BRIDGE REPORT
(3690)

グロース

LOCKON CO., LTD. (3690)
President Susumu Iwata
President Susumu Iwata
Corporate Profile
Company
LOCKON CO., LTD.
Code No.
3690
Exchange
TSE Mothers
Industry
Information and Communications
President
Susumu Iwata
Address
BREEZÉ TOWER, 2-4-9 Umeda, Kita-ku, Osaka
Year-end
End of September
URL
Stock Information
Share Price Number of shares issued Total market cap ROE (Actual) Trading Unit
¥1,551 6,311,694 shares ¥9,789 million 6.0% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
To be determined - - - ¥195.60 7.9 fold
*The share price is the closing price as of November 21. The number of shares issued, ROE and BPS were the values for the previous term.
EPS has not been disclosed.
 
Earnings Trends
Fiscal Year Net Sales Operating
        Income
Ordinary
      Income
Net Income EPS DPS
Sep. 2014 (Actual) 1,360 249 233 137 23.96 0.00
Sep. 2015 (Actual) 1,437 350 352 230 36.89 4.50
Sep. 2016 (Actual) 1,612 247 250 168 26.79 5.00
Sep. 2017 (Actual) 1,719 92 106 72 11.56 5.00
Sep. 2018 (Forecast) - - - - - -
* The earnings forecast for the term ending Sep. 2018 has not been announced, because there are many uncertainties. It will be announced immediately after reasonable calculation becomes possible. Net income means profit attributable to owners of parent.
 
This report outlines the financial results of LOCKON CO., LTD. for the term ending September 2017 and other information.
 
Key Points
 
 
Company Overview
 
The company provides a comprehensive set of effective and efficient digital marketing solutions such as "AD EBiS", a platform system for measuring advertisement effectiveness, and "THREe", a domestic listing advertisement operation platform, targeting enterprises that are aiming to maximize sales. The company has the top share in Japan in the field of measuring the effectiveness of Internet advertising.
The company is focusing on the realization of "marketing robot business" to solve problems in the marketing domain in the era of decreasing population, declining birthrate and aging society. After reaching sales of 3 billion yen in the fiscal year ending September 2020, it is aiming for further growth through global expansion.
The corporate vision, "Impact On the World", contains the founder's hope "to create a globally influential enterprise and give dream and hope to more people".
 
1-1 Corporate history
President Iwata who had a strong motivation to start a company paid attention to the future of the Internet as a business domain. For the success of the business, he thought it would be essential for him to be familiar with the technical elements as a network engineer. At that time, there was no programming school, so he studied thoroughly by himself, and, based on the knowledge he gained, he was engaged with website development business as a sole proprietor even while he was still in college. (Although there are currently many listed and non-listed Internet-related corporations, President Iwata is one of the few IT business entrepreneurs who have a deep understanding of network technology. This seems to be giving the company a competitive advantage over other companies.)

It was not common at that time to place advertisements on the Internet, but President Iwata felt that Internet advertising would eventually expand as he was handling many websites. After exploring the position that he should pursue "to be the No.1", he focused on "where do the companies advertise?" among a wide range of medium, instead of the field with existing media and advertising agencies which was already filled with an increasing number of players. He thought that it would become a big business to support providing optimal information to the most appropriate people in real time by utilizing "interactive nature", which is the biggest difference between the Internet and conventional media.

In 2000, in the business plan contest for university students, President Iwata presented the importance of data accumulation and mining (a process or method for digging useful information from the vast amount of accumulated data by applying a statistical method) with the word "click communication," based on the concept of "a click has a will", which would later become the basic concept of the company, and received an award.

As sales expanded, in June 2001, he established LOCKON Limited, and it became LOCKON CO., LTD. in July 2003. The company undertook development of websites and systems for client companies to strengthen its business foundation, while developing platforms aiming to optimize placement of Internet advertising. In 2004, it released "EBiS (current AD EBiS)" which is a system to measure effectiveness of the Internet advertising. Furthermore, in October 2012, it released the "THREe" service that combines accumulated data in client companies to optimize placement of Internet advertising.
With the limitation of mass marketing and declining influence of existing media such as TV and newspapers, the company steadily expanded its business by incorporating increasing cost-effectiveness awareness among advertisers. In September 2014, the company got listed on the TSE Mothers.
 
1-2 Corporate Vision, Management Philosophy
 
In order to embody the corporate vision, "Impact On the World" which contains the founder's hope "to create a globally influential enterprise and give dream and hope to more people", the company established the following mission statements and guidelines for action. In line with them, it undertakes its business from service provision, business strategies, recruitment activities, HR system, and daily work in a coherent manner and develops and provides digital marketing technology.
 
 
 
1-3 Environment surrounding the Company
◎Change in the advertising market
In the conventional advertising market, especially in the advertising business using mass media such as TV and newspaper, monopolistic and exclusive inventory was the most important factor for the business development for the supply side, including media and advertising agencies.
Major advertising agencies had been holding price leadership against advertisers by almost completely securing limited TV spots and had been creating great profits together with the media.
However, demand for mass advertisement by TV and newspaper is on a declining trend due to the end of ever-increasing economic growth and appearance of Internet advertising, which is characterized by the interactivity in essence, and low price as compared with the conventional media.

As the graph below shows, while the total advertising expenditure in Japan remained almost unchanged in the past decade, the Internet advertising expenditure, which was 377.7 billion yen in 2005, continued to expand at an average annual growth rate of 12%, and in 2016, it reached 1,310 billion yen.
In 2005, the Internet advertising expenditure, which was less than 20% of the terrestrial TV and less than 40% of the newspaper, became 70% of the terrestrial TV and 2.4-fold of the newspaper in 2016. (Source: "Dentsu, Japanese advertising market 2016")
 
 
Among Internet advertising, the ones that offer excellent cost-effectiveness equipped with automatic and instantaneous optimization performance, which was difficult through conventional advertising, are called "programmatic advertising". They are based on real-time bidding (RTB) technology, a distribution method to automatically buy and sell advertisement space by bidding for each impression (ad impression number). The programmatic advertising is growing at a speed faster than the entire Internet advertising market. In 2016, about 60% of the Japan's Internet advertising is occupied by the programmatic advertising. (Source: "Dentsu, Japanese advertising market 2016")
 
 
(*) Programmatic advertising: Programmatic advertising is an advertising method that automatically or instantly supports optimization of advertisements by a platform that processes huge amounts of data. In addition to search advertisement and some advertisement networks, newly appearing demand-side platform (DSP), ad exchange, supply-side platform (SSP), etc. are typical examples. Frame-selling advertising, tie-up advertising, affiliate advertising, etc. are not included in programmatic advertising.
 
As advertisers' awareness on cost-effectiveness grows, there is an increasing demand to deliver advertisements "to the most appropriate consumers", "at the best timing", and "using the most appropriate message", and the importance of more accurate effect measurement and analysis is increasing.
 
Sales and operating income are estimates by each company for the current fiscal year. Because LOCKON CO., LTD. has not announced this term's estimates, the figures are presented for referential purposes on the basis of the previous term. ROE is a result for the previous term. Market cap is the most recent end of quarter shares times the closing price as of November 21, 2017. PER (forecast) and PBR (actual) are based on the closing prices as of November 21, 2017. For GMO TECH, they are based on the closing prices as of November 20, 2017.
 
Although the company's sales and profit sizes are the smallest, operating income margin is high, and market cap does not differ from the other companies as much as the business. Consequently, PBR has the highest rating.
Reference: In the year ended September 2017, due to aggressive investment on growth, operating income margin was 5.4%, down 10% year on year. The operating income margin in the year ended September 2016 was 15.4%.
 
1-4 Business contents
◎Business segments
The company has 2 business segments: "Marketing platform business" and "Commercial distribution platform business".
The company provides a comprehensive set of effective and efficient digital marketing solutions to enterprises that are aiming to maximize sales.
 
 
(1) Marketing platform business
The key solutions are "Ad EBiS", a marketing platform system, and "THREe", a domestic listing advertisement operation platform.
The company provides a series of operations from "Measurement of effect → Optimization → Purchase/Placement". This is the three elements of "Marketing Automation" as a one-stop platform.
 
(a) AD EBiS
The company "utilizes" the marketing data accumulated by the "measurement" function centering on the advertisement effect measurement system and provides a comprehensive marketing integration environment.
The advertisers can comprehensively grasp which medium/which advertisement has made "what achievement and when".
 
 
In digital marketing, the process of "contact" → "interest" → "motivation" → "prevention of departure" → "acquisition" is performed until the user finally reaches specific actions (conversion) such as information request or purchase. "AD EBiS" offers various measurement and analysis tools as below, which makes it possible to solve a wide range of issues.
 
 
Ad EBiS research is a service to link behavior log data obtained by AD EBiS and research subject's data owned by external research companies to carry out web-based research on the people who have contacted but did not reach the results.
In addition, the company offers "SEO EBiS" to measure the result of natural influx and "Audience EBiS" to visualize each unit's action across various services.

The customer can start the service at no initial cost and minimum monthly fee of 10,000 yen (in case of AD EBiS).
Each function is paid at a metered rate based on the number of monthly advertisement clicks, page views, sessions, impressions, etc.
Over 8,000 of AD EBiS were introduced, and the number of active accounts as of the end of fiscal year ended September 2017 were 1,358. The average unit price is approximately 80,000 yen.
Sales of AD EBiS is based on stock business where the number of accounts and average unit price (monthly) are multiplied. This helps the company to achieve stable growth that is not easily affected by external factors.

It is possible to introduce services that meet needs and budget of each client in various industries, regardless of the client's size.
In addition to companies that have direct business relationships with the company, all advertising agencies can be the company's customers.
 
 
The company also released "AD EBiS Single Source API" that connects the user log data measured by AD EBiS with external systems in July 2017.
This made it possible to connect the user data measured by AD EBiS with an advertisement distribution system or a customer relationship management (CRM) system. This makes the client companies to undertake marketing activities that are linked with points of contact of users who were separated by media and tools. As a result, the efficiency of customer's marketing activities further progresses.
 
(b) "THREe (pronounced 'three')"
In order to achieve results with listing advertising, which is one of the programmatic advertising, both wheels, namely, "work-related measures" such as bid adjustment, addition of negative keywords, change of budget allocation and "creative measures" such as identification of new keywords derived from the latent needs of prospective customers and devising advertisements that appeal to the competitive advantage over competitors are required.
"Work-related measures" are measures that can be implemented by aggregating and calculating actual data. More detailed work leads to higher accuracy and better outcome.
On the other hand, "creative measures" can be effective measures only when there are experiences and know-hows about products and services that appeal in advertisements.

However, especially as programmatic advertising is growing rapidly, along with the expansion of type and scale of programmatic advertising, many companies are faced with issues that they take too much time for "work-related measures" by manpower and have no time for fundamental improvement through "creative measures".

To address this issue, "THREe" was created.
It can cover all "work-related measures". Therefore, the customers can focus on "creative measures" that require experiences and know-hows.
 
 
The basic usage fee is 5% of the distribution use amount, and the minimum charge is 50,000 yen.
The record of usage account exceeds 5,000.
 
(2) Commercial distribution platform business
The company's core service is "EC-CUBE", which is an open platform for e-commerce (EC).

"EC-CUBE" is an open source software originated in Japan that provides program sources to develop EC with no charge.
"EC-CUBE" is highly appreciated as being a software that has two characteristics: ease of "ASP type" and the flexibility of "development type" that can directly customize the program source.
In exchange for providing the program sources with no charge to a wide range of users, the company is making profit from various sources, including royalty revenues from EC-CUBE official partners such as settlement agent and hosting companies, sales income from plug-ins, that can easily add functions to the "EC-CUBE" body, design templates and commercial licenses, revenues from holding events and seminars centering on "EC-CUBE" and sales of advertisement space to "EC-CUBE" related sites, etc. However, due to rapid popularization of cloud services in recent years, the company believes that they also need to restructure its business.
 
1-5 Characteristics and strengths
◎Top share in the field of measuring Internet advertising effectiveness in Japan
Since its release in 2004, "AD EBiS", a system to measure effectiveness of Internet advertising, has been highly valued by many customers for its usefulness, and over 8,000 AD EBiS have been installed. The number of current active account is about 1,300, showing steady increases. It is one of the largest number in Japan.
Moreover, the precision of measurement by "AD EBiS" has been further improved by the vast amount of data accumulated over many years through many customers, and the company established the top position in Japan in the field of measuring Internet advertising effect.
The vast amount of data in the "marketing robot", which the company is currently focusing on, is unrivaled by the other companies and is a big advantage to the company.
 
◎Outstanding originality of the president with engineering background
The company's main solutions, "AD EBiS" marketing platform system and "THREe" domestic listing advertising operation platform, are helping the company achieve the "top domestic share in the field of measuring the effectiveness of Internet advertising". Both of them are the company's original products, born from the creative viewpoint of President Iwata, and they help the company to establish a strong competitive advantage over other companies in the same industry.
As mentioned above, President Iwata is one of the few IT executives who have a deep understanding on network technology, and this is the source of its competitive advantage.
 
◎Focusing on CSR
The company believes that "regardless of the size of the company, it is the minimum responsibility as a corporate citizen to conduct suitable social activities, and corporate social responsibility (CSR) will promote the growth of companies". The company is practicing this belief and pursuing the improvement of values for the stakeholders including customers, shareholders, employees and the community.
Specifically, it is undertaking the following activities.

"Osaka Startups"
"Osaka Startups" is a support program for startup companies and future entrepreneurs based in Osaka. The company, various support companies, and mentor networks, mainly based in Osaka, actively provide various supports with respect to "people, goods, money and information" so that startup companies can grow and succeed in Osaka. This way, the company is trying to embody its corporate vision of "Impact On The World" and contribute to the reinvigoration of local economies with an idea of "From Osaka to the world".

"Girls in Tech"
"Girls in Tech (GIT)", a non-profit organization launched in San Francisco in 2007, supports the activities of next-generation entrepreneurs and working women in the technology industry. It is supporting various age groups from elementary school students to adults in 52 countries and regions around the world, through global mentorship.
The company concurs with GIT's philosophy and supports their efforts to improve status of women in the technology industry, facilitate empowerment and education activities, and create a community that engages working women in the world and in Japan.

"Marketing Metrix Academy",Technology Academy"
The company provides opportunities to learn "marketing technology" which is the core of the company's business and "programming skill" that supports advanced technology with the aim of developing next generation human resources and developing young talents among students through actual work.
It was established as a social contribution activity to support young people in acquiring marketing and programming skills that cannot be gained at universities or graduate schools on a daily basis as well as improve business skills and deepen the understanding of corporations and communities.
 
1-6 Shareholder return
Taking into consideration the business performance and financial condition, the company returns profits to shareholders while balancing internal reserves.
The dividend for the year ended September 2017 was 5 yen/share, and payout ratio was 43.2%.

In addition, it has a unique shareholder benefit plan.
The company, which was established in Osaka in 2001 and got listed as an IT venture company "from Osaka" on the TSE Mothers in September 2014, has been offering "Osaka Special Products Preferential Treatment" as a shareholder benefit plan since the fiscal year 2015 to express appreciation to Osaka and contribute to the future development of Osaka.
This shareholder benefit plan aims to contribute to local PR by carefully selecting the special products of Osaka every year, presenting them to the shareholders by lottery, and introducing them at the company's website, etc.

In the fiscal year ended September 2017, which was its third year, the number of winners was 430, up about 1.4-fold from the second time, and the gifts were also further upgraded.
"Dancing Takoyaki Pan", an electronic, semi-automatic takoyaki pan, which had great reputation in the previous year, had 2.5-fold number of winners this year.
Also, from this year, a new award, "Future Good Product Award", was introduced, and "Giga Takoyaki Pan", with which a large takoyaki with about 10 cm diameter can be made, will be awarded to the winners.
From the newly launched products, the company selected products that are full of impact and unique to Kansai.
 
 
 
 
Fiscal Year September 2017 Earnings Results and Fiscal Year September 2018 Earnings Estimates
 
 
Sales grew due to the favorable performance of the marketing platform business, but profit declined due to the investment for growth, the discontinuation of a business, etc.
Sales increased 6.6% year on year to 1,719 million yen. The performance of the marketing platform business, which is their mainstay, is healthy.
Gross profit grew 7.6% year on year, and gross profit rate rose, too, but operating income dropped 62.6% year on year to 92 million yen, due to the investment for growth, including the active personnel recruitment in the marketing platform business, the discontinuation of the entrusted development project in the commercial distribution platform business.
 
 
◎ Marketing platform business
Both sales and profit grew.
The active investment in marketing and sales was effective, increasing both the number of accounts and average unit price. The number of active accounts is 1,358 as of the end of September 2017, and increased by 50 during the 4th quarter (July to September). Average unit price is 79,952 yen, up 3,011 yen year on year.
The company announced the single source API, which serves as the base for external cooperation, and the embodiment of a marketing robot progressed.
In addition, the company actively conducted advertisement by holding seminars at marketing events, etc., increased development staff for embodying a marketing robot, and enriched its support system in parallel with the expansion of a sales organization.

◎ Commercial distribution platform business
Both sales and profit declined.
For "EC-CUBE," the company implemented measures for offering more value to increase the originality of each online shop, by releasing a plugin linked to the shop section of a Facebook page for the first time in Japan and cementing the collaboration with online customer services utilizing the latest technologies, such as artificial intelligence (AI).
The transfer of the entrusted EC development business to the affiliates: Radical Opti Co., Ltd. and SAI Co., Ltd. is progressing steadily. 80% of engineers will be reassigned the development of original products, which is their core business.
There emerged an operating loss, due to the augmentation of cost for R&D projects and the drop in gross profit caused by the business transfer.
 
 
Although software and investment securities increased, total assets were almost unchanged from the end of the previous term, as cash and deposits and trade receivables decreased.
Total liabilities declined 36 million yen from the end of the previous term to 204 million yen, due to the decline in reserve for bonuses, etc.
Net assets were 1,234 million yen, up 41 million yen from the end of the previous term, due to the increase in retained earnings.
As a result, equity ratio rose 2.6 points from 83.2% at the end of the previous term to 85.8%.
 
 
Operating CF was almost unchanged from the previous term, as profit dropped, but trade receivables decreased.
Due to the acquisition of investment securities, the deficit of investing CF augmented, and the deficit of free CF increased.
The deficit of financing CF rose, due to the decline in proceeds from issuance of common shares, etc.
The cash position degraded.
 
(4) Earnings forecast for the term ending September 2018
The company has not announced the earnings forecast for the term ending September 2018, because there are many uncertainties. It will be announced, immediately after reasonable calculation becomes possible.
 
 
Progress of the mid-term management policy
 
The company aims to establish a ground for growth in Japan by improving organizations for embodying, developing, and selling a marketing robot, and "achieve sales of 3 billion yen in the term ending September 2020."
Subsequently, it will expand its footholds in Asia, promote global business operation through the acceleration of growth based on M&A, and pursue the increase of sales.
 
 
As for "marketing robot development," the company aims to promote the use of accumulated big data and cooperate with 30 companies in developing robot parts, including "sensors and visualization," "control," and "drive," by September 2018, and has announced the collaboration with 4 companies as of the end of October 2017.
 
 
As for the "reorganization of non-core businesses & reassignment of engineers in the core business," the transfer of the entrusted EC development business to affiliates has been completed as a whole. Nine engineers of the commercial distribution platform business are transferred to the marketing platform business section and the "original product development division" for EC-CUBE, to strengthen its development capacity.
 
The increase of development staff for embodying a marketing robot and marketing & sales staff for active sales promotion is progressing steadily.
 
 
 
Conclusions
 
The noteworthy point is how the company will proceed with the development of a marketing robot business and the strengthening of marketing & sales systems for the purpose of achieving sales of 3 billion yen in the term ending September 2020. We would like to pay attention to the news release of new cooperation and the speed of sales expansion of the marketing platform business.
 
 
<Reference 1: Marketing robot strategy>
 
Under the corporate vision: "Impact On The World," LOCKON CO., LTD. aims to become a global enterprise from Japan, will keep recognizing that its mission is to facilitate the communication between enterprises and clients, and concentrates on the establishment of the "marketing robot business" for further growth.
 
 
① Basic recognition
(Environment and issues)
The current social issues plaguing Japan are the "decreasing population" and "declining birth rate and aging society." Due to the decreasing population, the scale of the domestic market will inevitably shrink, and enterprises need to raise sales per customer in order to maintain and expand sales.
However, the communication between enterprises and consumers has become more complex, as consumers' needs and their channels for obtaining information have diversified.
In addition, the shortage of young workers who engage in marketing activities is forecasted, and the environment surrounding corporate marketing activities is becoming severe.

(Solutions)
The declining birthrate and aging society are serious issues common in many fields. The possible solution that attracts attention the most is "automation" and the utilization of "robots" in the fields of medicine and services, such as automated driving and drones. The robot industry is considered as a growing one that will meet the needs in the age of the declining birthrate and aging society.

LOCKON CO., LTD. defined "a marketing robot" as the robot technology for meeting the needs for robots in the marketing field, and is striving to establish and expand it as a business.
 
② What is the marketing robot business?
"A marketing robot" means a service of automating and streamlining marketing processes without using manpower.
 
 
In general, robots require three components: (1) a sensor, (2) an intelligence/control unit, and (3) a drive system, in order of importance.
As an advantage of LOCKON CO., LTD., it has accumulated an unrivaled amount of data about "sensor," the most important and fundamental element. Among these data, the key to the successful development of a marketing robot is "user profile data."

"One-dimensionally" measured data become "two-dimensional" with "AD EBiS," and the characteristics of users become more distinct.
If the profile of prospective users is clarified through the analysis of behavioral characteristics and attributes of users, the necessity to "review advertising media and pages" will be visualized, and new improvement measures will be implemented, changing marketing activities drastically.
Marketing activities have thus far been planned based on manpower through trial and error, but by using the data of user profiles, it is possible to automate the planning of each measure for each kind of prospective customers.

The company will link this to each kind of tool, conduct automatic operation, implement the PDCA (Plan, Do, Check, and Action) cycle for improving learning, and promote the link with external analysis and execution services utilizing accumulated data, in order to develop a "smarter" marketing robot.

LOCKON CO., LTD. plans to evolve the marketing robot to an "ecosystem" that can grow based on co-existence and co-prosperity by forming partnership with several external enterprises and utilizing their technologies and capitals mutually, and operate it not only inside Japan, but also outside Japan.
 
 
<Reference 2: Message from President Iwata (excerpt from the previous report)>
 
"The marketing robot would solve the severe social issues of the declining birthrate and aging society, and serve as the key business for achieving sales of 3 billion yen in 2020. By establishing this business, our company will obtain an extremely advantageous position for offering a model case to the world."
 
We aim to achieve sales of 3 billion yen in 2020. Since the estimated sales for this term are about 1.6 billion yen, we need to grow at an annual rate of about 30%. The key to achieve this is the marketing robot business.

In order to solve the severe social issues of the decreasing population, declining birthrate and aging society, it is indispensable to utilize robots. The same applies to the marketing industry, which is labor-intensive.
LOCKON CO., LTD. will be committed to solving the issues by embodying the marketing robot.

In general, automation or a robot consists of three elements: (1) a sensor, (2) AI, and (3) a drive system.
Drive systems have become commodities, and it is difficult to create added value, and AI, too, is becoming a commodity.
Among these elements, the most important is a sensor, that is, big data.

The crucial issues are how much exclusive, advantageous data our company can hold and whether or not our company can collect necessary data strategically.
Fortunately, our company secured the No.1 position in Japan in the field of Internet effect measurement with "AD EBiS," and has collected a much larger amount of data than competitors.
This position cannot be overthrown easily, and when the operation of the "marketing robot" starts, it will be possible to collect even better data, and further fortify the position of LOCKON CO., LTD.

We are polishing the above 3 elements for completing the marketing robot, and are expected to release the prototype of the marketing robot by the end of the coming term ending September 2018.
After that, it plans to improve the precision of the robot and brush it up so that it will be useful inside and outside Japan.

The declining birthrate and aging society are plaguing Japan, but they will also become global issues involving advanced countries and China.
Once LOCKON CO., LTD. establishes the marketing robot business, it will take an extremely advantageous position where it will be able to offer model cases to the world.
After 2020, LOCKON CO., LTD. will certainly complete the robot and grow to an enterprise that will produce an impact on the world, although our company will operate business in units of decade.
 
"The business of LOCKON CO., LTD. is based on the LTV acquisition model. The strengthening of marketing & sales systems is accelerated, to achieve significant sales growth."
 
In order to achieve sales of 3 billion yen in the term ending September 2020, it is indispensable to improve sales capability in addition to the embodiment of the marketing robot.
As for the marketing platform business, once a customer subscribes to the solution of LOCKON CO., LTD., it usually continues the subscription for 3 to 3.5 years, because it is effective. Namely, this business can earn recurring revenue for a couple of years.

Overseas SaaS* providers conduct upfront investment in marketing & sales for medium to long-term revenue, achieving a high sales growth rate.
According to the 2016 Pacific Crest Private SaaS Company Survey, the ratio of marketing & sales cost to sales among such SaaS providers is said to be 35% on average.

LOCKON CO., LTD. increased that ratio from 24% in the previous term to 29% in the current term. Since the active investment in marketing and sales is essential for medium to long-term revenue expansion, we plan to strengthen its marketing and sales systems further to actualize significant sales growth.
 
 
*SaaS (software as a service): Service of enabling customers to use software via the Internet. Customers do not need to purchase a packaged product, but can use only necessary functions through the Internet, paying fees according to the functions they use. There is a merit of reducing the burden of installation and management of computers and software.
 
(The company's LTV acquisition model, sales and profit in accounting: Note by Investment Bridge)
The average sales per customer of LOCKON CO., LTD. is currently about 80,000 yen, but customers normally subscribe to the service of LOCKON CO., LTD. for 3 to 3.5 years. Under the assumption that a customer keeps using the service of LOCKON CO., LTD. for 40 months, total sales are calculated by multiplying 80,000 yen/month by 40 months, and amount to about 3 million yen.
The monthly sales of 80,000 yen can be achieved by even new employees after experiencing their job for about half a year, and if they accumulate a little more experience, they can earn monthly sales of 200,000 yen, and top-class sales staff can mark monthly sales of 500,000 yen. In this case, total sales would amount to 8 to 20 million yen.

However, it takes about 3 years to earn these sales. In financial results for a single fiscal year, sales are calculated by multiplying average spending by the number of months, which is up to 12. As the account of LOCKON CO., LTD. is closed in September, if a customer signs a contract in September, sales for one month only are posted.
While total sales are divided by 40, total cost is posted first. Accordingly, in the case of the SaaS business of the company, even if sales increase steadily, it is difficult to post profit in the results for a single fiscal year. If they try to achieve a good balance between income and expenditure in a single fiscal year, they need to curtail necessary cost, and the loss of profit in the medium to long terms may augment.

To cope with such a situation, the concept of lifetime value (LTV) has been diffused in the U.S.
LTV means the profit (value) provided by a customer to an enterprise throughout a transaction period.
Compared with gross profit in manufacturing industries, which is calculated by subtracting cost from sales, LTV is considered to be suited for grasping the potential and current situation of an IT service provider, from the viewpoint of how much the enterprise can earn revenue from a customer.
 
 
SaaS enterprises like LOCKON CO., LTD. adopt a business model that needs to first invest in marketing and sales for attracting customers, but after recouping the investment, they can earn revenue stably throughout the lifetime. So, the active investment in marketing and sales is the key to medium to long-term revenue growth.

The following graph shows the trends in the sales, R&D cost ratio, sales & marketing cost ratio, and SG&A expenses ratio of HubSpot, Inc. (HUBS, listed in NASDAQ), which offers a cloud-based marketing and sales software platform.
The sales of the company rapidly grew from 15 million US dollars in 2010 to 270 million US dollars in 2016 with a CAGR of 61%.
For the term ended Dec. 2016, gross profit rate was as high as 77%, and sales & marketing cost ratio was 60%, which is much higher than the average of overseas SaaS providers as mentioned above. This seems to have boosted sales.
In the previous term, HubSpot incurred an operating loss of 44 million US dollars, but its share price has increased about 2.4-fold in the most recent three years since the IPO in October 2014.
 
 
When investors check LOCKON CO., LTD., they need to watch how sales are growing and sales promotion measures are progressing, rather than the profit and loss in a single fiscal year, as in the case of HubSpot.
"We would like you to support LOCKON CO., LTD., which aims to become a global enterprise from Japan and involves all employees to become a robust company with high ambition without pursuing short-term benefits, from the medium to long-term perspective."
 
The ad technology industry, in which LOCKON CO., LTD. operates business, seems to be based on technologies, but there are actually many labor-intensive enterprises. Accordingly, there are few enterprises that offer genuine technology-based services like LOCKON CO., LTD.
If we engage in an ad agency business using an enormous amount of excellent data and manpower, it will not be so difficult to expand sales steeply. However, its activity range would be limited to the inside of Japan, and it would be impossible to compete globally. Therefore, we will not choose that business.

As mentioned above, LOCKON CO., LTD. has aimed to become a global enterprise from Japan since its inauguration, as indicated by the corporate vision "Impact On The World."
We would like you to support LOCKON CO., LTD., which involves all employees to become a robust company with high ambition without pursuing short-term benefits, from the medium to long-term perspective.
 
 
<Reference 3: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Last update date: Aug. 4, 2017

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
It is mentioned that "Our company follows all of the basic principles of the Corporate Governance Code."

President Iwata sincerely recognizes that it is necessary to brush up himself and evolve the management, as he mentioned, "An organization cannot surpass the capacity of the head of the company."
Therefore, he invited those who have experienced the management of a listed company as outside directors, established an audit committee, and has outside directors attend not only monthly meetings of the board of directors, but also weekly management meetings, to receive their advice, in order to strengthen the governance system.
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However, we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
Copyright(C) 2018, Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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