Thinking Points

  • Azia (TSE: 2352) primarily designs and operates Japan’s largest email marketing software service and secondarily provides survey and miscellaneous web-related services.
  • The company achieved a high level of revenue and profit growth over the past decade by creating offerings that its competitors did not offer.
  • More specifically, Azia provides customization options for its core packaged software, cost-effectively tailoring software to customer demands.
  • At 1,302 yen per share, Azia trades at 10.4x adjusted EV/EBIT with a market capitalization of 5,154 million yen ($47.2 million USD). 
  • Investors are best advised to put Azia on a watchlist and revisit the company if share prices fall into the 1,000 yen per share range.

Introduction

Azia (TSE: 2352) primarily develops and operates Japan’s largest  email marketing service WEBCAS. Secondarily, the company offers services in related fields like surveys and marketing services for messaging apps among other things. It operates through four segments: Application, Consulting, Custom Development, and E-Commerce.

Source: Kenkyo Investing, based on company data

Azia managed to grow revenues for 10 years in a row. Although the business environment for email marketing services is increasingly getting competitive, there are certain traits about Azia’s services that make its operating business resilient. More specifically, the CEO is focused on pursuing areas where the company can leverage its strengths while avoiding competition.

The business & environment

Azia was founded in 1995 in Tokyo as a website design and development company. In a recent interview with Premium Talk (Japanese), CEO Kazuo Mino described the reason for the founding of Azia. The founder and former CEO Akira Eto realized the age of the internet was coming, but didn’t know where to start, so he decided to take on website development first.

After several years of website development, Azia started to understand the needs of website operators at a deeper level. In 2001, the company released its first email marketing service WEBCAS email. This was promptly followed by the release of survey service WEBCAS formulator in 2002.

From then on, Azia’s core business quickly transitioned to email marketing and surveying services. What’s more, the company was an early adopter of the recurring revenue model, releasing its WEBCAS with an ASP (application service provider) model later in 2002.

For the most part, Azia’s WEBCAS offering was purely packaged software with little customization. The company released various versions of mostly email marketing and survey service offerings over the next decade or so. In 2009, however, Azia added WEBCAS SaaS (software as a service) to its lineup.

The SaaS offering was a game changer for Azia as many of it addressed a need that none of its competitors did. While Azia’s competitors either developed packaged software or fully customized software, Azia was the only one offering packaged software with a customization option (SaaS). 

Generally speaking, the cost economics for packaged software works beautifully for the development company as the same software is sold to many clients. However, it rarely satisfies all of the needs for the end-user because of the lack of customization. Meanwhile, fully customized software is expensive as it is developed specifically for one company. 

Azia aimed in between. And today, its packaged software business is referred to as ASP and its customized software business is referred to as SaaS. According to the interview mentioned earlier, average monthly revenue per customer is around 6,000 yen for ASP and 200,000 for SaaS. Although Aiza does not disclose exact amounts, it provides charts that breakdown revenues by categories with a clear focus on recurring revenues.

Source: Company presentation, translations by Kenkyo Investing

The key difference between licensing and cloud revenues are whether the software is hosted by the customer (license) or by Azia (cloud). Although the split between ASP and SaaS revenues aren’t clear from the chart above, the company provides charts that broadly split the combined licensing and cloud revenues by new ASP, recurring ASP, new SaaS, and recurring SaaS categories.

According to the charts in the 2019 annual filings, the company had about 28.4 million yen (~3.0% of licensing + cloud revenues) in new ASP revenues, 107 million yen (~32.0%) in new SaaS revenues, 300 million yen (~11.4%) in recurring ASP revenues, and 503 million yen (~53.6%) in recurring SaaS revenues.

The churn rates for ASP vs. SaaS differ greatly:

Source: Company presentation, translation by Kenkyo Investing

CEO Kazuo attributes the low churn rate for SaaS to the customization option. In fact, Azia considers the package + customization option a cost effective core strength of the company, especially as no other major competitor offers this. 

What’s particularly interesting about the CEO is his thought process, which can be observed both through the interview mentioned earlier and through a recent Nikkei Radio interview (Japanese). 

When talking about hiring, Kazuo explained how Azia managed to increase interest among soon-to-be college graduates. Despite being the #1 player in the email marketing software business,  Azia’s public recognition is much lower compared to much larger and consumer oriented companies like Toyota or Softbank. 

In order to attract talent, Azia did what it does best – it created personalized messages that drive responses. This simple shift in strategy yielded vastly positive results, increasing attendance for Azia hiring events by three fold. 

On a separate note, when discussing business development, Kazuo referenced OBIC’s (TSE: 4684) business model, which shares certain characteristics with Azia. For those who are unaware of OBIC, it is Japan’s largest ERP system company. One of its biggest core strengths is that, unlike SAP or Oracle, which certifies third-party vendors for customization work, OBIC strictly performs customization work in-house. 

Generally speaking, the in-house “by the creators” customization keeps OBIC accountable for delivery of high quality output, and the developers are, of course, highly familiar with the inner workings of the system as well as its future directional development.

Azia takes a similar approach to OBIC, offering package software with a customization option. To be sure, the switching costs for email marketing software is considerably lower than ERP systems. Nevertheless, the point here is that Azia intentionally offers a cost effective package + customization offer that its competitors do not offer. 

Perhaps the biggest risk for Azia is that recent marketing automation software often includes email marketing, which may prompt some of its customers to make the transition. The company has previously noted that it started seeing some customers leave for this very reason, but has also seen customers make the transition and then return to Azia later.

In any case, Azia has managed to grow its business considerably with its package + customization offering.

Source: Kenkyo Investing, based on company data

Azia’s operating profit has grown in a similar fashion, aside from a few fluctuations.

Source: Kenkyo Investing, based on company data

In the Premium Talk interview, Kazuo commented that, with its current business model, Azia would generate 30% operating margins on 3,000 million yen ($27.5 million USD) in revenues, or 900 million yen in operating profits ($8.3 million USD). 

For FY03/20, Azia expects revenues of 1,950 million yen ($17.9 million USD, +14.5% YoY) and operating profit of 446 million yen ($4.1 million USD, +20.0% YoY). As of Q2, the company delivered revenues of 881 million yen ($8.1 million USD, +13.0% YoY) and operating profit of 181 million yen ($1.7 million USD, +18.2% YoY).

Shareholders

As of Q2 FY03/20 (ending September 30, 2019), Azia had 4,412,400 shares issued and 454,989 shares in treasury, putting outstanding shares at 3,957,411.

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

Most of the major shareholders are holding shares in street name. Considering that there are no reports on large shareholders submitted to the Japanese Financial Services Agency, it’s safe to say that the founder does not have a significant stake in the company. Based on the distribution of shares, there doesn’t appear to be a single shareholder with effective control over the company as is often seen in companies of Azia’s size.

The company has no unexercised stock options outstanding and foreign ownership is below 10%.

Financials & Valuation

  • Azia primarily designs and operates Japan’s largest email marketing software service and secondarily provides survey and miscellaneous web-related services.
  • The company achieved a high level of revenue and profit growth over the past decade by creating offerings that its competitors did not offer.
  • More specifically, Azia provides customization options for its core packaged software, cost-effectively tailoring software to customer demands.
  • At 1,302 yen per share, Azia trades at 10.4x adjusted EV/EBIT with a market capitalization of 5,154 million yen ($47.2 million USD). 
  • Investors are best advised to put Azia on a watchlist and revisit the company if share prices fall into the 1,000 yen per share range.

As expected out of software development companies, Azia runs an asset light operation, with current assets accounting for 69.5% of total assets. The company carries no debt and has a net cash balance of 654 million yen ($6.0 million USD). 

Considering the company’s balance sheet and recurring nature of its operating business, there are no short-term concerns. With that said, the major risk for Azia comes from the potential displacement of its email marketing software – especially its lower-end, non-customized software – by bigger marketing automation vendors.

While its ten year growth track record of 11.1% CAGR for revenues and 20.8% CAGR for operating profit is impressive, this will likely slowdown with emerging competitive pressures going forward. The high-end customization option software is proven to drive higher retention rates and margins, but it’s difficult to say whether the revenue quality is on par with businesses like OBIC, which develops and customizes mission critical ERP software.

At 1,302 yen per share, Azia trades at 10.9x EV/EBIT with a market capitalization of 5,154 million yen ($47.2 million USD). Adjusted for long term investment security holdings, the company trades for 10.4x EV/EBIT.

Overall, Azia’s business quality is somewhere between decent and good, but not great. However, as with any software company involved in marketing automation, there is a degree of uncertainty around the industry’s development in the next three years. While Azia’s healthy balance sheet and operating business essentially translate to little to no near or medium term doubts, an EV/EBIT multiple of 10.4x seems elevated given Azia’s scale, competitive environment, and growth prospects.

As a reference, assuming Azia continues its 10-year operating profit CAGR performance (20.8%) and its EV/EBIT multiple remains stable at 10.4x, investors can expect an investment CAGR of 13.7%, inclusive of dividends, over the next three years. 

This is a rather aggressive assumption, given that the company’s growth slowed down while competitive pressures increased. Applying its 3-year operating profit CAGR performance (15.9%) with stable EV/EBIT multiple at 10x, investors can expect an investment CAGR of about 11.4%, inclusive of dividends, over the next three years.

A safer bet for investors is to see if Azia’s price comes down to 1,000 yen per share or so (~7.5x EV/EBIT). The company most recently traded in this range in June 2019. At this price, a sub-optimal operating profit CAGR of 9.0% and EV/EBIT multiple of 7.5x will still generate 8.1% investment CAGR over three years, with the upside of stronger growth and multiples.

The bottom line

Azia designs and develops Japan’s leading email marketing software, with other strong peripheral offerings like survey software. The company achieved its strong historical 10-year operating profit growth of 20.8% CAGR through offering customization options to packaged software: something none of its competitors do. As a result, Azia developed an operating business with highly recurring revenues and profits. With an increasingly competitive environment in a fast changing industry, however, growth prospects are unknown over the long term. Investors are best advised to keep Azia on a watchlist and revisit the company if its share prices fall into the 1,000 yen per share range.


Kenkyo Investing
Kenkyo Investing

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