Thinking Points

  • DesignOne (TSE: 6048) operates a growing local search website “Ekiten”, a service similar to Yelp (NYSE: YELP) in the United States.
  • Since starting its paid listing service in 2011, the company grew both revenues and operating income at a 32.8% CAGR pace. More recently, however, growth has stagnated.
  • Although a leader in local search, DesignOne’s future growth depends on how well it can integrate with customers through offerings like customer relationship management software.
  • At 307 yen per share, DesignOne trades at an adjusted 2.8x EV/EBIT with a market cap of 4,640 million yen ($41.5 million USD).
  • Over the next three years, investors can expect an investment CAGR of between 0% and 6.9%, with considerable execution risk. Hence, investors are best advised to keep DesignOne on a watchlist, paying close attention to cancellation charges and revenue growth on a quarterly basis.

Introduction

DesignOne (TSE: 6048) operates website “Ekiten”, a local-search service with customer reviews, primarily on small and medium sized local businesses. The company is newly founded in 2005 and listed its shares on the Tokyo Stock Exchange in 2015. Currently, DesignOne is a single segment operation, but generates revenues from advertisements and paid memberships (from businesses).

Source: 2018 presentation


Although the company promotes itself as an all-encompassing local-search service, 56% of its paid memberships come from businesses in the Relaxation & Body Care genre. With a slowdown in growth and DesignOne reviewing its strategy, the company’s share price declined by over 70% in the last year.

Source: Google


The business & environment

The closest counterpart to DesignOne’s Ekiten in the western world is Yelp (NYSE: YELP). Although Yelp operates in Japan as well, its presence is considerably smaller than Ekiten. In short, Ekiten maintains a local store search and review website with over 4.69 million stores listed in Japan. Users can rate and comment on these stores for other users’ reference.

The way DesignOne generates revenue is primarily through paid store listings (i.e., subscriptions) and secondarily through advertising. Additional functionality like staff introductions, coupon issuance, and favorable listings are provided for stores that pay for a subscription service (about 5,000 yen, or $45 USD per month). In an indirect way, essentially all of DesignOne’s revenues come from advertising.

Source: Ekiten Website


DesignOne’s listings spans from relaxation and beauty related stores to medical facilities and restaurants. As a general store review site, it does not have direct competition, however, there are companies that provide a similar service with a focus on specific industries. For example, Gurunavi (TSE: 2440) focuses on restaurants and Kakaku.com (TSE: 2371) subsidiary Four Travel focuses on travel and lodging.

Interestingly, 56% of DesignOne’s paid subscriptions come from the relaxation and body care genre.

Source: Q1 2019 presentation, translation by Kenkyo Investing


Thus far, DesignOne almost purely operates as an advertising platform. More recently, however, the company is figuring out ways to make itself a part of its customers’ daily use. For Relaxation & Body Care customers, the company is experimenting with a light customer relationship management (CRM) tool.

Source: 2018 presentation, translation by Kenkyo Investing


As it currently stands, DesignOne is still replaceable. Simply put, the company is in the lead generation business, competing with other advertisers and platforms in its ability to generate leads for its customers. Depending on how well the company is able to integrate itself with its customers’ daily operational process (i.e., reservation system, billing, e-commerce, etc), DesignOne may be able to build a higher quality, difficult-to-replace revenue stream that is more recurring in nature.

Since the company started its paid subscription service in 2011, DesignOne has continuously grown revenues and operating income.

Source: 2018 presentation, translation by Kenkyo Investing


More recently, however, the pace of growth has slowed down considerably. In fact, the number of paid listings has declined between Q4 2018 and Q1 2019:

Source: Historical presentations


In total, the company has 4.69 million listings, most of which are listed by users and Ekiten. The number of free listings above (left) shows stores that maintain their own listing on Ekiten. The stores that pay for the additional functionalities and exposure are listed above (right).

The company attributes the decline to a decrease in site visits, which in turn made its advertisements less effective. With that said, DesignOne does not disclose page views.

In other words, DesignOne is at a crossroads. The company established itself as a sizeable player in store reviews, particularly in the Relaxation & Body Care genre, but has yet to solidify its position as a necessary tool for its customers. The company’s future growth is largely dependent on whether it is able to integrate into its customers’ business operations.

For fiscal 2019, the company guided for 2,500 million yen ($22.4 million USD, +2.3% YoY) in revenues and 503 million yen ($4.5 million USD, -25% YoY) in operating income. The company noted that the expected decrease in operating income is largely due to investment in technological development.

Shareholders

As of Q1 2019 (ending November 30th, 2018), DesignOne had 15,115,400 shares issued and 3,158 shares in treasury, putting outstanding shares at 15,112,242.

Here are the major shareholders:

Source: Company filings and Nikkei


Yasuo Takahata is the founder-CEO of DesignOne and TAK is his fund. Akio Takahata and Yasuo are brothers. Together, the Takahata family owns a controlling stake in DesignOne.

After college, Yasuo joined Fujitsu (TSE: 6702), developing supercomputers and CRM software, which eventually lead to his founding of DesignOne in 2005.

As of Q1 2019, the company has 163,100 shares (~1.1% of outstanding shares) worth of unexercised options.

Financials & Valuation

  • DesignOne operates a growing local search service “Ekiten” which faces a turning point as paid subscription listings declined for the first time since it started the service in 2011.
  • While Ekiten mostly operates as an advertising platform now, the company is working on integrating itself with its customers’ daily operations by building a light CRM system.
  • DesignOne’s future growth is dependent on how successfully it can integrate with customers, and the progression is currently unclear.
  • At 307 yen per share, DesignOne trades at an adjusted 2.8x EV/EBIT with a market cap of 4,640 million yen ($41.5 million USD).
  • Over the next three years, investors can expect an investment CAGR of between 0% and 6.9%. Hence, investors are best advised to keep DesignOne on a watchlist, paying attention to cancellation charges and revenue growth when revisiting the company each quarter.

Since it started offering paid listing services in 2011, DesignOne posted remarkable growth at a 32.8% CAGR pace for both revenues and operating income. Recently, however, growth has stagnated, with revenues declining (-0.2% ttm Q1 2019 vs. fiscal 2018) and operating income growing only slightly (+0.9% ttm Q1 2019 vs. fiscal 2018). Hence, the growth story fell apart and the company’s stock price performance reflects this.

Source: Google


The company attributes this to a decline in page views, which is not disclosed in its filings. As it currently stands, Ekiten is essentially an advertising platform. The company is working to change this by extending its service to include a light CRM system. As of Q1 2019, it is experimenting with a reservation system for its paying customers in the Relaxation & Body Care genre.

DesignOne’s future business performance is largely dependent on how well the company can maintain its positioning as a local search platform and how well it can extend services to integrate with its customers’ day-to-day operations. The company is focusing on the right things, but it is too early to tell how well execution is going.

Over the next several years, DesignOne plans to invest in technical developments to increase its utility as both a lead generation platform and CRM platform. Hence, the company is projecting lower operating performance in the next couple of years and stronger operating performance thereafter.

Source: Company filings, 2018 figures are actual, 2019-2021 figures are company projections


In terms of execution, the best metric to track is revenues as operating income will fluctuate depending on how much is invested in development. Additionally, paying attention to non-operating profits will be a good indicator of customer retention as DesignOne offers annual subscriptions with termination fees, and the termination fees fall under non-operating income.

Source: Company filings


For Q1 2019, DesignOne recorded 3,054 thousand yen ($27.3 K USD) in cancellation charges compared to 1,782 thousand yen ($16 K USD) in Q1 2018. Although the above chart appears to show an improvement in retention, it is unclear whether this is true based on Q1 2019 performance.

As far as the balance sheet goes, DesignOne is more than healthy with a 0.91 equity-to-asset ratio and 86.7% of assets in the form of cash & equivalents.

At 307 yen per share, the company trades for 3.3x EV/EBIT with a market cap of 4,640 million yen ($41.5 million USD). Adjusted for investment securities of 314 million yen ($2.8 million USD), the company trades for 2.8x EV/EBIT.

Assuming DesignOne achieves its medium term targets, but doesn’t receive high growth multiples (3x EV/EBIT), we can expect shares to recover back to 375 yen per share for a three year investment CAGR of 6.9%, adjusted for options. If the company generates 2018-level revenues with 500 million yen ($4.5 million USD) level operating income, as projected for 2019, we can expect shares to trade at today’s prices in three years for an investment CAGR of 0%.

Although DesignOne is a leading local search service with a solid growth record, it has yet to solidify its position as an indisputable leader. Hence, investing in the company today comes with considerable execution risk. Interested investors should keep DesignOne on a watchlist and pay attention to cancellation charges and revenue growth going forward.

The bottom line

DesignOne, through its local search website “Ekiten”, delivered remarkable growth over the last seven years. More recently, however, growth has stagnated, reflecting on the company’s share price. Although DesignOne is a leader in local search, its position is not yet solidified, and the company is working to rectify its position by offering a light CRM system. There is still considerable execution risk investing in the company today, but investors can expect a three year investment CAGR of between 0% and 6.9%, adjusting expectations each quarter depending on how well DesignOne can execute.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.