.

First of all, March is the beginning of the fiscal year. Starting at the very beginning, we invested 150 million in a company called, “ipoca,” which is just under 4% of the investment ratio, so a minority. ipoca is still an undisclosed company, but they have an interesting app. A simple explanation of it is written here, but the company’s app is called NEARLY and it provides useful information about various commercial facilities or notifications as you near that facility. Going into a little more detail, there are various things I could talk about, but this app has some distinctive features. In terms of the future, it will be possible to link it to our database system, SPIRAL. Now, there are about 1.05 million members, so in safely managing the member organization’s database using it in various effective ways, one possibility is connecting it to SPIRAL. Another is SPIRAL EC and advertising. SPIRAL EC supports the building of EC sites so there is potential to support the building of EC sites for the tenants of various commercial facilities. In addition to EC sites, there is likely to be a synergistic effect with advertising operations and advertising operations for commercial facilities and their tenants and shopping centers, helping out our group companies. One more is something that came up elsewhere today, we launched a company that provides a platform for issuing electronic currencies called L Coin. I realize this is like preaching to the choir, but in the future, we are going to become an even more cashless society, and there is a push for this in society as well, so through collaborations with electronic currency issuing platforms like L Coin, there is potential to collaborate with shopping centers for making payments. There seemed to be a broad range of possibilities in business so rather than considering whether or not we could link together, our first initiatives were investments aimed at business synergies.



Another initiative was the establishment of Shimokita Coin. This was released last month and it is the subsidiary of our subsidiary from our perspective as the holdings firm. I just mentioned L Coin. L Coin is a company that provides an electronic currency issuing platform. Shimokita Coin was set up as the subsidiary of L Coin, and it is the regional electronic currency for the Shimokitazawa area. Shimokita Coin was established to be the company that issues the regional electronic currency. Some of you may have heard about it as it was mentioned on TV news. This regional electronic currency can be used within the Shimokitazawa area. Across Japan there are already various electronic currencies being used, but I have yet to hear of any being overwhelmingly successful. We have decided to throw our hat in the ring and be proactive in this Shimokita Coin initiative. We are undertaking Shimokita Coin using some interesting gimmicks.

What we are doing is issuing electronic currency for cashless transactions at affiliated stores in Shimokitazawa. What is interesting is that the capital for Shimokita Coin has come entirely from L Coin at the moment, but ultimately, we hope the shopping arcades in the Shimokitazawa area will also participate capital-wise. To explain the purpose, in conventional other examples, such as Suica or Pasmo or even a regular credit card, when a cashless payment is made at an affiliated store, obviously a percentage is taken out. That cannot be helped, but that handling surcharge will basically apply to the area outside this enclosure, so outside the Shimokitazawa area. Credit card companies and IC cards for transportation take out a handling surcharge. When paying with Shimokita Coin, Shimokita Coin will, of course, also receive a handling surcharge, but it will go to Shimokita Coin, but the investors in Shimokita Coin are the affiliated companies in this structure, so in other words we want to create a mechanism that ensures capital and money circulate within the area providing a return to those in the area. In doing so, we are proactively introducing this regional currency to provide one means of encouraging this system.



We tried it out last month on the 24th and various media outlets tested it out and have started using it. It will actually go into use the day after tomorrow at the Shimokita Curry Festival. This is quite a famous festival in Shimokitazawa that has been held annually for several years. A portion of the shops are affiliated, and Shimokita Coin can be used there. If you are interested, please come to the Curry Festival where it will start the day after tomorrow. This is something else we have begun.

I will also share some further items, including systematic items. SPIRAL is LINE chat compatible. The LINE I am referring to is the LINE everyone knows well. I believe it is the most often used 1 to 1 talk mechanism between consumers in Japan, and our company’s main SPIRAL is also compatible with LINE’s 1 to 1 chat. LINE chat with consumers can be supported from apps created on SPIRAL. We did this in the form of a collaboration. One more major aspect is that SPIRAL is a database structure that the chat history on LINE, for example, with a consumer LINE can also be saved on SPIRAL, which is the database of our main service. It may be possible for consumers to manage other channels, for example the web, phone, e-mail, inquiries, including LINE, in an integrated fashion on our SPIRAL. The ability to organize and manage it as a database is one of the standout features of this collaboration.



Next, we have FRIENDIT. This is a combination of our subsidiaries. Our company FRIENDIT, which is our company that supports building EC sites, and our company AsBase, which does telephone CTI, merged. It was a merger of two of our subsidiaries so there is nothing particular about it, but each company has its own strengths and weaknesses and decided to merge them and move forward together.



We also have some discussion of capital. Regarding the acquisition of our own shares, we knew this was an issue that needed resolving for a long time, even as a holdings firm, so we solved the issue of subsidiaries holding our parent company stock. Written below is an explanation of how they came to acquire them in the first place. When we reorganized there were some stocks that were purchased by opposite shareholders and we had to resolve that according to the Companies Act so we were looking for the right timing. This past April, we finally had the chance, so this is the announcement regarding the acquisition of our own stock.



One major point is how these stocks will be used. We have thought of several different ways, and although we won’t use them all in this way, one way in which we will use them is in the form of issuance of new stock acquisition rights and they will be allocated to the foreign investment bank, Macquarie. We will use 500,000 shares, which is the exact number of our stock we acquired. The important issue is exercise price. The exercise price is set at a minimum of 1800 yen. This is slightly divergent from the current stock price level, but after various negotiations with them, we have decided this price is very reasonable for this amount of money, so we will allot these stocks to a third party. Of course, when the stocks rise above 1800 yen, Macquarie will exercise how to dispose of the stocks and a portion will likely be put on the market. By putting them on the market, that will contribute to improving liquidity, so I don’t think this is a bad initiative.

There are still other items that haven’t been mentioned that need to be dealt with capitally, and when these items come up we will discuss them.



Also, regarding SPIRAL, as mentioned elsewhere we are updating the version when appropriate, and this is a more detailed issue, but we created an updated version, increasing work efficiency for developers.



Also, although this is quite a deformed and cute picture, we have actually undertaken a very meaningful initiative in the first half. In terms of monetization, we have not been able to monetize it yet, but the initiative has attracted a great deal of attention from around the world. It is a Society 5.0 social implementation trial support project sponsored by Tsukuba City. In other words, Tsukuba City held a production contest. In this production contest held by Tsukuba City, there were 20 or 30, I forgot exactly but quite a lot, university researchers and private corporations who entered. For this production contest, it was decided that the best project would be decided by voting on the internet. But it was not simply internet votes, there were also several hot topic keywords interspersed. First, in order to identify people as themselves, it was decided My Number would be used. Although it is still only being used for taxes and social security as pushed forth by the government, it is said it will have many effective uses in the future. Though I can’t say for sure what will happen yet, I think it may become important as a form of personal identification for things, including internet voting. Using My Number for personal identification and a mechanism for identification was the first point. Then, as a mechanism to prevent the confidentiality of the votes and their content from being tampered with, we processed the voting results using blockchain technology, which is a popular topic throughout the world at the moment. We carried out demonstrative experiments on this at the end of August. And this is the content that was successful.

In terms of the overall process, the content is not that difficult. For example, I’m sure many people here have a My Number card, though I don’t have mine yet, but if you have a My Number card equipped with an IC chip and bring it to a polling location and hold it over the card reader there, there is an external affiliated organization of the Ministry of Internal Affairs and Communications that manages the My Number database, called J-LIS, and your My Number card is checked against that database and then you will be asked to enter your password. This password is most likely the password chosen when the My Number card was made and



known only to the card holder and entering this password will bring up the voting screen. This is the beginning of how the system will be introduced. If that verification is successful, then you can vote. If you choose this from among several productions and vote, that voting data does not go to a regular server, but rather it is processed as a blockchain. As it is a blockchain, the word used is node, and there are multiple nodes which act as a server, and the content is delivered as confidential information. The previous voting results, the anonymous ID that actually voted, and the voting results are grouped as one block and connected to more and more past blocks until only the correct content is published and synchronized with multiple nodes. By using this blockchain technology we can achieve non-tampered data. For example, even if someone attempts to tamper with the data on a particular node, we can verify that content is wrong on other nodes, and I think that is the real benefit of blockchains. As we achieved non-tampered data with this technology we have received a lot of attention. Approximately 200 people from the local government actually came to observe the vote and see the content for themselves. There were also seven members of the Diet in attendance, and a few ministry officials from the Ministry of Internal Affairs and Communications as well as other central management agencies who came to see how this might be used. Various verification tests have been successful, so we have received calls from a variety of local governing bodies.

As mentioned earlier, this will not contribute to earnings immediately, but we are thinking about means of future implementation in cooperation with local governments in such a way that we would receive reasonable compensation for it. How many votes were there in reality? There were actually 119 votes and you might think that sounds like very few. In terms of whether 119 votes are a lot or only a few for empirical testing, it may seem like too few, but it is not a bad number of votes for a demonstrative experiment. Two or three months ago, there was actually a release in Zug, Switzerland, where it was released that the Zug municipal votes would be processed with blockchains. At the time there was a major release that it was a huge success though only 72 votes were gathered, despite the fact that it was a vote among the citizenship. Based on this, 119 votes are not much different, and I think we were able to obtain sufficient results in terms of the demonstrative experiment, which has led to an extremely large number of inquiries from local governments now. I think this is a very interesting initiative that can lead to new things in the future.



This brings me back to SPIRAL again. I think you have seen this in many places. When you log into a site, in addition to entering a password, you have to drag a puzzle piece to fit into a picture. We are collaborating with the company that offers this service called Capy Puzzle CAPTCHA as one of SPIRAL’s main selling points is that it offers security. This collaboration was very important for strengthening that security making this a very good initiative.



Also within our social innovation business, we have what is called My Newsletter. This business is run by the company, Publica. As the public newsletters published by municipalities are open data, this is an effort to use them effectively as open data. They are actually constantly doing business with a variety of local governments, and there are currently about 1750 local governments in Japan and 521 of them currently have their newsletter data on homepages in Publica’ s My Newsletter, and they are increasing their share.

What are the distinctive features of effectively using publicity data? Normally, when a local government publishes their newsletter, tabloid, or other publication, the easiest way, and possibly the best way is to turn it into a PDF and publish it online. However, this is not great for searchability, and it can be difficult to see. What Publica does is receives the entire newsletter data in text form for each article. As they receive the text, it has excellent searchability, and you can read specific articles only or articles belonging to a certain category. This is one major feature. They are making these kinds of efforts. Also, in addition to simply making the newsletter data of municipalities widely available, there are other services. This is Docomo’s iConcierge service. From the iConcierge menu, we can provide the newsletter data we receive from local governments and it can be viewed on iConcierge. We also have initiatives we’re working on with Yahoo. Within Yahoo’s Yahoo! Loco service, the content can be integrated and the newsletter data from local governments can be searched for. We are looking for other places where we can likely collaborate with a variety of other businesses in providing this newsletter data to a more widespread civil audience as we move forward with this business. This is only the beginning and there is still more to come, but more than 500 municipalities are already participating, and we are now moving forward with a strategy to increase that number and gain more market shares.



I would like to go over human resources one more time. As I explained earlier, we hired 90 people in a group recruitment in the fiscal year ending February 2018, and 76 people in a group recruitment this fiscal year ending February 2019. There are 12 main subsidiaries respectively, but since it was a group recruitment, the new hires will go to each company. Almost all will be assigned to PIPED BITS, the information asset platform company, but a portion will also go to the advertising and solutions companies. But after all are assigned, from the end of this fiscal year, to next year and beyond we aim to see their contributions to profits. That is all for this slide.



I would like to introduce one or two more things from among our social innovations. One is this event in Shimokitazawa. I spoke earlier about Shimokita Coin, and we have been helping with regional construction and community revitalization in the Shimokitazawa area. In doing so, we held this type of event three times in the first half of the year. I explained that Shimokita Coin began last month on the 24th, and when it did, it took this form. I think you may have seen special TV programs on cashless payments before as it is often talked about on TV. Consumers download apps and charge the apps with money. What she has here is a QR Code. This is the shop’s QR Code. In this method, the shop’s QR Code is read and payment is made. In the end, whether Shimokita Coin is successful or not is dependent on how much we can increase the number of affiliated stores. And even if we increase the number of affiliated stores, we have to increase the number of consumers who want to use Shimokita Coin. These two areas are crucial to its success.

In order to increase the number of affiliate stores, the greatest strength of Shimokita Coin is that there is no implementation cost because stores only need this one sheet of paper. Normally, there are introductory costs associated with connection equipment like card readers or credit card readers or operational costs that make things complicated. All the store clerk needs to do is place this paper in front of the customer making introductory costs extremely low so the burden on the affiliate is also extremely low. I think this is our greatest strength.

For us to motivate consumers to want to use Shimokita Coin, I think it is extremely important we try it out at various events in Shimokitazawa as you saw in the previous slide. We actually have some employees assigned to Shimokitazawa and they hold events every month. Through these events, we gain these kinds of enlightenments and we also raise awareness about cashless systems through activities and projects. By



undertaking projects that demonstrate using this is fun, we can determine if we can increase the number of consumers. This is crucial to the success of electronic currencies, and especially regional electronic currencies.

As I said earlier, we have not yet heard of any hugely successful regional electronic currencies, but as we conduct our own research on this and implement our own gimmicks, we have a few frameworks in mind and we hope to achieve success not only in Shimokitazawa, but also in other regional areas as well.

This ends my qualitative report. Finally, I would like to return to the discussion of our performance and explain briefly. For the performance data for the fiscal year ending February 2019, even when we amended it previously at the end of August, as indicated, we have no plans to change the earnings forecast issued at the beginning of the fiscal year for this current entire fiscal year. We are finishing the first half a little bit behind, but according to our internal review we expect to make an adequate recovery in the latter half. We have great expectations and plan to move forward with them. What we plan to do specifically, we outlined some of that when we made the amendments at the end of August so please look at that too. We feel the books will balance at the end of this year.



The issue is whether or not the books will actually balance so I would like to explain this diagram briefly. We ended the first half at 2.6 billion yen. It was 2.62 or 2.63 billion, but roughly 2.6 billion. The goal for the entire fiscal year ending February 2019 is 5.8 billion yen, which is a difference of 3.2 billion yen. The essential thing is for us to make 3.2 billion yen and this explains how we are currently assuming we will make that 3.2 billion yen. Explaining in order, from the far right, is the number of people who were employed in the human resources investment mentioned earlier that will be assigned in the second half and accumulate to reach this figure. To explain this company’s sales in further detail, as they are indicated here in red and yellow, they are comprised of contract sales and general sales. General sales are exactly that, regular spot sales. The sales figures are constantly fluctuating, but as contract sales are contracts, for example, the amount is fixed for a period of six months. These contract sales are basically what is known as cushion-type and this is the cushion sales portion.

Here it is indicated how these contract sales and general sales accumulate respectively. On the far-right side, the amount expected to accumulate in the second half from the new hires is forecast at approximately 250 million yen. In contracts, there is 80 million at best, but if we acquire new contracts general sales will be generated in the form of account opening expenses so for that portion, we expect to see approximately 170 million yen. Meanwhile, the new hires can help with new sales by allowing the existing employees to concentrate on our existing clients. We have been shorthanded until now, so although there were orders from the top to create new accounts, the existing clients could not be neglected creating an impossible situation. If the new hires can work on new accounts for the most part, the existing people can concentrate on improving unit prices and making new proposals and growing numbers in that way, so we can expect certain growth in that form as well.



We are currently expanding contract sales. For example, by increasing record numbers and introducing new platforms, we plan to grow the current 1.9 billion even further to 2.15 billion. Regarding general sales, of course this is spot sales, but in the first half we produced 700 million, so this will definitely not suddenly drop to zero, and as long as we constantly make new proposals, there will be a variety of new customizations generated. Regarding this area as well, if we can make deeper proposals, then we can add another 100 million yen for a total of about 800 million yen. In this way, the newcomer’ growth is based on a specific model. The model is based on a specific calculated formula of how many blocks can be stacked per month per each person assigned, and if we accumulate these models to produce the remaining 3.2 billion yen then I think we can achieve the sales figure of 5.8 billion.

Next, if we can make the 5.8 billion then the next question is what about the 500 million in profits? As I explained earlier, in general the profits for the first half were about 170 million, which means 330 million remains until our goal of 500 million. Calculating our cost rate, our company’s cost rate is approximately 70%. Last year’s first half was the same, as was the end of the previous term, and the percentage is generally about 70%. If we calculate the cost rate at about 70% assuming sales of 5.8 billion, the cost rate is 30% and the gross profit is 70% so we can calculate a profit of about 4.1 billion yen in gross profit.

In terms of SG&A expenses, the most recent August was our maximum. As I have already explained, there will be no further increase in SG&A expenses though there may be some slight rises and dips, but the assumption is that there will be no major increases. If we consider the August SG&A expenses as our base, the SG&A expenses for the second half will be 1.8 billion yen. Combined with the first half, the total SG&A expenses for the year are expected to be 3.5 billion yen. If gross profit is 4.1 billion and SG&A is 3.5 billion, we can calculate operating profit to be 600 million yen. Though there will probably be some discrepancy in a portion of the SG&A expenses and we might come up short in sales somewhere. Although I don’t know for sure, if we go with these numbers, 5.8 billion and 500 million, according to these calculations are achievable without problems or difficulty, and we judge this figure to be adjusted somewhat accordingly. As a result, we have decided to keep our annual performance figures as they are.

This concludes my explanation. I will omit an explanation of the pages in the back, but I would appreciate if you could take a look at them in your own time. Thank you.



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Document Notes

1. Portions of the document where the audio is unclear are marked as follows: [Inaudible]. 2. This document has been translated by SCRIPTS Asia



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PiPEDO HD, Inc. · [Company Name] PiPEDO HD, Inc. [Event Type] Earnings Announcement ... There was...

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