Business risk

Business environment risks

1. Growth potential of the Internet industry

Our group of companies provides a wide variety of services in Japan and abroad, predominantly in the Internet industry. With the growing number of Internet users worldwide and the attendant growth of relevant markets, the number of users of the group's services is poised to continue expanding. Where, due to unforeseen factors such as the introduction of new legal regulations and delays in innovation, the growth of the Internet industry as a whole and its related markets is negatively affected, causing the number of users of our group’s service to not steadily grow as planned, it may affect the performance and outcomes of the business.

2. Trends in the Internet advertising market

While the share of revenue represented by our online advertising business remains consistent, changes to the online advertising market or wider economy affect the degree to which advertisers traffic advertisements. If these externalities render us unable to secure the profits initially forecast, it may affect the performance and outcomes of the business.

3. Competition

With growing numbers of Internet users, more and more firms are entering the Internet sector, with product categories and services offered becoming more wide-ranging in scope. Our group of companies maintains a policy of seeking to meet client needs and using this to expand our business, but there is the possibility of these plans not delivering the outcomes expected or, in the case of competitors emerging who offer innovative services or other competitive products, reduced group revenue. In addition, there may be cases where the group is impelled to decrease the cost of its services or expend a greater outlay on advertising in order to obtain more users. These cases may affect the performance and outcomes of the business.

4. Technology changes to industry

The Internet sector, in which our group of companies is engaged, is subject to rapid technological change and the frequent introduction of new products and services, which requires adapting to these changes. However, if our group of companies is for some reason unable to respond in a timely fashion to these changes, it may cause the obsolescence of certain services or reduced competitiveness. Even where the company is able to respond to said changes, it may require improvements or changes to existing systems or the development of new ones, which may in turn require the outlay of additional development or other costs and affect the performance and outcomes of the business.

Risks to nature of business

1. Dependence on specific suppliers/clients

Revenue from sales to Google, Inc., one of our key partners in our ad platform business, represented 15.4% of consolidated revenue across our group of companies for the September 2017 fiscal year, and 10.4% for the September 2018 fiscal year. We intend to continue pursuing collegial relationships with our partners, but in the event that, such as owing to changes to circumstances or initiatives of those firms, we experience a drastic decline in business with them, it may affect the performance and outcomes of the business.

2. Ad platform business

The online advertising market in which our group of companies is active has adopted a range of techniques and technologies to more effectively display advertisements and sell them to advertisers. We are also actively pursuing ways of improving delivery systems and adding new features to them in order to retain and increase our competitive edge. However, in the event that new techniques and technologies surrounding online advertising emerge, causing the ad trafficking systems offered by the group’s companies to become less competitive, it may affect the performance and outcomes of the business.

3. Point media business

Our point media business is gaining new users through the provision of a point service that issues points and allows for exchanging them for rewards. Points issuance systems are not unique to us, but something offered by a great many companies. In the event of major changes to the landscape of service users or preferences for point usage, it may affect the performance and outcomes of the business. In addition, points are issued not only against company services, but can be exchanged for other services provided by entities with whom we partner. Where the strategy or policies of a business operator with whom we partner are subject to change for some reason, it may affect the performance or outcomes of the group’s business.

4. Expansion of business scope

Our group of companies maintains the “360 Degree Sugoi” policy as a fundamental ethos in our approach to management. We endeavor that all initiatives drive back to this idea, and develop many new services and enter new service domains with alacrity in order to continue sustained growth. Realizing these new business developments perforce implies that the group of companies may be subject to risks inherent to those business activities, or others not indicated herein. In addition, entering new sectors requires hiring new personnel, acquiring and developing systems, revamping the sales force, and other ongoing and additional investments; it takes a long outlay of time for a new business venture to develop stable profitability. The speed with which a given market we have entered grows, or the scope of that growth, may lead to outcomes that differ from those initially forecast, impelling the company to suspend business, withdraw from that sector, dispose of assets related to that venture, or pay back debt, leading to losses.

5. Use of personal information

The majority of our group businesses employ unique identifiers and cookies (see note) to provide targeted advertising and information while respecting the right to privacy and safeguarding the personal information of our clients and customers. Pursuant to new international regulations concerning the use of transnational data, where changes are made to existing laws concerning the use of personal and private information, it may affect the performance and outcomes of the business.
Note: Cookies are a piece of data provided by a web site operator and temporarily stored on the user’s computer via the web site being accessed. The use of saved cookies allows for recording information such as whether the visitor is accessing the site from the same browser, the date and time of the visit, the number of cumulative visits, and activity within the site.

6. Investment risk

Per our business policy, the group of companies invests in Internet-related concerns. These investments are being made out of an expectation that they will achieve business synergy between our firms and those we invest in, but the business performance of said firms may lead to the inability to derive a return on investment or a paper loss resulting from asset impairment accounting, which may affect the performance and outcomes of the business.

7. Business partnerships, M&A

The group-wide policy advocates the use of various business ventures, capital partnerships, mergers and acquisitions, and other operations as a means of effectively expanding the business. By fusing the expertise and capacities of our group companies and the partners we acquire, we aim to achieve greater synergy for all parties involved. However, where initially forecast outcomes are not achieved, or where said alliances are terminated, it may affect the performance and financial position of the business. In the case of mergers and acquisitions, we undertake considerable prior audits of the financial situation of the other party and the contractual terms of agreement in order to assess possible risks before proceeding, but in the event of sudden liabilities or unaccounted-for liabilities being found after the merger or acquisition, or where the business does not develop to plan, it may require writing off the goodwill as a loss, which may affect the performance and financial position of the business.

Risks to operational structure of business

1. Dependence on specific managers

Where an employee of the company with specialized technical knowledge, experience, or expertise, including but not limited to the representative director and CEO, officers, and executives, retires or resigns for some reason and a successor cannot be readily appointed, it may affect the company’s performance and financial position.

2. Allocating and training talented personnel

Our group businesses rely on specialized personnel dedicated to not only building and maintaining systems, but conversant in the various sectors in which we operate, which implies continued acquisition of human resources to match scaling of the business. At present, we have not had any impediments with respect to acquiring talent, but competition in the human resources market or changing market needs in various sectors may make it difficult to secure talented personnel or cause the loss of existing personnel to other firms, which may in turn affect the performance and financial position of the business.

3. Internal management system

Seeking to maximize the corporate value of the group of companies, we employ a range of corporate governance measures. In addition, in order to ensure proper operations and the reliability of financial statements, a variety of systems and teams are organized, maintained, and operated towards effective internal control. However, where this system of internal control is unable to keep pace with rapid growth or expansion of the business, it may cause proper operations to be impeded and affect the performance and financial position of the business.

Compliance-related risks

1. Applicability of legal restrictions/regulations

The businesses operated by our group of companies are subject to legal provisions like the Act on Prohibition of Unauthorized Computer Access, Act on the Limitation of Liability for Damages of Specified Telecommunications Service Providers and the Right to Demand Disclosure of Identification Information of the Senders, Act on Specified Commercial Transactions, Act on Regulation of Transmission of Specified Electronic Mail, Consumer Contract Act, Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors, Telecommunications Business Act, Employment Security Act, Act on Development of an Environment that Provides Safe and Secure Internet Use for Young People, audit and oversight policies from government offices, and other applicable guidelines and regulations. In the event that legal or regulatory amendments, the revocation or disposal of approval from relevant government organs, or the creation of new, or amendment to existing, guidelines or voluntary rules affects the handling of personal information, point issuance, and management, or imposes other restrictions on aspects of the group’s activities, it may affect the performance and financial position of the business.

2. Possibility of litigation

Where, pursuant to developing its business, our group is subject to incidents, disputes, or illegal acts by vendors, purchasers, participants, and other users, where third-party illegal acts or the dissemination of harmful information or other content infringe on the rights of third parties, or where system malfunction causes damage to vendors, purchasers, participants, and other third parties or users, our group of companies may be subject to a lawsuit or other claim. The Internet business itself is still new, so there may be newly emergent business risks or latent risks that come to the fore in the future, resulting in litigation that could not be forecast at this time. Where the group of companies has its rights infringed on by a third party or sustains damages, there may be the possibility of our not being protected from said third-party infringement, or requiring the use of a considerable outlay of funds to protect the rights of the group from lawsuits or other litigation. In said case, the nature of the suit and the amount of damages sought may affect the group’s business, performance, and financial position.

Intellectual property rights and other risks

Our understanding is that the software, systems, and content used for processes pertaining to the group’s business activities do not infringe on the intellectual property rights of third parties. However, there is the possibility of unforeseen circumstances or other deficiencies causing infringement on third party intellectual property rights and the technology and content in use by the company being cited as claims for damages, which may result in additional expenses or loss being incurred for legal defense against the claim, or the resolution or settlement thereof. If future restrictions are imposed on the provision of specific content or services by the group, or use of specific technologies, it may affect the performance and financial position of the business.

Information security risks

As an operator handling customers’ personal information, the group is subject to the provisions of the Act on the Protection of Personal Information. We currently require members to register to use our primary services, and we obtain information that can be used to identify individuals, such as address, name, sex, and age. We exercise the utmost standard of care with respect to our privacy policy and the protection and management of personal information, and fully comply with laws, statutes, regulations, and policies in place by government organs and industry bodies as concern this information, and manage it accordingly. Our firm and its primary subsidiaries have obtained Privacy Mark certification, which remains in effect as of this writing. However, this does not imply that there is no possibility of the leak of information through viruses, unauthorized external access, system defects, error on the part of personnel or partners, and said cases may result in legal disputes or trust in the group declining, in which case it may affect the performance and outcomes of the business.

Risks to telecommunication systems and other systems

The majority of the businesses under the purview of our group of companies rely on telecommunications networks used to link online systems. For this reason, Internet connections and server management, among other key networking related processes, are outsourced to specialized contractors. Natural disasters, accidents, temporary system overloads, such as through increased access, malfunction of telecommunications networks at outsourced contractors, or hardware or software malfunction or defect at our group of companies, our partners, or members may render group or provider services non-functional, impede the regular provision of services, or cause systems to halt. There is also the possibility of viruses, unauthorized external access to systems, or other criminal acts, or fault of company personnel causing the overwriting, rendering non-functional, or misuse of group services, or the deletion or unauthorized theft of data. The suspension of service arising from server malfunction or defects may cause the loss of revenue opportunities, decreased trust in the company’s systems, or claims for damages, as well as administrative measures being imposed by a supervisory government authority. In the case of unauthorized use of company services, and where a party against whom a claim of damages cannot be sought, this may result in net damages or loss to the company. In such cases, this may affect the group's business performance and outcomes.

Disaster, conflict, and accident related risks

Earthquakes, typhoons, tsunami, and other natural disasters, fire, power outages, the spread of unknown infectious diseases, international disputes, or other incidents may have a significant impact on the operation of our corporate group’s activities. A large natural disaster to the Tokyo metropolitan area, which is one of the principal areas of business for our group of companies, may cause the provision of our services to be temporarily suspended and damage the trust in and brand image of the affected companies, as well as our corporate group performance and financial position. While our group of companies has taken due precautions with respect to considering the creation of business continuity planning measures and initiatives to cope with such a natural disaster, there is no guarantee that the effects of such disasters could be fully prevented, and the resulting physical or human damages and toll may render the continued operation of the business difficult or impossible. Earthquakes, typhoons, tsunami, and other natural disasters, fire, power outages, the spread of unknown infectious diseases, international disputes, or other incidents may have a significant impact on the operation of our corporate group’s activities.

Risk of dilution of share value via exercise of stock options

We pursue management of the business with a view to improving its corporate value and issue stock options to company personnel in order to foster interest in contributing to improved group-wide performance. As of September 30, 2018, the total number of potential new shares through the exercise of stock options is 812,600, representing 6.8% of the total shares outstanding (11,890,346). Where said stock options are exercised, the value of a share in the company may be diluted.