Bridge Report: (3916) Digital Information Technologies

President Satoshi Ichikawa	Digital Information Technologies Corporation (3916)

Company Information

Stock Information

*The share price is the closing price on March 26. The number of shares issued was taken from the latest brief financial report. ROE and BPS are the values of the pervious term.

Consolidated Earnings

*The forecast is from the company. A 2-for-1 share split was implemented on October 1, 2016 and April 1, 2018. EPS and BPS were retroactively recalculated. *From FY 6/16, net income is profit attributable to owners of the parent. Hereinafter the same will apply.
*Unit: million yen

This Bridge Report introduces the first half of the fiscal year June 2019 earnings results of Digital Information Technologies Corporation.

Table of Contents

Key Points
1. Company Overview
2. First half of the Fiscal Year June 2019 Earnings Results
3. Fiscal Year June 2019 Earnings Estimates
4. Conclusions
Reference1: Medium and long-term growth strategy and Usage of funds
Reference2: Regarding corporate governance

Key points

• The sales in the first half of the fiscal year ending June 2019 were 5,957 million yen, up 8.0% year on year (YoY). The sales of the business solution unit and the embedded solution unit were healthy, and the original product unit greatly contributed to sales. Gross margin ratio increased, and gross margin saw a two-digit growth while the increase in SG&A expenses remained in the single digits, and operating income rose 52.0% YoY to 577 million yen. Sales and profit marked record highs for the second quarter.

   

• The full-year earnings forecast remains unchanged. Sales are expected to be 11,904 million yen, up 7.5% YoY, and operating income is expected to increase 26.9% YoY to 1 billion yen. Every business unit is expected to experience sales growth. Although the company will continue to focus on investing in new businesses, profit rate is projected to rise and profit is forecasted to grow by double digits. It is estimated that sales and profit will grow for the nine consecutive term, marking the highest on record. The interim and term-end dividend amounts are estimated to be both 7 yen/share, totaling up to 14 yen/share. The estimated payout ratio is 32.3%, exceeding 30% for the second consecutive term.

   

• The sales in the first half of the fiscal year ending June 2019 remained healthy for all the business units, leading a significant increase in profit. As for profit margin, which Investment Bridge has been observing continuously, both gross margin ratio and operating income margin in the second quarter (October to December) marked record highs for the past few terms with 25.6% and 11.4% respectively, where operating income margin already exceeded 10%, which was the target of the medium-term business plan for the fiscal year ending June 2021. In addition to the sales growth of the original product unit, the profitability of the company’s major business units, i.e., the business solution unit and the embedded solution unit, which had been expected to increase the profit margin further, certainly improved, and it is highly appreciated. In the medium - term, investors should pay attention to the progress of “WebARGUS Total Security” and “xoBlos Plus-One Concept.”

   

1.Company Overview

Digital Information Technologies Corporation is an independent information service company. Its sales are mostly from the undertaking of the development of business systems, embedded devices, etc. for clients mainly in the fields of finance, communications, etc. The company concentrates on the expansion of its products based on its original technologies, including "WebARGUS," a website security solution, and "xoBlos," an Excel work innovation platform. The company has a variety of characteristics, such as "multifaceted, diverse information technologies" and "organizational strategies of partial and total optimizations."

1-1 Corporate history

The former president Norikazu Ichikawa (current Representative Director and Chairman) discovered a new world of computers and obtained programming qualifications while he was working at Nippon Telegraph and Telephone Public Corporation. He set up his own business because he was willing to take on challenges and found a great appeal in the potential of computers.
In 1996, he was appointed president of Toyo Computer System, Inc. as the successor to one of his acquaintances.

He expanded its business area starting from business system development, and then computer sales business (current: system sales business), embedded product development validation business and operation support businesses turning Toyo Computer System Inc. into a multifaceted and diverse IT company.
In 2002, he established Toyo IT Holdings Corporation, which is the predecessor of current Digital Information Technologies Corporation, by separating several companies under the same group and establishing subsidiaries with 100% ownership. In 2006, he integrated four subsidiaries into one company and renamed it to the current company name.
In addition, in January 2011, he established DIT America, LLC in Kansas, U.S.A. Digital Information Technologies Corporation was listed on JASDAQ of Tokyo Stock Exchange (TSE) in June 2015, listed on the second section of TSE in May 2016 and listed on the first section of TSE in March 2017.
In July 2018, Mr. Satoshi Ichikawa, who used to be Representative Director and Senior Managing Officer, took up the office of Representative Director and President to rejuvenate the management structure under the business environment where change is accelerating and make a system to enable prompt decision-making.

1-2 Corporate ethos, etc.

(From the company's website)

(From the company's website)

The above diagram is the unfoldment of the cube. According to the president Ichikawa, it emphasizes “clients first; this is where it all starts." Furthermore, the logo represents “training employees” and “communication with clients and among employees.” These are important values to the company. Additionally, we implore employees to “improve its added values,” “have passion” and “have a sense of purpose.”
Employees are to uphold this company policy as their creed and follow these principles at all times.

1-3 Business contents

1-3-1 Segments
There are two segments: software development business and system sales business. The software development business consists of 3 business units: business solution unit, embedded solution unit and original product unit.

1）Software Development Business
*Business Solution Unit
(Business system development unit)
The sales for this business unit is mostly from custom development for end-users and information systems companies which are clients’ subsidiaries in a wide variety of industries including finance, medicine/pharmacy, communications, distribution and transportation as well as for leading SI vendors.
Specifically, development for websites and key systems, front and back office operations, new system development and maintenance development with technologies developed in each area. The company has developed trustworthy relationships with leading companies in each area which enables them to secure stable orders.

(Operation support unit)
Main clients include communications carriers, total human service corporations and information system companies which are airlines subsidiaries.
This “business unit to support clients’ daily operations through IT” has stable revenue as it is an ongoing business in line with the business website domains of leading companies.

Specific business includes:
*Support desk operation for end-users who use various business systems.
*Build and maintain infrastructure (servers and networks).
*Efficient system operations in line with the latest technology trends.

*Embedded Solution Unit
(Embedded product development unit)
This business unit is trusted by leading manufacturers to directly develop custom software for in-vehicle devices, mobile devices, information home appliances and communication devices. For in-vehicle devices, mobile devices and information home appliances, the unit develops custom software for overall systems including firmware, device business unit controls and applications.

It focuses on Auto-Drive related field with new technology, as well as infotainment for in-vehicle devices as the demand for this market is expected to grow. In addition, it undertakes software development for wireless base stations and communication module devices for communication devices.

(Embedded product verification unit)
This business unit verifies and makes suggestions to improve qualities and functions of products through its verification service.
It provides verification services domestically and internationally (North America, Asia, Europe, etc.) including laboratory tests using specialized devices to verify product operation and function, field tests to verify products in the actual environments, as well as overall system tests conducted as the final quality verification from the perspectives of the third party.

Some of the overseas field tests are designated to its subsidiary, DIT America, LLC, which provides fast service with verification of product usability from the perspective of local staff.
The range of products for verification includes in-vehicle devices, medical devices, communication devices and mobile

*Original Product Unit
The company develops and sells its original products as a growing business, using its unique technology.
Currently, the company strongly focuses on the sales of two products, “WebARGUS,” a website security solution, which detects tampered website simultaneously as it occurs and instantly restores the original normal condition, and “xoBlos,” an Excel work innovation platform, which features data decomposition and restoration as well as meeting various forms of data business processing needs.

There are other products such as “APMG (Anti Phishing Mail Gateway),” a solution to prevent damages from phishing and illegal use of brands by automatically adding electronic signatures on e-mails, and “Rakuraku page,” a CMS (content management system), which enables editing and updating websites easily.

2) System Sales Business
The company and its subsidiary, Toyo Infonet Co., Ltd, sell “Rakuichi,” a business support mission-critical system, for small and medium enterprises, manufactured by Casio Computer Co., Ltd.
The sales area is started at Kanagawa first and expanded to Tokyo, Chiba, Gunma and Ehime successively. The Company provides substantial support for their users to increase the client retention rate. In addition, they set up a call center to attract and build a new client base. The number of sales for “Rakuichi” has been recorded to be the highest across all agencies for 14 consecutive years.

1-3-2 Main Strategic Products
1) "WebARGUS," a new website security solution
WebARGUS is a new security solution which detects tampered websites instantaneously and immediately restores it to its original state. By detecting and restoring immediately when incident occurs, WebARGUS protects corporate websites from damage caused by malicious and unknown cyber-attacks and simultaneously prevents the escalation of the damage from viruses spreading via the tampered website.

Increasing tampering of websites
According to the incident report published by “JPCERT Coordination Center”, about 100 cases are reported every month, and websites including the ones of government agencies are constantly exposed to threats, whether the case is major or minor.

“JPCERT Coordination Center” (*): This center receives reports concerning computer security incidents including hacking via internet and service disturbance in Japan. It also supports measures, grasps how the problems are generated, analyzes the methods, investigates and advises on measures to prevent recurrences from a technical point of view.

The background of the development of "WebARGUS"
Under these circumstances, the company, which had already released a solution called “APMG” to prevent damage from phishing and illegal use of brand by automatically adding electronic signature in e-mails, started developing “WebARGUS,” based on a core security technology in the spring of 2013, after 2 years of research. Then in July 2014, it released “WebARGUS.”

The major characteristic and strength of the company is that it has a variety of rich IT related technologies, and has a highly standardized core security technology. This is because its engineers have a mindset to embrace challenges and are not afraid to take risks. Thus, they are not satisfied with just developing custom products. This is strongly influenced by the company’s organization strategy represented by its corporate culture and in-house company system which will be explained later in this report.

The features and overview of the product

When a website has been tampered with, it can take an average of one month to restore. This is because the restoration process includes disabling the website, identifying the damaged files, strengthening protection, website restoration and re-enabling the website. For an e-commerce related website, the damage can be serious, including a drop in sales, time and effort to announce the re-enabling of the website and the difficulties in re-attracting clients who left the website.

On the other hand, if “WebARGUS” is installed, because it instantly detects and restores websites when tampered with, the condition of a website can be maintained in the normal state. Thus, the website does not need to be disabled in a rush when the application detects a threat. Companies can concentrate on pursuing the cause and strengthening protection while its website is kept open to public.

Most of the detection software detects tampered website with a periodic monitoring on pre-configured, specified timing or intervals. With this method, there will be a time lag between when the website is tampered with and when it was detected, so it is inevitable for the website to be tampered. In addition, if the interval is shortened to reduce the time lag, there are other challenges such as increasing CPU load.

On the other hand, when some kind of event occurs (such as data deletion or addition excluding browsing), “WebARGUS” conducts real time scanning to detect the event.
The major feature of this product is that it is also equipped with an instant restoring function which enables restoration to the original state in less than 0.1 seconds after the detection (average time under the demo environment: 0.003 seconds per file). This instant restoration is its unique technology.

The annual license fee of “WebARGUS” is JPY480,000 (excl. tax) per OS with support.
This also includes free update modules for minor version updates.

Introduction and sales
When WebARGUS was released, the sales growth was rather slow because general understanding of website security was mainly about protection against hacking into a computer system and awareness about “tampering” was limited. However, the acknowledgment that “software for detection is needed as well as for protection” is growing rapidly due to the more frequent mentioning of the independent administrative agency, “IPA (Information Processing Association),” taking measures to prevent defacement. This agency is established to support the IT national strategy from a technical and personnel aspect perspective and is supervised by the Ministry of Economy, Trade and Industry.

In addition, “Revised Points for the Cyber-Security Management Guidelines” were announced on November 16, 2017, to which the Ministry of Economy, Trade and Industry added a new key aspect: construction of a system to handle cyber-security risks, including functions such as threat detection and restoration. Because of this, inquiries to the company increased further.

Under these circumstances, the company has carried out promotion and marketing including organizing seminars for target users who recognize the necessity for a higher level of security, and participation in exhibitions.
It focuses on agency sales to strengthening marketability and currently makes agency contracts with 37 companies in total.
They have been actively involved in development collaborations with data centers and cloud service corporations.
Furthermore, the company is expected to expand its business overseas as well as product sales in Japan. The company is preparing to provide support for the tampering of websites across the globe.

Strengthening the feature of merchandise
Initially, WebARGUS was only available for Linux, but a Windows version was released in April 2016, and the enterprise edition, which was targeted at large-scale companies in September 2017. In February 2018, the company began offering a next-generation cloud WAF (WebARGUS Fortify), which dramatically strengthens the functionality of comprehensive web security. In particular, because of the release of the enterprise edition, which was targeted at large-scale companies, an increasing number of large companies (mainly listed companies) adopt WebARGUS.
The company also began offering “SaaS” in May 2018 to enhance user convenience and further popularize the products, and collaborated in full scale with F-Secure Corporation, a Finnish cyber security company, in June 2018. The company established a total security provision system using the complementary relationship between F-Secure’s “F-Secure RADAR,” a vulnerability scanning tool for IT system, and DIT’s “WebARGUS.”

The company also began offering “SaaS” in May 2018 to enhance user convenience and further popularize the products, and collaborated in full scale with F-Secure Corporation, a Finnish cyber security company, in June 2018. The company established a total security provision system using the complementary relationship between F-Secure’s “F-Secure RADAR,” a vulnerability scanning tool for IT system, and DIT’s “WebARGUS.”

The company enhanced the varieties of the security solution products through various measures including the above alliance, and it is also considering to expand the range of applications of products in anticipation of needs for security measures for the IoT generation, including WebARGUS for embedded products.
For example, the spread and penetration of automatic driving have made the securement of safety an important mission for the companies providing automatic driving systems, and it is expected that the field where they work actively will grow further.
As for the embedded edition, the company started up an official project and is continuously carrying out discussions and technical investigation of concrete business plans for its commercialization. Although commercialization will take time, the company aims to realize it earlier through the accumulation of its steady business accomplishments.

2) “xoBlos,” an Excel work innovation platform
Even in advanced corporations with a high level of IT, there are numerous Excel-based tasks including manual operations in the office. Most non-routine tasks consist of repetitive manual operations such as processing Excel reports by manually inputting data from paper reports, aggregating totals from multiple Excel sheets and visualizing and analyzing CSV data extracted from packaged system.
The company's original-brand, "xoBlos," entirely automates these inefficient Excel-based tasks and provides drastic improvements to workflow.

(Taken from the reference materials of Digital Information Technologies Corporation)

Background of development
Many corporations use Excel, the major spreadsheet software, for generating quotations and invoices. However, in cases where they generate these documents in different formats for each client according to the clients’ requirements, manual input is mandatory because it is difficult to tally, sort and analyze in a systematic way.
For this, the company developed “xoBlos,” an Excel work innovation platform, to automate tasks and significantly improve workflow efficiency.

Product feature, overview and an example of introduction

xoBlos was released about eight years ago with the aim of drastically improving the efficiency of work using Excel. It is now receiving considerably more attention due to its efficiency “to create a company-wide platform which covers everything from improving work efficiency to providing information useful in managerial decisions, while diverting workflow from areas currently using Excel,” in addition to the convenience and relatively cheap introduction cost, because work-style reform trends centered on revising long work hours grow stronger. Indeed, the times have caught up with xoBlos and the company.

For further enhancement of product competitiveness, the company strengthened the automatic processing of Excel work by providing a function linked with RPA* products and other systems in February 2018. This function can be operated on a PC client as well as a Web Server, leading to improvements in convenience for wider users.

* RPA (Robotic Process Automation)
RPA refers to efforts to automate work by using robots, and mainly deals with white-collar work in back offices by using AI (artificial intelligence) and “machine learning,” in which AI learns through repetition. It is capable of processing across a variety of applications, such as software, browsers, and cloud environments, by simply inputting the processing procedures normally done by humans into the operation screen.

The domestic RPA market is projected to double to 80 billion yen in the next few years, and RPA-related services, which occupy 80% of the market, are expected to have a higher growth rate than RPA tool products, which occupy only 20%. Based on this, xoBlos, which can be considered as an RPA-related service, is anticipated to have high growth potential.
Introduction of xoBlos brought significant operational efficiency in many companies, including the cases given below.

* A sample use case : Accordia Golf Co., Ltd. “Reduced the number of work hours by about 20,000 hours annually”
(Excerpt/summary by Investment Bridge with reference to the materials of the company)

The Accordia Golf Group runs golf courses and golf ranges in 161 locations in Japan, engaging in golf course and golf range management businesses, etc.

(Situation before the installation of xoBlos)
At the end of every month, a massive number of reports on business results, including sales, were collected in the form of Excel files in various formats from 161 bases in the country, but data totalization work was an extremely difficult task since some bases had restaurants, shops, hotels, resort facilities, etc., attached to the golf courses.
Also, as these figures were managed and analyzed in detail for each base, business unit, department, and employee, the back-office department had concerns about sustainability due to increased size of Excel files and maintenance at a macro level.

(Reasons for choosing xoBlos）
Most importantly, it is a high-speed engine. A system becomes useless despite its ability to process Excel files, if it is slow. Therefore, the fact that xoBlos can process a large number of Excel files at high speed was an important factor for selection for the company. In addition, the company valued the fact that it did not require database and could be used without programming as control sheets were also in Excel, and its cost was reasonable.

(After the installation of xoBlos)
Since the format differed for each base, a large number of work hours used to be required, but the adoption of xoBlos led to reduction in the number of work hours by about 20,000 hours (estimated) annually, and the information required by the management team for management could now be delivered swiftly and accurately.
With RPA in mind, the company is considering the utilization of xoBlos for further improvement of workflow and operational efficiency.

Toward further value improvement of the platform “xoBlos Plus-One Concept”
“xoBlos” is already highly rated as a work innovation platform that supports in bringing significant operational efficiency by fully automatizing the inefficient work based on Excel, but the company started taking initiatives to make it a platform that offers more high-added value to clients to respond to the changing times and customer needs.
“xoBlos Plus-One Concept” is the result of the above initiatives.
The main concept of “xoBlos Plus-One Concept” is “improvement of data value.”
Companies carry out various activities, and they have different systems for the management of each activity.
For example, a company has a system for ERP, which drafts a plan for the appropriate distribution of resources including personnel, things, capital and information, and their effective utilization, at the top, and other systems for CRM for customer management, inventory management, management of acceptance & placement of orders, attendance data, personnel and accounts.
A large amount of data is extracted from each system, and in recent years, there has been a skyrocketing need for enhancement of operational efficiency and visualization of a company’s own state by integrating and combining the data, instead of handling them individually.
However, realization of the above is not easy for a company as it requires a large number of work hours and involves huge costs.

In such a situation, clients who installed xoBlos, which processes data efficiently at high speed, achieved efficiency in reporting and are able to utilize the data of by integrating and combining the data easily at a reasonable cost.
Also, it is one of the major features of “xoBlos Plus-One Concept” that it allows the use of data in a desired format of each division and department, from the upstream management team to downstream departments of production, sales, general affairs and administration.

Although it is still a “concept” at present, the company has just begun to carry out activities for its realization, and it plans to link various systems on xoBlos through tie-ups with manufacturers, and propose a concrete image of “xoBlos Plus-One Concept” to its client companies.

* A sample use case：MARUZEN-YUSHODO Co., Ltd. “Greatly reduced the number of work hours for IT department”
(Excerpt/summary by Investment Bridge with reference to the materials of the company)

Maruzen-Yushodo Co., Ltd. offers academic materials for educational and research institutions in the country including universities, and also provides outsourcing services for management for libraries and other educational institutions. In addition, it also undertakes design, supervision and contract work of construction, as well as management consulting work related to school education business.

(Situation before the installation of xoBlos)
There were mainly two tasks.
The first task was to realize data coordination between ORO Co., Ltd.’s ERP “ZAC Enterprise” for the education environment solutions department which was planned to be installed, and the accounting system of the whole company. The second task was to improve the quality of data services to offer necessary data in a stable and efficient manner to user department.

As the company, too, runs multiple systems (core, accounting, personnel and operational systems), a large amount of processing work for data coordination is carried out among the systems. In addition, the company is actively taking efforts in EDI coordination with suppliers and clients to promote common processing related to data coordination.
When the company adopted ERP, it was planning to handle it within the conventional framework at first, but characteristics of ERP made it necessary to extract and process the data using multiple APIs for data coordination, increasing the complicatedness of the conventional method, which subsequently gave rise to concerns of increased costs.

As for data services, the company received a large number of requests mainly from divisions which were in charge of selling books, and operations division, which was responsible for procurement, order placement & acceptance and receipt & shipment of products, to offer data of the core system only after extracting the necessary items for each division, etc., but it would involve substantial costs to add functions to the core system to meet such diversified requests, and it was also difficult to handle requests urgently.
The company took efforts in improving operational efficiency through application of automation tools, but they lacked real-time properties, and many other difficulties remained in handling the cases where extraction conditions changed for each request.

(After installing xoBlos)
・The number of work hours for development reduced to half compared to the number required in the conventional method.
・As for data services, the number of work hours for IT department reduced as the whole process can be completed by the end users. The company is replacing the work requiring about 20 hours monthly with xoBlos.
・The previous data service had seen cases where re-processing was required using Excel, etc., to make the format into the one desired by end users, but presently, xoBlos processes and offers the desired data in an instantly-usable format, leading to the decreased number of work hours.

Maruzen-Yushodo highly values xoBlo for its functions, user-friendliness, and reasonable cost.
While xoBlos’s actual capability, which is its strong data processing function, has not been sufficiently utilized yet, the company plans to expand its application area as its effects are increasing greatly.
Also, the application area of xoBlos is expanding. For instance, the development team is considering the possibilities of other utilization methods of xoBlos which were not planned initially, such as using it as a simple upgrading tool of DB.

Introduction and sales
The company has been expanding sales including hosting seminars jointly with one of its major agencies, Daiko Denshi Tsushin, Ltd (8023, the second section of TSE), by taking full advantage of its wide variety of clients, branches and marketability. The company has established a network of about 30 primary agencies including Daiko Denshi Tsushin, Ltd.
The company has established a network of about 30 primary agencies including Daiko Denshi Tsushin, Ltd. At present, the company made introductions to over 350 companies, and it plans to increase the number by 100-120 annually.

Initially, the company was mainly making introductions to medium-sized companies, but as the need for efficiency in on-site work has increased, there have also been more introductions to large companies. Currently, about 70% of newly introduced companies are large companies.
The company holds a seminar for sales promotion three times per week, and on most occasions every seat is filled.
At present, the company made introductions to over 350 companies, and it plans to increase the number by 100-120 annually.
It also hopes to expand sales through the adoption of a subscription model that utilizes cloud.

1-4 Characteristics and strengths

1-4-1 Multifaceted and diverse IT company
The company has expanded its business areas by flexibly responding to the progress of information technology, from business system development business to computer sales (current: system sales), embedded product development and verification business, and operational support business as well as working on its original products based on its technical strengths which have been developed during the process of business expansion.
One of the major characteristics of the company is that it is a multifaceted and diverse IT company and has a wide range of business activities and provides own-brand product with originality.

1-4-2 A wide range of customer base
The company has approximately 2,600 business partners, ranging from listed companies and their affiliates to small and medium enterprises. With about 70% of customers, the company has direct transactions.

1-4-3 Organizational strategies of partial and total optimization
Another significant characteristic of the company is that it has an organizational strategy with two opposite factors, partial and total optimization in a well-balanced manner.
For partial optimization, the company has specialized companies under an in-house company system which aim to be the best in each field. It also provides training and produces entrepreneurs with innovative spirits.
For total optimization, the company pursues synergy between companies while respecting independence of each in-house company; through scrap and build done by the headquarters, collaboration between each in-house company and development of new business areas.

(Overview of each in-house company)

4) Development and sales of original own-brand products
As mentioned above, the company has developed a variety of original own-brand products like “xoBlos” and “WebARGUS” with its unique technologies. They are growing to be the primary source of revenue in the future.

2.First half of the Fiscal Year June 2019 Earnings Results

2-1 Consolidated business results

*Unit: million yen

Both sales and profit increased. Marking a record high for the second quarter.
The sales in the first half of the fiscal year ending June 2019 were 5,957 million yen, up 8.0% YoY. The sales of the business solution unit and the embedded solution unit were healthy, and the original product unit greatly contributed to sales. Gross margin ratio increased, and gross margin saw a two-digit growth while the increase in SG&A expenses remained in the single digits, and operating income rose 52.0% YoY to 577 million yen.
Sales and profit marked record highs for the second quarter.

2-2 Trends by segment　

*Sales mean sales to external clients. The composition ratio of operating income means the ratio of operating income to sales.
*Unit: million yen

（Sales trends by segment）

*Unit: million yen

Software Development Business
Both sales and profit increased.
*Business solution unit
The business system development unit in the field of finance grew and the operation support unit was healthy. The system development in the field of distribution also expanded.

*Embedded solution unit
The sales of in-vehicle devices grew steadily. In particular, the orders for connected car-related products, whose demand is expected to expand further, increased. The customer base shifted to the favorable one, and profit ratio improved.

*Original product unit
There was a significant increase in sales as a result of product and sales strategies carried out by the company so far.
Introduction of “WebARGUS” progressed to large number of users through the increased awareness of companies to prevent tampering, and functional enhancement of the product. Also, sales opportunities expanded as a result of collaborating with an external cyber security company.
The number of projects related to “xoBlos” significantly grew as a result of actively exhibiting the product in various exhibitions with a release of its function to coordinate with various RPAs seamlessly, and improvement in awareness as an effective tool for working style reform.

System Sales Business
Sales increased and the business turned profitable.
Sales increased as it related to replacement and repair work of systems grew as a result of the reduced tax rate and change of the name of the era. Also, the subsidies provided by the ministry of Economy, Trade and Industry for the purpose of upgrading their systems led small and medium enterprises to introduce products, contributing to sales increase. introductions to small and medium enterprises increased because of the subsidies provided by the Ministry of Economy, Trade and Industry for upgrading their systems. In addition, the business turned profitable since the sales of the server edition of “Rakuichi” having a high profit rate improved.

2-3 Financial condition and cash flow

Main BS

*Unit: Million yen

Current assets increased 187 million yen from the end of the previous fiscal year, due to an increase of accounts receivable. Noncurrent assets grew 35 million yen from the end of the previous fiscal year due to an increase of investments and other assets. Total assets rose 222 million yen from the end of the previous fiscal year to 4,306 million yen.
Total liabilities decreased 76 million yen from the end of the previous fiscal year to 1,385 million yen due to a drop in long-term prepaid expenses.
Net assets grew 299 million yen from the end of the previous fiscal year to 2,921 million yen, due to the growth of retained earnings.
As a result, equity ratio improved 3.6 points from the end of the previous fiscal year to 67.8%.

Cash Flow

*Unit: Million yen

The surplus of operating CF and free CF decreased due to an increase in trade receivables, etc.
The deficit of financing CF decreased since the expenses incurred in the acquisition of treasury stocks fell YoY. The cash position improved.

3. Fiscal Year June 2019 Earnings Estimates

3-1 Full-year earnings forecast

*The estimated values are from the company.
*Unit: Million yen

Earnings forecast remains unchanged. Sales and profit are estimated to grow for the ninth consecutive terms in a row.
Sales and operating income are estimated to be 11,904 million yen, up 7.5% YoY, and 1,000 million yen, up 26.9% YoY, respectively.
Every business is expected to experience sales growth. Even though the company will keep on investing in new businesses, profit rate is expected to rise and profit is forecasted to grow by double digits.
It is estimated that sales and profit will grow for the 9th consecutive term, marking a record high.
The interim and term-end dividend amounts are estimated to be both 7 yen/share, totaling up to 14 yen/share. The estimated payout ratio is 32.3%, exceeding 30% for the second consecutive term.

3-2 Strategies and topics

3-3 Trend of strategies of each business unit

*Unit: Million yen

Business Solution Unit
Sales are estimated to grow in the fields of mainly finance, and also medical care, pharmaceutical products, social infrastructure, and operation support is expected to be healthy.

* Advanced near-shore: A cost-effective development method carried out by a group of high value-added technicians at local bases in Japan.

Embedded Solution Unit
Demand for in-vehicle product development is healthy, and both development and verification are going well. IoT related projects are expanding and are expected to increase. Semiconductor related embedded product development projects will also be healthy.

Original Product Unit
With the tide of increasing security demand, shortening working time and working style reform, high growth is expected for both "WebARGUS" and "xoBlos".

WebARGUS

(*) WebARGUS Fortify: a next-generation type cloud WAF (Web Application Firewall) which is alternative for appliance type WAF. It can protect Website services from invisible threads, without technical knowledge or large-scale investments.
(*) ARM Architecture: A method for designing processors whose intellectual property right is held by ARM in the U.K. and which is widely adopted for semiconductor chips for low power applications such as smartphones and in-vehicle devices.
(*) System Resilience Ideology: To be resilient means to show strength of stability and the ability to recover quickly. In the case of WebARGUS, this refers to the instantaneous detection/restoration mechanism (websites are restored to their original state immediately after tampering is detected.)

xoBlos

System Sales Unit
Centered on new sales and replacement of "Rakuichi", the company will aggressively carry out sales promotion of its original products and network equipment and anticipate an increase in sales.

4. Conclusion

The sales in the first half of the fiscal year ending June 2019 remained healthy for all the business units, leading a significant increase in profit. As for profit margin, which Investment Bridge has been observing continuously, both gross margin ratio and operating income margin in the second quarter (October to December) marked record highs for the past few terms with 25.6% and 11.4% respectively, where operating income margin already exceeded 10%, which was the target of the medium-term business plan for the fiscal year ending June 2021. In addition to the sales growth of the original product unit, the profitability of the company’s major business units, i.e., the business solution unit and the embedded solution unit, which had been expected to increase the profit margin further, certainly improved, and it is highly appreciated. In the medium - term, investors should pay attention to the progress of “WebARGUS Total Security” and “xoBlos Plus-One Concept.”

<Reference1: Medium and long-term growth strategy and Usage of funds>

1-1 Strategy overview

As a medium-term business development, Digital Information Technologies aims to establish a strong business foundation by repeatedly conducting stable transactions in a wide range of business fields, and based on it, provide new value centered on original products. The company aims to grow substantially with these two ideals.

Following the fiscal year ended June 2016, which was focusing on “maintenance”, the company positioned the fiscal years ended June 2017 and 2018 as “strengthening” years and the fiscal year ending June 2019 and later as an “expansion and stabilization” year. As a medium-term goal, it is aiming to realize “Triple 10”, namely, “sales of 10 billion yen, an operating income of 1 billion yen, and an operating income margin of 10%”. As for sales, it already achieved the goal in the fiscal year ended June 2017.
It believes that an operating income of 1.0 billion yen will be surely achieved during this fiscal year.

1-2 Usage of funds

It will promote effective use of funds to further enhance corporate value.

(M&A)
To address HR shortage for the existing businesses, it is considering M&A of the most suitable companies in the business solution field and embedded product solution field.

(Collaboration/cooperation)
It will promote collaboration and cooperation with companies that offer complementary products or business fields.

(Return to shareholders)
It has a policy to gradually increase the payout ratio while looking at the balance with large investment for growth such as investment in security products related to IoT.

<Reference2: Regarding corporate governance >

Organization type, and the composition of directors and auditors

Corporate Governance Report
Last Update: February 14, 2019

<Basic principle>
The company recognizes that compliance with laws and regulations, maintaining transparency in management, and improving the soundness and sustainability of its corporate value are the most important management issues.
In order to tackle these issues and to fulfill social responsibilities to shareholders and other stakeholders, the company has established the following corporate governance system. The company considers it important to further strengthen this system, verify its functions on a regular basis, and implement necessary measures.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code>

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>

This report is intended solely for information purposes, and is not intended as a solicitation for investment. The information and opinions contained within this report are made by our company based on data made publicly available, and the information within this report comes from sources that we judge to be reliable. However, we cannot wholly guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.

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