Hengge

Hello, I'm Kazuhiro Ogura, the CEO of Hengek AK. Thank you so much for watching our video today. Let's go through our consolidated financial results of the second quarter of 2020. Before going through the slides, I would like to say thank you to all the medical workers and all the people who are doing their hard work to fight against the novel coronavirus under this difficult situation. Thank you very much. So let me start with the COVID-19 impact to our business and how we are responding to it. First things first, I'd like to talk about our strong business model. We picked up three points. The first thing I picked up is that we have a recurring revenue model. As of the end of the second quarter, 97.3% of our revenue is comprised of annual recurring revenue, which makes our revenue base stable. The second point we picked up is that we have an all upfront payment model. As of the end of the second quarter, Henge-1 accounts for 87.9% of the total revenue. Henge-1 is basically provided with an annual upfront payment contract, which brings in a strong cash inflow to us. And the third point is that we are an IDaaS. Hengewan, our main business, is an IDaaS that provides ID federation, single sign-on and cloud security for companies who want to use multiple cloud services to accelerate their businesses. We think there will be a certain demand for a service like ours under the current COVID-19 situation in which many companies are seeking to implement work from home. Given those factors, we think that our business model remains strong even if the world enters the recession phase in the future or even under a situation that most of the company workers are working from home. However, it is true that there are many factors that will impact our business, so I would like to explain those. We picked up short-term impacts and mid- to long-term impacts. So first about the impact on new customers acquisition. We do B2B sales and we do physical B2B sales. The typical way to get sales lead is from events or seminars. We have events and seminars, we gather leads, we contact our customers and we go to sell things. So if events or seminar get canceled or get postponed, that would impact our future sales leads. However, our sales lead time is not very short. Our customers typically plan yearly or annually, so the lead time is not days, it's not weeks, but it is months. So even if our seminars or event got canceled or postponed right now, it's not something that would immediately affect our business for this fiscal year. But it might affect our future lead building, so we would like to supplement this by accelerating our online sales activities as well as our online marketing activities. Regarding the impact on our existing customers, I think we have both good things and bad things. We do have some products that we might be able to expect upselling and cross-selling, like Henge device certificate, which directly helps our customers who are trying to implement work from home or remote working. On the other hand, if the world enters the recession phase and if in case our customers are going to decrease the number of their employees, that would affect our revenue because we bill based on the number of employees inside our customers' company who are using our product. mid to long term impact. This is not just about us, but about all SaaS companies. But now that all companies in the world is seeking to implement work from home, we are sure that the demand towards SaaS products will be growing steadily. It's just like what happened after the 2011 earthquake in Japan. We provide a secure access platform for the companies who are trying to implement multiple SaaS products in their work, so we believe that our potential market is going to grow steadily after this calms down. Next, I would like to talk about our response to COVID-19, how we are working right now, how we are doing right now. We are a kind of a company that are looking forward to experimenting new ways of working. So we've been implementing non-territorial office or teleworking, but it wasn't like everyone is working from home. Nobody comes to the office before this COVID-19. So we do have some challenges, but basically we are extending our working from home policy day by day. So it's not like something very new to us. We are just expanding the level. Basically, we are trying to fulfill the request from the metropolitan government or the Japanese government to reduce the number of people who are working at the office every day. So right now it's like the picture on the right side of this slide. There's basically no one in the office and we are all working from home. So I'm also working from home. I bought some green back at Amazon. We're taking videos, exchanging information online and having Zoom meetings to make this kind of video. So we are trying new things every day. The picture on the left side is our first remote board meeting. So how are we helping our customers? Our vision is liberation of technology. We love technology and we want to bring the power of technology to as many people as we can. We want to help our customers to adopt the technology to make the world a better place. Under the current situation, it means to help our customers to utilize the power of cloud technology to adapt to the new world order and continue doing their business. For example, we are providing a free online forum for the IT managers to exchange information regarding COVID-19 to solve problems together. And we also provide a free cloud-based communication platform to the local governments to support smooth communication with the residents. So we would like to find what we can do to help our customers, for our customers under this difficult situation. But if you look at our future business, there will be a tremendous opportunity in this area. So we would like to show our customers what they can do by utilizing the SaaS power to adopt work from home style, telework style. And we would like to capture future opportunities. Next, I would like to talk about our financial results. First, net sales. Please consult the slides for detailed numbers. Our business progressed stably during this period. Our consolidated financial results were like this. Profits were also strong this time. Regarding gross profit, our gross profit margin remained at the high level. operating expenses declined compared to the first quarter. As to the impact of COVID-19, some accounts like traveling and transportation expenses or entertainment expenses decreased due to the impact of COVID-19, while other accounts like recruiting expenses, marketing related fees, or system usage fees increased due to proactively investing in recruiting, sales, and operational efficiency. Overall, although we had some ups and downs, the total cost we spent during this period was as we planned beforehand. The number of our employees is 162. We'd like to continue to reinforce our workforce, especially for sales and customer success roles. Next, our business highlights. We highlighted some of our activities on the slide. COVID-19 started to affect our marketing events starting from March, but this time we didn't have any big events planned in March, so it did not affect us very much during this quarter. To strengthen our activities in Kansai region, we exhibited in Japan IT Week 2020 Kansai. Because we want to promote that SaaS will help adopting work from home, we conducted an online survey, and I think that we got an interesting result. It's as expected, but it's quite interesting. Our survey shows that there is a clear difference in the adoption of working from home between the SaaS-using companies and non-SaaS-using companies. Only 12.7% among the non-SaaS using companies adopt remote working or working from home, whereas 65% of the SaaS using companies already adopt it. Now it is clear that SaaS helps adopting work from home, so we'd like to continue promoting the fact to capture our future growth opportunity as a SaaS platform vendor. Let's move on to the KPI results. If we compare the numbers year on year, it will be like this. But since this is half year, let's check the progress for this 6 months. Henge-1's average monthly churn rate rose by 0.06 to 0.18% compared to six months ago. It remains at the low level. During these six months, the number of companies using Henge-1 increased by 120 to 1,548. The number of users using Henge-1 increased by 0.152 million to 1.824 million. ARR of Hengewan increased by 0.337 billion yen to 3.577 billion yen, growing steadily. ARPU of Hengewan increased by 22 yen to 1,961 yen. This slide shows the monthly transition of our average churn rate. This time it's rising towards March, which is the ending month of many companies' fiscal year in Japan. But regarding its rate or its absolute churn amount, we think that it's still in a low level. We will continue our efforts to keep our churn rate at the low level. The number of users is growing steadily over months. ARPU raised a bit. There is no change to our full-year forecast from the announcement at the beginning of the fiscal year. Both sales and the expenses are progressing accordingly to the forecast. Regarding expenses, there is some uncertainty ahead caused by the COVID-19. For example, we might not be able to have offline marketing events as planned, but we are trying to adapt to the new world, for example by adding more online contents or starting online consultations as our new sales activities. We'd like to continue actively investing in our opportunities to increase our future revenue Our growth strategy Our growth strategy is to maximize LTV LTV is lifetime value, the total value of the contracts we have Our SaaS service, Hengewan, is contracted annually, and it also has a very low churn rate. So, for example, if we got a ¥1 million contract, that just doesn't mean ¥1 million value. If the value is 1 million yen multiplied by years, the following decades that our users are going to use our service. More precisely speaking, it might be the gross profit that will be brought in for the following decades. The LTV can be calculated by multiplying three factors, ARR, annual recurring revenue, and Y, the average contract duration in years, and R, the gross profit rate. However, the average contract duration in years is already high because of the low churn rate, and also the gross profit rate is also at the high level. So if we want to raise the LTV, we need to raise the ARR. And the ARR could be calculated by three factors, number of companies using Hengewan, and the average number of users per company, and the ARPU. So we need to care about these three factors to have a future growth. This chart shows those three growth factors. The factor that we want to focus on our short term is N, the large N, number of contracted companies. Our sales power is now still concentrated in Tokyo because the cloud computing or SaaS adoption started from Tokyo after the earthquake in 2011. However, now that the wave of cloud adoption is reaching other regions as well, we would like to deploy more sales power and customer success power into other regions outside of Tokyo to capture future opportunities. In the mid-term, we would like to raise our ARPU as well. This could be achieved by adding more attractive features or functions to our service that our customers would will to pay us more. We would like to keep reinforcing our development power so that we can continue improving our service, adding more features and functions that would benefit our customers. The last factor to explain is the small n, the number of users per contract. Our service is targeted toward B2B users, for business customers. So, for example, if our customer hired more people, generally speaking, this small n will rise a bit. On the other hand, we might be targeting on smaller customers in the future, and in that case, this small n might decrease a bit. There are some uncontrollable features regarding this parameter. So currently we expect this to remain flat or to increase slightly. This slide shows the progress of our growth strategy, showing those factors that I have explained. On the leftmost column, you will find the ARR, and you can see that it is growing every year, constantly. For example, in fiscal year 2017, we piled up 611 million yen. In fiscal year 2018, we piled up 653 million yen. And in fiscal year 2019, we piled up 688 million yen. To maintain a high level of growth rate, we need to increase the growth of each year. For large and the number of companies, you can see that we are approximately acquiring around 250 customers every year. We want to accelerate this speed by gaining more sales power outside of Tokyo. As to the ARPU, we would like to keep adding features and functions that will help our customers to keep this slightly increasing trend. Lastly, the small N is now slightly increasing, but as I mentioned before, it has some uncontrollable nature, so we would like to expect flat or slightly increasing growth. Our growth strategy on and after fiscal year 2021. Hengewan is an ideas which has a strong and unique positioning. Compared to other vertical SaaS products, it's a horizontal solution which bridges different multiple SaaS products. We'd like to keep improving it and keep promoting it as an essential SaaS platform so that it will be adopted by more and more customers under the ongoing SaaS adoption. Let's move on to our corporate overview. We are Henge KK. You might want to read it Henge, but actually we are Henge. Henge means to change in Japanese. Our company name used to be HDE until 2019, but we changed our name in February 2019 to make sure that we will keep changing ourselves earlier than our customers, make mistakes earlier than our customers, and find the solutions that we can deliver to our customers. The pictures on the right side are the founders of this company, including me. We started this company in 1996 when we were university students and are running the company together for over 23 years. We have four offices within Japan, Tokyo, Nagoya, Osaka, and Fukuoka, and one office in Taipei. However, most of our workforce are centralized in Tokyo. Currently we are in an expansion stage to expand to regions outside of Tokyo to catch our future growth opportunities. Our vision is liberation of technology. We love technology and we believe in the power of technology. We want to bring the power of technology to as many people as we can. However, we also know that technology is sometimes not instantly available to the customers. We want to liberate it. We want to bridge it. We want to bring the power of innovative technology to our customers. We also want to bring our technologies to the customers to help them and to make the world a better place. our brief history since we were founded in 1996 we've been liberating cutting edge technology in various fields in the 20th century we were a b2b software vendor providing linux email and server security kind of products we changed into sas we pivoted into sas in 2011 after the earthquake hit tokyo Most of our revenue is coming from our SaaS product, Hengewan. Around 88% of our revenue is brought from Hengewan business, whereas 12% of revenue is brought from mainly our software business which we are running for over 20 years. Let me explain about our main business, Hengewan. Hengewan is an identity as a service. It's called IDOS. It's a kind of sauce product. We started this business around 2011 after the earthquake hit Tokyo. Because of the earthquake, Tokyo almost lost electricity and trains stopped, and many employees could not commute to their company. Many companies had to adopt work from home at that moment, and the only answer for that was to adopt cloud computing. We as a software company also tried work from home, switching to a cloud computing system. We noticed two things. One, cloud computing is very powerful. Two, it's not easy for a company to switch to the cloud computing because of some small problems. We wanted to solve that so that the companies can adopt cloud computing or SaaS to their business. That is why we implemented Hengewan and started selling it. It has mainly two features. On the left side, you can see ID federation. On the right side, you can see access control. Let me explain first from the ID federation. Imagine that the company wants to use five SaaS services together, maybe Salesforce management or HR management or name card management or email or chat. Whenever the company hires a new person and the employee enters the company, the IT division has to issue five different IDs and passwords for each SaaS services to that employee. And the employee has to manage all those five IDs and passwords every day to remember it and to change passwords when required and so on. But the worst part comes when the employee leaves the company. The company or the IT division has to be sure that they are deleting all those five different IDs. Otherwise, theoretically speaking, the employee might be able to access the company data even after they left the company. So when the company adopts multiple SaaS services, it gets tedious for the IT division or the IT managers. ID federation feature solves this problem. This brings in the technology called single sign-on so that the employee has to remember only one ID and one password. That is the ID and password of Hengewan. Once they log into Hengewan, now they can access other sources without entering IDs and passwords of those services. so the employees don't have to remember all those IDs and passwords, and the IT manager is now free from the worries that they might forget to delete IDs and passwords from sources. Another feature on the right side is access control. Unfortunately, ID Federation doesn't solve all of the problems. Usually, companies using multiple sources want to have different access level for each sources. For example, they might want to limit the access to HR database because it contains some confidential information, maybe only from a specific user group or from a specific place. On the other hand, they might want to open the access to business chat, maybe allowing to access it from their personal cell phones to encourage communication and collaboration. For Salesforce management, maybe they want to allow the salespeople to access confidential data from the company provided laptop from wherever on the world. Hengewan's access control allows the company to do this. It allows the company to set fine-grained security policy for each sources they are using. So these two features are the main features of Hengewan which makes it an IDaaS. Hengewan also provides various features that help companies to move their workload onto the cloud. We want to remove all the obstacles that are ahead of the company which are trying to move on to the cloud-based working style. Thanks to the cloud adoption, Hengewan's customer base is also growing. It is now used by over 1,500 customers in various industries, and it's used by over 1.8 million users. By doing some math, you will find that the average number of employees per one customer is around 1,200. That is how our average customer looks like, but we also have larger customers as well as smaller customers. That was our corporate profile. Thank you so much for watching this video.