AVANT is an information services company with a holding company structure. Group company DIVA Corporation develops and sells packaged software for consolidated accounting systems. Another group company, ZEAL Corporation, supports installation of business intelligence (BI) tools used to leverage companies’ vast stores of data.
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Executive summary
Business overview
AVANT CORPORATION operates three businesses: Group Governance, Digital Transformation, and Outsourcing, with a focus on providing information environments useful in decision-making, mainly for clients of listed companies. In the Group Governance Business, group company DIVA CORPORATION mainly provides solutions for issues related to group governance, centered around its consolidated accounting system. In the Digital Transformation Business, another group company, ZEAL CORPORATION, provides solutions related to decision-making environments, including non-financial information, such as business intelligence and data platform construction. In the Outsourcing Business, FIERTE CORPORATION provides outsourcing services related to information processing, including consolidated accounting operations. In FY06/21, consolidated revenue was JPY16.2bn and operating profit was JPY2.8bn. Looking at the composition of revenue (and operating profit before elimination of company-wide expenses) by segment, the Group Governance Business accounted for 50.1% (59.2%), the Digital Transformation Business for 38.5% (24.8%), and the Outsourcing Business for 11.5% (16.0%) of total revenue.
President and group CEO Tetsuji Morikawa founded the company in 1997. The late 1990s saw a “Japanese-style accounting Big Bang.” Consolidated financial statement principles were revised, and Japan saw widespread adoption of consolidated accounting. Seizing this opportunity, Mr. Morikawa developed software that could dramatically cut the time to perform accounting tasks, from several hours to just several minutes, and launched the company to market the new software.
DIVA develops and sells software for the DivaSystem consolidated accounting system and earns revenue from consulting and maintenance. In this niche market, it has a leading domestic market share of roughly 43%, according to a market research company commissioned by AVANT. As of end-December 2020, more than 1,100 companies have installed DIVA’s software, including major companies such as Toyota Motor (TSE1: 7203) and NTT (TSE1: 9432). DIVA is adding a few dozen new customers annually, with its initial system installation revenue per company ranging from JPY10mn to over JPY100mn. DIVA has also focused on outsourcing business in recent years. DIVA focuses on installation of consolidated accounting systems unlike many of its competitors, which aim to win contracts for operations management systems spanning entire companies.
With consolidated accounting software, a parent company and its group companies input financial data, and the software produces consolidated results, after making necessary consolidation adjustments and entries. Accounting standards for financial disclosure change frequently; the company has maintenance contracts in place with all of its customers to keep them abreast with the changes. The high cost of switching to new software creates barriers to entry once a system has been installed. Non-recurring revenue is high because customized solutions are often provided to existing customers, so the recurring revenue ratio was 44% in FY06/21. In recent years, the company has focused on improving its capacity to provide consulting-based solutions and thus facilitating expansion into the growth markets of managerial accounting and Integrated Business Planning (IBP), and aims to provide comprehensive solutions for group governance-related issues.
In 2012, the company acquired ZEAL, a system integrator that supports the installation of BI tools. End users typically adopt BI tools at the time of a large-scale system renewal. While most of ZEAL’s business used to come from subcontracting for major system integrators, ZEAL now receives the majority of orders directly from end users through recommendations by vendors such as Oracle and IBM. Few other Japanese companies have this narrow focus on BI tools. ZEAL can handle the entire BI product range from the major four vendors. It has more than 30 years’ experience in this area and has assisted more than 1,000 companies with installation. In recent years, the company has also received an increasing number of orders for the infrastructure behind the introduction of business intelligence, such as the construction of data platforms, and has provided comprehensive solutions related to the promotion of digital transformation. Only 9% of FY06/21 Digital Transformation Business revenue came from recurring revenue business.
FIERTE provides outsourcing services related to information processing, including consolidated accounting operations. Accounting departments still have heavy workloads during reporting season as they must confirm entries from individual subsidiaries, extract their notes, and create financial statements and securities reports. Accordingly, external outsourcing demand is burgeoning amid needs to reduce the profit reporting workload. High profit margins are maintained because of the pricing system that is based on workload reduction at customers. OPM was 21.1% in FY06/21. In addition, the recurring revenue ratio remains above 90% as most contracts are for recurring business. In FY06/21, the recurring revenue ratio was 92%.
AVANT is increasing its relationship with continual customers (project base) and believes that increasing the ratio of cloud-based products and taking other steps to move toward a business structure more reliant on recurring revenue business are essential for growing its top line and improving corporate value. To that end, it is not only developing proprietary products, but also plans to enter capital alliances with outside companies and consider M&A opportunities.
Earnings trends
FY06/21 results: Full-year FY06/21 revenue was JPY16.2bn (+3.5% YoY), operating profit JPY2.8bn (+22.7% YoY), recurring profit JPY2.8bn (+23.1% YoY), EBITDA JPY3.0bn (+21.2% YoY), and net income attributable to owners of the parent JPY1.9bn (+22.8% YoY). Group Governance Business revenue was down 3.8% YoY, Digital Transformation Business up 8.4% YoY, and Outsourcing Business up 20.2% YoY. In Q4 (three-month period), the Group Governance Business also turned in a 3.2% YoY increase in revenue. Operating profit increased 19.7% YoY in Group Governance Business, 17.2% YoY in Digital Transformation Business, and 43.7% YoY in Outsourcing Business. Cost reduction measures the company has taken since FY06/20 improved OPM to 17.2% (+2.7pp YoY). Order backlog increased JPY1.2bn YoY.
FY06/22 forecast: The company forecasts revenue of JPY17.8bn (+9.8% YoY; +11.0% under the previous accounting standards for revenue recognition), operating profit of JPY2.9bn (+2.3% YoY), recurring profit of JPY2.8bn (+0.8% YoY), net income attributable to owners of the parent of JPY1.9bn (+0.8% YoY), and EPS of JPY50.67. This forecast assumes accelerated growth in all segments. AVANT expects a negative impact on revenue of about JPY200mn from application of new accounting standards for revenue recognition (this does not factor for possible expansion of scope of percentage-of-completion-based processing of revenue that is under review). It expects OPM to deteriorate to 16.0% (versus 17.2% in FY06/21) as it focuses on enhancing product development and securing and training proposal-oriented human resources in order to increase the speed of recurring revenue growth to achieve the medium-term business plan targets.
Medium-term business plan (announced September 2018): The ten years from FY06/18 to FY06/27 are also the ten years leading up to the company’s 30th anniversary. The company’s targets for FY06/23, the midpoint in that span, include a GPP (Growth and Profit Point: revenue growth rate + operating profit margin) of at least 40pp (28.5pp in FY06/18), and a share of recurring revenue of 70% (33%). AVANT intends to execute a sweeping structural transformation of its business to meet these targets. It plans to develop outsourcing business in Consolidated Accounting Related (contracting consolidated accounting work for its customers). At ZEAL, it aims to shift from the current business model where it mainly plays a system integrator role, to a model centering on recurring revenue business such as maintenance. The company also appears to be aiming to grow recurring revenue through accelerated transition to the cloud in its Group Governance Business.
Strengths and weaknesses
Shared Research sees AVANT’s strengths as: possessing a significant share in the niche market of consolidated accounting systems; high switching costs and a recurring revenue model in the mainstay DIVA business; and a leading position in consolidated accounting outsourcing, a future growth driver. We consider its weaknesses to be: low profile outside the accounting departments who are its target customers; low profit margin despite selling packaged software; a high risk of losing well-trained, specialized personnel to better-paying consulting firms. (For details, see the Strengths and weaknesses section.)
Key financial data
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Recent updates
Partial revisions to its Q1 FY06/22 financial report and briefing materials
On November 12, 2021, AVANT Corporation released partial revisions to its Q1 FY06/22 financial report and briefing materials.
AVANT, in its Q1 FY06/22 results, had released the impact of applying the new Accounting Standard for Revenue Recognition on revenue, operating profit, orders, and order backlog, as well as the YoY amount and percentage changes under the previously accounting standard for reference purposes. The company made corrections as it discovered some errors in the impact amounts, mainly in the Digital Transformation Business. Shared Research has updated this report with the revised figures.
Trends and outlook
Quarterly performance
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.
Note: Figures may differ from company materials due to differences in rounding metho
Reference information excluding the impact of the Accounting Standard for Revenue Recognition
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.
Note: Figures may differ from company materials due to differences in rounding methods.
Q1 FY06/22 results
(Updated to reflect the company’s revisions released on November 12, 2021)
Segment name change: From Q1 FY6/2022, the company changed the name of its reporting segments from Consolidated Accounting Related to Group Governance Business and Business Intelligence to Digital Transformation Business. The name changes were implemented in the interest of better reflecting the reality of its business, given its policy of working on solutions for group governance-related issues while maintaining its foundation in consolidated accounting field, and the fact that it is expanding the scope of its business beyond business intelligence to encompass the construction of data platforms.
This change only means name changes and does not impact the segment information.
Q1 FY06/22 results: Revenue was JPY4.0bn, operating profit JPY462mn, recurring profit JPY442mn, EBITDA JPY519mn, and net income attributable to owners of the parent JPY262mn. Excluding the impact of the adoption of the Accounting Standard for Revenue Recognition, revenue was JPY3.9bn (+9.4% YoY). Revenue increased YoY due to growth in Digital Transformation Business and Outsourcing Business. Excluding the effect of the application of the Accounting Standard for Revenue Recognition, operating profit was JPY365mn (-23.7% YoY). Operating profit decreased YoY mainly because in the Group Governance Business, the company strengthened its software development and sales structure toward future growth and profitability, and established a division to pursue group synergies in FY06/22.
Full-year FY06/22 earnings forecast: AVANT left its initial forecast unchanged. Progress in Q1 against the company's full-year FY06/22 forecast was 22.7% for revenue, 16.1% for operating profit, 15.6% for recurring profit, and 13.8% for net income attributable to owners of the parent. As of Q1, the Group Governance Business was behind the company's plan in terms of progress, but according to the company, the Digital Transformation and Outsourcing Businesses were progressing in line with plan. For details on assumptions underlying the forecast, please see the “Full-year FY06/22 company forecast” section later in the report.
Summary
One target in the new medium-term plan is to raise the percentage of recurring revenue (for example, software maintenance fees). In Q1 FY06/22, the recurring-revenue ratio was 36.9%, up 0.8pp YoY. The ratio rose primarily due to growth in the Outsourcing segment, which has consistently maintained a recurring-revenue ratio of around 90%, and an increase in cloud revenue in the Group Governance business. Total recurring revenue increased 7.5% YoY.
According to materials the company disclosed in October 2021,c ross-selling in FY06/21 was 1,048 customers (77% of the
total) with at least one recurring business out of a total of 1,356 customers. The
average price per customer was JPY11.8mn, and the average price per recurring business was JPY5.5mn. There are issues with cross-selling, as the number of overlapping
customers within the group is only 120 (8.8% of the total). This also means, however, that there is room for growth. First, the company plans to reconfigure existing products scattered throughout the group from the
customer's perspective, and then combine them with external products as necessary to strengthen cross-selling.
At its FY06/21 results briefing, the company revealed that it had established theInnovative
Solutions Division for the purpose of pursuing group synergies. This division will play a central role in tackling untapped areas by
combining products from both inside and outside the group, while promoting
cooperation among multiple businesses. Initially, upfront costs are expected to be incurred, but from the perspective of accelerating the pursuit of group
synergies, the costs of the Innovative Solutions Division will not be borne by
each business, but as a company-wide expense.
Losses from equity method investments totaled JPY19mn. This includes the profits/losses related to Metapraxis (April–June of Metapraxis) and the amount equivalent to goodwill amortization.
As of end-Q1 FY06/22, the company had 1,123 employees on a consolidated basis (up 16 from end-FY06/21).
Overview by segment
Group Governance
In Q1 FY06/22, revenue came to JPY2.0bn and operating profit was JPY287mn.
The application of the Accounting Standard for Revenue Recognition boosted revenue by JPY173mn. Under the previous accounting standards (or excluding the impact of the application of the new standard), revenue decreased 1.0% YoY. This was attributable to a dearth of large-scale projects in Q1 and a decline in consulting services despite an increase in recurring revenue due to an increase in SaaS-type contracts.
Operating profit decreased to JPY287mn (JPY102mn increase due to the change in accounting standards; -43.1% YoY under the previous accounting standards). While revenue declined, this was due to the company strengthening its development structure and improving labor conditions in order to promote the development of software for future growth and profitability improvement (DivaSystem as SaaS and development of new products). Excluding the impact of the application of the Accounting Standard for Revenue Recognition, OPM was 10.3% (-7.6pp YoY).
Order backlog was JPY2.3bn, an increase of JPY358mn (+18.6%) YoY. Excluding the impact of the application of the new accounting standard, order backlog was up JPY601mn (+31.3%) YoY.
The company maintained the leading share of the consolidated accounting software market in FY2020, accounting for 43.8% (44.4% in FY2019) of the market (Fuji Chimera Research Institute, Software Business New Market 2021). This was more than 6pp higher than the second-place share of 37.0% (36.1% in FY2019).
The slight decline in market share from FY2019 was due to the company's need for resources to handle large-scale projects and limited resources to acquire new customers and handle small and medium-sized customers. The company says it has already reconsidered its client approach structure to avoid undue bias toward large-scale projects.
Digital Transformation
In Q1 FY06/22, revenue was JPY1.6bn, and operating profit was JPY187mn.
The application of the Accounting Standard for Revenue Recognition depressed revenue by JPY67mn. Under the conventional accounting standards (excluding the impact of the application of the new standard), revenue increased 17.9% YoY. There was steady growth in orders for data platform construction projects.
The need for companies to use data for decision-making in management and business promotion is accelerating, and the projects AVANT receives tend to be larger in scale as the company provides more cloud data platforms rather than traditional business intelligence-related development services. Moreover, the scale of projects tends to become larger as the number of vendor products the company handles increases and it accumulates implementation experience. The change in the project types is also leading to improved profitability. Operating profit increased to JPY187mn (the change in accounting standards pushed down JPY6mn; +66.8% YoY under the previous accounting standards), absorbing the increase in personnel expenses stemming from the increase in personnel and the recording of performance-linked compensation. Excluding the impact of the application of the new accounting standard, OPM was 11.8%, (+3.5pp YoY).
Order backlog was JPY975mn, up from JPY125mn in Q1 FY06/21. Excluding the impact of the adoption of the new accounting standard, that was up JPY139mn (+16.5%) YoY.
Outsourcing
In Q1 FY06/22, revenue totaled JPY711mn (+24.7% YoY) and operating profit was JPY161mn (+23.6% YoY). There is no impact from the adoption of the Accounting Standard for Revenue Recognition.
AVANT is seeing a rise in orders from new customers as companies are starting to move forward after being cautious in making final decisions due to uncertainty caused by COVID-19. The contracts the company secured at the end of FY06/21 contributed to higher revenue in Q1.
In Q1 FY06/22, OPM was 22.7% (down 0.2pp YoY). It was, however, essentially unchanged from the previous fiscal year, absorbing the increased costs associated with office expansion and increased personnel.
Order backlog was JPY1.5bn, an increase of JPY438mn (+42.5%) YoY.
Full-year FY06/22 company forecast
Note: Figures may differ from company materials due to differences in rounding methods.
Supplementary information as of end-Q1 (November 2, 2021)
The company left its initial forecast unchanged. The rate of progress versus the full-year forecast for FY06/22 was 22.7% for revenue, 16.1% for operating profit, 15.6% for recurring profit, and 13.8% for net income attributable to owners of the parent. As of Q1, the Group Governance Business was behind the plan in terms of progress, but according to the company, the Digital Transformation and Outsourcing Businesses were progressing in line with plan.
Initial forecast (out August 6, 2021)
In FY06/22, the company forecasts revenue of JPY17.8bn (+9.8% YoY; +11.0% under the previous accounting standards for revenue recognition), operating profit of JPY2.9bn (+2.3% YoY), recurring profit of JPY2.8bn (+0.8% YoY), net income attributable to owners of the parent of JPY1.9bn (+0.8% YoY), and EPS of JPY50.67. This forecast assumes accelerated growth in all segments. AVANT expects a negative impact on revenue of about JPY200mn from application of new accounting standards for revenue recognition (this does not factor for possible expansion of scope of percentage-of-completion processing of revenue under review). It expects OPM to deteriorate to 16.0% (versus 17.2% in FY06/21) as it focuses on enhancing product development and securing and training proposal-oriented human resources in order to increase the speed of recurring revenue growth to achieve the medium-term business plan targets.
Impact of application of new accounting standards for revenue recognition
The company had planned to adopt new accounting standards for revenue recognition from FY06/22, and the foregoing are post-adoption projections. For transactions recognized as arrangements for the provision of products from third parties, AVANT previously recorded the total sales amount as revenue and the purchase amount as expense, but it now records the difference between the sales amount and the purchase amount as revenue in the form of a commission. This change is likely to have a negative impact on revenue of some JPY200mn. Since the cost of revenue will decrease by the same amount, however, this change will have no impact on operating profit. The impact on revenue for Q1 FY06/22 was a decrease of JPY57mn.
In addition, the increase in scope for percentage-of-completion-based processing of revenue will not be limited to large-scale projects. Specifically, for most of the services for which revenue was previously booked at the time of project completion and acceptance, the company will instead book revenue based on progress. As a result, the timing of revenue recognition for projects that straddle fiscal years or quarters may differ from previous fiscal years. As of August 2021, the company was still evaluating the impact on revenue and profits of applying percentage-of-completion standards and plans to make an announcement as soon as it reaches a conclusion. The change is expected to primarily affect the Group Governance Business and Digital Transformation Business segments. The impact on revenue for Q1 FY06/22 was an increase of JPY273mn.
Assumptions pertaining to COVID-19 pandemic
AVANT formulated the forecast based on the assumption that the impact of the COVID-19 pandemic will subside to some extent by end-2021 and economic activity at domestic companies will gradually return to normal in 2022. Mainly, assumptions are conservative for the Digital Transformation Business segment, which has a relatively short order-to-delivery cycle and is susceptible to deterioration of the external environment. If the pandemic’s impact were to linger, the company’s performance may turn out worse than expected.
Outlook by Segment
The company does not disclose a breakdown of earnings forecasts by segment but provides the following qualitative outlook.
Group Governance Business
The company aims to accelerate revenue growth by expanding product offerings such as DivaSystem LCA, SMD, Compass, and DIVA Empower and emphasizing proposal-based marketing. Headcount increases, mainly boosting proposal-oriented consultant type human resources, will depress margins. The recurring revenue ratio (44% in FY06/21) is expected to grow due to the rising number of new customers not requiring customization for financial accounting (customization leads to increased non-recurring revenue, thereby depressing the recurring revenue ratio) and sales of managerial accounting products.
The primary customers in the financial accounting field are corporate finance departments whereas the main users of managerial accounting products are corporate planning departments and CFOs. Users (budget holders) differ even within the same company owing to differing awareness of issues, interests, and concerns of the users. Consequently, abilities required to make proposals to customers in financial accounting differ from those to make managerial accounting proposals. Accordingly, AVANT has decided to separate DivaSystems’ development, installation, maintenance businesses from the consulting business as in-house companies and plans to aggressively hire consulting personnel in FY06/22.
In addition, the company aims to continue deepening customer relationships (rather than focus on project-based relationships) and develop recurring businesses to meet customers’ needs through its software pipeline, thereby boosting the recurring revenue ratio.
Based on the capital and business alliance with British software company Metapraxis, AVANT released a Japanese version of Metapraxis Empower, a BI tool that supports financial information planning, analysis, and visualization that Metapraxis markets in Europe and the US, dubbed Diva Empower in August 2021. That said, the initial company plan does not assume aggressive sales contributions as sales will likely be proceeded by discussions with customers for about six months.
Digital Transformation Business
The company looks to aggressively market data platform creation, data utilization, and e-learning to accommodate current trends. Management plans to boost headcount to support revenue growth but expects to maintain the same level of profitability as in FY06/21 as some offices will be closed as working from home becomes more common place. Additionally, expansion of Business Process Outsourcing (BPO) contracts, will likely drive up the recurring revenue ratio (9% in FY06/21) as some project-based work transitions to outsourcing.
Outsourcing Business
Continued high growth is projected due to the launch of services following a wave of new contracts at end-FY06/21. That said, operating profit margins are expected to suffer as a result of aggressive investment to increase efficiency. Furthermore, offices will be expanded from July 2022 to accommodate increased staffing. The recurring revenue ratio (92% in FY06/21) is expected to remain at a high level.
Organizational changes to drive group transformation
AVANT, a holding company with a Group CEO and CFO, has also established the new positions of CDO (Chief Digital-transformation Officer), CBO (Chief Business-development Officer), and CRO (Chief Risk-management Officer) to strengthen group synergies.
The Group CDO is Mr. Okabe, who is adept at providing solutions and is a representative from ZEAL (Digital Transformation Business). He will provide DX solutions to customers while utilizing group-wide solutions and products of other companies.
The Group CBO is Mr. Nagata, a representative from FIERTE (Outsourcing), who will be responsible for business development and promotion of new business. No changes were made to the M&A investment policy.
The Group CRO is Mr. Takemura, a DIVA (Group Governance Business) representative that will spearhead risk management efforts.
At the FY06/21 results briefing, the company revealed that it had established the Innovative Solutions Division as a division to pursue group synergies. This division will play a central role in tackling untapped areas by combining products from both inside and outside the company group, while promoting cooperation among multiple businesses.
Dividend policy
In line with its existing dividend policy, AVANT intends to raise the ratio of dividends to net assets (payout ratio) while keeping in mind that the ratio should always be higher than the average for all listed companies. At the same time, it intends to maintain a stable dividend (in principle, the dividend per share should not fall YoY). The company also made no changes to its dividend policy in planning the dividend for FY06/22. It will consider the average of all listed companies and its results for the fiscal year, but currently projects a dividend of JPY12 per share to maintain a stable dividend and in light of the uncertain economic situation.
Medium-term business plan (announced September 2018)
In August 2017, AVANT announced long-term targets under the title Business Concept, covering FY06/17 through FY06/27. In September 2018 it revised its medium-term forecasts under a new plan called BE GLOBAL2023, covering the five years to FY06/23.
Previously, in its medium-term plans, the company made profit forecasts three years in advance. However, the latest plan, BE GLOBAL2023, is different and establishes the company’s vision of its future self.
Medium-term numerical targets for FY06/23
Revenue: JPY18.0–22.0bn (FY06/18 result: JPY12.1bn)
Recurring revenue share: 70% (33%)
Operating profit: JPY3.1–3.8bn (JPY1.6bn)
GPP (Growth and Profit Point): 40pp or above (28.5pp)
ROE: 20% or above (24.5%)
DPS (after stock split): JPY15 or above (JPY6)
The company has a particular focus on the share of recurring revenue and GPP.
AVANT strives to become a world-class software company. In terms of numerical targets, the company is focusing on its recurring revenue share and growth rates in addition to profit margin, rather than the absolute level of revenue and profit. During the period covered by “BE GLOBAL2023”, AVANT will be prioritizing activities in the Japanese market.
The company has three long-term numerical targets for FY06/27: maintaining ROE in the 20% range, CAGR of 18% for operating profit, and DPS of at least 10x the FY06/17 level. These were announced roughly one year before BE GLOBAL2023. The company’s focus on profit growth rates seems to reflect president and group CEO Morikawa’s vision of becoming a world-class software company. The BE GLOBAL2023 plan appears to be geared toward early realization of this vision.
BE GLOBAL2023 points to changing business structure
Toward GPP of 40pp
In FY06/18, GPP (Growth and Profit Point) was 28.5pp, composed of 15.0% revenue growth and 13.5% operating profit margin. If the company were to achieve the GPP of 40pp established in BE GLOBAL2023, it would rank in the top 5% of TSE listed companies. However, the GPP of 40% represents a considerable stretch from its current position.
Assuming the company achieves maximum straight-line revenue growth in its plan (JPY22.0bn), CAGR until FY06/18 would be 12.7%. Also, assuming operating profit at the upper end (JPY3.8bn) and revenue at the lower end (JPY18.0bn) of the target range gives an operating profit margin of 21.1%. Even if both occur simultaneously (though this is not possible), that would result in a GPP of just 33.8pp.
This suggests that AVANT is painting a future that does not rely on events unfolding in a straight-line. To fulfill its ambitions, it intends to change its business structure and make acquisitions. The shift in business structure includes accelerating outsourcing growth in the consolidated accounting business and an updated business model at ZEAL.
Toward a recurring revenue share of 70%
To boost the share of recurring revenue from 33% in FY06/18 to 70% in the last year of the plan is another lofty target. In FY06/18, recurring revenue was roughly JPY4.0bn, while nonrecurring revenue was around JPY8.1bn. Assuming revenue reaches the lower end of the plan target (JPY18.0bn), this would require recurring revenue of JPY12.6bn to reach the 70% target, or a CAGR of nearly 26%. Fundamentally, recurring revenue has the characteristic effect of stabilizing revenue and making it less likely to fall YoY, rather than driving revenue growth. This suggests that, in order to achieve its targets, the company is planning depart from previous business strategies.
The company intends to grow its Outsourcing segment (consolidated accounting work under contract for its customers) to help reach its goal of a recurring revenue share of 70%. In addition, it hopes to transform ZEAL from its current form as a system integrator, where it receives contracts on an irregular basis, to the model where ZEAL generates ongoing revenue. It also hopes to grow recurring revenue in the Group Governance Business segment by doing more business on the cloud. Even the maximum target for nonrecurring revenue (JPY22.0bn) in the medium-term plan assumes a decrease in nonrecurring revenue from the FY06/18 level to JPY6.6bn.
Long-term numerical targets
The company has three numerical targets for FY06/27 (announced in August 2017): maintaining ROE in the 20% range, CAGR of 18% for operating profit, and DPS of at least 10x the FY06/17 level.
If operating profit grew by a CAGR of 18% for 10 years through FY06/27, it would reach JPY6.8bn, and net income would be JPY4.4bn, assuming no changes in tax rates. In FY06/17, the annual DPS (before stock split) was JPY16.0 (JPY160.0 when multiplied by 10). Based on the number of shares outstanding as of end-FY06/17, the total dividend payout would be JPY1.5bn, for a dividend payout ratio of 34% in FY06/27 (21.2% in FY06/18). AVANT does not have a stated dividend payout ratio policy. It aims to be above the listed company average in indicators such as dividend on equity ratio and dividend yield. As a rule, it focuses on stable YoY increases in dividend per share.
Assuming straight-line profit and dividend growth through FY06/27 in the previous calculations, shareholders’ equity would be JPY20.6bn at end-FY06/27. Based on the hypothetical net income of JPY4.4bn, the ROE (end of year) would be 21.3%, achieving the company’s target.
Accordingly, the key to reaching the company’s long-term management targets is maintaining profit growth at a rapid 18% pace. This is in accordance with the GPP target of 40pp set forth in the BE GLOBAL2023 business plan.
Expanding business scope
AVANT expects annual growth of 5–6% in the domestic IT market. However, it thinks that the market for its foundation business, consolidated accounting systems, is roughly flat. It is attempting to expand its business scope to encompass not just institutional consolidated accounting systems for external disclosure, but also growing sales of managerial consolidation software for internal management purposes, such as budget preparation or developing outsourcing businesses for consolidated accounting tasks. Meanwhile, it assumes medium-term growth of around 10% for the BI tools market. The company does not intend to rely on market growth alone in its Digital Transformation Business segment. In the BI tools market, AVANT aims to handle highly flexible, simpler small-scale products from non-major vendors, and thus expand its target customer base. The company expects that the markets on which it is focusing will grow at a CAGR of around 13% under this wider business scope.
Possibility of acquisitions
Even if AVANT can grow its overall revenue at a CAGR in the teens by widening the scope of its business, its target of 18% operating profit growth is a tough task if operating profit margin stay flat. The company has commented that 20% growth is possible if it aims at being a market leader, and that acquisitions are an important strategy under consideration.
AVANT is considering M&A deals in earnest as a means to grow. It is aware of the merits of leverage, and its motivation in moving to a holding company structure was for a clear separation of roles. The business companies will specialize in operations, and the holding company will be constantly on the lookout for M&A opportunities.
The company has three criteria for considering an acquisition; 1) Having a customer base that helps promote the cloud-based services, 2) Ownership of proprietary IP or the ability to leverage AVANT’s IP, and 3) Level of focus on Japanese market.
The company does not look for synergies from a short-term perspective. It thinks that a target with shared customers naturally has a high probability of generating synergies. Using the holding company structure, AVANT allows ZEAL, which it acquired in 2012, to run its own operations and was not looking for synergies with DIVA. Still, both ZEAL and DIVA’s ultimate customers are in management divisions such as the corporate planning and accounting departments of major corporations. While DIVA may focus on the managerial accounting field, DIVA’s potential customers may overlap ZEAL’s current customers and competitors in BI tools, so the groundwork for generating synergies between DIVA and ZEAL appears to be in place. From FY06/19, top management of AVANT’s group companies has been serving as directors at other companies within the group to assess the potential to generate synergy.
Overseas markets are a low priority at present. The company aims to build a world-class organization, but is currently focusing on markets where it can best leverage its strengths.
Business
Business overview
AVANT CORPORATION operates three businesses: Group Governance Business, Digital Transformation Business, and Outsourcing Business, with a focus on providing information environments that are useful for decision-making, mainly for clients of listed companies. In the Group Governance Business, group company DIVA CORPORATION mainly provides solutions for issues related to group governance, centered around its consolidated accounting system. In the Digital Transformation Business, another group company, ZEAL CORPORATION, provides solutions related to decision-making environments, including non-financial information, such as business intelligence and data platform construction. In the Outsourcing Business, FIERTE CORPORATION provides outsourcing services related to information processing, including consolidated accounting operations. In FY06/21, consolidated revenue was JPY16.2bn and operating profit was JPY2.8bn. Looking at the composition of revenue (and operating profit before elimination of company-wide expenses) by segment, the Group Governance Business accounted for 50.1% (59.2%), the Digital Transformation Business for 38.5% (24.8%), and the Outsourcing Business for 11.5% (16.0%) of total revenue.
President and group CEO Tetsuji Morikawa founded the company in 1997. The late 1990s saw a “Japanese-style accounting Big Bang.” Consolidated financial statement principles were revised, and Japan saw widespread adoption of consolidated accounting. Seizing this opportunity, Mr. Morikawa developed software that could dramatically cut the time to perform accounting tasks, from several hours to just several minutes, and launched the company to market the new software.
DIVA develops and sells software for the DivaSystem consolidated accounting system and also earns revenue from consulting and maintenance. In this niche market, it has a leading domestic market share of roughly 43%, according to a market research company commissioned by AVANT. As of end-December 2020, more than 1,100 companies have installed DIVA’s software, including major companies such as Toyota Motor (TSE1: 7203) and NTT (TSE1: 9432). DIVA is still adding a few dozen new customers annually, with its initial system installation revenue per company ranging from JPY10mn to over JPY100mn. Many of its competitors are looking to win orders for entire corporate management systems, and as a result, ISID (TSE1: 4812) and DIVA often compete for projects to implement only consolidated accounting systems.
With consolidated accounting software, a parent company and its group companies input financial data, and the software produces consolidated results, after making necessary consolidation adjustments and entries. Accounting standards for financial disclosure change frequently; the company has maintenance contracts in place with all of its customers to keep them abreast with the changes. The high cost of switching to new software creates barriers to entry once a system has been installed. Non-recurring revenue is high because customized solutions are often provided to existing customers, so the recurring revenue ratio was 44% in FY06/21. In recent years, the company has focused on improving its consulting-based offering capabilities and expanding into the growth markets of management accounting and IBP (Integrated Business Planning), with the aim of providing solutions to resolve group governance-related issues.
In 2012, the company acquired ZEAL, a system integrator that supports the installation of BI tools. End users typically adopt BI tools at the time of a large-scale system renewal. While most of ZEAL’s business used to come from subcontracting for major system integrators, ZEAL now receives the majority of orders directly from end users through recommendations by vendors such as Oracle and IBM. Few other Japanese companies have this narrow focus on BI tools. ZEAL can handle the entire BI product range from the major four vendors. It has more than 30 years’ experience in this area and has assisted more than 1,000 companies with installation. In recent years, the company has also received an increasing number of orders for the infrastructure behind the introduction of business intelligence, such as the construction of data platforms, and has provided overall solutions related to the promotion of digital transformation. However, just 9% of FY06/21 Digital Transformation Business revenue came from recurring revenue business.
FIERTE manages the outsourcing business related to information processing, including consolidated accounting operations. Accounting departments still have heavy workloads during reporting season as they must confirm entries from individual subsidiaries, extract their notes, and create financial statements and securities reports. Accordingly, external outsourcing demand has been growing amid needs to reduce the profit reporting workload. High profit margins are maintained because of the pricing system that is based on workload reduction at customers. OPM was 21.1% in FY06/21. In addition, the recurring revenue ratio remains above 90% as most contracts are for recurring business. In FY06/21, the recurring revenue ratio was 92%.
Source: Shared Research based on company data
Group Governance Business
DIVA
Business since company inception
DIVA develops, sells, and maintains consolidated accounting systems, which has been a company business since its founding. The holding company was known as DIVA until it changed to its current name AVANT in 2013. The current DIVA CORPORATION was newly established as a 100% subsidiary to take over the software business when AVANT shifted to a holding company structure. President and group CEO Morikawa is also CEO of DIVA but is increasingly ceding authority to vice president Takemura.
DivaSystem software handles institutional consolidated accounting tasks such as financial accounting and tax accounting. As of end-December 2020, more than 1,100 client companies had installed its software. The company has a leading consolidated accounting system market share in Japan of roughly 43%, according to a market research survey the company commissioned.
Customers are major corporations
In FY06/21, DIVA had revenue of JPY7.8bn and recurring profit of JPY1.8bn. Customers are mainly large corporations, of which nearly 70% had 11 or more consolidated subsidiaries. According to company materials, as of end-FY06/21, 27 of Japan’s largest 50 companies (by market capitalization) and 97 of the top 200 were customers. The company’s customer list includes leading firms such as Toyota Motor (TSE1: 7203) and NTT (TSE1: 9432).
Expanding customer base to include small and medium-sized enterprises (SMEs)
In July 2020, DIVA released its cloud-based consolidated accounting service, DivaSystem LCA. The system runs on the Amazon Web Services (AWS) cloud computing platform under a monthly fee agreement with no customization needed. Main targets are relatively small companies with five to ten consolidated subsidiaries. By including smaller companies in its customer base, AVANT aims to increase its customer count from just above 1,100 as of end-June 2020 to about 2,000.
Business flows
Upon initial installation of systems, DIVA receives licensing and consulting fees. Revenue received at the initial installation phase varies markedly according to the contract, with initial revenue per company ranging from a minimum of JPY10mn to over JPY100mn. Around 80% of the customers do not customize DivaSystem at installation but use an off-the-shelf version. Even so, there is initial installation work and Consulting services revenues. Following system installation, there is often further revenue from consulting for consolidated budget preparation and other services.
The company enters maintenance support agreements following installation. Institutional accounting rules are revised almost yearly. It is difficult for customers to keep up by using their in-house staff, so all customers sign maintenance contracts. Under these contracts, DivaSystem upgrades are provided free of charge to deal with changes to accounting standards. Annual maintenance contract fees are set at 15% of the initial license fees.
High switching costs
There are few incentives for customers to switch to another system once they have installed a certain consolidated accounting system. This would not only entail licensing and consulting costs at installation but also require training of personnel. Problems are also more likely to arise with a new system than with a system that employees are used to using, so, barring extraordinary circumstances, customers do not usually switch to another company’s systems. The business thus has a strong recurring revenue aspect.
Superior cost-effectiveness from consolidated accounting systems
Preparing consolidated financial statements involves the following two stages. First, starting with the parent company and including all of the subsidiaries, all of the individual financial statements are simply aggregated. Next, adjustments specific to consolidation are carried out. Intra-group transactions and unrealized profits are then canceled or eliminated. Consolidated accounting systems perform these procedures.
In the latter stages of the process, individual consolidation adjustments are carried out based on individual financial statement data from each group company. These include offsetting capital transactions, product purchases and sales, debits and credits, and eliminating unrealized profits. When there are more than 10 subsidiaries, consolidated adjustment work becomes extremely complicated, so companies use systems to ensure accuracy and speed.
Actual use of consolidated accounting systems entails the production of financial statements individually for each group company in the first instance. When the balance of intra-group transactions is entered manually, systems pick up these additional data and produce consolidated financial statements. Manual inputting is required at the subsidiary level, and most competing consolidated accounting systems also use this methodology.
Naturally, a system that could automatically complete consolidated financial accounts end-to-end from individual accounts would be convenient. In that case such a system would have to cover small subsidiaries as well. Considering development costs and maintenance costs following installation, a consolidated accounting system that involves inputting a pre-determined set of data manually at the subsidiary level is more cost-effective.
There is a low probability that a customer will develop consolidated accounting systems in-house. To develop these systems in-house would require the formation of a development team including specialists in the systems development field as well as accounting and finance areas. This would result in a project involving several divisions. Meanwhile, there are frequent changes to institutional accounting rules that require corresponding maintenance. Handling the maintenance for each of these changes would entail forming project teams. In this case, AVANT’s systems offer more effective solutions.
Winning share from outdated competing systems
Although it varies year-by-year, DIVA is winning about 50 new customers annually. Some represent new demand to IPOs or from companies that had individual accounting and are moving to consolidated accounting. However, most of DIVA’s customers are large corporations, thus new demand is not the main source of new customers for the company.
Costs associated with switching consolidated accounting systems are high, and it is not easy to win back customers that have been using other companies’ software. DIVA has been able to grow its customer numbers by taking market share from outdated competitors’ systems whose support contracts are ending. Due to the high cost of switching, even large companies often continue using old systems as long as they can, even when they are aware that those systems are obsolete. Companies tend to start projects to install new systems around the time that support for the old systems ends, and DIVA secures most of its orders at this time.
Domain expansion
In recent years, the company has focused on improving its consulting-based offering capabilities and expanding into the growth markets of management accounting and IBP (Integrated Business Planning), with the aim of providing solutions to resolve group governance-related issues.
DIVA revenue grew at a CAGR of 13% from FY06/14 through FY06/21 (in FY06/18, DIVA spun out the Outsourcing business and transferred it to FIERTE). On the other hand, growth in the number of customers over the same period has been just around 4%. This is estimated to be an increase in the amount of revenue per customer, which is thought to be driven by expansion into areas other than consolidated accounting systems.
The purposes of managerial accounting differ from financial and tax accounting mandated for external disclosure. Managerial accounting is used to compile detailed segment data, make segment budgets, manage operations and analyze the differences between budgets and results. The company sells a product called DivaSystem SMD as managerial accounting system, and customer demands regarding this product differ dramatically. This entails a strong element of consulting. Even for a small contract, initial installation costs for customers, including licenses and Consulting services, are about JPY50mn, or around 5x that of institutional accounting systems.
Companies that install institutional accounting systems tend to think of these as costs because they are mandated. However, managerial consolidation systems are seen as proactive investments to enhance management decision-making, and companies tend not to mind paying a high price for systems if they can obtain commensurate benefits.
DivaSystem series
DIVA’s mainstay product is DivaSystem, a consolidated accounting system. Including consulting and maintenance support, revenue is roughly JPY6.0bn. DivaSystem also has some uses in managerial consolidation, but DivaSystem SMD, an in-depth system specialized for that purpose, is also part of the company’s product lineup. DivaSystem SMD is part of the lineup.
The company’s product series, outside of standalone tools, also includes DivaSystem FBX, a platform that collects and analyzes group financial and non-financial data, and DivaSystem Dx3-Advance, which helps users visualize journal entries and balance data of overseas subsidiaries. Dx3-Advance provides integrated management of ledger data used by group companies in creating their individual financial statements, and the company says there is strong demand from customers who want to enhance governance such as preventing the occurrence of improper conduct at their overseas subsidiaries.
Source: Shared Research based on interviews with the company
The company is also able to provide software via the cloud, although this accounts for less than 10% of the total. Customers intend to use the company’s products for several years after purchasing licenses and package purchases cost less, so rapid movement to the cloud is not expected. The company intends to provide outsourced consolidated accounting services to such customers, including convenient, cloud-based services.
DivaSystem LCA makes cloud-based consolidated accounting possible
In July 2020, the company released its cloud-based consolidated accounting service, DivaSystem LCA, which runs on the Amazon Web Services (ASW) cloud computing platform. This service has the following characteristics:
No need for customization: Based on consolidated accounting expertise cultivated by providing services to more than 1,000 companies, DIVA provides templates and task management for standardized business processes and reports, so that even companies that are not used to consolidated accounting, such as SMEs and companies preparing for an IPO, can easily use the system.
Users enjoy the merits of cloud-based services: Client companies can leave DIVA in charge of system operation, response to legal reform and changes to accounting standards, and the collection and formatting of data from group companies. In addition, it is possible to coordinate with group companies’ accounting systems, ERP functions, and disclosure systems, as well as with other services that use consolidated accounting data (for example, DIVA Compass outlined below).
The service does not use a licensing model. Instead, users pay annual usage fees, allowing them to reduce initial investment.
Cloud-based group management information analysis service, DIVA Compass
In April 2020, AVANT launched DIVA Compass, a cloud-based group management information analysis service. The service is being offered on a subscription basis for a fee of JPY900,000 per year. The features of DIVA Compass are as follows:
Ascertains management information that makes up a company’s corporate value: Using various management indicators prepared in advance, and data taken from consolidated accounting systems, the service is able to graphically report management indicators for each business and group company.
Compares indicators for other companies and the industry: All information disclosed by listed companies in Japan has been categorized into over 500 original industry categories. Using this information, the service is able to compare the management indicators of the company with those for other companies and the industry, and offer an objective assessment of the company’s position in the market.
Ascertains business value: Using the above disclosed information, the service is able to automatically calculate business-specific balance sheets (necessary for valuing a business) and business value.
Internet Disclosure
The company purchased Internet Disclosure Co., Ltd., in 2009. It provides a high-speed browsing service for profit results data and other public information. Its main customers are audit firms, which sets it apart from the company’s other businesses. Revenue and profit are not disclosed but based on revenue for the Group Governance Business segment and DIVA, Internet Disclosure’s FY06/21 revenue was estimated at around JPY340mn. Still, it is a highly profitable company with an operating profit margin of around 20%.
AVANT purchased Internet Disclosure to strengthen its IP. DIVA’s IP deals with companies’ internal information, while Internet Disclosure’s IP deals with information disclosed externally. There are few shared customers between the companies and no synergies to date, but AVANT hopes that integrating the two companies’ IP will enable new IP development in the future.
Digital Transformation Business
ZEAL
AVANT added ZEAL to the group in 2012 with the transfer of the information systems business at DHI (formerly ZEAL Co., Ltd.). It handles business intelligence (BI) tools from companies like IBM, Oracle, Microsoft, SAP, and SAS and enters partnership agreements with the main data warehouse product vendors. Working closely with the vendors, the company supports the installation of these products as a systems integrator serving end users.
In recent years, the company has also received an increasing number of orders for the infrastructure behind the introduction of business intelligence, such as the construction of data platforms, and provides overall solutions related to the promotion of digital transformation. The need for companies to use data for decision-making in management and business promotion is accelerating, and the projects the company receives tend to be larger in scale as the company provides more cloud data platforms rather than traditional business intelligence-related development services. Moreover, the scale of projects tends to become larger as the number of vendor products the company handles increases and it accumulates implementation experience.
ZEAL is responsible for the company's Digital Promotion business, with FY06/21 revenue up 8.4% YoY to JPY6.2bn and operating profit up 17.2% YoY to JPY811mn. Engineers who handle implementation support comprise the majority of ZEAL's workforce.
Business intelligence
Business intelligence refers to the methods and technologies used to collect and analyze large volumes of data stored on a company’s systems (inventory management, procurement management, and customer management systems, etc.) and use this in management decision-making. Companies such as IBM, Oracle, Microsoft, and SAP develop and sell the software for those systems.
The client companies use BI tools to speed up business decision-making and improve the Plan-Do-Check-Action (PDCA) cycle. Demand for BI tools is trending upward with major companies that compete on the global stage. Therefore, information accuracy and speed are crucial factors for BI tools.
Relationships with vendors
ZEAL’s customers are mainly introduced through vendors that supply BI tools, including Oracle Japan (TSE1: 4716), IBM, Microsoft, and SAP. Occasionally, a major systems integrator such as ITOCHU Techno-Solutions (TSE1: 4739), NEC Group, or NTT Data (TSE1: 9613) will refer the BI tools portion of an outsourced contract to ZEAL.
Major BI tool vendors such as Oracle and IBM aim to sell software and have not rolled out systems integration businesses to support installations in the Japanese market. The gross profit margin on software sales appears to be extremely high, while installation support has profit margin of 30–40% at best. Therefore, the appeal for major software vendors is limited. As a result, there is practically no risk that BI tool vendors will enter the installation support business themselves.
ZEAL does business with all of the four major BI tools vendors and handles their products. Even when the major vendors are competing with each other for projects with end users, ZEAL tends to receive orders regardless of which vendor wins the bid. Still, the company is not using its own salesforce to develop contacts with the customers, so it has limited ability to use relationships with the end users to cross-sell, resell, or develop other businesses.
ZEAL has been involved with installation support for BI tools for over 30 years and has executed over 1,000 projects. It is the only system integrator specializing in BI tools in Japan, and has the country’s leading track record. It thus tends to be selected as a subcontractor when major tool vendors such as Oracle receive an order for a project. The lead time for one project is from about three months to one year.
ZEAL’s lead time between receiving an order and delivering a product is usually relatively short, and it can estimate its order outlook for the subsequent three months or so with a high degree of accuracy.
Although the company receives regular work from BI tool vendors, post-installation work is usually limited to troubleshooting. It differs from DIVA as ZEAL’s business is basically a one-time revenue business. ZEAL also relies more heavily on outsourcing than DIVA when it comes to building systems, so the breakdown of costs for ZEAL between personnel and outsourcing is roughly 50:50.
ZEAL Enterprise-data Unified Service Cloud (ZEUSCLOUD)
ZEAL aims to expand recurring revenue in the Digital Transformation Business segment with the ZEUSCLOUD service as one of growth drivers. Built on the concept of improving corporate value, ZEUSCLOUD aims to provide an analytics service that is simpler and more affordable than existing solutions, thereby bringing analytics closer to customers. The service runs on the Amazon Web Services (AWS) platform, on which it offers analytics and data lake functions. ZEAL plans to expand service features in the future by adding budget input, DivaSystem, SAP-linked, and machine learning functions. The service can be customized to meet customer requirements. ZEUSCLOUD employs an analytics platform supplied by MicroStrategy (NASDAQ: MSTR).
Outsourcing Business
FIERTE
By installing consolidated accounting systems, customers systemize work difficult to do with their available workforce. Still, their accounting departments have heavy workloads during the reporting season. They have to confirm entries from individual subsidiaries, extract their notes, and create financial statements and securities reports. External outsourcing demand is burgeoning amid needs to reduce the profit reporting related workload. DIVA had previously tapped into such demand, but the business grew large enough to function as a standalone unit and encountered different personnel requirements, so in August 2017, the company established FIERTE to take over this business. The outsourcing business was spun out of DIVA in October 2017.
The company does not disclose FIERTE’s results themselves, but the Outsourcing segment results appear to reflect FIERTE’s business. Outsourcing segment revenues of JPY2.5bn (including intra-segment sales) in FY06/21 were up from JPY2.1bn in FY06/20. Outsourcing largely comprises two types of business: 1) Outsourced profit reporting work including data collection from subsidiaries, aggregation and system operations, and production of disclosure materials. 2) Systems outsourcing for data centers, including setting up and operation of server environments.
Systems outsourcing has annual revenue of around JPY300mn. When FIERTE was established in August 2017, DIVA maintained outsourcing contracts with its customers and subcontracted related work to FIERTE. In terms of segment revenue, this is recorded as Group Governance Business segment revenue and eliminated as internal revenue from the Outsourcing segment.
Contract work that provides added value using IP
According to its annual securities report, as of end-FY06/21, FIERTE had 229 employees (Outsourcing segment employees), with revenue per employee based on year-end numbers estimated at only about JPY11mn, but the operating profit margin (including internal revenue) was high at 21.1%. Unlike other businesses, FIERTE has low development costs and does not incur outsourcing costs, so it has high profit margin despite lower revenue per employee. Another important factor contributing to the segment’s high operating profit margin is its method to set prices based on the cost-savings (workload reduction) it provides to customers.
This means that the value added for the customer is reflected in contract pricing. FIERTE obtains high profit margin by leveraging expertise using its proprietary IP to add value and through the efficiency of its provision of its off-site outsourcing business. FIERTE operates outsourced business with teams that include junior staff under the leadership of managers familiar with accounting. FIERTE does not outsource this work and exclusively uses its own employees.
The Outsourcing business began at the insistence of a DivaSystem customer in 2004 and initially served just one company. The company turned its outsourcing service into a business unit in 2012 with four employees, and it grew rapidly by signing up new customers thereafter. Having a company salesforce contributed to customer acquisition, as did strong needs for outsourcing of consolidated accounting business.
The Outsourcing business comprises a variety of tasks, including the production of disclosure materials and the verification involved in consolidation upon customer requests, but mainly consists of production of consolidated accounting figures. This involves confirmation and correction of data used in disclosure, which is a burden for employees in charge. Even though it is routine work that occurs with every profit report, it requires expertise in consolidated accounting. Companies show strong demand for outsourcing due to the need to avoid situations in which only specific in-house employees are able to carry out these tasks.
There is a risk that third parties using the DivaSystem for consolidated accounting work will emerge to provide low-cost outsourcing. However, the company provides more than simple outsourcing work and is confident that it is difficult to gain the expertise necessary to operate DivaSystem, which is an IP developed in-house. It is also working to improve productivity and create further barriers to entry.
To contribute to transforming earnings structures across the group
As of August 2021, FIERTE has about 160 corporate customers according to its website, and intends to grow this to 300 in the medium term. Revenue per customer varies by contracted work, but even an inexpensive project is around JPY10mn, excluding simple spot projects. The company is targeting annual revenue of JPY10.0bn. If it meets this target, FIERTE will increase its share of revenue (external revenue) from 15.3% in FY06/21 to 40–50%. This would result in a major transformation of the overall company’s earnings structure.
AVANT also views regular interactions with customers in the outsourcing business as important. These enable it to understand customers’ needs and the company aims to develop new IPs using the feedback to DIVA.
Thinking behind a shift to a recurring-revenue business model
As of June 2021, the company’s recurring revenue ratio stood at 36%, focused on maintenance work after the introduction of software packages in the Group Governance Business segment, and outsourcing services for consolidated accounting and tax payment operations in the Outsourcing segment. For the company’s other services, contracts are mainly based on a “man-hours x unit price” calculation, resulting in a business model that requires greater headcount to increase revenue. The company believes shifting to contracts based on the value it delivers to customers will allow it to improve efficiency and profitability while also expanding revenue.
The company believes that increasing the recurring revenue ratio, in other words, increasing the ratio of revenue secured by continually providing the same service to the same customer, will lead to the development of new services as the company regards the work as its own challenge and responsibility. Avant’s aim is to shift its relationship with its customers from one based on individual projects to one based on an ongoing relationship, and has accordingly set for itself recurring-revenue ratio targets. Accordingly, the company’s goal of improving its recurring revenue ratio is not based solely on a shift from on-site operations to cloud-based operations, which is often the case with software companies, and management views the increase in cloud-based revenue as important, but not the only factor in play.
It is also worth noting that most of the company’s products are group management systems designed for large enterprises. While it does not sell a large number of systems, once the systems are installed, they have long useful lives and are replaced only with great difficulty. In this sense, unlike average software vendors, AVANT does not intend to simply switch its products to cloud-based ones but rather will continue growing the business, using its current business model under which it sells software licenses and provides ongoing support. The company’s efforts to transition to recurring revenue business will for the most part be centered around its Outsourcing segment, which handles business process outsourcing (BPO) and has a recurring revenue ratio of over 90%. However, unlike most business process outsourcing, the work that AVANT undertakes on behalf of client companies usually commands operating profit margins of 20% or better because its contract pricing reflects the added-value it brings to the table with its proprietary IP-based expertise and its efficient, results-oriented approach to contract work. The next step for AVANT will be to expand the development of its cloud-based product line, for which it believes there is a large potential market but will still be holding down risks so as to prevent the group as a whole from being seriously impacted in the event mistakes are made and things do not work out as planned.
Since FY06/19, AVANT has completed the software that will be the basis for its new cloud business and has already sold a number of the new systems. It plans to continue pursuing business with three forms: packaged software (software services), business process outsourcing, and cloud-related business. At the time of the FY06/20 results briefing, the company said it now expects a greater weighting of BPO and software services within the 70% recurring revenue ratio than it did at the time it proposed its medium-term plan. The company noted that in the past most of its clients were parent companies of group companies, but with these new cloud-based services it will aim to provide services directly to the subsidiaries of client companies as well.
The company at the Q2 FY06/21 results briefing provided supplementary information regarding FY06/23 recurring revenue ratio targets and current conditions. Management believes it can attain the 50% target for the Group Governance Business (the ratio as of the 1H results briefing was 45%) and the 95% target for the Outsourcing business (93%) based on current trends, though it noted a gap between the 40% target for the Digital Transformation Business and the current ratio (10%). In order to achieve its consolidated recurring revenue ratio target of 70%, management noted that it would have to reach its targets for the existing businesses and take action to fill the remaining gap to 70% through action points to be followed under the next medium-term business plan.As mentioned earlier, AVANT, as the holding company, has led exploration of M&A opportunities in preparation for expansion of cloud-based business. However, as the company did not realize the acquisitions in FY06/20, it has indicated since the beginning of FY06/21 that it plans to create a system that will allow its various subsidiaries to consider M&A independently, to strengthen preparation for the first M&A since the acquisition of ZEAL in 2012.
Moreover, the company considers M&A to be more important in driving existing businesses than for entering new growth areas, as the company itself already operates in a growth field.
KPIs
According to its securities reports, key management indicators for AVANT include: 1) profitability (YoY operating profit growth and operating profit margin), 2) productivity ratios (roughly equivalent to revenue divided by [employee personnel expenses + outsourcing costs]), and 3) revenue growth rate. In reality, the company keeps a close eye on GPP (Growth and Profit Point), which is the sum of revenue growth rate and operating profit margin. For example, in FY06/21, GPP was 20.7pp, composed of 3.5% revenue growth and 17.2% operating profit margin. The company is targeting a GPP of 40pp in FY06/23.
DIVA has established targets for customer numbers to meet the revenue growth component of GPP. The managerial accounting business division, which handles the rapidly growing DivaSystem SMD, has its own separate targets. The company does not have targets for revenue per customer, but some business divisions have voluntarily adopted their own. In the medium term, DIVA wants the number of companies that have installed its software to increase to 2,000, from roughly 1,100 at present. Similarly, As of August 2021, FIERTE aims to increase its customer numbers to 300, from around 160.
The company has left operating profit margin up to the individual companies and does not set particular numerical targets. It is proactively investing in human resources to underpin future growth, and is not concerned about individual company margins as long as it meets GPP targets.
In addition to GPP, AVANT has set targets for the share of its recurring revenue. For the overall group, it aims to raise this from 33% in FY06/18 to 70% in FY06/23. A key management priority is converting ZEAL’s current systems integrator business to one that has mainly recurring revenue. At the same time, it aims to increase FIERTE’s overall share of consolidated revenue, which would also help it meet its recurring revenue share targets.
AVANT aims to increase its value by setting these numerical targets. The stock market is a key measurement tool for this goal, and the company envisions a market capitalization of JPY100bn in the medium term. When it drafted its medium-term plan, its market cap was around JPY25bn, so this represents a fourfold increase. The company believes it can achieve this growth and become a game changer by changing its business model, thereby doubling both its EPS, through revenue growth, and its P/E ratio.
Value chain
Planning and development
The IP at the core of AVANT’s business is software that it has developed in-house. Planning and development thus play an important role. The company’s current focus is narrowed to consolidated accounting systems, so these software engineers are in charge of creating new versions tailored to changes in accounting standards and advances in technology, rather than developing entirely new products. They are also planning and developing new products in fields such as managerial accounting as well as application platforms for the cloud.
ZEAL is primarily engaged in providing installation support to users for BI tools developed by other companies. It does not have a major planning and development function. Still, planning and development play a role in uncovering new BI tool products, so their importance is likely to increase in the future.
Sales
Looking at the sales capabilities of AVANT’s various operating companies, we find the group as a whole employing a pull-marketing strategy, building relationships with customers through customer inquiries. DIVA has 20 to 30 salespeople. It does not do walk-in sales. When there are fresh inquiries, the salesperson makes presentations and otherwise coordinates between the consultant and the project customer. The company has recently been signing up about 50 new customers per year.
DIVA aims to increase its number of managerial accounting customers. It assesses the needs of existing customers in the institutional accounting business when it performs maintenance support at customer sites and provides information to potential customers via seminars or online. Based on inquiries, it targets customers with a strong willingness to install the software. Most of DIVA’s customers are accounting departments.
In most cases, ZEAL’s customers are introduced through BI tool vendors, such as Oracle and IBM, or contracted from major systems integrators such as NTT Data. These vendors and systems integrators have a high level of trust for ZEAL, which in turn receives a steady flow of business. It is important to maintain good relationships with such companies, but there are more cases where the company sells BI tools from emerging vendors and provides installation support to meet diversified customer needs. Therefore, the salesforce is developing such new sales routes. Most of ZEAL’s customers are IT departments.
FIERTE also has its own salesforce. Most of the company’s roughly 160 customers appear to use DivaSystem, but the company intends to win orders in other areas as well.
In FY06/21, the company plans to further emphasize its shift to the cloud for top-line growth and aims to launch products and solutions based on proprietary IP to raise the recurring revenue ratio. To that end, it has made organizational changes to create a business unit system, united the sales and service provision functions that were previously separate, and established a dedicated organization to focus on providing proprietary solutions.
Cross-selling
According to materials the company disclosed in October 2021, cross-selling in FY06/21 was 1,048 customers (77% of the total) with at least one recurring business out of a total of 1,356 customers. The average price per customer was JPY11.8mn, and the average price per recurring business was JPY5.5mn. There are issues with cross-selling, as the number of overlapping customers within the group is only 120 (8.8% of the total). This also means, however, that there is room for growth. First, the company plans to reconfigure existing products scattered throughout the group from the customer's perspective, and then combine them with external products as necessary to strengthen cross-selling.
Consulting
Consulting services accounted for 61.7% of revenue by business type in FY06/18. This is the main source of revenue for the company. DIVA has around 200 consultants who comprise over half of its workforce. DIVA’s consultants need IT knowledge, but understanding of accounting is more important for them to succeed as business consultants.
DIVA has sources of revenue other than maintenance services. In addition to service such as customized systems installations, this involves consulting with existing customers regarding managerial accounting system installations and work following version upgrades. The company says that around 40% of contracted customers have other types of transactions with the company.
The main business of ZEAL is consulting regarding BI tool installation support. Most of its employees are engineers. They must have IT capabilities as engineers, understand the customers’ businesses, and be able to incorporate this knowledge in their systems. The company is also trying to expand sales to new products and increase the share of recurring revenue, but there have been no intrinsic changes to how they perform consulting.
Maintenance and outsourcing
Employees handling maintenance and outsourcing tasks contact customers on a regular basis. Therefore, they are expected to identify customer needs and provide feedback to the development division.
Employee hiring practices
Each operating company within the AVANT group does its own hiring. This reflects not only the differences between operating companies as to what types of employees are most suitable for the kind of work they do, but also AVANT’s desire to give operating companies the freedom to manage their own businesses.
Market and value chain
Target is niche market
Focus on niche market in information services industry
According to the Ministry of Internal Affairs and Communications’ 2020 Basic Survey on the Information and Communications Industry, the Japanese information services industry is worth JPY19.0tn (+2.5% YoY). Under the detailed industry classifications, DIVA is categorized into the packaged software business and ZEAL is in the custom software business.
In FY2019, the packaged software market was worth JPY1.2tn, up 3.2% from FY2018. The custom software market was worth JPY9.5tn in FY2019, up 5.6% YoY.
In that sense, the company is developing its business in a large technology-based market. That is, the personnel the company needs are not limited to only people who possess rare technologies, and its customer base is not extremely limited. That said, DIVA has specifically focused its business activities on consolidated accounting systems and ZEAL has focused on BI tool installation support, as they both focus on niche markets. DIVA has a domestic market share of 43%, and this implies that the consolidated accounting system market is worth around JPY18bn.
The parameter for domestic market share here consists of annual consolidated accounting systems revenue for industry companies, not DivaSystem’s share among consolidated accounting systems companies have installed. DIVA had installed its systems in over 1,100 companies as of end-December 2020. Based on the number of companies listed on Japanese stock exchanges (3,756 as of end-2020, of which around 3,000 are estimated to use consolidated accounts method), DIVA may have a market share of under 30% based on number of companies (although not all of the company’s customers are listed).
Changes to institutional accounting rules are turning points for the business
Changes to Japan’s accounting systems represent significant changes to the company’s business environment. In the past, they had at least some impact on market developments. These included the widespread adoption of consolidated accounts, quarterly profit disclosure, timely disclosure of financial results, the implementation of J-SOX—Japan’s version of the US Sarbanes-Oxley Act—, and debate surrounding the adoption of IFRS.
Widespread adoption of consolidated accounts
The emphasis on consolidated accounts over non-consolidated earnings in Japanese corporate profit reporting started in the fiscal year 1999. Despite consolidated accounting becoming mandatory in 1978, reporting documents still had focused on non-consolidated accounts. Observers from all sides pointed out that Japan’s accounting systems were inadequate compared to the US and other advanced countries. At the same time, the production of consolidated cash flow statements was mandated and, in principle, the scope of consolidation extended to all subsidiaries except those which were deemed unimportant.
Including the 1997 revision to consolidated financial statement principles, the movement to approach international accounting standards in Japan in the late 1990s was dubbed a “Japanese-style accounting Big Bang.” For AVANT, which was founded in 1997, these developments provided a tailwind in its initial growth stage.
Quarterly financial reports disclosure
Quarterly financial reports disclosure was voluntary at first, but, starting in fiscal year 2003, listed companies had to disclose on a quarterly basis under Tokyo Stock Exchange listing rules. From FY03/09, under the Financial Instruments and Exchange Act, companies were required to submit quarterly financial reports to the Prime Minister within 45 days of the end of each quarterly period. Traditionally, the bulk of the work related to profit announcements had been conducted twice yearly, when announcing full-year and half-year results. However, these changes doubled the workload in terms of frequency, increasing the burden on relevant departments such as accounting.
Timely disclosure of financial results
The Tokyo Stock Exchange demanded timely disclosure of financial results starting from the fiscal year 2006. Until then, it had been customary to disclose results within 60 days of the end of an accounting period, but the TSE mandated disclosure within 45 days. Since February 2017, TSE guidelines for preparing annual and quarterly earnings reports have required preparation and disclosure of results within 45 days of the end of a settlement period, with 30 days as a preferable timetable.
As outlined, the deadlines for producing financial results reports are getting tighter and this is driving demand for consulting to boost the efficiency of installed consolidated accounting systems and outsourcing work overall.
Japan style SOX regulations
The Financial Instruments and Exchange Act was amended in fiscal 2008 to strengthen internal corporate controls modeled upon the US Sarbanes-Oxley (SOX) Act. Made to ensure the appropriateness of financial information, this amendment mandated that internal control reports evaluating internal control systems be submitted within three months of the end of the business year. This meant that companies that had traditionally prepared their own consolidated reports using their own methodology were required to assure the appropriateness of their accounts. This spurred the adoption of external consolidated reporting systems.
The adoption of IFRS
The Financial Services Agency’s Business Accounting Council approved the adoption of consolidated financial reports in line with International Financial Reporting Standards (IFRS), starting with fiscal year 2009 accounts, after preparing an interim report in the same year. Mandatory application was delayed to 2016 from the initial target year of 2015 but has not been implemented yet. Currently, the timing has still not been set. IFRS is not only significantly different from Japanese accounting standards, but the preparation of notes is more complicated and this should lead to an increase in demand for Consulting services.
Frequently announced changes to accounting standards drive maintenance demand
For listed companies, not only is timely disclosure stipulated under securities exchange regulations, legal disclosure is compulsory under the Financial Instruments and Exchange Law. Securities reports must be submitted to the Prime Minister within three months of the end of the business year. The relevant financial statements, including balance sheets and income and cash flow statements, are based on corporate accounting principles, but actually follow corporate accounting standards and corporate accounting guidelines produced by the Accounting Standards Board of Japan (ASBJ).
ASBJ often announces new standards and guidelines, and companies are supposed to prepare financial reports accordingly. This means that the mere maintenance of consolidated accounting systems is insufficient; newer versions must be installed from time to time. Furthermore, third-party production of financial notes and case studies must also follow the new accounting standards, so an appropriate response may be impossible in the absence of familiarity with both systems and accounting. This gives rise to demand for maintenance and outsourcing businesses.
Some recently announced corporate accounting standards appear to have driven changes to consolidated account preparation: those regarding tax effect accounting (February 2018), equity-method accounting (March 2015), business divestitures (September 2013), and consolidated financial statements (September 2013).
Market in gradual uptrend
Although there are fluctuations depending on economic and financial conditions, the number of companies listed on Japanese stock exchanges is trending upward. There has been particularly steady growth since the Tokyo Stock Exchange and Osaka Stock Exchange merged in 2013. The increase in companies listed on the TSE First Section suggests a coincident uptrend in companies that use consolidated accounting.
While DIVA has been growing customer numbers by around 4–5% annually in recent years, the number of listed companies has been growing by around 1–2% annually since 2013. Although the number of start-up companies adopting consolidated accounts is surely growing faster than the number of listed companies, there is a good chance that AVANT is winning market share. Of course, costs associated with switching consolidated accounting systems are high, and it is difficult to lure customers away from competitors. Precisely due to this reason, major companies set up projects to introduce new systems when support for their long-used prior systems expires, and the company is winning orders for these projects and boosting its market share.
Company forecasts of Total Addressable Market (TAM)
The company provided the following figures for TAM at the FY06/21 earnings results briefing.
Group Governance Business
While the markets for financial accounting and managerial accounting/IBP (Integrated Business Planning) are about the same size, the growth rates differ significantly.
Digital Transformation Business
According to the DX Report 2 issued by METI in December 2020, a self-assessment survey of companies in 2019 revealed that 95% of responding companies had not started DX or plan implementation limiting to some departments.
Outsourcing Business
Competitor developments
The consolidated accounting systems market is niche by nature. Similar systems include STRAVIS, sold by a major competitor, ISID (TSE1: 4812); SUPER COMPACT pathfinder (Fujitsu, TSE1: 6702); Hyperion Financial Management (Oracle Japan, TSE1: 4716); Business OBJECT (SAP Japan); and BTrex Renketsu Kaikei (Business Trust, not listed). STRAVIS is DivaSystem’s most frequent competitor. According to a survey by Fuji Chimera Research Institute (Software Business New Market 2021, consolidated accounting software market share trends), AVANT had a 43.8% market share in fiscal 2020, ISID had a 37.0% share, and the remainder (19.2%) was split among a number of other players. According to IT-focused research and advisory firm ITR Corporation (ITR Market View: Budget, Expense, and Project Management Market 2021), AVANT ranked 1st at 39.5% in consolidated accounting market share on revenue basis in FY2019 and also for FY2020 based on forecasts.
BTrex Renketsu Kaikei appears to be aimed at SMEs, and there are few cases in which it has competed directly against AVANT. Oracle and SAP entered the business after purchasing companies that own consolidated accounting systems but appear to be trying to build overall management systems including those for non-consolidated earnings. There are few projects in which they compete with the company in consolidated accounting systems alone.
Unlike institutional consolidation, which follows specific conventions, effective utilization of managerial consolidation systems (AVANT’s main area of focus) entails consulting elements such as system customization that meets customers’ diverse needs. Therefore, competitors include large system integrators that deal in BI tools and Qunie Corporation, an NTT Data group consulting company.
ZEAL’s competitors are basically other system integrators, but there are very few BI tool specialists, so it has a competitive advantage. Some business consultants compete with ZEAL, but ZEAL appears to have pricing advantages.
Differentiation with ERP companies
The company operates in niche markets. Major system integrators and ERP companies such as SAP try to build comprehensive systems that incorporate consolidated accounting systems. Some customers will undeniably want to operate an end-to-end system. This trend is more evident mainly in customers whose projects are spearheaded by systems development divisions.
That said, in an overall evaluation including maintenance and operating costs, standalone consolidated accounting systems like those of AVANT are not necessarily inferior, and the company is not necessarily losing customers without gaining replacements. Companies such as SAP advocate ecosystems tend to look for collaboration with AVANT and others. If the company can win orders for outsourcing in addition to systems maintenance services, it will retain, and strengthen ties with, existing customers.
Comparison with competitors
To give an overview of earnings structure, Shared Research compared AVANT with typical Japanese companies that deal with packaged software, although they do not compete directly with the company. AVANT’s revenue per employee and gross profit margin are low, but its ROA of 21.8% tying with JustSystems as the highest among nine companies.
AVANT has a higher total asset turnover rate than the three companies with the highest operating profit margin (JustSystems, Trend Micro, and OBIC Business Consultants), which compensates for its lower profit margin and enables it to achieve a high ROA. In FY06/21 its total asset turnover rate was 1.2x, markedly higher than the second-highest, JustSystems, which had asset turnover of just 0.6x.
Strengths and weaknesses
Strengths
Significant share in the niche market of consolidated accounting systems:
The domestic niche market of consolidated accounting systems is worth less than JPY20bn in Japan, but AVANT believes demand growth is likely as long as institutional accounting requires such software. Also, because the market is small, major software companies have little incentive to allocate management resources to it. Over 50% of DIVA’s employees have both IT skills and accounting expertise. The company has captured a domestic market share of 43% by enhancing its competitiveness in both fields.
Group company DIVA has built a high share of the market for consolidated accounting systems. This name recognition means that potential clients often invite DIVA to participate in competitive bidding for new systems. Consequently, without marketing proactively DIVA is gaining around 50 new customers yearly.
High switching costs and a recurring revenue model in the mainstay DIVA business:
Unless major issues arise, customers have little incentive to switch to another company’s consolidated accounting systems, as initial licensing costs are high, as is the cost of training employees in how to use the systems. Further, as institutional accounting standards are frequently revised, the company has maintenance service contracts with most of its customers. Such revenue tends to grow as customer count increases. Recurring revenue business, including from FIERTE (which runs the company’s Outsourcing business), accounted for 36.0% of total revenue in FY06/21. AVANT aims to boost this figure to 70% in the medium term.
Leading position in consolidated accounting outsourcing, a future earnings driver:
AVANT is working to grow its Outsourcing business by leveraging proprietary software, which it sees as an earnings driver. For companies, consolidated accounting tasks mainly occur when preparing quarterly results. Meanwhile, the work involved requires a high degree of expertise in consolidated accounting. Outsourcing needs are growing from customers that want to avoid relying too heavily on specific in-house individuals, and the company is meeting these needs. The work AVANT performs under contract is complex, involving the manipulation of proprietary software, while simultaneously confirming and correcting data and making full use of consolidated accounting knowledge. As a result, the compensation for outsourced work is not on a cost-plus basis (personnel numbers and hours worked). Instead, compensation depends on contribution to customer performance, enabling the company to earn an operating profit margin of nearly 20%, even though the Outsourcing business is contract work.
Weaknesses
Low profile outside the accounting departments who are its target customers
DIVA has installed software at around 1,100 companies, but interactions are mainly with clients’ accounting departments. ZEAL’s BI tool installation support customers are mainly obtained through introductions from BI tool vendors. The company is trying to expand its target customers to the entire organization overseen by the CFO, but it currently has a low profile. Meanwhile, DIVA aims to develop business in the managerial accounting market, and ZEAL intends to sell directly to end users going forward. In both cases, the company will need to approach management personnel, with whom it currently has weak ties. Shared Research believes a lack of direct communication with clients’ management or operational teams also makes the process of discerning potential needs more difficult, as well. With the exception of ZEAL, which the company acquired in 2012, the majority of AVANT’s profits still come from businesses based on the consolidated accounting systems the company developed at its inception.
Low profit margin despite selling packaged software
In FY06/21, the company’s operating profit margin was 17.2%. This was much lower than 44.2% (in FY03/21) of packaged software company OBIC Business Consultants. These differences are partly because the companies sell different types of software and partly because of investment, as the two companies are in different stages of the growth cycle. Also, AVANT’s focus is gradually shifting from high-margin software sales to more labor-intensive consulting and maintenance businesses. The company intends to grow its high-margin Outsourcing business to boost profit. Even so, Shared Research believes obtaining margin similar to the license sales business, which has virtually no variable costs, may be difficult.
High risk of losing well-trained, specialized personnel to better-paying consulting firms
DIVA plans to tap into the managerial consolidation market. This area is highly related to corporate management, and the work is similar to business consulting. Essentially, AVANT is training its personnel to have better consulting skills. Meanwhile, personnel demand in the consulting industry is increasing for skilled consultants with IT capabilities as they deal with the increasing use of IT in the business world. Before becoming a holding company, annual parent-company salary levels (accounted for largely by the current DIVA) were under JPY7mn. Annual salaries in the consulting industry are higher (second only to trading companies according to one recruitment website), averaging more than JPY10mn. The company thus faces a dilemma: it may train skilled personnel only to see them leave to join other firms.
Historical performance and financial statements
Income statement