Thinking Points

  • Startia Holdings (TSE: 3393) operates a group of companies that provides IT infrastructure and digital marketing support tools and services to business with 300 employees or fewer.
  • The company started out as a telecom agency in 1996, then transitioned into a software subscription company, focusing on subscription revenues since 2006.
  • Startia has since established formidable software offerings for e-book creation, website content management systems, and marketing automation, with plans to focus on areas like augmented reality content creation.
  • At 560 yen per share, Startia Holdings trades for an adjusted 4.1x EV/EBIT with a market capitalization of 5,293 million yen ($48.6 million USD).
  • Investors can expect an investment CAGR of between -1.9% and 26.6%, inclusive of dividends, over the next three years.

Introduction

Startia Holdings (TSE: 3393) is a group of 15 companies (referred to as “company” from here on) that primarily provides IT-related equipment and services for small and medium sized businesses with less than 300 employees. Secondarily, the company offers digital marketing services. Startia Holdings operates through 5 segments: IT Infrastructure, Digital Marketing, Business Applications, Overseas, and Other:

Source: Company filings

From 2006 and on, the company has focused on increasing the proportion of subscription revenues for services like e-book creation software, cloud storage, website content management systems, virtual private network (VPN), and marketing automation tools. In 2019, subscription revenues accounted for 42.7% of annual revenues.

The business & environment

Startia Holdings was founded in 1996 by current CEO Hideyuki Hongo in 1996. The company started out as a phone line agency, signing up customers then passing the contract on to phone companies, and receiving a commission. 

In a 2017 interview with Listen (Japanese), Hideyuki described his background and how Startia started. First and foremost, Hideyuki is a salesman. When he was 18, he moved from Kumamoto Prefecture, a generally rural area of Japan, to Tokyo. He attended trade school specializing in hotel management during the day and worked as a bellboy at night.

After two years of this routine, Hideyuki decided to change careers, accepting a job as a futon (Japanese bedding) salesman at a company known for long hours and a harsh working environment. Seven years later, Hideyuki became the top sales person in the company.

Looking for a new challenge, Hideyuki switched jobs to a sales position in the telecommunications industry. After a year, however, the company went bankrupt. Hideyuki’s team at the time wanted him to start a company, so he took the opportunity to start Startia when he was 29 years old. 

In the beginning, as mentioned earlier, Startia was effectively a telecom agency. In 2006, however, the company ventured out into a new domain: ebook creation software. The company first started selling outside software, then released “ActiBook” in 2007, an internally developed ebook creation software, marking the beginning of its focus on subscription revenues.

Startia continued introducing new subscription services, including CMS Blue Monkey for website content management (2007), Secure Samba cloud storage (2008), ActiBook AR for augmented reality content creation (2013), Global Gateway VPN service (2014), and BowNow marketing automation tools (2016). 

The company recently started its current segment reporting, which is broken down into IT Infrastructure, Digital Marketing, and Other. Rather than going over segment reporting, however, it is more practical to assess revenue quality through the proportion of recurring (i.e., subscription) vs. non-recurring revenues.

Source: Company filings

Startia’s e-book creation software and website content management software are now established software brands in Japan. According to the Listen interview earlier, Startia’s ActiBook e-book creation software is the leading market share holder in the industry. Additionally, the CMS Blue Monkey website content management system is the market leading CMS software while the BowNow marketing automation tool has gained the #2 position in the industry according to company presentations (Japanese).

Part of this success comes from Startia’s sales force. Until 2016, the company provided a breakdown of staff by job role. In 2016, 46% of staff were involved in sales while 28.8% were in technical positions and 25.2% were in management positions. Interestingly, as a part of its M&A strategy, Startia targets regional/rural office equipment companies with a weak web service offering and a shortage of sales staff.

For fiscal 2020, Startia Holdings is guiding for revenues of 12,822 million yen ($118 million USD, +7.7% YoY) and operating income of 506 million yen ($4.7 million USD, -2.2% YoY). The company is expecting continued stable revenue growth and plans to invest in new businesses in fiscal 2020, resulting in a higher revenue guidance and lower operating income guidance.

Shareholders

As of fiscal 2019 (ending March 31st, 2019), Startia Holdings had 10,240,400 shares issued and 475,211 shares in treasury, putting outstanding shares at 9,765,189. 

Here are the major shareholders:

Source: Company filings & Nikkei

In addition to Hideyuki having a significant stake in the company, long-time managers like Masakatsu and Hirokazu have a meaningful stake in Startia Holdings.

There are no unexercised stock options outstanding.

On May 28th, 2019, Startia made a proposal for setting up an equity compensation plan for the management team (both for Startia Holdings and group company management teams). The proposal laid out a plan to set up a trust fund that purchases company shares and pays out up to 190,000 company shares, or 2% of currently outstanding shares each year. Up to 40,000 shares go to board directors, up to 7,500 shares for outside directors, and up to 142,500 for group company directors in a single year. 

The proposal was voted on and approved at the shareholder’s meeting held on June 20th, 2019. The plan is valid between fiscal 2020 and 2024.

Financials & Valuation

  • Startia Holdings operates a group of companies that provides IT infrastructure and digital marketing support tools and services to business with 300 employees or fewer.
  • The company started out as a telecom agency in 1996, then transitioned into a software subscription company, focusing on subscription revenues since 2006.
  • Startia has since established formidable software offerings for e-book creation, website content management systems, and marketing automation, with plans to focus on areas like augmented reality content creation.
  • At 560 yen per share, Startia Holdings trades for an adjusted 4.1x EV/EBIT with a market capitalization of 5,293 million yen ($48.6 million USD).
  • Investors can expect an investment CAGR of between -1.9% and 26.6%, inclusive of dividends, over the next three years.

Startia Holdings operates a group of companies that provide IT infrastructure and digital marketing support tools and services to businesses with fewer than 300 employees. The company originally started out as a telecom agency in 1996, then transitioned to a software company.

In 2007, the company released its first internally developed software, “ActiBook” an ebook creation software. Today, after several updates, ActiBook is the leading ebook creation software in Japan. Additionally, Startia has created several other subscription-based software offerings with formidable market positions.

One key measure of Startia’s revenue quality is subscription revenues as a percentage of total annual revenues. This figure has progressively increased over time and is a key focal point for the company. Another point of interest is Startia’s customer base, which includes over 20,000 companies, many of which are small and medium sized businesses. The benefit of a wide customer base and a strong sales team is in the company’s ability to suggest and implement a new offering for existing customers.

Going forward, the company is expecting continued revenue growth with temporarily declining operating profits as it invests in new businesses. While revenue quality is improving, management equity compensation is an important consideration for valuation purposes.

At 560 yen per share Startia Holdings trades at 5.9x EV/EBIT with a market capitalization of 5,293 million yen ($48.6 million USD). Adjusted for long term investment security holdings, the company trades at 4.1x EV/EBIT.

The company delivered an 8-year overall revenue CAGR of 14.6%. Subscription revenue growth was at 20.4% CAGR while non-subscription revenues grew at 11.5% CAGR. Revenue growth rates have slowed down significantly in recent years, with overall revenue CAGR at 5.4%, subscription revenue CAGR at 10.4%, and non-subscription revenue CAGR at 2.2%. While Startia does not report operating income by revenue type, it appears subscription revenue growth still remains strong while non-subscription revenues occasionally decline YoY. 

Given Startia’s small scale – annual revenues of ~12 billion yen (~$110 million USD) – a no growth case will likely result in EV/EBIT multiples shrinking, especially with management equity compensation plans open to paying out up to 10% of currently outstanding shares over the next 5 years. 

2 to 3x EV/EBIT is fairly common for a company of Startia’s size. With a strong sales focus, however, continued growth in subscription revenues is highly likely. Meanwhile, non-subscription revenues may fluctuate.

Assuming Startia maintains its 3 year revenue CAGR and overhead for subscription based services runs around 4,500 to 5,000 million yen ($41.3 – 45.9 million USD) and increases at 5% CAGR, investors can expect an investment CAGR of 26.6%, inclusive of dividends and shareholder dilution, over the next three years.

Between the no growth scenario and the optimistic scenario outlined above, investors can expect an investment CAGR of between -1.9% and 26.6%, inclusive of dividends, over the next three years.

The bottom line

Startia Holdings operates a group of companies that provides IT infrastructure and digital marketing support tools and services to business with 300 employees or fewer. The company has transitioned from a telecom agency to a software subscription focused company. Additionally, Startia has a strong sales focus with a wide customer base and an increasingly deep service offering. Investors can expect an investment CAGR of between -1.9% and 26.6%, inclusive of dividends and shareholder dilution, over the next 3 years.


Kenkyo Investing
Kenkyo Investing

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