Bridge Report:（4388）AI the second quarter of fiscal year ending March 2021

Representative Director Daisuke Yoshida	AI, Inc. (4388)

Corporate Information

Stock Information

*The share price is the closing price on December 10. Shares outstanding, DPS, EPS are taken from the brief financial report for the second quarter of the FY ending March 2021. ROE, BPS are from the brief financial report for the FY March 2020.

Earnings Trends

*Unit: Million yen, yen. The estimated values are provided by the company.
*DPS ¥8.00 for FY 2019 includes ¥3.00 commemorative dividend.

This report presents AI, Inc.’s earning results for the second quarter of fiscal year ending March 2021 and its forecast, etc.

Table of Contents

Key Points
1. Company Overview
2. The second quarter of Fiscal Year ending March 2021 Earning Results
3. Fiscal Year ending March 2021 Earnings Estimates
4. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• AI, Inc. offers a speech synthesis engine and solutions regarding speech synthesis. The company provides corporations and consumers with products and services based on “AITalk®,” a speech synthesis engine developed by the company, for automatic answering systems, car navigation systems, anti-disaster wireless systems, smartphones, communication robots, in-vehicle devices, and games. The company has unrivaled characteristics and strengths; for example, it can synthesize high-quality speeches from a few voice samples and offer many speakers.

   

   

• In the second quarter of the term ending March 2021, sales grew 15.7% year on year to 360 million yen. While negative factors such as (1) delayed orders for projects related to the Tokyo Olympics, (2) a decrease of multiple languages projects due to the decline in the number of tourists from overseas, and (3) exhibition cancelations, worked as a drag, these were outweighed by the growth of demand for applications for creating narrations for e-learning content, video, etc., due partly to telecommuting at companies and online class for schools. The rise in demand for products for consumers, stemming from people staying at home, also contributed to sales growth. Operating income soared 66.5% year on year to 105 million yen. R&D costs increased due to the release of next-generation speech synthesis engine AITalk®5, but this was handily offset by boosts from larger sales as well as lower costs associated with exhibition cancelations, refrained business trips, and postponement of hiring activities. Ordinary income and net income also saw sharp growth.

   

• The company’s earnings estimates for the term ending March 2021 are unchanged, calling for sales of 840 million yen, up 2.5% year on year, and an operating income of 280 million yen, up 2.3% year on year. While the impact from the spread of COVID-19 is a concern, the company expects sales and operating income to increase due to the expansion of the speech synthesis market. The dividend is to be 8 yen/share, which is 1 yen/share higher than the previous term’s 7 yen /share. The expected payout ratio is 19.6%.

   

   

• The company launched the next-generation speech synthesis engine AITalk 5.0. Attention is being placed on the news release on concrete application cases and the situation with existing customers switching to the new engine. Our eyes are also on the effects of its first TV commercial “Have you heard of AITalk®?” to be aired in the second half of the term. In addition, the company is aiming to develop the market through direct sales, starting with A.I. VOICE, a voice reading software for personal use under the original brand, which is scheduled to go on sale in February 2021. We thus consider it necessary to also pay close attention to changes in advertising expenses and other factors.

   

   

1. Company Overview

AI, Inc. offers a speech synthesis engine and solutions regarding speech synthesis. “AITalk®,” which is a speech synthesis engine developed by the company, is offered to corporations for producing voices for automatic answering, car navigation, and anti-disaster wireless systems, and also as an audio communication system for smartphones, communication robots, in-vehicle devices, and automated call center operation. It also sells products targeted at consumers, including VOICEROID.

【1-1 Corporate history】

When the founder Daisuke Yoshida (representative director of AI, Inc.) was working for Advanced Telecommunications Research Institute International*, he encountered a speech synthesis technology, and had an intuition that it is a promising technology that would contribute to society. The technology was still immature, but he established AI, Inc. in April 2003, for the purpose of substantiating, diffusing, and commercializing that technology.
In 2007, the company started granting the license of the series of “AITalk®,” which is a speech synthesis engine developed by the company. Later, it developed a variety of products and services based on “AITalk®.” Its unique features, including “a wide array of speakers and languages” and “reduction of time and expenses with a small amount of voice samples,” were highly evaluated. Since it was adopted by the government for anti-disaster wireless communication, it has been adopted by many institutions and applied in a wider variety of cases.
In June 2018, the company was listed in Mothers of Tokyo Stock Exchange.

*Advanced Telecommunications Research Institute International (ATR)
It was established in 1986, under the concept of the preparatory meeting held by the then Posts and Telecommunications Ministry, NTT, Japan Business Federation, Kansai Economic Federation, universities, etc., with the mission to promote pioneering, unique research in the field of information and communications based on the international collaboration among government, industry and academia. 111 companies hold a stake in the company such as NTT and KDDI.

【1-2 Corporate Mission, Vision】

On November 11, 2019, the company renewed its logo, corporate philosophy, and vision; it newly added a mission, value, and action guidelines.

Amid the changes in internal or external business environments, the company has set forth the way they should be as its new corporate mission, corporate logo, and action guidelines, through which it aims to get recognized and become a company that provides value to society.

【1-3 Market environment, etc.】

(1) Market environment
The development of the speech synthesis technology has a long history. However, the expansion of the scope of application was slow because the mainstream method has been to produce audio data mechanically although it has been adopted for automatic answering machines, anti-disaster announcement, voice interaction via smartphones, etc.

As the technology for producing sounds pronounced by human beings has advanced and artificial intelligence (AI) has evolved in recent years, we have seen the improvements in functions, including the shift from voice-over recording to “the utilization of speech synthesis,” the shift from unilateral provision of information to “the actualization of interactive communication,” and the shift from the Japanese language only to “multiple languages.” Going forward, the scope of application is expected to expand rapidly, and it will be used for e-learning, mobility, robots, AI speakers, etc.
A private research firm predicted that the scale of the global market of voice recognition and speech synthesis technologies will grow from about 47 billion dollars in 2011 to 200 billion dollars in 2025 (compound annual growth rate [CAGR]: about 10%).

Following “Phase 1: One-way information provision” and “Phase 2: Interactive dialogue and dissemination to consumers,” AI, Inc. believes that the speech synthesis market has entered “Phase 3,” a period of rapid growth, with alternatives to narration by speech synthesis, development of multiple languages, creation of new markets, etc. In the current COVID-19 crisis, demands for e-learning and videos and the consumer market are also growing rapidly.

(Taken from the reference material of the company)

(2) Competitors
Major competitors of “AITalk®,” a speech synthesis engine of AI, Inc., include HOYA Corporation (1st section of TSE, 7741, product name: Voice Text) and Toshiba Digital Solutions Corporation (unlisted, product name: To Speak).
Specializing in speech synthesis, AI, Inc. meets the requests from users swiftly and flexibly and secures its market share, by offering services of R&D, product development, sale, and support in an integrated manner.

【1-4 Business contents】

(1) What is the speech synthesis technology?
The voice technology can be roughly classified into the “voice recognition technology” for recognizing voices and translating them into characters, etc., and the “speech synthesis technology” for converting text information into audio data. AI, Inc. has been conducting the “speech synthesis” business since it was established.

R&D in the speech synthesis field has a long history and dates back to around the 1850s. “Speech synthesis” reminds us of “mechanical sounds and robot voices” developed in around 1940, but AI, Inc. adopted the “corpus-based text-to-speech method.”

(Outline of the corpus-based text-to-speech method)
While the conventional “speech synthesis by rule” produces audio data mechanically, the “corpus-based text-to-speech method” produces a waveform by combining recorded human voices in units of vowels and consonants. Accordingly, sounds are derived from human voices rather than mechanical sounds.

The technology for “corpus-based text-to-speech synthesis” is constituted by the two technologies: “a technology for producing a phonetic dictionary” and “a speech synthesis technology for producing audio data from text information.”

(Taken from the reference material of the company)

(2) “AITalk®”, a high-quality Japanese speech synthesis engine
“AITalk®” is a high-quality speech synthesis engine researched and developed by the company based on the “corpus-based text-to-speech synthesis technology,” which produces sounds based on human voices.
The following section will describe the features of “AITalk®,” which can synthesize speeches freely with more human-like and natural voices, major application cases, and outlines of products based on “AITalk®.”

①Characteristics of “AITalk®”
*A diverse lineup of speakers and languages
Currently, Japanese speakers of this system range from adults to kids and speak 18 kinds of male or female languages (16 kinds of standard languages and 2 kinds of Kansai dialects). From this diverse lineup of voices, customers can choose appropriate ones for various scenes.

*Please try the “demonstration of speech synthesis” in the company’s website at https://www.ai-j.jp/demonstration/.

(Taken from the website of the company)

*It is also possible to express emotions.
It is possible to express emotions, including delight, anger, sorrow, and pleasure, according to situations and purposes of use.

(Taken from the website of the company)

*Anyone’s voice can be converted into synthetic data.
The voices of entertainers, voice actors, and users recorded for a short period of time can be converted into data for speech synthesis.
Since it is possible to easily produce speeches of real people just by inputting text, it is possible to offer a variety of contents, including online campaigns, smartphone applications, and games.

②Customer segments and major application cases
As the “corpus-based text-to-speech synthesis technology” has advanced, the speech synthesis engine has been adopted in various scenes where recorded voices of voice actors and narrators had been used.
AI, Inc. has a broad range of client enterprises in the fields of communications, disaster prevention, finance, railways, transportation, in-vehicle devices, games, sightseeing, municipalities, and libraries. Over 500 companies adopted the system, and we heard that the number of clients is increasing by 20-30% every term.

As IoT and robots have been popularized and the number of sightseers visiting Japan has increased over the past several years, there are an increasing number of cases in which the system is used as a dialogue solution combining voice recognition and the interpretation of intentions or a speech translation solution combining translation and multilingual speech synthesis. The company expects that the speech synthesis technology will be used for interactive dialogue as part of artificial intelligence, indicating the evolution from the conventional unilateral information provision.

Matsukoroid

This is an android entertainer developed by making a cast of the entire body, including the head and toes, accurately mimicking facial expressions, behavior, habits, etc., and applying the cutting-edge android technology, with the aim of producing an android that is like two peas in a pod with Matsuko Deluxe. It was born under the supervision of Professor Hiroshi Ishiguro of Osaka University, who is a pioneer in android research.   AITalk®, a speech synthesis engine of AI, Inc., was adopted for producing some voices of “Matsukoroid.” AI, Inc. recorded the actual voices of Matsuko Deluxe in a short period of time, and produced “AITalk® CustomVoice®,” an original phonetic dictionary for speech synthesis. This enabled Matsukoroid to read a variety of texts aloud with the voices of Mastuko Deluxe. Going forward, Matsukoroid will speak with AITalk®, which synthesizes speeches with the voices of Matsuko Deluxe, at events, etc.

③Major products
Based on AITalk®, AI, Inc. develops and sells products and services suited for various scenes of corporations and individuals.

(3) The next-generation speech synthesis engine, AITalk®5.
In May 2020, AI, Inc. released the next-generation speech synthesis engine, AITalk®5 (provisional name), which utilizes the Deep Neural Network (DNN) to express emotions with the speech synthesis engine.

(Background for development)
For the company’s current AITalk®4, which is a corpus-based speech synthesis engine, it is necessary to create a separate emotion sound dictionary for emotions, such as happiness, sadness, and anger, needed to create interactive sound synthesis. This has problems like the large cost and that the change in the emotion of the synthesized speech was random and not smooth.
Therefore, the company has been working on “subsidies for developing new products and technologies project” for 18 months from July 2017 to December 2018 in order to successfully transition from a calm state to an emotional state smoothly, by predicting emotion change filters from DNN and producing emotion elements from normal elements; they succeeded in commercialization. The company is currently applying for a parent on that system.

(Overview of the next-generation speech synthesis engine, AITalk®5)
(1) Characteristics
1 According to the usage scene, it offers the option of a conventional corpus-based speech synthesis system or the DNN speech synthesis system.

2 The system can synthesize a more natural and human-like high-quality sound thanks to the sound improvement achieved by using deep learning. Moreover, it eliminates the problem of jarring transition between emotions associated with AITalk®4 and now can synthesize an emotion-rich voice that transitions smoothly between happiness, sadness, and anger.
3 The conventional AITalk®4 required separate emotion sound dictionaries for each emotion and entailed recording separate sounds assigned to each emotion happiness, anger, and sadness. Comparatively, the next-generation speech synthesis engine, AITalk®5 utilizes Deep Learning to create sound dictionaries from a much shorter recording than usual. Therefore, shortening the time of recording and creating sound dictionaries lead to reducing the costs of creating sound dictionaries and allowed the company to offer the speech synthesis engine at a much lower price.

(2) Products lineup
AITalk®5 SDK: development kit/library
AITalk®5 Custom Voice®: Original sound dictionary creation service
AITalk®5 Edito A narration/guidance sound creation software
AITalk®5 Serve server-based speech synthesis
AITalk®5 WebAPI: Cloud-based speech synthesis service
etc.

In May 2020, the company started providing “AITalk®5 Koe-no-shokunin (Voice Craftsman) ® Package Edition” and “AITalk®5 SDK.”
In November, the company upgraded the speech synthesis API, AITalk®5 WebAPI, to AITalk®5, newly providing it as AITalk®5 WebAPI.
AITalk®5 WebAPI is a service that enables the use of high-quality speech synthesis engine AITalk®, part of cloud-based speech synthesis series AICloud®, in SaaS (Software as a Service) form via online services, etc. Since users do not need to build and operate in-house server for voice synthesis, they can easily start services using voice synthesis such as online services, smartphone apps, and campaigns.

(Taken from the reference material of the company)

(4) Business model and commercial distribution
The company’s products and services are classified into “products for corporations,” “services for corporations,” and “products for consumers.”
To corporations, AI, Inc. offers the most appropriate products or cloud services according to the characteristics of each client.

As for marketing targeted at corporations, the company owns “Inside sales” staff, who deal with inquiries through sales promotion (SEO, email newsletters, news releases, etc.), and “Field sales” staff, who strive to increase new customers and orders from existing customers, and sales partners sell packaged software.
As for marketing targeted at consumers, the company does not sell its products directly to customers, but entrusts distributors with sale, and receives royalties from them on a quarterly basis.

①Products for corporations
AI, Inc. sells packaged software, grants licenses, and carries out entrusted development.

◎Sale of packaged software
The company sells packaged software with which you can easily produce audio files just by inputting text into your PC.
Through easy, intuitive operation, it is possible to produce high-quality voice-overs.

◎Licensing
This is a major business model of AI, Inc. The company concludes a licensing contract for use with each client and receives some fees for the use of the speech synthesis engine.

The company individually set the basic license fee, monthly fees for use, royalties, which depend on sales results, and so on. The company offers the most appropriate speech synthesis engine according to the purposes of use.

◎Entrusted development
AI, Inc. is entrusted by clients with the development of original phonetic dictionaries for respective clients.

②Services for corporations
◎Cloud service
The company offers speech synthesis services utilizing the cloud environment. Users can use services utilizing speech synthesis via the Internet.

◎Support services
The company provides clients of products for corporations with continuous technical support.

③Products for consumers
The company sells packaged software, with which you can easily produce audio files.

(5) R&D structure
As of the second quarter of fiscal year ending March 2021, the number of R&D staff members was 11. The total R&D cost for this term was 62 million yen, up approximately 17% year on year.
The three groups, "language processing", "voice processing" and "engine development", are working on improving Japanese language processing technology for speech synthesis, developing a new high-quality speech synthesis engine, and putting new algorithms for language and speech developed in the early stages of development to practical use, respectively.

【1-5 Characteristics, strengths, and competitive advantage】

AI, Inc., which developed AITalk®, a high-quality speech synthesis engine, and offers products and services, has the following characteristics, strengths, and competitive advantage.

(1) The required number of voice samples is small.
The general approach for improving speech synthesis quality in the “corpus-based text-to-speech synthesis” is to increase voice samples. However, it has a disadvantage; if voice samples increase, then recording time is prolonged and the size of a phonetic dictionary increases, augmenting the cost for producing the phonetic dictionary.

AI, Inc. is proceeding with R&D, with the aim of synthesizing high-quality speeches with a small number of voice samples. In general, it is necessary to record voices for several tens of hours (several to ten thousand sentences), but the company can produce a phonetic dictionary with 2 to 6 hours of recording (200 to 600 sentences).

(2) Provision of a variety of speakers
Since a phonetic dictionary can be produced with a small number of voice samples, it is possible to offer a wide array of phonetic dictionaries. At present, the company offers a total of 18 speakers, including 8 female speakers, 6 male speakers, 2 boyish speakers, and 2 girlish speakers. (including Kansai dialect speakers.)

(3) Multiple introductions and sales results
The production of a phonetic dictionary used to cost tens of millions of yen, but the company developed a technology for producing it with a small number of voice samples at a cost of 0.5 to 5 million yen. As a result, it is now possible to inexpensively produce a phonetic dictionary desired by each user, including the voices of specific voice actors, narrators, and characters, and the scope of application of the speech synthesis engine has expanded.
Up until now, the company has produced over 300 custom voices.

Also, the company’s technology has been exceptionally highly evaluated, with 1,200 companies using AI’s products, 648 local governments using AI’s products for anti-disaster wireless systems, 1,300 licenses for corporate package software sales, and more than 60,000 licenses for consumer package software sales.

(4) System for offering services of R&D, product development, sale, and support in an integrated manner
Most competitors that offer speech synthesis engines are large makers, in which R&D and product development/sale sections are separated.
Meanwhile, AI, Inc. deals with almost all processes including R&D, product development, sale, and support, by itself, so that it can operate business flexibly and swiftly. For the speech synthesis engines for foreign languages, it collaborates with overseas makers.

【1-6 ESG activities】

In the second quarter of the term ending March 2021, AI, Inc. carried out the following activities.

2. The Second Quarter of Fiscal Year ending March 2021 Earning Results

(1) Earnings Results

*Unit: Million yen.

Double-digit growth of sales and profit, also exceeding revised estimates for the first half.
In the second quarter of the term ending March 2021, sales grew 15.7% year on year to 360 million yen. While negative factors such as (1) delayed orders for projects related to the Tokyo Olympics, (2) a decrease of multiple languages projects due to the decline in the number of tourists from overseas, and (3) exhibition cancelations, worked as a drag, these were outweighed by the growth of demand for applications for creating narrations for e-learning content, video, etc., due partly to telecommuting at companies and online class for schools. The rise in demand for products for consumers, stemming from people staying at home, also contributed to sales growth. Operating income soared 66.5% year on year to 105 million yen. R&D costs increased due to the release of next-generation speech synthesis engine AITalk®5, but this was handily offset by boosts from larger sales as well as lower costs associated with exhibition cancelations, refrained business trips, and postponement of hiring activities. Ordinary income and net income also saw sharp growth.
The company upwardly revised its projections for the first half of the term ending March 2021 on August 12, but both sales and profit exceeded these revised figures.

(2) Sales in each segment

*Unit: Million yen.

Products for corporations
Amid the spread of COVID-19, demand for applications for creating narrations for e-learning content, videos, etc., grew due partly to telecommuting at companies and online class for schools, leading to strong sales of packaged software (Koe-no-shokunin, Koe Plus).

Products for consumers
Demand for products for consumers also increased due to people staying at home.

(3) Financial Conditions and Cash Flow

Equity ratio increase by 5.2% from the end of previous term to 93.3%.

◎Cash flow

*Unit: Million yen.

In the second quarter of fiscal year ending March 2021,investing CF fell year on year amid little spending on the acquisition of property, plant, and equipment. The net inflow of free CF grew significantly, partly owing to growth in operating CF. The cash position steadily improved.

3. Fiscal Year ending March 2021 Earnings Estimates

(1) Earnings Estimates

*Unit: Million yen. The estimates were announced by the company.

Full-year plan remains unchanged. Sales and profit estimated to grow.
Although the forecast for the first half of fiscal year revised upward, the full-year plan remains unchanged from the initial forecast at this time. The company’s earnings estimates for the term ending March 2021 are unchanged, calling for sales of 840 million yen, up 2.5% year on year, and an operating income of 280 million yen, up 2.3% year on year. While the impact from the spread of COVID-19 is a concern, the company expects sales and operating income to increase due to the expansion of the speech synthesis market.
The dividend is to be 8 yen/share, which is 1 yen/share higher than the previous term’s 7 yen /share. The expected payout ratio is 19.6%.

(2) Sales in each segment

*Unit: Million yen.

(Products for corporations)
Demand for applications for creating narrations for e-learning content, videos, etc., grew due partly to telecommuting at companies and online class for schools, leading to strong sales of packaged software (Koe-no-shokunin, Koe Plus). Meanwhile, the spread of COVID-19 has caused a decline in entrusted projects related to Custom Voice, which involves voice recording, and those related to the Tokyo Olympics. Considering these positive and negative factors, the company projects sales to drop 1.9% year on year to 490 million yen.

(Services for corporations)
In addition to contributions from NTT Docomo’s my daiz service, the company anticipates sales of AITalk® WebAPI and AITalk® Koe-no-shokunin Cloud Version to be in line with the year-earlier levels at 230 million yen.

(Products for consumers)
The company estimates sales to jump 32.8% year on year to 120 million yen thanks to higher demand for products for consumers due to people staying at home.

(3) Major Initiatives

① Commercialization of the next-generation speech synthesis engine AITalk 5.0
AI, Inc. commercialized the speech synthesis engine that utilizes Deep Neural Network (DNN), and started providing AITalk®5 Koe-no-shokunin® Package Edition and AITalk®5 SDK on May 7, 2020. In November, the company upgraded the speech synthesis API, AITalk®5 WebAPI, to AITalk®5, newly providing it as AITalk®5 WebAPI.

Using deep learning improves voice quality and achieves more human-like, natural, and high-quality speech synthesis. It also reduces phonetic dictionary creation costs by shortening recording time and phonetic dictionary creation time, making it possible to provide a speech synthesis engine at lower costs.

② Promotion of work-style reform
The company has been working to create a comfortable work environment for employees. In this term, it will further promote work-style reforms through the adoption of a flextime system, the adoption of telecommuting, and reviewing its personnel evaluation system.

③ Accelerating collaboration with Cerence
AI, Inc. has indicated that it plans to accelerate its collaboration with the American company, Cerence, in the automotive field. Cerence has expertise in AI, natural language understanding, voiceprint recognition, gesture and gaze detection, augmented reality (AR), etc. It collaborates with major automobile manufacturers around the world as an innovation partner to provide unique solutions, and are promoting business in connected cars, autonomous driving, electric vehicles, etc.

It was announced that Cerence TTS, a next-generation speech synthesis technology incorporating AITalk® that enables high-quality speech output, had been launched on June 1, 2020. This indicates that the collaboration is progressing smoothly.

④ R&D of next-generation engines
The company is promoting the research and development of speech synthesis technology based on innovative deep learning technology, such as WaveNet (one of the deep neural networks for generating speech waveforms) with Professor Toda of Nagoya University (from April 2018 to March 2021 [planned]). The plan is to file a patent application, then presenting the research results at academic conferences and outside the company, proceeding with commercialization from April 2021.

⑤ Development of the consumer market
As the first product under the original brand, A.I.VOICE™, geared toward individuals, Akane/Aoi Kotonoha and Yuzuru Iori will be commercialized, and in February 2021, the company will also move forward with market cultivation through direct sales, beginning with the start of sales of a Japanese language speech synthesis package. In December 2021, they will also launch a singing voice synthesis package and foreign languages (English, Chinese) speech synthesis packages.

(Taken from the reference material of the company)

4. Conclusions

The company launched the next-generation speech synthesis engine AITalk 5.0. Attention is being placed on the news release on concrete application cases and the situation with existing customers switching to the new engine. Our eyes are also on the effects of its first TV commercial “Have you heard of AITalk®?” to be aired in the second half of the term. In addition, the company is aiming to develop the market through direct sales, starting with A.I. VOICE, a voice reading software for personal use under the original brand, which is scheduled to go on sale in February 2021. We thus consider it necessary to also pay close attention to changes in advertising expenses and other factors.

<Reference: Regarding Corporate Governance>

◎Organization type and the composition of directors

◎Corporate Governance Report
Last update date: June 24, 2020

<Basic policy>
Recognizing that for an enterprise to grow and develop stably, it is indispensable to enhance the efficiency and soundness of business administration and establish a fair, transparent management system, the company considers thoroughgoing corporate governance as the most important mission.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
Our company follows all the basic principles of the Corporate Governance Code.