Risk Factors

Risk factors in association with businesses of ValueCommerce are described below.
ValueCommerce is aware of the following risk factors and will seek to avoid / mitigate / transfer them if they are likely to occur. In the meantime, risks relating to the company are not limited to the risks described here.
This description may contain forward-looking statements on future results and projections, and they are based on information currently available on the date this page was described and on certain assumptions that we deem reasonable.

1. Business environment

(1) E-commerce market

The Group’s businesses include services to help advertisers, our clients, effectively engage in E-commerce and online marketing, and are correlated with the expansion of the E-commerce market. We expect the E-commerce market to continue to expand. However, if companies’ commercial use of the Internet does not increase as expected, or if the number of users, or the merchandise volume, does not expand as expected, the Group’s results could be significantly affected.

(2) Trends in the Internet advertising market

The Group provides online marketing services, including pay-per-performance Internet ad distribution service on the Internet, and are correlated to the expansion of the online ad market. Although the online ad market is expanding, the advertising market is susceptible to the business environment. The adverse effect of a decline in aggregate ad spending in the online ad market due to volatile business conditions could significantly affect the Group’s results.

(3) Consumer behavior

The Group provides services primarily to support B-to-C E-commerce, and its businesses follow trends in consumer spending. The Group’s results could be significantly affected if long-term stagnation in the domestic market results in sluggish growth in the domestic E-commerce market and online ad market.

(4) Legal restrictions

The Group has not seen any particular legal regulations that would have a significant effect on the Group’s businesses. However, if any laws, administrative guidance, or other regulations for Internet users and businesses are enacted that would restrict the use of the Internet for commercial or advertising purposes, the Group’s businesses and results could be significantly affected. If the technologies, including cookies, that the Company’s network uses to distribute ad, track orders, and prevent irregular practices are regulated and restricted, a large investment would be required to develop alternative methods, which could significantly impact the Group’s performance.

2. Business characteristics

(1) Competition

The Group expects competition to intensify in the online ad market due to the development of new technologies and the entry of new companies into the market, among other factors. The Group will seek to increase its competitiveness by developing new functions and business alliances. However, if the Group cannot attain a sufficient competitive advantage by its differentiation against the competitors, which could have a significant adverse effect on the Group’s results.

(2) Changing business models

Technologies and business models are changing rapidly in the online ad market, where the Group operates its business, and new business models using smartphones and tablet computers have become popular. To maintain a certain level of service as an Internet business provider, the Group must make an effort to respond to technological innovations and change its business models in a proactive, flexible manner. Failure to respond to changes or failure to effectively adopt or apply in a timely manner the new technologies and business models necessary to improve the Group’s services or to launch new services could have a significant impact on results.

(3) Systems

Maintaining stable system operation is necessary for the Group’s businesses, and the Group conducts routine maintenance. The Group continuously makes capital expenditures and reviews the configuration of its systems in anticipation of the demand for its services. However, a failure of one of the Group’s mission-critical systems or the temporary inability to provide services due to a delay in a system’s response time, equipment failure, manmade disaster, accident, or other reasons could significantly affect the Group’s performance.

(4) Dependence on external environments and technologies

In providing its services and support, the Group uses systems created by third parties and external infrastructure. The Group’s systems only work if the third-party systems employed by the users of the Group’s services work properly. A failure in the external environment could have a material effect on the Group’s businesses.

(5) Harmful websites (antisocial websites, including websites associated with malicious business practices and solicitations)

The Group approves the use of each service only if participants vow to comply with laws and regulations as well as the Group’s bylaws. The Group also checks the content of the websites, primarily to determine whether the websites are antisocial, whether they have violated laws, and whether they include expressions pertaining to a guarantee of client action. If the Group finds that any of its bylaws have been violated, it asks participants to correct the violation(s). If the participants do not correct the violations, the Group removes them from the network. However, it is actually difficult to guarantee that all websites will be exhaustively monitored. Failure to prevent illegal activities, such as the promotion of illegal products, exaggerated advertising claims, solicitations for high-yield financial products, and malicious solicitations, and to ensure a sound network, which is indispensable to the Group’s services, could adversely affect confidence in the Group and the Group’s performance as a result.

(6) Information security

The Group has a huge amount of information assets connected with its services. To manage these information assets properly, the Group has established a basic information security policy, and the information security manager strives to regularly and efficiently evaluate and optimize information security. However, damage or other trouble such as information leaks, data destruction or falsification, and service outage could result from a work-related human error or intentional illegal act, system failure caused by a disaster or a similar event, a cyber attack such as a malware infection or a targeted attack, vulnerability of a system, product, or similar item, or other causes. Such damage or trouble could reduce confidence in the Group, its image, or its competitiveness and incur a large amount of costs for compensation for damages and security system repairs, which in turn could significantly affect the Group’s businesses and results.

(7) Personal information management

In providing its services, the Group obtains personal information of users of the services. The Group strives to protect such personal information by obtaining a Privacy Mark certificate (granted by the Japan Information Processing Development Corporation [JIPDEC], an affiliate of the Ministry of Economy, Trade and Industry, to enterprises that take appropriate steps to protect personal information), and by establishing and complying with the Company privacy policy. Where the Group entrusts personal information to an external contractor to outsource operations, it establishes criteria for selecting contractors to which to entrust personal information, based on which the Group only selects contractors that are able to implement a certain level of information security measures. However, information leaks or the inappropriate processing of personal information due to malicious attacks or errors by persons related to contractors or the Group, or attacks by a malicious third person and/or an unforeseen situation could reduce confidence in the Group, its image, or its competitiveness and incur a large amount of costs for compensation for damages and security system repair, which in turn could significantly affect the Group’s businesses and results.

(8) Intellectual property rights

The Group regularly applies for and acquires patents for the technologies and business models that constitute the basis of its services, and has registered trademarks both in Japan and abroad. However, it is not certain that the Group will be able to obtain rights it does not have. If Japanese or foreign businesses acquire patents or other intellectual property rights in the Group’s business domains, that could lead to lawsuits or complaints against the Group depending on its contents, which in turn could have a significant adverse effect on the Group’s businesses and results. The Group is always careful to avoid infringing on the intellectual property rights of other parties. However, it is hard to keep abreast of all intellectual property rights in the Group’s business domains. If the Group infringes on the intellectual property rights of other parties, they could demand damages or injunctions against its use of these rights, which in turn could have a significant adverse effect on the Group’s businesses and results.

(9) Natural disasters, infectious disease outbreaks, accidents, and emergency situations

The Group’s human and physical resources are concentrated in Tokyo, and are vulnerable to natural disasters, including large earthquakes and fires, as well as damage to property, plant and equipment from natural disasters, blackouts, and line failures. The Group is preparing a physical environment to withstand damage and ensure the lives and safety of all officers and employees. The Group is also taking Group-wide steps to prevent sickness from infectious diseases and to continue its important operations. However, if the Group cannot ensure normal business operations or restore things to normal due to unexpected disasters, that could affect the Group’s business continuation and results. Accidents caused by international conflicts or phenomena besides natural disasters, incidents, and terrorism could interrupt or suspend business, which in turn could impact the Group’s businesses and results.

(10) Organizational structure and human resources

To expand operations and respond to the diversification of stakeholders’ needs, the Group aims to improve its personnel distribution, organizational structure, and internal control system. In the meantime, the Group needs to secure excellent human resources in a timely manner to facilitate operations for further growth. However, if the Group cannot recruit or cultivate competent human resources as expected or if key persons leave the Group that could generate problems in the Group’s operations and have a significant adverse impact on the Group’s businesses and results.

(11) Internal control

Our Group is striving for strengthening of an internal control system in order to prevent a bad influence to business operation by human error due to occupational cases or a dishonest act of the internal persons concerned, etc. Also, an Internal Auditing Office evaluates an internal control system and the execution situation of business, and is performing the concrete advice towards an improvement of business. However, in case that the problem of business operation occurs according to an unforeseen situation, the business and achievements of our Group may be affected.

3. Strong dependence on specific businesses

To continue growing, the Group seeks to increase its revenues by strengthening measures for new businesses. At present, however, the Group is highly dependent on the affiliate marketing service within the Advertising Business. Changes in the E-commerce business environment, tightening of legal restrictions, system failures, and other rapid changes in the Internet business environment could impede the growth of the Group’s affiliate marketing service, which in turn could significantly affect the Group’s performance.

4. Relationships with business connections

(1) Capital and business alliance with Yahoo Japan Corporation

Yahoo Japan Corporation is the Company’s parent company and holds 51.59% of the Company’s voting rights as of December 31, 2016. The Company has formed a capital and business alliance with Yahoo Japan Corporation principally to expand operations by strengthening its business ties. The Company’s policy for doing business with Yahoo Japan Corporation is to increase profits for both companies. The Company achieves synergies by linking its services to their businesses, including the shopping business. However, because of this relationship, the Company’s services partly depend on their businesses, and if a competition problem arises within the Yahoo Group in the businesses the Company engages in, if Yahoo Japan Corporation changes its management policy in relation to the Company, or if the alliance cannot be sustained for other reasons, it could have a significant impact on the Group’s businesses and results.

(2) Major advertisers and publishers

The Group is seeking to acquire new clients so it won’t depend too strongly on specific industries and advertisers. However, the Group is striving to improve its results by providing a consulting service for those advertisers it has a good and stable relationship with, using the experience and achievements the Group has accumulated and, as a result, sales from certain advertisers such as financial sector could account for a greater percentage of total revenues. Changes in the business strategies or financial situation of these advertisers, or their policies regarding transactions with the Group, could have a significant influence on the Group’s results. Despite maintaining its relationships with those publishers that can attract a lot of clients and that have strong advertising, changes in the business strategies or financial situation of these publishers, or their policies regarding transactions with the Group, could have a significant influence on the Group’s results.

5. Future business expansion

(1) Risks associated with investing in/loaning to and developing new businesses

To expand its businesses, the Group could establish subsidiaries and joint venture companies or acquire other companies in Japan or overseas. Investments and loans for these activities could be large compared with the Group’s current scale of operations. If the Group initiates new businesses, it might not develop them as planned due to unexpected factors. These situations could have a significant influence on the Group’s businesses and results. It is hard to accurately estimate the effect on the Group of the status of the businesses the Group has invested in/loaned to, or the effect on the Group of new businesses. The Group may not recoup its investments or loans due to unexpected circumstances, which could significantly affect the Group’s results.

(2) Risks associated with the development of global operations

The Group’s business model could not only be adopted in Japan, but also overseas. If specific global businesses do not progress as expected, that could have a significant effect on the Group’s results.

(3) Risks related to financing

To expand its businesses, the Group must meet the financial requirements for capital expenditures and the development of new technologies. The Group will mitigate risks by diversifying its fund-raising methods, including capital market financing. If the Group cannot raises funds due to changing circumstances, that could have a significant impact on the Group’s results.

6. Other

(1) Dividend policy

The Company considers returning profits to its shareholders as one of its most important managerial issues. Our policy is to pay dividends in accordance with our performance, while maintaining certain retained earnings used for investments for our future growth, and we have established a consolidated payout target of 30% or higher. However, there’s a possibility not to be achieved the target payout ratio due to the drastic change of business environment.

(2) Stock dilution due to the exercise of stock options

To motivate its directors and employees to increase the Company’s enterprise value in the long term, the Company grants stock options. The number of shares underlying these stock options was 913,000 as of December 31, 2016, which is 2.65% of the total number of issued shares of 34,471,000. In case that new shares are issued by the stock options possible to be granted in the future, the total number of issued shares will increase, and the stock value per share will be diluted. This dilution of the stock value could affect the stock price.

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