Hengge

Hi, I'm Kazuhiro Ogura, the CEO of Henge. Thank you for watching our video today. Let's go through our consolidated financial results of the third quarter of fiscal year 2020. The first topic is COVID-19 impacts and responses, but before going into the details, let me explain the strengths of our business model. The first point I'm picking up is the recurring revenue model. Over 97% of our sales is coming from recurring revenue, which is a kind of revenue expected to be recurring over the following years. We've achieved a strong and stable recurring revenue model. The second point is the annual upfront payment model. As the end of the third quarter, 88.1% of our sales is coming from hengeban business, which builds our customers all upfront annually. We have built a strong cash inflow based on our annual upfront payment model. The final point is that we are an IDaaS. Our main service, Hengewan, is an IDaaS, which provides access security for various sources with a single sign-on technology. We believe it helps our customers who are planning to adopt remote working or work from home under the COVID-19 pandemic. Powered by those three strengths, we believe that our business model has the essential characteristics to keep growing stably even under challenging situations like the COVID-19 pandemic or an economic recession. Now let's look into how the COVID-19 pandemic would impact our business and how we are responding to it. As I explained, in the long run, we expect that companies will adopt a more flexible work style like work from home, which would increase demands for sauces and our service. On the other hand, in the short term, COVID-19 impacts our recruiting, marketing, and sales activities. Regarding impacts on new customer acquisition, we used to rely on physical means on marketing and sales. And some events and seminars had to be postponed or canceled because of the COVID-19. Also, it's difficult to visit our customers right now. So we are trying to switch our sales and marketing activities to online activities, which affect our customer acquisition activities to a certain extent. However, the transition is not something immediately affecting our current fiscal year sales, because purchasing our service is usually planned annually on our customers' side, resulting in a relatively long lead time of 3 to 6 months. Regarding the impact on our existing customers, a good news is that we are seeing an increase in upselling and cross-selling opportunities to sell Henge device certificate or other features to our current Hengewan customers who are planning to extend the adoption of work from home. On the other hand, because our Hengewan is a service that builds a customer per headcount per year basis, For example, if our customer decides to reduce the number of their employees, it results in the decrease of our revenue. There is a concern that the future economic downturn might result in a reduction of our revenue in that way, or that it might lead to service cancellations in the worst-case scenario. Regarding other impacts, one thing which makes us different from other companies is that we hire various talents from all over the world. However, hiring employees and accepting interns from other countries is currently delayed by travel restrictions and delay of visa matters. Next, our response to COVID-19. We are promoting work from home in our company to prevent the spread of COVID-19 and to ensure our employees' safety. We've been actively adopting work from home or teleworking even before the COVID-19 pandemic because we regard it as one of the forms of a more resilient work style enabled by the adoption of cloud at work. Under the COVID-19 pandemic, we are accelerating our adoption and experimentation of those new ways of working further ahead. After the lift of the state of emergency in May, we are not forcing but encouraging our employees to work from home. Currently, it's like most of our employees are working from home. In March, we published a survey regarding the correlation between SaaS adoption and the adoption of remote working among Japanese companies. According to the survey results, there is a significant difference in the adoption of teleworking between the SaaS-using companies and the non-SaaS-using companies. We believe the results suggest that there is a strong correlation in using SAS and adopting teleworking or work from home. We are sure that the more the Japanese companies adopt work from home, the more they will start using SASEs, and there will eventually be more chances for us to help those customers. We want to capture those business opportunities by promoting and advertising that SASE is an essential factor for effective work-from-home adoption. The next topic is the full-year forecast of fiscal year 2020. We revised our full-year forecast from the announcement at the beginning of the fiscal year as shown on the slide. To summarize, the revision is mainly caused by the COVID-19 pandemic, which suppressed our activities tied to expenses. Advertising expenses are expected to be lower than initially planned due to the cancellation of Hengewan-related events. Personal expenses are expected to be lower than initially planned due to the delays in hiring global talents and accepting global interns. Traveling and transportation expenses and entertainment expenses are expected to be lower than initially planned due to adapting work from home on both our side and our customers' side. To comply with our growth strategy of maximizing our future LTV by actively investing in new ARR acquisition, we've been seeking opportunities to make effective moves in sales and marketing or hiring. But we had no choice but to suppress our spending under the COVID-19 pandemic. We want to adjust to the new norm, and we are seeking our new ways such as conducting webinars or online events. As to the net sales forecast, we didn't change it because we don't see any significant impacts on Hengewan's lead generation, customer acquisition, or churn, which might affect it by now. Since there is a positive change in planned income, I'm aware that this revision might be viewed as positive news, but I'm afraid that I don't view it as a completely positive result. Our business, Hengewan, has a growing recurring revenue with a high gross margin and a low churn rate. While the forecast gives a glimpse of our business model's massive potential profitability, our growth strategy stays to actively invest in future ARR acquisition, maximizing our LTV, not caring too much about the amount of the current fiscal year's profit. In light of that strategy, it could be said that we are not devoting our resources to future ARR acquisition as planned this year While we are sure that the encouraging trend of SaaS and work-from-home adoption in Japan will serve as a strong tailwind for our business I would say that we are still seeking a new way of sales and marketing under the new norm, and I still feel very much alert. We want to continue investing in maximizing our LTV for the following fiscal year. The progress of net sales is as shown on the slide Basically, it's progressing well This slide shows the progress of the operating expenses Next, let me explain about the financial results of the third quarter Net sales is progressing steadily as shown on the slide The overview of the results is as shown on the slide Gross profit margin is remaining at the high level This slide shows the structure of our operating expenses compared Q&Q Let me explain a bit Let's go from the bottom side While the net sales of Henge-1 increased steadily, the sum of cost of sales and R&D expenses increased by only ¥3 million Q&Q, which might look weird to you. There are two reasons for this. One is the decreased outsourcing in our professional service business, despite an increase in the total number of engineers. The other is the improving efficiency of the cloud server infrastructure of Hengewan, which has the effect of mitigating our cloud spending. Advertising expenses decreased due to the cancellation of our offline events due to COVID-19 impact, as I explained before in this video. sorry for repeating the same phrases again and again but it's like we had to cancel physical events while trying to have webinars or online events As to the SG&A fees, while recruiting expenses and marketing-related fees increased due to proactively investing in recruiting and sales, traveling and transportation expenses and entertainment expenses decreased due to the COVID-19. Starting from this time, we are plotting our net sales and operating expenses quarterly transition, including the forecast. we now have 173 employees Next, let me show some business highlights from the third quarter Regarding advertising and events we are trying to have more online activities because currently it's very difficult to have physical events due to the COVID-19 pandemic For example, we had an online consultation room to reach out to companies' IT managers who are planning to adopt SAS to have work from home in light of the COVID-19. Also, we had an online recruiting seminar called Henge Talks. We used to have these kind of things physically, but now we are trying on new ways to adjust to the new norm. As a new survey, we had a survey regarding VPNs and teleworking at companies. The background is we heard many stories regarding slow VPNs from our customers, or the story was even in newspapers under this COVID-19 pandemic. And we got interested in what is happening since we view using a VPN at the company as a transitional or at the previous step to move on to the full cloud-powered company network. So if the companies found a problem in VPN usage, they might accelerate their move towards adapting SaaS or cloud. The result was like 83% of companies use VPN during the state of emergency and 62% of companies experience problems with their VPN So let me explain a bit Before the cloud, there was data inside their company's on-premise system and you need to come to the office to access the data If you're not inside the company, you basically cannot access the data To access data from outside, companies use VPN to provide a way to securely get into the company's on-premise network from outside the company For example, a salesperson might want to access the server inside the company from outside to edit or view documents, and then they can use a VPN to do that. In a transitional step of moving the company system to the cloud, a typical employee still needs access to the on-premise system along with the data on the cloud. As a result, VPN is also there, VPN is still there, and cloud access also happens via VPN. This is shown on the left side So what's happening right now? Why is VPN slow? At the time when the company prepared the VPN system, it was supposed to be used only by some special employees who needed access to the data from outside it wasn't supposed to be used by all employees or 70% of the employees like now. And because this bandwidth or performance is bound to physical infrastructure, the company can't react fast to increase the capacity Consequently, throughput gets slow when everyone in the company is using VPN We think that these kind of problems will be solved in the future by moving the infrastructure to the cloud as shown on the right side If you don't put data inside your company, there's no need to access it via the company's poor VPN infrastructure. Each device can access the cloud service via internet. For example, our company is very close to the picture on the right side. We do have printers or sensors connected to the local network, but those don't need to be accessed from outside the company. Each of our work-from-home devices connects to the SaaS we are using through the Internet, and Henge One controls the access policies and IDs at the entrance. This concept is recently promoted by not only us, but many SaaS vendors. Some call it zero trust, some call it direct access. And we believe that the more the companies go towards the direction, the more they will realize that they need a solution like Henge-1. Also, we announced a new plan called Hengewan for Education Giga School, the concept to let schools have access to more computers and faster networks got accelerated because of the COVID-19 situation We would like to help the schools in Japan We think the adoption of cloud will also accelerate so we adjusted our plan to match their needs Let's move on to our KPI results of the third quarter Year-on-year KPI highlights are as shown on the slide Hengewan's gross revenue churn rate is as shown on the slide It improved by 0.02 point, quarter-on-quarter This slide shows the transition of the contracted companies and users ARR and ARPU is developing steadily Next, let's move on to our growth strategy Our growth strategy is to maximize our LTV LTV is the total lifetime value of the contracts we have As we saw in the previous slides, our main service Hengewan has a relatively long average lifetime of several decades For example, if we got a 1 million yen per year contract this year That doesn't mean just 1 million yen. It means the deal will bring in 1 million yen every year to this company for the following decades in the future. Based on that concept, we want to prioritize our future revenue over our short-term profit. We want to actively invest in acquiring new contracts to maximize our LTV, the total lifetime value of the contracts we have. The LTV can be calculated by multiplying three factors shown on the top area of this slide ARR is the annual recurring revenue Y is the average contract duration in years and R is the gross profit margin However, the average contract duration in years is already high enough. As we saw in the previous slides, it's already over 50 years, so we don't think it's very meaningful to discuss how to make it longer. Also R, the gross profit margin is also already high. So the parameter left is the ARR, and we think that that is our key driver when thinking about maximizing our LTV. ERR could also be broken down into three factors as shown on the bottom area of this slide Large N is the number of companies using Hengewan Small N is the average number of users per contract And the ARPU is ARPU, average revenue per user If we can raise these factors together, we can have exponential growth This slide shows the actual progress of our growth strategy, showing those factors that I have explained. We are currently updating this table quarterly. On the leftmost column, you will find the ARR, and you can see that the delta, or the incremental difference, or the amount of ARR we piled up that year, is increasing every year. so ARR is growing steadily over the years. However, our business model has a growing denominator backed by a low churn rate. Since that denominator has grown faster than the numerator over time, our operand growth rate is slowing down. How to keep the growth rate at a high level is one of our business focus. Our tactics are to focus on large N in the short term while working on increasing ARPU in the midterm. Large N is the number of companies. At the end of the third quarter, we have over 1,600 customers and we've been increasing the number by approximately 250 companies per year. That is our current sales power. We want to raise the number of companies we contract per year gradually to, for example, like 300 or 350 by gaining more sales power outside of Tokyo In the next to the rightmost column, you can see small N, which has some uncontrollable nature If we target on big customers, it might rise a bit On the other hand, we might be targeting smaller customers in the future which we are not mainly focusing right now and then, it might decrease a bit So currently, we expect this parameter to remain flat or to have a slightly increasing trend Regarding ARPU, this would be a mid-term plan rather than a short-term plan but we want to raise it by continuously developing, improving or adding new features to the service to get more revenue from our customers We also want to make our service plan to include those new features Our main service, Henge-1, is a special kind of a sauce called Ideas. It federates with various types of sauces, and the more the customers adopt sauces, the more the demand for our service will increase. Right now, we think Japanese companies are accelerating their SaaS adoption because of the work-from-home trend We want to capture that growth opportunity with that trend We will keep working hard to grow Hengewan as a SaaS platform Let me show our corporate overview Our company name is pronounced Henge Henge means to change or to transform in Japanese We were founded in 1996 by three university students They are now serving as directors as shown on the slide We have four offices in Japan and one office in Taiwan Still most of our employees are concentrated in Tokyo We want to capture the growth opportunity outside Tokyo so we've been opening offices outside Tokyo and allocating sales power. Our corporate philosophy is liberation of technology. We love technology, we believe in the power of technology, and we want to deliver the power of technology to as many people as we can to change the world into a better place. We've been liberating technology in various business domains. Since we were founded in 1996, we've been pivoting our business area from Linux to email security to SaaS or to IoT. Our current business, Hengewan, started in 2011. Our current main business is Hengewan. Over 88% of net sales comes from our Hengewan business. We started Hengewan in 2011 after the earthquake hit Japan. At that moment, companies were facing a problem. It was difficult to let their employees come to the office because of the city's malfunction. They had to prepare a way to let them work from home. Some Japanese companies sought the adoption of cloud services to overcome the situation. However, there was a problem with security. We saw that the companies were feeling challenging to move to the cloud because of the security concern. We wanted to create something that removes the obstacle for the companies willing to move to the cloud-based working style. That was the reason why we created Henge-1. Hengewan has two main features, the ID federation and the access control. Initially, the access control was more directly solving the customer's problem. Before the cloud, the company's system was placed inside the company's network. If you come to the office, you can access the corporate data. If you are out of the office, you cannot access the corporate data. After adopting the cloud-based working style, you can access your data from all over the world from whichever device you want to use This is the exact reason why the cloud is powerful and why it's great But when you see it from the access control point of view, it could be interpreted as an access security risk So what we developed to solve this problem was the access control feature of Henge-1. For each SaaS the company uses, it can control who can access that service, from which device, by defining access policies for each of those services. For example, a company can let only their salespeople who are using company-owned devices to log in to their SFA or CRM SaaS they are using They can prevent someone from accessing the service using unauthorized devices The company will be freed from the access security concern by having our access control feature and can adopt the cloud-based work style smoothly. On the left side of the slide, there is the ID Federation feature shown. This would be the next step for the companies that have adopted multiple sources. The problem is that if they use multiple sources, they need to manage multiple IDs for each employee. For example, if the company uses 10 sources, they need to create 10 IDs when a new employee joins the company And when that employee leaves, they need to be sure that they have deleted the 10 IDs Otherwise, the person who left the company would be able to access the data by logging in with the ID and password he or she is remembering And in the first place, it's tough for an employee to use 10 different IDs at everyday work. ID Federation feature of Henge-1 lets the employee remember only one ID and password of Henge-1 itself. They don't need to enter a separate ID or password when accessing various SaaS the company is using. ID Federation feature of Henge-1 will let the companies move on to the SaaS-based work style smoothly by removing the burden of ID management. Our goal is to help remove all the obstacles lying ahead of a customer who is adopting a cloud-based work style. Henge-1 includes various features other than access control, such as email security, secure file transfer, and secure access from smartphones. Over 1,600 companies are using Hengewan and the number of employees covered by the service is over 1.9 million Various companies are using Hengewan The average number of employees per user is around 1,200 but there is a wide range of companies in size Since it's a security product typically speaking Companies with a small number of employees won't be interested in our product. So currently, our salespeople mainly target customers of 300 to 5000 employees. But of course, there are bigger customers as well as smaller customers. Thank you so much for watching the video today.