The kaonavi talent management system: kaonavi, inc. provides the kaonavi talent management system, which consolidates client HR data and presents it in an easily viewable format to enhance HR management. Data items include portrait photos, names, experience, evaluation results, and skills of employees. The system was originally conceived to help managers put names to faces using the portrait photos feature, which was unique at the time. By introducing kaonavi, clients can expect gains in efficiency thanks to consolidation of their HR data, improved productivity as a result of assigning personnel to tasks suitable to their abilities, enhanced HR development based on accurate evaluations, improved HR strategy, and prevention of employee turnover. As of November 2021, the company had a single reportable segment, Cloud-Based HR Management System.
ARR, number of clients, ARPU, client base: As of end-Q2 FY03/22, kaonavi had annual recurring revenue (ARR) of JPY4.2bn (JPY3.6bn as of end-FY03/21), 2,214 clients (2,061), and monthly average revenue per user (ARPU; per client) of JPY157,000 (JPY146,000). Clients tend to be on the large side—over 80% of them had 200 employees or more—due to the greater need for talent management systems among companies of a certain size.
Earnings structure: kaonavi’s revenue comprises recurring revenue from basic usage fees and one-time revenue from initial fees, support fees, and seminar fees. Basic usage fees account for over 80% of revenue. Basic usage fees are billed monthly for the duration of service usage (i.e., subscription model), and charges vary by the level of functionality provided and the number of personnel whose data is registered on the system (not the number of users). The contract period is one year. Clients can choose to pay by the month or in advance as a lump sum for the year. The company acquires clients mainly through advertising (upfront spending), expenses for which it aims to recover with recurring revenue earned as clients use its services over an extended period of time. In FY03/21, revenue was JPY3.4bn (+29.6% YoY) and operating loss was JPY11mn (operating loss of JPY278mn in FY03/20).
Churn rate and unit economics: The monthly recurring revenue (MRR) churn rate averaged 0.71% per month for the 12 months through March 2021. Extrapolating from this low churn rate yields an average contract duration of—at least in theory—141 months. All else constant, the company can count on clients continuing to use its services over a long period of time. Regarding profitability, kaonavi emphasizes unit economics (life time value ÷ customer acquisition cost). It targets unit economics of 3.0 or above, a level that is generally considered healthy.
Market growth potential: Unlike the personnel administration market, which matured long ago due to legal compliance needs, the HR management market is new, first appearing around the time of kaonavi’s launch in 2012. According to the Corporate IT Trends Report 2021 prepared by the Japan Users Association of Information Systems, only 11.2% of companies surveyed had introduced a talent management system in FY2020. The company expects the market to expand at an annual rate of 20–30% for at least three to five years starting in 2021. It thus plans to focus on expanding its existing business in Japan for the time being. In its Q4 FY03/21 results briefing, kaonavi estimated the total addressable market for talent management systems to be approximately JPY200bn.
Share and competing products: kaonavi has not actively expanded overseas as of November 2021. According to company materials, kaonavi has the largest share of the talent management market in Japan, accounting for approximately 25–30% of all companies that have introduced such systems. However, the number of competing products has been growing since around 2016 when the market began to expand. As of November 2021, competing products included Talent Palette developed by Plus Alpha Consulting Co., Ltd. (TSE Mothers: 4071) and HR Brain developed by HRBrain, Inc. (unlisted).
FY03/21 results: In full-year FY03/21, kaonavi had revenue of JPY3.4bn (+29.6% YoY), gross profit of JPY2.5bn (+24.8% YoY), operating loss of JPY11mn (versus operating loss of JPY278mn in FY03/20), recurring loss of JPY16mn (versus recurring loss of JPY280mn in FY03/20), and net loss attributable to owners of the parent of JPY131mn (versus net loss of JPY357mn in FY03/20). Revenue finished the year slightly above the upper bound of the range forecast (JPY3.4bn). All profit categories from the gross profit level down came in toward the top end of the range. In Q4, recurring revenue was up 36.0% YoY, the number of clients was 2,061 (1,791 in Q4 FY03/20), ARPU was JPY144,000/month (JPY121,000/month), the MRR churn rate was 0.71% (0.55%), and unit economics was 4.9x (7.5x).
FY03/22 company forecast: For FY03/22, the company forecasts revenue of JPY4.5bn (+33.4% YoY), gross profit of JPY3.3bn (+33.3% YoY, GPM of 72.2%), operating profit of JPY100mn (loss of JPY11mn in FY03/21), recurring profit of JPY93mn (loss of JPY16mn in FY03/21), net income attributable to owners of the parent of JPY26mn (loss of JPY131mn in FY03/21), and EPS of JPY2.28. Kaonavi expects the churn rate for FY03/22 to be on par with that of FY03/21, and does not expect it to fluctuate significantly. The company plans to continue to focus on large client companies. It expects ARPU to maintain its recent uptrend. The company also expects the average billing price to continue to rise due to an increase in the proportion of large companies in the customer mix and upselling workflow functions and other options to existing customers. The company forecasts recurring revenue of JPY3.8bn (+28.4% YoY) and one-time revenue of JPY700mn (+70.4% YoY). The company expects growth rates for each type of revenue after adoption of the revised Accounting Standards for Revenue Recognition to be 31.0% YoY for recurring revenue and 46.1% YoY for one-time revenue. The company expects GPM to be on par with that of FY03/21, assuming that it will aggressively invest in product development to improve ease-of-use and add new functions. The company forecasts marketing costs of JPY820mn in the full-year (+19.1% YoY). It expects headcount to come in at 220 (+19.6% YoY) at end-FY03/22. See “FY03/22 company forecast” for details such as the assumptions that went into the forecasts.
Medium- to long-term vision: Following its listing in March 2019, kaonavi set a medium-term goal (expressed as a “milestone” to convey its lack of commitment to a specific timeframe) of JPY10.0bn in revenue by FY03/24. It expects to have a GPM of 80% and an OPM of 30% when it reaches this milestone. Since March 2019 when the company set these growth goals, the business environment has changed significantly due to the spread of COVID-19. In the short term, the pandemic had depressed customer acquisition and caused an increase in the churn rate. In the supplementary materials provided with its Q3 FY03/21 results, kaonavi stated that, given the current business environment, it would extend the period in which it aims to achieve the medium-term goals to around five years from FY03/20. Although the company has pushed back the timeframe, it has made no changes to its expectations for the number of clients, ARPU, or other metrics at the point when it achieves the medium-term revenue goal (JPY10.0bn), nor has it revised its profit margin estimates for the same point in time. Assuming that the company achieves its medium-term revenue goal in Q4 FY03/25, revenue would have to grow at a CAGR of 30.9% over four years from FY03/21 based on FY03/21 results. In the future, the company plans to establish a comprehensive HR data platform centered on the kaonavi system. It plans to provide a range of HR services by leveraging its superiority in consolidated cloud-based HR data management functions, thereby monetizing services peripheral to kaonavi. See the Medium- to long-term vision section for details.
Shared Research sees the company’s strengths as: 1) its advantage in its ability to spend upfront due to its high market share and a cash flow structure with negative required working capital, 2) the virtuous cycle of accumulating and utilizing case studies in talent management, where the needs and issues differ by company, and 3) its large HR database—key to long-term growth—accumulated thanks to its head start over competitors.
We see the company’s weaknesses as: 1) the ease with which the software can be replicated, allowing latecomers to catch up, 2) prioritizing growth in users comes at the cost of leaving some of the needs of potential clients unaddressed, and 3) vulnerability to intensifying competition in talent management services as it has only one business.
|Gross profit margin||-||-||-||73.2%||57.5%||65.6%||75.1%||72.3%||72.2%|
|Operating profit margin||-||-||-||-||-||-||-||-||2.2%|
|Recurring profit margin||-||-||-||-||-||-||-||-||2.0%|
|Net income attributable to owners of the parent||-10||-5||-39||-207||-283||-96||-357||-131||26|
|Per-share data (split-adjusted; JPY)|
|Shares issued (year-end; '000)||-||-||-||-||9,136||10,837||10,945||11,382|
|Treasury shares ('000)||-||-||-||-||-||-||0||0|
|EPS (fully diluted)||-||-||-||-||-||-||-||-|
|Dividend per share (JPY)||-||-||-||-||-||-||-||-||-|
|Book value per share (JPY)||-||-||-||-||-0.8||124.3||90.9||84.4|
|Cash and cash equivalents (JPY)||-||-||-||251||587||1,786||1,635||1,955|
|Total current assets||-||-||-||328||713||1,950||1,863||2,263|
|Tangible fixed assets||-||-||-||10||19||54||15||236|
|Investments and other assets||-||-||-||43||148||124||501||501|
|Total fixed assets||-||-||-||53||169||195||534||751|
|Total current liabilities||-||-||-||183||450||713||1,062||1,598|
|Total fixed liabilities||-||-||-||22||139||86||341||455|
|Total net assets||26||122||83||177||294||1,347||995||961|
|Total liabilities and net assets||37||144||168||381||882||2,146||2,398||3,014|
|Total interest-bearing debt||-||-||-||41||199||131||463||582|
|Cash flow statement (JPYmn)|
|Cash flows from operating activities||-||-||-||-123||-76||175||-53||384|
|Cash flows from investing activities||-||-||-||-40||-142||-45||-430||-236|
|Cash flows from financing activities||-||-||-||313||554||1,069||331||173|
|Financial leverage (equity multiplier)||1.4||1.2||1.5||2.1||2.7||1.8||1.9||2.8|
|Total asset turnover||2.8||1.3||1.5||1.7||1.5||1.1||1.2||1.3|
On November 11, 2021, kaonavi, inc. announced earnings results for 1H FY03/22.
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||% of Est.||FY Est.|
|% of total revenue||76.8%||77.5%||78.7%||80.1%||89.4%||88.1%||87.9%||87.9%||88.2%||88.7%||84.6%|
|% of total revenue||23.2%||22.5%||21.3%||19.9%||10.6%||11.9%||12.1%||12.1%||11.8%||11.3%||15.4%|
|Gross profit margin||76.3%||76.2%||75.9%||75.1%||74.8%||75.0%||73.9%||72.3%||70.9%||71.8%||72.2%|
|Operating profit margin||1.0%||-||-||-||16.0%||10.2%||4.2%||-||3.0%||4.8%||2.2%|
|Recurring profit margin||1.0%||-||-||-||15.8%||10.1%||4.1%||-||2.8%||4.6%||2.0%|
|% of total revenue||76.8%||78.1%||81.0%||83.5%||89.4%||87.0%||87.5%||87.9%||88.2%||89.1%|
|% of total revenue||23.2%||21.9%||19.0%||16.5%||10.6%||13.0%||12.5%||12.1%||11.8%||10.9%|
|Gross profit margin||76.3%||76.1%||75.3%||73.3%||74.8%||75.2%||71.9%||68.2%||70.9%||72.6%|
|Operating profit margin||1.0%||-||-||-||16.0%||5.0%||-||-||3.0%||6.5%|
|Recurring profit margin||1.0%||-||-||-||15.8%||4.8%||-||-||2.8%||6.3%|
|Key performance indicators||FY03/20||FY03/21||FY03/22|
|% of total||23.0%||22.9%||22.0%||20.7%||19.7%||19.0%||18.4%||17.6%||17.0%||16.4%|
|% of total||60.9%||61.5%||61.4%||62.8%||64.0%||64.5%||65.4%||65.9%||66.5%||67.1%|
|1,000 or more||227||241||272||295||302||315||317||340||350||364|
|% of total||16.1%||15.7%||16.6%||16.5%||16.4%||16.5%||16.1%||16.5%||16.5%||16.4%|
|ARPU (per client; JPY'000)||110||113||118||122||127||134||138||146||152||157|
|MRR churn rate||0.70%||0.71%||0.67%||0.55%||0.59%||0.65%||0.65%||0.71%||0.69%||0.63%|
|Unit economics (LTV/CAC)||8.6||6.2||5.9||7.5||6.2||4.3||4.7||4.9||5.1||6.0|
|Marketing costs (JPYmn)||140||203||266||296||71||189||189||239||158||199|
Please see Earnings structure and key performance indicators (KPIs) under the Business section for the definition and significance of each KPI.
|Unearned revenue (JPYmn)||435||433||511||600||738||777||861||962||1,211||1,248|
|Unearned revenue/ARR (%)||23.4%||20.7%||21.9%||22.8%||26.2%||25.3%||26.4%||26.6%||31.3%||29.9%|
|Cost of revenue||FY03/20||FY03/21||FY03/22|
|Cost of revenue||137||152||169||195||189||204||248||300||293||291|
|% of total||36.5%||34.3%||30.3%||30.7%||43.3%||40.2%||36.3%||32.7%||34.5%||34.4%|
|% of total||39.5%||44.1%||48.1%||48.1%||38.0%||41.2%||40.3%||42.4%||40.3%||40.6%|
|% of total||23.4%||21.7%||22.0%||21.0%||18.5%||18.6%||23.4%||25.0%||24.9%||25.1%|
|% of total||40.1%||36.9%||31.4%||28.1%||54.6%||40.5%||36.1%||34.3%||41.3%||39.3%|
|% of total||26.1%||38.1%||38.9%||33.5%||14.0%||29.1%||21.2%||26.2%||16.6%||21.0%|
|% of total||33.7%||24.7%||29.8%||38.3%||31.4%||30.5%||42.8%||39.7%||42.2%||39.6%|
|% of total||35.1%||33.6%||33.9%||37.0%||33.5%||34.8%||35.3%||35.3%||34.7%||33.2%|
|Sales and marketing||30||35||38||49||47||49||50||55||57||60|
|% of total||26.3%||30.2%||31.4%||31.8%||29.7%||29.9%||28.9%||29.9%||29.5%||30.6%|
|Customer success and support||21||20||21||21||26||25||27||31||35||36|
|% of total||18.4%||17.2%||17.4%||13.6%||16.5%||15.2%||15.6%||16.8%||18.1%||18.4%|
|% of total||20.2%||19.0%||17.4%||17.5%||20.3%||20.1%||20.2%||17.9%||17.6%||17.9%|
In 1H FY03/22, kaonavi had revenue of JPY2.1bn (+31.3% YoY), gross profit of JPY1.5bn (+25.7% YoY), operating profit of JPY99mn (-38.8% YoY), recurring profit of JPY95mn (-40.6% YoY), and net income attributable to owners of the parent of JPY63mn (-27.5% YoY). Operating profit declined in a fall-off versus Q1 FY03/21, when the company significantly curtailed advertising spending due to the pandemic. From Q2 FY03/22, the company began disclosing annual recurring revenue (ARR). ARR in Q2 was JPY4.2bn (+36.0% YoY).
The company said there were no significant changes in competition when customers were classified by size. It said that the main reasons customers choose to use kaonavi are ease of use, operability, and user interface/user experience (UI/UX). According to the company, it is aware that some potential customers that prioritize analysis features use competitors’ products, but such behavior is not widespread.
In Q2 (July–September 2021), revenue was up 29.0% YoY and gross profit was up 24.5% YoY. GPM was 72.6% (-2.6pp YoY). Since Q3 FY03/21, GPM had been declining due to higher rents, but it is recovering along with sales. Unearned revenue at end-Q2 was JPY1.2bn (+60.6% YoY). Annual payments (i.e., monthly fees for one year paid in advance in a lump sum) accounted for 67.3% of MRR at end-September 2021.
In Q2, cost of revenue was JPY291mn (+42.5% YoY) and SG&A expenses JPY702mn (+21.4% YoY).
Cost of revenue featured a 40.5% YoY increase in outsourcing expenses and 92.1% YoY rise in other cost of revenue as rents rose accompanying headquarters relocation. Personnel expenses declined versus Q1 on lower costs for share-based remuneration due to a slump in the share price (impact of about JPY4mn on cost of revenue and JPY14mn on SG&A expenses).
Employees numbered 196 (+19.5% YoY) at end-Q2. Some positions were slightly behind the hiring plan, such as engineers, who are generally in high demand. However, the company has resident engineers dispatched from system engineering service (SES) companies (included in outsourcing costs under cost of revenue), so said that overall it had sufficient development resources. It said that there were no particular delays to development activities as a result.
The company left its full-year FY03/22 forecast unchanged. The company said that in terms of orders received, both one-time revenue and recurring revenue were growing steadily. Recently there has been growing demand for talent management solutions, and the company’s marketing strategies are yielding results. In Q2, orders were particularity brisk in September (these will mainly be reflected in the income statement in Q3 and later). Growth in one-time revenue was driven by record-high orders in value terms, owed to increases in order unit prices and service adoption rates following revisions to the support service menu. The company said that despite some fluctuations attributed to seasonal factors, it was maintaining high levels of lead acquisitions and conversion of leads into orders. It also said that it was planning upfront spending in 2H for future growth. For more details of the company forecast, refer to the "FY03/22 company forecast" section below.
Moves to improve one-time revenue as of Q1 results announcement
The company introduced revised support fee menu and pricing in July 2021, and said it wanted to restore one-time revenue from Q2 onward. However, the changes apply to marketing activities targeting new clients from July onward, so it thought the impact would likely become clear from new contracts acquired in September 2021 at the earliest. In light of Q2 results and the company’s commentary, it appears that the measures were effective.
ARR at end-Q2 was JPY4.2bn (+36.0% YoY). In Q2, recurring revenue (kaonavi’s basic usage fees [monthly charge]) was up 32.1% YoY to JPY946mn and one-time revenue was up 8.3% YoY to JPY115mn. In Q2, the recurring revenue ratio rose to 89.1% (versus 87.0% in Q2 FY03/21).
One component of ARR, the number of clients, totaled 2,214 as of end-Q2 (+15.9% YoY). By number of registered personnel (payment plan), 364 of these clients had 100 or fewer registered personnel (+0.3%), 1,486 clients had 200–900 registered personnel (+20.5%), and 364 companies had 1,000 or more registered personnel (+15.6%).
Another component of ARR, ARPU (average basic usage fee
[monthly charge] for kaonavi per client), at end-Q2 was JPY157,000 (+17.2% YoY). Overall average ARPU is in an uptrend as the share of large
companies among clients increases. Since the company began disclosing ARR from Q2 FY03/22, it changed its ARPU disclosures from quarterly averages to end-quarter figures.
The monthly recurring revenue (MRR) churn rate, a continuity index, averaged 0.63% for the 12 months through September 2021 (versus 0.69% for the 12 months through June 2021).
Unit economics (the ratio of life time value [LTV] to customer acquisition cost [CAC]), a profitability index, was 6.0x in Q2 (versus 5.1x in Q1 FY03/22). This was above 3.0x, which the company deems to be a healthy minimum level. ARPU and GPM climbed versus Q1, but churn rate also rose as contract renewals are concentrated in Q2 and Q4, so LTV was roughly in line with Q1. Marketing costs were JPY199mn (JPY158mn in Q1 FY03/22). CAC also improved from Q1 as new customer acquisitions increased.
The company updated its previous mission and established a corporate purpose. Its newly defined purpose is to “deploy technology at work and use the power of the individual to change society’s specifications.” The company thinks that it is important to return human resources information to individuals who will trigger the changes needed in society. kaonavi sees its raison d’être as providing the technology needed to accomplish this. It supplies products that support individual careers and diversification of work styles, and also provides support through workflow streamlining, but said its ultimate aim was empowering individuals, in other words, shaping a world where companies can better understand the potential of their employees. The company plans this purpose to be the core of management policies going forward and serve as a guideline for product development.
The company launched “kaonavi Industry Recipe,” its industry-specific human resources management template, on September 9, 2021. In a profile book which has an HR database with basic employee information, the company provides a human resources management template specific to an industry, using the experience and expertise acquired to date. The aim is to reduce the burden of adopting kaonavi by clients. The template is available free of charge to kaonavi customers. As the first installment, the company plans to offer templates covering industries with readily definable characteristics, including restaurants/retail/accommodation, nursing care/welfare, education/childcare, transport/logistics, and IT/internet. It plans to gradually extend the service going forward.
|(JPYmn)||1H Act.||2H Act.||FY Act.||1H Act.||2H Act.||FY Act.||1H Act.||2H Est.||FY Est.|
|% of total revenue||77.5%||82.3%||80.1%||88.1%||87.7%||87.9%||88.7%||81.1%||84.6%|
|% of total revenue||22.5%||17.7%||19.9%||11.9%||12.3%||12.1%||11.3%||18.9%||15.4%|
|Cost of revenue||289||364||652||393||548||941||584|
|Gross profit margin||76.2%||74.3%||75.1%||75.0%||70.0%||72.3%||71.8%||72.6%||72.2%|
|Operating profit margin||-||-||-||10.2%||-||-||4.8%||0.1%||2.2%|
|Recurring profit margin||-||-||-||10.1%||-||-||4.6%||-||2.0%|
|Net income attributable to owners of the parent||-7||-350||-357||86||-217||-131||63||-37||26|
The company left its full-year FY03/22 forecast unchanged. It said that in terms of orders received, both one-time revenue and recurring revenue were growing steadily. Recently there has been growing demand for talent management solutions, and the company’s marketing strategies are yielding results. In Q2, orders were particularity brisk in September (these will mainly be reflected in the income statement in Q3 and later). Growth in one-time revenue was driven by record-high orders in value terms, owed to increases in order unit prices and service adoption rates following revisions to the support service menu. The company said it was maintaining high levels of lead acquisitions and conversion of leads into orders, despite fluctuations due to seasonal factors. It was planning upfront spending in 2H for future growth.
Over the next few quarters, the company intends to continue focusing on development spending. It aims to keep GPM in the 70% plus range. It said there were no changes to its FY03/22 plans for personnel or marketing spending.
In terms of unit economics (LTV/CAC), insisting on a high number during a phase of rapid market expansion could lead to lost opportunities from a medium-term perspective. The company aims to make investment decisions depending on the operating environment, while sticking to its investment benchmark targeting unit economics in the 3.0–5.0x range.
The company left its full-year FY03/22 forecast unchanged. It said while Q1 progress was largely solid as expected, one-time revenue was below plan. One-time revenue mainly consists of initial fees and support fees when clients install the system, and largely tracks the number of new installations (regardless of client size). One-time revenue in Q1 was behind plan as the number of new customers was fewer than forecast. While there was no change in the adoption rate of paid support services, support fees were impacted by lower-than-expected new client numbers, in addition, average billing prices declined.
The company had finished changing its support fee menu and pricing as of July 2021, and said it wanted to restore one-time revenue from Q2 onward. However, the changes apply to activities concerning new clients from July onward, so the impact is likely to become clear from new contracts acquired in September 2021 at the earliest. If the measures are correct, the adoption rate of paid support services should improve, and churn rate should decline due to appropriate onboarding.
The company plans to step up efforts to increase the number of clients from Q2 onward. While it will maintain its focus on large companies (plans with 1,000 registered employees or more), it aims to step up its sales towards medium-sized companies (200–900 registered employees) to build up customer numbers. To this end, it plans to enhance the quality and size of its sales team. ARPU is in an uptrend, which the company expects to continue.
For FY03/22, the company forecasts revenue of JPY4.5bn (+33.4% YoY), gross profit of JPY3.3bn (+33.3% YoY, GPM of 72.2%), operating profit of JPY100mn (loss of JPY11mn in FY03/21), recurring profit of JPY93mn (loss of JPY16mn in FY03/21), net income attributable to owners of the parent of JPY26mn (loss of JPY131mn in FY03/21), and EPS of JPY2.28. The company expects GPM to be on par with that of FY03/21, assuming that it will aggressively invest in product development to improve ease-of-use and add new functions.
Kaonavi expects the churn rate for FY03/22 to be on par with that of FY3/21, and does not expect it to fluctuate significantly. The company plans to continue to focus on large client companies. It expects ARPU to maintain its recent uptrend. The company also expects the average billing price to continue to rise due to an increase in the proportion of large companies in the customer mix and upselling workflow functions and other options to existing customers. Kaonavi aims to increase monthly recurring revenue (MRR) by increasing the number of client companies and ARPU.
The Japanese government declared a third state of emergency in some areas in April 2021 in response to resurgence of COVID-19 cases. However, unlike when the first state-of-emergency declaration was issued in April 2020, Kaonavi and its customers have adapted to teleworking, and the company does not expect the development to significantly affect performance.
The company forecasts recurring revenue of JPY3.8bn (+28.4% YoY) and one-time revenue of JPY700mn (+70.4% YoY). The adoption of the revised Accounting Standards for Revenue Recognition is expected to depress recurring revenue by JPY80mn while providing a JPY100mn lift to one-time revenue. Adjusting for this effect and assuming application of the previous standard, the company forecasts the growth rate to be 31.0% YoY for recurring revenue and 46.1% YoY for one-time revenue. Although the growth rate of recurring revenue was affected by the slowdown in growth of the number of client companies in FY03/21, the company plans to reaccelerate growth with continued upfront spending.
The company expects GPM to be 72.2%, the same level as in FY03/21, assuming active spending on development. GPM temporarily fell below 70% in Q4 FY03/21, but is expected to recover gradually starting in Q1 FY03/22. The company forecasts marketing costs of JPY820mn in the full-year (+19.1% YoY). Unlike Q1 FY03/21, when performance was affected by the COVID-19 pandemic, the company will attempt to curb marketing expenses. It expects headcount to come in at 220 (+19.6% YoY) at end-FY03/22. Although the company does not expect any extraordinary gains or losses, the ratio of tax expenses to recurring profit is high due to the impact of temporary differences related to software development costs (expenses for accounting purposes, assets for tax purposes). As a result of these factors, the company expects profit lines from operating profit on down to be in the black, but stated that these figures are not particularly meaningful beyond the anticipation of upfront spending necessary for future growth.
|Results vs. Initial Est. (JPYmn)||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21|
|Revenue (Initial Est.)||1,645||2,540||3,340 ~ 3,400|
|Results vs. Initial Est.||-||-||-||-||-||2.7%||3.3%||0.1% ~ 1.9%|
|Operating profit (Initial Est.)||-114||-350 ~ -250||-210 ~ 90|
|Operating profit (Results)||-212||-244||-73||-278||-11|
|Results vs. Initial Est.||-||-||-||-||-|
|Recurring profit (Initial Est.)||-147||-351 ~ -251||-216 ~ 84|
|Recurring profit (Results)||-10||-3||-56||-214||-250||-92||-280||-16|
|Results vs. Initial Est.||-||-||-||-||-||-||-||-|
|Net income (Initial Est.)||-147||-355 ~ -255||-330 ~ -30|
|Net income (Results)||-10||-5||-39||-207||-283||-96||-357||-131|
|Results vs. Initial Est.||-||-||-||-||-||-||-||-|
Revenue tends be in line with forecasts given the company’s recurring revenue model and low MRR churn rate.
Following its listing in March 2019, kaonavi set a medium-term goal (expressed as a “milestone” to convey its lack of commitment to a specific timeframe) of JPY10.0bn in revenue by FY03/24. It expects to have a GPM of 80% and an OPM of 30% when it reaches this milestone. Since March 2019 when the company set these goals, the business environment has changed significantly due to the spread of COVID-19. In the short term, the pandemic had depressed customer acquisition and caused an increase in the churn rate. Conversions, a leading indicator, was up YoY in Q3 FY03/21, but new customer acquisition continued to be sluggish. In the supplementary materials provided with its Q3 results, kaonavi stated that, given the current business environment, it would extend the period in which it aims to achieve these medium-term goals to around five years from FY03/20.
Although the company has pushed back the timeframe, it has made no changes to its expectations for the number of clients, ARPU, or other metrics at the point when it achieves the medium-term revenue goal (JPY10.0bn), nor has it revised its profit margin estimates for the same point in time. Assuming that the company achieves its medium-term revenue goal in Q4 FY03/25, revenue would have to grow at a CAGR of 30.9% over four years from FY03/21 based on FY03/21 results.
The company set these growth goals immediately following its IPO (March 2019) based on the belief that it needed to communicate its medium-term vision with investors. The goals reflect an objective analysis of the natural growth trajectory of existing businesses (as of March 2019) in an attempt to determine the general timeframe in which the company will achieve revenue of JPY10.0bn and the likely profit margins at that point in time. Revenue from the HR platform that kaonavi envisions building (see below) is not factored into these growth goals. Considering the current volatile nature of the industry and the large number of competitors in the rapidly growing market, kaonavi believes it would not be reasonable to present a medium-term management plan with a clear commitment to progress targets delineated by year.
The company is currently focusing on expanding its existing business in Japan (increasing the number of clients and ARPU) because it expects the market to continue to expand at an annual rate of 20–30% for at least three to five years starting in 2021, and because of its strategy of accumulating a robust HR database to underpin the HR data platform it plans to build (see the Long-term vision section for details).
In its Q4 FY03/21 results briefing, kaonavi estimated the total addressable market for talent management systems to be approximately JPY200bn. This estimate was calculated by referencing the Ministry of Economy, Trade and Industry’s 2016 Economic Census for Business Activity to find the number of companies with 50 or more employees and multiplying the number of companies of different sizes obtained from the report by the company’s corresponding system usage fees (which vary by client company size, i.e., the number of registered personnel).
While kaonavi says it will consider expanding overseas in the future, it will prioritize expanding its existing businesses in Japan for the time being.
The company expects to have 4,000–5,000 clients (assuming it reaches its medium-term revenue goal in Q4 FY03/25, this will be equivalent to a CAGR of 18.0–24.8% over 4 years based on Q4 FY03/21 results).
The company expects the market to continue to expand at an annual rate of 20–30% for at least three to five years starting in 2021, and expects growth in client count mainly as a result of this expansion. When the above client count is achieved, the adoption rate among potential clients should increase from approximately 10% as of January 2021 to 20–25% (Shared Research estimate).
The company expects ARPU to be 150,000–200,000/month (assuming it reaches its medium-term revenue goal in Q4 FY03/25, this will be equivalent to a CAGR of 1.0–8.6% over four years based on Q4 FY03/21 results). The company expects ARPU to rise as midsize and large clients become more heavily represented in the revenue composition as kaonavi acquires new clients. Another reason is that it expects the number of registered personnel per user company to increase as it acquires more clients who adopt the system in certain divisions of their business.
kaonavi has given a less precise range for its expected ARPU than for its expected number of clients. This is because ARPU is affected by the competitive environment and the company’s pricing strategy, whereas it can expect the number of clients to continue to grow unless the churn rate increases.
Based on the company’s expectations for the number of clients and ARPU, we estimate that recurring revenue will exceed JPY9.0bn when total revenue reaches JPY10.0bn. In other words, the recurring revenue ratio will increase to around 90%.
The company does not expect a significant increase in the churn rate because competitors are likely to prioritize the acquisition of new clients over trying to poach clients from kaonavi.
The company plans to aggressively spend on recruitment and advertising while the market is expanding (for at least three to five years starting in 2021) to maximize its advantage during this period.
Calculating expenses from kaonavi’s medium-term goals yields cost of revenue of JPY2.0bn and SG&A expenses of JPY5.0bn. This means the company expects advertising expenses and expenses for development personnel and sales personnel to roughly 1.6x versus the Q4 results.
The company plans to focus on expanding the kaonavi business for the time being. In the future, however, it plans to create a comprehensive HR data platform centered on kaonavi to monetize peripheral services. In its Q4 FY03/21 results briefing, the company estimated the total addressable market of the HR platform-related business to be approximately JPY8.4tn based on total market size estimates from various surveys. Note that the recurring revenue ratio will decline if this development results in an increase in one-time revenue.
The company’s purpose is to “deploy technology at work and use the power of the individual to change society’s specifications.” Its vision is to “create a HR data-centric platform.”
The company’s purpose is to “deploy technology at work and use the power of the individual to change society’s specifications.” The company thinks that it is important to return human resources information to individuals who will trigger the changes needed in society. kaonavi sees its raison d’être as providing the technology needed to accomplish this. It supplies products that support individual careers and diversification of work styles, and also provides support through workflow streamlining, but said its ultimate aim was empowering individuals, in other words, shaping a world where companies can better understand the potential of their employees.
The company’s vision is to “create a HR data-centric platform.” Although kaonavi is classified as a talent management system, the company thinks of itself as primarily building a data platform and a large cloud-based database rather than simply providing a talent management system. The company envisions a future where its data platform consolidates HR data to bring out the strengths of individuals.
The COVID-19 pandemic has had major impacts worldwide. A number of expressions have become associated the word “work,” including remote working, co-working spaces, second jobs, and side hustles. The company or office is no longer necessarily the workplace. In light of the changed environment, the company thinks that HR information will come to be returned to individuals, who will take it with them. The company envisions a future where people manage their own HR data, including information on their skills, personality, and what sort of persons they best collaborate with. kaonavi wants to create an era where people can leverage their own HR data, skills, and talents so they can work enthusiastically without necessarily being employed by a company.
As a future product for the new era, the company hopes to provide a career passport containing individuals’ characteristics and talents. It imagines a product that will go beyond data merely regarding work history and CV to information that demonstrates an individual's potential, such as evaluations at former worksites, traits employers have assessed favorably, personal characteristics, type of people he/she works well with, and type of projects where he/she add value.
The company believes that individuals should have the right to choose how their data is used. This idea will become entrenched to such a degree that permission to use an individual’s data will need to be obtained from that individual rather than just the company they work for. Assuming this becomes the norm, it will be important to ensure that services benefit individuals. kaonavi will develop its database and services with this possibility in mind.
The HR data platform concept is an extension of the company’s vision. HR comprises many subfields including recruitment and dispatching, employment management, job matching, payroll, personnel management and evaluation, attendance management, social insurance, job advertising, and benefits and employee training. There currently exist many HR technology providers specializing in each of these subfields, but each only offers services relevant to their particular domain. By leveraging its superiority in consolidated cloud-based HR data management functions, the company aims to offer an HR database (platform) that functions as a hub for hosting a broad array of HR services.
The platform will utilize information on the core database (kaonavi) to increase the accuracy of hiring decisions and personnel evaluations. The company will also be able to use its database to achieve better outcomes in HR businesses such as job matching, recruitment and dispatching, HR consulting, and HR education. The company is currently focusing on increasing the number of clients, but plans to expand to related businesses in the future.
The company insists on developing the core database (kaonavi) in-house, but does not take the same stance on other projects. In other areas, the company will choose the most appropriate method of development on a case-by-case basis, pursuing M&A and business tie-ups where necessary. The company’s major shareholder, Recruit Holdings (TSE1: 6098), provides services in aptitude testing, HR consulting, HR training, recruitment and temporary staffing, recruitment management, and job matching. kaonavi said developments in collaboration with Recruit Holdings were a potential option. The company says it does not expect to pursue M&A in areas with no relevance to the realization of its HR data platform concept.
Increasing data quantity: Extrapolating from the ratio of the database size to revenue in 2020, we expect kaonavi to have a database of several million personnel (not exceeding five million) by the time it achieves revenue of JPY10.0bn. The company does not disclose the size of its database in its earnings announcements. However, an interview with kaonavi’s president in October 2018 revealed that the company expects to have data on 1.5mn registered personnel by the time its client count reaches 3,000 companies. From this, we can infer that the database comprised data on slightly over 1.0mn registered personnel as of April 2021.
Enhancing data quality: The company is also working to enhance the quality of dynamic data. In the past, kaonavi mainly handled static data items including employment history, qualifications, and skills. However, in 2019, kaonavi strengthened dynamic data by adding a pulse survey function that helps companies monitor conditions of their organization and employees. Static data alone is not sufficient for the realization of the company’s purpose to “deploy technology at work and use the power of the individual to change society’s specifications.” Dynamic data is becoming increasingly more important toward that end.
Supplementary note on personnel administration data
It is conceivable that accounting system providers (belonging to the personnel administration field) will also strengthen their HR databases. This is because companies developing businesses in the personnel administration field tend to start with accounting systems and expand out to payroll systems before eventually entering the HR database market. However, as long as these companies stick to personnel administration, their databases should mainly consist of data related to payroll systems, such as attendance records and salaries. In kaonavi’s view, payroll system data has little relevance to the data that will form the core of the company’s planned HR data platform, which is concerned with the personalities and skills of personnel.
The company provides the kaonavi talent management system, which consolidates client HR data (including portrait photo, name, experience, evaluation results, and skills of employees) and presents it in an easily viewable format to enhance HR management. The system was originally conceived to help managers put names to faces using the portrait photos feature, which was unique at the time. By introducing kaonavi, client companies can expect gains in efficiency thanks to data consolidation, productivity enhancement as a result of assigning personnel to tasks suitable to their abilities, HR development based on accurate evaluations, improved HR strategy, and prevention of employee turnover. The company uses the term “HR management” instead of “talent management” in its segment name, but says there is no distinction in meaning. As of November 2021, it reported in a single segment: Cloud-Based HR Management System (comprising only kaonavi).
The company provides the kaonavi system to clients as a cloud service, i.e., in a software as a service (SaaS) format.
According to company materials, kaonavi has the largest share of the talent management market in Japan, accounting for approximately 25–30% of all companies that have introduced such systems. As of end-Q2 FY03/22, kaonavi had annual recurring revenue (ARR) of JPY4.2bn (JPY3.6bn as of end-FY03/21), 2,214 clients (2,061), and monthly average revenue per user (ARPU; per client) of JPY157,000 (JPY146,000). Clients tend to be on the large side—over 80% of them had 200 employees or more—due to the greater need for talent management systems among companies of a certain size.
Unlike the personnel administration market, which matured long ago due to legal compliance needs, the HR management market is new, first appearing around the time of kaonavi’s launch in 2012. According to the Corporate IT Trends Report 2021 prepared by the Japan Users Association of Information Systems, only 11.2% of companies surveyed had introduced a talent management system in FY2020. The company expects the market to expand at an annual rate of 20–30% for at least three to five years starting in 2021. It thus plans to focus on expanding its existing business in Japan for the time being.