CEO Comments

Kaoru Hayashi

Representative Director,
President Executive Officer and Group CEO,
Digital Garage, Inc.

CEO Comment “Revision to Financial Forecasts for Fiscal Year Ending June 2011 and Overview”

As approved at the regular board meeting today, we hereby announce the revision of our financial forecasts for the fiscal year ending June 2011 (PDF/Japanese).

In fiscal 2011, which is the first year of the Mid-Term 3-Year Business Plan we announced in May 2010 under the corporate slogan of “Social Media Incubator,” we returned to an operating profit as a result of the favorable performance of the Hybrid Solution and Venture Incubation businesses, and we upwardly revised our ordinary income and net income forecasts from the initial 500 million to 900 million yen and from the 310 million to 800 million yen, respectively. We feel that the “creation of a new Internet business based on Enabling Platform,” which we have advocated as our business model, has entered the expansion stage for the full-fledged social media-related business together with changes in the market environment.

Highlights by business segment are as follows:

1. Hybrid Solution segment
The advertising/solution business has grown to be highly appreciated by our customers, partly because Digital Garage’s concept of “shifting from flow marketing to stock marketing” generated synergy with the application of real time web technology, on which we have focused across the group. As a result, the segment is exhibiting favorable growth with sales expected to increase by 20% compared with the previous year. In the settlement solution business, the diversification of platforms symbolized by the rise of the smartphone led to an increase in business opportunities, as well as the solid results of the business for the game and travel-related industries. “ worry-free settlement service,” which we co-launched with group company,, Inc., is also growing smoothly.

2. Media Incubation segment In the Twitter-related business, advertisement sales growth temporarily slowed because of voluntary restraint from advertising stemming from the Great East Japan Earthquake and the renewal of functions and ad display spaces on the PC-version Twitter site, but we are expecting to log record high sales in May 2011 with sales growth recovering earlier than projected. The segment is expected to not meet our initial forecast due to the liquidation of the segment’s existing mobile phone-related business (DG Mobile Inc.) in February 2011. However, we have launched a series of strategic businesses by our new company (Wheel, Inc.), etc., as well as the smartphone-based new concept social media business by Path of the U.S., in which we invested in February 2011. In addition, we are also preparing “J Government on twinavi,” an effort to introduce the Twitter accounts of public institutions, which we started in collaboration with Twitter, Inc.. We are also working on a new SNS businesses including “BirdFish,” our proprietary micro blog service for corporate users. As such, we feel the growth potential of this segment is increasing.

3. Venture Incubation segment In the Venture Incubation segment, the results of our business shift from investment in domestic ventures to overseas ventures focusing on Silicon Valley, which we have promoted over the last few years, have started to emerge. In the U.S. market in particular, pre-listed shares of primarily Internet companies have increasingly been liquidated, and as a result, an environment to use liquidation as a new measure of recovering investment is about to be established. Aided by this new trend, the segment is enjoying a desirable environment with stock disposal slated for 4Q coming in at a better-than-expected evaluation, for example. As symbolized by the share price of LinkedIn Corporation, which went public on the New York Stock Exchange on May 18 and nearly doubled its offer price on the day it was listed, we believe this year will be a memorable one and regarded as the first year of initial public offerings (IPO) for social media companies.

Outlook for fiscal 2012 and strategic framework for the future

We are likely to generate results outperforming our forecasts for this fiscal year, which is the first year of our Mid-Term 3-Year Business Plan. Now I would like to comment about the outlook for the next year forward and our strategy below.

Toward a consolidated ordinary income of 5 billion yen, consolidated ROE of more than 25% and operating income margin of more than 50% in the Media Incubation business, target figures (for the year ending June 2013) in our Mid-Term Plan, we position the next year as the year in which we will find our footing for full-fledged growth.

From fiscal 2012 and forward, we will expand our current businesses, while further accelerating the development of the next social media rooted in users’ real lives, based on the knowledge that we have accumulated through Twitter operations in Japan. We are also earnestly preparing new strategic businesses.

In addition, we are confident that the success of the Japanese-version of LinkedIn, for which we announced our marketing support in the Japanese market, will be the watershed of Japanese social media following Twitter.

Since inviting the company’s founder Reid Hoffman to join our advisory board in 2007, Digital Garage has built up a good relationship with LinkedIn. Behind the latest agreement with Digital Garage in 2011 was LinkedIn’s determination that the Japanese market will grow more important than ever before in the continuation of its business expansion in the global market. In accordance with the latest agreement, Digital Garage will enhance marketing activities to establish LinkedIn in Japan as the network that organically connects professional human resources – unlike other existing social networks that are primarily used during off-work hours – and pioneer a market for Western-style professional networks in which users use their real names.

As we announced earlier, Digital Garage’s co-founder Joichi Ito became the director of the MIT Media Lab. Like Ito, who described one of his missions at Media Lab as “to connect my own network with Media Lab” in his blog, Digital Garage is also planning to make a contribution to Media Lab by facilitating research activities aimed at shaping the future of social media rooted in users’ real lives. The Media Lab-based network on the U.S. east coast will accordingly join the network on the U.S. west coast led by Silicon Valley – which has already established close ties with influential investors – and will also link up with the Singaporean network, which is the hub of Asia.

Now that the Japanese-style business model, which supported Japan’s development in the 20th century, is under pressure to change, we are considering establishing the “Digital Garage ecosystem” with the dream of cultivating the next Internet technologies and businesses by creating a new context that connects Japan, Silicon Valley, Boston (where MIT is located) and the Asian hub Singapore. We are quite certain that we can generate a next-generation type global Internet business that utilizes the features of the unique Japanese culture and technologies as a result.

We sincerely appreciate the continued support and guidance of our shareholders and investors.

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