*The share price is the closing price on November 2.
The number of shares issued is from the brief financial report for the latest period.
ROE and BPS are the values from the previous term.

 

*The forecasted values were provided by the company. On Sep. 1, 2016, the company conducted a 2-for-1 stock split.
EPS was adjusted retroactively.
Net income is profit attributable to owners of the parent company. Hereinafter the same shall apply.

This Bridge Report presents an overview of FreakOut Holdings, inc.'s earnings results for the fiscal year ended September 2018, and more.

 

 

 

 

FreakOut Holdings, inc. is a marketing technology company that solves advertisers' challenges of conveying the right message to the right consumers at the right moment with its cutting-edge technology using AI (artificial intelligence). Its chief business is the "DSP business," including the operation of "DSP (demand-side platform)"- a platform that enables advertisers and advertising agencies to buy Internet advertisements efficiently and distribute them to maximize profit - and OEM. Its major strengths and characteristics include "holding vast amounts of data," "capability of securing good-quality ad space," and "active investment for developing a superior algorithm." The company's philosophy is to "Give People Work That Requires A Person" with its technologies in various fields not limited to advertisement, and to contribute to the development of a creative society. 【1-1 Corporate History】 FreakOut was founded in October 2010 by its Founder & Global CEO Yuzuru Honda, an engineer with the previous experience of engaging in advertising businesses at Yahoo! Japan Corporation, who wanted to bring about a game change in advertising in Japan by introducing RTB(Real-Time Bidding) - a distribution method that automatically trades advertisement spaces in the form of bidding according to the number of times an Internet advertisement is displayed -, which already became a norm in the USA about a year earlier than in Japan. Joined the start-up by the Representative Director, Yusuke Sato, also an engineer who worked on advertisement products at Google Japan, the company was the first in Japan to commercialize the RTB technologies in January 2011. Helped by the feature of high sensitivity to new products of the advertising industry, the company gained numerous corporate clients soon after its launch while its customer satisfaction level has remained high, pushing both its sales and profits constantly upward. In June 2014, the company was listed on TSE Mothers in less than four years after its founding. In January 2017, the company changed its structure to a holding company to actualize faster decision-making and more dynamic business development. 【1-2 Philosophy】 FreakOut's philosophy is "Give People Work That Requires A Person." As shown in the corporate history section, the company has its origin in the first commercialization of real-time transactions of Internet advertisements in Japan, with the aim of gradually changing the system of advertising transactions from manual operations to inter-computer transactions. With the use of technologies, advertisers are now able to communicate with each and every consumer, approaching the true 1-to-1 marketing that was not possible with conventional mass-advertising. At the same time, the "people" engaged in the advertising business are becoming freer from the transaction-related chores, and instead they are now able to dedicate more time to creative works such as planning more human-like communications and creating sympathetic messages. The company believes its mission to be "generate surplus labor (the time for people to dedicate to their creativity) by letting computers do what they are good at." The company is striving to contribute to a more creative society by "Giving People Work That Requires A Person" through the use of its advanced technologies in more diverse fields than just advertising. 【1-3 Overview of the Internet Advertising Market】 To understand FreakOut's businesses, it is necessary to have some knowledge of environmental and constituent elements surrounding the operation of the "Internet advertisement," such as the changing needs of advertisers and media, and advertising markets, as well as the technologies and the main players. A few essential points are outlined below. ≪Changing advertising market≫ In the conventional advertising market, especially with the advertising businesses that exploited the mass media such as television and newspapers, monopolization and exclusivity of stock were of paramount importance in terms of business development for the supply side (i.e. the media and advertising agencies). Major advertising agencies would have a near-total monopoly over the limited television ad spaces, enabling them to hold onto their pricing leadership against advertisers to continually generate huge profits in tandem with the media. However, with the end of the era of strong economic growth and the advent of Internet advertising characterized by its interactivity and low-cost, compared to the conventional media, the demand for mass advertising via TV and newspapers is apt to decline. As shown in the graph below, while Japan's total advertising spending has not grown in the last 10 years, Internet advertising expenses of 377.7 billion yen in 2005, which was less than 20% of Terrestrial TV and 40% of Newspapers, has grown 12.2% per year on average and reached 1,509.4 billion yen in 2017, which was 80% of Terrestrial TV and 30% of Newspapers. (Data from Dentsu "Japan's Advertising Market in 2017") Meanwhile, the needs from advertisers for even more effective advertisements keep growing, creating a significant challenge in delivering "the right message" to "the right consumers" at "the right moment." In this situation, there appeared a marketplace with open advertisement space called "Ad Exchange." This is indeed a "marketplace" in which advertisers, the media and advertising agencies can freely trade advertisement space. For advertisers, this means that it has become even more important that they buy optimal advertisement space for an even better advertisement performance and one of the key technologies that enable this is "RTB," which was commercialized by the company for the first time in Japan. ≪Real-time transaction of advertisement space through RTB≫ RTB (Real-Time Bidding) is a distribution method that performs automatic transactions of advertisement space through bidding per impression (the number of times an advertisement is displayed). Before RTB debuted, "a pure advertising transaction" was the norm. This was, as it were, a `set menu' in which the space for display advertisements (advertisements utilizing images, flash, videos, etc. displayed on websites) were sold to the media and advertising agencies as a package with impression guarantees and period guarantees attached. In contrast, RTB analyzes the attributes of the user who accessed a display advertisement per impression, and performs a transaction by bidding as "an advertisement for a user with specific attributes" per impression. The RTB technologies enable advertisers to engage with potential consumers whom it was previously difficult to reach through conventional pure advertising (buying advertisement space of specific websites at a pre-fixed price) or search advertising (relating to the keywords searched), and also make it possible to take recognition measures through a more effective advertisement distribution to elicit further interests and curiosity of users. "RTB" requires two main players: "DSP (the demand-side system)" and "SSP (the supply-side system)" of advertisement space. What is DSP (Demand Side Platform)? DSP is a platform on which advertisers and advertising agencies can effectively purchase and distribute Internet advertisements so that they can maximize their profits. More specifically, it is a platform where advertisers and advertising agencies perform an automatic bidding transaction and advertisement distribution per impression utilizing the RTB technologies and their own algorithms with Ad Exchanges, SSP, adnetworks and others. Advertisers first determine the attributes of their target users and the maximum bidding price, and when a user who satisfies their criteria is found, bidding is instantaneously (within roughly 0.05 second) carried out and the advertisement with the highest bid is distributed on the medium. Before RTB appeared, advertisers were forced to make an assumption as to which websites might be visited by the target users and then purchase specific advertisement slots at a pre-fixed price. However, DSP enables advertisers to make an assessment in real-time about the user to whom they want to distribute an advertisement. Furthermore, the advertisement can be distributed at a reasonable price through the bidding process, optimizing the cost effectiveness of the advertisement for the advertisers. FreakOut's main businesses are the sales of its uniquely developed DSPs "Red" and "FreakOut" as well as the "DSP business" that supplies OEM. To be able to regularly distribute advertisements to the right users and bid at the best price requires building highly advanced algorithms and training the AI (artificial intelligence) to be "even more intelligent" through repeated machine learning based on vast amounts of data. The company has a powerful competitive advantage on this matter (for more details, please refer to 【1-6 Characteristics & Strengths】). What is SSP (Supply Side Platform)? SSP is a system that supports the maximization of advertisement effectiveness from the viewpoint of the media. It is a platform used by the media to manage and sell advertisement space and has the technologies to respond to real-time biddings from DSP. This type of cost-effective advertising, based on the RTB technologies, which cleared the hurdles of optimization that were difficult to realize with conventional pure advertising is termed "performance-based advertising" and it is growing at a speed that is faster than that of Internet advertising as a whole. In 2017, slightly more than 60% of Internet advertising in Japan was performance-based advertising. *Performance-based advertising: an advertising method which utilizes platforms that employ ad technologies processing vast amounts of data to provide automatic or instantaneous optimization of advertising. In addition to search engine advertising and some ad networks, major types include recently developed demand-side platforms (DSPs), ad exchanges, and supply-side platforms (SSPs). Performance-based advertising does not include ad space sales, tie-up ads, or affiliate advertising The company's RTB commercialized in Japan is currently only less than 10% in size of its US counterpart, but it is growing rapidly. As seen here, "performance-based advertising" based on the remarkably fast-growing RTB technologies even within the Internet advertising, the sector showing the highest growth compared to the other media, is the company's main field. It is assuredly capitalizing on the robust demands and expanding its business operations. In addition, while the company is actively working on expanding the overseas business mainly in Southeast Asia, as described later, the proportion of digital advertising expenses in the advertising market in each Southeast Asian country including Taiwan is also rising and the market is expanding continuously. 【1-4 Business contents】 1. Business segments There are three business segments: "DSP business," "DMP business," and "Other business." ① DSP business ◎ Business model The Group purchases ad spaces through SSPs, ad exchanges, and media, and provides internet ad spaces to advertisers and ad agencies and provides the OEM service on DSP to some ad agencies. ◎ Major products and services The company aims to maximize the effect of ad distribution via DSP "Red" and "FreakOut," by utilizing the private DMP "MOTHER," an original analysis software which analyzes big data such as access data to each advertiser's website, ad distribution data, membership data, and purchase data. "Red" and "FreakOut" have various methods for ad distribution, in order for advertisers to target prospective customers. In detail, they distribute ads that choose targets based on the behaviors of consumers using the following methods: (1) methods such as "Audience Expansion" for reaching "those who do not know the advertiser's products/services (prospective customers)," (2) methods such as "Keyword Match" for reaching "those who know advertisers' products/services (people who have interests)," and (3) methods such as "Retargeting" for promoting "those who want advertisers' products/services (expected customers)" to take action by purchasing products, requesting a brochure, getting registered as a member, etc. ② DMP business DMP stands for Data Management Platform, which is a data integration management tool for managing and analyzing the data of access to advertisers' websites, ad distribution, membership, etc. and enabling the use of the data in cooperation with data utilization channels, for email distribution, analysis, surveys, etc. In order to actualize the optimization of data marketing conducted by client companies and ad agencies, the company collects vast amounts of data from data providers, including media companies and research firms, and stores and analyzes data on DMP to provide the unique DMP for an enormous amount of public data, support the development of the DMP for large-scale portal sites, and offer consulting services utilizing the company's own data with optimal marketing channels, etc. ③ Other business This is a new business segment established in the term ended Sep. 2017, as the company shifted to the holdings company system. New businesses and business administration in the group companies inside and outside Japan are included in this segment. 【1-5 Group companies】 Under the management of the holdings company FreakOut Holdings, inc., establishes the corporate group. As for the overseas business, they have been mainly operating the native ad platform business with FreakOut Pte. Ltd. (headquartered in Singapore) serving as the headquarters. Since a native ad platform was released for the first time in Southeast Asia in 2015, the company has formed tie-ups with mainly the leading media in each country, and currently over 700 advertisers use the service of FreakOut. In July 2017, the company entered the Hong Kong market and established local subsidiaries in Vietnam, Malaysia, the Philippines, India, and Iran as new bases in Southeast Asia, following the existing ones in Singapore, Thailand, and Indonesia. Also, the company actively promotes M&A and forms alliances with the premium media in each country. It also offers the native ad platform in Asia and the Middle East. It also started business operations in Russia, the United Arab Emirates and Australia in the term ended Sep. 2018. It will provide services in 16 countries around the world, mainly in Asia. Furthermore, it plans to develop several bases in the term ending Sep. 2019. 【1-6 Characteristics and strengths】 As mentioned above, in order to distribute ads to the right users and submit a bid at the best price, it is necessary to develop an extremely advanced algorithm and repeat machine learning based on a large amount of data to actualize "smart artificial intelligence (AI)." At this point, the company possesses a significant competitive advantage. Having good ad spaces is its advantage as well. ① The largest amount of data Since the company commercialized the RTB technology for the first time in Japan, it possesses the largest amount of data in Japan. No matter how superior AI is, it will not grow to a practical and effective AI, unless machine learning is repeated with vast amounts of data. The company, which "knows about smartphone owners the most in Japan", with accurate data of 3 million users (5%) out of 60 million mobile users in Japan, it is possible to predict the thoughts and behaviors of the remaining 57 million users according to age and gender. Therefore, the satisfaction level of advertisers towards this strength of the company is high. ② Securing of good-quality ad spaces After RTB debuted, the "smartness" of a platform in an open environment has become important, whereas the gap in technology levels shrank over a certain period of time. As a result, the quality and exclusiveness of ad spaces, in particular, became the major competitive conditions in the mobile field again. In these circumstances, LINE Corporation and FreakOut Holdings hold 50.4% and 49.5%, respectively, of M. T. Burn Inc., the company's equity-method affiliate. Accordingly, FreakOut Holdings exclusively secures the ad spaces of LINE apps and presents high performance to advertisers. ③ Active investment for developing a superior algorithm For targeting advertisement, it is possible to win a bid by submitting the highest bid. As the company aims to expand sales, it wants to purchase as many ad spaces as possible, but if ad performance is poor, advertisers will not evaluate it highly, which will make it difficult to continue transactions with them. This indicates that it is essential to produce reasonable results for clients even when the ad cost was high. Therefore, the company has developed "a model for predicting rate of clicking" and "a model for predicting rate of conversion," boosting the capability of giving proposals to advertisers, and constantly carries out investment for further improving the accuracy of these models. The data science team of the company has top-level abilities among Japanese mid-sized companies, so their accumulated active investment is leading to continuous high performance. ④ Securing of talented personnel In a survey called "popularity ranking of companies among the students of Tokyo and Kyoto Universities" conducted by a magazine, the company has been ranked high along with some renowned large IT companies, foreign financial institutions and other global manufacturers at 28th, which is 79 ranks higher than the previous year's 107th rank. In addition to active utilization of the internship system to increase the contact points with students, possibilities to work in wider and new fields such as HR tech and Fintech despite having the adverting as the core business and being able to work with some renowned and excellent engineers of the industry as an engineer, are reasons why they are attracted to the company. Also, the company considers the incentive system that evaluates the challenges to the maximum is one of the factors for its popularity.

 

 

Sales increased 22.7% year on year, while EBITDA decreased 40.9% year on year. Sales were 14,745 million yen, up 22.7% year on year. In the domestic Internet advertising market, Red, a mobile marketing platform, continued to perform well and led the business results. Overseas, the advertising business has grown substantially and is strong including companies acquired by M&A. In the new business, contribution of sales of FinTech etc. by Gardia Co., Ltd. has begun. Quarterly results also show steady growth as shown below. The operating loss was 532 million yen. The business in Indonesia, an existing base of the company, has increased the surplus for the full year. The businesses in Thailand and Taiwan also achieved a single-month surplus. Meanwhile, costs still exceed revenue for new projects and overseas businesses. Selling, general and administrative expenses are increasing centered on personnel expenses as shown below. Outside of operating income/loss, equity in earnings of affiliates increased from 614 million yen in the previous fiscal year to 891 million yen. For IRIS, application of the equity method has started from the second half. Despite foreign exchange losses, ordinary income decreased to 307 million yen, down 74.6% year on year. EBITDA decreased to 843 million yen, down 40.9% year on year. This is because of the investments in new businesses, and transient cost. Trends of each quarter are as follows. Expenses associated with the replacement of impairment system of securities invested in the past were recorded as extraordinary losses, and profit attributable to owners of parent decreased to 25 million yen, down 97.0% year on year. In comparison with company forecasts, sales exceeded the estimate considerably in the overseas advertising business. However, in the domestic advertising business, delays in the contribution of "Red for Publishers" revenue and timing of "Poets" release occurred, and as a result, sales were below the estimate. Regarding EBITDA, the company could not reach the forecast because of the downward revenue factors of the domestic advertising business as well as upfront investments including personnel investment in Singapore. DSP Business Net sales increased to 12,995 million yen, up 21.4% year on year, while segment profit decreased to 209 million, down 73.0% year on year. The company offered DSP platforms "Red" and "FreakOut", a native advertising platform, and the Trading Desk. It also worked on maximizing advertisement effectiveness of advertisers and maximizing revenue of medium companies through "Red for Publishers (RFP)". "Red", a DSP platform for mobile marketing, continued to lead the business performance. The business of overseas subsidiaries was also strong. For overseas subsidiaries, the company made upfront investments to establish new bases and secure personnel for further leaps. DMP Business Net sales increased to 1,646 million yen, up 20.5% year on year, while the segment profit decreased to 62 million yen, down 50.8% year on year. Performance has expanded against the backdrop of increased awareness on data marketing using data and an increase in the number of companies that have introduced the data management platform. Other business Net sales increased to 766 million yen, up 80.5% year on year, while the segment loss was 604 million yen (the segment loss was 299 million yen in the previous fiscal year). The company has made upfront investments to strengthen the management system following the expansion of overseas bases. Qualitative situation in Japan and overseas ≪Domestic advertising business≫ Aiming to create a new growth engine, the company has been operating business with in-house manufactured products "RFP" and "Poets" for about a year. Regarding "RFP", two publishers of the largest size ever joined, but it took time to incorporate it in their system. However, compared with the existing five publishers, these two new companies are extremely large publishers in terms of size, business scale and traffic. Therefore, for the term ending Sep. 2019, its contribution can be expected. As for "Poets", it has been growing very steadily since its release in the past three quarters. According to the company, it has grown to the size that will fully cover the sales contribution rate of media with large handling volume that has been on the declining trend in the term ending Sep. 2019. ≪Overseas advertising business≫ Regarding the existing bases, both sales and profits are steadily growing. The business in Indonesia remains in surplus, and Thailand and Taiwan are also making a surplus on a monthly basis, and the sales are very strong. In addition, although the M&A base became red due to a transient factor in the third quarter, it was solved successfully and the fourth quarter was in surplus. Meanwhile, large expenses are observed in the intermediate holding company in Singapore and the new base. Total assets grew 5,644 million yen from the end of the previous term to 15,636 million yen. This is largely due to an increase in trade receivables by 848 million yen, an increase in unearned income by 1,233 million yen, and an increase due to purchase of investment securities, etc. by 3,146 million yen. Liabilities augmented 5,463 million yen from the end of the previous term to 11,141 million yen. This is largely due to an issuance in convertible bond-type bonds with subscription rights to shares by 4,500 million yen and an increase in short-term borrowings by 631 million yen. Net assets grew 180 million yen from the end of the previous term to 4,495 million yen. This is largely due to an increase in capital and capital surplus by 520 million yen and an increase in treasury stock due to acquisition of treasury shares by 305 million yen. As a result, capital-to-asset ratio became 26.9% (40.8% at the end of the previous term). Operating CF was a cash outflow of 1,921 million yen (cash inflow of 317 million yen in the previous term). This was mainly due to an increase in trade payables by 382 million yen, an increase in other liabilities by 373 million yen, an increase in equity method investment income by 891 million yen and an increase in trade receivables by 745 million yen and an increase in unearned income by 1,348 million yen. Investing CF was cash outflow of 3,157 million yen (cash outflow of 2,729 million yen in the previous term). This was mainly due to acquisition of investment securities of 2,315 million yen, acquisition of shares of affiliates of 227 million yen, and cash outflow of 426 million yen due to the execution of loans. Financing CF was a cash inflow of 5,062 million yen (cash inflow of 2,321 million yen in the previous term). This was mainly due to inflow of funds of 4,483 million yen because of the issuance of convertible bond-type bonds with stock acquisition rights and capital inflow of 518 million yen due to the issuance of stocks.

 

 

Sales and ordinary income are estimated to grow 28.9% and 192.6%, respectively, year on year. Sales are forecasted to grow 28.9% year on year to 19 billion yen. Ordinary income is estimated to increase to 0.9 billion yen, up 192.6% year on year, and EBITDA is expected to grow to 1.4 billion yen, up 65.9% year on year. In the domestic Internet advertising market, which is expected to continue to grow, the company is intending to aggressively promote and accelerate growth of the business in the advertising platform field, which supports maximizing revenue of media, centered on "RFP" and "Poets", in addition to its core DSP and DMP businesses. Although revenue contribution from "RFP" which is to support advertising platform development and operation was delayed, it has already been decided that they would be distributed to multiple premium media in the term ending Sep. 2019. In the overseas Internet advertising market that is showing remarkable growth, the expansion in the major countries in Southeast Asia and South Asia and establishment of relations with major media gained certain results in the term ended Sep. 2018. In the term ending Sep. 2019, the company will continue investing in newly expanded countries, and promote not only growth of individual business in each country but also expansion of sales and enhancing profitability by actively supporting advertisement distribution and advertisement operation of global enterprises, mainly in Asia area. (2)Medium-term plan FreakOut HD aims to achieve "sales of 33 billion yen and an EBITDA of 3 billion yen" in the term ending Sep. 2020. In the coming two years, the company will strive to increase sales and EBITDA by 2.8 times and 2.1 times, respectively, from the results for the term ended Sep. 2017. It is expected that the sales of domestic ads will grow steadily while the overseas ad business will serve as a growth driver.

 

 

◎ Overseas Business * There still remain many opportunities in the market. The company will continue to actively invest, as they feel that there is a lot of potential for growth. * The company currently operates business in 16 countries, including Japan, and has a team of local employees in each of those countries. * Since 2017, the company has been working to increase solutions in parallel with target area expansion. One of their initiatives is to conduct M&As. In 2017, they acquired five companies which will act as local agencies. The company plans to continue M&A activities. * Companies acquired through M&As have been steadily growing. The company will maximize group value by developing in-house products in conjunction with solutions from the acquired companies. In addition to M&As, the company has expanded their range of solutions in various other ways, such as setting up teams to manage global media and working together with investment partners and group companies to create exclusive products. From term ending Sep. 2019 onward, they plan to focus on combining these efforts in order to exert powerful synergy. * Regarding area development, the company has recently expanded into Russia, Dubai, and Australia. They began expanding into China in Apr. 2018. They currently offer services in 16 countries, including Japan. * Starting with Indonesia, Thailand, and Turkey in 2015, the company then expanded into Taiwan; and in the last two years has grown throughout Southeast Asia and India. By establishing bases in developing countries first, they were able to keep labor costs and other costs low, while gaining experience and developing methods to establish future bases more effectively. * Using this experience, the company is expanding into China, Russia, Australia, and Dubai, which are considered to be developed countries. Although this is more difficult and costly than it is in developing countries, the company plans to make full use of the know-how and profit-making methods they gained in developing countries in order to rapidly set up business in the developed countries as well. * Regarding the construction of additional bases in Asia, for the most part, the company already has enough presence in the developed countries and developing countries with high potential; however there are still some countries that could benefit from further expansion in the term ending Sep. 2019 onward. * As for solution development, in 2017, FreakOut acquired one agency in Taiwan, two in Indonesia, and two in Thailand. With their resources and connections to the local media, the range of solutions that can be offered by the company group is growing. The company is closely tied to the rest of the Group, and transactions within the Group are gradually increasing. The company also makes investments and alliances in order to increase the number of solutions that can be provided exclusively by the FreakOut Group. * One example of them is "Silver Push," an India-based investment partner of the company. Silver Push has technology for posting advertisements in real time by linking with television commercials. This technology is exclusively sold in Southeast Asia, and is very useful in markets with a high demand for brand advertisement. The company's investment strategy also includes taking a hands-on approach in supporting the global expansion of Silver Push, rather than simply providing capital. * Another example is "SPLIT." In Singapore, the company IRIS conducts business involving digital signage installed in taxis. IRIS is currently partnering with another company, Grab, but the sales portion is controlled exclusively by FreakOut, which has begun marketing it in Southeast Asia, mainly Singapore. * The company is also improving its operational capabilities. Rather than each base operating individually by utilizing Facebook and Google to globally share advertising media, FreakOut strives to raise efficiency as a whole. Thanks to this, they are now able to propose global advertising even in countries where it was previously not possible. * Asian markets are in a very strong oligopoly state by global players, particularly Europe and the U.S. Local companies in Asia are not able to provide services to multiple countries at the same quality and standards as companies in Europe and the U.S. FreakOut will build teams who are deeply rooted in the Asian region and have a firm understanding of Asia, positioning themselves as developers of one-stop solutions for local advertisers with the same quality of service as major global companies. * Companies local to Asia face a great many hurdles when trying to establish bases in multiple countries due to problem of financial power, and it is often difficult for them to expand business due to insufficient cash flow. In terms of capital and corporate strength, it is difficult for these local companies to operate on the same level as, for example, the company who is listed on the stock market in Japan and expanding to multi countries in Asia. The company views this situation as an opportunity for growth. * In Japan, the company mainly focuses on developing in-house technology and products, but in the Asian market, in addition to selling their own products, they found the opportunity to develop the digital marketing environment itself. * Although there will be fewer new bases established in term ending Sep. 2019, the company will continue to actively invest in team-building and expanding solutions. ◎ Investment business * Impairment loss was recorded in term ended Sep. 2018. When it comes to investment, it is common to record impairment loss before yielding profits from successful investments. * The company continues to invest actively, particularly in private companies. Of the 23 companies they are currently investing in, only two recorded an impairment loss. Although the other 21 companies are not yet recording profits, they have been growing steadily. The company plans to continue these kinds of investment activities. * Because these companies are private, they may remain in the red for some time. However, in the past, there were two other companies in the same situation that are now turning profits, so there is a possibility that the two companies will become profitable. For the time being, the company declared an impairment loss of 170 million yen. * Because FreakOut has been investing in very successful private companies, they plan to expand investment activities even further, as well as considering commercialization. * As the company has been pursuing a great deal of overseas expansion, particularly in Asian countries, they receive many offers from Japanese companies with great potential as investment, who express a desire to work with FreakOut Group in expanding overseas after success in Japan. Compared to similarly-sized companies, the number of offers that FreakOut receives is overwhelmingly large. They are also very successful in actually providing assistance to such companies. * For example, after FreakOut invested in "Progate," a company that provides online training for programming, Progate established bases in the U.S. and India, and is now rapidly expanding overseas. This is one of the defining characteristics of their portfolio, and their investing activities reach beyond Japan as well. They are teaming up with "Silver Push," a company in India which was introduced through the overseas business, in order to expand into nearby Asian countries. The company believes that by collaborating with these companies, it will increase value for investment partners, which can lead to a big exit in the future.

 

 

The failure to reach the targets in the term ended Sep. 2018 was because large-scale projects were shifted to the next fiscal year. Sales steadily expanded both in Japan and overseas, and the company's growth potential remains high. Especially the overseas business is growing rapidly involving M&A and looks very promising. While continuing many upfront investments including domestic businesses, the company is securing a surplus in net income. The challenge for achieving the Mid-term Plan will be to gain profit. In particular, we would like to expect the contribution from consolidation of new investment destinations. We would also like to pay attention to the progress of new projects including IRIS and Fintech and when the upfront investments show the results.

 

 

◎ Corporate Governance Report Last modified: February 15, 2018. <Basic Policy> The company believes that improving management efficiency, management soundness, transparency and compliance will enhance the corporate value from a long-term perspective, and by doing so, it can return profits to many stakeholders including shareholders. In order to enhance the management soundness, transparency and compliance, it is important to build an organizational structure that can respond swiftly and flexibly to changes in the business environment while improving the corporate governance. The company carries out efficient management based on the viewpoints of shareholder who are the owners of the company. <Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)> It is mentioned that "our company follows all of the basic principles of the Corporate Governance Code."