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
¥1,290 6,352,143 shares ¥8,194 million 6.0% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
0.00 - - - ¥195.60 6.2 x
*The share price is the closing price as of May 22. 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) 1,800 -150 - - - 0.00
* Estimated sales and operating profit have only been announced for Fiscal Year ending September 2018. Net income means profit attributable to owners of parent.
 
This report outlines the financial results of LOCKON CO., LTD. for the first half of the term ending September 2018 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.
 
 
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 has decreased slightly 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 12.2%, and in 2017, it reached 1,509 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 80% of the terrestrial TV and almost 3-fold of the newspaper in 2017. (Source: "Dentsu, Japanese advertising market 2017")
 
 
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 2017, about 60% of the Japan's Internet advertising is occupied by the programmatic advertising. (Source: "Dentsu, Japanese advertising market 2017")
 
 
(*) 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.
 
 
Although the company's sales are the smallest, and market cap does not differ from the other companies as much as the business. Consequently, PBR has a high rating.
 
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 user analysis to visualize each unit's action across various services.

Each function is paid at a metered rate based on the number of monthly advertisement clicks, page views, sessions, impressions, etc.
Over 9,000 of AD EBiS were introduced, and the number of active accounts as of the end of fiscal year ended March 2018 were 1,497. 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 9,000 AD EBiS have been installed. The number of current active account is about 1,500, 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.

In addition, it has a unique shareholder benefit plan as well.
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 FY 2016, had 2.5-fold number of winners this year.
Also, from FY 2017, 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.
(Enforcement and details for the FY September 2018 are undecided)
 
 
 
 
First half of FY September 2018 Earnings Results
 
 
Sales rose as marketing platform business is healthy, but the company incurred the loss due to active investment
Sales increased 3.7% year on year to 877 million yen. Sales experienced double-digit growth in marketing platform business, which is company's core business, but commercial distribution platform business saw a decline in its sales due to restructuring was done in the previous term.
An operating loss of 70 million yen was incurred due to expenditure on active recruitment and enhancement of advertising activities in marketing platform business.
 
 
◎ Marketing platform business
Sales rise, profits fall,
Sales rose due to active investment in marketing and sales, and the number of accounts, as well as average unit price, grew. The number of active accounts increased 194 year on year to 1,479 and average unit price hiked 1,927 yen year on year to 75,846 yen due to upselling at the end of March 2018.
On the other hand, operating loss was incurred as continuous investment was made for growth by increasing the number of personnel for development and sales activities.

As the importance of pioneering business model of marketing robot became stronger, DMP Business (Data Management Platform: service that creates and offers data environment integrating the specific customer information, etc. that companies possess the data of "AD EBiS"), which used to be included in commercial distribution platform business until the previous term, is now included in marketing platform business. Sales in the first half of the fiscal year ending September 2018 were 46 million yen (53 million yen in the same period of the previous year). Sales of marketing platform business excluding DMP Business rose 13.8%.

◎ Commercial distribution platform business
Sales decrease, return to profitability
The company started offering fraud detecting plug-in for credit cards to strengthen the security of EC Website, continued to actively expand campaign activities to acquire new EC operators and enhanced communication with the development community working for developing the next version.
As for EC commissioned business, as mentioned in the previous report, the company has transferred operations to affiliate companies, i.e., Radical Opti Co., Ltd. and SAI Co., Ltd., and shifted a large number of engineers to its own product development, which is its core business.
 
 
Total assets were 1,627 million yen, up 188 million yen from the end of the previous term, resulting from increase in cash and deposits, software, etc.
Total liabilities were 424 million yen, up 219 million yen from the end of the previous term, due to increase in short-term debts.
Net assets amounted to 1,203 million yen, down 31 million yen from the end of the previous term, as retained earnings declined.
As a result, capital-to-asset ratio fell 11.9 points from 85.8% to 73.9%.
 
 
Surplus of operating CF shrank due to losses, and investing CF was negative due to continuous acquisition of intangible fixed assets (development of software).
Financing CF turned positive because of borrowing of short-term debts.
Not much change in cash position.
 
(4)Topics
◎Acquires patent of access history analytical function that centers on "people"
In February 2018, the company obtained a patent relating to access history analytical function, which centers on people. It is equipped in "AD EBiS," and it visualizes and evaluates the activity history of users.

While advertisement evaluation has been centered on "policies" and visualized cost effectiveness, customer journey (*refers to a process from the point where a customer gets to know about the product or service to the point he or she makes the purchase, involving his or her "activity," "thinking" and "emotion") analytical function made marketing evaluation centering on people possible by visualizing users' contact history.
This patent of this function that was developed by AD EBiS's unique thinking and mechanism, and centers on people, was granted as an invention.

The company considers that foundational technology that is essential for developing marketing robot has been established.
 
◎ Chosen as Best Company at "Great Company to Work" 2018
The company was chosen as the Best Company under "25-99 Employees Category" of "Great Company to Work" Ranking 2018 hosted by Great Place to Work(R) Institute Japan (GPTW Japan).
This year was the 12th time that "Great Company to Work" survey was conducted by GPTW Japan, and the company has been selected 7 times and for the 6th year in a row, which is the highest under "25-99 Employees Category."
In the company, all employees make efforts as one to realize 3 principles or company policies, i.e., "for the happiness of all employees," "for the happiness of all customers" and "for the happiness of all suppliers." However, in the survey this time, "sense of solidarity" amongst the employees, "respect" for the company environment and system, and "pride" for the company and service were highly appreciated in particular.
 
 
FY September 2018 Earnings Estimates
 
The earnings forecast for the fiscal year ending September 2018 was not published as it was difficult to numerically express the forecasts due to many uncertain factors affecting the business performance, but the company disclosed estimated sales and operating profit based on the recent performance trends on May 8th, 2018.
 
 
(Sales)
While active investment is expected to increase sales in marketing platform business, only a slight increase in companywide sales are anticipated because of commercial distribution platform business, where EC-CUBE business has been performing well but sales are estimated to drop drastically in solutions business as a result of transferring business operations in the previous term.
However, the company intends to expand top-line largely as it expects continuous expansion of marketing platform business and EC-CUBE business from the next term onward as well and also plans to finish transferring operations of solutions business by the end of the present term.

(Operating profit)
As the company plans to invest actively in recruitment, etc. for development of new services and enhancement of marketing sales in order to expand its business scale and accelerate sales growth, it expects operating loss.

(Dividends)
As for capital, it will be allocated for making new investments for business expansion preferentially amidst the growth trends, and the company has decided not to pay dividends, which had been undecided, this term.
 
 
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.
 
 
The company considers that external cooperation is needed to promote the use of accumulated big data for "marketing robot development".
It is aiming to newly collaborate with 30 companies by September 2018 in three different elements, i.e., "Sensor/visualization," "Control" and "Driving force," that structure the robot, and it has already announced its collaboration with 20 companies as of the end of March 2018. It was only 10 companies at the end of January 2018, but it succeeded in collaborating with 10 more companies in 2 months.
 
 
Realization of marketing robots and enhancement of marketing and sales system are essential for sales to reach 3 billion yen in the fiscal year ending September 2020. In general, SaaS companies (*) overseas are said to invest an average of 35% of marketing and sales expense to total sales for medium to long-term growth.
The company's percentage of marketing & sales expenses to total sales was 24% in the fiscal year ended September 2016, but it has risen to 35% as of second quarter of the current term (cumulative total) as it strengthened its investment from the fiscal year ended September 2017. It plans to expand its revenue in medium to long-term with operating profit rate being 10-20% by slowly improving the cost structure in parallel with the growth of recurring revenue.
 
※SaaS(software as a service):a software service which the customers use through the Internet. Customers are able to buy only necessary tools on the Internet, not buying a whole package. Its advantages include the reduction of introducing and controlling the computers and software.
 
 
The increase of development staff for embodying a marketing robot and marketing & sales staff for active sales promotion is progressing steadily.
 
 
 
Conclusions
 
Although the stock price has been around the lowest price since listing as a result of press releases that showed both the performance in the first half and forecasts for the whole financial year indicating operating losses and forecast of one-digit growth in sales for the whole financial year, the foundation for bottoming out and reversal seems adequately prepared due to the expectation of two-digit sales growth from next term in marketing platform business and EC-CUBE business after the completion of restructuring in this term, a definite increase in the number of active accounts, and engineers and sales staff being secured steadily.
Not the profit and loss in a single year, but we will continue to observe how the expansion of top-line and policies for that purpose make progress.
 
 
<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.
 
2.Business model: About Lifetime Value (LTV) acquirement model
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.

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.
 
 
As it is shown, 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 2017 to 375 million US dollars in 2016 with an average annual progress of +58%.
For the term ended Dec. 2017, gross profit rate was as high as 79.8%, and sales & marketing cost ratio was 56.7%, which is much higher than the average of overseas SaaS providers although the trend has been a decrease.
This seems to have boosted sales.
However, during this term, it has never been in surplus, in the previous term HubSpot incurred an operating loss of 40 million US dollars, but its share price has increased about 3-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.
 
 
<Reference 2: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Last update date: Dec. 25, 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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