Hengge

Hi, I am Kazuhiro Ogura, the CEO of Henge. Thank you for watching this video today. First of all, I would like to begin with our financial results in the fourth quarter of fiscal year 2020. Let me first explain our financial results in the fourth quarter. Our consolidated net sales expanded steadily as shown on this slide. This is a summary of our consolidated financial results. Consolidated net sales in fiscal year 2020 modestly exceeded our full year forecast we had disclosed on August 7th. A main reason for this was slightly higher than expected sales in professional service and others. As a result, our profit exceeded our full year forecasts. Gross profit margin also remained high These graphs show a year-on-year comparison of our profit This is a year-on-year comparison of the breakdown on operating expenses This shows quarter on quarter changes in the breakdown of operating expenses. Let me explain a little more detail here. Recruiting expenses increased from the previous quarter as we stepped up recruiting, especially for sales staff. Travel, transportation, and entertainment expenses remained at the low level, but increased from the previous quarter. Cost of sales rose quarter on quarter because of factors such as transferred cost of sales from work in process in professional services and others. This slide shows quarterly trends in net sales and operating expenses. Let's turn to our employees. Currently we have 181 employees. The growth in our workforce is displayed here. In fiscal year 2020, we added a total of 27 employees, mainly to sales and customer success divisions. Now let's move on to the cash flow status. Most of our group revenue comes from upfront payments for annual hengewan contracts. In other words, our business model tends to generate cash inflows upfront. Operating cash flows in fiscal year 2020 increased from the previous fiscal year, mainly because advertising and other expenses were low due to the impact of the COVID-19 pandemic. Next, let me discuss our business activities in the fourth quarter of fiscal year 2020. This is an overview of our business highlights. We continue to actively hold various online events as in the third quarter. In August 2020, we launched Chromo, a new service and professional service and others. Adding more solutions to Chromo Education that was launched in April 2019, Chromo has become a comprehensive communication service that facilitates smooth two-way communication between community residents and municipalities. Rakumo, one of the companies we have invested in, went public in September 2020. Let me take this opportunity to briefly explain our business investments and new business development. On the business investment front, in recent years, we have invested in B2B startups that own strengths and technologies and also generate synergies with our existing businesses. At present, we have investments in four companies, Rakumo, Diggle, Shitateru, and Eni Inc. As for new business development, aside from R&D and existing businesses, we regularly have sessions to develop ideas for new businesses across divisions. These activities are based on our corporate mission, liberation of technology. We intend to create new businesses mainly drawing from insights obtained from our work and solutions to our own challenges. We conduct market research to develop prototypes for future businesses and hold internal contests called Inspire Matsuri to identify new business candidates. Henge aims to expand into new business fields adjacent to its existing businesses. To this end, we focus on business investments in new business development along with R&D activities. Next, I would like to discuss our KPIs on the fourth quarter of fiscal year 2020. This slide shows a year-on-year comparison of KPIs for Hengewan. This is an overview of KPI results in the fourth quarter. The average monthly churn rate remained at the low 0.16%, unchanged from the end of the previous quarter. This slide shows quadrated trends in the number of contracted companies and the number of contracted users. The growth in the number of contracted companies in the fourth quarter of fiscal year 2020 was slightly below previous levels. We achieved our full-year target for new orders, but orders from new customers were pushed to the later stage of the fourth quarter due to the impact of COVID-19. As a result, the number of contracted companies that actually started using our services in fiscal year 2020 was below the year earlier level. ARPU continued to increase in the fourth quarter of fiscal year 2020. An improvement in ARPU from new contracts was a major drive of this rise. On the other hand, the growth in ARR in the fourth quarter of fiscal year 2020 was not high compared to the previous year. There were four reasons for this. First, additional orders from existing customers were concentrated in the third quarter this fiscal year, and in the fourth quarter those orders were flat year on year. Second, orders from new customers were pushed back to the later stage of the fourth quarter due to the COVID-19 pandemic. As a result, the orders included in ARR in this fiscal year, in other words, orders for which actual service started by the end of this year, were smaller than the previous year. Third, the total value of cancellations in absolute terms increased from the previous year. Our churn rate remained low, but the total value of cancellations increased proportionately to the increase in the denominator of the contract value. And fourth, the ARPU at the time of contract renewals for existing customers declined modestly due to billing-related work following our pricing structure revision. Let me explain a little further. As I mentioned in previous financial result briefings, we revised our pricing structure in June 2019 and have been providing quotes to new customers based on the revised price plans. For existing customers, we have also started rounding off billing amounts in some cases for the sake of billing management. The reduction in billing amounts due to this rounding practice is not reflected in the numerator used in the formula for calculating the churn rate we disclose. This practice is a temporary measure, and its impact should be limited from fiscal year 2021 onward. Due to these four factors, ARR growth narrowed in the most recent quarter. Although growth may appear to be slowing down, we do not see any signs of a structural downtrend as our orders remained firm over the full year. Next, let's move on to our full year outlook for fiscal year 2021. In fiscal year 2021, we aim to accelerate mid-term growth in Hengewan ARR by aggressively investing in marketing and capturing growth opportunities in the new normal. We plan to create an inflection point in ARR growth by increasing both the number of contracted companies in ARPU. We aim to achieve the target of sustained annual growth of 20% or more for Hengewan ARR from 2021 onward. In the first half of the fiscal year, we will hold a digital event that will be 10 times the size of previous events and conduct an associated large-scale advertising campaign. We also plan to raise the profile of the Henge brand among a broader customer segment than before, including decision makers and partner companies nationwide. We aim to create an inflection point for both the number of contracted customers and ARPU. We aim for a net increase of 30 or more employees across the company with a focus on sales and customer success members. This slide shows our consolidated earnings forecast for fiscal year 2021. For Hengewan business, we will aim for above 20% annual growth. For the sustained growth, we want to create an inflection point by aggressive marketing activities. For this reason, the operating income will be lower than the previous fiscal year. These charts show sales trends by business over the last few years. Here you can see trends in our advertising expenses and operating expenses since fiscal year 2018. As you can see we plan to spend more money on advertising than we couldn't do in the previous year. I will now explain the background to this plan. We think the market environment has changed significantly. We have so far concentrated on maximizing LTV, ultimately ARR. At the same time, we have remained conservative about investment in marketing. However, the Japanese government declared a state of emergency in April 2020 to counter the spread of COVID-19, and Japanese companies were forced to transition to remote work across the country. This rapidly raised the profile of SAS. We think this brought us a huge business opportunity only seen once in a decade. Hengewan's service we provide is mainly a security service which enables secure access to a range of cloud services used by companies and single sign-on for such services. We want to highly recommend this service to all companies that are about to use SaaS. To take advantage of the opportunities in the new normal, we plan to aggressively market our services to companies that are already using SAS consistently, and also to companies which seek to expand internal usage of SAS. SAS adoption gained traction in Japan, especially in the Tokyo metropolitan area, shortly after the Great East Japan earthquake in 2011. We feel the recent outbreak of COVID-19 has further accelerated SaaS adoption, not only in the Tokyo metropolitan area, but across the country. The conditions in the Tokyo metropolitan area in 2011 drove growth in the cloud market from 2013 onward, and a similar situation is unfolding now throughout the country. This environment presents major opportunities for Henge and other SaaS providers. Until this year, it was said that the sauce adoption among Japanese companies has been proceeding slowly compared to countries such as the United States. We think this is going to be changed by COVID-19, just like how the earthquake changed the behavior of Japanese companies in the Tokyo metropolitan area after the earthquake. creating a sustained trend of cloud adoption. Face-to-face events are no longer held as before because of the COVID-19 pandemic but participating in digital events has become commonplace since the Japanese government declared a state of emergency in April. Taking this as a unique opportunity to efficiently promote our services to customers around the country, we are planning an online sauce festival. The event will be 10 times the size of previous events and we aim to attract 10,000 visitors. We will establish new sales and marketing methods effective in the new normal and strive to capture opportunities in the rapidly expanding market. We want to have both SaaS providers or cloud service providers and customers who are utilizing the power of SaaS to participate in this event. We will invite partners, potential customers, current customers, and other companies or other SaaS companies so that we can share and exchange various kinds of cutting-edge information in the SaaS world. This event is still in the planning stage, but these are some of the companies scheduled to participate in this event at present. We will also conduct a large-scale advertising campaign related to this digital event. We'd like to further energize the SaaS market in cooperation with many other companies. Let me move on to a discussion of our growth strategy next. The core of our growth strategy is to maximize LTV. Our users have signed up for our services with a very long theoretical average lifetime of several decades, as shown on the previous slide. For example, when we secure a contract of 1 million yen per year in the current fiscal year, that does not just mean additional 1 million yen in our sales. To our company, it means 1 million yen in sales and every year for the following decades when the user continues to use our service. For this reason, we do not focus too much on near-term operating profit level. Rather, in our growth strategy, we focus on maximizing LTV through aggressive spending to secure future sales. LTV can be calculated by multiplying the three factors shown at the top of this slide. ARR stands for annual recurring revenue, Y represents the average contract duration in years, and R means gross profit margin. We consider the product of these three factors as the total lifetime value of the contracts we have. However, since the theoretical average contract duration in years is already over 50 years, as shown on the previous slide, we do not think it is meaningful to attempt to make it longer. Similarly, lowercase r, small r, GRUSP's profit margin is already high. Therefore, we think growth in ARR will be the key driver to maximize LTV going forward. ARR can be broken down into three factors. The big N means the number of contracted companies, and the small n represents the average number of users per contracted company. ARPU stands for average revenue per user. If we can raise at least two out of these three factors simultaneously, we can increase ARR exponentially. Our basic tactics is to focus mainly on getting more customers to raise large N in the short term while aiming on raising ARPU in the midterm. For small N, we regard it as an uncontrollable parameter and expect it to stay flat or to slightly increase. This slide shows the actual progress of these three factors. First of all, you may notice the delta or year-on-year change for large N in ARR is narrowing, so let me address this. As I explained before, we believe the lower delta reflects an irregular situation caused by the COVID-19 pandemic in this fiscal year. It does not indicate a structural downtrend and we believe we can continue increasing the delta onward as the market expands. The real structural challenge, which I have mentioned before, is the slowing growth rate, even with the increasing delta. Our services have an extremely low churn rate, which means the denominator increases as our business grows. Therefore, even if we steadily increase the year-on-year change, this alone will not be sufficient to overcome the slowdown in growth. We want to keep it above 20% and have a sustained growth in Hengewon ARR for the midterm. The inflection point I mentioned before refers to ARR growth. Growth in ARR has slowed down to date. We aim to accelerate ARR growth from FY2022 with FY2021 as an inflection point. As for the large N, we aim to increase this by expanding our sales force and further collaborating with the sales partners as the previous fiscal year. We also plan to decisively implement measures to improve ARPU from fiscal year 2021. We want to create an inflection point by aggressive marketing activities. We revised our pricing structure in June 2019 and the ARPU from new customers has improved significantly over the last year. Going forward, we expect overall ARPU to trend upward as we continue to secure new customers. To further improve ARPU, we plan to provide new applications and strengthen our brand power. We have recently enhanced our Hengewan service by releasing the groundbreaking Hengelok application. Hengelok allows users to break free from password management. We aim to increase ARPU by continually enhancing our service features and broadly promoting the innovation of our services to the market through aggressive digital advertising. Regarding small n in the second right column of this slide, which represents number of users per contracted companies, we think we have relatively little control over this parameter. If we continue to secure large customers, this small n will increase. However, if we start selling our services to smaller customers that we have not approached in the past, for example, small n will decline. For this reason, we expect small n will either remain flat or increase modestly. Henge mainly operates a subscription model business. Barring any cancellations, the contracts secured this year should continue to generate sales and become the foundation of sales from next year. Basically, our subscription business will grow steadily as shown by the solid line in this chart, but the growth rate is bound to slow over time. To create an inflection point in its growth rate, we need to raise ARR to a certain level as shown by the dotted line on the slide, and then shift to a gradual growth trend. This is not an easy task. But if there is ever a time that is best to do something to achieve this task, it will be no other fiscal year but this fiscal year. COVID-19 changed how people work, and companies in Japan are finally about to adopt the SaaS-powered work style. In light of the current major changes in the market environment, we aim to create an inflection point in ARR growth from 2021 onward. In fiscal year 2021, we plan to hold our largest digital event ever to raise the profile of the Henge brand among a broader segment of customers, including decision makers and partner companies across the country. Our goal is to create an inflection point which affects both Large N and ARPU. Due to widespread use of SaaS applications, the number of IDs and passwords we use every day is increasing. Single sign-on services integrate these IDs and passwords into one ID and password. SSO is the first step to break away from password management, and we are providing it as an IDaaS. As the leftmost column on this slide shows, as SaaS adoption proceeds, IDs and passwords that the company needs to manage increases, and at some point they will need services for single sign-on as a logical consequence. The middle column shows the SSO stage. The six digits are the one-time password, commonly used as an additional authentication factor. Additional authentication factors are added to enhance security for IDs and passwords. This is commonly known as multi-factor authentication and one-time passwords fall into this category. Hengewan also provides these features. By simplifying how to use these authentication factors, Henge aims to achieve a passwordless world where users are entirely free from remembering or typing in user IDs and passwords. We have launched HengeLock as a new application for HengeOne. This is our first move to achieve a secure passwordless environment. Using HengeLock, smartphones and smartwatches can be used as additional authentication factors. When used in combination with Henge device certificate, customers can even log in without having to enter a password at all. The market adoption of SOS has only just begun. Many companies have only recently started using SOS, which means the current situation is in the phase shown in the leftmost column of this diagram. We think this also means the realization of passwordless environment will take a little longer. Still, as a leader in this market, we plan to raise the profile of the Hengewan brand by adding services that introduce next-generation technologies to our customers. In this way, we aim to build the foundations for improvement in ARPU. Hengewan currently integrates with 152 third-party cloud services. Through integration with Hengewan, SaaS providers can allow their customers to break away from password management without having to develop the functionality by themselves. Our Hengewan service is an IDaaS, a kind of special SaaS that works across multiple SaaS that the user is using. It becomes more valuable as the use of various types of third-party SaaS at our customers increases. Going forward, we would like to encourage the acceleration of the cloud service adoption by companies around the country. We also plan to deepen our cooperation with various SaaS providers to promote SaaS platforms. In this way, we aim to expand our business further. Next, I would like to provide a general overview of our company. Henge was established in 1996 by three university students who are now still serving as directors as shown on the slide. Fiscal year 2021 will be our 25th term since the establishment. At present, we have 181 employees. We have four offices in Japan and one subsidiary in Taiwan. However, most of our employees are still based in Tokyo. We established these offices in Nagoya, Osaka, Fukuoka, and Taiwan to step up sales activities in these regions where we expect SaaS demand to grow. 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 and change the world into a better place. We have been liberating technology in various domains. Since establishment of Henge in 1996, our company has provided technology to our customer, shifting its business domains from Linux to email security to SaaS and to IoT. In 2011, we launched Henge1 service, our present growth driver. The Henge1 business generates roughly 87% of our total net sales. It is our current mainstay business. We launched Henge-1 in earnest in 2011 shortly after the Great East Japan Earthquake. At that time, the sudden earthquake prevented many people from going to work. As companies sought ways to sustain their operations through work from home, they adopted SaaS one after another. However, security was an obstacle that prevented many companies from making the switch to SaaS. To remove such an obstacle, we launched Hengewan as a service to support customers' smooth transition to cloud-based work styles. Hengewan mainly provides ID integration and access control. In the aftermath of the earthquake, access control became an issue. Prior to that, systems were physically located on companies' premises, so employees could only access company data by commuting to the offices or by using a VPN. Through cloud solutions, anyone can access company data from any location around the world. This is exactly what makes cloud solutions so powerful, but it also presents security risks from the standpoint of access control. Companies were naturally concerned that some stranger might be able to access their data from somewhere over the world. And that worry was preventing those companies to move on to the sauce. And that was a problem because at that moment, they had to find some way to continue their business, let everyone collaborate from their homes. As a software vendor working on security for over 10 years, we wanted to do something to solve this problem. This is why we developed the access control feature of HengeOne. This functionality allows our customers to configure access policies for the SaaS services they used and control who can access which services, when, and from which devices. With access restrictions, for example, customers can limit access to business card management applications and sales management data only to sales staff. They can also limit access only to company provided computers and block access from PCs for household use or PCs at cafes. By configuring who can access when and from which locations for each service, companies can transition to work styles that leverage cloud services without concerns over access security. The left side of this slide illustrates the ID integration functionality. When companies use multiple cloud services, they need to configure IDs and passwords for the users for each service. That's where the ID integration functionality comes in. For example, if a company uses 10 SaaS solutions, it needs to create 10 IDs and passwords for each new employee who joins the company. When employees leave the company, their IDs and passwords need to be deleted completely. Otherwise, the former employee, for example, could possibly still access data with their old login credentials. And memorizing and managing 10 sets of IDs and passwords is of course cumbersome for employees. So they tend to reuse their password when they have to manage 10 sets of IDs. And that is regarded as a bad habit because it leads to an unauthorized access if that password leaks. The ID integration functionality of the Hengewan allows employees to log into multiple SaaS with one ID and password. It also relieves companies from troublesome ID management, allowing them to transition to work styles that utilize SaaS with a sense of security. Henge aims to remove all of the typical obstacles companies face when they move into a cloud-based work style. Along with access control, Henge 1 offers various other features such as secure browsing of cloud data from smartphones, email security, and secure file transfer as a SaaS suite. We provide this service in per user per month basis to companies. At present, we provide Hengewan to over 1,600 companies of various sizes in a variety of industries. Its user count has reached roughly 1.95 million, and as shown on the previous slide, the average number of users per company is around 1,200. Our sales staff are mainly targeting companies with 300 to 5,000 employees. The graph slides a breakdown of our customer accounts by ARR as the end of fiscal year 2020. As you can see here, we have some smaller customer with fewer than 300 employees as well as larger customers with more than 5,000 employees. This concludes our video today Thank you for watching