Dream Incubator (DI) is a professional consulting firm founded in April 2000. The company says its core values lie in “business producing,” referring to tackling social challenges, planning businesses with visions and ideas beyond industry barriers, formulating strategies, gathering reliable partners, and creating added value. It has produced new businesses crossing various sectors, major companies, venture businesses, and borders since its founding.

Mainstay businesses are the Business Production and Incubation businesses. In Business Production, the company provides strategic consulting, business producing support, M&A advisory, and core management development assistance to major corporations (in Japan and overseas) and national and regional government agencies. In Incubation, the company engages in venture investment and buy-and-hold business investment, and leverages its principal investments to develop venture companies deemed integral to new industries. Overseas, the company aims to support innovation around the world by forming partnerships with promising venture capital companies in the US, China, and India for joint investment and consultation. The company also invests using funds it manages. In terms of accounting, the company books venture investment profits when shares in the invested company are sold, whereas for buy-and-hold business investments, it books consolidated profits or losses in proportion to the ownership ratio in the invested company.

Dream Incubator has two main businesses, Business Production (formerly Professional Services) and Incubation. The Incubation business is further divided into the Venture Capital segment (name changed in Japanese only), the Pet Lifestyle segment (formerly Insurance), the HR Innovation segment (formerly Other), and the newly constituted Other segment, which engages in fan marketing. As of FY03/21, the company had five consolidated reporting segments: Business Production, Venture Capital, Pet Lifestyle, HR Innovation, and Other.

Top management of the company changed in June 2020. The founding members passed the leadership baton to a new management team to carry on the company’s founding spirit. The new team is pursuing four structural reform initiatives: realigning the investment and procurement profile of the Venture Capital business, strengthening its core competency of business production, utilizing financial functions to expand the Business Production business, and strengthening corporate governance. Through these initiatives the company aims to fulfill its motto of “helping people,” “generating profits,” “growing,” and “sharing,” thereby maximizing shareholder value.

In May 2021, the company announced a capital and business alliance with Dentsu Group Inc. (TSE1: 4324). On July 2, Dentsu Group bought additional shares of the company, acquiring more than 20% of voting rights, making DI an equity-method affiliate of Dentsu Group.

Trends and outlook

FY03/21 results: For FY03/21, the company reported full-year consolidated sales of JPY27.8bn (22.1% YoY), operating loss of JPY957mn (versus profit of JPY124mn in FY03/20), recurring loss of JPY971mn (versus loss of JPY25mn in FY03/20), and a net loss attributable to owners of the parent of JPY2.1bn (versus loss of JPY198mn in FY03/20).

By segment, sales in the Business Production segment were down 13.4% YoY, due to the loss of sales from its market research business that it exited in Q2 FY03/20 as well as the lull of corporate interest in new business in the wake of the pandemic.

In the Venture Capital segment, the company completed a number of trade sales and sales were up 36.2% YoY. In the Pet Lifestyle segment, sales were up 24.8% YoY, the strong growth driven by the record number of new policies in force, which benefited from strong growth in the pet insurance market. In the HR Innovation segment, sales were up 15.0% YoY, the growth driven by the expansion of its sales force (including those added to handle digital transformation projects), which easily offset the drag from the pandemic.

At the operating profit level, the Business Production segment reported 9.0% growth in operating profit, the Venture Capital segment reported operating loss of JPY1.4bn (versus loss of JPY166mn in FY03/20), the Pet Lifestyle segment reported a 17.1% decline in operating profit, and the HR Innovation segment reported operating loss of JPY54mn (versus loss of JPY105mn).

The jump in earnings in the Business Production segment reflected the company’s efforts to recoup the losses from the exit from its money-losing market research business and the result of management cost reviews. In the Venture Capital segment, the loss reflected a combination of fewer capital gains on stock sales as IPOs initially scheduled for F03/21 were delayed to FY03/22 or later in the wake of the pandemic and writedowns of the carrying value of its investments in companies whose prospects dimmed in the wake of the pandemic, which also took into account the potential long-term impact of the pandemic. The losses in the Pet Lifestyle segment resulted from the increases in expenses (such as commissions and collection fees) that accompanied the increase in pet insurance policy sales, and the rise in net claims paid and loss adjustment expenses accompanying the increase in the number of insurance claims filed.

Net asset value (NAV) as calculated by the company came to JPY32.4bn (JPY3,244 per share) as of the end of FY03/21, up from JPY28.4bn (JPY2,811 per share) at the end of FY03/20, the increase driven in large part by a recovery in the Business Production segment’s industry P/E ratio, which bounced up to 34x versus 25x in the wake of the pandemic, and the rebound in the stock price of subsidiary ipet Holdings.

FY03/22 outlook: Owing to the inherent difficulties in projecting sales and earnings at some of its businesses, the company does not issue a public forecast. While projecting sales and earnings for its Business production segment is fairly easy, making projections for other businesses is more problematic. More specifically, under Incubation, the Venture Capital segment derives most of its sales from the sale of stock holdings, making it subject to the state of the stock market in general and conditions in the IPO market in particular.

In the Business Production segment, the company reports that orders for new projects (representing future sales) have been on the mend since Q3 FY03/21. In the wake of the pandemic, the company saw an especially rapid increase in consulting projects to help companies take advantage of the growing number of transformative changes in industry structures in environment-related and social fields. In order to meet the broad range of needs and keep the Business Production segment growing, the company plans to continue working to build out related business infrastructure by accelerating its investments in human resources and utilizing its capital/business alliance with Dentsu Group. Although the increases in costs stemming from growth investments are expected to leave segment earnings down despite the rise in sales, over the longer term the company expects these investments to help build a stronger, more stable earnings base.

In the Incubation business, as usual, the company thinks it is difficult to make a reliable forecast for sales or earnings in the Venture Capital segment because so much depends on the ups and down of the stock market, particularly the IPO market. The company does have plans for multiple IPOs (including some fairly large ones) and is expecting to make some trade sales as well, but there is always the risk that in any given timeframe the stock market will suffer a downturn that would not only reduce the capital gains on stock sales but also lead to additions to reserves for losses on investments.

The Pet Lifestyle segment sees ongoing growth in the pet insurance market as a whole underpinning sales growth at its own pet insurance business. Related costs are expected to rise, though, as plans call for pushing ahead with digital transformation initiatives to establish a firm foundation for the next growth phase of the pet insurance business. As a result, the company expects adjusted recurring profit at ipet Holdings to finish FY03/22 at JPY880mn (-21.4% YoY).

In the HR Innovation segment, the company is looking to continue growing its sales and earnings with the help of its ongoing digital transformation initiatives and investments in human resources, and sees very little drag from the pandemic.

In the Other segment (PEACS Inc.), the company expects to finish FY03/22 in the red owing to its adoption of a new growth model that should take better advantage of PEACS’s forte in fan marketing. The Other segment promises to move into the black before much longer, though, and so the company will continue putting the infrastructure in place to make that happen sooner rather than later.

Strengths and weaknesses

Shared Research believes that Dream Incubator’s strengths are its clearly formulated management strategy and philosophy, growing and cash-flow generating businesses, and the high retention rate of consultants and management quality. Weaknesses are a limited track record in business investment, few opportunities to source venture capital deals, and limited experience in global consulting.

Key financial data

Income statement		FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18		FY03/19		FY03/20		FY03/21		FY03/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Cons.	Cons.: Insurance adjusted	Est.
Sales		2,690	6,526	7,693	9,092	13,343	12,691	14,526	18,418	18,418	20,705	20,705	22,755	22,755	27,776	27,776	na
	YoY	2.7%	142.6%	17.9%	18.2%	46.8%	-4.9%	14.5%	26.8%	26.8%	12.4%	12.4%	9.9%	9.9%	22.1%	22.1%	-
Gross profit		1,385	2,918	3,711	4,811	7,914	6,384	7,018	9,551	9,825	9,303	9,933	10,440	11,080	10,987	11,720
	YoY	266.4%	110.7%	27.2%	29.6%	64.5%	-19.3%	9.9%	36.1%	33.0%	-2.6%	1.1%	12.2%	11.5%	5.2%	5.8%
	Gross profit margin	51.5%	44.7%	48.2%	52.9%	59.3%	50.3%	48.3%	51.9%	53.3%	44.9%	48.0%	45.9%	48.7%	39.6%	42.2%
Operating profit		702	1,100	768	1,141	1,348	538	517	1,854	2,128	124	754	124	768	-957	-220	na
	YoY	-	56.7%	-30.2%	48.6%	18.1%	-60.1%	-3.9%	258.2%	139.7%	-93.3%	-64.6%	-90.1%	1.9%	-	-	-
	Operating profit margin	26.1%	16.9%	10.0%	12.5%	10.1%	4.2%	3.6%	10.1%	11.6%	0.6%	3.6%	0.5%	3.4%	-3.4%	-0.8%
Recurring profit		698	1,104	759	1,101	1,373	525	527	1,915	2,189	277	908	-25	619	-971	-233	na
	YoY	-	58.2%	-31.3%	45.1%	24.7%	-61.8%	0.3%	263.2%	143.9%	-85.5%	-58.5%	-	-31.9%	-	-	-
	Recurring profit margin	25.9%	16.9%	9.9%	12.1%	10.3%	4.1%	3.6%	10.4%	11.9%	1.3%	4.4%	-0.1%	2.7%	-3.5%	-0.8%
Net income attributable to owners of the parent		422	833	671	854	993	420	101	899	1,071	378	358	-198	63	-2,105	-1,806	na
	YoY	69.5%	97.4%	-19.4%	27.3%	16.3%	-57.7%	-75.9%	787.4%	199.0%	-57.9%	-66.5%	-	-82.3%	-	-	-
	Net margin	15.7%	12.8%	8.7%	9.4%	7.4%	3.3%	0.7%	4.9%	5.8%	1.8%	1.7%	-0.9%	0.3%	-	-
Per-share data
Shares issued (year-end; '000)		96	96	96	9,783	10,054	10,181	10,244	10,301		10,301		10,381		10,422
EPS		4,414.5	8,698.0	7,002.0	88.1	103.2	43.0	10.3	92.4		38.6		-20.3		-215.2
EPS (fully diluted)		4,412.0	8,696.1	6,766.8	83.7	98.9	41.7	10.1	90.7		36.7		-		-
Dividend per share		-	-	2,100.0	2,600.0	29.0	12.0	3.0	26.0		-		-		-
Book value per share		72,274.1	81,895.1	89,573.4	1,364.9	1,085.9	1,033.8	1,015.3	1,078.6		1,141.5		1,090.8		955.6
Balance sheet (JPYmn)
	Cash and cash equivalents	3,145	4,032	4,889	5,555	6,497	7,307	7,409	6,299		6,559		4,745		4,327
Total current assets		6,853	7,570	9,012	16,322	14,029	14,858	14,990	15,235		15,926		20,497		23,528
Tangible fixed assets		29	162	198	180	152	130	159	197		341		491		680
Investments and other assets		423	410	309	385	375	470	1,288	3,217		6,396		2,847		3,339
Intangible assets		1,052	1,620	1,438	1,286	1,176	674	909	718		2,041		2,588		2,001
Total assets		8,358	10,551	12,056	19,539	15,734	16,134	17,348	19,368		24,705		26,424		29,549
	Accounts payable	-	9	39	29	23	-	-	-		131		194		384
	Short-term debt	-	3	4	1	1	1	102	108		697		1,122		1,647
Total current liabilities		1,244	1,833	2,420	5,026	4,266	4,817	5,912	7,247		9,502		11,521		14,819
	Long-term debt	-	10	13	168	2	-	329	251		1,018		940		1,085
Total fixed liabilities		-	10	13	168	21	71	467	474		1,347		1,265		1,533
Total liabilities		1,244	1,844	2,434	5,195	4,287	4,889	6,380	7,722		10,850		12,786		16,353
Total net assets		7,114	8,707	9,622	14,344	11,446	11,245	10,967	11,646		13,855		13,638		13,196
Total interest-bearing debt		-	13	17	169	3	1	431	359		1,715		2,062		2,732
Cash flow statement (JPYmn)
Cash flows from operating activities		902	2,322	1,504	1,622	2,421	907	1,509	864		1,292		-1,178		-700
Cash flows from investing activities		-551	-4,058	610	-1,463	-1,026	74	-873	-1,865		-3,285		-61		-1,510
Cash flows from financing activities		1	-2	-1	-141	-618	-33	-126	-100		2,891		401		1,816
Financial ratios
ROA (RP-based)		9.3%	11.7%	6.7%	7.0%	7.8%	3.3%	3.1%	10.4%		1.3%		-0.1%		-3.5%
ROE		6.3%	11.3%	8.2%	7.8%	8.3%	4.0%	1.0%	8.8%		3.5%		-1.8%		-21.2%
Equity ratio		82.8%	74.4%	71.6%	68.3%	67.2%	63.2%	56.8%	54.4%		45.5%		40.2%		31.3%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company conducted a 100-for-1 stock split, effective April 1, 2014.

By segment						FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)						Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Sales						2,690	6,526	7,693	9,092	13,343	12,691	14,526	18,418	20,705	22,755	27,776
	YoY					2.7%	142.6%	17.9%	18.2%	46.8%	-4.9%	14.5%	26.8%	12.4%	9.9%	22.1%
		Business Production				1,696	1,972	2,379	2,171	2,504	2,667	3,202	3,454	2,556	2,679	2,319
				YoY		52.5%	16.3%	20.6%	-8.7%	15.3%	6.5%	20.1%	7.9%	-26.0%	4.8%	-13.4%
				% of total		63.0%	30.2%	30.9%	23.9%	18.8%	21.0%	22.0%	18.8%	12.3%	11.8%	8.3%
		Incubation				-	-	-	-	-	-	-	-	-	20,088	25,494
			YoY			-	-	-	-	-	-	-	-	-	-	26.9%
			% of total			-	-	-	-	-	-	-	-	-	88.2%	91.7%
				Venture Capital segment		899	979	426	1,011	3,671	703	1,179	2,752	2,867	800	1,062
					YoY	-40.4%	8.9%	-56.5%	137.3%	263.1%	-80.8%	67.7%	133.4%	4.2%	-72.1%	32.8%
					% of total	33.4%	15.0%	5.5%	11.1%	27.5%	5.5%	8.1%	14.9%	13.8%	3.5%	3.8%
				Pet Lifestyle segment		-	3,325	4,284	5,100	6,363	8,126	10,067	12,212	14,876	18,317	22,859
					YoY	-	-	28.8%	19.0%	24.8%	27.7%	23.9%	21.3%	21.8%	23.1%	24.8%
					% of total	-	51.0%	55.7%	56.1%	47.7%	64.0%	69.3%	66.3%	71.7%	80.5%	82.2%
				HR Innovation segment		-	-	-	-	-	-	-	-	-	957	1,092
					YoY	-	-	-	-	-	-	-	-	-	-	14.1%
					% of total	-	-	-	-	-	-	-	-	-	4.2%	3.9%
				Other segment		-	-	-	-	-	-	-	-	-		442
					YoY	-	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-		1.6%
				Former segment
				Other		-	-	594	809	803	1,193	78	-	448	-	-
					YoY	-	-	-	36.2%	-0.7%	48.6%	-93.5%	-	-	-	-
					% of total	-	-	7.7%	8.9%	6.0%	9.4%	0.5%	-	2.2%	-	-
		Adjustments				-	-	-	-	-	-	-	-	-43	-12	-38
Operating profit						702	1,100	768	1,141	1,348	538	517	1,854	124	124	-957
	YoY					-	56.7%	-30.2%	48.6%	18.1%	-60.1%	-3.9%	258.6%	-93.3%	-90.1%	-
	Operating profit margin					26.1%	16.9%	10.0%	12.5%	10.1%	4.2%	3.6%	10.1%	0.6%	0.5%	-
		Business Production [1]				672	407	779	490	1,288	1,439	1,861	1,685	652	967	1,054
				YoY		405.3%	-39.5%	91.4%	-37.1%	162.9%	11.7%	29.3%	-9.5%	-61.3%	48.3%	9.0%
				Operating profit margin		39.6%	20.6%	32.7%	22.6%	51.4%	54.0%	58.1%	48.8%	25.5%	36.1%	45.5%
				% of total		86.7%	37.0%	64.3%	30.0%	52.8%	87.4%	114.3%	62.0%	63.7%	94.1%	-
		Incubation				-	-	-	-	-	-	-	-	-	62	-1,106
					YoY	-	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	0.3%	-
					% of total	-	-	-	-	-	-	-	-	-	6.0%	-
				Venture Capital segment [2]		104	50	89	835	2,577	-148	-344	632	261	-166	-1,382
					YoY	-	-51.7%	78.0%	838.2%	208.6%	-	-	-	-58.7%	-	-
					Operating profit margin	11.5%	5.1%	20.9%	82.6%	70.2%	-	-	23.0%	9.1%	-	-
					% of total	13.3%	4.5%	7.3%	51.2%	105.6%	-9.0%	-21.1%	23.2%	25.5%	-	-
				Pet Lifestyle segment [3]		-	743	460	451	-1,046	157	177	402	134	333	276
					YoY	-	-	-38.1%	-2.0%	-	-	12.7%	127.1%	-66.7%	148.5%	-17.1%
					Operating profit margin	-	22.3%	10.7%	8.8%	-16.4%	1.9%	1.8%	3.3%	0.9%	1.8%	1.2%
					% of total	-	67.5%	38.0%	27.6%	-42.9%	9.5%	10.9%	14.8%	13.1%	32.4%	-
				HR Innovation [4]		-	-	-	-	-	-	-	-	-	-	-54
					YoY	-	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-	-	-
				Other segment [5]		-	-	-	-	-	-	-	-	-	-	54
					YoY	-	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-	-	-
				Former segment
				Other segment [5]		-	-99	-116	-143	-378	201	-65	-	-23	-105	-
					YoY	-	-	-	-	-	-	-	-	-	-	-
					Operating profit margin	-	-	-	-	-	-	-	-	-	-	-
					% of total	-	-	-	-	-	-	-	-	-	-	-
		Adjustments [6]				-74	-	-443	-491	-1,093	-1,109	-1,111	-865	-899	-904	-905
Adjustments related to ordinary underwriting reserve						-	-	-	-	-	-	47	-117	155	64	20
Adjustments related to catastrophe reserve						-	-	-	-	-	-	322	391	475	580	717
		Insurance segment OP (adjusted; [3]')				-	-	-	-	-	-	547	676	765	978	1,014
				YoY		-	-	-	-	-	-	-	23.6%	13.2%	27.8%	3.7%
				Operating profit margin		-	-	-	-	-	-	5.4%	5.5%	5.1%	5.3%	4.4%
				% of total		-	-	-	-	-	-	27.4%	22.6%	46.3%	58.5%	148.0%
Operating profit (adjusted;[1]+[2]+[3]'+[4]+[5]+[6])						-	-	-	-	-	-	886	2,128	754	768	-220
		YoY				-	-	-	-	-	-	-	140.2%	-64.6%	1.9%	-
		Operating profit margin				-	-	-	-	-	-	6.1%	11.6%	3.6%	3.4%	-
Recurring profit (adjusted)						-	-	-	-	-	-	897	2,189	908	619	-233
		YoY				-	-	-	-	-	-	-	143.9%	-58.5%	-31.8%	-
		Recurring profit margin				-	-	-	-	-	-	6.2%	11.9%	4.4%	2.7%	-
Net income attributable to owners of the parent (adjusted)						-	-	-	-	-	-	358	1,071	358	63	-1,806
		YoY				-	-	-	-	-	-	-	199.0%	-66.5%	-82.3%	-
		Net margin				-	-	-	-	-	-	2.5%	5.8%	1.7%	0.3%	-

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
In FY03/21, the company changed the name of its reporting segments: the former Professional Services segment became the Business Production segment, the Venture Capital segment retained its name (in English), and the Insurance segment became the Pet Lifestyle segment. The newly established HR Innovation segment consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment.

Recent updates

Stock listing approved for investee Slogan, Inc.

2021-10-21

Dream Incubator Inc. announced its principal investee Slogan, Inc. had been approved for listing on the Mothers market of the Tokyo Stock Exchange on October 21, 2021.

Established in 2005, Slogan provides various services centered on human resources support for new industries.

The company owns 51,725 shares in Slogan (2.4% share, based on the number of present shares).

Transfer of consolidated subsidiaries (share transfer)

2021-09-30

Dream Incubator Inc. announced a transfer of its consolidated subsidiaries (share transfer).

At a meeting of its Board of Directors held on September 30, 2021, the company resolved to transfer all shares of its consolidated subsidiary Dimension Inc. to Mr. Takamitsu Miyaso, the representative director of Dimension. As a result of this transaction, Dimension Investment Partners Limited, which is operated by Dimension as a general partner, will be removed from the company's consolidated subsidiaries. The contract conclusion date is September 30, and the execution date is October 1.

As previously announced, under the new management structure, the company has been promoting structural reforms to achieve a growth trajectory. The company has recognized the volatility of venture investment as a management issue and one of the themes of these reforms is to curb investment to reduce volatility (in addition to curbing its own investment, the company has been reconsidering its involvement in fund investment). The company believes that selling Dimension will contribute to the future management policy of the group, while allowing Dimension to continue to promote management support for startup growth as an independent entity.

It is difficult to make a reasonable forecast at this time as to the impact of this transaction on the company's FY03/22 earnings because most of the venture investment sales will come from the sale of shares in the stock market. The company will promptly disclose any relevant matters as they arise.

Details of the share transfer
Number of shares held before the transfer: 100 shares (100% of voting rights)
Number of shares to be transferred: 100 shares
Transfer price: JPY3mn

Launch of the Sustainable BX Team with Dentsu Inc.

2021-08-30

Dream Incubator Inc. announced the launch of the Sustainable BX Team with Dentsu Inc. to fully deploy its business production capabilities for the carbon neutral era.

As the entire world makes a large shift toward the realization of carbon neutral, the company will expand the scope and fully deploy its business production activities for the carbon neutral era, which it has engaged in for a number of client companies.

The company launched the Sustainable BX Team, an expert business transformation (BX) team to realize the balance of sustainability and corporate transformation/business growth as part of a joint effort with business partner Dentsu Inc. (TSE1: 4324). The company’s strength lies in its business production capabilities that are able to create new businesses based on strategy, technology, and policy to tackle social problems. Dentsu’s strength lies in providing integrated solutions based on consumers, customer connections, and customer experiences. The team will utilize both of these strengths to support the realization of sustainability goals and corporate transformation/business growth.

Along with the launch of this team, the company will begin providing the Carbon Neutral Transformation Program as the first service. In recent years, companies have gained a growing awareness of carbon neutrality as an important management agenda. In Japan, many companies have announced declarations for the realization of carbon neutrality. The major efforts to realize carbon neutrality are within the scope of existing businesses, such as reviewing electric power procurement and materials suppliers/business partners. However, companies have struggled to make progress with such efforts as they encounter the issues of higher costs and lower profit for their existing businesses.

In this program, companies are not restricted to measures that simply cut CO2 emissions from existing businesses to fulfill their social responsibility by going from negative impact to neutrality. Instead, companies are made to grasp that this shift to carbon neutrality is a good opportunity for market structure transformation (game change). The program will support their proactive efforts to go from neutrality to positive impact, including generating new businesses, and reviewing and transforming their business domains. The company believes this will open up opportunities to global investment and financing money said to be several tens of quadrillion yen (source: International Renewable Energy Agency “Global Renewables Outlook”). This program will also support the generation of new corporate value, corporate transformation, and the realization of a management style that emphasizes carbon neutrality.

Trends and outlook

Quarterly trends and results

Quarterly earnings		FY03/20				FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		5,231	5,383	6,101	6,040	6,074	7,269	6,592	7,841	7,974	8,821
	YoY	-3.7%	23.9%	24.7%	0.0%	16.1%	35.0%	8.0%	29.8%	31.3%	21.4%
Gross profit		2,404	2,435	3,003	2,598	2,503	2,891	2,786	2,807	3,427	3,613
	YoY	0.7%	17.1%	28.7%	3.8%	4.1%	18.7%	-7.2%	8.0%	36.9%	25.0%
	Gross profit margin	46.0%	45.2%	49.2%	43.0%	41.2%	39.8%	42.3%	35.8%	43.0%	41.0%
SG&A expenses		2,499	2,440	2,592	2,785	2,679	2,861	2,939	3,465	3,565	3,708
	YoY	14.3%	10.0%	8.7%	16.6%	7.2%	17.3%	13.4%	24.4%	33.1%	29.6%
	SG&A-to-sales ratio	47.8%	45.3%	42.5%	46.1%	44.1%	39.4%	44.6%	44.2%	44.7%	42.0%
Operating profit		-94	-5	409	-186	-175	30	-154	-658	-138	-95
	YoY	-	-	-	-	-	-	-	-	-	-
	Operating profit margin	-	-	6.7%	-	-	0.4%	-	-	-	-
Recurring profit		-106	-41	325	-203	-161	93	-200	-703	59	-88
	YoY	-	-	-	-	-	-	-	-	-	-
	Recurring profit margin	-	-	5.3%	-	-	1.3%	-	-	0.7%	-
Net income		-18	-126	163	-217	-143	-100	-192	-1,670	-21	-108
	YoY	-	-	-	-	-	-	-	-	-	-
	Net margin	-	-	2.7%	-	-	-	-	-	-	-
Cumulative		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales		5,231	10,614	16,715	22,755	6,074	13,343	19,935	27,776	7,974	16,795
	YoY	-3.7%	8.6%	14.0%	9.9%	16.1%	25.7%	19.3%	22.1%	31.3%	25.9%
Gross profit		2,404	4,839	7,842	10,440	2,503	5,394	8,180	10,987	3,427	7,040
	YoY	0.7%	8.3%	15.3%	12.2%	4.1%	11.5%	4.3%	5.2%	36.9%	30.5%
	Gross profit margin	46.0%	45.6%	46.9%	45.9%	41.2%	40.4%	41.0%	39.6%	43.0%	41.9%
SG&A expenses		2,499	4,939	7,531	10,316	2,679	5,540	8,479	11,944	3,565	7,273
	YoY	14.3%	12.1%	10.9%	12.4%	7.2%	12.2%	12.6%	15.8%	33.1%	31.3%
	SG&A-to-sales ratio	47.8%	46.5%	45.1%	45.3%	44.1%	41.5%	42.5%	43.0%	44.7%	43.3%
Operating profit		-94	-99	310	124	-175	-145	-299	-957	-138	-233
	YoY	-	-	2,718.2%	-90.1%	-	-	-	-	-	-
	Operating profit margin	-	-	1.9%	0.5%	-	-	-	-	-	-
Recurring profit		-106	-147	178	-25	-161	-68	-268	-971	59	-29
	YoY	-	-	104.6%	-	-	-	-	-	-	-
	Recurring profit margin	-	-	1.1%	-0.1%	-	-	-	-	0.7%	-
Net income		-18	-144	19	-198	-143	-243	-435	-2,105	-21	-129
	YoY	-	-	-87.3%	-	-	-	-	-	-	-
	Net margin	-	-	0.1%	-0.9%	-	-	-	-	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Earnings by segment: quarterly

By segment: quarterly				FY03/20				FY03/21				FY03/22
(JPYmn)				Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales
Business Production				573	708	739	659	508	664	467	680	614	683
	YoY			-	-	-	-	-11.3%	-6.2%	-36.8%	3.2%	20.9%	2.9%
Incubation				4,662	4,763	5,281	5,382	5,573	6,611	6,134	7,176	7,364	-
	YoY			-	-	-	-	19.5%	38.8%	16.2%	33.3%	32.1%	-
		Venture Capital segment		253	151	311	85	141	811	21	92	33	296
			YoY	-	-	-	-	-44.3%	437.1%	-93.2%	8.2%	-76.6%	-63.5%
		Pet Lifestyle segment		4,212	4,425	4,719	4,961	5,192	5,545	5,836	6,286	6,639	7,053
			YoY	-	-	-	-	23.3%	25.3%	23.7%	26.7%	27.9%	27.2%
		HR Innovation segment		197	185	251	324	240	257	278	317	288	342
			YoY	-	-	-	-	21.8%	38.9%	10.8%	-2.2%	20.0%	33.1%
		Fan Marketing segment		-	-	-	-	-	-	-	-	401	461
			YoY	-	-	-	-	-	-	-	-	-	-
		Other segment		-	-	-	-	-	-	-	442	-	-
			YoY	-	-	-	-	-	-	-	-	-	-
Internal transactions or transfer				-4	-6	0	-2	-8	-5	-9	-16	-5	-11
Former segment
Professional Services				573	708	739	659	-	-	-	-	-	-
	YoY			12.1%	26.9%	23.4%	-25.8%	-	-	-	-	-	-
Incubation				4,647	4,696	5,241	5,344	-	-	-	-	-	-
	YoY			-5.5%	24.1%	22.0%	2.9%	-	-	-	-	-	-
		Venture Capital		253	151	311	86	-	-	-	-	-	-
			YoY	-82.9%	-20.1%	37.0%	-91.2%	-	-	-	-	-	-
		Insurance		4,197	4,358	4,680	4,922	-	-	-	-	-	-
			YoY	21.9%	21.3%	21.9%	23.1%	-	-	-	-	-	-
Other segment				197	-	-	-	-	-	-	-	-	-
	YoY			-	-	-	-	-	-	-	-	-	-
Operating profit
Business Production				67	245	342	313	215	379	147	313	241	239
	YoY			-	-	-	-	220.9%	54.7%	-57.0%	0.0%	12.1%	-36.9%
Incubation				60	68	204	-270	-155	-131	-106	-768	-177	-
	YoY			-	-	-	-	-	-	-	-	-	-
		Venture Capital segment		96	-82	116	-296	-108	-276	-198	-800	-115	-9
			YoY	-	-	-	-	-	-	-	-	-	-
		Pet Lifestyle segment		-6	186	109	44	-13	156	103	30	74	35
			YoY	-	-	-	-	-	-16.1%	-5.5%	-31.8%	-	-77.6%
		HR Innovation segment		-30	-36	-21	-18	-34	-11	-11	2	-27	-38
			YoY	-	-	-	-	-	-	-	-	-	-
		Fan Marketing segment		-	-	-	-	-	-	-	-	-109	-96
			YoY	-	-	-	-	-	-	-	-	-	-
		Other segment		-	-	-	-	-	-	-	442	-	-
			YoY	-	-	-	-	-	-	-	-	-	-
Company-wide expenses				-221	-241	-213	-229	-235	-219	-194	-257	-202	-226
Former segment
Professional Services				67	245	342	313	-	-	-	-	-	-
	YoY			36.7%	155.2%	159.1%	-16.5%	-	-	-	-	-	-
Incubation				79	36	194	-254	-	-	-	-	-	-
	YoY			-78.4%	-	240.4%	-	-	-	-	-	-	-
		Venture Capital		96	-82	116	-296	-	-	-	-	-	-
			YoY	-66.0%	-	-	-	-	-	-	-	-	-
		Insurance		-17	118	78	42	-	-	-	-	-	-
			YoY	-	-	-68.7%	-	-	-	-	-	-	-
Other segment				-30	-36	-21	-18	-	-	-	-	-	-
	YoY			-	-	-	-	-	-	-	-	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Effective Q1 FY03/21, the company changed the name of its reporting segments. The former Professional Services segment became the Business Production segment, the Venture Capital segment retained its name, the Insurance segment became the Pet Lifestyle segment. The newly established HR Innovation segment consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment. For purposes of comparison, segment results for Q1 FY03/20 were recalculated to match the new reporting segment scheme.

Earnings by segment: cumulative

By segment: cumulative				FY03/20				FY03/21				FY03/22
Cumulative				Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales
Business Production				573	1,281	2,020	2,679	508	1,172	1,639	2,319	614	1,297
	YoY			-	-	-	-	-11.3%	-8.5%	-18.9%	-13.4%	20.9%	10.7%
Incubation				4,662	9,425	14,706	20,088	5,573	12,184	18,318	25,494	7,364	-
	YoY			-	-	-	-	19.5%	29.3%	24.6%	0	32.1%	-
		Venture Capital segment		253	404	715	800	138	949	970	1,062	33	329
			YoY	-	-	-	-	-45.5%	134.9%	35.7%	32.8%	-76.1%	-65.3%
		Pet Lifestyle segment		4,212	8,637	13,356	18,317	5,192	10,737	16,573	22,859	6,639	13,692
			YoY	-	-	-	-	23.3%	24.3%	24.1%	24.8%	27.9%	27.5%
		HR Innovation segment		197	382	633	957	240	497	775	1,092	288	630
			YoY	-	-	-	-	21.8%	30.1%	22.4%	14.1%	20.0%	26.8%
		Fan Marketing segment		-	-	-	-	-	-	-	-	401	862
			YoY	-	-	-	-	-	-	-	-	-	-
		Other segment		-	-	-	-	-	-	-	442	-	-
			YoY	-	-	-	-	-	-	-	-	-	-
Internal transactions or transfer				-4	-10	-10	-12	-8	-13	-22	-38	-5	-16
Former segment
Professional Services				573	1,281	2,020	2,679	-	-	-	-	-	-
	YoY			12.1%	19.8%	21.1%	4.8%	-	-	-	-	-	-
Incubation				4,647	9,343	14,584	19,928	-	-	-	-	-	-
	YoY			-5.5%	7.3%	12.2%	9.5%	-	-	-	-	-	-
		Venture Capital		253	404	715	801	-	-	-	-	-	-
			YoY	-82.9%	-75.8%	-62.2%	-72.1%	-	-	-	-	-	-
		Insurance		4,197	8,555	13,235	18,157	-	-	-	-	-	-
			YoY	21.9%	21.6%	21.7%	22.1%	-	-	-	-	-	-
Other segment				197	382	633	969	-	-	-	-	-	-
	YoY			-	-	177.6%	116.3%	-	-	-	-	-	-
Operating profit
Business Production				67	312	654	967	215	594	741	1,054	241	480
	YoY			-	-	-	-	220.9%	90.4%	13.3%	9.0%	12.1%	-19.2%
Incubation				60	128	332	62	-155	-286	-392	-1,160	-177	-285
	YoY			-	-	-	-	-	-	-	-	-	-
		Venture Capital segment		96	14	130	-166	-108	-384	-582	-1,382	-115	-124
			YoY	-	-	-	-	-	-	-	-	-	-
		Pet Lifestyle segment		-6	180	289	333	-13	143	246	276	74	109
			YoY	-	-	-	-	-	-20.6%	-14.9%	-17.1%	-	-23.8%
		HR Innovation segment		-30	-66	-87	-105	-34	-45	-56	-54	-27	-65
			YoY	-	-	-	-	-	-	-	-	-	-
		Fan Marketing segment		-	-	-	-	-	-	-	-	-109	-205
			YoY	-	-	-	-	-	-	-	-	-	-
		Other segment		-	-	-	-	-	-	-	54	-	-
			YoY	-	-	-	-	-	-	-	-	-	-
Adjustments				-221	-462	-675	-904	-235	-454	-648	-905	-202	-428
Former segment
Professional Services				67	312	654	967	-	-	-	-	-	-
	YoY			36.7%	115.2%	136.1%	48.3%	-	-	-	-	-	-
Incubation				79	115	309	55	-	-	-	-	-	-
	YoY			-78.4%	-65.3%	-20.4%	-86.1%	-	-	-	-	-	-
		Venture Capital		96	14	130	-166	-	-	-	-	-	-
			YoY	-66.0%	-94.2%	160.0%	-	-	-	-	-	-	-
		Insurance		-17	101	179	221	-	-	-	-	-	-
			YoY	-	13.5%	-47.0%	64.9%	-	-	-	-	-	-
Other segment				-30	-66	-87	-105	-	-	-	-	-	-
	YoY			-	-	-	-	-	-	-	-	-	-

1H FY03/22 results (out November 9, 2021)

Summary

Sales: JPY16.8bn (+25.9% YoY)
Operating loss: JPY233mn (versus loss of JPY145mn in 1H FY03/21)
Recurring loss: JPY29mn (versus loss of JPY68mn in 1H FY03/21)
Net loss attributable to owners of the parent: JPY129mn (versus loss of JPY243mn in 1H FY03/21)

Performance versus plan

The company does not make earnings forecasts due to the volatility of results at the Venture Capital segment, where earnings can vary greatly depending on conditions in the stock market and trends in initial public offerings.

Sales

1H FY03/22 sales were JPY16.8bn (+25.9% YoY).

Sales in the Business Production segment were up 10.7% YoY. In Q2, new project orders continued to show the strength exhibited in Q1 FY03/22, bolstered by an increase in social and environmental projects as companies moved to take advantage of the accelerating changes in industry structures as a result of the COVID-19 pandemic.

In the Venture Capital segment, sales were down 65.3% YoY. The company expects the bulk of the capital gains booked in FY03/22 to come in the second half of the year. In 1H, the segment had no significant proceeds from the sale of venture capital investments, though neither did it book impairment losses.

In the Pet Lifestyle segment, sales were up 27.5% YoY, the growth driven by robust performance in terms of the number of new policies in force, which benefited from strong growth in the pet insurance market.

In the HR Innovation segment, sales were up 26.8% YoY, the growth driven by the expansion of its sales force (including those added to handle digital transformation projects), which offset the drag from the pandemic.

Sales in the Fan Marketing segment (launched in February 2021) came in at JPY862mn (the segment did not exist in 1H FY03/21).

Operating losses

The company booked an operating loss of JPY233mn (versus a loss of JPY145m in 1H FY03/21).

Operating profit in the Business Production segment declined 19.2% YoY. The increase in projects had a positive impact on sales, but this was outweighed by investment reinforcing human resources, business expansion such as the preparation of social impact bonds (SIB), and increased outsourcing costs to compensate for a shortage of personnel.

The company booked an operating loss in the Venture Capital segment of JPY124mn (versus a loss of JPY384mn in 1H FY03/21). Earnings at the operating line were impacted by the same factors affecting sales.

The Pet Lifestyle segment saw operating profit decrease 23.8% YoY. The narrowing operating profit in the Pet Lifestyle segment despite a YoY rise in sales was the result of increased expenses (such as commissions and collection fees) that accompanied the increase in pet insurance policy sales, and the rise in net claims paid and loss adjustment expenses accompanying the increase in the number of insurance claims filed. The company uses adjusted earnings to gauge the true profitability of its pet insurance business. For 1H FY03/22, the segment reported adjusted operating profit of JPY580mn (versus JPY422mn in 1H FY03/21).

The HR Innovation segment booked an operating loss of JPY65mn (versus a loss of JPY45mn in 1H FY03/21). The segment continued to grow in scale, but booked a loss as it continued to invest to ensure future growth.

The Fan Marketing segment booked an operating loss of JPY205mn (the segment did not exist in 1H FY03/21). The loss was more significant than the company had expected as a result of the partial downturn to business caused by the COVID-19 pandemic.

Unrealized gains on investments

With an eye toward improving clarity in performance indicators in line with the individual characteristics of each business, the company revised its disclosure of NAV, which previously reflected the sum value of all its businesses, to exclude the Business Production business. NAV excluding the Business Production business was JPY22.3bn as of the end of Q2 FY03/22 (end-September 2021). In the Incubation business, only held investment assets were subject to mark-to-market valuations. As of the same date, associated book value was JPY7.9bn, which yields estimated unrealized gains of JPY14.4bn.

The company believes that profit calculated on the basis of the unearned premium method for regular policy reserves, and not taking into account provision of the catastrophe reserve, is a useful indicator of the profitability ipet Insurance Co., Ltd., one of its key subsidiaries. On that basis, Dream Incubator reported adjusted recurring profit of JPY441mn (adjusted recurring profit of JPY210mn in 1H FY03/21).

Effective Q1 FY03/21, the company changed the name of its reporting segments. The former Professional Services segment will now be the Business Production segment, the Venture Capital segment will retain its name, the Insurance segment will now be the Pet Lifestyle segment. The Other business segment was replaced by the new HR Innovation segment, which consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment. For purposes of comparison, segment results for Q1 FY03/20 were recalculated to match the new reporting segment scheme.

Business Production business

Business Production segment

For 1H FY03/22, the Business Production segment reported sales of JPY1.3bn (+10.7% YoY) and operating profit of JPY480mn (-19.2% YoY).

Under the Business Production segment, the company operates a consulting business with the concept of creating leading businesses of the next generation (“business producing”). In addition to providing strategic consulting services for major corporations to support new business creation and strategic long-term growth initiatives, the company also offers M&A financial advisory services.

Sales were up 10.7% YoY. In Q2, new project orders continued to show the strength exhibited in Q1 FY03/22, bolstered by an increase in social and environmental projects as companies moved to take advantage of the accelerating changes in industry structures as a result of the COVID-19 pandemic. Meanwhile, segment profit narrowed by 19.2% YoY as the company invested in reinforcing human resources and expanded its business into areas such as social impact bonds (SIB), and outsourcing costs increased to compensate for a shortage of personnel.

The company is accelerating human resources investment and the reinforcement of its alliances as part of its effort to strengthen its revenue base.

Incubation business

Under its Incubation business, the company counts the Venture Capital segment, Pet Lifestyle segment, HR Innovation segment, and Fan Marketing segment.

Venture Capital segment

For 1H FY03/22, the Venture Capital segment reported sales of JPY329mn (-65.3% YoY) and an operating loss of JPY124mn (versus a loss of JPY384mn in 1H FY03/21).

In the Venture Capital segment, the company works together with partner venture capital companies to invest in startup companies, most of which are located in Japan and India. Dream Incubator funnels both capital and human resources into the start-ups in which it invests when they are at the stage where the company’s deeper involvement is expected to help accelerate growth.

The company resolved to dispose of Dimension Inc. in 1H in order to concentrate management resources on the Business Production business and curb investment volatility, and effected that transfer on October 1, 2021. Dimension Inc. is the company that operates Dimension Investment Partners Limited (DMS Fund), a fund that invests in Japanese startups. As a result, Dimension Inc. and the DMS Fund will both be out of scope of consolidation from Q3 FY03/22 (only the amount equivalent to the company's equity interest in the DMS Fund will be included in results).

The company expects the bulk of the capital gains booked in FY03/22 to come in the second half of the year. The segment had no significant proceeds from the sale of venture capital investments in 1H, though neither did it book impairment losses.

Pet Lifestyle segment

For 1H FY03/22, the Pet Lifestyle segment reported sales of JPY13.7bn (+27.5% YoY) and operating profit of JPY109mn (-23.8% YoY).

The Pet Lifestyle segment consists of the pet medical insurance business operated by ipet Insurance, the largest company under the umbrella of consolidated subsidiary ipet Holdings. During FY03/21 ipet Holdings acquired Pet’s All Right, an online pet health consultation/pet-related information platform operator, making Pet’s All Right a subsidiary.

As mentioned previously, the company uses adjusted earnings to gauge the true profitability of its pet insurance business. For 1H FY03/22, the segment reported adjusted operating profit of JPY580mn (versus JPY422mn in 1H FY03/21). The difference reflects adjustments to regular policy reserves and catastrophe reserves (excluding regular provisioning) to compensate for a change in its reserve calculation method (from the first-year income-expenditure balance method to the unearned premium method).

Sales growth in the Pet Lifestyle segment reflected continued strong growth in the number of policies in force, driven by an increase in new insurance customers amid robust pet-related demand. At the end of 1H FY03/22, the segment reported a total of 678,532 policies in force, up 56,463 from end-FY03/21. On the cost side, the segment saw increases in expenses (such as commissions and collection fees) stemming from the growth in insurance policies sales and the increases in the number of policies in force, and increases in net claims paid and loss adjustment expenses due to an increase in the number of insurance claims filed.

HR Innovation segment

For 1H FY03/22, the HR Innovation segment reported sales of JPY630mn (+26.8% YoY) and an operating loss of JPY65mn (versus a loss of JPY45mn in 1H FY03/21).

Formerly known as the Other segment, the HR Innovation segment consists of subsidiary Work Style Lab, Inc. (WSL), which operates a matching platform for freelance consultants and became a wholly owned subsidiary in August 2018.

While somewhat offset by the effects from the pandemic, sales improved as the company expanded its sales force (including those added to handle digital transformation projects), allowing losses to narrow despite digital transformation and human resources-related investment aimed at securing future growth.

Fan Marketing Segment

The Fan Marketing segment in 1H FY03/22 booked sales of JPY862mn (no YoY comparison) and a segment loss of JPY205mn.

The Fan Marketing segment centers on consolidated subsidiary PEACS (launched in February 2021), which handles the hobby and lifestyle media intellectual properties (IPs) business and the planning and production of digital marketing and digital services.

The loss was more significant in 1H FY03/22 than the company had expected as a result of the partial downturn to business caused by the COVID-19 pandemic.

Company outlook for FY03/22

Summary

Owing to the inherent difficulties in projecting sales and earnings at some of its businesses, the company does not issue a public forecast. While projecting sales and earnings for its Business Production segment is fairly easy, making projections for other businesses is more problematic. More specifically, under Incubation, the Venture Capital segment derives most of its sales from the sale of stock holdings, making it subject to the state of the stock market in general and conditions in the IPO market in particular.

Business Production business

In the Business Production segment, the company reports that orders for new projects (representing future sales) have been on the mend since Q3 FY03/21. In the wake of the pandemic, the company saw an especially rapid increase in consulting projects to help companies take advantage of the growing number of transformative changes in industry structures in environment-related and social fields. In order to meet the broad range of needs and keep the Business Production segment growing, the company plans to continue working to build out related business infrastructure by accelerating its investments in human resources and taking advantage of its capital/business alliance with Dentsu Group. Although the increases in costs stemming from investments are expected to leave segment earnings down despite the rise in sales, over the medium to long term these investments are expected to help the company build a more stable earnings base.

Incubation

In the Pet Lifestyle segment, the company sees ongoing growth in the pet insurance market as a whole underpinning sales growth at its own pet insurance business. Related costs are expected to rise, though, as plans call for pushing ahead with digital transformation initiatives so as to establish a firm foundation for the next growth phase of the pet insurance business. As a result, the company expects adjusted recurring profit at ipet Holdings to finish FY03/22 at JPY880mn (-21.4% YoY).

In the Venture Capital segment, as usual, the company does not expect to be in a position to make a reliable forecast for sales or earnings because so much depends on the ups and down of the stock market, particularly the IPO market. The company does have plans for multiple IPOs (including some fairly large ones) and is expecting to make some trade sales as well, but there is always the risk that in any given timeframe the stock market will suffer a downturn that would not only reduce the capital gains on stock sales but also lead to additions to reserves for losses on investments.

ipet Holdings: Company forecast for FY03/22

For FY03/22, ipet Holdings projects recurring revenue of JPY28.6bn (+25.0% YoY), the gains stemming largely from growth in insurance underwriting. ipet Holdings sees adjusted recurring profit coming in at JPY880mn (-21.4% YoY) and adjusted net profit coming in at JPY580mn, as earnings are weighed down in large part by increased spending on its digital transformation initiatives and other measures aimed at bringing its combined ratio down and increasing profitability over the long term.

Medium-term management strategy

Company’s view on numerical targets (recurring profit/loss)

Although the company has not disclosed a medium-term business plan, it says it aims to achieve recurring profit (adjusted for insurance items) of around JPY2.0–2.5bn in FY03/24 (versus a recurring loss of JPY233mn in FY03/21). The company will drive recovery in profitability by means of investments in the Business Production business, while building a stronger, more stable earnings base. The company will also launch a business model that utilizes financial functions and steadily put into place a business foundation that yields profits.

Business Production business target: Sales of JPY4.0–5.0bn, profit margin above 20%.
Incubation business target (venture investment, buy-and-hold business investment): Balance of capital investments JPY4.0–5.0bn, internal rate of return (IRR) above 15%.

Structural reforms

Top management of the company changed in June 2020. The founding members passed the leadership baton to a new management team to carry on the company’s founding spirit. The new team is pursuing structural reform initiatives (see below). More than 20 years have passed since the company was founded in April 2000. New management believes that a relentless pursuit of growth, shaped by the company’s history, will enable DI to meet shareholder expectations while achieving its mission.

The four structural reform initiatives are: realigning the investment and procurement profile of the Venture Capital business, strengthening its core competency of business production, utilizing financial functions to expand the Business Production business, and strengthening corporate governance. Through these initiatives the company aims to fulfill its motto of “helping people,” “generating profits,” “growing,” and “sharing,” thereby maximizing shareholder value. By moving forward with these structural reform initiatives, the company is aiming to both achieve its mission and grow profits, as well as mitigate volatility while making a bigger impact.

Realigning the investment and procurement profile of the Venture Capital business

To reduce profit volatility in the segment, the company will pare down investing its own principal (JPY5.8bn in FY03/21) and increase the weight of investment through funds (JPY1.3bn in FY03/21). Looking back over the five years to FY03/21, the Business Production segment saw a sharp downturn in profits three years ago, and the company believes the balance between the volatility of the Venture Capital segment in the Incubation business and growth in the Business Production segment has deteriorated. Starting in FY03/22, DI will ratchet down investments using its own principal (to under 50% of nonconsolidated net assets), while expanding investment through funds (earning returns in 10-year units), in this way mitigating volatility in the Venture Capital business. The company expects to invest tens of billions of yen combining both principal investments and investments through funds.

Strengthening its core competency of business production

By increasing headcount and forming tie-ups with outside partners, DI will seek to build a stronger, more stable earnings base. The company aims to double sales in FY03/24 compared to FY03/21. By being theme-driven, the company will strive to create strong businesses, implementing strategically focused initiatives in particular. Further, by being customer-driven, it will strive to offer customer-centered support that meets real issues facing customers’ business creation goals. In producing new industries, by being concept-driven, the company will create new business ecosystems through tie-ups with financial institutions.

Utilizing financial functions to expand the Business Production business

To address issues involving environmental and social sustainability, the company will bring together business production and financial functions to go beyond the conventional boundaries separating industries and the public and private sectors, endeavoring to have a greater social impact while at the same time building a business model that enables the pursuit of solid earnings.

Resolving issues regarding environmental and social sustainability through business requires creating ecosystems that transcend traditional barriers between industries and the public and private sectors, and making use of financial tools to fill the gaps in project timing and funding. The company will build financing mechanisms into its business model to sharpen its own competitive strengths in expanding businesses while pursuing more partnerships with financial institutions promoting ESG investment.

Strengthening corporate governance

DI will appoint a majority of outside directors to the board of directors (six out of nine directors). It hopes not only to encourage discussions about strategy, but also reinforce the monitoring of executive responsibilities by having outside directors make up the core of the Nomination and Compensation Committee.

Target business areas

Relationship to Japanese government’s effort to promote SDGs, “Eight priority issues”

The United Nations summit in 2015 agreed on 17 sustainable development goals (SDGs) and 169 targets in addressing issues facing global society. From the SDGs, the Japanese government chose eight priority issues to promote nationwide. In line with this, DI is pursuing, or preparing to pursue, initiatives in the following areas.

Achievement of good health and longevity: DI is preparing a social impact bond to address long-term care and preventative medicine needs.

Creation of growth markets, regional revitalization, and promotion of technological innovation (digital transformation, biotechnology, sustainable cities, etc.): The company is implementing initiatives through its Venture Capital and other Incubation businesses.

Sustainable and resilient land use, promoting quality infrastructure: The company is preparing social impact bonds to address prevention of infrastructure collapse.

Energy conservation, renewable energy, climate change and natural disaster countermeasures, and sound material-cycle society (carbon neutrality by 2050, virtuous economic-environmental cycle, etc.): The company says it wants to establish a decarbonization fund.

Strengthening of the means and frameworks for implementation of the SDGs: The company is preparing to launch an Asian impact investment fund to support the development of emerging economies through public-private partnerships.

Start of Japan’s first SIB project

In cooperation with Toyota city in Aichi Prefecture, DI has started a new business to address long-term care and preventative medicine needs, making use of social impact bonds (SIBs). SIBs are a scheme that allows private investment in the activities government and local governments take to tackle social issues, while government entities draw on the expertise and capital of private companies. Investors receive a performance-based payment from the governments.

Dream Incubator plans to harness the strengths acquired through its business to date to: 1) design models or schemes to solve social problems; 2) liaise with governments, create specific projects, execute and coordinate the projects; and 3) raise funds through networks with investors and others, and manage the funds. The company also plans to invest in projects as an active participant.

In addition to Toyota City, the company is in talks regarding specific projects with Development Bank of Japan, Maebashi City, and other local governments. SIBs have potential in Japan for promoting efforts to reduce the number of elderly people requiring nursing care, building infrastructure such as bridges, promoting employment, assisting effective urban planning, and constructing disaster prevention and mitigation facilities. In elderly nursing care, for example, an estimated JPY3–4tn could be saved in long-term care costs if seniors’ healthy lifespans were extended by encouraging their social participation.

There are many challenges to the full-scale development of SIB schemes. Because SIB projects require enlisting the participation of many diverse organizations, while what constitutes a project’s “success” may need to be defined in advance if there is no precedent. Another problem is the fact that multiple organizations within local governments may be involved. A sustainable business model also needs to be designed. The company is confident it has the business production capabilities to overcome these challenges. It seeks to change society for the better by actively harnessing its capabilities in running projects.

Forming Asia impact investment fund

Amid the accelerating global trend toward impact and ESG investment, the company is preparing to launch an impact investment fund for emerging economies in Asia. The fund will invest in tech startups, primarily in India. DI will serve as a hub, promoting cooperation with government-affiliated financing agencies, international organizations, government entities, and NGOs, as well as providing funding and technical support to the startups.

Dream Incubator has engaged in business production and investment mainly in Vietnam and India. The new fund will combine the company’s expertise in these businesses. The company is working with Japan International Cooperation Agency (JICA) on the specifics of the fund. It will pursue both social impact and financial returns by combining business production with investment.

Business and capital alliance with Dentsu Group

DI’s strengths are in business production, through which it connects the business creation efforts of major companies to social issues. Customers are increasingly demanding one-stop support in this area, from conceptualization and strategic planning through to execution. The company hopes to strengthen these capabilities through the alliance with Dentsu Group. Dentsu Group is a leading marketing communication firm, but in recent years has made moves to go beyond marketing and is examining ways to strengthen its organizational capabilities to meet customers’ business creation needs. Recognizing their complementary strengths and value provided, the two companies entered into the alliance with the intent of partnering in business production support and achieving mutual growth. By collaborating with Dentsu Group in providing management and project support to customers, DI also hopes to bolster its earnings base.

Company’s thinking on its own enterprise value

NAV

Dream Incubator has calculated a theoretical shareholder value as of end-FY03/21 of approximately JPY32.4bn (or JPY3,244 per share) based on the sum of the estimated value of all its individual businesses and FY03/21 results. It expects the theoretical shareholder value to rise to about JPY50.0bn by FY03/23 (assuming CAGR of 20% from FY03/20 to FY03/23). However, as of July 5, 2021, there was a large gap between this theoretical value based on a sum-of-the-parts calculation and the actual market value of JPY10.4bn (JPY999 per share).

In the Incubation business, the company invests in other companies and using knowledge, expertise, and other strengths it has cultivated in strategic consulting, raises their corporate value; as a final exit strategy, it then sells the shares it owns, thereby securing profit. However, when it determines that listed companies in which it has invested have corporate values with the potential to rise even higher than current market appraisals, it does not normally sell their shares at that time.

The company believes that it is not possible to appropriately express its corporate value through just the income statements and balance sheets it prepares, which are based on the Japanese GAAP standard (securities other than trading securities are not marked to market). For this reason, and also based on demand from several institutional investors in Japan and overseas, the company looks to disclose its net asset value (NAV; a figure calculated based on mark-to-market valuations of assets) more actively in the future. The company acknowledges that there is room for improvement in terms of its evaluation range and methods, and it plans to refine these elements moving forward.

NAV calculation method used by the company

Dream Incubator calculates its enterprise value using a sum-of-the-parts valuation model as follows.

Venture Capital and Business Investment: (1) Listed companies: market capitalization at fiscal year-end x DI’s holdings; (2) Unlisted companies (valuation method to be reviewed as necessary going forward): book value of investment stake at end of fiscal year ± mark-to-market valuation difference (recent financing prices or third-party transaction prices); (3) Holdings that cannot be valued using the methodologies in (1) and (2): book value without revaluation.

Business Production: five-year average after-tax profit x P/E of sector peer.

Theoretical shareholder value based on FY03/21 results

Approximately JPY32.4bn in total (JPY3,244 per share; value calculated by subtracting net debt from the total value of stocks in the Business Production business, business investment, and venture capital investment): Up JPY4.0bn from end-FY03/20* (+JPY433 per share)

*Breakdown of the JPY4.0bn difference since end-FY03/20: (1) +JPY2.4bn in Business Production, (2) +JPY2.5bn in business investment,
(3) -JPY800mn in venture capital investment, (4) -JPY100mn in net cash.

Dream Incubator: Calculation of Net Asset Value (NAV)

			End FY03/20	End FY03/21	Note
			End FY03/20	End FY03/21	Note
(JPYmn)			[a]	[b]	(Changes from [a] to [b], and other comments)
Total			28,400	32,400
	YoY		-5.6%	5.2%

	Per share (JPY)		2,811	3,244
	Business Production		9,900	12,300	- Five-year average profit declined; PER assumption: 34x (up from 25x previously)
		YoY	-2.0%	6.0%
		% of total	34.1%	37.2%
	Business Investment		11,500	14,000	- Share price recovered for ipet Insurance Co., Ltd. (consolidated subsidiary)
		YoY	-14.8%	12.0%
		% of total	39.7%	42.3%
	Venture Capital		7,600	6,800	- Recovered large investments - Large impact from rise in valuation losses due to increased impairment losses
		YoY	11.8%	-4.2%
		% of total	26.2%	20.5%
	Subtotal		29,000	33,100
		YoY	-4.6%	6.1%
		% of total	100.0%	100.0%
	Net debt		-600

Source: Shared Research, based on company data
*Note: The proceeds from the sale of venture capital investments are used to fund new venture capital investments

Business

Business description

Consulting firm differentiating itself with “business producing”

Business overview

Dream Incubator (DI) is a professional consulting firm founded in April 2000. The company’s objective is to produce and develop businesses. It has two mainstay businesses: Business Production and Incubation.

In Business Production, the company provides business producing support aimed at creating leading businesses of next generation, growth and business strategy support, M&A advisory, and assistance in developing core management, to major corporations (domestically and overseas) and government agencies. Particularly characteristic of the company are its business producing support (more below), which drives future growth, and its growth strategy design support.

In its Incubation business, the company conducts venture capital investment (Venture Capital) and buy-and-hold business investment, leveraging its principal investments to develop venture companies deemed to be integral to new industries. In its overseas operations, the company aims to support innovation around the world by forming strategic partnerships with promising venture capital companies in the US, China, and India so as to jointly engage in investment and growth. In addition, Dream Incubator also operates the DI India Digital Investment Fund, which invests in Indian technology startups, and the Dimension Investment Partners Limited fund, which invests in domestic startups.

In terms of accounting, the company books venture investment profits when shares in the invested company are sold, whereas for buy-and-hold business investments, it books consolidated profits or losses in proportion to the ownership ratio in the invested company.　

Venture capital investment (Venture Capital): Limited-stake investment (about 20% or less) focused on providing support with risk money. As of end-FY03/21, the company had a principal investment balance of JPY5.8bn (book value), including investment in 51 companies and LP (limited liability) investment in other companies’ funds. DI India Digital Investment Fund had AUM of JPY1.5bn and the Dimension No. 1 fund had AUM of JPY3.5bn.

Business investment: Investment with deeper commitment secured by obtaining near-majority stakes (or higher). As of end-FY03/21, the company held the following three business investments:

ipet Holdings Inc. (56.1% stake): Second-ranked pet health insurance business in the industry

Boardwalk Inc. (22.14% stake at time of investment in September 2015; 30% as of March 31, 2019 [46% including dilutive shares]; non-consolidated): Operates event ticket sales business; preparing for an IPO (in addition to the company, NTT Docomo, Inc. [TSE1: 9437] and Information Services International-Dentsu, Ltd. [TSE1: 4812] are primary shareholders)

Work Style Lab, Ltd. (100.0% stake): Matching platform business for freelance consultants

Dream Incubator’s vision for the future

To mark the 20th anniversary of its founding in 2020, Dream Incubator redefined its mission, vision, and value as follows.

Mission: Create businesses and change societies

Vision: Become the first choice of challengers

Value:：Advance beyond boundaries

Envision beyond boundaries of areas

Formulate beyond boundaries of customaries

Partner beyond boundaries of organizations

Challenge beyond boundaries of ourselves

Dream Incubator provides business investment and incubation services and regards itself as the “The Business Producing Company.” It is committed to continue “creating businesses and changing societies” as its mission in the future. Its vision is to “become the first choice of companies and managers in search of a challenge.” In other words, the company aspires to “be a partner in the pursuit of new challenges.” To produce new businesses, Dream Incubator needs to envision new challenges, formulate strategies, and assemble partners to tackle such challenges. In each of these processes, the company believes the most important value to a business producer is to “transcend boundaries.”

Business producing support

The company states that the core value it offers lies in its ability to "produce business.

The company said its core value is “business producing,” referring to tackling social challenges, planning businesses with visions and ideas beyond industry barriers, formulating strategies, gathering reliable partners, and creating (or producing) added values. The company said that it has produced new businesses beyond the barriers of countries, sectors, major companies, venture businesses, and borders since its founding.

Other major consulting firms typically have strengths in regulated industries, such as banking, insurance, telecom, and medical services. Most of these firms also have teams of consultants specializing in particular sectors. However, many of Dream Incubator’s clients are outside these regulated sectors. The company’s consultants (business producers) do not work in industry-specific teams.

The company’s clients are seeking to create new businesses and establish new pillars of operations by considering medium- to long-term changes in their business environment. Since Dream Incubator’s business producers do not work as part of industry-specific teams, they could, for example, handle two separate projects that cut across different sectors in a given month. As a result, the company can create new businesses that span multiple industries.

The company’s corporate value comprises its assets (venture capital companies and businesses) and its business creation and development mechanism (a combination between its business producing support, which it cultivated in strategic consulting, and its investment and business development). The company is working to ensure continued growth of its own corporate value.

Sales and net income by segment

Source: Shared research based on company data

Dream Incubator’s ecosystem

Through its Business Production segment (strategic consulting), the company has gained society- and industry-level perspectives that extend beyond the boundaries of management and its own businesses. The company is utilizing these perspectives in the Incubation business. On the other hand, in this segment, the company has also cultivated substantive management abilities through working with investees from the perspective of an interested party, as well as networks of global and perceptive entrepreneurs and capitalists. These advantages enable the company to make effective and implementable consulting strategy proposals.

In its overseas operations, the company aims to support innovation around the world by forming strategic partnerships with promising venture capital companies in the US (the Raine Group LLC), China (Legend Capital), and India (Blume Ventures), so as to jointly engage in investment and growth. Dream Incubator says that the alliances it enjoys with domestic and overseas partners serve as a source of added value for its Strategic Consulting Services and Incubation businesses.

Moreover, businesses produced by these services become a catalyst for new and wider networks. The company hopes to cultivate such mutually beneficial relationships by increasing partner companies as it looks to further strengthen its business producing ecosystem.

Dream Incubator’s ecosystem

Source: Company data

Global investment framework

Dream Incubator is focusing its energy on Japan and Asia (particularly India), and is putting together investment strategies for each of these regions. The company aims to establish a network that can keep excellent investment opportunities from slipping away and to systematically expand that network once it is in place.

In Japan, which it considers its home base for global expansion, Dream Incubator is focusing on uncovering the next generation of promising young entrepreneurs. The company uses its own media (DIMENSION NOTE at http://venturenavi.dreamincubator.co.jp/) and SNS to publish interviews with entrepreneurs with proven track records. It also holds closed study meetings for entrepreneurs.

In Asia (particularly India), which it considers the next frontier, Dream Incubator is focusing on fields that have been displaying extraordinary growth (especially B2C), making investments jointly with influential local venture capital investors. In India, it has invested in 19 companies involved in fields including mobile entertainment, fintech, consumer tech, healthcare tech, sharing economy, and HR tech. Furthermore, it established the DI India Digital Investment Fund in April 2018 (details follow).

In the US, which it considers the epicenter of innovation, Dream Incubator is focusing on the most advanced businesses and technical fields, making investments jointly with influential local venture capital investors. It has invested in the latest technology, including digital tools, hardware tech (university-originated technology startups), and digital media, and aims to use this technology in business producing.

Strategic partners by country

Country	The US	China	India
Company	The Raine Group LLC	Legend Capital	Blume Ventures
Profile	VC focusing on digital media; founder is an investment banker specializing in media; advisory group comprised of founders of major media firms.	Subsidiary of major private enterprise; founder of this VC has 30-year experience in the IT sector; of the over 300 companies invested, more than 50 were IPOs and about 40 M&As.	Largest early-stage VC in India; founder has over 15 years’ experience in the TMT sector; biggest number of investments in India, surpassing major European and US VCs.

Source: Shared Research based on company data and websites from partner companies

DI India Digital Investment Fund

In April 2018, Dream Incubator established the DI India Digital Investment Fund as a subsidiary enterprise to invest in technology startups in India (see the Recent updates section). Dream Incubator completed the first round of fundraising, securing a total of JPY1.5bn in committed capital, and investment activities commenced in April 2018. This is the first venture capital fund specializing in India to be operated by a Japanese company alone. Via this fund, Dream Incubator plans to further accelerate its investment activities* in India, which it expects to grow into a major focal point on the global startup ecosystem. In order to promote the creation of business opportunities between Japanese and Indian companies, Dream Incubator aims to nurture the fund into a platform for joint Japan-India digital business initiatives. In the mobile entertainment field, the company will conduct investment activities in partnership with one of the fund’s investors Akatsuki Inc. (also refer to Segment breakdown, Incubation section, fund diagram).

*Dream Incubator began venture capital activities in India in 2015 and as of April 2018 had invested in 10 startups (including non-public companies) chiefly in the area of B2C.
Venture capital in India:
In India, the last and fastest growing frontier, the startup ecosystem has developed rapidly.
・Total 2012–2016 venture capital investment exceeded USD20.0bn. (Source: KPMG, “Venture Pulse Q4 2016 Report”)
・The number of tech startups has exceeded 5,000. (Source: NASCOM: “Indian Startup Ecosystem – Traversing the maturity cycle”)
・India has 10 unicorn companies. (Source: CB Insight, “The Global Unicorn Club (as of March 2018)”)
・Major US and Chinese IT companies (US: Google, Apple, Facebook, Microsoft, and Amazon; China: Baidu, Alibaba, Tencent, and others) are expanding investment. In particular, in light of the rapid increase in smartphone use, leapfrog-type development (in which technology or business develops rapidly, skipping over typical developmental phases) is occurring in the areas of retail and distribution, finance, media and entertainment, medicine, and mobile computing. This has brought significant change to India’s economy and produced numerous globally active companies and entrepreneurs.

Dimension Investment Partners Limited

Dimension Investment Partners Limited invests in Japanese startups. Dream Incubator has established the Dimension No. 1 fund (maximum size of JPY3.5bn; investment period of nine years) with investment from Mizuho Bank, Ltd., Akatsuki Securities, and individual investors. The fund is managed by Dimension Investment Partners Limited (51.3% of voting rights held by DI as of end-March 2020). It will invest in roughly 20 investee companies, and work closely together with these companies to support them. Initial investees will be startups in the nascent, early, or later (but pre-IPO) stages of development. The fund will aim to support a large number of companies operating in advanced technology fields ranging from Internet services to deep tech.

Segment breakdown

Dream Incubator consists of two businesses: Business Production (formerly Professional Services) and Incubation.

The company’s consolidated reporting segments are Business Production (primarily comprising the former Strategic Consulting segment) and Incubation, which breaks down into the Venture Capital segment, the Pet Lifestyle segment (formerly the Insurance segment), and the HR Innovation segment (formerly the Other segment)^*1*2.

*¹ When announcing Q1 FY03/21 results, the company changed the name of its reporting segments. The former Professional Services segment became the Business Production segment, the Venture Capital segment retained its name, the Insurance segment became the Pet Lifestyle segment. The Other business segment was replaced by the new HR Innovation segment, which consists of subsidiary Work Style Lab (WSL), formerly included under the Other segment.
*²Before FY03/17, the company had four consolidated reporting segments: Strategic Consulting Services, Venture Capital, Insurance, and Other. Before FY03/16, Dream Incubator had six segments: Asset Liquidation and Intellectual Rights Investment in addition to the above four segments (the former Consulting segment was renamed Strategic Consulting Services when FY03/17 results were announced). However, in January 2016, the company sold its entire stake in consolidated subsidiary ReVALUE Inc., which operated its Asset Liquidation segment. In addition, the company in June 2015 sold the trademark rights to Tokyo Girls Collection, which was a core asset of the Intellectual Rights Investment segment.
^*3When accounting for investees to which its commitments meet or exceed predetermined levels (stakes of 15% or more, executive dispatch, etc.), the company may apply the equity method or include the investee as a consolidated subsidiary in accordance with accounting standards. Similarly, in accordance with segment disclosure standards, the company is sometimes required to list segment information separately for an investee whose earnings results exceed pre-determined scales. In light of these standards, the Insurance segment was listed separately as of March 31, 2019.

In terms of its business investments (ipet Holdings and two other companies as of end-FY03/21) the company makes investments with the goal of developing investees and not merely to control or consolidate them. The company may, in some cases, book periodic gains or losses from its investees, but even in these cases, it plans to ultimately sell its shares in these companies, as it does for all companies targeted for investment and development. However, at the time of sale, the company comprehensively considers factors including stock market conditions, earnings trends and growth potential of the companies for which it provides support, and the progress of that support. It then makes final decisions with the goal of securing profit from the sale of shares in the investees. As a result of this careful consideration, the company may sell shares relatively shortly after acquiring them, or it may sell them after retaining them for long periods of time.

Sales by segment and composition ratio

(JPYmn)		FY03/18		FY03/19		FY03/20		FY03/21
(JPYmn)		Amount	% of total	Amount	% of total	Amount	% of total	Amount	% of total
Business Production		3,454	18.8%	2,556	12.3%	2,679	11.8%	2,319	8.3%
Incubation		14,964	81.2%	18,192	87.9%	20,088	88.3%	25,495	91.8%
	Venture Capital segment	2,752	14.9%	2,867	13.8%	800	3.5%	1,062	3.8%
	Pet Lifestyle segment	12,212	66.3%	14,876	71.8%	18,317	80.5%	22,859	82.3%
	HR Innovation segment	-	-	-	-	957	4.2%	1,092	3.9%
	Other segment	-	-	448	2.2%	-	-	442	1.6%
Inter-segment transactions		-	-	-43	-0.2%	-12	-0.1%	-38	-0.1%
Consolidated sales		18,418	100.0%	20,705	100.0%	22,755	100.0%	27,776	100.0%

Source: Shared Research based on company data
Note: Professional Services figures for FY03/16 and FY03/17 only include results from the Strategic Consulting segment.

Business segments