Hengge

Hi, I'm Kazuhiro Ogura, the CEO of Henge. Thank you for watching our video today. Today, I'd like to go through our financial results of the first quarter of fiscal year 2021.

Let me first explain about our financial results of the first quarter.

Our consolidated net sales expanded steadily as shown on this slide. This is the summary of our consolidated financial results. In the first quarter, we performed steadily compared to the full year forecast disclosed on November 13th.

Gross profit margin remained high. These figures show a year-on-year comparison of our profit.

And this is a year-on-year comparison of the breakdown of operating expenses. This page shows quarter-on-quarter changes in the breakdown of operating expenses. Let me explain in a little more detail here. In addition to recruiting expenses, other SG&A expenses decreased compared to the previous quarter. The reason of that is that the one-time expenses incurred in the last quarter didn't occur in this quarter. As for advertising expenses, we have started using them gradually towards the upcoming HengeNow event. While the sales of Hengewan increased steadily, the sum of the cost of sales and R&D expenses decreased by ¥2 million quarter-on-quarter. The main reasons are that firstly, the outsourcing in professional service and others' business decreased, and secondly, the efficiency of the cloud server infrastructure of Hengewan improved, mitigating our cloud spendings. This slide shows quarterly trends in net sales and operating expenses. The reason for the decline in net sales in this quarter is that we had a large amount of sales of systems integration services in the previous quarter in our professional service and others business. Sales of Hengewan business, which has a recurring nature, increased on a quarterly basis as in the previous quarters. As to the employees, currently we have 189 employees. The percentage breakdown is as shown in the slide.

The growth in our workforce is displayed here. Next, let's see our business activities in the first quarter.

This is an overview of our business highlights. We have started an advertising campaign for the large-scale virtual event Hengenau, scheduled to be held in the second quarter. Also, we have tried corporate advertising at the SMBC Japan Baseball Series and also tried out-of-home advertising at Tokyo Station. In this fiscal year, we aim to improve our brand awareness among a wide range of people nationwide. In November 2020, we launched the Hengewan Product Alliance program. Since the launch of the program, many brilliant SaaS companies have joined us, and we hope to solve the issues of ID password management in user companies by productively promoting technical cooperation on SSO integration with Hengewan. Next, let's take a look at our KPIs in this first quarter. This slide shows a year-on-year comparison of the KPIs of Hengewan. This is an overview of the KPI results of the first quarter. Our average monthly churn rate rose 0.06 points to 0.22% from the end of the previous quarter, but still remains low in its absolute level. This slide shows quarterly trends in the number of contracted companies and the number of contracted users. The growth in the number of contracted companies in the first quarter was larger than the previous levels. This was mainly due to two facts. Firstly, many projects queued for activation at the end of the previous fiscal year were put into service in this quarter. Secondly, we saw more closing sales deals than before. We want to keep our eyes on our sales activities for a while before judging whether this is a permanent acceleration influenced by the work-from-home trend or not. The total number of contracted users at the end of the first quarter decreased compared to the previous fiscal year. This is due to a special factor. We will come back to this topic later. our ARR is growing steadily. ARPU has been on a gradual upward trend in the past, but due to a special factor, it increased to a larger extent.

Let me explain in a little more detail.

As I explained, the number of contracted companies in ARR grew steadily, and the ARPU grew more rapidly than usual. However, the number of users declined over the quarter, which is unusual compared to the past quarter's trend. The decline in the number of users and the rapid growth in the ARPU is mainly due to one customer's cancellation, which I mentioned earlier as a special factor. Back in the early days of Hengewan, when we haven't yet found our winning strategy, we tried to sell it in various ways. And this time, in this quarter, one customer who had been using Hengewan since those early days, in a way not common these days, mainly for email security purposes, unfortunately cancelled the contract. There are three charts on this slide showing the quarterly changes in the number of contracted companies N, ARPU, and ARR. The customer who stopped using Hengewan had a relatively large number of users, approximately 80,000, so the total number of users has declined as I mentioned. But on the other hand, ARPU has significantly risen, as shown on the chart. As you can see, the decline in the total number of users doesn't mean that our future growth is slowing down. We view that the trend of the steady growth of our business is ongoing. Our new customer acquisition activities are progressing well. we will keep focusing on maximizing our LTV, which means piling up our future ARR by increasing N and ARPU following our growth strategy. So without the special factor, all these charts might have looked more appealing with more steady and smooth growth.

But yeah, things don't go well all the time. Let's move on to our full year outlook for fiscal year 2021.

The business is progressing as planned, and there have been almost no updates on our plan since the last time we explained. However, since there are plans for large-scale investments in advertising expenses, let me explain our policy of the fiscal year 2021 again. In the 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 and ARPU. We aim to achieve a sustained annual growth of 20% or more for Hengewan ARR from 2021 onward. As to advertising expenses, in February, we will hold a large-scale digital event, which is a virtual event called HengeNow, that will be almost 10 times the size of the previous HengeNow events we held physically. Specifically speaking, we want to get 10,000 registerers to the event. We also plan to raise the Henge brand profile among a broader customer segment than before, including decision makers and partner companies nationwide, by having an associated large-scale advertising campaign together. We believe this will contribute to both EN and ARPU. As a personal plan, we aim for a net increase of 30 or more employees across the company with a focus on sales and customer success members. There is no change to our full year forecast from the announcement at the beginning of the fiscal year. As for Hengewan business, we will aim for above 20% annual growth. For sustained growth onward, we want to create an inflection point through our aggressive marketing activities. For this reason, the operating income will be lower than the previous fiscal year. These charts show the transition of our sales by business over the last few years. Sales are progressing steadily accordingly to the forecast. On this slide, you can see the transition of our advertising expenses and operating expenses since the fiscal year 2018. While the quarter's progress on advertising may appear to be a little slow, advertising expenses are expected to be spent heavily on the second quarter in which our large-scale digital event will be held. As you can see, we plan to actively spend money on advertising more than the previous fiscal years. Let me explain the background to this plan again. We have been concentrating on maximizing our LTV and our future ARR, but we have remained relatively conservative about spending on marketing until this fiscal year. This is because we thought that we could grow together with a strong and steady market expansion in an organic way while staying as a leader. However, we think the market environment is under a significant change because of the COVID-19. The Japanese government declared a state of emergency in April 2020 to counter the spread of COVID-19, and Japanese companies across the country were forced to adopt work from home. This rapidly raised the profile of SAS. We think this brought us a huge business opportunity only seen once in a decade. Hengewan is a security service that enables secure access and single sign-on to a range of cloud services used by companies. We believe we can help many companies in this country that are about to start using SaaS under this situation. To take advantage of the opportunities in this new norm, we plan to aggressively market our services to companies that are already using SAS and companies seeking to expand their 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. This trend gave birth to many successful Japanese SaaS companies. And as you know, many SaaS companies succeeded in achieving growth enough to go public in recent years. A similar situation is unfolding now, this time not locally around Tokyo, but throughout the country, at a larger scale. This environmental change presents significant opportunities for Henge and other SAS providers. Until this year, it was said that the SAS adoption among Japanese companies has been proceeding slowly compared to countries such as the United States. We think this might be changed by COVID-19, bringing cloud adoption nationwide, just like how the earthquake changed Japanese companies' behavior in the Tokyo area after the earthquake back in 2011, creating a sustained cloud adoption trend. Nowadays, face-to-face events are no longer held as before because of the COVID-19 pandemic, but participating in digital events has become a common thing since the Japanese government declared a state of emergency last April. Taking this as a unique opportunity to efficiently promote our services to customers nationwide, we plan an online SaaS festival called HengeNow. 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 would like to capture opportunities in the rapidly expanding market. Let me briefly explain about this online sauce festival, Hengenau. In the past, Hengenau was held as a physical event. For example, the one held in 2019 was a physical event. This year, it will be held as a virtual event for the first time. Starting on February 15th, more than 40 companies, municipalities and institutions will speak at this six-day event, which will feature over 50 sessions on various topics such as DX, SaaS, security, the digitization of education and cities, and so on. Not only user companies, but also the SaaS companies will participate and will share knowledge such as how to adapt to the new norm, how to stay productive, or how to boost productivity under the new norm. The event will be 10 times the size of previous events, and we aim to attract 10,000 visitors. We will also conduct a large-scale advertising campaign related to this event. We'd like to further energize the SaaS market in cooperation with many other companies. In addition to the SaaS companies shown on the slide, many users' companies will also be speaking at the event.

Next, let me explain our growth strategy.

The core of our growth strategy is to maximize our 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 an additional 1 million yen to our sales. It means 1 million yen in sales every year for the following decades as long as the user continues to use our service. For this reason, we do not focus too much on the near-term operating profit level. Instead, in our growth strategy, we focus on maximizing our LTV through aggressive spending to secure future sales. LTV can be calculated by multiplying the three factors shown at the top of the 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 35 years, we do not think it is meaningful to attempt to make it longer. Similarly, lowercase r, small r, gross profit margin is already high. Therefore, we think growth in ARR will be the key driver to maximize LTV. ARR can be broken down into three factors. The big N, capital N, means the number of contracted companies, and the small n represents an average number of users per contracted company. That is, how many users are using it inside a company on average. ARPU stands for Average Revenue Per User. The production of these three parameters will be our ARR. We'd like to pile up as much ARR as we can as our growth strategy. We do not focus too much on the near-term operating profit level, but we focus on maximizing LTV through aggressive spending to secure future sales. To achieve that, we need to raise either large n, small n, or ARPU. But if we can raise at least two out of these three factors simultaneously, we can increase ARR exponentially. Our basic tactics are to focus mainly on getting more customers to raise large N in the short term, while aiming to raise ARPU in the midterm. For small N, we regard it as an uncontrollable parameter, and expect it to stay flat or to increase slightly.

This slide shows the actual progress of those three factors.

In our fiscal year 2020, the delta or year-on-year change for large and ARR narrowed by some irregular situation. But it does not indicate a structural downtrend and we believe we can continue increasing the ARR and the delta onward as the market expands. The real structural challenge is of 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 we want to have sustained growth in Hengewan ARR for the mid-term. 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 fiscal year 2022 with the fiscal year 2021 as an inflection point. As for the large N, we aim to increase this by expanding our sales force and collaborating with the sales partners as the previous fiscal year. We also plan to implement measures to improve ARPU from fiscal year 2021 decisively. We want to create an inflection point through aggressive marketing activities. We revised our pricing structure in June 2019, and the ARPU from new customers has improved significantly over the last year. As we advance, 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 our services innovation to the market through aggressive advertising. Regarding small n, in the second right column of this slide, which represents the 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, small N will decline. For this reason, we expect small N will either remain flat or increase modestly. This is the growth trajectory we envision from 2021 onward. 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 black 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 we want to shift it 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 Henge brand profile 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.

Hengewan currently integrates with over 160 third-party SASSs. Through integration with Hengewan, SASS providers can allow their customers to break away from password management without developing functionalities such as multi-factor authentication, single sign-on, or passwordless login by themselves. In other words, we already provide those features to their users. Hengewan 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 SaaS increases. As we advance, we would like to encourage the acceleration of cloud service adoption in companies in this country, not only by ourselves, but also by cooperating with various SaaS providers. We'd like to promote and grow us as a SaaS platform and expand our business further. I would like to provide a general overview of our company. It was established in 1996 by three university students, Ogura, Miyamoto, and Nagatome, who are now serving as directors as shown on the slide. Fiscal year 2021 will be our 25th term since the establishment. Haruo Amano has been appointed as a director after the resolution of the annual general meeting of shareholders held on December last year. At present, we have 189 employees. We have four offices in Japan and one 100% 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. In other words, we are in the process of expanding regionally from Tokyo.

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 we want to change the world into a better place. We have been liberating technology in various domains. Since the establishment of Henge in 1996, our company has provided technology to our customers, shifting its business domains from Linux, to email security, to SaaS, and to IoT. In 2011, we launched HengeOne service, our present growth driver. The HengeOne business generates roughly 89% of our total net sales.

It is our current mainstay business.

We launched Henge-1 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 federation and access control. In the aftermath of the earthquake, access control became an issue. Prior to that, companies were using not cloud services but on-premise systems, and those systems were physically located on companies' premises, so employees could only access company data by commuting to the offices or by using a VPN. So the companies could ensure that the building is appropriately locked and no stranger is coming into the building to be sure about their data security. On the other hand, through cloud solutions, the company data will be distributed on the cloud, so anyone can access company data from any location worldwide. And this is exactly what makes cloud solutions so powerful. You can now collaborate from anywhere on the globe. It boosts the productivity of the company workers. It is a strong and innovative feature of the cloud. But this 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 from moving on to the sauce. And that was a problem because, at that moment, they had to find some way to continue their business, letting everyone collaborate from their home. As a software vendor working on security for over 10 years, we wanted to do something to solve this problem. We wanted to liberate and deliver the power of cloud technology to the customers. This is why we developed Hengewan. Hengewan has mainly two features. On the right side of this slide, access control feature is illustrated. On the left side, there is the ID federation feature. Access control is the feature that directly solves the problem I mentioned. It allows the customers to configure access policies for each SaaS provider they use, and control who can access which services, when, and from which devices. For example, customers can limit access to HR tech sauce to HR staff only or business card management applications or sales management services only to sales staff with access restrictions. 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 Federation functionality. This integrates multiple IDs and passwords of multiple services into one authentication utilizing single sign-on technology. After the company switched to the SaaS-based work style, they typically start to adopt many SaaS solutions. Then they need to configure IDs and passwords for the users for each service, and it starts to become complicated. That's where the ID federation 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 passwords when they have to manage 10 sets of IDs. And that is regarded as a bad habit because it leads to unauthorized access if that password leaks. The ID federation functionality of 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. We aim to remove all of the typical obstacles companies face when they move into a cloud-based working style. Along with access control, Hengewan offers various other features such as secure browsing of cloud data from smartphones or email security or secure file transfer as a SaaS suite. We provide this service, Hengewan, in per user per month basis to companies. At present, we provide Hengewan to more than 1,750 companies of various sizes in a variety of industries. Its user count has reached roughly 1.94 million and as shown on the previous slide, the average number of users per contracted company is around 1,100. Our sales staff are mainly targeting companies with 300 to 5000 employees. The chart shows a breakdown of our customer accounts by ARR as of the end of the previous fiscal year. As you can see here, 300 to 5000 is the biggest portion, but we have also smaller customers with fewer than 300 employees and larger customers with more than 5000 employees.

This concludes our video today. Thank you for watching