HENNGE provides proprietary software services to companies. Its core offering is HENNGE One, a software service that facilitates consolidated management of IDs and passwords for a wide array of third-party cloud-based software services that traditionally had to be managed separately. HENNGE One’s ID integration functionality allows customers to access such services with a single sign-on (SSO). It also provides a full range of user management and security features including access restrictions that can be configured to block sign-ins from unauthorized devices or locations, device authentication for notebook PCs and smartphones, and data loss/leak prevention tools such as email attachment encryption, email archiving, and exchange of large files.

In FY09/20, the company reported revenue of JPY4.2bn and operating profit of JPY539mn. At end-FY09/20, it had 1,667 contracts for HENNGE ONE, and supplied services to 13% of the companies listed on the Tokyo Stock Exchange. No individual customer accounts for more than 10% of HENNGE One’s total revenue. Major customers include Asahi Kasei Corporation (TSE1: 3407), Keio Corporation (TSE1: 9008), Persol Holdings Co., Ltd. (TSE1: 2181), and FamilyMart Co., Ltd. (TSE1: 8028). HENNGE One has 1.95mn users at its customer companies. HENNGE listed on the TSE Mothers market in October 2019.

By business category, the HENNGE One business generated revenue of JPY3.6bn (87% of total) and Professional Service and Others JPY535mn (13%) in FY09/20. The latter mainly provides cloud-based email services and packaged software for high-speed distribution of large volumes of emails.

Recurring revenue accounted for 97.1% of total revenue in FY09/20. Revenue from the HENNGE One business is mostly recurring revenue, as is some revenue from the Professional Service and Others category. The company collects annual usage fees from customers as upfront payments (recorded as unearned revenue on the balance sheet), and books these as monthly revenue once service actually starts. This business model produces stable revenue, although the launch or cancellation of services for major customers can cause fluctuations. In FY09/20, the churn rate was 0.16% (average monthly churn rate [TTM]).

HENNGE One revenue can be roughly calculated by multiplying the number of users (customer companies × users per company) and average revenue per user (ARPU). As of September 2020, annual recurring revenue (ARR) for the business was JPY4.0bn (+22.5% YoY). The number of users was 1.95mn (+16.5% YoY), the number of customer companies was 1,667 (1,169 users per company), and annual ARPU stood at JPY2,007 (+3.6% YoY). The company had 181 employees (excluding part-time staff) as of end-September 2020.

SSO demand is rising in Japan amid 1) increased adoption of cloud-based services by companies, 2) growing availability of convenient enterprise cloud-based services and a higher number of users relying on multiple such offerings to perform tasks, and 3) demand for new management systems to mitigate the risk of data loss/leaks, due to increased need for remote work.

HENNGE has pioneered cloud-based services such as ID and password authentication and management, SSO, and access restrictions in Japan, and commanded a 65.4% share of this market in 2017 (according to Fuji Chimera Research Institute). Its revenue expanded rapidly, rising 27.4% YoY in FY09/18, 20.9% YoY in FY09/19, and 21.2% YoY in FY09/20. In the US, an early mover in this space is Okta Inc. (NASDAQ: OKTA), which reported revenue of USD586mn in FY01/20 (+46.8% YoY). At present, HENNGE lags Okta in business scale, mainly because cloud services took off in the US before they did in Japan. Cloud-based services used in each country and region diverge due to differences in legal systems and business practices. SSO providers need operational expertise in a wide range of third-party cloud services, and the SSO market is therefore highly split by region.

Earnings trends

In FY09/21, revenue was JPY4.8bn (+16.7% YoY), operating profit JPY380mn (-29.4% YoY), recurring profit JPY383mn (-28.4% YoY), and net income attributable to owners of the parent JPY224mn (-36.9% YoY). The mainstay HENNGE One business drove overall revenue growth with steady increases in contracts and user count, while revenue in Professional Service and Others also rose.
The company made forward investment, seeing FY09/21 when users of cloud service are expected to accelerate, as a "once in a ten-year opportunity."

For FY09/22, HENNGE forecasts revenue of JPY5.8bn (+19.3% YoY), operating profit of JPY434mn (+14.2% YoY), recurring profit of JPY434mn (+13.2% YoY), net income of JPY273mn (+22.0% YoY), and EPS of JPY16.8. The company aims to boost revenue from HENNGE One to JPY5.3bn (+21.8% YoY) by expanding the numbers of customer companies and users while raising ARPU. The company forecasts revenue in Professional Service and Others of JPY476mn (-2.7% YoY).

Strengths and weaknesses

Shared Research believes HENNGE’s strengths are: 1) its core business (SSO) that is less vulnerable to service cancellations, 2) a strategy of differentiation by providing data loss/leak prevention services that can be flexibly tailored to customers’ security policies, and 3) its support system that encompasses popular Software as a Service (SaaS) offerings used by customers in Japan. Its weaknesses are 1) profit generation being hampered to some degree by upfront spending on customer acquisition, 2) the rollout of new services not contributing to higher service prices, and 3) uncertainty surrounding the company’s ability to secure customers with global operations (see the Strengths and weaknesses section for details).

Key financial data

Income statement		FY09/17	FY09/18	FY09/19	FY09/20	FY09/21	FY09/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Revenue		2,226	2,835	3,427	4,153	4,845	5,782
	YoY	29.1%	27.4%	20.9%	21.2%	16.7%	19.3%
Gross profit		1,645	2,204	2,822	3,417	4,023
	YoY	-	34.0%	28.0%	21.1%	17.7%
	Gross profit margin	73.9%	77.8%	82.3%	82.3%	83.0%
SG&A expenses		1,493	2,002	2,635	2,879	3,643
	YoY	-	34.1%	31.6%	9.3%	26.6%
	SG&A ratio	67.1%	70.6%	76.9%	69.3%	75.2%
Operating profit		152	202	187	539	380	434
	YoY	-	32.9%	-7.3%	187.7%	-29.4%	14.2%
	Operating profit margin	6.8%	7.1%	5.5%	13.0%	7.8%	7.5%
Recurring profit		155	219	178	535	383	434
	YoY	88.3%	41.1%	-19.0%	201.6%	-28.4%	13.2%
	Recurring profit margin	7.0%	7.7%	5.2%	12.9%	7.9%	7.5%
Net income		172	123	110	355	224	273
	YoY	158.8%	-28.4%	-10.9%	223.0%	-36.9%	22.0%
	Net margin	7.7%	4.4%	3.2%	8.5%	4.6%	4.7%
Per-share data (split-adjusted; JPY)
Shares outstanding (ex. treasury shares; year-end; '000)		-	15,388	15,388	16,002	16,244	-
EPS (JPY)		11.3	8.1	7.1	22.6	13.9	16.8
EPS (fully diluted: JPY)		-	-	-	21.9	13.8	-
Dividend per share (JPY)		-	-	-	-	-	-
Book value per share (JPY)		29	38	45	114	113	-
Balance sheet (JPYmn)
	Cash and cash equivalent	1,418	1,940	2,023	3,006	3,609
Total current assets		1,548	2,065	2,115	3,171	3,737
Tangible fixed assets		73	64	174	188	171
Investments and other assets		122	181	310	878	581
Intangible assets		19	5	4	3	1
Total assets		1,762	2,315	2,603	4,241	4,491
	Short-term debt	-	-	-	-	-
Current liabilities		1,242	1,669	1,786	2,227	2,549
	Long-term debt	-	-	-	-	-
Fixed liabilities		69	63	126	191	100
Total liabilities		1,311	1,732	1,912	2,419	2,648
	Shareholders' equity	451	584	691	1,822	1,843
Total net assets		451	584	691	1,822	1,843
Total interest-bearing debt		-	-	-	-	-
Cash flow statement (JPYmn)
Cash flows from operating activities		517	536	227	774	527
Cash flows from investing activities		-98	-53	-157	-123	-25
Cash flows from financing activities		-	10	-	345	18
Financial ratio
ROA (RP-based)		10.4%	10.8%	7.2%	15.6%	8.8%
ROE		47.2%	23.9%	17.2%	28.3%	12.2%
Equity ratio		25.6%	25.2%	26.6%	43.0%	41.0%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Trends and outlook

Quarterly trends and results

Cumulative		FY09/19				FY09/20				FY09/21				FY09/21
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	% of Est.	FY Est.
Revenue		780	1,614	2,516	3,427	940	1,953	3,006	4,153	1,134	2,303	3,531	4,845	100.1%	4,841
	YoY	-	-	-	20.9%	20.5%	21.0%	19.5%	21.2%	20.7%	17.9%	17.5%	16.7%		16.6%
Gross profit		632	1,322	2,065	2,822	763	1,596	2,468	3,417	939	1,912	2,937	4,023
	YoY	-	-	-	28.0%	20.7%	20.7%	19.5%	21.1%	23.1%	19.8%	19.0%	17.7%
	Gross profit margin	81.1%	81.9%	82.1%	82.3%	81.2%	81.7%	82.1%	82.3%	82.8%	83.1%	83.2%	83.0%
SG&A expenses		561	1,314	1,919	2,635	766	1,469	2,150	2,879	738	1,935	2,710	3,643
	YoY	-	-	-	31.6%	36.5%	11.8%	12.1%	9.3%	-3.6%	31.8%	26.0%	26.6%
	SG&A ratio	72.0%	81.4%	76.3%	76.9%	81.5%	75.2%	71.5%	69.3%	65.1%	84.0%	76.8%	75.2%
Operating profit		71	8	146	187	-3	127	318	539	201	-23	227	380	122.6%	310
	YoY	-	-	-	-7.3%	-	-	117.1%	187.7%	-	-	-28.6%	-29.4%		-42.4%
	Operating profit margin	9.1%	0.5%	5.8%	5.5%	-0.3%	6.5%	10.6%	13.0%	17.7%	-1.0%	6.4%	7.8%		6.4%
Recurring profit		65	4	133	178	-2	127	317	535	204	-20	230	383	123.7%	310
	YoY	-	-	-	-19.0%	-	-	138.4%	201.6%	-	-	-27.4%	-28.4%		-42.1%
	Recurring profit margin	8.3%	0.3%	5.3%	5.2%	-0.2%	6.5%	10.5%	12.9%	18.0%	-0.9%	6.5%	7.9%		6.4%
Net income		41	-6	80	110	-5	51	180	355	137	-20	150	224	116.0%	193
	YoY	-	-	-	-10.9%	-	-	125.1%	223.0%	-	-	-16.7%	-36.9%		-45.6%
	Net margin	5.3%	-0.4%	3.2%	3.2%	-0.6%	2.6%	6.0%	8.5%	12.1%	-0.9%	4.2%	4.6%		4.0%
Quarterly		FY09/19				FY09/20				FY09/21
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue		780	834	902	911	940	1,013	1,053	1,146	1,134	1,169	1,228	1,314
	YoY	-	-	-	-	20.5%	21.5%	16.8%	25.8%	20.7%	15.3%	16.6%	14.6%
Gross profit		632	690	743	756	763	833	872	949	939	973	1,025	1,086
	YoY	-	-	-	-	20.7%	20.7%	17.4%	25.5%	23.1%	16.9%	17.5%	14.4%
	Gross profit margin	81.1%	82.7%	82.4%	83.0%	81.2%	82.2%	82.8%	82.8%	82.8%	83.3%	83.4%	82.7%
SG&A expenses		561	753	605	715	766	703	682	728	738	1,197	775	933
	YoY	-	-	-	-	36.5%	-6.7%	12.7%	1.8%	-3.6%	70.3%	13.7%	28.1%
	SG&A ratio	72.0%	90.3%	67.1%	78.5%	81.5%	69.3%	64.7%	63.5%	65.1%	102.4%	63.1%	71.0%
Operating profit		71	-63	138	41	-3	130	191	221	201	-224	250	153
	YoY	-	-	-	-	-	-	37.7%	440.1%	-	-	30.9%	-30.6%
	Operating profit margin	9.1%	-7.6%	15.4%	4.5%	-0.3%	12.8%	18.1%	19.3%	17.7%	-19.1%	20.3%	11.7%
Recurring profit		65	-61	129	45	-2	130	189	219	204	-223	250	153
	YoY	-	-	-	-	-	-	47.1%	389.8%	-	-	31.9%	-29.8%
	Recurring profit margin	8.3%	-7.3%	14.3%	4.9%	-0.2%	12.8%	18.0%	19.1%	18.0%	-19.1%	20.3%	11.7%
Net income		41	-47	86	30	-5	57	129	175	137	-158	170	74
	YoY	-	-	-	-	-	-	49.6%	485.0%	-	-	32.4%	-57.8%
	Net margin	5.3%	-5.6%	9.5%	3.3%	-0.6%	5.6%	12.2%	15.3%	12.1%	-13.5%	13.9%	5.6%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Revenue by business category

Sales by business (JPYmn)			FY09/19				FY09/20				FY09/21				FY09/21
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	% of Est.	FY Est.
Revenue			780	834	902	911	940	1,013	1,053	1,146	1,134	1,169	1,228	1,314	100.1%	4,841
	YoY		-	-	-	-	20.5%	21.5%	16.8%	25.8%	20.7%	15.3%	16.6%	14.6%		41.3%
	HENNGE One		661	703	762	789	836	881	932	969	1,008	1,058	1,114	1,175	99.2%	4,388
		YoY	-	-	-	-	26.4%	25.2%	22.3%	22.8%	20.6%	20.1%	19.5%	21.3%		21.3%
	Professional Services and Others		119	130	141	122	104	132	122	177	126	110	115	139	108.0%	453
		YoY	-	-	-	-	-12.4%	1.8%	-13.3%	45.3%	21.2%	-16.7%	-5.7%	-21.5%		-15.3%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Full-year FY09/21 results (out November 12, 2021)

Summary

Revenue: JPY4.8bn (+16.7% YoY; 100.1% of full-year company forecast)
Operating profit: JPY380mn (-29.4% YoY; 122.6%)
Recurring profit: JPY383mn (-28.4% YoY; 123.7%)
Net income*: JPY224mn (-36.9% YoY; 116.0%)
* Net income/loss attributable to owners of the parent

Revenue increased JPY692mn YoY to JPY4.8bn on the back of JPY737mn YoY increase in the mainstay HENNGE One business, while revenue decreased JPY45mn YoY in Professional Service and Others. SG&A expenses increased JPY764mn YoY to JPY3.6bn, mainly due to a rise in advertising expenses by JPY489mn and personnel expenses by JPY253mn.

Revenue by business

HENNGE One

The company reported full-year FY09/21 revenue in the mainstay HENNGE One business of JPY4.4bn (+20.4% YoY). Annual recurring revenue (ARR) for the service expanded to JPY4.7bn (+21.3% YoY). The company added 285 contracts from end-FY09/20, bringing the total number of customers to 1,952 companies (+17.1% YoY). The total number of users at customer companies rose to 2.1mn (+9.7% YoY). The number of users at end-Q1 decreased by about 9,000 from end-FY09/20, mainly attributable to the cancellation of a large client company (with about 80,000 users) which primarily used the service’s mail function for a relatively specialized purpose. However, the number of users steadily grew by 66,000 in Q2, 66,000 in Q3 and 67,000 in Q4. The full-year net increase was 190,000 users.

Annual revenue per user (ARPU) was JPY2,217 (+10.5% YoY; average monthly revenue per user was JPY184.7). ARPU went up due to an increase in the number of customers following a change in the license structure in June 2019. The churn rate (12-month monthly average; value basis) continued to stayed low at 0.25% (up 0.09pp YoY).

ARR = N (number of customer companies) × n (number of users per company) × annual ARPU

JPY4.7bn (+21.3% YoY) = 1,952 companies (+17.1% YoY) × 1,095 users/company (-6.3% YoY) × JPY2,217/user (+10.5% YoY)

KPIs for HENNGE One

HENNGE One		FY09/19				FY09/20				FY09/21
		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
ARR (JPYmn)		2,696	2,907	3,069	3,240	3,411	3,577	3,793	3,909	4,102	4,324	4,551	4,740
	YoY	-	-	-	27.0%	26.5%	23.0%	23.6%	20.6%	20.3%	20.9%	20.0%	21.3%
No. of contracts (companies)		1,230	1,298	1,361	1,428	1,487	1,548	1,610	1,667	1,752	1,813	1,900	1,952
	YoY	-	-	-	21.4%	20.9%	19.3%	18.3%	16.7%	17.8%	17.1%	18.0%	17.1%
No. of users ('000)		1,442	1,465	1,631	1,672	1,776	1,824	1,910	1,948	1,940	2,005	2,071	2,138
	YoY	-	-	-	22.0%	23.2%	24.5%	17.1%	16.5%	9.2%	9.9%	8.4%	9.7%
Average monthly churn rate (TTM)		0.11%	0.10%	0.13%	0.12%	0.13%	0.18%	0.16%	0.16%	0.22%	0.18%	0.24%	0.25%
	YoY	-	-	-	-0.03pt	0.02pt	0.08pt	0.03pt	0.04pt	0.09pt	0.00pt	0.08pt	0.09pt
ARPU (JPY)		1,870	1,984	1,881	1,938	1,921	1,961	1,986	2,007	2,115	2,156	2,198	2,217
	YoY	-	-	-	4.1%	2.7%	-1.2%	5.6%	3.6%	10.1%	9.9%	10.7%	10.5%

Source: Shared Research based on company data
Notes: Figures based on results in the last month of the respective quarter (i.e., December, March, June, and September).
Figures may differ from company materials due to differences in rounding methods.

Professional Service and Others

The company reported Professional Service and Others revenue of JPY490mn (down by JPY45mn YoY).

Cost trends

SG&A expenses increased JPY764mn YoY to JPY3.6bn, mainly due to a rise in advertising expenses by JPY489mn and personnel expenses by JPY253mn. Advertising expenses rose sharply due to heavy investments related to the HENGE NOW! Event, and associated TV commercial and online and transport ads in the previous quarter.

Breakdown of SG&A expenses

SG&A expenses			FY09/19				FY09/20				FY09/21
Cumulative (JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue			780	1,614	2,516	3,427	940	1,953	3,006	4,153	1,134	2,303	3,531	4,845
SG&A expenses			561	1,314	1,919	2,635	766	1,469	2,150	2,879	738	1,935	2,710	3,643
	YoY		-	-	-	31.6%	36.5%	11.8%	12.1%	9.3%	-3.6%	31.8%	26.0%	26.6%
	% of revenue		72.0%	81.4%	76.3%	76.9%	81.5%	75.2%	71.5%	69.3%	65.1%	84.0%	76.8%	75.2%
	R&D expenses		50	107	153	210	44	97	153	211	57	116	170	225
		YoY	-	-	-	45.8%	-12.0%	-9.3%	0.0%	0.5%	29.5%	19.6%	11.1%	6.6%
		% of revenue	6.4%	6.6%	6.1%	6.1%	4.7%	5.0%	5.1%	5.1%	5.0%	5.0%	4.8%	4.6%
	Personnel		214	448	680	925	251	510	788	1,081	308	625	961	1,334
		YoY	-	-	-	14.8%	17.3%	13.8%	15.9%	16.9%	22.7%	22.5%	22.0%	23.4%
		% of revenue	27.4%	27.8%	27.0%	27.0%	26.7%	26.1%	26.2%	26.0%	27.2%	27.1%	27.2%	27.5%
	Outsourcing expenses, other		115	254	374	508	139	276	398	513	112	227	350	493
		YoY	-	-	-	50.7%	20.9%	8.7%	6.4%	1.0%	-19.4%	-17.8%	-12.1%	-3.9%
		% of revenue	14.7%	15.7%	14.9%	14.8%	14.8%	14.1%	13.2%	12.4%	9.9%	9.9%	9.9%	10.2%
	Advertising expenses		34	177	189	225	82	116	132	168	54	542	572	657
		YoY	-	-	-	32.4%	141.2%	-34.5%	-30.2%	-25.3%	-34.1%	367.2%	333.3%	291.1%
		% of revenue	4.4%	11.0%	7.5%	6.6%	8.7%	5.9%	4.4%	4.0%	4.8%	23.5%	16.2%	13.6%
	Other SG&A expenses		148	327	523	767	251	470	679	906	207	426	656	933
		YoY	-	-	-	40.7%	69.6%	43.7%	29.8%	18.1%	-17.5%	-9.4%	-3.4%	3.0%
		% of revenue	19.0%	20.3%	20.8%	22.4%	26.7%	24.1%	22.6%	21.8%	18.3%	18.5%	18.6%	19.3%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Full-year FY09/22 company forecast

		FY09/19			FY09/20			FY09/21			FY09/22
(JPYmn)		1H	2H	Full-year	1H	2H	Full-year	1H Act.	2H Act.	FY Act.	FY Est.
Revenue		1,614	1,813	3,427	1,953	2,200	4,153	2,303	2,542	4,845	5,782
	YoY	-	-36.1%	20.9%	21.0%	21.3%	21.2%	17.9%	15.6%	16.7%	19.3%
Cost of revenue		292	313	605	357	378	735	390	432	822
Gross profit		1,322	1,500	2,822	1,596	1,821	3,417	1,912	2,111	4,023
	YoY	-	-32.0%	28.0%	20.7%	21.5%	21.1%	19.8%	15.9%	17.7%
	Gross profit margin	81.9%	82.7%	82.3%	81.7%	82.8%	82.3%	83.1%	83.0%	83.0%
SG&A expenses		1,314	1,320	2,635	1,469	1,410	2,879	1,935	1,708	3,643
	YoY	-	-34.1%	31.6%	11.8%	6.8%	9.3%	31.8%	21.1%	26.6%
	SG&A ratio	81.4%	72.8%	76.9%	75.2%	64.1%	69.3%	84.0%	67.2%	75.2%
Operating profit		8	179	187	127	412	539	-23	403	380	434
	YoY	-	-11.2%	-7.3%	1,510.2%	129.5%	187.7%	-	-2.1%	-29.4%	14.2%
	Operating profit margin	0.5%	9.9%	5.5%	6.5%	18.7%	13.0%	-1.0%	15.8%	7.8%	7.5%
Recurring profit		4	173	178	127	408	535	-20	403	383	434
	YoY	-	-20.9%	-19.0%	2,951.9%	135.4%	201.6%	-	-1.2%	-28.4%	13.2%
	Recurring profit margin	0.3%	9.6%	5.2%	6.5%	18.6%	12.9%	-0.9%	15.9%	7.9%	7.5%
Net income		-6	116	110	51	304	355	-20	244	224	273
	YoY	-	-6.0%	-10.9%	-	161.9%	223.0%	-	-19.6%	-36.9%	22.0%
	Net margin	-0.4%	6.4%	3.2%	2.6%	13.8%	8.5%	-0.9%	9.6%	4.6%	4.7%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

For FY09/22, HENNGE forecasts revenue of JPY5.8bn (+19.3% YoY), operating profit of JPY434mn (+14.2% YoY), recurring profit of JPY434mn (+13.2% YoY), net income of JPY273mn (+22.0% YoY), and EPS of JPY16.8. The company aims to grow HENNGE One revenue to JPY5.3bn (+21.8% YoY) by adding customer companies and users, and increasing ARPU. It expects revenue in Professional Service and Others to come in at JPY476mn (-2.7% YoY).

Shared Research will update the contents of the report following interviews with the company.

Growth strategy

Growth strategy: Accelerate customer acquisition for HENNGE One with a focus on lifetime value

HENNGE’s growth strategy centers on expanding revenue in its core service HENNGE One, which combines an Identity as a Service (IDaaS) solution that facilitates secure and reliable access and single sign-on (SOO scheme that allows customers to log into multiple online services or applications with a single ID and password) for a wide range of third-party cloud services used by its customers, with secure and reliable emailing and other services that mitigate the risk of data loss/leaks.

The company believes any office with 30 or more employees is either already using multiple cloud services or likely to do so at some point in the future, and it expects demand for secure and reliable email services to expand as a result. Japan has around 325,000 offices with a workforce of at least 30 people, and they employ a total of 29mn people (based on 2016 Economic Census by the Ministry of Internal Affairs and Communication [MIC] and the Ministry of Economy, Trade and Industry [METI]). At end-September 2020, HENNGE only provided services to 1,667 companies (share of 0.5%) and 1.95mn users (share of 6.7%), leaving ample room for growth.

Offices by workforce size and number of employees

Employees per location	Number of offices	% of total	Number of employees	% of total
1–4	3,047,110	57.1%	6,516,332	11.7%
5–9	1,057,293	19.8%	6,940,748	12.4%
10–19	649,836	12.2%	8,768,303	15.7%
20–29	232,601	4.4%	5,530,991	9.9%
30–49	163,074	3.1%	6,133,936	11.0%
50–99	100,428	1.9%	6,864,826	12.3%
100–199	39,002	0.7%	5,291,760	9.5%
200–299	10,454	0.2%	2,524,234	4.5%
300 or more	12,223	0.2%	8,301,696	14.9%
Total	5,340,783	100.0%	55,872,826	100.0%
30 or more	325,181	6.1%	29,116,452	52.1%

Source: Shared Research based on 2016 Economic Census by MIC and METI

HENNGE One is a service that is difficult to cancel once subscribed to. It not only provides convenience to users by eliminating the need to manage multiple IDs and passwords, but also allows system administrators to effectively control access privileges. Cancelling the service to switch to a competing one is a cumbersome process that requires time and additional costs to reconfigure and manage user IDs and passwords (number of employees × IDs and passwords for number of services in use). HENNGE One has more than 1,600 customer companies with over 1.9mn users, and its utilization rate (based on non-utilization time the company aggregates in increments of 10 minutes or more on a monthly basis) exceeded 99.9% at end-September 2020, which shows that customers place a high degree of trust in the company’s service.

At end-FY09/20, the churn rate was 0.16% (average monthly churn rate [TTM]). The company theoretically estimates the average years of service usage before cancellation to be roughly 51 years (calculated as 1 / (0.16% × 12 months), and believes its low churn rate will contribute to long-term revenue. Based on this calculation, it estimates a lifetime value (LTV) per acquired user of JPY102,000 (= annual ARPU of JPY2,007 × 51 years) and an LTV of JPY119mn per acquired customer company (LTV of JPY102,000 per user × 1,169 users per company). HENNGE accordingly pursues a strategy of rapidly acquiring new customers to expand corporate value.

Cultivating new customers

From a cost-effectiveness standpoint, the company plans to cultivate new customers among businesses with 300 to 5,000 employees. On a net basis, it added 243 companies as customers in FY09/16, 286 in FY09/17, 248 in FY09/18, 252 in FY09/19, and 239 in FY09/20 and looks to further accelerate the net annual increase in customer companies from the current pace of roughly 250 companies per year.

HENNGE One: Customer companies and users at those companies

		FY09/14	FY09/15	FY09/16	FY09/17	FY09/18	FY09/19	FY09/20
		Act.	Act.	Act.	Act.	Act.	Act.	Act.
No. of contracts ( )		232	399	642	928	1,176	1,428	1,667
	YoY	-	72.0%	60.9%	44.5%	26.7%	21.4%	16.7%
No. of users ('000 people)		275	437	654	1,027	1,371	1,672	1,948
	YoY	-	58.7%	49.6%	57.2%	33.5%	22.0%	16.5%
Average monthly churn rate (TTM)		-	-	-	-	0.15%	0.12%	0.16%
	YoY	-	-	-	-	-	-20.00%	33.33%
Number of users per contract		1,187	1,095	1,018	1,107	1,166	1,171	1,169
	YoY	-	-7.8%	-7.0%	8.7%	5.3%	0.4%	-0.2%

Source: Shared Research based on company data
Notes: Figures reflects results in last month of the fiscal year (i.e., September).
Figures may differ from company materials due to differences in rounding methods.

HENNGE aims to cultivate new customers by: 1) actively participating in exhibitions and events and carrying out advertising campaigns (raise name recognition), 2) strengthening its sales force, and 3) expanding operations outside the Tokyo metropolitan area.

The company actively takes part in exhibitions and events as it believes this is an effective way to improve name recognition for HENNGE One. In FY09/20, the company participated in Japan IT Week Kansai and Security Days 2020 Nagoya, among other events. After the COVID-19 outbreak halted in-person events, the company proactively participated in online seminars, holdings its own seminars, presenting at online AWS (Amazon Web Service) seminars, and co-hosting seminars with affiliated companies. In FY09/21, it plans to host a large-scale digital event with over 10,000 participants as it aims to improve name recognition among corporate decision makers and engineers at partnered agents (e.g., system integrators).

HENNGE had a sales team of 51 people as of September 2020, and it plans to continue adding a dozen or so new sales staff per year. The company acknowledges it has been unable to fully capture emerging demand for its services due to a combination of its low profile and a shortage of sales staff. Its name recognition increased following the listing on the TSE Mothers section in October 2019, and its reputation as an employer has improved following an increase in disclosure of information about its operations. Leveraging this momentum, HENNGE aims to actively hire sales staff.

The company is headquartered in Tokyo, with its sales structure centering on the Tokyo metropolitan area, which presents a large market. However, businesses with workforces of 300 to 5,000 employees can also be found in large numbers in other areas of the country. HENNGE set up branch offices in Osaka in June 2015, in Nagoya in August 2016, and in Fukuoka in August 2018, laying the foundations to cultivate new customers in areas outside of the Tokyo metropolitan area. The company plans to increase sales staff at such branch offices going forward to support its customer development efforts across Japan.

Aims to maximize users and increase ARPU through activities that contribute to customer success

HENNGE has established a Customer Success Division that was staffed with 41 employees as of September 2020. In addition to expanding its sales force, which is its first priority, the company plans to further increase the number of employees in this division. The primary responsibilities of the Customer Success Division are to respond to customer inquiries, elevate customer satisfaction, and prevent service cancellations. The company set up the division in FY09/17, and has continued to work to improve customer satisfaction. These efforts have paid off in the form of a low churn rate of 0.16% as of September 2020 (average monthly churn rate [TTM]). HENNGE is working to further reduce its churn rate by expanding efforts to support customer success.

Other important tasks of the Customer Success Division include collecting information on service usage conditions and proposing new features. For example, the division could up-sell device authentication and other services to customers who are only subscribed to SSO or email-related services, if it identifies a clear need for such services.

In addition, the division listens to customer opinions and requests in an effort to gather information on SaaS solutions used by customer companies and features that may improve their productivity. HENNGE thinks that identifying the issues confronting customers can lead to development of new features. Its strategy is to leverage the customer feedback obtained by its Customer Success Division to deploy additional features that provide convenience to a large number of companies, and accordingly create opportunities to up-sell services to its entire customer base.

HENNGE consolidated its previous price structure into three main price plans in June 2019 to promote new features under a simplified price structure. It expects spread of these plans to drive up ARPU. The new plans are 1) HENNGE One Secure Access (JPY400/month per user), 2) HENNGE One Standard (JPY500/month per user), and 3) HENNGE One Business (JPY700/month per user). Because the company pays mediation fees to partners (agents such as telecom carriers and system integrators) and offers discounts to large companies, it does not collect the aforementioned prices in full as revenue. Nevertheless, ARPU for recently acquired customers is exceeding ARPU for the entire customer base (JPY2,007 per year as of September 2020). HENNGE aims to increase ARPU by spreading new price plans and increasing users of new features.

In the medium term, HENNGE aims to grow ARPU by adding new features. In November 2020, the company launched its new multi-factor authentication feature, HENNGE Lock. The service, which supports iOS and Android operating systems, incorporates the user’s smartphone or smartwatch as an additional authentication factor to enable users to log in to SaaS platforms such as Microsoft 365, Google Workspace, Box, LINE WORKS and Slack without using passwords. Currently, the feature is available to HENNGE One users at no additional charge. In the future, the company intends to develop more new features and services to increase ARPU, such as by making them optional features available for an additional charge, or offering the features exclusively as a part of top-tier plans.

ARPU trends

ARPU		FY09/14	FY09/15	FY09/16	FY09/17	FY09/18	FY09/19	FY09/20
		Act.	Act.	Act.	Act.	Act.	Act.	Act.
ARPU (JPY)		2,042	2,015	1,970	1,848	1,861	1,938	2,007
	YoY	-	-1.3%	-2.2%	-6.2%	0.7%	4.1%	3.6%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Overseas operations

In October 2016, HENNGE established subsidiary HENNGE Taiwan K.K. in Taiwan to support full-scale sales of HENNGE One in Asia. Through HENNGE Taiwan, the company also monitors cloud service trends in Asia, develops new services, and gauges sales potential. At present, contributions from the overseas subsidiary are negligible (revenue of JPY8mn and operating loss of JPY22mn in FY09/20 after subtracting parent revenue and operating profit from consolidated results). However, HENNGE intends to expand its customer base in Asia and Europe over the medium term.

Launching new services

The company considers revenue growth for HENNGE One as its growth driver in the foreseeable future. At the same time, it is committed to broadly distributing proprietary, leading-edge technologies to customers under its management philosophy, “Liberation of Technology.” HENNGE actively adopts and tests new technologies internally to determine if they can be utilized in its services. This practice is part of its corporate culture, and the company aims to continue launching new services as deemed appropriate. Recent examples of such services are HENNGE Workstyle (released in February 2019) and Chromo Education (April 2019)

In February 2019, HENNGE launched HENNGE Workstyle, a new service powered by Internet of Things (IoT) technology. The service matches data obtained from motion sensors installed in meeting rooms with meeting schedule data obtained from Microsoft 365 or Google Workspace calendars to facilitate effective use of meeting rooms. It comes with a range of features that allow users to confirm meeting room bookings from various devices, play an alarm sound at the end of a scheduled meeting time, and aggregate data on meeting room usage. It is attracting attention as a tool that can help resolve meeting room shortages faced by customers.

In April 2019, the company rolled out Chromo Education, a new service that allows schools and nurseries to securely and reliably deliver emails to guardians. To prevent spam, telecom carriers generally impose some restrictions on the simultaneous distribution of large volumes of emails. Chromo Education harnesses the technologies underpinning HENNGE’s email services for companies to enable schools and nurseries to effectively communicate with guardians via email. The service ensures rapid and reliable distribution of emails, cuts out unnecessary features, and is equipped with a simplified and easy-to-operate user interface. In August 2020, the company launched CHROMO, a service geared for local government bodies. Through the service, HENNGE aims to contribute to the revitalization of local communities by facilitating smooth two-way communication between local government employees and residents.

Business

Business description

HENNGE provides proprietary software services to companies. Its core offering is HENNGE One, a software service that facilitates consolidated management of IDs and passwords for a wide array of third-party Software as a Service (SaaS) solutions—essentially cloud-based applications—that would typically have to be managed separately. HENNGE One’s ID integration functionality allows users to access such services with a single sign-on (SSO). HENNGE One is also equipped with a full range of user management and security features, including access restrictions to block sign-ins from unauthorized terminals or locations, device authentication for notebooks and smartphones, and data loss/leak prevention tools such as email attachment encryption, email archiving, and large-file exchange. HENNGE listed on the TSE Mothers market in October 2019.

The company reported revenue of JPY4.2bn and operating profit of JPY539mn in FY09/20. As of end-FY09/20, HENNGE One had 1,667 customer companies with about 1.95mn users. HENNGE had 181 employees at end-FY09/20.

In FY09/20, the HENNGE One business contributed revenue of JPY3.6bn (87% of total revenue) and Professional Service and Others revenue of JPY535mn (13%). Recurring revenue made up 97.1% of total revenue. The HENNGE One business mostly generates recurring revenue, and the same applies to some services in Professional Service and Others. The company collects annual usage fees from customers as upfront payments (recorded as unearned revenue on the balance sheet), and books these as monthly revenue once service actually starts. This business model produces stable revenue, although securing or losing large customers can cause revenue fluctuations.

HENNGE One

Core services

HENNGE One is a cloud-based SaaS offered to companies. It provides a comprehensive ID and password management service that consolidates IDs and passwords for a wide array of third-party SaaS into single sets of login credentials. It also offers one-stop user management and security services that prevent data loss/leaks. According to the “2018 Cloud-based Groupware/Security Service Market Trends” survey by Fuji Chimera Research Institute, HENNGE had captured a share of 65.4% of the domestic SSO market in 2017 (on a shipment volume basis).

HENNGE One comprises six core services: 1) Access Control, 2) Secure Browser, 3) Device Certificate, 4) Email Archive, 5) Email DLP, and 6) Secure Transfer. In addition to a comprehensive ID management service, HENNGE One also includes data loss/leak prevention services such as safe and reliable email and email archiving solutions that the company has developed based on expertise accumulated in other businesses, which differentiate the company from its competition.

1) HENNGE Access Control is an access control service that facilitates SSO for users and allows system administrators to manage IDs and impose access restrictions with ease. By authenticating its users, HENNGE One is able to log them into multiple cloud services with a single account. The service also comes with access restriction features to prevent unauthorized access such as IP address restrictions, cookie restrictions, device certificates, and two-factor authentication.

2) HENNGE Secure Browser provides a secure web browser for PCs, tablets, smartphones, and other devices. By blocking the storage of documents and email attachments on devices (so that users can only view such files in the browser), it aims to prevent data loss/leaks in scenarios such as devices being lost or infected by viruses. Also, text displayed in the browser cannot be copied and pasted, further reducing the risk of data loss/leaks.

3) HENNGE Device Certificate is a service under which the company issues device certificates that are registered on notebooks (Windows/Mac) or smart devices (iOS/Android). In this way, customers can restrict access to their cloud-based services to devices that have the certificate installed. By only allowing access from PCs or smart devices that have the certificate installed, companies can block access from unregistered PCs and smart devices, thus mitigating the risk of data loss/leaks and unauthorized access.

4) HENNGE Email Archive is a storage and search service for emails. It stores all email data sent and received by individual users, and allows system administrators to search emails and attachments (with Japanese language support), browse, forward, or download all archived emails as necessary. It provides settings to configure the archiving period in line with the security policy of each company. The service allows companies to rapidly investigate leaks of insider information or personal information.

5) HENNGE Email DLP reduces erroneous email transmissions, and provides cloud-based email security features that coordinate with email services such as Microsoft 365 and Gmail, including email filtering, email monitoring, and zip-file encryption of email attachments. The service allows companies to keep emails on hold before sending until authorization is obtained from another person other than the sender, and facilitates effortless and secure transmissions of attachments by automatically encrypting attachments in locked zip files and sending their passwords in a follow-up email. DLP stands for data loss or data leak prevention.

6) HENNGE Secure Transfer allows users to exchange large files securely and reliably with internal and external parties. Senders can send files to other individuals inside or outside their organizations by generating download passwords and setting an expiration date for each download. They can also generate upload links to obtain large files from such individuals.

Demand growth drivers

In the past, many companies operated on-premises information systems, which entailed running software on in-house servers. Under this approach, only devices installed within offices and connected to a company’s local area network (LAN) could access internal information systems, making it possible to prevent external data leaks to a large extent by managing physical access to company premises.

However, despite the security advantages afforded by on-premises information systems, a growing number of companies have switched to fixed-cost software services because: 1) operating on-premises information systems requires significant spending on equipment and software updates, maintenance, and management, 2) a range of convenient SaaS solutions have become available at low upfront costs with the advent of increasingly diverse cloud-based computing services offered by many vendors, and 3) software service providers are now able to provide third-party authentication thanks to advances in data management systems. In addition, factors such as the pursuit of improved labor productivity, the use of mobile devices such as smartphones, work style reforms, and remote work can all create the need for information systems to be accessible from outside a company. In such scenarios, managing physical access to office premises no longer suffices as data management.

However, strict management of ID and password data becomes even more important when switching to cloud-based systems. When using external software services, different IDs and passwords are generally needed for each service. This means terminal users need to properly manage such information and enter their ID and password every time they wish to use the software in question (also, if a password is forgotten, it needs to be reissued). With HENNGE One’s SSO, users only need to sign in to HENNGE One and the system subsequently signs in to various third-party SaaS on behalf of the users, giving them access to all services without requiring individual sign-ins. This increases user convenience and productivity.

HENNGE One also reduces the management burden on system administrators, who ordinarily have to manage a large number of IDs and passwords (one set per user for each service). HENNGE One provides fine-grained control over access privileges, allowing system administrators to configure which individuals or divisions/ranks can use which services and to what extent. Access can also be restricted based on location. For example, attempts to access sensitive personal information via public Wi-Fi in places such as airports or coffee shops can be blocked.

When new employees join a company or existing employees are transferred within the company, HENNGE One removes the need to install or delete software from each of their work devices, and allows administrators to update their user privileges in one stroke, alleviating the workload of information system divisions. When employees resign, their user privileges can be cancelled immediately, preventing data leaks to the external world. These benefits are driving up demand for SSO services.

In addition to SSO, HENNGE provides one-stop user management and security features such as device certificates that restrict system access to notebook PCs, tablets, smartphones, private desktop computers authorized by information system divisions, and a secure browser that allows data to be viewed and handled in a browser on authorized devices, but prevents downloading, storing, or copying data to devices. In other words, the company’s services help prevent data loss/leaks, reduce burdens on users and administrators, increase productivity, and improve convenience.

Access Control

Source: Shared Research based on company data

HENNGE also provides the email-related services HENNGE Email Archive and HENNGE Email DLP, which are used by many companies. These are designed to prevent data loss/leaks, which can often be traced back to email exchanges with the outside world. HENNGE Email Archive allows customers to flexibly store incoming and outgoing emails for a specific period in line with their information security policy. In the event of a data leak, system administrators can search the archived emails and find out whether the leak originated internally. Even if emails are deleted on user devices, they remain stored in the archives at customer companies. Therefore, simply informing staff that the information system division has access to all exchanged emails through the archives can be an effective strategy to reduce data leaks.

Many companies subscribe to the aforementioned services when they start using cloud services such as Microsoft 365 and Google Workspace. While Microsoft 365 and Google Workspace also provide archiving and search solutions, HENNGE’s services are highly received as they allow archiving periods to be configured in accordance with the information security policies of each customer, and offer better performance for searches in the Japanese language. For such reasons, it is not uncommon for companies to adopt HENNGE One at the same time as services such as Microsoft 365 and Google Workspace.

The HENNGE Email DLP service is used by many customers for tasks such as filtering emails based on specific text strings (e.g., account numbers) included in emails, delaying deliveries of outgoing emails after the send button was pressed (the delay time can be configured in accordance with a company’s security policy; a delay of one to five minutes is commonly used), and automatically encrypting attachments into password-protected zip files and generating corresponding passwords that are sent in a following email.

As many email errors such as forgotten or erroneous attachments are only noticed after a sender has pressed the send button, the HENNGE Email DLP feature to cancel emails shortly after they are sent has been well received by customers. Some of HENNGE’s customers cancel up to 500 emails per year in this manner. The feature was developed based on the assumption that human beings are prone to errors and that immediate correction of those errors is critically important. Its ultimate aim is to reduce the risk of data loss/leaks.

From the standpoint of data security, it is advisable to encrypt email attachments in password-protected zip files, and many companies intend to do so. However, manually zipping files and setting passwords is a laborious process. The HENNGE Email DLP service comes with features that automate the entire process of zipping files, generating passwords, and sending passwords in following emails. In addition to lowering the risk of data loss/leaks, the service reduces the work burden for users, thus contributing to enhanced productivity.

HENNGE has offered email-related services in Japan since 2000, when it began developing and selling mail servers and packaged software for email management. It provides several specialized email services in Professional Service and Others. Its HENNGE Email DLP service incorporates email data loss/leak prevention strategies accumulated by the company by gauging email-related needs of customers over many years. Some of the company’s customers have adopted HENNGE One based on its solid track record in email services (over 1.80mn users across customer companies) and in providing services to customers that require the highest level of reliability such as financial institutions (including banks) and local governments.

Usage fees

HENNGE introduced three new price plans in June 2019. Its Secure Access plan provides Access Control, Secure Browser, and Device Certificate as a package for a monthly fee of JPY400/user. Its Standard plan, which is mainly geared toward email services, includes Access Control, Secure Browser, Email Archive, Email DLP, and Secure Transfer for a monthly fee of JPY500/user. Its Business plan offers all six services mentioned above for a monthly fee of JPY750/user.

The usage fees cited above are standard prices per user, and do not correspond to revenue per user. The company also provides HENNGE One through partners, and records wholesale prices as revenue in such cases. In addition, it offers discounts to high-volume customers. At end-FY09/20, annual ARPU stood at JPY2,007 (monthly ARPU of JPY167.3). HENNGE expects ARPU to increase further once more customers adopt the new price plans.

Price plans

	HENNGE One Secure Access	HENNGE One Standard	HENNGE One Business
Plan	Entry level plan including single sign-on to SaaS and terminal device control	Standard plan with SSO to Microsoft 365, Google Workplace, and other SaaS, and email security services	Enterprise plan with device certificate required for device control added to Standard plan
Monthly fee per user (ex. tax; annual contract)	JPY400	JPY500	JPY750
Services included in the plan	HENNGE Access Control HENNGE Secure Browser HENNGE Device Certificate	HENNGE Access Control HENNGE Secure Browser HENNGE Email Archive HENNGE Email DLP HENNGE Secure Transfer	HENNGE Access Control HENNGE Secure Browser HENNGE Email Archive HENNGE Email DLP HENNGE Device Certificate HENNGE Secure Transfer
Device certificate issuance [No. of available licenses]	One per user [from 200]	Paid option [from 100]	Three per user [from 100]

Source: Shared Research based on company data

HENNGE One’s SSO service integrates with over 150 verified cloud services (as of September 2020). The company collects feedback from customers and actively pursues integration with new cloud services that are gaining in popularity. However, any cloud service that implements the Security Assertion Markup Language (SAML: a standard for exchanging user authentication data between different internet domains)—even those not verified by the company—should at least in principle integrate with HENNGE One. At present, the company does not regard its number of supported cloud services as a KPI. If services emerge that compete with HENNGE ONE and the number of supported SaaS becomes a metric to determine user convenience or competitiveness, the company will actively verify such services and aggressively work to ensure integration with a larger number of services.

Number of cloud services that integrate with HENNGE One

Source: Shared Research based on company data

Major supported cloud services

Communication	Platform	Workflow	CRM	HR	Other
Chatwork Google Workplace Microsoft 365 LINE WORKS slack ZOOM Shoprun WaWaOffice	AWS box Dropbox druva fileforce brightcove CYDAS SAP HANA	DocuSign servicenow concur rakumo X-print Streamline collaboflow ActionPassport Rakuraku Seisan	salesforce kintone zendesk Sales Force Assistant Knowledge Suite	Smart HR TeamSpirit kaonavi Leaf Jobcan SkyDesk sansan	cybozu CyberMail GitHub AddressLook MotionBoard Adobe Creative Cloud moconavi Atlassian DIGGLE Automation Anyware ZAC CLOUDSIGN Qast

Source: Shared Research based on company data

In November 2020, the company launched the HENNGE One Product Alliance Program, a new system aimed at explicitly promoting the connectivity gained by linking participating companies’ various SaaS applications with a single sign-on function of HENNGE One for users. In this manner, companies using a single sign-on can securely select SaaS, and companies using various SaaS can adopt a single sign-on without security concerns. The company looks to further enhance the convenience for user companies by encouraging more SaaS partners to participate in the program.

Business model

HENNGE One revenue is essentially determined by the number of users and service fees per user. The company regards annual recurring revenue (ARR), the number of customer companies (N), the number of users per company (n), annual ARPU, the churn rate, and GPM as important KPIs for the HENNGE One business. It will focus on these KPIs, while determining its spending (including operating-related costs).

ARR = N (number of customer companies) × n (number of users per company) × annual ARPU

At end-September 2020, HENNGE had 1,667 companies as customers, roughly 30% of which were listed. It supplies services to about 13% of the companies listed on the Tokyo Stock Exchange. HENNGE’s customers operate in a range of industries, and the company is not reliant on any particular industry. It generally sees growth in users at customer companies in the three months starting from April and October (in the company’s Q1 and Q3), when many companies add or transfer personnel, and increases in new customers (companies) in the remaining months of the year (in its Q2 and Q4).

Number of customer companies and users at those companies

HENNGE One		FY09/18				FY09/19				FY09/20
		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
No. of contracts (companies)		-	-	-	1,176	1,230	1,298	1,361	1,428	1,487	1,548	1,610	1,667
	YoY	-	-	-	-	-	-	-	21.4%	20.9%	19.3%	18.3%	16.7%
No. of users ('000 people)		-	-	-	1,371	1,442	1,465	1,631	1,672	1,776	1,824	1,910	1,948
	YoY	-	-	-	-	-	-	-	22.0%	23.2%	24.5%	17.1%	16.5%

Source: Shared Research based on company data

Main HENNGE One customers

Source: Shared Research based on company data

The number of users per customer company is determined by the staff size of the company, and is therefore difficult to control through management efforts. The number of users varies by customer, but has hovered at around 1,100 employees per company over the past five years. The company sees the benefits of HENNGE One for companies with at least 30 employees. From the perspective of cost-effectiveness, however, it aims to secure new customers with 300 to 5,000 employees.

Annual ARPU reached JPY2,007 (monthly ARPU of JPY167.3) at end-FY09/20. The company introduced a simplified price structure consisting of three new price plans in June 2019. The company says many of its customers have opted for the mid-range HENNGE One Standard plan (JPY500/month per user), and that ARPU for new customers is trending above average ARPU for all customers. This suggests that ARPU should rise further if the company continues to secure new customers at a steady pace. However, ARPU may drop over the near term if the number of users increases through service usage expansion to other divisions at existing customers with low service price per user (i.e., customers that signed up for the service early on, use a limited range of features, or receive volume discounts).

ARPU and ARR

		FY09/18				FY09/19				FY09/20
		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
ARR (JPYmn)		-	-	-	2,552	2,696	2,907	3,069	3,240	3,411	3,577	3,793	3,909
	YoY	-	-	-	-	-	-	-	27.0%	26.5%	23.0%	23.6%	20.6%
ARPU (JPY)		-	-	-	1,861	1,870	1,984	1,881	1,938	1,921	1,961	1,986	2,007
	YoY	-	-	-	-	-	-	-	4.1%	2.7%	-1.2%	5.6%	3.6%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

HENNGE’s churn rate was low at 0.16% at end-FY09/20. The company utilizes gross revenue churn rate—lost subscription revenue due to service cancellations as a percentage of existing subscription revenue—and discloses the average monthly churn rate (TTM). The recent churn rate has been sufficiently low, and HENNGE theoretically estimates the average years of service usage before cancellation to be about 51 years (calculated as 1 / [0.16% × 12 months]). HENNGE is expanding staff in its Customer Success Division in addition to its sales force. It aims to raise customer satisfaction to reduce its churn rate, strengthen features and services based on customer feedback, and believes such efforts will lead to growth in ARPU.

Average monthly churn rate for HENNGE One

Source: Shared Research based on company data

Professional Service and Others

In FY09/20, HENNGE reported Professional Service and Others revenue of JPY535mn (13% of total revenue). This business mainly comprises services such as Customers Mail Cloud, HDE Mail Application Server #Delivery, and HDE Mobile MTA. The company does not allocate significant management resources to this business category at present as it thinks it needs to continue allocating its resources to the HENNGE One business. In addition, it is in the process of terminating support for several existing products, as a result of which support revenue is trending down. Consequently, revenue in Professional Services and Others is unlikely to expand in the foreseeable future.

Customer Mail Cloud is a cloud-based email service that enables the distribution of large volumes of emails to mobile phones, PCs, and smartphones. Systems developed by information system developing companies have the capability to notify users of email delivery but as their user base grows and notifications increase in frequency, they require additional mechanisms to prevent email delays or failures. Customer Mail Cloud facilitates the distribution of large volumes of emails over the cloud, removing the need to build such mechanisms. The service is mainly used by e-commerce providers and other companies that regularly send out large volumes of emails.

HDE Mail Application Server #Delivery and HDE Mobile MTA are packaged software products deployed on customer premises that facilitate secure, reliable, and high-speed distribution of large volumes of emails to mobile phones, PCs, and smartphones. HDE Mail Application Server #Delivery is mainly used as a backbone system by financial institutions and local government bodies to send important emails that must be delivered without fail such as ATM withdrawal notices or disaster prevention notices. HDE Mobile MTA achieves reliable email distribution by using a high-speed email distribution server customized for mobile carriers and technology that clearly identifies senders.

In 1997, HENNGE started developing and selling web servers. In 2000, the company launched email-focused electronic customer relationship management (eCRM) packaged software, and started operating mail servers. It has accumulated a long track record in the email space, and although it positions the HENNGE One business as its core business today, accumulation of email-related technologies remains a core part of the company.

Cost structure

In FY09/20, cost of revenue ratio came to 17.7%. Although labor expenses are a major cost component within cost of revenue, a large portion of these is transfer to other account and booked as R&D expenses under SG&A expenses. In real terms, therefore, the largest expense item within cost of revenue is service and system usage fees. These mainly consist of Amazon Web Services (AWS) usage fees, which increase in tandem with growth in business scale. Other costs include outsourcing costs and royalties paid, but these are not strongly correlated to revenue.

Cost of revenue

Source: Shared Research based on company data
Note: Above chart created based on FY09/20 results

In FY09/20, SG&A expenses mainly comprised personnel expenses, outsourcing expenses, advertising expenses, and R&D expenses. At end-FY09/20, the company had 181 employees. It plans to add some 30 employees per year, focusing particularly on sales force and staff in its Customer Success Division. HENNGE has a flexible hiring policy and is not fixated on hiring Japanese nationals. For example, the company’s Development Division has a large number of non-Japanese employees. Outsourcing expenses are used to cover personnel shortages, especially for support tasks. If the company continues to bring on new staff, it should be able to cut outsourcing expenses. Advertising expenses are trending up. HENNGE aims to effectively invest in advertising to increase its name recognition and, by extension, expand its revenue.

SG&A expenses (FY09/20)

Source: Shared Research based on company data

Employees (including part time staff) and ratio of non-Japanese employees

Source: Shared Research based on company data

On a consolidated basis, the company had 181 employees at end-September 2020. A unique characteristic of the company is that it actively hires non-Japanese talent. Of its 194 employees (including part-time staff) at end-September 2020, 45 (23.2%) were non-Japanese. HENNGE is committed to the pursuit of continual change. Although it is headquartered in Japan and mainly supplies services to Japanese companies, the company believes diversity is the driving force behind continual change (new technologies are often launched in the English language first, and diversity allows the company pick these up at an early stage). HENNGE uses English as its official language for internal use and launched a global internship program in 2012 to recruit non-Japanese talent. Through FY09/20, it had received applications from over 14,000 applicants from 148 countries. Many applicants are drawn to the prospect of working in Japan, which they see as an additional benefit of working at HENNGE.

By division, the company allocates large numbers of staff to research and development for HENNGE One, sales, and the Customer Success Division.

Employees (as of end-September 2020)

Source: Shared Research based on company data

Growth trajectory

Establishment

HENNGE was founded in 1996. Its current representative director and CEO Kazuhiro Ogura set up Horizon Digital Enterprise Ltd. with some friends as a college student. Fascinated by the rapid technological advances in the IT space, Mr. Ogura founded the company with the intention of using his knowledge of IT and programming to create services that contribute to society. At the time, the company focused primarily on developing corporate websites.

As their graduation from college approached, Mr. Ogura as well as other founding members Kazuaki Miyamoto and Yoshiki Nagatome (currently serving as HENNGE’s representative director/executive vice president and director/executive vice president, respectively) faced the dilemma of whether to join a major company or continue their business after graduation. They concluded that if they were to carry on with the business, it would need a clear purpose. Aspiring to “become a company that provides its own unique and unprecedented value,” the trio set out to create a company that could serve as a “technology bridge” to share leading-edge technologies with a large number of people. The company’s motto “Liberation of Technology,” which encapsulates HENNGE’s corporate vision, was coined around this time.

Web servers

The company started selling web servers and server management tools around 1997. It realized that it would need to sell hardware with embedded technology to accomplish the vision of sharing its technological expertise with a large number of people. It ultimately settled on web servers as the vehicle through which to distribute its accumulated technologies. These servers sold at a price of roughly JPY400,000 per unit, and attracted a certain degree of attention within the IT industry. A web server market was formed as competing products emerged, and HENNGE assumed a leading position in this market.

Packaged email services

HENNGE began selling electronic customer relationship management (eCRM) software in 2000. Having gained the expertise to sell server management tools as packaged software, it transitioned from being a supplier of hardware (products) to a developer and provider of packaged software (services). Its eCRM software mainly focused on email management. Email had been rapidly spreading as a communication tool, and HENNGE concentrated on how to reliably send emails to a large number of recipients and prevent data loss/leaks. The technologies accumulated through these efforts are being utilized in its mainstay HENNGE One service to this day. While sale of the eCRM packaged software series was initially brisk, the company’s revenue dropped by half after the IT bubble burst, and its financial condition deteriorated significantly thereafter.

Under the business model of selling packaged software, HENNGE did not get to know its customers, making it difficult to reflect customer feedback in follow-up development. The company realized it needed to cultivate another earnings pillar to stabilize its business. To pivot to a business model with a stronger emphasis on services and communication with customers, the company shifted its focus to system integration services. Leveraging its high-volume and high-speed email technologies, HENNGE developed email services tailored to local government bodies which need to be able to send disaster prevention notifications and financial institutions which need email services linked to bank ATM systems. It started selling these services through partners such as IBM Japan, NEC (TSE1: 6701), and Fujitsu (TSE1: 6702). While the plan was to sell these services to its already solid customer base, the company faced another challenging business environment when banks scaled back capital investment in the wake of the financial crisis that erupted in the US in 2008.

Still, the customer base acquired by the company through this period eventually proved a major asset to the company. HENNGE has supplied services to roughly 1,000 local government bodies, which practically means about one-third of such bodies across Japan have adopted the company’s software services. The company’s digitally signed email services have been adopted by a large number of banks, including megabanks such as Sumitomo Mitsui Banking Corporation (Sumitomo Mitsui Financial Group [TSE1: 8316]), for online banking usage notifications. The adoption of the company’s email systems by local government bodies and leading banks expanded its reputation as a provider of reliable systems, which is having a positive impact on customer acquisition for HENNGE One.

Move to cloud services

In the aftermath of the 2008 global financial crisis, the company’s earnings worsened due to a sharp decline in capital investment demand from financial institutions, forcing the company to explore new businesses. Cloud computing services had just started taking off in the US, and cloud technology appeared, to the company, to be the next big thing poised to significantly transform the world, which made a perfect fit for a company committed to the pursuit of leading-edge technologies. The company launched HDE Mail Service in March 2011, its first cloud-based service that leveraged the email technologies the company had accumulated. HDE Mail Service was the precursor to HENNGE One, the current mainstay service. In January 2014, the company added access security features (login authorization/denial based on IP address and device information; establishing an SSO environment) and device security features (providing secure browser) to the service, and rebranded it as HENNGE One (which had launched as HDE One).

Further growth under the HENNGE name

The company changed its name to HDE in 2007, and subsequently to HENNGE in February 2019. Having experienced several ups and downs throughout its history, it selected the name HENNGE (originating from the Japanese characters for “transformation” and “challenge”) to reflect its conviction that “continual change is essential to survive in the ever-changing IT industry.” The name also includes a warning to avoid resting on one’s laurels after having achieved a certain measure of success.

HENNGE has cultivated a corporate culture that encourages continual change. It eagerly adopts new technologies under the slogan “plucking unripe technological fruits.” This philosophy of “taking the first bite” of immature technologies naturally leads to (minor) failures. However, HENNGE believes the lessons learned from such failures are instrumental in providing customers with optimal solutions.

This corporate culture of valuing changes is also apparent in the company’s recruiting policy. HENNGE has adopted English as its official language for internal use, and launched a global internship program to aggressively hire non-Japanese talent. It thinks strictly Japanese teams are prone to filter out diverging voices or perspectives. To prevent this, HENNGE aggressively promotes diversity in the workplace, and believes this fosters a corporate climate in which new technologies, cultures, and lifestyles are actively adopted.

In sum, the company name HENNGE embodies the idea of not eschewing changes but rather valuing failure, transformation, and learning, as well as an understanding that success is fueled by the lessons from past failures.

Market and value chain

Cloud services market

The company positions its core HENNGE One service as a Software as a Service (SaaS) that facilitates the use of a broad range of third-party cloud computing services (including Infrastructure as a Service [IaaS], Cloud as a Service [CaaS], Platform as a Service [PaaS], and other SaaS) with a high degree of security, reliability, and convenience. The single sign-on (SSO) functionality built into HENNGE One, which allows customer companies to consolidate IDs and passwords for multiple cloud computing services into single sets of login credentials, becomes more useful in proportion to the number of third-party SaaS used by customers. In this sense, the company’s growth hinges to a large extent on expansion in third-party cloud services, particularly SaaS.

Global cloud services market

Source: Shared Research based on IHS Markit materials

According to a survey by IHS Markit, the global cloud services market was worth USD164.0bn in 2017, and has continued to expand since. The COVID-19 pandemic is estimated to have further accelerated market growth by prompting a global shift to remote work and online learning.

Cloud services are often categorized into SaaS, PaaS, CaaS, and IaaS. SaaS generally refers to the delivery of software services that were supplied as packaged software in the past, through a web browser. SaaS examples are Google Workspace offered by Google (Alphabet Inc. [NASDAQ: GOOGL]) and Salesforce provided by Salesforce.com, Inc. (NYSE: CRM).

PaaS is comprehensive platforms (hardware and OS to run application software) offered as an online service. Examples are Microsoft Azure offered by Microsoft Corporation (NASDAQ: MSFT) and Google App Engine offered by Google. CaaS is hybrid-type services that offer third-party cloud services over the cloud. Finally, IaaS provides hardware and networking infrastructure such as virtual servers, which are necessary to run information systems, as an online service. Examples are Amazon Elastic Compute Cloud (EC2) offered by Amazon Web Services (AWS), a subsidiary of Amazon.com, Inc. (NASDAQ: AMZN), and Google Compute Engine offered by Google.

Software as a Service (SaaS): Packaged software provided as online service
Platform as a Service (PaaS): SaaS development and operating environment provided as online service
Cloud as a Service (CaaS): Hybrid-type service that provides third-party cloud services over the cloud
Infrastructure as a Service (IaaS): Service that provides hardware and ICT infrastructure as an online service

Domestic public cloud services market

Source: Shared Research based on IDC Japan materials
Note: Includes some estimates by Shared Research

The Japanese public cloud services market was valued at JPY1.09tn (+15% YoY) in 2020, according to a survey by IDC Japan. As companies continue to transition from conventional IT systems to cloud solutions, IaaS and PaaS have expanded rapidly as infrastructure for new digital services (specifically, mobile and web applications that strengthen customer engagement). The domestic SaaS market is enjoying stable growth supported by steady expansion in information-centric SaaS, which were launched early on (comparatively speaking), and the emergence of a multitude of industry-specific SaaS. Systems that take advantage of public cloud services have diversified from information systems to backbone systems and digital transformation, and applications continue to expand. IDC Japan expects the market to grow to JPY2.1tn by 2024 (CAGR of 18.6%). In other words, the Japanese cloud services market is poised for further growth.

Usage of cloud services

Source: Shared Research based on “Communications Usage Trend Survey” by MIC

While the cloud services market is expanding in Japan, Shared Research thinks that adoption of such services remains low. The 2020 White Paper on Information and Communications in Japan showed that only 36.1% of surveyed companies were using cloud services across the company, with that percentage rising to 64.7% after adding in respondents that indicated some offices or divisions used cloud services. Although usage exceeded 50% in 2017 and continues to increase, a large number of companies have yet to adopt cloud services or are only using them to a certain degree.

By industry, usage of cloud services is relatively high in the information communications, financial, and insurance industries, but low in the transportation, postal services, manufacturing, services, and other industries. By company size, 80% of companies with capital of JPY500mn or more use cloud services, but only a small percentage of small and medium-sized companies do so. Although the latter stand to reap significant benefits from the adoption of cloud services due to the absence of upfront investment and availability of pay-per-use billing, the data show that cloud services have not gained traction among small and medium-sized companies.

Cloud service usage rates by industry and company size (capital basis)

Source: Shared Research based on “Communications Usage Trend Survey” by MIC

Cloud service usage purpose and effects

Source: Shared Research based on “Communications Usage Trend Survey” by MIC

Companies that use cloud services mainly do so to “store and share files,” “use email services,” and “gain access to servers.” While the usage rates for such services are the highest overall, they still remain at only around 50%.

Usage rates are low for operations such as “salary, finance and accounting, human resources,” “sales support,” “e-learning,” “information sharing with business partners,” “systems development and website building,” and “production management, logistics management, or store management,” leaving ample scope for further growth in usage of cloud services.

Among surveyed cloud service subscribers (companies), 85.5% of the respondents indicated they derive some type of benefits from the use of cloud services, with 33.6% reporting “major benefits” and 51.9% “some benefits.” This shows many companies have a positive view of cloud services, and suggests resistance to such services may be waning. Many companies were reluctant to adopt cloud services in the past either because they had no need for them or due to security concerns over data loss/leaks or concerns over network stability. However, as adoption of cloud services expands, the number of companies that get to experience the benefits of such services is increasing.

Main competitors

The SSO and Identity as a Service (IDaaS) solutions provided in the core HENNGE One service do not face competition from major companies in Japan. HENNGE One commanded a 65.4% market share of the domestic cloud-based IDaaS market in 2017 (on a shipment basis), according to the “2018 Cloud-based Groupware/Security Service Market Trends” survey published by Fuji Chimera Research Institute.

Below, we present information on US-based Okta Inc. (NASDAQ: OKTA), which entered the SSO space at an early stage and is mainly expanding earning in the US, as a reference.

Okta reported FY01/20 revenue of USD586mn (+46.8% YoY), of which SSO subscription revenue accounted for over 90%. Its revenue growth averaged a high 53.9% in the three years from FY01/17. The company had 8,400 customers as of April 2020, and offered support for over 6,500 SaaS solutions. Cloud computing services became popular in the US between 2005 and 2010, and many software providers in the US started offering subscription-based services to companies around that time. However, such services only gained traction in Japan at a later stage.

Okta earnings trends

Okta			FY01/16	FY01/17	FY01/18	FY01/19	FY01/20
(USD'000)
Revenue			85,907	160,806	256,547	399,254	586,067
	YoY		-	87.2%	59.5%	55.6%	46.8%
	Subscription		76,443	144,909	236,422	370,855	552,688
		YoY	-	89.6%	63.2%	56.9%	49.0%
	Professional services and others		9,464	15,897	20,125	28,399	33,379
		YoY	-	68.0%	26.6%	41.1%	17.5%
Cost of revenue			36,074	55,949	80,755	113,421	159,382
	YoY		-	55.1%	44.3%	40.5%	40.5%
SG&A expenses			125,871	179,527	287,644	405,455	612,517
	YoY		-	42.6%	60.2%	41.0%	51.1%
	SG&A ratio		146.5%	111.6%	112.1%	101.6%	104.5%
	R&D expenses		28,761	38,659	70,821	102,385	159,269
		YoY	-	34.4%	83.2%	44.6%	55.6%
	Selling expenses		77,915	110,769	165,020	227,960	340,356
		YoY	-	42.2%	49.0%	38.1%	49.3%
	Other		19,195	30,099	51,803	75,110	112,892
		YoY	-	56.8%	72.1%	45.0%	50.3%
Operating profit			-75,988	-74,670	-111,852	-119,622	-185,832
	YoY		-	-	-	-	-
	Operating profit margin		-88.5%	-46.4%	-43.6%	-30.0%	-31.7%

Okta			FY01/19				FY01/20				FY01/21
(USD'000)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue			83,621	94,586	105,576	115,471	125,223	140,480	153,037	167,327	182,859	200,446	-	-
	YoY		-	-	-	-	49.8%	48.5%	45.0%	44.9%	46.0%	42.7%	-	-
	Subscription		76,841	87,854	97,698	108,462	117,163	132,494	144,517	158,514	173,781	190,689	-	-
		YoY	-	-	-	-	52.5%	50.8%	47.9%	46.1%	48.3%	43.9%	-	-
	Professional services and others		6,780	6,732	7,878	7,009	8,060	7,986	8,520	8,813	9,078	9,757	-	-
		YoY	-	-	-	-	18.9%	18.6%	8.1%	25.7%	12.6%	22.2%	-	-
Cost of revenue			24,107	28,228	29,700	31,386	35,095	38,780	40,824	44,683	48,486	51,147	-	-
	YoY		-	-	-	-	45.6%	37.4%	37.5%	42.4%	38.2%	31.9%	-	-
SG&A expenses			84,492	104,788	104,355	111,820	141,910	145,317	157,943	167,347	186,572	194,687	-	-
	YoY		-	-	-	-	68.0%	38.7%	51.4%	49.7%	31.5%	34.0%	-	-
	SG&A ratio		101.0%	110.8%	98.8%	96.8%	113.3%	103.4%	103.2%	100.0%	102.0%	97.1%	-	-
	R&D expenses		19,929	24,829	27,596	30,031	34,032	40,045	41,832	43,360	48,494	53,866	-	-
		YoY	-	-	-	-	70.8%	61.3%	51.6%	44.4%	42.5%	34.5%	-	-
	Selling expenses		49,493	59,004	56,911	62,552	82,112	78,385	87,224	92,635	104,043	98,322	-	-
		YoY	-	-	-	-	65.9%	32.8%	53.3%	48.1%	26.7%	25.4%	-	-
	Other		15,070	20,955	19,848	19,237	25,766	26,887	28,887	31,352	34,035	42,499	-	-
		YoY	-	-	-	-	71.0%	28.3%	45.5%	63.0%	32.1%	58.1%	-	-
Operating profit			-24,978	-38,430	-28,479	-27,735	-51,782	-43,617	-45,730	-4,903	-15,145	-21,010	-	-
	YoY		-	-	-	-	-	-	-	-	-	-	-	-
	Operating profit margin		-29.9%	-40.6%	-27.0%	-24.0%	-41.4%	-31.0%	-29.9%	-2.9%	-8.3%	-10.5%	-	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Before cloud services appeared on the scene in the US, it was common practice for software user companies to spend money upfront on packaged enterprise software and use such products for several years. As subscription-based cloud services became more prevalent, companies adopted cloud software with new functionality for an initial period and determined whether to continue using them long-term or switch to competing services based on user convenience. As a result of fierce competition in the market for cloud-based enterprise software, the underlying technologies continued to evolve rapidly, driving improvement in services and growth in useful services for many user companies.

In Japan, cloud services started taking off in the wake of the Great East Japan Earthquake of 2011. Prior to that, many companies were reluctant to try out cloud services due to concerns over data security, and the majority therefore invested in on-premises information systems (running software on in-house servers). However, the addition of features such as third-party authentication improved the security of cloud services, and the earthquake prompted a renewed recognition of the effectiveness of cloud services as a tool to underpin business continuity plans (BCPs). These factors drove adoption of cloud services in Japan.

In addition to purchasing packaged software, a large share of companies in the US have also relied on software developed by in-house IT divisions in areas of strategic importance, with only 30% turning to contracted software development. The transition to standardized cloud services was proved to be an easy one for US companies accustomed to purchasing packaged software.

In contrast, roughly 90% of Japanese companies depend on contracted software development. These companies typically use customized software developed by system integrators or other contracted software developers, and this could be one of the factors hindering adoption of standardized SaaS offerings. Since 2011, however, usage of cloud services has gradually increased in Japan as well, which in turn has fueled growth in the number of SaaS providers. As of end-September 2020, HENNGE had 1,667 customers and offered support for over 150 cloud services. The company has captured a leading market share in Japan, but it lags Okta in business scale. However, Shared Research thinks Japan is about to enter a phase in which the use of multiple SaaS will become commonplace among companies. As such, the value proposition of HENNGE’s SSO functionality should improve going forward, and expansion in the Japanese SaaS market will therefore be a key trend to watch.

Breakdown of software adoption in Japan (FY2017, left) and software investment in US (2016, right)

Source: Shared Research based on the 2018 Basic Telecommunications Basic Survey and materials published by the US Department of Commerce

Okta has a high GPM of roughly 60% (but lower than HENNGE’s 82.3% in FY09/20), but it has reported an operating loss due to aggressive spending on sales to rapidly lock in customers and high R&D expenses to increase SaaS support (going beyond SSO support by also offering deeper integration with SaaS solutions).

On the development front, Okta is leveraging its position as an SSO provider to become a platform provider. It thinks it will be able to further enhance user convenience if it could offer some of the functions of the SaaS supported by its SSO service through its own platform. The services provided by Okta already include core SaaS features. For example, when configuring initial settings for new employees, customers’ information system divisions can take advantage of Okta’s SSO solution to immediately set up access to the Slack communication platform. They can even configure the channels those new employees should join, even generating automated welcome messages. Okta’s efforts to enhance added value by seeking deeper integration with core SaaS solutions shows it takes a more proactive approach than HENNGE.

Okta has also secured a large number of companies that operate globally as customers. While this can be in part attributed to the fact that many companies with global operations are headquartered in the US, Okta also provides services to Japanese companies such as Toyota Motor (TSE1: 7203), Hitachi (TSE1: 6501), NTT Data (TSE1: 9613), the Dentsu Group (TSE1: 4324), and DeNA (TSE1: 2432). Okta derives only 16% of its revenue from companies outside of the US, so it is not a direct competitor of HENNGE at present. However, Okta aims to raise its non-US revenue ratio to 50% over the medium term, and may therefore become a direct rival of HENNGE if more major Japanese companies start using Okta’s services.

HENNGE believes it can maintain its competitive edge in the Japanese market for a number of reasons. First, SaaS ecosystems differ by country and region. The SaaS solutions used by Japanese and US companies are evidently different. From the standpoint of user companies, the key consideration is which SaaS are supported by the SSO provider. Consequently, the major SSO providers will likely remain different by country and region going forward. Second, HENNGE One comes with email services and information security features developed by the company over many years, so its business model is different from Okta. Although both companies offer SSO services, there are distinct differences in the other services they provide. Third, HENNGE has developed a mature and elaborate support structure (through its Customer Success Division) for SaaS available in Japan. SSOs are not self-contained solutions, but rather serve as a bridge between several third-party SaaS. SSO customers therefore expect their providers to have a certain degree of knowledge about SaaS available in the relevant country or region. Through its Customer Success Division, HENNGE provides some degree of support for popular SaaS in Japan, and Shared Research thinks this is one area that will be difficult to replicate by potential competitors.

Strengths and weaknesses

Strengths

Core business is relatively resilient to service cancellations: The core HENNGE One service provides single sign-on (SSO) service to customers. This not only removes the need for users to log in separately to different Software as a Service (SaaS) solutions, but also allows system administrators to centrally manage access privileges, thus elevating productivity. Annual ARPU is low, at roughly JPY2,000. Cancelling the service to switch to a competing one is a cumbersome process that requires time and additional costs to reconfigure and manage user IDs and passwords (number of employees × number of services in use). While SaaS solutions are generally susceptible to customer defections, SSO service is typically integrated with several third-party SaaS, and is therefore less vulnerable to service cancellations. At end-FY09/20, the churn rate for HENNGE One was at a low 0.16% (average monthly churn rate [TTM]). SSO demand is poised to expand along with growth in the market for enterprise cloud services, and HENNGE has a first-mover advantage in this space.

Differentiation through data loss/leak prevention services tailored to customers’ security policies: Prior to the launch of HENNGE One, the company mainly supplied email services and accordingly gained expertise in dealing with the diverse information security policies of various companies. HENNGE One’s SSO function provides fine-grained control over access privileges, allowing customer companies to determine which employees can access which SaaS solutions—as well to what extent—in accordance with their own security policy. In addition to SSO, HENNGE One is equipped with data loss/leak prevention features such as automated encryption of email attachments in zip files and generation of corresponding passwords, email archiving that facilitates tracing in the event of a data leak, and online browsing of files that removes the need for downloads to devices. SaaS such as Microsoft 365 and Google Workspace also offer generic archiving features, but HENNGE’s archiving service allows customers to set a specific archiving period in line with their security policy. The company’s expertise, which allows it to flexibly adapt to the different security requirements of its customers, sets it apart from rivals.

Support structure that also covers SaaS used by companies in Japan: Integration with SaaS solutions that are commonly used in specific countries or regions is essential to SSO service. As the leading SSO provider in Japan, HENNGE is well-positioned to collect information on which services are being used by its customers. The company has enhanced its Customer Success Division to establish a support structure that can also to a certain extent respond to inquiries related to SaaS services that are frequently used in Japan.

Weaknesses

Profit generation hampered by upfront spending on customer acquisition: The company looks to expand its market share ahead of rivals to maximize lifetime value (LTV: total usage fees collected until service cancellation). It has accordingly increased upfront spending to strengthen its Sales Division (to secure new customers), expand its Customer Success Division (to enhance customer satisfaction), reinforce its R&D Division (to develop new features), and raise name recognition through advertising campaigns. HENNGE reported high GPM of 82.3% and YoY revenue growth of 21.2% in FY09/20, but its FY09/21 initial forecast for OPM of 6.4% suggests its profitability is expected to remain low. Its US-based rival Okta (NASDAQ: OKTA) is also aggressively expanding operating costs and R&D expenses, and was in the red in FY01/21 despite sharp revenue growth.

New services not translating into higher ARPU: Annual ARPU hovers around JPY2,000 without much fluctuation (JPY2,042 at end-FY09/14, JPY2,007 at end-FY09/20). The company has continued to gradually upgrade HENNGE One with new features, and increase the number of supported SaaS solutions. It booked JPY211mn in R&D expenses (5.1% of revenue) in FY09/20. However, these feature improvements have not yet translated into a substantial increase in ARPU. This is a side-effect of the fact that the company prioritizes customer acquisition and is less concerned with growing its ARPU. Meanwhile, rival Okta recorded USD159mn in R&D expenses (27.2% of revenue) in FY01/20, and it has successfully raised its ARPU by enhancing the added value of its services.

Uncertainty surrounding ability to secure “global customers”: The SaaS solutions that can be integrated with an SSO service tend to have a distinct regional character. HENNGE mainly concentrates on providing support for Japanese SaaS (such as accounting software compliant with Japanese tax law, and applications to manage business cards, which are commonly used in Japan). That said, HENNGE One in principle supports any SaaS (even overseas services) that implement the Security Assertion Markup Language (SAML: a standard for exchanging user authentication data between different internet domains), but the level of integration may not be strong enough to draw in customers. From the standpoint of delivering convenience to overseas employees and system administrators, it therefore remains to be seen if HENNGE can lock in Japanese companies with global operations and large workforces.

Historical performance and financial statements

Income statement

Income statement		FY09/14	FY09/15	FY09/16	FY09/17	FY09/18	FY09/19	FY09/20
(JPYmn)		Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
Revenue		1,109	1,338	1,724	2,226	2,835	3,427	4,153
	YoY	-	20.6%	28.8%	29.1%	27.4%	20.9%	21.2%
Cost of revenue		-	-	-	581	631	605	735
Gross profit		-	-	-	1,645	2,204	2,822	3,417
	YoY	-	-	-	-	34.0%	28.0%	21.1%
	Gross profit margin	-	-	-	73.9%	77.8%	82.3%	82.3%
SG&A expenses		-	-	-	1,493	2,002	2,635	2,879
	YoY	-	-	-	-	34.1%	31.6%	9.3%
	SG&A ratio	-	-	-	67.1%	70.6%	76.9%	69.3%
Operating profit		-	-	-	152	202	187	539
	YoY	-	-	-	-	32.9%	-7.3%	187.7%
	Operating profit margin	-	-	-	6.8%	7.1%	5.5%	13.0%
Non-operating income		-	-	-	3	17	1	1
Non-operating expenses		-	-	-	0	-	-10	-4
	Gains (losses) on foreign exchanges	-	-	-	3	17	-10	-4
Recurring profit		26	-16	83	155	219	178	535
	YoY	-	-	-	88.3%	41.1%	-19.0%	201.6%
	Recurring profit margin	2.4%	-1.2%	4.8%	7.0%	7.7%	5.2%	12.9%
Extraordinary gains		-	-	-	-	-	-	-
Extraordinary losses		-	-	-	-	30	-	30
Income taxes		-	-	-	-17	66	68	150
Implied tax rate		-	-	-	-11.0%	34.8%	38.1%	29.8%
Net income		22	-16	67	172	123	110	355
	YoY	-	-	-	158.8%	-28.4%	-10.9%	223.0%
	Net margin	2.0%	-1.2%	3.9%	7.7%	4.4%	3.2%	8.5%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Cost of revenue breakdown				FY09/14	FY09/15	FY09/16	FY09/17	FY09/18	FY09/19	FY09/20
(JPYmn)				Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
Cost of revenue							581	631	605	735
	YoY			-	-	-	-	8.6%	-4.0%	21.5%
	% of revenue			-	-	-	26.1%	22.2%	17.7%	17.7%
	Material costs						1	0	0	-
		YoY		-	-	-	-	-99.2%	3,216.7%	-
	Labor costs						206	235	267	300
		YoY		-	-	-	-	14.0%	13.5%	12.4%
	Various costs						456	514	528	329
		YoY		-	-	-	-	12.6%	2.8%	-37.7%
		Outsourcing costs					82	98	44	42
			YoY			-	-	19.2%	-54.9%	-4.5%
		Service system fees					-	335	352	415
			YoY			-	-	-	5.0%	18.1%
		Other			-	-	374	81	132	211
			YoY			-	-	-78.3%	63.3%	59.4%
	Transfer to other accounts			-	-	-	112	144	210	211
		YoY		-	-	-	-	28.3%	45.7%	0.4%
	Royalties paid						28	26	20	17
		YoY		-	-	-	-	-7.8%	-23.0%	-14.9%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Balance sheet

Balance sheet		FY09/14	FY09/15	FY09/16	FY09/17	FY09/18	FY09/19	FY09/20
(JPYmn)		Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
Assets
	Cash and deposits	-	-	-	1,311	1,804	1,874	2,871
	Notes and accounts receivable	-	-	-	85	82	88	163
	Prepaid expenses	-	-	-	107	136	149	135
	Inventories	-	-	-	0	0	0	0
	Other