Digital Arts Inc. develops and markets internet, email, and file security software, focusing on web security to block access to harmful sites. It also provides comprehensive information security solutions, including web filtering and email security. The company internally handles a wide range of processes including product design, development, sales, and support and is also capable of swiftly responding to user requests by quickly supplying web filtering databases or providing assistance or other services, such as software upgrades. Subsidiary Digital Arts Consulting Inc. provides consulting services that aim to resolve information security issues faced by a variety of organizations.
At its establishment in 1995, the company developed internet-related application software in a variety of genres, but in September 2004 sold most of its other businesses to focus on filtering software. Since then, the company has focused on developing and marketing security-related software.
Main products are i-FILTER® (web filtering software, more than 70% of sales), m-FILTER® (email security software, roughly 20% of sales), and FinalCode® (file encryption software, about 5% of sales). The company has expanded its business domain to include Outside Security (countermeasures for targeted threats originating externally) in addition to Inside Security (measures targeting the prevention of internal information leaks). In FY03/19, the company launched cloud versions of both of these security services. Cloud service products accounted for about 53% of the JPY11.5bn in contract amount (orders) the company reported in FY03/21 (license sales products and other products accounted for the remaining 47%).
Digital Arts’ customers include companies, government offices, municipalities, schools and educational committees, and households. Out of the JPY6.8bn in sales reported by the company in FY03/21, sales to the enterprise market accounted for 58%, while sales to the public market (such as schools and educational committees) accounted for 35% and sales to the consumer market accounted for 6%. The company sells products via distributors. It has distributor agreements in place with some 20–30 agents, with the top three distributors accounting for 40–50% of total sales.
The company’s core product, i-FILTER®, has roughly 50% of the domestic web filtering software market in the enterprise and public markets (in FY2019, according to a study by ITR). Digital Arts attributes this to its database of harmful websites, the most extensive one within the Japanese-language environment, finely tuned over time. i-FILTER® helps prevent information leakage caused by targeted attacks and can be used as a countermeasure aimed at eliminating decreases in efficiency stemming from private use of software during working hours. In response to the ongoing diversification of devices stemming from changes in working styles, the company is providing i-FILTER Browser & Cloud (compatible with iOS, Android, and Windows devices) to provide security for company smartphones, tablets, and carry-out PCs, in addition to on-premises support.
m-FILTER® is an email security software that helps prevent information leaks that occur when accidentally sending emails to the wrong recipient and enables the user to safely store and manage emails. Further, according to an international market survey regarding security products released by IDC Japan, m-FILTER® has the top share of the domestic messaging security software market (on-premise) by vendor at 19.6% (source: IDC Japan, Inc; Japan Information Security Product Market Share: 2017, published September 2018).
In 2012, the company launched FinalCode®, file encryption software independent of the language environment. FinalCode® has a market share of approximately 77% (in FY2016, according to a study by ITR). This software provides encryption and tracking solutions that enable users to encrypt important files, track their usage, and delete them remotely, if necessary.
From FY03/06 through FY03/21, consolidated sales and operating profit grew at CAGRs of around 11% and 14%, respectively. In FY03/19, its operating profit margin rose to 45.0%. However, the decline in sales in FY03/20 brought its OPM down to 41.3% before it recovered to 43.6% in FY03/21 (up 12.7pp compared to FY03/06). While the company does not release a medium-term plan, it aims to grow sales to JPY10bn (roughly 1.5x the FY03/21 figure) as early as possible, driven by sales expansion of i-FILTER®, m-FILTER®, and FinalCode®. In the first two products, the company anticipates CAGRs of around 15%, backed by increasing demand for security.
The Japanese government has accelerated the rollout of its GIGA School Concept (calling for one tablet computer per pupil for schoolwork and the creation of a high-speed, high-volume network to bring the whole system together) in response to the COVID-19 outbreak. The company will focus on winning orders for new web filtering software related to the GIGA School Concept mainly in FY03/21 and FY03/22. In FY03/21, 59% of the 1,741 educational committees in Japan were implementing commercial filtering software, and the committees using i-FILTER® presided over 46% of the total number of students associated with the committees utilizing the software (source: Digital Arts). In FY03/22, the company will approach educational committees that are not yet implementing commercial filtering software.
The company released i-FILTER® Ver.10 and m-FILTER® Ver.5 on September 19, 2017. With these products, clients can strengthen their security against data leaks and malware attacks from both the internet and email, and also reduce the costs of educating employees about security and creating multi-level security systems. The company was able to fulfil its aim to expand its business area by providing security against targeted outside attacks (Outside Security) in addition to its core competency of preventing internal information leaks (Inside Security). The company said that this reflected its decision to make upgrades to i-FILTER® Ver.10 and m-FILTER® Ver.5 for clients of i-FILTER® Ver.9 and m-FILTER® Ver.4 free of charge until the end of September 2022. The company aims to get a positive client response to its free upgrades and use it in cross-selling and new client acquisition.
Digital Arts released FinalCode® Ver.6 on June 27, 2019. It also revised its pricing and licensing structures to encourage more users to adopt FinalCode®. For the overseas market, whereas the company has been leveraging the strength of FinalCode® as software that works independently of the language environment, it now aims to develop the Digital Arts brand globally as a comprehensive security solutions provider, as it has already been doing in Japan.
In FY03/21, Digital Arts reported contract amount (orders) of JPY11.5bn (+103.1% YoY), consolidated sales of JPY6.8bn (+21.0% YoY), operating profit of JPY3.0bn (+27.9% YoY), recurring profit of JPY3.0bn (+28.5% YoY), and net income attributable to owners of the parent of JPY2.1bn (+29.4% YoY). Achievement rates versus full-year FY03/21 forecast were 91.0% for sales, 83.9% for operating profit, 84.3% for recurring profit, and 84.0% for net income. With the increase in telecommuting in the enterprise market and the advancement of the GIGA School Concept in the public market, there has been a surge in demand for cloud service products. However, sales for these products are booked on a monthly basis throughout the service period, and with the increase in sales pushed back to FY03/22 and thereafter exceeding expectations, sales and profit in FY03/21 fell below the company’s respective projections.
For FY03/22, Digital Arts forecasts sales of JPY9.0bn (+31.9% YoY), operating profit of JPY4.0bn (+34.4% YoY), recurring profit of JPY4.0bn (+33.7% YoY), and net income attributable to owners of the parent of JPY2.8bn (+34.5% YoY). The company projects dividend per share of JPY65 (versus JPY55 in FY03/21).
In the enterprise market, the company aims to continue adding functions and strengthening products in the i-FILTER® and m-FILTER® lineup, while at the same time accelerating the development of products offering an even broader level of security functions. In addition to security products, the company is also considering offering products that serve to bolster efficiency in business operations. In the public market, Digital Arts aims to continue to expand sales to schools with inadequate security measures necessary for implementing the GIGA School Concept initiative. The company also aims to strengthen its lineup of products supporting the “model for enhancing the resilience of municipal information systems” and expand its share of security products for municipalities as a whole. In line with the rapid expansion in telecommuting, the company aims to take on the challenge of creating new markets by enhancing the functions of Desk@Cloud, a communications tool that can improve business efficiency through use of an online conferencing system.
Shared Research considers Digital Arts’ strengths to be swift support capabilities, an extensive database of harmful websites tailored to the Japanese-language environment, and stable recurring sales underpinned by high renewal rates. Weaknesses: a business model dependent on the domestic market and the small size of the conventional market for its core products.
|Gross profit margin||76.0%||74.8%||71.0%||71.4%||76.9%||80.1%||79.0%||81.9%||75.9%||71.5%||70.0%|
|Operating profit margin||21.7%||25.3%||21.6%||25.4%||25.2%||36.1%||37.2%||45.0%||41.3%||43.6%||44.4%|
|Recurring profit margin||20.9%||25.0%||21.8%||26.8%||24.9%||35.8%||37.3%||45.0%||41.2%||43.8%||44.4%|
|Per-share data (split-adjusted; JPY)|
|Shares issued (year-end; '000)||13,993||14,133||14,133||14,133||14,133||14,133||14,133||14,133||14,133||14,133|
|EPS (fully diluted)||22.56||32.15||28.74||38.19||39.14||80.68||92.13||140.80||110.83||143.45|
|Dividend per share||6.00||8.00||8.00||14.00||15.00||24.00||28.00||48.00||50.00||55.00||65.00|
|Book value per share||226.32||249.48||272.98||303.40||329.03||375.07||446.43||558.33||617.27||715.79|
|Balance sheet (JPYmn)|
|Cash and cash equivalents||1,905||2,070||2,156||2,674||2,943||3,899||4,426||6,169||7,652||11,382|
|Total current assets||2,768||3,041||3,437||4,011||4,189||5,287||5,708||7,730||8,733||12,725|
|Tangible fixed assets||150||127||127||145||127||125||157||261||249||233|
|Investments and other assets||570||611||421||657||822||812||779||457||459||493|
|Total current liabilities||858||962||954||1,409||1,448||2,066||1,636||2,010||2,125||4,743|
|Total fixed liabilities||30||32||42||43||44||45||45||46||47||50|
|Total net assets||3,213||3,568||3,876||4,298||4,642||5,270||6,248||7,803||8,680||10,062|
|Total interest-bearing debt||0||0||0||0||0||0||0||0||0||0|
|Cash flow statement (JPYmn)|
|Cash flows from operating activities||848||821||817||1,355||1,027||2,012||1,663||3,092||2,687||5,221|
|Cash flows from investing activities||-899||-558||-646||-848||-441||-672||-775||-909||111||-830|
|Cash flows from financing activities||-80||-97||-85||-120||-188||-503||-293||-430||-709||-671|
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||% of Est.||1H Est.|
|Gross profit margin||77.0%||77.2%||76.2%||75.9%||69.7%||71.8%||71.3%||71.5%||68.0%||72.8%|
|Operating profit margin||33.1%||39.7%||39.8%||41.3%||34.3%||42.3%||41.5%||43.6%||38.1%||45.7%||37.7%|
|Recurring profit margin||33.0%||39.5%||39.8%||41.2%||34.6%||42.4%||41.7%||43.8%||38.1%||45.7%||37.7%|
|Quarterly||Q1||Q2||Q3||Q4||Q1||Q2||Q3||Q4||Q1||Q2||Q3||Q4||% of Est.||FY Est.|
|Gross profit margin||77.0%||77.3%||74.3%||74.8%||69.7%||73.5%||70.5%||71.8%||68.0%||76.3%|
|Operating profit margin||33.1%||45.1%||40.0%||45.3%||34.3%||48.9%||40.2%||48.4%||38.1%||51.2%||44.4%|
|Recurring profit margin||33.0%||44.9%||40.4%||45.2%||34.6%||49.0%||40.4%||48.6%||38.1%||51.2%||44.4%|
Earnings seasonality: Sales tend to be concentrated in Q4. This seasonality reflects the tendency of private companies and public organizations to place orders for IT products in the run-up to their March financial year-ends.
In 1H FY03/22, Digital Arts reported contract amount (orders) of JPY4.5bn (+20.2% YoY), sales of JPY4.6bn (+46.8% YoY), operating profit of JPY2.1bn (+58.6% YoY), recurring profit of JPY2.1bn (+58.0% YoY), and net income attributable to owners of the parent of JPY1.4bn (+57.7% YoY). Contract amount, sales, and operating profit were all 1H records.
Progress versus 1H forecasts was 116.7% for sales, 141.4% for operating profit, 141.5% for recurring profit, and 140.5% for net income attributable to owners of the parent.
Progress versus full-year FY03/22 forecasts (revised up on October 29, 2021) was 50.6% for sales (45.4% of full-year FY03/21 results in 1H FY03/21), 52.0% for operating profit (44.0%), 52.0% for recurring profit (44.0%), and 51.7% for net income attributable to owners of the parent (44.1%).
Contract amount (orders) totaled JPY4.5bn (+20.2% YoY), of which JPY2.2bn (+21.9% YoY) was for the enterprise market, JPY2.1bn (+20.4% YoY) for the public market, and JPY229mn (+4.7% YoY) for the consumer market. Orders from the public market climbed on growth for the i-FILTER® series under the GIGA School Concept, and orders from the enterprise market grew thanks to new customer acquisition by Digital Arts Consulting (DAC). The share of license sales product contracts increased from 66.7% a year earlier to 70.3% in 1H FY03/22 as a result of DAC winning orders from the enterprise market and the public market (projects for government agencies and local governments). The order backlog at end-1H was JPY6.4bn (JPY1.5bn will be booked as sales in 2H, and JPY4.9bn in FY03/22 and beyond).
Sales amounted to JPY4.6bn (+46.8% YoY), of which JPY2.3bn (+23.9% YoY) was sales to the enterprise market, JPY2.1bn (+95.5% YoY) to the public market, and JPY229mn (+4.4% YoY) to the consumer market. Sales to the enterprise market were up 23.9% YoY, driven by higher sales of the i-FILTER® series and growth of DAC. Sales to the public market climbed 95.5% YoY on growth in sales of the i-FILTER® series for GIGA School Concept projects and for central and local government projects.
Operating profit came to JPY2.1bn (+58.6% YoY). Cost of sales rose JPY363mn (+41.5%) YoY, and the gross profit margin improved 1.0pp YoY to 72.8%. The increase in cost of sales was due mainly to a rise in labor costs with the hiring of consultants at DAC (+JPY243mn, or +47.0%, YoY), an increase in communication costs of cloud servers associated with sales expansion of cloud service products (+JPY199mn, or +236.9%, YoY), higher depreciation (+JPY7mn, or +1.7%, YoY) stemming from the start of software depreciation for cloud products in Q2 FY03/21, and a rise in other expenses (+JPY101mn, or +44.5%, YoY). Holding online events aimed at partners boosted advertising expenses (+JPY51mn, or +76.1%, YoY) and an increase in planned bonuses for employees due to sales growth raised personnel expenses (+JPY264mn, or +54.1%, YoY), but the SG&A expense ratio improved 2.4pp YoY to 27.1% and the operating profit margin rose 3.4pp YoY to 45.7%.
Consolidated sales by quarter
Consolidated operating profit by quarter
Sales to the enterprise market were JPY2.3bn (+23.9% YoY).
Aggressive marketing promotion of the high-end i-FILTER® Ver.10 and m-FILTER® Ver.5 raised awareness of the effectiveness of both products and was helpful in winning new contracts. The COVID-19 pandemic in particular has accelerated the use of cloud services by those aiming to reduce the burden and costs of operations management.
Sales generated by the i-FILTER series rose JPY104mn (+9.2%) YoY to JPY1.2bn, driven by an increase in demand for web security stemming from the spread of telework in corporate circles.
Sales of the m-FILTER® series grew JPY138mn (+43.9%) YoY to JPY450mn on mounting email security needs and to resolve PPAP issues (PPAP entails sending password-protected and encrypted .zip file and password separately).
Subsidiary Digital Arts Consulting (DAC), which offers security consulting services, signed up new customers and increased its sales by JPY204mn (+67.8%) YoY to JPY505mn. Consulting sales grew 46% YoY as the company steadily responded to demand associated with digital transformation and cyber security measures. Solution sales, which include sales generated by the company's products, were also strong, increasing 131% YoY. At the conclusion of 1H FY03/22, the company was employing 69 consultants (an increase of 14 from March 31, 2021), but recruitment fell slightly short of the company's targets.
Sales to the public market were JPY2.1bn (+95.5% YoY).
Digital Arts enjoys a high level of market recognition and holds a solid market share in security solutions in the Japanese market. Backed by its proven reliability and track record, the company saw continuing substantial growth in i-FILTER® series orders for the GIGA School Concept projects, and sales grew JPY1.0bn (+126.5%) YoY.
Due to the Japanese government's GIGA School Program, the percentage of Japanese boards of education that have adopted commercial filtering software rose to 70% as of September 30, 2021 (+11pp compared to March 31, 2021). Meanwhile, the share of i-FILTER®
Sales to the consumer market were JPY229mn (+4.4% YoY).
In the consumer market, Digital Arts cooperated with mobile operators and MVNO providers and focused on selling i-FILTER® for Multi-Device, which can use a single serial ID on multiple operating systems, which resulted in an increased user count.
|(JPYmn)||1H Act.||2H Act.||FY Act.||1H Act.||2H Act.||FY Act.||1H Act.||2H Est.||FY Est.|
|Cost of sales||630||731||1,362||876||1,071||1,947||1,238||1,462||2,700|
|Gross profit margin||77.2%||74.6%||75.9%||71.8%||71.2%||71.5%||72.8%||67.1%||70.0%|
|Operating profit margin||39.7%||42.8%||41.3%||42.3%||44.8%||43.6%||45.7%||43.2%||44.4%|
|Recurring profit margin||39.5%||42.9%||41.2%||42.4%||45.0%||43.8%||45.7%||43.2%||44.4%|
Digital Arts revised up its FY03/22 full-year forecast when announcing 1H results. For FY03/22, the company forecasts sales of JPY9.0bn (+31.9% YoY; previous forecast was JPY8.7bn), operating profit of JPY4.0bn (+34.4% YoY; JPY3.7bn), recurring profit of JPY4.0bn (+33.7% YoY; JPY3.7bn), and net income attributable to owners of the parent of JPY2.8bn (+34.5% YoY; JPY2.6bn). The company revised its forecast upward because it added JPY300mn in sales to its full-year projections. This figure excludes project sales that the company expected to book in 2H but instead recorded ahead of schedule in 1H.
For FY03/22, Digital Arts projects sales of JPY9.0bn (+JPY2.2bn, or +31.9%, YoY).
For FY03/22, the company projects JPY2.7bn in total cost of sales (+JPY754mn, or +38.7%, YoY).
The company projects SG&A expenses of JPY2.3bn in FY03/22 (+JPY400mn, or +21.0%, YoY)
Digital Arts projects sales of JPY4.9bn (+21.7% YoY). The company aims to augment sales generated through existing customers by promoting the cross-utilization of its products as a security countermeasure for companies and boost overall sales in the enterprise market by acquiring new customers through product enhancement. By strengthening the consulting capabilities of subsidiary DAC, the company plans to increase its volume of orders from large corporations, which has not been substantial up until the present.
The company will continue to conduct dynamic sales promotion activities. Meanwhile, it will strive to stimulate demand by holding seminars with current and timely themes such as PPAP countermeasures (PPAP entails sending password-protected and encrypted .zip file and password separately), placing newspaper advertisements, and holding study sessions for sales agents.
The company aims to continue adding functions and strengthening products in the i-FILTER® and m-FILTER® lineup, while at the same time accelerating the development of products offering an even broader level of security functions. In addition to security products, the company is also considering offering products that serve to bolster efficiency in business operations.
The company projects sales of JPY3.7bn (+53.7% YoY). The company will record sales for a portion of the contracts it acquired in FY03/21. In addition, it aims to expand its contracts in FY03/22 as well.
Digital Arts aims to continue to expand sales to schools with inadequate security measures necessary for implementing the GIGA School Concept initiative. The company also aims to strengthen its lineup of products supporting the “model for enhancing the resilience of municipal information systems” and expand its share of security products for municipalities as a whole. In line with the rapid expansion in telecommuting, the company aims to take on the challenge of creating new markets by enhancing the functions of Desk@Cloud, a communications tool that can improve business efficiency through the use of an online conferencing system.
The company projects sales of JPY450mn (+4.1% YoY) in the consumer market.
The company aims to augment sales generated through existing customers by promoting the cross-utilization of its products as a security countermeasure for companies and boost overall sales in the enterprise market by acquiring new customers through product enhancement.
In order to enter the Secure Web Gateway (SWG) market, the company is attempting to enhance the product value of i-FILTER by conducting development aimed at strengthening its features. Specifically, the company plans to add antivirus, sandbox, and other features to its web filtering software, thereby converting it into a comprehensive packaged software product. It aims to acquire new customers by responding to needs that have not been served before and providing added values to users in peripheral markets. The company launched product development in 1H and aims to begin selling the resulting product before the end of FY03/22.
To provide reliable response for needs associated with file sanitization, the company will enhance product features in its m-FILTER series that are related to PPAP countermeasures (PPAP entails sending password-protected and encrypted .zip file and password separately) and actions aimed at improving the resilience of local municipalities. At the same time, the company will enhance the overall link between these products and file transfer and sanitization solutions as it seeks to expand customer acquisition.
In terms of its Desk@Cloud web conferencing system, the company will work to enhance its capacity for facilitating communication with external users (release of webinar features; automatic file encryption) and provide support for highly confidential online meetings (enhanced authentication). Through internal use, the company will endeavor to develop Desk@Cloud into a web conferencing system equipped with strong security and video performance that is on par with that of video streaming platforms.
By acquiring new customers through enhanced integration of its i-FILTER and m-FILTER software products and ongoing development of their features, the company aims to achieve 10mn user licenses by March 31, 2022 (versus 9.1mn as of September 30, 2021).
According to the company, 59% of educational committees in Japan are utilizing commercial filtering software in connection with the GIGA School Concept launched by the Japanese government in FY2020, and 46% of the committees that make up this portion have placed orders for i-FILTER with the company. Orders from the remaining 54% of educational committees utilizing commercial filtering software were placed with seven other sector peer companies. The company believes that it will have ample opportunity to approach educational committees that are not implementing commercial filtering software (41% of total educational committees in Japan) in FY03/22 because those that are not using free filtering software will eventually be required to implement commercial filtering software. Furthermore, the company believes that it will be able to target educational committees using DNS filtering with its products. Through seminars and other activities, the company will appeal to the necessity of filtering software and the superiority of its products.
In accordance with procurement guideline revisions implemented by the Ministry of Internal Affairs and Communications in December 2020, the company will ensure that requirements associated with enhancing the resilience of municipal information systems can be met with support from a combination of its products. As needs change along with the passage of time (including conversion to online administrative procedures and promotion of telework), the company strives to improve efficiency and convenience while maintaining information security.
Digital Arts will attempt to expand its share of the enterprise market by pitching its products to customers utilizing consulting services provided by subsidiary DAC. Through D Alert and services from DAC, the company will provide one-stop solutions for processes ranging from detection of website tampering to recovery.
Within the security industry, demand for security products has been expanding amidst a wave of increasingly diversified cyber-attacks. Demand for the installation of security products has been expanding in particular at small and medium-sized companies that have been relatively slow in implementing security measures. Moreover, with the rapid increase in telecommuting and the spread of AI and IoT, the risks that security personnel will need to manage are becoming increasingly diverse and sophisticated, which is expected to further increase demand for security products. Amid such an environment, the company projects that the outsourcing of security operations and the use of cloud services as way to reduce the burden of security operations will continue to accelerate. It also believes that with telecommuting becoming increasingly prevalent, the need to ensure efficient business operations even when working from home will likely result in increased demand for cloud services.
In May 2020, the Ministry of Internal Affairs and Communications (MIC) announced a review of local government information security measures, ordering an overhaul of their “three-tiered security” structure (see below). Local governments are directed to maintain a basic framework for their IT systems comprising three segments, while seeking to improve efficiency and convenience as well as ensuring security. The three segments are administrative (based on usage of My Number national ID system), LGWAN* (wide-area network that interconnect local governments and is dedicated to their use), and Internet connection. For the Internet connection segment, prefectural governments and smaller municipalities are cooperating to review the “local government information security cloud” built to integrate Internet connection points for each prefecture (see below).
* Local Government Wide Area Network (LGWAN): A closed network for local government use only that is cut off from the Internet. Interconnected with network that connects central government ministries and agencies. Administered by Japan Agency for Local Authority Information Systems (J-LIS).
Local government information security cloud is a scheme for integrating web and other servers of prefectural governments and other municipalities to run sophisticated security measures such as surveillance and log analysis. The current version went live in 2017, with specific requirements discussed and provided by each prefectural government in a short period of time to provide “three-tiered security.”
As a result, although the number of malware attack incidents has been sharply reduced, critics have noted that the level of security varies between local governments. As a solution, the government proposed, for the next-generation local government security cloud, a set of minimum standard requirements and optional requirements that vary according to each municipality’s required level of security, which then should be presented to private-sector vendors developing and providing cloud services to ensure adequate security levels while keeping costs down. The cloud will continue to operate in the same way, with prefectural governments primarily responsible for sourcing and operation, while supporting security measures of smaller municipalities. Multiple prefectural governments can jointly source and run their cloud services as well.
The model with three-tiered security structure is called the alpha model. Due to the inconvenience of physically separating the LGWAN and online segments, a new model known as the beta model (β or β´ model; in which most of the terminals and systems connected to LGWAN is part of the Internet connection segment) is under consideration by an MIC discussion group. Although the beta model is more efficient and convenient than the alpha model, it requires sophisticated security measures for the Internet connection segment such as endpoint protection.
FY03/22 dividends: The company projects annual dividends of JPY65.0 per share (+JPY10.0 per share YoY) consisting of an interim dividend of JPY30.0 per share (+JPY5.0 per share YoY) and a year-end dividend of JPY35.0 per share (+JPY5.0 YoY).
Projected FY03/22 consolidated dividend payout ratio: 32.9% (versus actual ratio of 37.4% in FY03/21)
Digital Arts does not release a medium-term plan. However, it says that the growing demand for security solutions has made it raise its projections for sales CAGR in the domestic market from 10% to around 15%. Further, through increased sales of FinalCode®, the company targets sales of JPY10.0bn (+60% compared to FY03/21).
The Japanese government is moving forward with the Global and Innovation Gateway for All (GIGA) School Concept, which calls for one computer per pupil for schoolwork and the creation of a high-speed, high-volume network to bring the whole system together.
This latest move will facilitate provision of devices for one class out of every three at elementary and junior high schools nationwide by FY2022 (providing maximum assistance of JPY45,000 per computer). The goal is for every pupil to have a device by FY2023.
The measure will also provide a high-speed, high-volume network.
In addition, the FY2020 supplemental budget plan includes ICT measures for emergencies, such as temporary school closures due to disasters or infectious diseases, as part of the Emergency Economic Measures to Cope with COVID-19 (Cabinet Decision on April 7, 2020). Approximately JPY229.2bn is earmarked for rapidly developing an environment that can ensure continued education for all children. JPY195.1bn is earmarked to accelerate the one device per pupil goal while JPY7.1bn was budgeted for development of a comprehensive network environment to provide service to all schools. Corrective measures were implemented in FY2019 to facilitate early realization of the one device per pupil objective and covered all 5th and 6th grade elementary school students and 1st year junior high school students. This has now been expanded to include 2nd and 3rd year junior high school students and 1st to 4th grade elementary school students (maximum budget per device is JPY45,000).
Additionally, the third supplementary budget for FY2020 included a JPY20.9bn added in accordance with the “Comprehensive Economic Measures to Secure People’s Lives and Livelihoods toward Relief and Hope” (a Cabinet decision delivered on December 8, 2020). The draft budget for FY2021 allots funds for expenses necessary for efforts to establish and utilize ICT environments, including GIGA School Concept expansion initiatives. Through these efforts, the government will further accelerate implementation of the GIGA School Concept.
According to a survey conducted by the Ministry of Education, Culture, Sports, Science and Technology, as of end-March 2019, only 1.8mn PCs were being used by 9.6mn elementary and junior high school students (18.5% penetration, or one PC per 5.4 students; excludes PCs used by teachers). This would mean additional demand of 7.8mn PCs to ultimately achieve the one device per student objective. The company estimates demand for new devices at 7.5mn (the figures differ by 0.3mn because the company calculated the number of PCs implemented for educational purposes based on data available as of end-March 2019). Digital Arts estimates the value of the new web filtering software market will total JPY19.0bn in two years. The company had originally assumed a four-year timeline but hearings with educational committees (Conducted in February–March 2020, these hearings produced about 1,000 valid responses) suggest that approximately 40% are expected to be prepared in FY2020.
i-FILTER® accounts for about 46% of web filtering software used by the 1,741 educational committees nationwide (based on number of students represented; Source: Digital Arts; as of March 2021). Benefits of i-FILTER® include blocking access to sites unrelated to learning (especially sites that might be infected with a virus) and protecting students from attackers through the use of whitelisting.
According to a comparative analysis with competing products, product A allowed access to about 61% of 7,684 URLs (one week) that i-FILTER® determined to be harmful sites (risk of malware infection). Product B allowed access to about 84% of the 1,787 URLs (one day) that i-FILTER® determined to be harmful sites (risk of malware infection). The company plans to highlight the advantages of i-FILTER® to GIGA School Concept administrators.
i-FILTER®@Cloud can be used not only on school grounds, but also for devices used at home or for extracurricular activities. The company aims to continue providing products such as web filtering software i-FILTER® and email filtering software m-FILTER® while aggressively conducting local sales activities.
In contrast to the JPY20.0bn market for web filtering (FY2019 forecast from Fuji Chimera Research Institute) which i-FILTER® has been targeting, the market for countermeasures to targeted outside attacks is JPY130.0–140.0bn (FY2019; source: Japan Network Security Association), which means the scale of the company’s target markets will expand.
With the release of the new versions of i-FILTER® Ver.10 and m-FILTER® Ver.5 in September 2017, the company is expanding its business area by providing security against targeted outside attacks (Outside Security) in addition to its existing competency of preventing internal information leaks (Inside Security; see following paragraph) (refer to Business for details). i-FILTER® Ver.10 and m-FILTER® Ver.5 version upgrades are being provided for free until the end of September 2022 to i-FILTER® Ver.9 and m-FILTER® Ver.4 users. The company obtains client evaluations through the free version upgrades, and uses these for cross-selling and new client acquisition.
The security industry faces increasingly advanced and complex risks. These stem from cyberattacks targeting specific companies and national institutions, and information leaks by people inside organizations. Incidents in the last seven years include the 2014 case of an employee at Benesse Corporation taking a large volume of customer data outside the office, and the incident in 2015, when an employee of Japan Pension Service opened a virus-laced email that caused a large volume of pension information to be leaked. Companies and organizations saw that it is insufficient to focus solely on attacks from outside the organization, as they are also susceptible to information leaks from within. The increased interest in internal information security solutions (the focus of Digital Arts since its founding) is driving demand for the company’s core products, i-FILTER® and m-FILTER®, as well as FinalCode®.
In addition to Japan, Digital Arts has obtained patents related to FinalCode® in the US and other key countries. Until now, it has limited its activities to FinalCode® in the overseas markets, but going forward it plans to roll out the Digital Arts brand globally as a comprehensive security measure provider, in a similar manner to the domestic Japanese market. As part of these plans, it will liquidate its North American subsidiary FinalCode, Inc. and continue business in that market through Digital Arts America, Inc. In the Asia-Pacific, the company will conduct business as Digital Arts Asia Pacific Pte. Ltd. (changing its name from FinalCode Asia Pacific Pte. Ltd.), and will develop business in Europe as Digital Arts Europe Ltd. (changing its name from FinalCode Europe Limited).
|May 13, 2014||m-FILTER®||Began collaborating with NRI Secure Technologies, Ltd. (NRI Secure), to develop a service for sending large files over email easily and securely|
|October 29, 2014||i-FILTER®||Began providing a linkage option with the NX/CM series of web security products of FireEye, Inc., whose strengths are in products and services for countering cyber threats|
|May 12, 2015||m-FILTER®||Entered tie-up with UBIC, Inc., to provide solutions using artificial intelligence to prevent data leaks|
|December 10, 2015||i-FILTER® Browser & Cloud||Browser & Cloud Formed tie-up with Gluegent, Inc., and Cybertrust Japan Co., Ltd., to augment convenience and offer security measures in the cloud for the enterprise market|
|January 13, 2016||i-FILTER®, m-FILTER®||Commenced product tie-up with Japan Info Net Service, a provider of integrated ID management solutions, to enhance the efficiency of corporate ID management|
|January 21, 2016||FinalCode®||Entered tie-up with Mitsubishi Space Software Co., Ltd., and Toshiba Information Systems Corp. (Japan) to provide solutions that automatically locate and encrypt files containing important and confidential information|
|January 29, 2016||FinalCode®||Formed link with JP1, integrated system operations management software from Hitachi, Ltd., for secure transmission of large CAD and video files|
|March 8, 2016||FinalCode®||Began providing linkage options on the Box cloud service, being rolled out globally|
|April 6, 2016||i-FILTER®||Adopted a new style for the filtering database from an alliance option with FireEye Inc. (began June 2016)|
|May 9, 2016||m-FILTER®||Announced that it will begin offering an option to add the secure file/data transfer appliance File Zen® from SOLITON SYSTEMS K.K.|
|June 2, 2016||m-FILTER®||Entered agreement with YASKAWA INFORMATION SYSTEMS Corporation to develop an appliance server with email security function for local governments|
|November 7, 2016||i-FILTER®||Strengthened alliance with IBM Japan to conduct correlative analysis on targeted attack logs|
|December 8, 2016||All products||Announced efforts to sell cyberattack insurance as part of an alliance with Tokio Marine & Nichido Fire Insurance Co., Ltd. and JLT Risk Services Japan Limited|
|April 25, 2017||i-FILTER®||Worked with OPTiM Corporation’s MDM (Mobile Device Management) to provide East Japan Railway Company (JR East) highly secure tablets|
|June 2, 2017||i-FILTER®||Collaborated with Allied Telsis, Inc. solution Secure Enterprise SDN, realizing a one-stop solution, from threat detection to diffusion prevention and message blocking|
|March 5, 2020||Security consulting service||Concluded a distribution agreement with Tenable Inc. (US) to provide cyber hygiene support services based on a cyber exposure platform that integrates Tenable’s vulnerability diagnosis and compliance check functions.|
Digital Arts, established in 1995, develops and markets internet and email security software, with a focus on web filtering to block access to harmful sites. Its core product, i-FILTER® (filtering through “white operation” [use of a database that includes all URLs that can be searched in Japan and email information that has been determined to stem from secure senders]), has over 50% of the web filtering software market in the enterprise and public markets.
The company provides a comprehensive range of information security solutions, including web filtering (i-FILTER®) and email filtering (m-FILTER®). It handles all processes ranging from product design and development to sales and support and is capable of responding quickly to a variety of user demands, such as requests for support, software upgrades, and the prompt supply of web filtering databases. In addition, subsidiary Digital Arts Consulting provides consulting services aimed at resolving information security issues facing a variety of organizations.
At the time of its establishment in 1995, the company developed web application software in a range of genres. In September 2004, however, it sold its other businesses to focus on filtering software. Since then, the company has focused on developing security software. In FY03/18, the company expanded its business area by providing security against targeted outside attacks (Outside Security) in addition to its existing strength of preventing internal information leaks (Inside Security). In FY03/19, it launched a cloud version suitable for both Inside Security and Outside Security.
In FY03/18, the company aimed to expand its business area by providing security against targeted outside attacks (Outside Security) in addition to its existing strength of preventing internal information leaks (Inside Security). i-FILTER® is a web security product, whereas m-FILTER® is an email security product with several different functions, from preventing erroneous email transmissions to neutralizing contamination threats. In September 2017, the company released new versions of these two products, with improved functionality to protect client devices against targeted attacks. If clients implement both of the updated versions, m-FILTER® Ver.5 and i-FILTER® Ver.10, they can strengthen*1 their security against data leaks and malware*2 attacks from both the internet and email, and also reduce the costs of educating employees about security and creating multi-level security systems. i-FILTER® Ver.10 and m-FILTER® Ver.5 version upgrades are being provided for free until the end of September 2022 to i-FILTER® Ver.9 and m-FILTER® Ver.4 users. The company plans to leverage the client evaluations from the free version upgrades for its cross-selling and new client acquisition efforts (see below for more detail).
*1 Using i-FILTER® Ver.10 and m-FILTER® Ver.5 in tandem allows users to integrate the database of problematic emails contained in m-FILTER® into i-FILTER® (so the user only receives safe emails, as determined by a white list). Targeted attacks via the internet or email can be completely prevented using a filter that blocks access to URLs not registered in the white list. In addition, computers that have accessed the URLs of dangerous websites are quarantined by i-FILTER® so that they cannot use the internet, and an email notification is sent to a designated administrator.
*2 Malware: a category of malicious software or codes intentionally created to cause damage
DigitalArts@Cloud is a service launched in May 2018 to provide internet security product i-FILTER® Ver.10 and email security product m-FILTER® Ver.5 via the cloud. Users can purchase either product, depending on their needs. As the only cloud service providing both Outside Security and Inside Security in one place, the service gives users multi-layered protection at low cost by combining multiple security products and services, keeping a lid on investments and management man-hours. Most conventional security products were installed on-premises, requiring clients to handle construction, management, and operation themselves. For this reason, the burden of server installation and management costs and the hiring of security personnel were ongoing issues at companies and public offices.
In January 2018, Digital Arts began offering the D-Alert cyber-risk information service free of charge, using the functionality of its i-FILTER® Ver.10 to provide clients and others with information on suspected malware infections, website spoofing, and other issues. With i-FILTER® Ver.10, if a URL the user intends to access is an unknown URL, that data with all personal and other parameters removed is provided to i-FILTER® Ver.10 and stored in the Cloud Lookup Function database after categorization. Access data on all kinds of unknown URLs suspected of carrying malware are notified and stored in the database by new and upgrading users of i-FILTER® Ver.10.
The GIGA School Concept that calls for one tablet computer per pupil for schoolwork and the creation of a high-speed, high-volume network to bring the whole system together provides an excellent business opportunity, and the company is focusing on acquiring i-FILTER® orders from elementary and junior high schools (see Medium-term strategy section for details).
Digital Arts develops web security software such as i-FILTER®, which it sells to companies, schools, and government agencies through distributors. Most of its contracts are for 250-500 licenses* (number of individuals or computers allowed to use the software). Typical fees for a 500-license contract are roughly JPY5,000 (renewal price is JPY2,500) per license per year (in the case of a standard license for i-FILTER® Ver.10 standard version).
The company’s business model allows for recurring sales and stable earnings, with renewal rates of around 90%. Web filtering products account for around 75% of its sales, and its pricing strategy helps maintain high renewal rates. To encourage clients to continue using its software after the first year, Digital Arts offers software renewals at half of the first-year price. According to company research, over five years its products are up to 45% cheaper than similar domestic products (comparison with standard-priced corporate products). A survey of web filtering products by Veriserve Corporation ranks Digital Arts’ products as number one in terms of accuracy (blocking rate: 96.3% for i-FILTER®, 66.7% for competing product A, 62.9% for competing product C, and 48.1% for competing product D). The product’s quality and the price discounts allow Digital Arts to enjoy a renewal rate of around 95%, resulting in recurring sales and stable earnings.
The company’s main products—i-FILTER® for web security and m-FILTER® for email security (details of each product are described later)—can protect the ITC business environment from threats by using a white list database (DB) that covers all domestic searchable URLs and email information determined to be from a safe sender (category filtering that combines both whitelisting and blacklisting is used). This provides an environment for safely using the Internet, email, and files regardless of external dangers, and is the main differentiator between Digital Arts and the competition.
The method of booking earnings generated by license sales products varies between i-FILTER®, m-FILTER®, and FinalCode® as well as between one-year contracts and multiple year contracts. For i-FILTER® and m-FILTER®, the software portion of the sales (about 90% of total sales) is booked in full (at each contract start for one-year contracts). The maintenance support portion (for example, database updating for i-FILTER®) is divided by the number months in the contract and booked as sales each month starting the month after the contract is signed. Starting from the second year after the contract is signed, license fees are reduced to half of what they were during the first year of the contract. For FinalCode®, the license fee is booked on a monthly basis. The average renewal rate for the company’s core products is about 95% (source: Digital Arts).
Earnings generated by cloud service products are recorded by prorating the total value of the contract by month over the length of the contract (total contract value divided by length of contract measured in months). When the values associated with cloud service product contracts rise, so do the corresponding contract values bought forward at the end of the fiscal year (classified as order backlog).
The company had 295 employees at end-FY03/21 and devotes many of its human resources to development (over 40% of its staff) and sales (over 30%). More than 40% of the company’s employees work in the development department, which focuses on product development and upgrades. While large overseas security software developers handle products in various genres, Digital Arts specializes in certain product categories. Although small and not as well-known, it leverages its flat and flexible organization to quickly develop products that reflect clients’ needs. In-house development allows it to respond to problems and provide support more quickly than large software vendors.
In 2012, Digital Arts launched FinalCode® (file encryption and tracking software), which is independent of the language environment. It plans to sell this product overseas.
See the following section for the breakdown of sales by product and client.
The company has four main products: i-FILTER® (web security software), m-FILTER® (email security software), D-SPA® (proxy server with the company’s filtering function), and FinalCode® (file encryption and tracking software). The biggest contributor to sales and profits is i-FILTER®, followed by m-FILTER®. FinalCode® makes a small contribution to sales. However, not only does it work independently of the language environment, but it protects critical files with a unique approach to security.
i-FILTER® (web security software) is the company’s core product, accounting for approximately 70% of consolidated sales. Although high, this percentage is declining as Digital Arts expands its product lineup. The enterprise market is now the biggest market for this product, although it was first sold to schools and other public-market entities seeking to prevent browsing on harmful websites. The company remarks that although public-market demand is on the rise, fluctuations in the national budget are affecting sales in the short term. In comparison, sales to the enterprise market are growing, as clients look to counter malware and other cyberattacks, and prevent browsing on harmful websites. The company in September 2017 launched the new i-FILTER® Ver.10, with enhanced functionality to counter targeted attacks on client computers. It also began offering a cloud service in May 2018. As the GIGA School Concept that calls for one tablet computer per pupil for schoolwork and creation of a high-speed, high-volume network to bring the whole system together is being accelerated its initial schedule in response to the COVID-19 outbreak, Digital Arts is leveraging its commanding 60% share in the educational market to focus on expanding public market orders (see Medium-term strategy section for details).
|Sales YoY by market|
i-FILTER® is software that prevents data leakage by blocking both unauthorized external access and internal fraudulent activity. The company specializes in filtering software in Japan, and in addition to gathering website data, it also handles the entire process from product planning, development, sales, and support. This enables it to provide support for software upgrades and its web filtering database more quickly than larger software developers overseas.
The company’s rapid support and highly accurate filtering database are enabling it to steadily expand its client base. It notes that more than 7,300 companies and government organizations, and more than 31,000 schools and educational facilities across Japan had installed i-FILTER® as of end-March 2021.
According to “ITR Market View: 2021 Market for Cybersecurity Measures,” published by ITR Corporation in April 2021, in FY2019 i-FILTER® accounted for a leading 50.0% share of the URL filtering (web filtering) market by sales. According to “Education Market 2020” (November 2020), a study by Fuji Chimera Research Institute, Inc., Digital Arts had the top share of sales in the educational market in FY2019. The company further noted that out of 1,741 educational committees in Japan, i-FILTER® had a 46% penetration rate in web filtering software as of end-February 2021 (based on number of students represented).
|Company||Market share of i-FILTER® (based on sales in FY2019)|
The company’s high domestic market share stems from its database on harmful websites, which is one of the largest in the Japanese-language environment. The prototype for i-FILTER® was Japan’s first web filtering software to prevent browsing of harmful websites, developed in August 1998. It launched a version for schools in July 2000, followed by a version for the enterprise market in January 2001. As this was in the early days of the Internet in Japan, when foreign software dominated both in scale and recognition, Digital Arts struggled to sell its filtering software. The company leveraged its small scale to swiftly respond to issues and provide support—helping it build up its client base. Filtering harmful websites requires an extensive database of those sites, and the company was one of the earliest Japanese companies to build such a database. It did so while developing its web filtering product in 1998.
Digital Arts’ i-FILTER® database tops the list of web filtering products in a comparative study of product quality and accuracy (Veriserve Corporation, which provides third-party verification of IT products). In this study, i-FILTER® achieved a blocking rate of over 90% across all 10 categories, including “adult/porn,” “online message boards,” and “games,” with an average blocking rate of 96.3%. The second-ranked product had an average blocking rate of 66.7%.
At Digital Arts, a specialized team uses proprietary technology to manually collect data. The team works to increase database effectiveness not only by adding new URLs to its database but also by removing defunct URLs. The company says that the effort it has put into building this database has made it the leading web filtering database in Japan. This plus its high degree of effectiveness, serve as a strong barrier to entry by competitors.
m-FILTER® accounts for 20% of sales, and is the second-largest contributor to sales after i-FILTER®. Companies and public institutions use this product to counter email-based data leaks and the growing amount of spam email. m-FILTER® was launched in February 2007. Although a latecomer to the email security software market, Digital Arts uses its support capabilities and sales channels developed through i-FILTER® to grow sales of m-FILTER®.
Digital Arts in September 2017 launched the new m-FILTER® Ver.5, with enhanced functionality to counter targeted attacks on client computers. If clients implement both of the updated versions, m-FILTER® Ver.5 and i-FILTER® Ver.10, they can strengthen their security against data leaks and malware attacks from both the internet and email, and also reduce the costs of educating employees about security and creating multi-level security systems. The company began offering a cloud service in May 2018.
|Sales YoY by market|
Out of the companies in the email filtering and archiving market in FY2018 (worth JPY7.0bn on a sales basis), m-FILTER® had the leading share of the market by new shipments for the sixth year in a row, at 55.7% (survey released in August 2019 by MIC Research Institute Ltd.). Share of the market by shipments rose from 44.8% in FY2015. According to a survey by IDC Japan entitled “2018 Market Shares of Domestic Information Security Products: Internal and External Threat Prevention” (published in June 2019), Digital Arts ranked first in messaging security software (on-premise) sales (value basis).
|Company||Market share of m-FILTER® (based on unit shipment in FY2018)|
The main functions of m-FILTER® are email security (prevent information leaks due to mistaken email transmission), email archiving and management (promote internal governance), and spam email filtering. These functions can be combined depending on client needs.
To prevent data leaks, companies set rules for sending and receiving email, but preventing all leaks, both intentional and accidental, can be difficult. m-FILTER® helps employees automatically comply with company policies, preventing intentional or accidental data loss.
Stores all incoming and outgoing emails. High-speed searches and tamper detection promote secure use of information.
This product uses a global spam detection engine to identify and eliminate spam email. The detection engine is provided by Cloudmark, Inc., and features one of the highest detection rates in the world.
This file encryption and tracking software was launched in July 2012. While Digital Arts’ other products leverage the Japanese-language environment and the company’s swift support in Japan, FinalCode® does not depend on a specific language environment. It also differs from the other products as it offers a heightened security function for important files. In June 2019, the company rolled out FinalCode® Ver.6, making changes to not only the software’s features but also its pricing and licensing system.
|Sales YoY by market|
According to the market report “ITR Market View: Data Leakage Prevention Markets 2017,” published in December 2017 by ITR Corporation, in the Information Rights Management (IRM)*1 market, when market share is broken down by offering type, the company’s FinalCode® obtained 78.4% of the SaaS-based*2 IRM market in 2016.
*1 Refers to a system through which a business can encrypt files with confidential information that it stores and manages, allow individual users to decrypt and view such files, grant precise operational authority such as printing, and monitor usage conditions
*2 Software as a Service (SaaS): Refers to software (predominantly application software) provided as a service allowing use of necessary functions as required, or the mode of delivery of such software. Generally necessary functions are used through the internet
|Company||Market share of FinalCode® (based on sales in FY2016)|
FinalCode® is file security software that allows remote tracking and operation of files after they have been sent. It is the world’s first file security software that allows files to be deleted after being sent.
Managing important electronic files is a challenge when dealing with external entities. FinalCode® is a proprietary product that helps secure important files.
Typically, managing important electronic files involves password protection, and if passwords are leaked, it is impossible to know who has opened a file, or to retrieve files. FinalCode® provides full tracking of the use of files sent outside of a company, and allows those files to be deleted if necessary.
The company’s other products have a solid foothold in the Japanese-language environment. In comparison, FinalCode® is independent of the language environment, and is being positioned as a key product for overseas markets.
FinalCode® has three main functions: protection, tracking, and deletion after sending.
|Protection||Files can only be viewed by designated people. Permissions can be changed as necessary. (Main features: no password, specification of file duration and number of times it may be accessed, automatic deletion if tampering is detected, and specification of who can view files)|
|Tracking||Files may be tracked via an access log even after they have been sent. (Main features: checking who accessed the file and what operations were done, detection of unauthorized viewing)|
|Later deletion||Files can be deleted even after they have been sent. (Main functions: Remote file deletion, remote changing of permissions)|
To promote greater use of FinalCode®, the company made changes to not only the software’s features but also its pricing and licensing system. Under FinalCode® Ver.5, free usage was limited to users outside of enterprise/institutional settings while users in enterprise/institutional settings had to pay. In contrast, FinalCode® Ver.6 allows free-of-charge, read-only use by some users in enterprise/institutional environments, with the number of free users at a particular enterprise/institution capped at ten times the number of licenses purchased. The company also changed its pricing structure for FinalCode® Ver.6 licenses, offering volume discounts to corporate clients where companywide installation is expected. Further details regarding the changes are detailed below:
FinalCode® Ver.6 provides licenses to users requiring encryption and editing for a fee. In the case of FinalCode® Ver.5, free usage was limited to users outside companies and institutions, while there was a charge for users in enterprise/institutional settings. With Ver.6, all users viewing files in FinalCode®, even those using the software in enterprise/institutional settings, may do so free of charge*. This means there is a greater number of users than before who are able to view files for free within companies and institutions. The company aims to increase the use of FinalCode® files inside companies and institutions, so that they would also be used more frequently in external communications.
Digital Arts has also established a new pricing structure with prices corresponding to the number of licenses purchased, including volume discounts to encourage companywide deployment. (The fee structure has 15 levels depending on the license count. For example, the annual per-license fee for 10–29 standard licenses (for corporations) is JPY12,000, but for 7,000–9,999 licenses, it is JPY6,000. Individual inquiries should be made for 10,000 or more licenses.)
*A merit of FinalCode®, the security option for deleting files even after they are sent, providing functionality for deletion and notification of unauthorized use, will be provided as a standard feature at no charge. Whereas companies typically had limited oversight over files that had been sent outside, FinalCode® can identify potential leaks, send an alert, and automatically delete the files remotely even for such files. A shared folder auto-encryption option will also be provided as a standard feature at no charge. FinalCode® monitors shared folders on the server at all times, automatically encrypting files when they are stored in the folder according to a template established in advance. This means that file security is maintained without effort on the part of users.
Launched in November 2010, D-SPA® is a proxy appliance server equipped with a filtering function. PCs connect to the internet via D-SPA®, which has caching* and web filtering functions, increasing security and enabling fast network communication speeds and smooth internet connections. According to a user survey by the company, client satisfaction with the product was 98.0%.
*Caching function: The content of accessed sites is stored in a file to display information faster the next time sites are accessed.
The products developed by Digital Arts have garnered high third-party ratings. The following table lists major third-party ratings announced since 2016, as well as product share information.
|November 9, 2018||FinalCode®||Final Code® won Grand Prix from the ASP-Saas-IoT Cloud Consortium (ASPIC) as the most excellent service in the "ASP-Saas Business Support" category|
|October 30, 2018||m-FILTER®||m-FILTER® achieved the top share of sales by vendor (19.6%, a 3.9pp increase from the 2016 survey) in the Japanese messaging security (on-premises) software market, based on a survey by IDC Japan regarding Japanese products designed to prevent external threats installing its product in the email archiving and filtering market|
|November 30, 2017||i-FILTER®||i-FILTER® won the top vendor position with a 53.1% share (sales value) in the URL filtering market in FY2016, according to an ITR survey|
|August 22, 2017||m-FILTER®||For the forth consecutive year, m-FILTER® came first in a survey of new installations by MIC Research Institute. No.1 with a 51.1% share in shipment volume in FY2016|
|May 16, 2017||i-FILTER®||According to Fuji Chimera Research Institute survey of culture/education market, i-FILTER® had the highest web filtering tool market share in 2016 at 40.7%|
|October 4, 2016||m-FILTER®||For the third consecutive year, m-FILTER® came first in a survey of new installations by MIC Research Institute. No.1 in the number of companies installing its product in the email archiving/filtering market with 44.8% market share|
|October 4, 2016||FinalCode®||FinalCode® became the leader in the SaaS market in 2015 with a 76.7% market share, according to a survey by ITR|
|-||i-FILTER®||According to a survey by ITR, i-FILTER® had the leading vendor share (49.8%) of the URL filtering market in 2015|
|1998||8||Developed first internet filtering software in Japan and started collecting information on harmful websites|
|2000||7||Launched i-FILTER School Edition filtering software for schools|
|9||Launched i-FILTER® filtering software aimed at consumer market|
|2001||1||Launched i-FILTER Business Edition for corporate market|
|7||Launched m-FILTER email filtering software for schools|
|2007||2||Launched m-FILTER® email filtering software|
|2010||11||Launched secure proxy appliance D-SPA®|
|2012||7||Started offering FinalCode®|
|2017||9||Started offering i-FILTER Ver.10 and m-FILTER Ver.5 countermeasures to targeted attacks from outside|
|2018||1||Started offering D-Alert cyber risk information service for free|
|5||Started offering DigitalArts@Cloud® cloud services for i-FILTER® and m-FILTER®|
i-FILTER® uses URL filtering to filter inappropriate websites, such as those featuring adult content, drugs, and crime, to block access in the workplace or in school settings. By blocking access to SNS and dangerous websites, the product prevents intentional and accidental information leaks.
i-FILTER® has three main functions: preventing data leaks, preventing cyber threats, and strengthening internal controls.
|Prevent data leaks||Prevents data leaks stemming from electronic bulletin boards, email, Twitter, Facebook, and malware or phishing websites. Web filtering is used to keep logs of employees’ web access and make this access visible. Information system administrators can track employees’ browsing activities and go back over past posts. This helps prevent information leaks due to careless communications and intentional actions.|
|Prevent cyberattacks||Cyberattacks can arise from malware infection through careless web access by employees, as well as targeted email attacks. Employees may not even be aware that their PCs have been taken over. The number of such attacks has increased, where infections have spread from malicious outside servers and extracted important information from an organization. Preventing such threats calls for “exit measures” that block web access to malicious external servers. Digital Arts says that i-FILTER® is being used to prevent cyberattacks by incorporating a specialized database of malicious websites.|
|Strengthen internal controls||Similar to preventing data leaks, making employees’ web access visible helps prevent them from carelessly posting information on SNS or using online storage to intentionally send sensitive information outside of the company. This strengthens internal controls.|
m-FILTER® offers three functions: preventing erroneous email transmission, email archiving, and spam blocking.
prevents erroneous email transmission
|Gateway-style software prevents erroneous email transmission. Based on set transmission rules, it promotes strict compliance with operating policies. It also prevents deliberate and accidental information leaks from erroneous email transmission using staggered transmission times (delayed sending) depending on whether the recipient’s address is internal or external, and password protection for sent files.|
|This product supports internal controls and strengthens compliance by providing secure storage and management of the entire text of emails through email archiving. Tampering detection enables preservation of the entire text of emails, securely maintaining their value as evidence. Also, it is possible to quickly search entire emails and attachments by specifying detailed search criteria and by batch downloads of multiple emails that are relevant to a search. The user can manage and search stored emails without depending on a system administrator.|
|This product blocks spam email with the highest detection rates in the industry. It uses a spam detection engine from Cloudmark, Inc., which boasts the highest detection rates in the industry. It also incorporates an individually managed spam email function, leaving the final judgment to the user, lightening the burden on administrators and enabling more accurate spam detection.|
FinalCode® is file encryption and tracking solution that allows remote tracking and operation of sent files. Released in 2010, this is the world’s first file security software that enables files to be deleted after sending. Digital Arts began selling this product in July 2012. Different from its filtering software, FinalCode® is independent of the language environment, and Digital Arts plans to use the product as a springboard for global development. Digital Arts is concentrating on increasing sales and sales partners in overseas markets, as well as in Japan.
FinalCode® uses encryption key technology, which offers the functions outlined in the previous table, but without the need for passwords.
|Before sending file (sender)||The sender sets recipient permissions. These include setting the email addresses of people permitted to view the file, the number of times the file can be viewed, settings in the event of illegal operations (such as remote deletion), retrieving the original file, overwriting, copy/paste and capture, and printing permissions.|
|When sending file (recipient)||The file is automatically encrypted when sent to the recipient. Simultaneously, an encryption key to open the file is automatically generated. This key contains information about the preset permissions and is stored on the FinalCode® server.|
|After receiving file (recipient)||When attempting to open the file, the recipient’s email address and information about the machine being used is sent to the FinalCode® server. If the FinalCode® server authorizes the recipient, an encryption key is sent, and the file can be opened. The file access log and operational history are recorded on the FinalCode® server. The file remains encrypted and is never available as plain text on the PC (or hard drive). The recipient must access the FinalCode® server to receive an encryption key each time the file is opened.|
|After sending file (sender)||If necessary, after a file is sent, the recipient’s permissions and the file itself can be deleted. When the recipient wants to perform an operation on the file, they must access the FinalCode® server, where the new information is reflected.|
|Of all these operations, only setting and changing permissions need to be performed manually by the sender. Other operations are performed automatically.|
The SaaS (cloud) version of FinalCode® does not require server configuration. For this edition the user simply downloads specialized FinalCode® Client software and installs it on a PC.
In September 2017, the company released updated versions of these two products, with improved functionality to protect client devices against targeted attacks. If clients implement both new updated versions, m-FILTER® Ver.5 and i-FILTER® Ver.10, they can strengthen their security against data leaks and malware* attacks from both the internet and email. Specifically, using i-FILTER® Ver.10 and m-FILTER® Ver.5 in tandem allows users to integrate the database of problematic emails contained in m-FILTER® into i-FILTER® (so the user only receives safe emails, as determined by a white list). Targeted attacks via the internet or email can be completely prevented using a filter that blocks access to URLs not registered in the white list. In addition, computers that have accessed the URLs of dangerous websites are quarantined by i-FILTER® so that they cannot use the internet, and an email notification is sent to a designated administrator. In terms of security costs, they can also reduce the costs of educating employees about security and creating multi-level security systems.
A targeted attack* is a kind of cyberattack that aims to steal certain information from within an organization. 98% of these attacks begin by sending an email containing a computer virus to a member of the organization (source: Information-technology Promotion Agency, “The Threat of Targeted Attacks and Measures to Combat Them”). The remaining 2% stem from the internet (contamination through visiting websites) and USB memory sticks. In order to combat targeted attacks, the number of steps for opening emails has increased. As a result, for many companies and institutions, using the internet can often lead to a decrease in work efficiency.
*Currently, not only major companies and financial institutions but also individuals and small businesses have become the target of such attacks. Information leaks from targeted attacks are the most concerning security threat. In the Information-technology Promotion Agency’s “10 Major Security Threats 2016,” information leaks from targeted attacks were ranked the number one largest threat for organizations (ranked second in overall largest threat for both organizations and individuals).
In m-FILTER® Ver.5, emails with suspicious attachments are quarantined and any internet traffic that may lead to a suspicious website is suspended. As a result, users can enjoy a security environment where they may use the internet or email freely, without worrying about potential threats. This product can determine* whether the email sender, attached file, or internet link has been disguised. For example, if the email contains a macro-enabled Office file, the email will be quarantined. This allows each member of the organization to be able to receive the neutralized email of their client. i-FILTER® Ver.10 can check URLs within an email and convert them to text if the links are determined to be potentially harmful. If accessing the URL is absolutely necessary, users can do so with a quarantined PC.
*According to company information based on the operational status (October–December 2016) of the Cyber Information Initiative (J-CSIP), 58% of attacks from targeted emails came from attached files while 16% came from URLs. Of the attached files, 36% were executable files (programs that run automatically when the user clicks on them), 27% of them were RLO* executable files (Right-to-Left Override, a fraudulent file which uses special characters in Unicode, the industry encoding standard for text), and the remaining 37% were Office document files.
According to the company, roughly 80% of information leaks occur through the internet. The new i-FILTER® Ver.10 limits access to malicious websites and file downloads that may cause malware infections. The company planned to review the previous data gathering method of its website filter database and increase the coverage of searchable website filter to nearly 100% six months from the update’s release (current coverage level was around 60%). This product classifies all searchable websites in a cloud database. If a user accesses a website which is not managed by i-FILTER® (not classified), i-FILTER® will either warn or block access* to the site, preventing potential targeted attacks. Only PCs identified by i-FILTER® Ver.10’s cloud database (whitelisted devices) can access this database.
*The main route of leaking information is through command-and-control servers (servers that issue commands to a group of computers called a botnet, in which each device serves as a bot¹ infected with malware). These servers use the Darknet² or Deep Web³ to hide. Because sites on the Darknet or Deep Web are not searchable on search engines, they are not registered in the i-FILTER® database and are blocked or trigger a warning.
¹Bot: Application software that executes tasks automatically on the internet.
²Darknet: An IP address that does not have a host name allotted for the IP address.
³Deep Web: A website that is unsearchable on search engines
The company calculates that if a client implements m-FILTER® Ver.5 and i-FILTER® Ver.10 as a set, companies of around 3,000 employees could cut roughly 55% of costs and companies of around 20,000 employees could cut roughly 45% of costs compared to using a multi-level security system with other companies’ products to prevent data leaks and malware infections. This is because companies can cut installation and operation costs as well as personnel and educational costs, and expenses related to using the services of a SOC (Security Operation Center).
DigitalArts@Cloud provides cloud-based services with products including i-FILTER® Ver.10 (internet security), m-FILTER® Ver.5 (email security), and FinalCode® Ver.6 (file encryption and tracking). As the only cloud service providing both Outside Security and Inside Security in one place, the service gives users multi-layered protection at low cost by combining multiple security products and services, keeping a lid on investments and management man-hours. Because the service automatically encrypts internal workplace files, it effectively blocks leaks of internal documents without requiring users to think about operations and policies. Most conventional security products were installed on-premises, requiring clients to handle construction, management, and operation themselves. For this reason, the burden of server installation and management costs and the hiring of security personnel were ongoing issues at companies and public offices.
Digital Arts has clients in the enterprise, public, and consumer markets. Its main clients are corporate clients, government offices, and schools. In FY03/21, the enterprise market accounted for 58.4% of sales, the public market 35.3%, and the consumer market 6.3%.
|Sales breakdown (JPYmn)||FY03/11||FY03/12||FY03/13||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|% of total sales||52.2%||52.8%||49.4%||54.1%||55.8%||56.0%||50.9%||58.8%||53.6%||58.2%||58.4%|
|YoY by product|
In FY03/21, the enterprise market contributed most to consolidated sales, at 58.4%. The public market used to account for a largest share of sales, due to efforts to prevent viewing of harmful websites in educational settings. Compared with a decade earlier, however, sales to the enterprise market have grown amid increasing security concerns. The company sells all four of its products (i-FILTER®, m-FILTER®, FinalCode®, and D-SPA®) in this market. Sales have expanded YoY each year for the last 10 years (CAGR of 12.7%).
|Sales breakdown (JPYmn)||FY03/11||FY03/12||FY03/13||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|% of total sales||36.5%||36.9%||39.6%||34.0%||33.5%||35.4%||42.0%||33.9%||37.5%||33.9%||35.3%|
|YoY by product|
Although the company separates sales to the public and enterprise markets, the products and pricing are the same in both markets. The company also sells all four of its products (i-FILTER®, m-FILTER®, FinalCode®, and D-SPA®) to the public market. Sales are increasing in the public market due to growing security needs, but tend to be affected in the short term by fluctuating government spending.
In FY03/17, sales rose because many local governments invested in security in response to the Ministry of Internal Affairs and Communication’s guidelines to strengthen local government information security. In FY03/18, sales to the public market as a proportion of total sales declined 8.1pp due to the falling away of extraordinary demand from local governments and major government contracts. However, in FY03/19, the ratio of public market sales to total sales rose again, up 3.6pp YoY to 37.5%, mainly on increased sales of i-FILTER® Ver.10 and m-FILTER® Ver.5 (which protect against various threats including targeted attacks), thanks to its track record and reputation of reliability in security solutions for internal data leaks.
In FY03/20, the sales weighting declined 3.6pp YoY to 33.9% owing to the absence of major projects booked in FY03/19. In FY03/21, the sales weighting rose 1.4pp YoY to 35.3% due to the acquisition of orders associated with the GIGA School Concept.
|Sales breakdown (JPYmn)||FY03/11||FY03/12||FY03/13||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|% of total sales||11.3%||10.4%||10.9%||11.9%||10.7%||8.6%||7.1%||7.3%||8.8%||7.9%||6.3%|
|YoY by product|
|i-FILTER® for PC||-4.2%||4.5%||-28.1%||5.5%||8.4%||8.2%||-8.1%||-11.8%|
|i-FILTER® for game/TV||7.4%||64.6%||29.3%||-13.0%||-3.9%||-1.4%||-||-|
|i-FILTER® for mobile devices||108.2%||-28.0%||41.6%||15.8%||2.7%||99.8%||-17.4%||8.7%|
Most of the company’s sales in the consumer market are from i-FILTER® (web filtering software). Specifications for the consumer market differ from the enterprise and public markets. i-FILTER® can be used for computers, smartphones, game consoles, or on multiple devices (including computers and smartphones).
In FY03/16, sales fell due to lower PC version sales, with the overall decline in number of PCs sold. However, in FY03/17 sales recovered, growing due to solid results for the i-FILTER® for smartphones as the company worked with mobile phone vendors and MVNO providers. The company also improved OEM sales and increased shipments of multi-year packaged products, leading to a recovery of the PC version i-FILTER®. Similar trends continued in FY03/18.
In FY03/19, following revisions to the Act on Development of an Environment that Provides Safe and Secure Internet Use for Young People, mobile phone distributors installed filtering for young smartphone users on behalf of mobile network operators, pushing up sales by 37.4% YoY. FY03/20 sales declined 13.6% YoY and FY03/21 sales fell 3.1% YoY as Digital Arts lowered prices to mobile network operators that are providing free filtering services to smartphone users. Increasing numbers of minors using smartphones, coupled with stricter Internet laws for young users, have boosted the use of filtering.
The company mostly sells its products in the enterprise and public markets through distributors. It says it has distributor agreements in place with some 20–30 distributors, and the top three distributors account for 40–50% of its total sales. It sells its products to the consumer market via computer manufacturers and mobile network operators.
The company offers various versions of its products. The following tables indicate basic fees. A single contract is typically for 250–500 licenses. However, in terms of sales, contracts for 5,000 or more licenses account for some 40% of the total.
|Ranking||Number of licenses||Price per license||Price per license|
|New (JPY)||Renewal (JPY)|
|1||10 - 29||9,800||4,900|
|5||200 - 299||6,600||3,300|
|6||300 - 499||5,800||2,900|
|7||500 - 749||5,000||2,500|
|15||10,000 -||Quoted separately|
|Ranking||Number of licenses||Price per license||Price per license|
|New (JPY)||Renewal (JPY)|
|1||10 - 29||9,800||4,900|
|5||200 - 299||6,600||3,300|
|6||300 - 499||5,800||2,900|
|7||500 - 749||5,000||2,500|
|15||10,000 -||Quoted separately|
|Ranking||Number of licenses||Standard price (JPY)||Price per license|
|:||10,001||-||Quoted separately||Quoted separately|
|Ranking||Number of licenses||Standard price (JPY)||Price per license|
|:||10,001||-||Quoted separately||Quoted separately|
|(JPY)||For one||For three|
|i-FILTER® for game systems*||-|
|i-FILTER® for multi devices|
|Business Edition||Enterprise Edition|
|Monthly fee for one license (JPY)||JPY2,000||JPY3,600|
|Minimum no. of licenses||10||50|
|Unit of license||1||1|
|Ranking||Number of licenses||Price per license (JPY)|
|6||5,001 -||Quoted separately|
Around 70% of the company’s sales stem from i-FILTER® (software sales and maintenance fees). When a contract is signed, Digital Arts books around 90% in a lump sum as software sales, and the remaining 10% as maintenance fees apportioned over the life of the agreement. For m-FILTER®, the second pillar of sales, it sells software and maintenance services separately. If maintenance is required after the first year, annual maintenance fees are equivalent to 15% of the software price.
The Digital Arts group comprises the parent company and four consolidated subsidiaries. The group designs, develops, and sells web and email security software, and file encryption and tracking solutions.
|Company||Business description||Ratio of voting rights||Relationship with Digital Arts|
|Digital Arts||Design, development, and sale of internet security software and appliances||-||-|
|Digital Arts America, Inc. (US)||Sale of internet security products in the US||100.0%||Concurrent officers. Consigned operations. Product procurement.|
|Digital Arts Asia Pacific Pte. Ltd. (Singapore)||Sale of internet security products in Asia||100.0%||Concurrent officers. Consigned operations.|
|Digital Arts Europe Limited||Sale of internet security products in Europe||100.0％||Concurrent officers. Consigned operations.|
|Digital Arts Consulting Inc.||Information security consulting||92.1%||Concurrent officers. Consigned operations.|
|Client market||Main products||Company responsible|
|Enterprise market||・i-FILTER® (web security software)
・m-FILTER® (email security software)
・D-SPA® (Digital Arts Secure Proxy Appliance)」
・「FinlCode® (file encryption and tracking solution)
Digital Arts America, Inc.
Digital Arts Asia Pacific Pte. Ltd.
Digital Arts Europe Limited
|Public market||・Communication Server System
(Integrated security-focused internet server system for schools)
・「m-FILTER® (web security software)
・D-SP®」 (Digita lArts Secure Proxy Appliance) (web security appliance)
・FinalCode® (file encryption and tracking solution)
Digital Arts America, Inc.
Digital Arts Asia Pacific Pte. Ltd.
Digital Arts Europe Limited
|Consumer market||・i-FILTER® (web security software)||Digital Arts|
|Enterprise market (consulting)||Provides two major consulting service lines: the CIO Service for support ranging from the business and IT strategy formulation stage through the execution stage and the CISO Service for comprehensive security risk countermeasures.||Digital Arts Consulting|
The table below compares parent and consolidated performance, but there is little disparity between the two. Consolidated performance differs from parent performance in that it includes domestic research consulting (IT strategy and security-related consulting and digital solutions) and overseas sales of FinalCode®.
The company’s US subsidiary, Digital Arts America, Inc. (procedures to dissolve previous US subsidiary FinalCode, Inc., were completed by March 31, 2019, with Digital Arts America, Inc., taking over the business), pays the parent development fees for FinalCode®, which are accounted for as sales at the parent-level accounts. In consolidated accounts, these development fees are eliminated internally and instead added to sales of US subsidiary Digital Arts America, Inc. At the US subsidiary, sales of FinalCode® in FY03/16 were less than the commissions paid to Digital Arts (parent).
As a result, there was an inversion such that in FY03/16 consolidated sales were lower than those of Digital Arts (parent). This trend continued in FY03/17. This inversion of sales was resolved in FY03/18 and consolidated/parent ratios for sales and gross profit again exceeded 1.0x in each of the years during the period spanning from FY03/19 through FY03/21. Earnings contributions from domestic consolidated subsidiary Digital Arts Consulting expanded.
|Cost of sales||463||649||733||878||975||926||1,007||1,075||1,059||1,362||1,947|
|Gross profit margin||79.9%||76.0%||74.8%||71.0%||71.4%||76.9%||80.1%||79.0%||81.9%||75.9%||71.5%|
|Operating profit margin||29.7%||21.7%||25.3%||21.6%||25.4%||25.2%||36.1%||37.2%||45.0%||41.3%||43.6%|
|Total asset turnover||0.68||0.71||0.67||0.64||0.64||0.67||0.75||0.67||0.66||0.54||0.53|
|Working capital (JPY'000)||663||722||814||815||930||1,076||1,279||1,104||1,150||964||1,239|
|OCF / Current liabilities||1.29||1.16||0.90||0.85||1.15||0.72||1.15||0.90||1.70||1.30||0.00|
|Net debt-to-equity ratio||-59.2%||-59.3%||-58.0%||-55.6%||-62.2%||-63.4%||-74.0%||-70.9%||-79.1%||-88.2%||-113.1%|
|OCF / Total liabilities||1.2||1.0||0.8||0.8||0.9||0.7||1.0||1.0||1.5||1.2||1.1|
|Cash conversion cycle (days)||110.9||92.5||97.0||99.1||93.2||90.3||81.6||79.7||64.2||62.9||54.9|
|Change in working capital||-65||59||92||1||115||146||203||-175||46||-186||275|
|Breakdown of costs||FY03/11||FY03/12||FY03/13||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|Cost of sales||463||649||733||878||975||926||1,007||1,075||1,059||1,362||1,947|
|Transfer to other accounts||87||167||177||220||232||263||270||298||294||-240||-57|
|Cash conversion cycle||FY03/11||FY03/12||FY03/13||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|Accounts receivable turnover||3.3||3.9||3.8||3.7||3.9||4.0||4.3||4.2||5.1||5.2||6.0|
|Days in accounts receivable||109.7||93.6||96.2||97.8||93.8||91.9||85.8||86.4||71.8||70.1||60.5|