～Starting New Five-Year Medium-term Plan【Recurring Shift】responding to revolutionary changes in technologies～

With the approval of the Board of Directors today, we have announced FY23.3 financial results (IFRS).

I. Summary of FY23.3 Financial Results

As for the consolidated business results for the fiscal year ended March 31, 2023, revenue was 30,070 million JPY (down 42,884 million JPY, – 58.8% YoY) and loss before tax was 13,881 million JPY (profit before tax for the previous fiscal year was 45,393 million JPY). Due to significant decrease in the fair value of gains/losses in some of our investees, the Incubation Technology (hereafter, IT) business and the corporate division which doesn’t belong to any business segment recorded valuation loss, resulting in the decreased revenue and profit.

On the other hand, the Financial Technology (hereafter, FT), the Marketing Technology (hereafter, MT), and the Long-term Incubation (hereafter, LTI) businesses continued to grow steadily. The settlement transaction volume in the FT business increased by 19% YoY due to the successful alliance strategies in the face-to-face settlement. In the MT business, the transaction volume of digital advertising in the financial sector, the mainstay of the company’s business, grew by 15% YoY, while the overall advertising market remained stagnating. And in both FT and MT businesses, profit before tax (excluding one-off gain and loss) grew by 22% and 58% YoY respectively, driven by a shift in environmental trends in H2 of FY23.3. In the LTI business, in addition to the improved performance of Kakaku.com, Inc., our Group company, due to recovery in demand for food services, etc., profit on sales of investments in affiliates was recorded in 3Q.

In the IT business, the balance of investment composing diversified portfolio focusing on early-stage companies remained stable despite the significant valuation loss, and the impact from the financial instability triggered by the collapse of Silicon Valley Bank is currently limited.

Also, the following slide shows the progress of “DG FinTech Shift” since 2021, titled with “Summary of Strategic Business Area and Partners as of FYE 23.3”.

For the details, please watch “FYE March 31, 2023 Financial Report and Medium-term Plan Meeting Video” at the end of this message.

Ⅱ. Start New Medium-term Plan “Recurring Shift”

〜Creating next-generation businesses by combining the three largest group assets in Japan〜

Since its establishment in 1995, DG has seen and embodied the transition of the IT/internet industry for 28 years. Today, the tsunami of new technologies such as web3 (Blockchain) and Next-generation AI including Gen AI (Generative AI) will change the “IT business ecosystem” on an unprecedented scale.

Our 28-year company history can be described as the history of the Internet itself. As we look back, technology waves have occurred in 7-8 year cycles, but we are confident that this wave will bring about unprecedented changes. The following slides summarize the “History of DG Group’s Contextual Design and Social Implementation.”

(1)Define KPIs and concepts for the new Medium-term plan

We have formulated KPIs for the New Medium-term plan for the fiscal year ending March 31, 2028. Pre-tax income growth rate (excluding investment business and equity method income of Kakaku.com) is targeted at a 5-year CAGR of 20% or more, and payment transaction volume is targeted at 15 trillion yen or more, approximately three times of the 5 trillion yen recorded in the fiscal year ended March 31, 2023. Further, by promoting the sale of stock holdings, we aim to generate more than 30 billion yen in investment exit income over the five-year period and will consider reinvestment in new business development initiatives and additional shareholder returns based on the cash generated. We aim to return more than 10 billion yen in dividends to shareholders over the five years.

Two business areas, ＜【Ⅰ】Ongoing development of payment platforms＞ and ＜【Ⅱ】non-linear business development＞ will continue over the next five years. In this Medium-term plan, we don’t mention much about developing non-linear businesses, but we are making steady progress in the social implementation of web3, and this year, the first year of the new medium-term management plan, we plan to announce a specific set of strategic projects. Please expect more information in the coming months.

Combining three of the DG Group’s most significant assets in Japan, described in the following slides, we have designed a resilient and scalable strategy to adjust to the period of technological transformation.

“Recurring Shift,” an advanced version of “DG FinTech Shift,” is the keyword for the Medium-term plan. This is a strategy to bring together DG’s largest domestic internet media business, global investment business, and domestic and global Internet businesses on a payment platform to achieve further growth. Incubation businesses on a payment platform to expand our business domestically and globally. Through creating Group synergy, enhancement of platform business, and deepening and expanding global alliances, we will achieve the goals of this Medium-term plan and reach the social implementation of “NEW CONTEXT.” Please see the following summary slides.

(2) Initiatives with Kakaku.com – One of the Group synergies

Since DG invested in Kakaku.com in 2002, we have grown together through many payment, marketing, and startup support collaborations. DG, which has one of Japan’s largest payment platforms and knowledge of cutting-edge technologies, and Kakaku.com, which has Japan’s largest range of vertical media businesses, will cooperate to jointly develop Fintech businesses and promote Smart Commerce in the age of Gen AI and web3 using next-generation technologies, reinforcing group synergies. Please review the following slide.

The size of the domestic market for the media industries in which Kakaku.com operates is enormous, and it is an industry that can promote DX by utilizing next-generation technologies, including Fintech.

For example, when consumers shop online, they are required to enter complicated passwords and payment information for each E-Commerce site. However, using next-generation technology, the new Smart E-Commerce (frictionless commerce) can be securely created to enhance user convenience with password-less authentication and one-click payment. Kakaku.com, which had only owned user data, can now utilize purchase data and analyze the data to increase user convenience further. By doing these, we will contribute to the growth of sales of E-Commerce businesses, leading to the expansion of DX and cashless transactions. Furthermore, we will expand this technology to other media, including the 30 companies (150 media) participating in the media consortium operated by BI.Garage, a DG Group company. This business has the potential to generate significant revenues next to the advertising business.

In addition to the introduction of in-store payments for “Tabelog Order,” which we began in the previous fiscal year, we will work on advance payment for “Tabelog” reservations in addition to expanding these efforts. Gen AI will change how people search for restaurants and make reservations, moving away from the current search by area and category to a more conversation-driven search, such as “Find me a table at a Korean style barbecue restaurant in Shibuya for the three of us for tomorrow at 7 p.m.” Also, by enabling conversation in any foreign language other than Japanese, the system targets payments from inbound tourists from overseas in other languages. The following video introduces the first ChatGPT plugin in Japan. We hope you can imagine and see how you can search shortly.

When planning a trip, simply saying, “I’m looking for a hot spring resort for my family of four for a one-day trip from Tokyo next weekend,” will enable you to search for a destination, providing a new experience as if you were talking to a hotel concierge. The dynamic package search provided by “Time Design” is also more intuitive for humans, allowing them to build itineraries, make reservations, and complete payments on a conversational basis.

In the B2B area, the new technology will be applied to “Tabelog Shiire” a service that “Tabelog” provides free of charge to restaurants, enabling people in the food service industry to place orders for products based on AI-based sales forecasts. By doing this on a smart contract basis, we hope to contribute to the growth of the group’s business and the development of the industry.

Through these diversified efforts, DG and Kakaku.com aim to achieve 10% of the KPI of DG’s new Medium-term plan of 15 trillion yen in payment transaction volume in five years through joint business with Kakaku.com.

（3）Advancement and stable operation of payment platforms

DG’s payment platform has reached 5.3 trillion yen in processing volume, one of the largest in Japan, and has become a designated national critical infrastructure company. Two major features of the system are its advancement and stable operation. Thanks to real-time twinning (bi-directional synchronization) of Oracle’s newest payment platform for stability and redundancy, the system uptime was 99.9994% on the last fiscal year basis, with only 20 seconds of downtime due to hardware failure. We have already completed the integration of the payment systems of the two group companies and plan to start integrating the center with Toshiba TEC, with whom we have a capital and business alliance. As the leading payment platform in Japan, we will continue contributing to the industry by leveraging our technology as a key player.

Moreover, while responding to DX in various areas and in the B2B domain with post-COVID, we will collaborate with payment players worldwide to strengthen [Global Payment Orchestration] and support global DX such as multi-currency, multi-payment, and cross-border E-Commerce market development through technology. We will enhance and expand our engineering resources through offshore and near-shore development in India to achieve further stable operations and the development of high-performance technology.

（4）Global alliance – Global investment and strategic R&D

Since its founding, DG has established unique connections in Japan, North America, Asia, and Europe through numerous startup investments and support. Starting with a network based in Tokyo and Silicon Valley, we will expand our network 【Global Incubation Stream】 to Asia and Europe. We have an incubation center and conference hall in the Shibuya Parco DG Building in Tokyo, and we opened an incubation center, “DG717,” in San Francisco 10 years ago, which has served as a bridge between Japan and San Francisco. THE NEW CONTEXT CONFERENCE, which began in 2005 with myself and Joichi Ito as hosts, has been held 24 times, and the Open Network Lab, which started in 2010, has adopted more than 140 companies and has created a base for startups in Japan. Over the next five years, we are convinced that various startups will be born in multiple fields, and we will strengthen our European bases to drive “Origination,” “Incubation,” and “Implementation” of cutting-edge technologies on a global scale.

（5）Segment Classification Changes and Forecasts for the Current Fiscal Year

The business segment classifications will be changed in conjunction with the formulation of this new Medium-term plan. As technology is expected to change dramatically and competition is expected to intensify, achieving high growth in a stand-alone business will be difficult.

The main change is the integration of the former FT and MT segments into the “Platform Solutions Segment.” This is because the payment business, which earns revenue from consumer purchases, requires a comprehensive approach to marketing and DX business that supports the sales and business of merchant companies, including E-Commerce, which is the source of such revenue. In addition to segment integration, the revenue model will also be more recurring.

DG previously did not disclose earnings forecasts due to the volatility of the investment business but has decided to announce estimates for the “Platform Solutions Segment.” Please see the following slide.

In the current fiscal year, we are pursuing a growth target of 15% or more, and through the monetization of new businesses and group strategies, we will follow a growth strategy to achieve a profit growth CAGR of 20% or more over the five years of the current Medium-term plan.

Ⅲ. Next-Generation AI and ESG Initiatives

(1)Research and development that goes beyond ChatGPT = Digital Architecture Lab initiatives

In these days, Gen AI (Generative Artificial Intelligence) services, including Open AI’s ChatGPT, have been attracting great attention around the world. As part of the “DG Lab” initiative led by DG and Kakaku.com, we launched Japan’s first ChatGPT plugin for “Tabelog” on May 8th, 2023.

Gen AI is expected to be used in various industries to enhance human creativity and improve business efficiency, but issues have surfaced, such as the generation of fake information and the need for more privacy and data protection. “Digital Architecture Lab” is also promoting research and development, looking beyond ChatGPT to deal with these issues. One example is the development of highly reliable AI close to the human brain system. Their analysis combines “Gen AI – Neural Networks” like the right brain and “Symbolic Probabilistic Programs” like the left brain. Starting in 2021 with the MIT Probabilistic Computing collaboration as part of the Symbolic Probabilistic Program, we continue to work with MIT globally.

Also, as an initiative to support startups related to Gen AI, we will launch a global “Startup Studio” that will provide capital support and help companies from multiple perspectives, including technology, product development, sales, recruitment, and financing, to accelerate growth.

THE NEW CONTEXT CONFERENCE TOKYO 2023 Summer will be held on June 8, hosted by Joichi Ito and myself under the theme of “New Global Community Created by Gen AI – How Internet Business Will Change.” It will be a great conference to discuss the future of Internet business with leading experts from various fields. It will be streamed LIVE online, so please watch!

【Speakers】
・Yutaka Matsuo (Professor of Research into Artifacts, Center for Engineering & the Department of Technology Management for Innovation, The University of Tokyo)
・Lili Cheng (Corporate Vice President of Microsoft, AI & Research)
・Taichiro Motoe (Founder and President of Bengo4.com,Inc. / Attorney at Law)
・Katsuya Uenoyama (CEO of PKSHA Technology) and more

(2)ESG Initiatives – Continuous support for startups’ social implementation activities based on the concept of “Earthshot”

We will continue providing “ESG courses for startup entrepreneurs” for our portfolio companies and investing in ESG-related startups through the Open Network Lab & ESG I “Earthshot Fund.”

In June this year, in collaboration with “One Young World,” a platform for training the next leaders, and Shibuya City, we will also host an event, “One Young World Japan Caucus – SHIBUYA 2023,” at our conference hall. ​​We are dedicated to providing influential young leaders from around the world with the opportunity to take leadership in solving more global problems and to help this world become a better place through their leadership.

We look forward to the continued support and encouragement of our stakeholders in the new “Medium-term Plan.”