Cyberlinks Co., Ltd. provides cloud services primarily to the retail and government sectors. Because the company started offering cloud services when they were relatively unknown in Japan, it refers to them as “shared cloud” services. The company also operates Docomo stores, which sell smartphones and related products.
Internet Software & Services
Executive summary
Business overview
Cyberlinks Co., Ltd. provides cloud services primarily to the retail and government sectors. Because the company started offering cloud services when they were relatively unknown in Japan, it refers to them as “shared cloud” services. The company also operates Docomo stores, which sell smartphones and related products. Founded in Wakayama Prefecture in 1956, the company posted revenue of JPY13.2bn (+3.6% YoY) and recurring profit of JPY959mn (+0.7% YoY) in FY12/21. Cyberlinks has four segments: Distribution Cloud (30.4% of revenue, recurring profit margin of 14.1% in FY12/21), Government Cloud (46.5%, 9.7%), Trust (0.7%, recurring loss of JPY350mn), and Mobile Network (22.4%, 12.9%).
@rms ERP (cloud retail ERP system for supermarkets) is the core product of the Distribution Cloud segment. ERP systems offer comprehensive business processing features such as ordering/purchasing and accounts payable management, inventory management, and sales management. Peripheral systems such as automatic ordering, ledgers creation (revenue management by store or department), merchandising (analysis by product on identifying strong selling items and out-of-stock items), attendance management, and accounts/payroll/HR are offered as optional services.
Large supermarkets usually build their own ERP systems, outsourcing the work to system development companies. Small to mid-size supermarkets use Cyberlinks’ @rms ERP, Toshiba TEC Corporation’s (TSE1: 6588) RX-700, or develop their systems in-house. Japan has roughly 1,000 supermarket companies, of which around 130 use Cyberlinks’ @rms ERP. Supermarkets generally review their systems every five to seven years, giving rise to replacement demand.
In 2005, the company launched Japan’s first cloud service for retailers. As of December 2021, the number of stores using @rms ERP was 1,288 stores versus the total market of around 21,000 stores. @rms ERP mainly targets small and mid-size supermarkets with annual revenue of JPY30.0bn or less. Users pay an initial set-up fee and a monthly fee commensurate with the number of stores they operate. According to the company, a typical mid-size supermarket with 10 stores with annual revenue of around JPY10.0bn pays an initial set-up fee of JPY5.0mn and a monthly fee of JPY700,000–800,000. Users pay additional charges for peripheral services.
According to the company’s research and analysis, assuming that the cost of hardware, software, and labor for the initial setup of a supermarket ERP system is 100 when a company builds its own system (either in-house or through outsourcing), the cost for building a cloud-based system would be 87 and using Cyberlink’s cloud service 45. Similarly, assuming that the cost of operation and maintenance of the ERP system is 100 for a company’s own system, the cost is 81 for using a cloud-based system and 70 for using Cyberlink’s cloud service. Cyberlink’s cloud services help users to keep their costs down, but a drawback is that users must fit their business processes to the services that the company provides.
The Government Cloud segment provides services such as administrative information systems and regional disaster prevention systems mainly to local governments in Wakayama, Osaka, and Nara prefectures. The company was previously a distributor in Wakayama Prefecture for Matsushita Communication Industrial Co., Ltd. (now Panasonic Mobile Communications Co., Ltd.). Matsushita Communication Industrial’s sales policy was prefecture-based, which meant the company could not sell in other prefectures and distributors based in other prefectures could not sell in Wakayama Prefecture. Local governments also tend to order from local companies. Consequently, most users of the Government Cloud business are local governments in Wakayama Prefecture. The company extended its operations to Osaka and Nara prefectures when it made Minamiosaka Computing Center Co., Ltd. a consolidated subsidiary in October 2019.
The Government Cloud business’s administrative information system and regional disaster prevention system businesses engage in system development, operation, and maintenance work. The company also provides cloud services such as Clarinet (a school administration support service for elementary and junior high schools nationwide) and community medical collaboration platforms that link medical information of medical institutions during disaster or emergency situations.
Cloud services provided by the Distribution Cloud and Government Cloud businesses use four data centers (two owned by the company in Wakayama Prefecture and two rented centers in Tokyo and Osaka), which complement and back up each other. System failures at the company would cause serious issues for customers’ operations. The company has not had a single system failure causing a stoppage lasting 30 minutes or longer in the past five years.
The Trust segment, which the company sees as a growth area, provides a time stamping service for electronic data and ID authentication service based on My Number Card (Japan’s social security and tax number system). The business posted a recurring loss of JPY350mn in FY12/21, but targets recurring profit of JPY150mn in FY12/25.
The Mobile Network segment operates seven Docomo stores (NTT Docomo dealers) in Wakayama Prefecture. The company acts as a second-tier reseller, which signs up subscribers and sells smartphones based on a reseller agreement with CONEXIO Corporation (TSE1: 9422), a primary reseller for NTT Docomo, a consolidated subsidiary of Nippon Telephone and Telegraph Corp. (TSE1: 9432). The company had about 35% share among mobile phone sales companies in Wakayama Prefecture. Revenue and recurring profit per store were JPY423mn and JPY55mn, respectively. Revenue is affected by smartphone sales trends and recurring profit by the sales mix, as profit margins vary between smartphone manufacturers. Shared Research understands that the Mobile Network segment is a cash cow business that generates stable profits.
The company regards the recurring portion of its revenue as a KPI. Recurring revenue is revenue earned on an ongoing basis such as information processing and maintenance fees for cloud services and some incentives related to mobile handset sales. The CAGR of recurring revenue is 12.2% in the past five years, and recurring revenue accounted for 50.5% of total revenue in FY12/21.
Earnings trends
In FY12/21, revenue was JPY13.2bn (+3.6% YoY), operating profit was JPY945mn (+2.2% YoY), recurring profit was JPY959mn (+0.7% YoY), and net income attributable to owners of the parent was JPY645mn (+0.1% YoY). Although revenue declined at the Government Cloud segment due to a drop out of contributions from the construction projects for digitalization of disaster prevention communication systems, revenue was up in the Distribution Cloud and Mobile Network segments. The company posted record revenue and profits.
The full-year FY12/22 company forecast calls for revenue of JPY13.3bn (+0.2% YoY), operating profit of JPY1.0bn (+10.4% YoY), recurring profit of JPY1.0bn (+9.1% YoY), and net income attributable to owners of the parent of JPY670mn (+3.8% YoY). The company forecasts revenue and profit growth on robust expansion of the Distribution Cloud business. It looks for lower revenue and profit in the Government Cloud segment due to the dropout of construction projects for digitalization of disaster prevention communication systems and higher revenue and lower profit in the Mobile Network business.
Numerical targets of the medium-term management plan in FY12/25 are revenue of JPY14.5bn (of which recurring revenue accounts for JPY9.0bn), recurring profit of JPY1.6bn, and ROE of more than13%. Key points for attaining these targets are increased market share of the Distribution Cloud business and turn the new Trust business to the black.
Strengths and weaknesses
Shared Research sees the company’s strengths are (1) compatibility of its multiplePOS systems in the ERP system market for small and mid-size supermarkets where there is limited competition; (2) a wealth of retail industry expertise and a menu of peripheral services (thanks to the fact that the company has a long history in retail); and (3) relatively high profit margin of the Mobile Network business compared to peers, due to favorable store locations and operational efficiency, thereby serving as a stable cash cow for the company.
Weaknesses include (1) heavy upfront investment required for cloud services (such as software development costs and data center capex), (2) cyclical nature of earnings in the Government Cloud business due to demand fluctuations associated with central and local government policies, and (3) business areas being limited to Wakayama, Osaka, and Nara prefectures in the administrative information systems and regional disaster prevention systems business. The last point stems from its history as a distributor for Matsushita Communications Industrial, which had a prefecture-based sales policy.
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
The company conducted a 3-for-1 stock split in October 2014 and a 2-for-1 stock split in January 2021. EPS, DPS, and BPS are adjusted for the stock splits.
Recent updates
Issuance of new shares as restricted stock compensation
On April 15, 2022, Cyberlinks Co., Ltd. announced details on issuance of new shares as restricted stock compensation.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
The company changed its segment breakdown in FY12/21.
Q1 FY12/22 results (out May 13, 2022)
Q1 FY12/22 results
Progress versus the FY12/22 company forecast was 24.5% for revenue (29.7% of the full-year result in Q1 FY12/21), 24.7% for recurring revenue (23.7%), 38.2% for operating profit (49.7%), 38.2% for recurring profit (49.4%), and 40.1% for net income (51.7%).
Revenue grew 11.1% YoY in the Distribution Cloud segment, but declined 31.3% YoY in the Government Cloud business and 12.2% YoY in the Mobile Network business, for a decline of 17.5% YoY in overall revenue. The Trust business, which the company is focusing on, posted revenue of JPY12mn (versus JPY41mn in Q1 FY12/21), for a still-modest contribution to overall revenue. Recurring revenue (company’s KPI) was up 6.6% YoY.
Operating profit fell 15.2% YoY and the OPM rose 0.3pp to 12.3%. The cost of revenue ratio fell 4.2pp YoY to 66.5%, but the SG&A ratio rose 3.9pp to 21.2%.
Distribution Cloud
Progress versus the FY12/22 company forecast was 24.1% for revenue (23.0% of the full-year result in Q1 FY12/21) and 21.4% for recurring revenue (18.5%).
Recurring revenue increased due to expanded offerings of cloud services such as @rms ERP for food retailers’ core business processes and the BXNOAH EDI service for retailers. Non-recurring revenue also increased, such as revenue associated with system installation and customizing to customer specifications. The company worked to expand its service provision by winning orders from major food retailers for C2Platform, an inter-company collaboration platform for digitalizing negotiations in the distribution industry.
Software amortization in cost of revenue declined YoY, partly due to amortization for some features of @rms ERP for medium and large size users coming to an end.
Under the previous accounting standard, sales would have been JPY1.0bn (+9.0% YoY) and recurring profit JPY150mn (+44.1% YoY).
Government Cloud
Progress versus the FY12/22 company forecast was 24.5% for revenue (34.0% of the full-year result in Q1 FY12/21) and 52.2% for recurring revenue (51.9%).
Revenue declined YoY as extraordinary demand for construction projects involving digitalization of disaster prevention communication systems and GIGA school-related projects came to an end in FY03/21. The company continued with efforts aimed at future growth. These include the development of Web Contact Service, an online administration service enabling electronic signatures on electronic documents and ID authentication using My Number Cards and MynaTrust electronic Know Your Customer (eKYC) capabilities that the Trust segment provides.
Under the previous accounting standard, sales would have been JPY1.4bn (-35.2% YoY) and recurring profit JPY189mn (-38.9% YoY).
Trust
Progress versus the FY12/22 company revenue forecast was 7.9% (42.7% of the full-year result in Q1 FY12/21).
The company started providing CloudCerts, a certificate issuance service using blockchain technology it acquired in December 2021. However, because it concentrated resources in developing the new service, sales declined versus Q1 FY12/21, when it installed existing services.
Meanwhile, the company worked to develop new trust services based on My Number Card. It conducted a demonstration test regarding registering real estate completely online.
Application of the Accounting Standard for Revenue Recognition had no impact on sales or recurring profit.
Mobile Network
Progress versus the FY12/22 company forecast was 25.7% for revenue (29.7% of the full-year result in Q1 FY12/21) and 35.8% for recurring revenue (39.6%).
Revenue declined 12.2% YoY. Handset unit prices were boosted by sales of the iPhone 13 and other high-end products. However, sales volume declined due to a lack of handset inventory amid the global semiconductor shortage. Non-handset revenue also declined on reduced support payments from NTT Docomo from October 2021.
Under the previous accounting standard, sales would have been JPY776mn (-11.7% YoY). Application of the Accounting Standard for Revenue Recognition had no impact on recurring profit.
Full-year company forecast
Note: Figures may differ from company materials due to differences in rounding methods.
FY12/22 Full-year forecast
Note: Figures may differ from company materials due to differences in rounding methods.
Distribution Cloud
The company forecasts revenue and profit growth in the Distribution Cloud segment, as it expects a rise in recurring revenue on increased uptake of the @rms series and EDI cloud service for wholesalers. The company will pay particular emphasis on service rollout and development of new features for C2 Platform (inter-company collaboration platform for digitalizing negotiations in the distribution industry). It plans to develop a system in preparation for the start of Japan’s new qualified invoice system in October 2023 and the termination of analog lines (PSTN) in 2025.
Government Cloud
The company expects lower revenue and profit for the Government Cloud segment due to a decline caused by the falloff of extraordinary demand for construction projects involving digitalization of disaster prevention communication systems and GIGA school-related projects, which made earnings contribution through Q1 FY12/21. The company will focus on increasing uptake of the Clarinet school administration cloud service and development of comprehensive disaster prevention services.
In January 2022, the company released a multimedia distribution service for disaster prevention information, “Open Link for Machi UP!.” The new online administrative service Web Contact Service is scheduled to be released in May 2022.
Trust
Profitability of the Trust segment is expected to improve. The company plans to grow services such as the MynaTrust digital proxy service (launched in August 2021) and CloudCerts, a blockchain certificate issuance service acquired in December 2021. The company also plans to continue investing in the development of trust services based on My Number Card with hopes to contribute to the digitalization of business contracts used by companies, and applications used at government offices.
Mobile Network
The company forecasts higher revenue but lower profit in the Mobile Network segment, based on assumptions that delays in delivery of mobile phone handsets will continue amid the global semiconductor shortage and that it will receive less subsidies from the primary dealer. That being said, the company expects to attract new customer demographic, as its Docomo stores began offering OCN Mobile One, a low-cost plan provided by NTT Communications Corporation.
Difference between initial company forecast and results in previous fiscal years
The difference between initial company forecasts and results in previous fiscal years is as follows.
In FY12/21, results exceeded the company’s forecast, which was upwardly revised in May 2021. The company had expected revenue in Government Cloud to decline due to the peak out of construction projects for digitalization of disaster prevention communication systems, but the decline was contained by large system renewal projects in the medical information field and new orders for the Clarinet school administration system. In Mobile Network segment, incentive income exceeded the company’s forecast.
In FY12/20, revenue fell short of the initial company forecast, because orders for construction projects for digitalization of disaster prevention communication systems for local governments came in later than expected. However, profits exceeded the initial forecast owed to higher profit margins attributed to lower labor and travel expenses due to a shift to online meetings and telework.
In FY12/19, the company canceled and terminated the installation of a system in the Distribution Cloud segment following discussions with the customer regarding system specifications, installation schedule, and costs. The company agreed to reimburse the expenses paid by the customer, recording JPY162mn under SG&A expenses.
In FY12/17, the company booked a JPY177mn impairment loss as an extraordinary loss. The impairment loss was on software for the education market, expense calculation software, and automatic product photography device, whose earnings were unlikely to meet initial expectations.
Note: Figures may differ from company materials due to differences in rounding methods.
Medium- and long-term outlook
Medium-term management plan (out February 12, 2021)
In February 2021, the company released its medium-term plan “Transformation 2025,” which runs from FY12/21 to FY12/25. The theme of the plan is “working with industry and customers to improve productivity through digital transformation (DX).” Numerical targets for the final year (FY12/25) are as follows.
The company targets CAGRs of 2.6% for revenue and 11.0% for recurring profit over the five-year period. Growth of the Distribution Cloud and Trust segments is key to attaining medium-term plan targets.
Distribution Cloud
The key medium-term management plan strategy for Distribution Cloud is “promote industry digital transformation (DX) by launching an inter-company collaboration platform.” The company plans to expand its market share by increasing the number of stores using the @rms cloud retail ERP service for supermarkets. The company targets an increase in Distribution Cloud revenue from JPY3.8bn in FY12/20 to JPY5.1bn in FY12/25, recurring profit from JPY318mn to JPY1.1bn, and recurring revenue from JPY3.2bn to JPY4.5bn over the same period.
Cloud retail ERP service @rms ERP
The company targets an increase in the number of stores using @rms ERP from 1,205 in FY12/20 to 1,765 in FY12/25, and in revenue from JPY2.1bn to JPY2.6bn over the same period. According to the company, the ERP market size for supermarkets is around JPY20.0bn. In the longer term, the company targets a 35% market share or JPY7.0bn.
The company had been selling @rms ERP mainly to small and mid-size supermarkets with revenue of JPY30.0bn or less, but launched a system for larger supermarkets in July 2019. The company aims to expand its market share by adding extensive features to the new system. It expects software amortization expenses to start declining from FY12/22.
Cloud EDI-Platform for wholesalers
The company targets an increase in revenue of Cloud EDI-Platform for wholesalers, from JPY780mn in FY12/20 to JPY1.1bn in FY12/25. Based on the company’s estimate, the food processing and retailing market size was JPY36tn in FY12/20, of which orders placed and received using the company’s Cloud EDI-Platform accounted for JPY8.7tn. The company aims to increase this figure to JPY12.3tn in FY12/25. The company plans to launch a next-generation EDI service in FY12/23.
C2 Platform, an inter-company collaboration platform
The company targets an increase in revenue in the inter-company collaboration platform C2 Platform, from JPY30.0mn in FY12/20 to JPY400mn in FY12/25. The company estimates that the market size for this business is JPY6.0bn. In FY12/21, it released a feature for preparing price estimates and plans to add more features in stages. The company announced a business alliance with Toppan Inc. (TSE1: 7911) in May 2021.
Government Cloud
The key strategy for Government Cloud is “support local governments in keeping up with the rapid progress of digitization.” The company projects a fall in segment revenue from JPY6.2bn in FY12/20 to JPY5.6bn in FY12/25 and a contraction in recurring profit from JPY631mn to JPY390mn over the same period. The outlook for lower revenue and recurring profit is due to unusually high revenue in FY12/20, which was buoyed by an extraordinary demand for construction projects involving digitalization of disaster prevention communication systems for local governments and GIGA School Concept-related work.
The medium-term management plan calls for developing a next-generation comprehensive disaster prevention service that the company aims to sell nationwide. It plans to expand its trade area for administrative information systems from Wakayama, Osaka, and Nara prefectures to the entire Kansai region. The company also plans to increase the number of schools using the Clarinet school administration cloud service from 473 in FY12/20 to 2,000 in FY12/25.
Trust
The key theme of medium-term management plan for Trust is “develop business in the Trust field centered on My Number Card.” The company targets an increase in segment revenue from JPY14mn in FY12/20 to JPY986mn in FY12/25 and turn to recurring profit of JPY150mn in FY12/25 versus a JPY80mn recurring loss in FY12/20.
Mobile Network
The key theme of medium-term management strategy for the Mobile Network segment is “boost value of physical stores in the rapidly changing competitive environment.” The company targets Mobile Network revenue growth from JPY2.76bn in FY12/20 to JPY2.84bn in FY12/25, and recurring profit growth from JPY349mn to JPY350mn over the same period. The medium-term plan focuses on strengthening the non-telecom business and sales to corporations as new sources of revenue.
Other
The company plans to invest in growth as follows:
Enhance operational efficiency by investing in DX (ERP systems and other internal systems)
Strengthen M&A activities and capital and business alliances to accelerate growth
Focus on training the next generation of executives
Continuously improve benefits to boost employee satisfaction and attract talented personnel
Reference: Previous medium-term management plan
In February 2016, the company announced a five-year management plan ending in FY12/20. Recurring revenue in FY12/20 exceeded the target by 29.8%, but recurring profit and ROE fell short of their respective targets. This is because software amortization associated with the development of @arms in the Distribution Cloud was booked later than planned.
Business
Business overview
Cyberlinks mainly provides cloud services to the retail and government sectors and operates Docomo stores, which sell smartphones and other products. In FY12/21, the company operated in four segments: Distribution Cloud (30.4% of revenue, RPM of 14.1%), Government Cloud (46.5%, 9.7%), Trust (0.7%, JPY350mn recurring loss), and Mobile Network (22.4%, 12.9%).
The company previously had two segments (IT Cloud and Mobile Network), but changed to the above four from FY12/21.
Note: Figures may differ from company materials due to differences in rounding methods.
Recurring revenue
The company regards recurring revenue (including information processing and maintenance fees in cloud services and some incentives associated with mobile handset sales) as a KPI. Recurring revenue accounted for 50.5% of total revenue in FY12/21. By segment, Distribution cloud accounted for 82.4% of recurring revenue, Government Cloud 44.4%, Trust 24.2%, and Mobile Network 20.5%. The company prioritizes the growth rate of recurring revenue. The CAGR for recurring revenue from FY12/16 to FY12/21 was 12.2%. The company forecasts a CAGR for recurring revenue of 7.0% in the current medium-term management plan period during FY12/21 to FY12/25, with a recurring revenue target of JPY9.0bn (62.5% of total revenue) in FY12/25.
Note: Figures may differ from company materials due to differences in rounding methods.
Distribution Cloud
Cloud services provide users with data and software that were previously used on their own computers as a service via a network. The advantages of moving systems to the cloud include reduced initial investment, easy system expansion according to the scale of the business, lower operating costs, and ability to promote decentralization and backup (data is operated and managed in robust data centers).
The company’s cloud service allows customers to share the use of systems it has developed. In addition to the advantages of cloud services described above, the company’s cloud service enables customers to continuously improve system functions (the latest version is always available free of charge), select the functions they need, and lower costs through joint use.
According to the company’s research and analysis, assuming that the cost of hardware, software, and labor for the initial setup of a supermarket ERP system is 100 when a company builds its own system (either in-house or through outsourcing), the cost for building a cloud-based system would be 87 and using Cyberlink’s cloud service 45. Similarly, assuming that the cost of operation and maintenance of the ERP system is 100 for a company’s own system, the cost is 81 for using a cloud-based system and 70 for using Cyberlink’s cloud service.
In October 2002 with an initial development budget of around JPY500mn, the company began developing @rms ERP (Japan’s first cloud retail ERP service) and started providing the service in February 2005.
Services
The main cloud services that the company provides in the @rms series include fresh food ordering, automatic ordering, and attendance management systems. The company also provides services such as Cloud EDI-Platform for wholesalers and retailers, which allows users to send and receive various data such as ordering and order receipt data.
Revenue breakdown for the Distribution Cloud segment in FY12/20 by service was @rms ERP (cloud retail ERP service) 62.0%, Cloud EDI-Platform service for wholesalers 23.1%, product image database 2.2%, sales management system for specialty stores (Retail Pro) 11.4%, and others 1.3%.
@rms ERP
@rms ERP is a cloud service that supports all core business processes of the food retail industry (mainly supermarkets), including ordering, purchasing and accounts payable management, inventory management, and sales management. In addition to systems for companies’ core business processes such as creating merchandise ledgers and management of purchasing and accounts payable, @rms ERP offers features of business systems for reporting, communication, and ordering, creating a basic ledger for managing supermarkets’ core management data, and analysis systems such as product ABC analysis*.
Peripheral @rms services such as fresh food ordering, automatic ordering, attendance management, and online supermarket
The company also offers peripheral services of @rms ERP such as the fresh food ordering system, automatic ordering system, attendance management system, and online supermarket system as cloud services.
Customers
@rms ERP mainly targets small and mid-size supermarkets with annual revenue of JPY30bn or less. As of December 2021, there were 1,288 stores using @rms ERP versus the total market of around 21,000 stores, growing at a CAGR of 8.8% over the past five years.
Large supermarket companies usually build their own ERP systems, outsourcing the work to system development companies. Mid-size and small supermarkets use Cyberlinks’ @rms ERP, Toshiba TEC Corporation’s (TSE1: 6588) RX-700, or develop their systems in-house. Japan has roughly 1,000 supermarket companies, of which around 130 companies use Cyberlinks’ @rms ERP. Supermarkets generally review their systems every five to seven years, when replacement demand arises.
As of December 2020, there were approximately 1,000 companies operating supermarkets in Japan according to National Supermarket Association of Japan data. Around 130 companies use Cyberlinks’ @rms ERP, but the company does business with around 300 companies if users of peripheral services are included. The company does not sell its services through third-party agencies; it sells directly to companies all over Japan. The management team notes that its sales structure as of FY12/21 covered almost all supermarkets in the country.
@rms ERP mainly targets small and mid-size supermarkets with annual revenue of JPY30.0bn or less, but the company plans to extend its trade area to large supermarkets as well. The reason for this is because there is no cloud service for large supermarkets, which usually uses its own in-house developed systems. Cyberlinks launched @rms ERP for medium and large size users in July 2019, which was adopted by three companies. The company plans to expand the features of these services by 2023.
Pricing
Pricing consists of the initial setup fee and monthly fees. The initial setup fee includes the price of hardware and cost of customization. Monthly fees break down into headquarters fees and store fees. Store fees have a larger weighting, and thus the number of stores using the service is a key earnings indicator. Although the number of headquarters will decrease in a case when supermarket companies merge, there is little or no impact on earnings if the total store count remains the same. A typical mid-size supermarket with 10 stores and annual revenue of around JPY10.0bn pays an initial set-up fee of JPY5.0mn and a monthly fee of JPY700,000–800,000. Users pay extra for peripheral services.
Cancellations
According to the company, there are very few cancellations due to customers switching to a competitor’s system. Customers are satisfied with the company’s system, which is tailored to the supermarket business. Rare cases where cancellations occur are when a supermarket goes out of business or is absorbed by a major supermarket as a result of M&A.
Cloud EDI service for wholesalers
The Cloud EDI*1 service for the wholesale industry is a cloud service that collectively receives information on order placement, arrival of products, receipt, return, billing, and payment sent from retailers to the wholesalers via various means of communication; converts this information to a specified format; and provides it to wholesalers. The system supports all formats including JCA protocol*2, Japanese Bankers Association standard communication protocol*3, and various versions of distribution BMS*4, the industry-standard format. The service enables wholesalers to significantly reduce their cost burden for equipment and facilities, management, and operations.
In January 2007, the company began providing a Cloud EDI service for wholesalers.
Users include Mitsubishi Shokuhin Co., Ltd. (TSE1: 7451), NipponAccess, Inc. (unlisted), and Kokubu Group Corp (unlisted). Seven of the top 10 companies in terms of food processing and wholesale revenue have adopted the company’s Cloud EDI services.
The company estimates its market share based on FY12/21 revenue of JPY830mn is around 20% of a market worth around JPY4.0bn (Cyberlinks estimate). Gross merchandise value (GMV) handled by the company was JPY8.9tn or 25% of a market worth around JPY36tn (based on the company’s estimate). Shared Research understands that its revenue is based on charging wholesalers a fee of around 0.9bp of GMV.
Sales management system for specialty stores (Retail Pro)
The company is the sole distributor for US company Retail Pro International, LLC, engaged in the purchase, sales, installation, and operational support for the Retail Pro sales management system for specialty stores. Retail Pro offers features such as sales management systems for specialty stores that have overseas stores and tools for communication between headquarters and stores. The company opened a branch office in Singapore with six employees to support Japanese customers using Retail Pro that have expanded operations to other parts of Asia.
Government Cloud
Government Cloud segment provides installation, maintenance, and operation services for administrative information systems and implementation and maintenance services of regional disaster prevention systems mainly to local governments in Wakayama, Osaka, and Nara prefectures. The company also provides cloud services for school administration and community medical collaboration platforms of medical institutions. As a partner of the Fujitsu Group, the company also provides IT&C hardware repair and maintenance services.
Although the segment is called Government Cloud, the administrative information and disaster prevention systems are not cloud services, but entail standard system development, operation, and maintenance work.
Services
The company provides the following services to the government sector.
In May 1964, the company began sales, maintenance, and management of government communication control systems as a distributor for Matsushita Communications Industrial, which developed into today’s regional disaster prevention system business. The company began providing an ERP service for government administrative information systems in October 2001, the Clarinet school administration cloud service in April 2012, and the community medical collaboration platform service in April 2013.
The company made Minamiosaka Computing Center Co., Ltd. a consolidated subsidiary in October 2019, consolidating the balance sheet only in FY12/19 and the income statement as well in FY12/20. Revenue growth of administrative information systems and community medical collaboration businesses in FY12/20 was due in part to the consolidation of Minamiosaka Computing Center, which posted revenue of JPY2.5bn and recurring profit of JPY94mn in that year.
Revenue of the regional disaster prevention system increased in FY12/19 and FY12/20 due to an increase in construction projects for digitalization of disaster prevention communication systems. Demand spiked in those two years, as the laws governing radio waves were revised, banning the use of analog disaster prevention government radio facilities from FY12/22, and as projects were subsidized by the government.
Features of government projects
Budgets for government projects consist of local government budgets and central government subsidies. The company’s projects are often affected by central government subsidy trends. Recent examples of subsidized projects are related to digitalization of disaster prevention communication systems and GIGA School Concept. Demand for these projects tends to increase sharply in one to three years and then disappears.
Government projects are also specific to each region. Orders are placed by local governments, not the central government, and local governments tend to place orders with local companies to create employment and revitalize the local community.
For many years, the company was a distributor for Matsushita Communications Industrial, which had a prefecture-based sales policy, which meant the company could not sell in prefectures other than Wakayama and distributors based in other prefectures could not sell in Wakayama Prefecture. As a result, the company is highly competitive in its home base of Wakayama Prefecture, but struggles to make inroads into markets in other prefectures held by local companies. The company gained access to trade areas in Osaka and Nara prefectures by acquiring Minamiosaka Computing Center.
Trust
The Trust segment provides a time stamping service for electronic data and ID authentication service based on My Number Card.
Cyberlinks time stamping service and TsunAG for Time Stamp
Cyberlinks time stamping service adds reliable time and signature information to electronic data as a time stamp*1 to certify that the data existed before a certain date and time, and that the data has not been altered since that time. In April 2017, the company obtained the Time Stamping Authority (TSA) certification from the Japan Data Communications Association’s (JADAC) Time Stamping Business Accreditation Center under its voluntary accreditation program*2.
TsunAG for Time Stamp is a service that provides seamless time stamping of diverse data that is produced in the work flow process.
Digital proxy authorization service*1 (MynaTrust Digital Proxy)
Cyberlinks provides a service that utilizes the digital certificate incorporated in My Number Card to authenticate digital data by preventing the alternation of data and identity theft in cyberspace. In December 2017, the company obtained Japanese Public Personal ID Authentication Service certification (My Number Card) from the Minister of Internal Affairs and Communications as a service platform provider, and in July 2020, the company obtained Digital Proxy Authorization Management Service*2certification from the Ministry of Economy, Trade and Industry.
In the company’s digital proxy authorization service MynaTrust Digital Proxy, the delegator (such as a company representative) and authorized party (such as company’s salesperson) use a digital key issued by Cyberlinks to register for the digital proxy service. The recipient of the digital proxy can verify on the Cyberlinks’s digital proxy registration to ensure whether or not the other party to the contract or other formalities (the authorized party) has been delegated the authority necessary for the formalities by the party itself (delegator). Specifically, the system is expected to be used in the below situations. The company’s digital proxy authorization service has been connected to the Government e-Procurement System (GEPS)*3.
Electronic tenders for procurement by central and local governments
Formalities such as electronic applications to government organizations
Electronic contracts, applications, and other formalities between companies
The company provides two services based on two formats of files; delegator record file and service provider record file. In the former, delegators prepare their own digital proxy using a smartphone app or other tools. In the latter, Cyberlinks prepares the proxy based on required documents provided by the customer. The pricing plan starts from JPY3,000 for a basic plan (preparing one proxy) using the delegator record file format and JPY7,000 for the service provider record file format.
CloudCerts, a blockchain certificate issuance service
The company’s CloudCerts digital certificate issuance service was launched in December 2021. It converts paper certificates and those in image format such as jpg and pdf into secure digital certificates. Today, most certificates in Japan still have paper originals and use authorized stamps or specialty paper for authentication. However, using blockchain technology ensures that they cannot be tampered and that they retain their originality.
CloudCerts uses a system that prevents falsification and identity theft for safe exchange of information using the blockchain technology of LasTrust Inc. (unlisted), whose patent is pending.
Mobile Network
Mobile Network segment runs seven Docomo stores (NTT Docomo resellers) in Wakayama Prefecture. The company is a second-tier reseller, which signs up subscribers and sells smartphones based on a reseller agreement with CONEXIO Corporation (TSE1: 9422), a primary reseller of NTT Docomo.
The company sells NTT Docomo smartphones, mobile phones, and phone accessories. Its services include consultation of pricing plans, signing up of customers for phone contracts, receipt of payment of mobile phone charges, and after-sales services such as receiving handsets for repair. It also acts as an agent for NTT Docomo for its business with corporate customers. Its services here include selling smartphones and other mobile phones, providing consultation of pricing plans, signing up customers for phone contracts, receiving handsets for repair, and proposing and selling mobile systems.
As a second-tier reseller, the company runs Docomo stores through CONEXIO and thus receives a fee from CONEXIO. Terms of trade such as the amount of fees received, content of services for which fees are payable to, and fee rate (percentage of phone charges) vary according to the management policies of NTT Docomo and CONEXIO.
The company’s market share among resellers in Wakayama Prefecture (based on company data) is as follows.
* Market share excludes stores directly managed by primary reseller.
Trends in sales to primary reseller CONEXIO are shown below.
Revenue per store was JPY423mn (+7.3% YoY) in FY12/21. The company operates seven stores. The store count has not changed since FY12/13, when the company began disclosing stores’ earnings performance. Recurring profit is affected by revenue trends (such as smartphone sales volume) and NTT Docomo’s measures and incentives.
Earnings structure
Recurring revenue trends
Recurring revenue is a key indicator of the company’s earnings. Recurring revenue is revenue earned on an ongoing basis such as information processing and maintenance fees in cloud services and some incentives related to mobile handset sales.
Revenue from cloud services consists of the initial set-up fee and monthly fees. Thus, an increase in the number of users and low churn rate results in stratified revenue growth. For the company’s mainstay service @rms ERP, a typical mid-size supermarket with 10 stores and annual revenue of around JPY10.0bn pays an initial set-up fee of JPY5.0mn and a monthly fee ranging from JPY700,000 to 800,000. As of December 2021, 1,288 stores used @rms ERP versus the total market of around 21,000 stores, growing at a five-year CAGR of 8.8%. According to the company, there are very few cancellations due to customers switching to a competitor’s system. Rare cases where cancellations do occur are when a supermarket goes out of business or is absorbed by a major supermarket as a result of M&A.
Expenses are mainly fixed, such as personnel expenses (labor costs and outsourcing costs) and depreciation associated with software development and operational costs associated with data center (personnel expenses, communications expenses, rent, power, and depreciation). With limited variable expenses, the company has an earnings structure with a high marginal profit rate. This means that profit margins increase once revenue exceeds the breakeven point.
Recurring revenue went up from JPY2.7bn in FY12/11 to JPY6.7bn in FY12/21, growing at a CAGR of 9.4% over the 10 years. In FY12/21, recurring revenue accounted for 50.5% of revenue. Shared Research estimates that recurring revenue accounted for around 80% of Distribution Cloud segment, 40% of Government Cloud, and 20% of Mobile Network. While revenue fluctuates in the Government Cloud business due to one-time demand for construction projects involving digitalization of disaster prevention systems and GIGA School Concept projects, trend in recurring revenue is what is important.
Cost of revenue breakdown
The cost of revenue ratio trended between 69.3% and 74.0% during the period of FY12/12 to FY12/21.
The company disclosed a cost of revenue breakdown in FY12/18. In the former IT Cloud business (corresponds to the total of Distribution Cloud, Government Cloud, and Trust), cost of revenue broke down into labor costs 48.9%, raw materials and supplies 15.8%, outsourcing expenses 15.0%, depreciation 4.5%, communication expenses 2.7%, and others 9.3%. Purchasing costs of smartphones and accessories account for 100% of cost of revenue in the Mobile Network segment.
SG&A expense breakdown
In FY12/20, SG&A expense breakdown was personnel 61.0%, R&D 4.6%, depreciation 2.1%, and others 32.3%. The SG&A expense ratio contracted from 26.5% in FY12/12 to 20.5% in FY12/20. As a percentage of revenue, personnel expenses, depreciation and amortization, and other expenses declined, while R&D expenses rose.
In the Distribution Cloud segment, the company agreed to compensate a customer for expenses incurred after system installation was canceled, which resulted in the company recording a charge of JPY37mn in FY12/18 and JPY162mn in FY12/19 under other expenses.
Recurring profit
The company’s CAGR for recurring profit was 12.6% over the past nine years. RPM has trended between 4.6 and 7.8% with an average of 6.1%. Software amortization in the Distribution Cloud segment is a significant factor that affects the change in recurring profit. It is important to estimate the period and amount of software amortization, which begins after initial development of the software is completed. Other factors affecting fluctuations in recurring profit include the reduction of costs and SG&A expenses.