Risks Related to Business Operations
With CARTA HOLDINGS Co., Ltd. as the holding company that manages and oversees group companies in our Group, each group company is involved in a wide range of businesses both domestically and internationally. The execution of these corporate activities involves various risks. As of the end of the current consolidated fiscal year, the following are the key risks that could potentially have a significant impact on investors’ decision-making. It should be noted that these do not cover all the risks that may occur within our Group companies. Furthermore, unless otherwise stated, these judgments are based on the situation as of the end of the current consolidated fiscal year.
Risks Related to Business Environment
Market Trends Risks
Our Group primarily provides various services in the internet-related market, both domestically (in Japan) and internationally. While we anticipate the continued proliferation and expansion of internet usage, as well as increased corporate internet adoption in economic activities, if circumstances arise that hinder the growth of the internet-related market, it may impact our Group's business and performance. Additionally, our Group relies on internet advertising as a significant source of revenue, and internet advertising is subject to fluctuations due to changes in market conditions and economic trends. Such external environmental changes may result in an inability to secure the anticipated revenue, affecting our Group's business and performance. Furthermore, concerns related to 'brand safety' (ensuring the quality of advertising placements to maintain the safety of advertisers' brands) or other factors that hinder market expansion could also potentially impact our Group's business and performance. Therefore, our Group continuously strives to improve and enhance services and products to provide high added value to customers and users, aiming to maintain and expand our customers and user base.
Driven by the increasing number of internet users, many companies have entered the internet-related business sector, offering a wide variety of product categories and service types. Consequently, our Group is constantly aware of competition and regularly adds new features to existing services and develops new services. However, there is a possibility that these efforts may not yield the expected results, or that there may be a decrease in our Group's revenue, as a result of competitive companies introducing groundbreaking services or other competitive factors. Additionally, the cost of services may increase due to a decrease in service prices or increased advertising and promotional expenses for user acquisition, potentially impacting our Group's business and performance.
Our Group's operations are subject to various regulations, including but not limited to laws such as the 'Act on Prohibition of Unauthorized Access,' the 'Act on Limitation of Liability for Damages of Specified Telecommunications Service Providers and the Disclosure of Information of the Senders,' the 'Act against Unjustifiable Premiums and Misleading Representations,' the 'Law Concerning the Quality, Efficacy and Safety of Drugs and Medical Devices,' the 'Act on Specified Commercial Transactions,' the 'Act on the Protection of Personal Information,' the 'Act on the Proper Transmission of Specified Electronic Mail,' the 'Consumer Contract Act,' the 'Subcontracting Payment Delay Prevention Act,' the 'Employment Security Act,' the 'Act on the Development of an Environment for Children to Safely Use the Internet,' and the 'Payment Services Act.' Changes or amendments to these laws, cancellations, or penalties for permits or approvals by regulatory authorities, or the development or revision of new guidelines or voluntary rules may result in new constraints on our Group's business or the strengthening of existing regulations, potentially impacting our Group's business and performance. Therefore, our Group strives to comply with various laws and collaborates with relevant parties to monitor regulatory trends, implement various measures, and engage in awareness-raising activities regarding regulatory changes.
Parent Company Risks
We entered into a capital and business alliance agreement with Dentsu Group Inc., our parent company, on October 31, 2018, and we have been actively working on various initiatives to build a positive relationship with the parent company group and maximize business synergies based on this agreement. However, there is a possibility that the expected benefits may not be realized due to changes in the parent company group's business strategy, unforeseen events occurring subsequently, or changes in the business environment, among other factors. Additionally, there is a possibility that the capital and business alliance may terminate for some reason in the future. In such cases, it may impact our Group's business and performance.
Risks Related to Business Operations
Risk Related to Dependency on Specific Business Partners
In our digital marketing business, a significant portion of our revenue is generated from transactions with affiliated companies within Dentsu Group Inc. If, for any reason, there are changes in the volume of transactions or the terms of transactions with these companies, it could potentially impact the business and performance of our Group.
Risk Related to Digital Marketing Business
In our Group's digital marketing business, we act as intermediaries in the buying and selling of advertising space, facilitating transactions between media companies and advertising agencies/advertisers. In recent years, there has been a shift from reserved advertising to performance-based advertising, along with a shift of consumers to mobile platforms, leading to increased complexity in internet advertising transactions. Therefore, our Group is actively diversifying and adding value to revenue sources in the growing field of performance-based advertising. However, in this environment, if we fail to meet the needs of advertising agencies and advertisers with effective planning or fail to deliver suitable advertising, it could result in the loss of clients and a reduction in transaction volume, impacting the business and performance of our Group. Furthermore, if sourcing transactions from major media companies are not sustained or if transaction terms are altered, it could also affect our Group's business and performance.
Risk Related to E-commerce (EC) Business
In our Group's e-commerce (EC) business, we comply with relevant laws and regulations and maintain strict product management and contractual agreements with suppliers. However, if there are legal violations or defects in products and issues arise regarding the safety of these products, it could lead to liability for damages and loss of trust, potentially impacting our Group's business and performance.
Risk Related to Investment Business
Our Group conducts investments in internet-related companies in accordance with our business strategy. These investments are executed with the expectation of achieving synergies and other business benefits with the respective investee companies. However, depending on the future performance of these investee companies, there is a possibility that we may not be able to recover these investments or that they may lead to impairment losses in our accounting, impacting our Group's performance.
Risks Related to Business Expansion
Our Group continues to achieve business growth by creating numerous new services and entering new business domains swiftly. However, such business expansion introduces specific risks inherent to those businesses, and even risks not explicitly mentioned in this section may become risk factors for our Group. Furthermore, entering new businesses often requires additional investments, such as hiring new talent, purchasing or developing systems, and strengthening sales structures. It may also take an extended period for new businesses to generate stable revenue.
Moreover, depending on the speed and scale of market expansion and growth of newly entered businesses, it may not be possible to achieve the initially expected results. In such cases, it might be necessary to suspend or withdraw from these businesses, resulting in losses due to the disposal or write-off of assets related to those businesses. In such instances, there is a potential impact on our Group's business and performance.
Risk Related to Mergers and Acquisitions (M&A)
In our marketing solutions business, our Group acts as intermediaries in the buying and selling of advertising space, facilitating transactions between media companies and advertising agencies/advertisers. In recent years, there has been a shift from reserved advertising to performance-based advertising, along with a shift of consumers to mobile platforms, leading to increased complexity in internet advertising transactions. Therefore, our Group actively diversifies and adds value to revenue sources in the growing field of performance-based advertising. However, in this environment, our Group positions M&A (mergers and acquisitions) as an important growth strategy and actively promotes it. We establish a fundamental policy for M&A, evaluate target companies based on factors such as profitability, growth potential, and capital cost considerations, and thoroughly assess their compatibility with our existing business. Furthermore, we actively consider M&A for cases where there is an expected synergy between our Group and the target company, especially in the area of vertical integration strategy in the advertising field. We aim to create greater synergy by integrating our Group's business operations and know-how with that of the target company. Nevertheless, if the expected benefits fail to materialize initially, it could potentially impact our Group's business and performance.
Additionally, we conduct detailed due diligence on the financial status, contractual relationships, and other aspects of target companies before making acquisition decisions. However, if issues arise after the acquisition, such as the emergence of contingent liabilities or previously unrecognized obligations, or if business developments do not proceed as planned, or if there is a need to recognize impairment losses on goodwill, it could potentially impact our Group's business and performance.
Furthermore, when a new business is added to our Group through M&A, it introduces specific risk factors inherent to that business. If we are unable to meet the needs of advertising agencies and advertisers with effective planning or fail to deliver suitable advertising, it could result in the loss of clients and a reduction in transaction volume, impacting our Group's business and performance. Additionally, if sourcing transactions from major media companies are not sustained or if transaction terms are altered, it could also affect our Group's business and performance.
Risks Related to Business Operations
Corporate Governance Risk
Our Group has established, maintained, and operated internal controls to ensure the proper conduct of business and the reliability of financial reporting. In addition, our board of directors includes four independent outside directors to strengthen oversight of management decision-making and business execution. Furthermore, we have set up and operate an internal audit department directly under the President and CEO to enhance legal and proper corporate governance. However, if corporate governance does not function as intended and leads to governance deficiencies or if the rapid expansion of our business surpasses our ability to build an adequate internal management system, it may become challenging to conduct business appropriately, potentially affecting our Group's business and performance.
Dependency on Specific Executives and Talent Acquisition Risk
In our Group's business, we require not only technical experts for system development and maintenance but also professionals with expertise in various business fields. We recognize the ongoing need for talent acquisition to support the expansion of our business and continuously implement various measures for talent recruitment and development. However, in the future, intense competition for talent in various business fields and regions or changes in market demands could make it difficult to secure highly qualified personnel or lead to the external attrition of our existing talent.
Additionally, if executives, including the CEO and president, or senior employees with specialized knowledge, skills, and experience were to retire or leave for any reason, and if finding suitable replacements becomes challenging, it could potentially impact our Group's business and performance.
Information Security, Communication Network System, and System-Related Risk
Our Group is committed to improving information security to provide customers and users with safe and secure services. We have obtained certification for the ISO 27001 information security management system to enhance information security, appropriate risk management, and business continuity, as well as improve operational efficiency. However, despite these efforts, there remains a possibility that our services may be disrupted or our systems may stop functioning due to factors such as natural disasters, accidents, temporary overloads from increased access, external network failures of outsourcing partners, or hardware or software defects in the equipment used by our Group, business partners, members, or other users. Furthermore, there is a risk of cybercrime, including intrusion into our systems from external sources through viruses or unauthorized means, or errors made by our employees, which could result in alterations to our service programs, system malfunctions, unauthorized use of our services, deletion or unauthorized acquisition of critical data, and more. Server outages or defects leading to transaction interruptions could result in revenue loss, reduced trust in our Group's systems, or damage claims, among other consequences. In the case of improper use of our services, if we cannot identify and pursue the responsible parties for damages, it will result in losses for our Group. In such cases, there is a potential impact on our Group's business and performance.
Risks Related to the Handling of Personal Information
Our Group operates as a personal information handler under the 'Act on the Protection of Personal Information' and is subject to the application of this law. Currently, some of our services require user registration, during which we collect information that can identify individual users, such as addresses, names, genders, and ages. Our Group places the utmost importance on the protection of privacy and personal information, and we diligently manage this information in accordance with relevant laws and guidelines established by government agencies or industry organizations, tailored to the nature of each service. Certain subsidiaries within our Group, which handle personal information, have obtained the 'privacy mark' certification, which they continue to hold as of the date of this submission. However, it is not possible to completely eliminate the risk of external intrusion into our systems through viruses, unauthorized means, system flaws, errors by employees or partners, external exposure of information due to natural disasters, etc. In such cases, there may be a risk of legal disputes or a decrease in our Group's reputation, potentially impacting our Group's business and performance.
Furthermore, in our Group's business, while respecting individuals' privacy rights, we use information such as Cookie data (note) and proprietary identifiers to provide users with beneficial advertisements and information. However, in the future, changes in laws related to the handling of personal information, including privacy, may occur due to the development of international rules for cross-border data. In such cases, there may be an impact on our Group's business and performance.
(Note) Cookie data refers to data temporarily written and stored by website providers on a visitor's PC or other devices through web browsers. It can record information such as the fact that a visit is from the same web browser, the visit date and time, the number of visits, and the browsing history within the website.
Risk Related to Intellectual Property Rights
Our Group strives to protect intellectual property rights in response to technological innovations in the internet industry and the expansion of intellectual property businesses. We also work on awareness and strengthening internal management systems to prevent our Group's officers from infringing on third-party intellectual property rights. However, unforeseen circumstances or errors may lead to the infringement of third-party intellectual property rights by our Group's technology, content, etc. As a result, rights holders may claim such infringements, leading to expenses or losses for defense or dispute resolution. Additionally, restrictions may be imposed on our Group's future provision of specific content or services or the use of certain technologies, which could impact our Group's business and performance.
Natural Disaster and Emergency Risk
In the event of natural disasters such as earthquakes, typhoons, tsunamis, accidents such as fires and power outages, or widespread outbreaks of infectious diseases like the recent novel coronavirus, our Group's business operations may be severely affected.
Moreover, if large-scale natural disasters were to occur in the Tokyo metropolitan area, where our Group's major business bases are located, it may result in temporary service interruptions that are beyond our control. In such cases, not only could our Group's reliability and brand image be damaged, but there may also be an impact on our Group's business and performance.
While our Group has been preparing for contingencies in the event of natural disasters and similar situations, it is impossible to guarantee complete prevention of the impact of various disasters. In cases where physical or human damage from various disasters is significant, the continued operation of our business may become difficult or impossible.
Furthermore, measures to prevent the spread of the Coronavirus may lead to the cancellation or disruption of large-scale sporting events and other activities, as well as constraints on business operations and reductions in advertising spending by advertisers, which could have an impact on our Group's business and performance.