Startia Holdings 3393
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2022-05-16
2022-03-03
2022-02-15
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Summary
Company profile: Startia Holdings (Startia HD) supplies digital marketing and IT infrastructure solutions to small and medium-sized enterprises (SMEs) as its core business.
IT ServicesSoftware
Key dates
2021-07-26
Coverage initiation
Executive summary
Business overview
Company profile: Startia Holdings (Startia HD) supplies digital marketing and IT infrastructure solutions to small and medium-sized enterprises (SMEs) as its core business. In its Digital Marketing segment, the company offers tools that support revenue growth at SMEs. Its mainstay product in this segment is the digital marketing tool suite Cloud CIRCUS provided as a Software as a Service (SaaS). In its IT Infrastructure segment, the company provides office-equipment management services and builds enterprise systems that improve management efficiency (reduce costs) for SMEs. In FY03/22, Startia HD reported revenue of JPY16.0bn (+20.2% YoY), operating profit of JPY345mn (operating profit of JPY22mn in FY03/21), and an OPM of 2.2% (0.2% in FY03/21).
Segments: Digital Marketing segment (revenue of JPY2.8bn, 17.5% of total revenue, operating loss of JPY274mn), IT Infrastructure (revenue of JPY13.1bn, 82.0% of total revenue, operating profit of JPY757mn), Corporate Venture Capital (CVC; revenue of JPY70mn, 0.4% of total revenue, operating profit of JPY47mn), and Overseas (revenue of JPY0mn, 0% of total revenue, operating loss of JPY3mn). As of FY03/22, the IT Infrastructure segment generated the lion’s share of revenue and profit. However, the current medium-term management plan (spanning from FY03/21 to FY03/25) calls for FY03/25 operating profit of JPY1.7bn in the Digital Marketing segment, exceeding the JPY1.6bn target for the IT Infrastructure segment.
Digital Marketing: In this segment, the company provides consulting services and digital marketing tools (SaaS) that support the marketing activities of SMEs. Its goal is to create business models that help expand customer revenue. The company offers around 10 types of digital marketing tools under its unified “Cloud CIRCUS” brand. One example is the marketing automation (MA) tool BowNow, which automates processes to cultivate prospective customers. Based on customer adoption, BowNow commanded a domestic market share of 17% as of May 2021, making it the second largest service of its kind in Japan (source: DataSign Web Services Survey Report).
Investment: From April 2020, Startia HD moved from a packaged software (outright) sales approach to a monthly subscription model for all its tools in the Digital Marketing segment. It has been investing in development and advertising to gain new customers, and looks to recoup its investment by continuing to build up monthly recurring revenue (MRR). In the five years starting from FY03/21, it expects revenue in the Digital Marketing segment to increase at a CAGR of 20% or more. It regards the three years from FY03/21 to FY03/23 as a period of investment, and sees operating losses persisting through FY03/22.
Subscription-based revenue structure: In FY03/22, revenue in the Digital Marketing segment comprised recurring revenue (70.4% of segment revenue) from monthly subscription fees for digital marketing tools and one-time revenue (29.5%) from initial fees and consulting fees. As of March 2022, subscription MRR was JPY180mn, and monthly average revenue per user (ARPU) was JPY47,000. Shared Research estimates Startia HD offers services to some 3,800 companies. Based on contract licenses, the monthly churn rate is roughly 1% (average annual churn rate of about 11% across all tools). Assuming this remains unchanged going forward, we estimate the company will lose a total of about JPY1.4bn in revenue between FY03/21 to FY03/25 from service cancellations. Over the same period, Startia HD plans to secure about JPY5.4bn in revenue by cross-selling to existing customers and capturing new customers.
IT Infrastructure: This is the original business that was launched when the company was established in 1996. In this segment, Startia HD sells, installs, and maintains information and communication equipment such as multifunction peripherals (MFPs) and unified threat management solutions (UTM: hardware that integrates numerous cybersecurity features into one device), network equipment, and office telephones. In FY03/22, revenue in the IT Infrastructure segment broke down into one-time revenue (58.8% of segment revenue) from system development and the supply of office equipment, and recurring revenue (44.9%) from the management and maintenance of office equipment, cloud storage services, and robotic process automation (RPA) tools for office work (offered under a SaaS model). Shared Research estimates that recurring-revenue customers totaled 18,494 in FY03/22, and monthly ARPU was about JPY27,000 (annual recurring revenue [ARR] of JPY5.9bn/18,494 companies/12 months).
Services tailored to SMEs: Startia HD provides IT infrastructure services to SMEs with workforces of 10–1,000 employees. It says it had transactions with about 25,000 companies in FY03/21. It has accumulated data on the cost structures of SMEs, and on their capacity to allocate human resources to IT operations, which differs from major companies. In the Digital Marketing segment, Startia HD concentrates on supplying digital marketing tools with user-friendly designs to SMEs that have limited human and capital resources. The company also offers a range of free services with streamlined features to facilitate adoption among cash-strapped SMEs, and thus increases its market share.
Earnings trends
In FY03/22, the company reported revenue of JPY16.0bn (+20.2% YoY), operating profit of JPY345mn (operating profit of JPY22mn in FY03/21), recurring profit of JPY554mn (+687.7% YoY), and net income attributable to owners of the parent of JPY958mn (loss of JPY131mn in FY03/21). Revenue rose in the Digital Marketing segment (+8.7% YoY) and the IT Infrastructure segment (+23.4% YoY). Operating profit rose YoY thanks to the revenue increase, although there was an increase in costs
driven by higher development and advertising expenses.
For FY03/23, Startia HD forecasts revenue of JPY18.0bn (+12.4% YoY), operating profit of JPY700mn (+103.0% YoY), recurring profit of JPY700mn (+26.4% YoY), and net income attributable to owners of the parent of JPY420mn (-56.2% YoY). It expects growth in subscription revenue in the Digital Marketing business and in recurring and one-time revenue in the IT Infrastructure segment to lead to an overall revenue increase.
The company is pushing ahead with its medium-term management plan that spans from FY03/21 to FY03/25. However, the conditions assumed at the time of the medium-term business plan have drastically changed because of the COVID-19 pandemic, soaring electricity prices, and semiconductor shortages. For this reason, the company announced that it would revise its plan for FY03/24 and FY03/25. The timing of the release of the revised plan has not yet been determined.
Strengths and weaknesses
Shared Research thinks the company has the following strengths:
Startia HD has been providing office equipment and IT services to SMEs since its founding in 1996. It therefore has accumulated experience and “tacit knowledge” regarding their cost structures, staff compositions, and IT literacy that are leveraged in its business operations.
The company provides two types of services that confer distinct benefits to customers and underpin long-term relationships: digital marketing services that contribute to revenue growth and IT infrastructure services that help reduce costs.
Although the company sells its digital marketing tools (mainly its MA tool) to SMEs, which have comparatively weaker finances, its churn rate for such tools has remained in line with the sector average.
We think its weaknesses are as follows.
Startia HD lags larger competitors in terms of consulting rates and efficiency because its sales strategy relies heavily on labor-intensive customer consultations in which its representatives explain the benefits the customer stands to derive from adopting its services.
The IT Infrastructure segment to a large extent relies on labor-intensive operations, and revenue expansion therefore hinges on increases in personnel to maintain and support network infrastructure equipment at customers’ offices.
Because the customer companies in the IT Infrastructure and Digital Marketing segments are in different growth stages, it will take time to generate synergies such as revenue growth by sharing customers among segments.
Key financial data
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
Notes: Figures may differ from company materials due to differences in rounding methods.
Notes: Figures may differ from company materials due to differences in rounding methods.
Full-year FY03/22 results (out May 13, 2022)
Summary
Highlights
Revenue was JPY16.0bn (+20.2% YoY). Revenue expanded 8.7% YoY in the core Digital Marketing segment and 23.4% YoY in the IT Infrastructure segment.
In the Digital Marketing segment, cross-sales and new orders for the Cloud CIRCUS digital marketing tool were solid. As a result, SaaS sales (subscription-based business model) were strong. Meanwhile, in the IT Infrastructure segment, revenue and profits increased significantly YoY, due to strong sales of mainstay multifunction peripherals (MFP) and network equipment and business acquisitions from industry peers.
In the Digital Marketing segment, the company transitioned to a subscription-based business model from FY03/21, offering its products as Software as a Service (SaaS) applications. As a result, it was able to capture new customers who were previously unable to purchase its higher-priced, one-time-revenue services.
The operating profit was JPY345mn (operating profit of JPY22mn in FY03/21). The Digital Marketing segment recorded operating loss of JPY274mn, while the IT Infrastructure segment recorded operating profit of JPY757mn, but adjustment resulted in operating loss of JPY182mn.
Recurring profit was JPY554mn (+687.7% YoY). In terms of non-operating income, the company recorded equity-based affiliate earnings of JPY68mn and a JPY52mn gain on investments in partnerships.
Net income was JPY958mn (loss of JPY131mn in FY03/21). The company recorded extraordinary profit of JPY344mn from the sale of investment securities and JPY417mn from the sale of shares in subsidiaries and affiliates.
Advertising expenses, primarily for TV commercials, in the Digital Marketing segment were JPY624mn (93.1% of initial full-year forecast), and development expenses were JPY767mn (83.8%).
Results by segment
Digital Marketing
Revenue: JPY2.8bn (+8.7% YoY), comprising recurring revenue of JPY2.0bn (+22.9% YoY) and one-time revenue of JPY828mn (-14.8% YoY)
Operating loss: JPY274mn (loss of JPY122mn in FY03/21)
Key performance indicators (KPIs; March 2022)
Sales increased by 8.7% YoY due to steady cross-selling in SaaS subscription sales. The operating loss reflected the impact of accelerated advertising and development from the previous fiscal year.
At end-FY03/22, MRR stood at JPY180mn (+31.4% YoY). Startia HD also discloses ARR (calculated as MRR for December multiplied by 12), which came to JPY2.2bn.
New order acquisitions increased (number of companies under paid contract as estimated by Shared Research up 11.8% YoY) and cross-selling to existing customers expanded (cross-sell MRR up 41.4% YoY).
Shared Research estimates that the number of customers under cross-sell contracts as of end-FY03/22 reached 909, accounting for 23.7% of the number of customers under paid contracts (3,830 according to our estimate), marking a jump from 21.8% as of end-FY03/21. Startia HD is working to increase the number of cross-sell contracts among existing customers. Shared Research understands these efforts make existing customers more dependent on the company’s services in their marketing activities, which ultimately reduces service cancellations.
Source: Shared Research based on company data
IT Infrastructure
Revenue increased 23.4% YoY as a result of strong sales of multifunction peripherals (MFPs) and network equipment, the company's core products. Also contributing to revenue growth was the company's acquisition of IT infrastructure businesses from Sharp Document 21yoshida Co., Ltd. (unlisted; headquartered in Miyagi Prefecture) and Yoshida Store (unlisted; headquartered in Fukushima Prefecture), both undergoing civil rehabilitation proceedings.
By revenue type, recurring revenue was up 34.5% YoY, and one-time revenue was up 15.7% YoY.
One-time business: Mainly includes sales of information and communication equipment such as multifunction peripherals (MFPs), unified threat management (UTM) solutions, network equipment, and office telephones; installation work; development of information and communication systems for customer companies (system integration); deployment of and support for automation of office work (robotic process automation [RPA]).
Recurring-revenue business: Mainly includes maintenance and operation of customers’ information and communication systems, MFP leasing and maintenance services, cloud storage services, and operation of an electronic signature SaaS.
Operating profit was JPY757mn (+165.1% YoY).
CVC
In Q3 FY03/22, the company did not make any new investments.
Overseas
Changed to Other from Q1 FY03/22.
Full-year company forecast for 2023
Source: Shared Research based on company data.
For FY03/22, Startia HD forecasts revenue of JPY18.0bn (+12.4% YoY), operating profit of JPY700mn (+103.0% YoY), recurring profit of JPY700mn (+26.4% YoY), and net income attributable to owners of the parent of JPY420mn (-56.2% YoY). It expects growth in subscription revenue in the Digital Marketing business and in recurring and one-time revenue in the IT Infrastructure segment to lead an overall revenue increase.
Medium-term management plan “NEXT’S 2025” (announced on May 15, 2020)
Overview
The company unveiled its medium-term management plan “NEXT’S 2025” on May 15, 2020. The five-year plan kicked off in FY03/21, and contains revenue targets for FY03/25 as well as qualitative targets.
The plan assumes the impact of the COVID-19 pandemic will subside from around September 2020.
Digital Marketing segment to generate the bulk of operating profit by FY03/25
In the final year of the medium-term plan (FY03/25), the company forecasts operating profit of JPY1.7bn in the Digital Marketing segment and JPY1.6bn in the IT Infrastructure segment.
In FY03/20, the year in which the company formulated the medium-term plan, operating profit came to JPY137mn in the Digital Marketing segment and JPY598mn in the IT Infrastructure segment.
Shift to new business model
The medium-term plan calls for a shift in business model to accelerate growth in the Digital Marketing segment.
The company has decided to abandon outright sales of software in the Digital Marketing segment in favor of a subscription model for all its services.
It has positioned the Digital Marketing segment as a growth business, and forecasts temporary operating losses in the segment as a result of investments in development and advertising. It has defined Software as a Service (SaaS) revenue (annual recurring revenue [ARR]), the number of accounts, the number of companies under cross-sell contract, and ARPU as KPIs. It expects ARR to grow at a CAGR of 24.3%.
The company has positioned the IT Infrastructure segment as a stable cash generation business. It has defined the number of companies under contract in recurring-revenue businesses, the number of companies under cross-sell contract, and the revenue per sales representative as KPIs. It expects revenue to expand at a CAGR of 20.0%.
Quantitative (numerical) targets
The medium-term plan calls for the following three companywide quantitative targets.
Revenue CAGR of 20% or above: To be achieved by concentrating on SaaS operations in the Digital Marketing segment.
ROE of 10% or above: To be realized by streamlining internal operations (digital transformation) and by creating a highly productive organization.
Market cap of JPY50.0bn or above: To be attained by enhancing corporate value through achievement of the two targets above.
Companywide earnings targets
Startia HD forecasts companywide revenue of JPY31.0bn in FY03/25, implying growth at a CAGR of 24.3% from the JPY13.0bn recorded in FY03/21, the first year of the medium-term plan.
The company looks for operating profit of JPY3.3bn in FY03/25, and targets an increase in OPM from 5.7% in FY03/20 (the year before the plan went into effect) to 10.6% in FY03/25 (the last year of the plan). In FY03/21 and FY03/22, it forecasts temporary operating losses due to upfront spending on development and advertising (see details below) in the Digital Marketing segment.
In FY03/21, the first year of the plan, the company posted an operating loss of JPY122mn in the Digital Marketing segment.
Source: Shared Research based on company data.
Digital Marketing
In the Digital Marketing segment, Startia HD withdrew from software package (outright) sales in FY03/20, and started providing all its digital marketing tools as subscription-based SaaS applications.
Earnings targets
The company forecast FY03/25 revenue of JPY8.1bn, with subscription-based ARR of JPY4.8bn (59.3% of total revenue). This implies ARR growth at a CAGR of 36.8% from the FY03/21 forecast (estimate by Shared Research).
Source: Shared Research based on company data
From FY03/21 to FY03/23, Startia HD plans to record a total of JPY4.4bn in development and advertising costs to fuel business growth. Factoring in the upfront spending, the company as of May 2020 forecast operating losses of JPY500mn in FY03/21 and JPY350mn in FY03/22. It expects the development and advertising expenditures to contribute to new customer acquisition, and intends to recoup the investments by continuing to build up MRR.
MRR and churn rate
The company will strive to continually increase MRR in a bid to expand subscription-based ARR. It can achieve MRR growth by ensuring new recurring revenue exceeds the monthly cancellation value. To this end, the company will concentrate on acquiring new customers to bring in new recurring revenue, and on upselling or cross-selling to existing customers.
Startia HD does not disclose the average churn rate for its entire service lineup, but Shared Research understands the company has factored in a monthly churn rate of around 1% based on contract licenses (= Number of cancellations / Number of contract licenses at end of previous month) into its forecasts.
The company discloses contract renewal rates for two services on its website. Its BowNow and Blue Monkey services (discussed below) currently have contract renewal rates of 98.4% and 99.6%, respectively (these percentages reflect the ratio of contracts that were renewed by the end of the current month from among the contract licenses in effect at the end of the previous month. The company does not disclose the applicable months).
Source: Shared Research based on company data
Source: Shared Research based on company data
Qualitative targets and business policy
Significance of change in business model
From FY03/21, Startia HD abandoned outright sales of software in the Digital Marketing segment in favor of a subscription model for all its services. The company says the shift in business model was necessary because SMEs—its target customers—struggled to purchase higher-priced packaged software, resulting in growing requests from customer companies for subscription services with low monthly fees. Another objective was to efficiently manage personnel and development costs (management resources). In the past, the company had to divide its management resources between one-time revenue businesses and recurring-revenue (subscription) businesses.
The company expects its earnings to sharply decline in FY03/21 and FY03/22 as it shifts its management resources away from one-time businesses and channels them into recurring revenue businesses. In FY03/20, it booked a JPY154mn impairment loss mainly for packaged software.
Provides comprehensive tool suite Cloud CIRCUS (strengthens product and competitiveness)
Cloud CIRCUS is the brand name of the SaaS tool suite developed and provided by Startia HD. The company aims to raise its name recognition by actively advertising its SaaS tools under a unified brand. It explains that a consolidated brand also facilitates proposals for upselling or cross-selling to customer companies.
By FY03/25, the company aims to become the Japanese market leader for subscription-based digital marketing services (in terms of adoption).
Acquisition of new customers
Startia HD has not disclosed a quantitative target for its number of customers by FY03/25, but it aims to capture the top share of the domestic market for subscription-based digital marketing services, and plans to expand its customer base accordingly.
The company has announced ARPU currently stands at JPY40,000, calculated by dividing MRR of JPY137mn in March 2021 by the number of companies under contract at end-March (number of companies under paid contract). Calculating back, Shared Research estimates the company has roughly 3,500 companies under paid contract.
ARPU rose 21.2% YoY in FY03/21. Assuming it continues to expand at the same pace, Shared Research estimates ARPU will reach roughly JPY86,000 in FY03/25. The company forecasts ARR of JPY4.8bn in FY03/25. Calculating back using our ARPU assumption, we estimate the number of customers under paid contract will be roughly 4,600.
The company will actively engage in promotional activities from FY03/21 to FY03/23 to raise the brand recognition of Cloud CIRCUS.
For example, the company aired TV commercials featuring a popular celebrity in November–December 2020, January–February 2021, and June–July 2021 (as of July 2021).
It says the brand recognition for Cloud CIRCUS is already improving. The degree of brand recognition for Cloud CIRCUS (9.9% as of February 2021) exceeded that of some competing services (for details, see the Business overview section).
Action plans tailored to customer categories
Startia HD targets three types of customers: B2B companies, B2C companies, and partner companies. B2B companies account for about 60% of its SaaS revenue. The company has distributed its internal sales resources across these customer categories and set up separate divisions to cater to their needs. By customer category, it pursues the following business strategies.
B2B companies: Reduce churn rate and increase cross-selling through investment in human capital (strengthening salesforce) and marketing (advertising).
B2C companies: Develop products used by consumers (example among current offerings: augmented reality [AG] services) and establish corresponding sales organizations.
Partner companies (agents that sell the company’s services, printing companies that use the company’s e-book creation software, etc.): Transition customers that use current offerings such as e-book creation software or other packaged software to subscriptions, while also bringing in new partners.
Non-subscription operations (one-time revenue)
The medium-term plan calls for FY03/25 revenue of JPY8.1bn. After excluding JPY4.8bn in recurring revenue from subscriptions, Shared Research understands the company targets JPY3.3bn in one-time revenue, mainly from consulting services. In 2025, we estimate recurring revenue will account for 59.3% of total revenue, and one-time revenue for 40.7%.
One-time income from consulting work generally expands in tandem with growth in recurring revenue driven by an increase in subscriptions. This is because the company provides consulting services to customer companies that adopt its digital marketing tools. Unlike other SaaS providers, the company does not expect its recurring revenue to reach 80–90% of its total revenue (see the Business overview section for details).
IT Infrastructure
Earnings targets
In FY03/25, the company targets revenue of JPY22.7bn, operating profit of JPY1.6bn, and an OPM of 7.0%. It expects the share of IT Infrastructure revenue to decline from 84.2% in FY03/21 to 73.2% in FY03/25, but looks for revenue to grow at a CAGR of 20.0%. By FY03/25, the company expects revenue to more than double from FY03/21, and sees operating profit rising at a CAGR of 49.5%, increasing 5x from FY03/21.
Productivity as the main KPI
In the IT Infrastructure segment, the company aims to increase cross-selling in a bid to reduce expenses of customer companies by combining multiple services. It will focus on strengthening business relationships with customers through cross-selling (and stemming cancellations), rather than expanding ARPU. However, the cross-selling it is planning in this segment is different than the cross-selling envisioned for the Digital Marketing segment.
Startia HD has set revenue per sales representative—rather than ARPU—as the KPI for the IT Infrastructure segment. As medium-term objectives for the segment, the company will drive up revenue by expanding its operating area and growing its business scale through M&A deals, and increase the productivity of its sales representatives.
Source: Shared Research based on company data
Qualitative targets and business policy
Expansion of operating area and product lineup to fuel revenue growth
Through FY03/25, Startia HD plans to expand its operating area (i.e., number of customers) and its product lineup. In particular, it will conduct the following measures.
Action plan
In light of the above, Startia HD has formulated an action plan that comprises the following four items.
Business
Summary
Startia HD provides digital marketing and IT infrastructure solutions to SMEs as its core business. In its Digital Marketing segment, it supplies tools that support revenue growth at SMEs. Its mainstay product in this segment is the digital marketing tool suite Cloud CIRCUS offered as a Software as a Service (SaaS). In its IT Infrastructure segment, the company provides office-equipment management services and builds enterprise systems that improve management efficiency (reduce costs) for SMEs.
In FY03/22, the company reported revenue of JPY16.0bn (+20.2% YoY), operating profit of JPY345mn (operating profit of JPY22mn in FY03/21), and OPM of 2.2% (0.2% in FY03/21). In FY03/22, it recorded product development and advertising expenses in the Digital Marketing segment in line with its medium-term management plan. It expects such investments to weigh on profit through FY03/23.
Overview of segments
Digital Marketing: FY03/22 revenue of JPY2.8bn, 17.5% of total revenue, operating loss of JPY274mn
In this segment, Startia HD sells digital marketing tools (SaaS) that support revenue expansion at SMEs, offers corresponding consulting services on website production and strategies to attract customers, and undertakes system development. Shared Research estimates it provides services to some 3,800 customers. From FY03/21, the company stopped selling packaged software and fully transitioned to a subscription-based business model.
IT Infrastructure: FY03/22 revenue of JPY13.1bn, 82.0% of total revenue, operating profit of JPY757mn
In this segment, the company procures, sells, maintains, and leases equipment such as multifunction peripherals (MFPs), office telephones, and IT equipment for SMEs, and undertakes network integration (building telephone and network infrastructure) for such customers. It has about 25,000 customers, and aims to provide a one-stop service by consolidating their monthly outlays (e.g., telephone, copier leasing, and internet connection expenses) into a single invoice.
CVC: FY03/22 revenue of JPY70mn, 0.4% of total revenue, operating profit of JPY47mn
In this segment, Startia HD invests in IT startups to pursue collaborations and generate synergies with its core operations.
Overseas: FY03/22 revenue of JPY0mn, 0.0% of total revenue, operating loss of JPY3mn
In this segment, the company sells digital marketing tools to local companies in Southeast Asia.
In the 10 years through FY03/20 (the year before the current medium-term plan kicked off), the IT Infrastructure segment (which was split into the Network Solutions segment and the Business Solutions segment up to FY03/16) generated over 70% of total revenue. Shared Research understands this segment has historically been the source of cash inflow for the company.
Simple free cash flow (FCF) = Pre-tax profit + Depreciation and amortization - Capital investment - Changes in working capital
Digital Marketing (FY03/22: 17.5% of revenue)
Business overview
In this segment, Startia HD develops and sells various Software as a Service (SaaS) applications that help customer companies grow their revenue. In addition, it provides a range of consulting services to support the adoption and operation of digital marketing tools.
Digital Marketing refers to marketing activities—mechanisms to expand revenue—conducted over the Internet via corporate websites and social media (as opposed to conventional methods).
With “analog” (conventional) marketing methods, companies are often unable to objectively gauge the purchasing appetite of store visitors. Digital marketing, on the other hand, captures data on the behavior of customers who visit a company’s website (online store). This allows companies to quantify and assess the potential for customer conversion, and undertake effective advertising activities.
The company develops a total of about 10 types of digital marketing tools under the Cloud CIRCUS brand. From April 2020, it switched to a subscription-based business model, transitioning the products it was still selling as packaged software to cloud (SaaS) solutions.
It also provides paid consulting services to help customers clarify and set objectives (identify prospective customers, set up sales negotiations), and support the establishment of a customer organization to operate digital marketing tools.
Business model
Revenue composition
Revenue in the Digital Marketing segment comprises recurring revenue from monthly subscriptions, and one-time revenue from initial fees and paid consulting fees. In FY03/22, recurring revenue made up 70.4% of segment revenue.
In the five years through FY03/25 covered by the current medium-term management plan, the company will focus on expanding its recurring revenue in the segment, targeting a CAGR of 30%. This will concurrently drive up its one-time revenue, which tends to increase in tandem with growth in recurring revenue.
Revenue from subscriptions (recurring revenue)
Startia HD sells all its in-house developed digital marketing tools as SaaS applications under a monthly subscription model. It calculates monthly recurring revenue (MRR) using the formula below.
MRR = Monthly subscription revenue from existing customers under paid contract - Monthly cancellation value + Monthly subscription revenue from new customers under paid contract
To expand MRR, the company will strive to reduce contract cancellations, increase revenue from existing customers at a pace that exceeds the cancellation value (increase ARPU through cross-selling and upselling), and bring in new paying customers. In March 2021, the KPIs for the segment were as follows.
MRR was JPY180mn (+31.4% YoY). Monthly revenue per customer (ARPU) was JPY47,000 (+17.5% YoY). Startia HD does not disclose the number of companies under contract, but Shared Research estimates that figure at roughly 3,800 (based on back calculation: MRR/ARPU).
Monthly ARPU for cross-sell contracts was JPY109,000 (+16.0% YoY), and 909 customers companies had contracts for two or more products.
About 2,900 customers had contracts for one product, and their monthly ARPU was about JPY27,000 (calculated by Shared Research based on the data above).
The average monthly churn rate across the company’s services was about 1%.
Provision of free versions
Startia HD offers free versions for eight of its 10 SaaS tools. These freemium products target SMEs with small marketing budgets, and are intended to bring in new customers and ultimately move them to paid services. By offering free products, the company establishes a connection with customers it can subsequently approach with proposals that are tailored to their needs. Customers who are successful in expanding their revenue by using these free tools are more likely to switch to paid products (upselling) or concurrently purchase other products (cross-selling).
Shared Research understands that, as a rule of thumb, some 5% of customers using freemium software eventually switch to paid software. However, this conversion from free to paid products appears to be higher at Startia HD.
One-time revenue
In FY03/21, one-time revenue made up 37.7% of segment revenue. Such revenue is generated from face-to-face (“analog”) services such as website development (a necessary step that precedes the use of digital marketing tools) and consulting regarding suitable marketing methods.
Fees are determined separately for each project. In addition to initial fees for digital marketing tools, Startia HD charges several hundred thousand yen (in some cases up to JPY500,000) in consulting fees ahead of confirmed adoption of its SaaS applications.
Profit and cost structures
In FY03/22, the Digital Marketing segment posted total revenue (one-time plus recurring revenue) of JPY2.8bn (+8.7% YoY) and an operating loss of JPY274mn. It booked a total of JPY1.4bn in temporary expenses, breaking down into JPY624mn in advertising expenses (under SG&A expenses) and JPY767mn in development expenses (under manufacturing expenses).
From FY03/21 to FY03/23, the company plans to record a total of JPY2.1bn in advertising expenses and a total of JPY2.2bn in development expenses (these reflect the actual expenses booked in FY03/21 and budgeted expenses for FY03/22 and FY03/23), and therefore sees operating profit languishing during this period (for details, see the Medium-term management plan section).
The company has been investing in development and advertising to acquire new customers, and plans to recoup these investments by continuing to build up MRR. In FY03/25, the final year of the current medium-term plan, the company targets an OPM of 21.0%.
In the period from FY03/18 to FY03/20, when the company was still selling packaged software outright, the company recorded a segment OPM of 7.0% in FY03/18, 7.5% in FY03/19, and 6.1% in FY03/20.
Overview of services
What are digital marketing tools?
Definition
Digital marketing tools are software solutions (SaaS tools) that provide functions to support marketing activities (in areas such as customer acquisition, continued business transactions, and prevention of service cancellations). Below are some examples.
Marketing automation tool (MA tool): A tool that sends automated sales emails to prospective customers who visit a company website, automatically identifies customer attributes (for example, extracting data such as company names and addresses from IP addresses), and records historical activity.
Content Management System (CMS): A software used to create a website, which is required for digital marketing.
In addition to the above, business card creation tools, Customer Relationship Management (CRM) tools, and Sales Force Automation (SFA) tools.
Cloud CIRCUS
Cloud CIRCUS is a brand under which Startia HD has consolidated its SaaS tools that help customer companies expand their own customer bases through support in five areas: (1) deliver information, (2) attract customers, (3) improve customer experience and value, (4) cultivate prospective customers and convert them into actual customers, and (5) prevent cancellations and increase repeat rate (under development).
As of June 2021, Startia HD provided 10 types of applications (including the MA and CMS tools discussed above) as digital marketing tools. It developed some of these in-house and acquired others through M&A deals. In November 2020, the company consolidated all tools under the Cloud CIRCUS brand, and worked to expand sales by airing TV commercials and through other initiatives. Cloud CIRCUS supports customer companies in the following five areas.
Deliver information
The purpose of delivering information is to raise awareness of a company’s presence and its services. Startia HD provides five types of services that help achieve this. Below are some examples.
The e-book creation software ActiBook was the company’s first digital tool, launched in 2006. It was initially sold outright as a packaged software. The company says the software was adopted by a majority of publishers and printing companies in Japan. The software has been downloaded more than 2.5mn times, and adopted by over 2,400 companies (as of March 2021). The company also provides a free version.
E-books are often used to produce product manuals. They offer many benefits over PDF documents from both a creator and reader perspective, including features that prevent duplication and the ability to be browsed online without having to be downloaded.
The CMS Blue Monkey allows users to produce website content without programming knowledge. An effective website is an indispensable tool to deliver information and design marketing that caters to the needs of customers. As of March 2021, over 1,700 companies had adopted the software, which ranked third by market share among paid domestic CMS's.
Improve customer experience (CX)
Customer experience is the overall impression a customer gains across all points of contact with a service, starting from showing interest in a service to buying and using it. Services that are experienced as interesting, fun, or moving lead to higher customer satisfaction, and can therefore help expand the customer base.
Startia HD provides augmented reality (AR) applications as marketing tools that help improve the customer experience. AR is a technology that superimposes digital contents such as 3D data and video on or adds information to a real-life environment observed through smartphones or smart glasses. For example, AR technology is used in the mobile game Pokémon GO and the video-sharing platform TikTok.
The company provides the AR application creation tool COCOAR and the web AR creation tool LESSAR. COCOAR was launched in 2012, and has been downloaded over 2.8mn times and adopted by over 2,400 companies.
Cultivate prospective customers and convert them into actual customers
This area involves actively approaching prospective customers (cultivating leads), increasing their purchasing appetite, and ensuring leads are not missed or neglected. The goal is to lock in prospective customers as actual customers.
In this process, marketing automation (MA) tools are used to automatically centralize the management of information on prospective customers, classify customers, and identify those with high purchasing appetite (promising leads). Promising leads are entrusted to the sales division and converted into actual customers through negotiations and other sales activities.
Startia HD’s MA tool BowNow was released in January 2016, and has since been adopted by a total of over 6,000 companies.
As of March 2021, it had captured a roughly 20% share of the Japanese market for MA tools (in terms of adoption), ranking it in second place behind Salesforce, which is operated by a US-based company.
Prevent cancellations and increase repeat transactions (customer success management)
Customer success management (CSM) is an important marketing field that developed out of the recognition that retaining paying customers and preventing service cancellations is essential to earnings expansion particularly in SaaS businesses such as the ones operated by the company.
In April 2021, Startia HD released Fullstar, a CSM application that allows companies to centrally monitor usage data for their services (such as number of days since their customers last logged in) through a visual user interface. This can help them make decisions on whether to invest in activities to prevent service cancellation (in case of lower-than-expected usage) or upsell or cross-sell (in case of higher-than-expected usage) without having to exhaust their limited resources.
Attract customers and manage advertising
Startia HD identifies suitable SaaS tools for customers through consulting. For example, if it determines that a customer company needs to revamp its corporate website to effectively attract customers, it will recommend its Blue Monkey CMS tool.
Comparison with competing products
The largest difference between Cloud CIRCUS and rival services is that the former includes free versions of tools. If we compare the company’s MA tool BowNow, which has captured a 20% market share, with the nine other offerings in the top 10 tools for this category, we find that only the fourth-ranked HubSpot has a free version (see table below).
Pardot, the market share leader, does not require initial fees, but its monthly subscription fee starts from JPY150,000 (JPY1.8mn per year). Third-ranked Marketo has a monthly subscription fee starting from JPY200,000 (JPY2.4mn per year).
Source: Shared Research based on DataSign Report
Startia HD provides paid and free versions of BowNow, with the latter intended to create opportunities for upselling. The paid versions are priced at JPY5,000/month (Entry Plan), JPY20,000/month (Light Plan), and JPY30,000/month (Standard Plan). These rates are more affordable than those of rival services.
The pricing structure for HubSpot, a competing service that is also available in a free version, is JPY6,000/month (Starter Plan), JPY106,800/month (Professional Plan), and JPY384,000/month (Enterprise Plan). In other words, HubSpot is more expensive than BowNow across the board.
BowNow achieves low price by only including features necessary for SMEs
To keep prices low, Startia HD has stripped down its MA tool to essential features. BowNow omits features such as lead scoring and scenario configuration, which are standard features on competing services.
Lead scoring: The assignment of a score to specific actions of prospective customers (leads). For example, a company can configure how many points are assigned for user actions such as clicking on a price list, product specifications, or inquiry links on their corporate website. Sales activities can then be actively targeted at leads with high scores, which have a greater probability of being converted into actual customers. Companies can independently configure how the points are allocated.
Scenario configuration: Scenarios refer to preconfigured responses to lead actions. They allow companies to program an MA tool in a way that automatically triggers a response (such as transmitting an email or updating browsed content) when a user fulfills a specific condition (such as clicking a price list). Companies can independently decide which scenarios to create.
Startia HD explains it omitted lead scoring and scenario configuration from BowNow because it found that customers did not take full advantage of these features via a survey (“October 2020 Marketing Automation Awareness Survey”) conducted by the former Mtame Inc., a member of the Startia HD group. According to the company, both features require complex configurations which are difficult to utilize to their full potential for SMEs that have limited human resources.
The company prices its MA tool below competing offerings because it looks to expand adoption among SMEs (companies with 30 to 1,000 employees). It says it has managed to determine the maximum budgets SMEs can allocate to marketing.
Startia HD has dealt with SMEs since its founding in 1996, and Shared Research understands it has accumulated more than a quarter of a century of experience, “tacit knowledge,” and insights regarding SMEs. The company says its pricing structure for BowNow is set at a level that SMEs can afford without taking on an excessive cost burden.
Consulting
Startia HD says SMEs often do not formulate a marketing strategy before adopting an MA tool. In addition to supplying an MA tool, the company also provides paid consulting services in areas such as the following.
Clarify customer companies’ purpose in adopting MA tools (determine which of Startia HD’s digital marketing tools are required)
Set clear goals to be targeted after adoption (identify prospective customers, conclude negotiations, etc.)
Establish a customer-side organization to operate the digital marketing tools (identify tech-savvy employees, etc.)
According to the company, some customers approach it with the intention of adopting its MA tool BowNow, but upon analysis of their conditions (through consulting services), it becomes clear that building a website to attract customers is the key priority. In such cases, the company initially provides its CMS Blue Monkey––rather than its MA tool––to the customer.
Startia HD records consulting revenue as one-time revenue. It says growth in revenue from digital marketing tools tends to be accompanied by an increase in one-time revenue.
IT Infrastructure (FY03/22: 82.0% of total revenue)
Business model
Overview
In this segment, Startia HD provides office-equipment management services and builds enterprise systems that increase management efficiencies (reduce costs) for SMEs. It can procure all kinds of office equipment ranging from office telephones, copiers, and PCs to telephone/Internet infrastructure and communication equipment for on-site local area networks (LAN).
The company says the majority of SMEs cannot adopt IT equipment or services, or fully take advantage of these, because they either do not have sufficient personnel to establish IT departments or appoint internal IT managers, or struggle to secure such human resources. Startia HD provides value to its customers by addressing these issues.
Revenue
The following equipment and services account for over 90% of segment revenue.
One-time and recurring revenue
In FY03/22, one-time revenue came to JPY7.2bn and recurring revenue to JPY5.9bn, respectively accounting for 55.1% and 44.9% of segment revenue. One-time revenue businesses encompass the supply (outright sales) of office equipment such as telephones, copiers, and PCs, establishment of internal communication infrastructure (on-site LAN), and supply of consumables. The company sells roughly 80% of these directly, and 20% through agents.
Recurring revenue is generated from the following services.
Customers and average spend per customer
Startia HD mainly targets SMEs with 10 to 1,000 employees. Some 682,000 such companies operate in Japan (estimate by Shared Research based on data published by the Ministry of Internal Affairs and Communications [MIC]). The company supplies services to about 25,000 customers, translating into a market penetration rate of 3.7%. It has indicated its core customer base consists of micro, small, and medium-sized companies with 10 to 50 employees (of which some 558,000 operate in Japan).
At end-March 2022, the IT Infrastructure segment generated recurring revenue from 18,494 customers (companies under recurring revenue contract). Shared Research estimates the monthly ARPU per company at around JPY27,000 (recurring revenue of JPY5.9bn/18,494 companies/12 months).
Among recurring-revenue customer companies, those that use multiple products or services of the company (companies under cross-sell contract) numbered 8,810, accounting for 47.6% of the total.
Productivity the main KPI
Startia HD intends to expand cross-selling in the IT Infrastructure segment. It believes it can help cut expenses at its customer companies by offering them multiple services. It is not fixated on increasing ARPU, but rather aims to strengthen relationships with customers through cross-selling and, by extension, prevent service cancellations. In other words, the intent behind cross-selling in this segment is different from that in the Digital Marketing segment.
The company aims to utilize cross-selling to offer one-stop services (by providing multiple services by itself) that consolidate the office outlays of customer companies into a single invoice, and it is highlighting this as a key benefit.
The company has set revenue per sales representative––instead of ARPU––as the main KPI for the IT Infrastructure segment. Over the medium term, it will aim to drive up revenue by expanding its operating area and increasing its business scale through M&A deals, while also improving the productivity of its sales representatives.
Operating area defined as customer locations reachable within 1.5 hours from Startia HD branches
The company defines its operating area as the area its sales representatives can reach within 1.5 hours when dispatched from its branches. It complements its procurement and remote support services for office equipment with face-to-face services, which it believes plays an important role in bolstering relationships with SMEs and mitigating service cancellation risk.
Services
Establishing office IT infrastructure
In this segment, Startia HD provides 14 categories of services. Its service lineup essentially contains all the components necessary to build a basic office IT infrastructure (see table below). The company aims to be a one-stop shop for services that cover all the IT infrastructure needs of its customers’ offices.
The company also undertakes website development projects in the IT Infrastructure segment. These projects are for customers that do not use the tools in the Cloud CIRCUS suite operated by the Digital Marketing segment. Website development orders accepted in this segment are outsourced to external partners.
The IT Infrastructure segment is the original business of the company. After it was launched, Startia HD operated as a sales agent for manufacturers, procuring office and network equipment hardware. Because it lagged competitors such as Otsuka Corporation (TSE1: 4768) in business scale, the company from 2006 also launched recurring-revenue businesses such as copy counter devices and network maintenance contracts. It aimed to grow its earnings through upsell and cross-sell services, supplementing outright sales, which are unlikely to support enduring relationships with customers, with recurring-revenue businesses, which are conducive to long-term relationships with customers.
Cost reduction services
In October 2017, the company launched the BiziSUKE suite of products that consolidates 25 support services across five areas. It includes a money transfer service, an office supply discount mail order service, and an on-site PC repair service. The standard plan for BiziSUKE costs JPY5,800/month (JPY3,900 for companies that already do business with the company). As of September 2020, a total of 3,242 companies had adopted the BiziSUKE suite.
Below, we provide an example of the costs savings facilitated by one of the services in the BiziSUKE suite.
Bank transfer service “Rakutasu Furikomi BiziSUKE plan:” This service allows customers to make transfer payments for various costs including procurement, general expenses, and personnel expenses at a flat administration fee of JPY285 per payment. The regular fee for bank transfers between two branches of the same bank is JPY330 per payment for amounts under JPY30,000, and JPY550 per payment for amounts of JPY30,000 or higher. By taking advantage of this service, customers can enjoy cost savings of up to 65%.