Base provides outsourced software development services, leveraging the strengths of Japanese and Chinese IT engineers. Founder Katsunari Nakayama, originally from China, has identified software production (specifications design and programming) and operation/maintenance as two segments of the market that require the most man hours. The company he founded has focused exclusively on building a base in these areas, and its name derives from this objective. Today, Base specializes in outsourced development for system integrators as well as IT divisions of corporate customers.
Fujitsu is one of the company’s main customers (generating 19.5% of revenue in FY12/21) and a major shareholder (8.6% stake at end-FY12/20). Base has conducted business with Fujitsu since its inception, and its Chinese subsidiary BCH is a joint venture established with Fujitsu. Base is also a certified Core Partner of Fujitsu. It has in the past invited Fujitsu officers to serve as external directors on its board, and accepts personnel seconded by Fujitsu, all of which attest to the strong relationship between the two companies.
At the parent level, the company generates roughly 52% of its revenue from system development, 16% from Operations & maintenance, 12% from Staffing service (dispatch of staff to customers mainly under worker dispatch contracts), 17% from ERP solutions, and 3% from Other solutions. On a consolidated basis, offshore system development mainly by Chinese subsidiary BCH is added to the lineup. Base also sells to local Chinese companies, but it refrains from actively expanding in China where competition is fierce. BCH only contributes about 6% of consolidated total revenue (Consolidated/Non-consolidated ratio: 1.06) and lags the parent company in profit margin.
Nearly half of Base’s revenue comes from system development for the financial industry (particularly, securities companies). In recent years, revenue from the manufacturing industry has shown rapid growth, making it the second largest customer industry by revenue share, followed by logistics. Trends such as investment in digital transformation and labor shortages in the IT industry have been tailwinds for the company, driving demand for its services.
For Base, revenue is a function of the engineer rate, project duration, and number of engineers, but can also be expressed as the product of revenue per customer, project duration, and number of customers. Base’s engineer rate is on par with that of its competitors, so its revenue growth hinges on engineer deployment capacity (number of deployable engineers x deployment speed). The company hires college graduates and mid-career engineers in Japan and China to raise its number of deployable engineers, and delegates decision-making authority to on-site managers to improve deployment speed. This approach allows the company to respond rapidly to customer needs, setting it apart from its competitors. Base uses a proprietary man-hour management system to manage and maintain systems, allowing it to visualize the work hours of all its teams. Based on collected data, the company aims to effectively allocate resources by redirecting manpower from teams with spare capacity to those carrying heavy workloads.
Revenue growth is driven by increases in the number of engineers, the number of customers, and revenue from major customers. The company has increased its number of employees (engineer-to-all employee ratio of 95%) by 2.4x from 372 (non-consolidated basis at end-FY12/16) to 890 (consolidated basis at end-FY12/21) over five years (external contractors up about 5x from just under 90 to just under 450). Revenue from top customers Fujitsu, Mizuho Securities and Nomura Research Institute has remained stable at just over JPY2.0bn each (48.3% of total revenue from these three companies in FY12/21), but revenue from NTT Data continues to expand. The four major customers generate approximately 59% of total revenue. Base sees ample room for further growth by cultivating new customers and expanding business with existing customers. It estimates the work it undertakes for the major customers represents less than 1% of their total outsourced project costs.
The company balances one-time revenue businesses (mainly system development) and recurring-revenue businesses (Operations & maintenance and Staffing service). Both have the same level of profitability, but recurring-revenue businesses deliver steady revenue that solidifies the company’s earnings foundation. Base plans to continue balancing the revenue shares of its one-time and recurring-revenue businesses in line with economic trends.
The company regards operating profit growth as its most important performance indicator. In FY12/21, it reported operating profit per employee of JPY3.4mn, and OPM of 22.6%, which is higher than the 7.6% average for software companies and the 6.5% average for data processing and provision service companies (source: Ministry of Economy, Trade and Industry's 2021 Basic Survey on the Information and Communications Industry). The high OPM level reflected a combination of strong GPM (29.3% in FY12/21) and a low SG&A-to-revenue ratio (6.7% in FY12/21). By expanding its revenue from existing customers and reducing its dependence on outsourcing, Base builds in-house expertise, reduces loss-making projects, and raises its gross profit. It recovers cash efficiently by using short-term contracts (renewed within three to six months) for system development and by increasing revenue from recurring-revenue businesses (Operations & maintenance and Staffing service). It has reduced its cash cycle from 48 days in FY12/16 to 27 days in FY12/21 by shortening its accounts receivable turnover days.
In FY12/21, Base reported revenue of JPY13.3bn (+7.2% YoY), operating profit of JPY3.0bn (+23.1% YoY), recurring profit of JPY3.0bn (+24.0% YoY), and net income attributable to owners of the parent of JPY2.1bn (+22.0% YoY).
While the company resumed a project that had been suspended in FY12/20 due to the spread of COVID-19, some projects were either delayed or downsized as a result of repeated states of emergency declarations by the Japanese government.
In FY12/22, the company forecasts revenue of JPY15.0bn (+12.8% YoY), operating profit of JPY3.6bn (+20.0% YoY), recurring profit of JPY3.6bn (+19.9% YoY), and net income attributable to owners of the parent of JPY2.5bn (+16.1% YoY). While noting that the situation remains uncertain, especially in light of the sudden rise in the number of COVID-19 infections in January 2022, the company generally assumes that the economy will gradually return to normal. Management expects IT investment demand, especially for DX, to remain strong.
Base plans to step up recruiting in Japan, China, and the rest of the world, and continue to add at least 100 new employees per year (net increase after offsetting departures). It aims to rapidly establish a team of 1,000 employees (with a full-time employee to external contractor ratio of 2:1).
The company’s strengths: 1) its ability to deploy a large number of qualified engineers thanks to access to both Japanese and Chinese labor markets and internal system of continuous learning, 2) rapid and flexible decision-making by front-line project managers, and 3) consistent focus on high profitability.
Its weaknesses: 1) susceptibility to structural shifts in the software industry due to focus on outsourced projects, 2) challenges with succession planning due to uniform approach toward executive development, and 3) high dependence on certain industries and customers.
|Gross profit margin||24.9%||24.9%||26.8%||27.5%||29.3%||-|
|Operating profit margin||13.5%||14.6%||17.3%||19.7%||22.6%||24.0%|
|Recurring profit margin||13.8%||14.5%||17.0%||19.5%||22.6%||24.0%|
|Per-share data (JPY)|
|Shares issued (year-end; '000)||-||2,636||2,960||8,929||8,978|
|Treasury shares ('000)||-||-||-||-||-|
|EPS (fully diluted; JPY)||-||-||403.4||184.7||225.0|
|Dividend per share (JPY)||130.0||160.0||120.0||60.0||80.0||85.0|
|Book value per share (JPY)||1,015||1,192||1,863||754||932|
|Balance sheet (JPYmn)|
|Cash and cash equivalents||4,458||4,394||5,868||7,181||7,487|
|Total current assets||5,987||5,888||7,713||8,929||9,990|
|Tangible fixed assets||21||21||22||28||69|
|Investments and other assets||1,140||1,137||1,201||1,266||1,371|
|Total current liabilities||2,203||2,513||2,668||3,104||2,748|
|Total fixed liabilities||2,381||1,437||730||281||108|
|Total net assets||2,798||3,271||5,657||6,901||8,585|
|Total liabilities and net assets||7,382||7,220||9,055||10,286||11,441|
|Total interest-bearing debt||3,693||2,333||1,422||715||266|
|Cash flow statement (JPYmn)|
|Cash flows from operating activities||313||1,345||1,215||2,558||1,438|
|Cash flows from investing activities||-133||37||4||-12||-117|
|Cash flows from financing activities||102||-1,531||260||-1,236||-1,064|
|Total asset turnover||85.3%||102.7%||119.4%||128.2%||122.4%|
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||% of Est.||1H Est.||% of Est.||FY Est.|
|Cost of revenue||2,042||4,325||6,738||8,987||2,176||4,404||6,772||9,398||2,795|
|Gross profit margin||29.9%||29.6%||29.2%||27.5%||29.4%||29.8%||29.5%||29.3%||28.8%|
|Operating profit margin||22.3%||21.6%||21.8%||19.7%||22.8%||22.9%||22.8%||22.6%||23.5%||23.2%||24.0%|
|Recurring profit margin||22.0%||21.5%||21.7%||19.5%||22.7%||23.0%||22.8%||22.6%||23.7%||23.2%||24.0%|
|Cost of revenue||2,042||2,283||2,413||2,249||2,176||2,228||2,368||2,626||2,795|
|Gross profit margin||29.9%||29.2%||28.6%||22.0%||29.4%||30.2%||28.8%||28.9%||28.8%|
|Operating profit margin||22.3%||20.9%||22.2%||12.6%||22.8%||23.0%||22.5%||22.1%||23.5%|
|Recurring profit margin||22.0%||21.1%||22.1%||12.4%||22.7%||23.3%||22.5%||22.0%||23.7%|
Q1 consolidated revenue of JPY3.9bn was up JPY843mn YoY. Equal to 26.2% of the company's full-year target, this represents a good start for the year. The company reported solid order flows for offshore systems development projects at its subsidiary in China from not only Japanese companies but non-Japanese companies as well.
Q1 gross profit of JPY1.1bn was up JPY225mn YoY. This represents a gross profit margin of 28.8%. The SG&A expense ratio of 5.3% was down 1.3pp versus 6.6% in Q1 FY12/21.
Q1 operating profit of JPY924mn was up JPY221mn YoY. This represents an operating profit margin of 23.5%, up 0.7pp versus 22.8% in Q1 FY12/21.
|(JPYmn)||1H Act.||2H Act.||FY Act.||1H Act.||2H Act.||FY Act.||1H Est.||2H Est.||FY Est.||YoY|
|Cost of revenue||4,325||4,661||8,987||4,404||4,994||9,398|
|Gross profit margin||29.6%||25.5%||27.5%||29.8%||28.8%||29.3%|
|Operating profit margin||21.6%||17.8%||19.7%||22.9%||22.3%||22.6%||23.2%||24.7%||24.0%|
|Recurring profit margin||21.5%||17.6%||19.5%||23.0%||22.2%||22.6%||23.2%||24.7%||24.0%|
For FY12/22, the company forecasts full-year consolidated revenue of JPY15.0bn (+12.8% YoY), operating profit of JPY3.6bn (+20.0% YoY), recurring profit of JPY3.6bn (+19.9% YoY), and net income attributable to owners of the parent of JPY2.5bn (+16.1% YoY). The company has not changed its stance of targeting an annual increase in operating profit of at least 20% YoY. It targets an operating profit margin of 24.0%, up 1.4pp from FY12/21.
While noting that the situation remains uncertain, especially in light of the sudden rise in the number of COVID-19 infections in January 2022, the company generally assumes that the economy will gradually return to normal. Management expects IT investment demand, especially for digital transformation, to continue to increase and expand the market.
The forecast for each company for FY03/22 in its related segment is expected to exceed the FY03/21 results (NRI Group and NTT Data Group increased 10% YoY) due to increased digital transformation and SAP-related demand.
The company focuses on projects with high certainty, particularly digital transformation and SAP-related projects, as well as aggressively promote the acquisition of Application Management Outsourcing (AMO) services, a recurring revenue business that provides applications operation and maintenance.
The company's executives, department heads, and leaders, regardless of their positions, promotes on-site sales. The Business Promotion Department covers the areas that cannot be covered by on-site work.
The company aims to continue steadily increasing transactions with the four major customers. For developing its fifth and sixth pillars, it steadily expands transactions with several major systems integrators and build relationships of trust by leveraging its sales know-how.
The company intends to move the organization from the traditional vertical customer-specific organization to a cross-functional services organization. The systems headquarters will be reorganized from two divisions to three divisions, and the systems divisions will be reorganized from 22 divisions to 28 divisions.
The company's policy of recruiting a net increase of 100 employees per year remains unchanged. However, it will shift from traditional mid-career hiring to new graduate hiring, and referral recruitment will also be strengthened. In addition to stepping up the recruitment of foreign nationals at Japanese offices, the company will also expand its recruitment channels. The company also plans to strengthen communications through initiatives such as holding partner meetings in order to actively utilize external partners. This should increase the number of external partners from an average of less than 450 per month in FY12/21 to around 600 per month.
Base does not disclose medium-term management plans. Below, we discuss the company’s medium-term outlook based on the views of company founder and Representative Director Katsunari Nakayama.
President Nakayama established Base in January 1997. He had previously worked as an engineer in China and Japan, and felt that, contrary to its high-tech reputation, the Japanese software industry had undergone little change from its early days, and continued to be closed and suffer from outdated business practices (chief among which was the ambiguous designation of responsibility). President Nakayama believed that the industry lagged other industries in terms of productivity, and that it would ultimately become unable to compete on the global stage if it continued to drift along the same path.
The Japanese software development industry currently has a multi-layer subcontracting structure. User companies fully delegate the software development process to large system integrators, which outsource the various stages of the development process (design, development, testing, and operation) to a series of vertically integrated subcontractors (first-tier, second-tier, third-tier, etc.). This approach is problematic as it depresses the prices that can be charged by lower-ranked subcontractors in the vertical hierarchy, and leads to structural issues such as inefficiencies stemming from intermediary margins and bottlenecks. President Nakayama concluded early on that these problems stemmed from a failure to clearly designate responsibility, and believed this weakness of the existing pyramid structure could be exploited to generate business opportunities.
Base aims to create new value and increase customer satisfaction by enhancing productivity and clearly attributing responsibility in its projects. It is always exploring how to realize the values of its customers, and aspires to be an enterprise that continually provides new value for the customers, says the company.
President Nakayama believes developers should take more pride in outsourced development. In system development, he sees software production (activities such as specifications design and programming) and operation/maintenance as two segments of the market that require the most man hours, and believes it is critical for Base to solidify its foundations in these areas. The company ultimately aims to serve as a base for the IT industry (hence its name), and wants Base to be the top-of-mind brand when it comes to software production.
Another company that aims to create new value for its customers and, like Base, specializes in a single business field is leading software testing company SHIFT (TSE1: 3697). SHIFT believes the software industry will increasingly adopt a horizontal business division like other industries, where specialist vendors at each development process have autonomy. In this model, SHIFT aims to take on the role of managing such multi-vendor projects by providing quality assurance through software testing. Base, on the other hand, aims to be the first-tier subcontractor in the multi-layer subcontracting structure, and create new value in software production (specifications design and programming).
The transition to a horizontal business division is already underway on a global scale in the semiconductor and hardware (smartphone) industries in the form of foundries and outsourced electronics manufacturing services (EMS). The companies that dominated the semiconductor industry in the past, such as IBM and Japanese semiconductor manufacturers, were all vertically integrated. Over time, the production process (where cost is key) have been supplanted by foundries such as Taiwan-based TSMC. Companies such as Apple have shifted their focus to product design, product requirement specifications, and specifications design, and fully outsource manufacturing to EMS providers such as Hon Hai Precision Industry (Foxconn Technology Group), which operates mainly in China. This is because a horizontal business division is ideally suited for industries that require massive capital investment (semiconductors) or substantial parts supply (smartphones). The semiconductor and smartphone industries are therefore prime examples of how structural transformation can create new value by improving productivity, introducing new technologies, and clearly designating work responsibilities.
Whereas the semiconductor and smartphone industries are equipment-centric, the software industry is labor-intensive. In other words, semiconductor and smartphone manufacturers invest heavily in equipment, while software developers mainly invest in human resources. Base is no exception, and the company has increased its hiring budget in an effort to recruit over 100 people per year (net increase after offsetting departures). However, excessive hiring tends to increase the company’s training burden and depress productivity per employee, so Base tries to maintain a balance between personnel increases and productivity per employee.
In order to maintain cutting-edge technology and a high level of quality, the company is placing an emphasis on skills development, leadership development, and employee follow-up. In terms of skills development, the company is collaborating with customers and partners to provide training in the most up to date technologies. It is also focusing more on training in agile development, which is highly suitable for digital transformation. Regarding leadership development, the company is implementing an early selection and training system and developing the next generation of departmental managers through a dedicated training curriculum.
The company’s revenue has more or less expanded in tandem with the number of employees. The employee count and revenue per employee have concurrently increased since FY12/17. Its revenue and employee count plateaued temporarily in the wake of the global financial crisis and the Great East Japan Earthquake, but have trended up since around 2017 as the push toward DX resulted in severe labor shortages in the IT market. The Japanese market for outsourced software development is valued at just under JPY9tn, so the company has ample room for further expansion in this industry.
Base will continue to strengthen recruitment of human resources in Japan and China, as well as from the rest of the world, and it plans to add at least 100 new employees per year (net basis). The company’s organic growth can be expressed using the following formula: revenue (operating profit) = number of employees x revenue (operating profit) per employee. Assuming productivity per employee holds steady, revenue should rise in tandem with growth in the number of employees. The company aims to rapidly build a team of 1,000 full-time employees.
Base regards M&A as one path to secure human resources, but it is currently taking a wait-and-see approach as deals have become expensive. In January 2017, the company added about 60 people to its workforce when it acquired Goto Software. This, coupled with a move to a new management structure, drove a decline in revenue and operating profit per employee in FY12/17, but both bounced back to pre-acquisition levels by FY12/19 as synergies from the acquisition began to emerge. According to Base, obtaining new manpower and customers through acquisitions would be a viable option from the standpoint of capital efficiency, if the company were to rapidly increase its revenue to several times the current level.
|Revenue/operating profit/no. of employees||FY12/17||FY12/18||FY12/19||FY12/20||FY12/21|
|Number of employees||553||606||749||855||890|
|Number of employees (average during the term)||463||580||678||802||873|
|Revenue per employee||12.7||12.9||14.3||15.5||15.2|
|Operating profit per employee||1.7||1.9||2.5||3.0||3.4|
Base provides outsourced software development services to its customers by leveraging the strengths of Japanese and Chinese engineers. It operates in four service lines: SI Services, ERP Solutions, ICT Solutions, and Japan-China Solutions. SI Services include system development as well as operation and maintenance. ERP Solutions mainly covers SAP integration and maintenance support. ICT Solutions includes electronic Know Your Customer (e-KYC) solutions, online ID confirmation services, and ICT-powered BPO support. In Japan-China Solutions, the company provides offshore solutions and also sells to local Chinese companies, mainly through its Chinese subsidiary Base (Wuxi) Information Systems Co., Ltd. (“BCH”). BCH only contributes about 6% of total consolidated revenue (Consolidated/Non-consolidated ratio: 1.06), and lags the parent company in profit margin. Base has refrained from actively expanding in China, where competition is fierce, and considers Japan its main target market.
The company discloses revenue data by core businesses of the parent, which divide into System development (Development [narrowly defined], Operations & maintenance, and Staffing service), ERP solutions, and Other solutions (BPO and OCR). The relationship between the core businesses (parent) and the service lines (consolidated) are shown in the following table.
Base discloses parent revenue shares for the following businesses: System development, roughly 52% of revenue; operations & maintenance, roughly 16%; staffing service*, roughly 12%; ERP solutions, roughly 17%; and Other solutions, roughly 3% (BPO and OCR).
*Staffing Service entails fixed-term deployment of staff to customers mainly under worker dispatch contracts.
In relation to the service lines, the Staffing Service business belongs to SI Services. The Other Solutions business (parent) includes Base’s proprietary corporate services (yet to account for a material portion of revenue) that fall under the consolidated service line of ICT Solutions.
|business||Revenue||% of total||Revenue||% of total||Revenue||% of total|
|Operations & maintenance||2,283||25%||2,008||17%||2,016||16%|
In the system development business, Base mainly develops open-source-based systems (which run software on top of an open-source operating system on a server) for the financial, logistics, and manufacturing industries. It has a particularly strong track record in building systems for the financial industry such as securities companies, banks, and credit card companies.
The company offers comprehensive services that span all aspect of the system development process ranging from defining requirements, basic design, detailed design, programming design, and programming to various types of testing, migration and release, and post-launch operation and maintenance. In an effort to improve quality at an organizational level, the company (1) manages projects meticulously to avoid delays and/or rework, (2) conducts third-party quality control checks through a specialized department, and (3) stringently follows and works to enhance its plan-do-check-action (PDCA) cycles.
In this business, Base’s staff are stationed at customers’ IT/helpdesk divisions to operate and provide maintenance services to new and existing systems. The company focuses on educating these staff with knowledge of customer businesses, thereby building their non-technical skills. Further, engineers who were involved in the development phase of these systems are often included in the staff members to have in place a team that can meet customer needs promptly. This setup also allows Base to keep track of customers’ organizational changes, addition of new products, or modification of business processes, which enables the company to win development assignments (such as systems enhancement, functionality expansion, and UI improvements) for core and peripheral systems.
In systems management, Base uses its proprietary man-hour management system b.mat (which tracks man-hours per project to visualize engineer deployment) to ascertain the hours worked by each team. This allows the company to effectively allocate resources by redirecting manpower from teams with spare capacity to those carrying heavy workloads, thus contributing to cost reductions. From a customer perspective, this normalizes the workload of related divisions, reducing peaks (busy periods) and troughs (downtime), and thus contributes to efficient utilization of resources.
In the Staffing Service business, Base dispatches systems developers and operators to customers as a service accompanying system development. Sharing a common viewpoint with the customer, these staff mainly engage in systems planning, requirement discussions with end users, project management, and problem solving. For development or operation/maintenance projects mandated to Base, the company’s dispatched staff often collaborate with its systems developers (assigned to the project) to ensure greater mutual understanding of the requirements and systems specifications, which leads to more secure and efficient development work.
In the ERP solutions business, Base mainly provides ERP, CRM, and BASIS (business application software integration systems) solutions centered on SAP SE products. Leveraging its experience and expertise gained in ERP-related services, the company provides consulting, development, and operation/maintenance services associated with implementation, upgrade, and migration projects.
In the Other solutions business, Base leverages its experience in development projects to build proprietary solutions, which it proposes to customers. The company’s solutions for NISA* (setup) and the My Number** system have been adopted by multiple customers. Base also proposes ways to support customer operations through business optimization and workflow improvements using cutting-edge technology. The adoption of OCR-based card number recognition system in account setup operations at customers (applicable to a variety of cards including driver’s licenses, My Number cards, and credit cards) is one such example.
* NISA, short for Nippon Individual Savings Account. Individual investors (limited to residents of Japan) with a NISA account are offered a certain amount of tax exemption for small investments.
** My Number: Japan’s social security and tax number system comprising a unique 12-digit number allotted to each registered resident in Japan.
Accompanying these solutions, Base also provides BPO services. While BPO services generally entail the outsourcing of administrative functions, the company goes a step further to combine administrative tasks with IT solutions in its offerings.
System development refers to the process of designing, programming, and testing to develop IT systems for corporate operations. The process is divided into two stages handled by different professionals. Systems engineers oversee outline design, specification of requirements, and basic design (sometimes collectively referred to as upstream processes). Programmers engage in subsequent detailed design, programming, testing, and deployment support. In addition to defining requirements and creating systems design, systems engineers generally handle operation and support, while programmers focus on writing codes based on the design specifications provided by the systems engineers. The system development flow and an estimated share of allocated work hours are shown in the following diagram and graph.
Within system development, Base sees software production (design and programming) and operation/maintenance as two segments of the market that require the most man hours. Detailed design and programming account for 44% of Base’s total man hours (person/month), and this goes up to 58% if adding in basic design. The company derives 59% of its revenue from its four major customers, and we estimate projects undertaken for these customers concentrate on the production phase of the overall system development process.
|System development stages|
|Project management||Requirements definition||Basic design||Detail design||Programming/unit testing||Integration testing||Comprehensive testing||Post go-live follow up|
|% of total||9%||13%||14%||13%||31%||9%||7%||4%|
Different stages of the system development process
(1) Requirements analysis/requirement specifications
The type of system a customer looks to build is first assessed through interviews. This is followed by an examination of the system necessary to resolve the customer problems identified in the requirements analysis. Finally, the parts of the customer’s operations that need to be integrated in the system are explored, and hardware configurations and software functions are explored (requirements specification). At the same time, decisions are made regarding the development period and budget.
(2) Basic design (external design)
The functions that underpin the system are determined in accordance with the requirement specifications. Because this step entails the design of the overall interface (including data input/output screens), it requires a user-centric viewpoint and close coordination with the customer.
(3) Detailed design (internal design)
Concrete methods are meticulously designed to create the functions determined in the external design, and the system specifications are prepared. As the latter will be used as the basis for the subsequent programming, they need to be formulated in detail and use a notation style that is easy to understand for programmers. All work through this step is carried out by systems engineers.
The programming work kicks off based on the specifications prepared by the systems engineers. All work from this step onward is carried out by programmers. The specifications often only include minimum requirements, and decisions on how to express the required behaviors in code are left to the programmers. However, systems engineers may occasionally get involved in programming.
(5) Various types of testing
Once all code has been written, testing begins. Any defects (bugs) that are discovered are fixed, and the systems are retested. This process is repeated until all bugs are removed. Testing is conducted by systems engineers or outsourced to dedicated testing companies.
(6) Operation and support
After a system has been delivered, follow-up support is provided to address bugs and handle additional customer requests. Maintenance services are also provided as needed. Operation and support services are generally handled by systems engineers, but programmers may also get involved.
Amid accelerated digital transformation initiatives, in recent years, the IT industry has seen an increase in investment projects that involve advanced technologies such as IoT, cloud, robotic process automation (RPA), and fintech. However, according to the Nikkei xTech investment survey conducted in FY2012, companies on average manage to allocate only 24.3% of their IT budgets toward new development, compared with 44.9% for operations and management and 30.8% for maintenance-related development. The “Domestic IT Investment Trends” survey conducted by ITR in 2017 puts new development at only 31% of IT budgets (of which investment to support business growth accounted for 32%, operational efficiency 37%, and business continuation 31%).
Industry observers have warned that Japanese companies are being held back by so-called legacy systems that are outdated, bulky, complex, and closed (“Digital Transformation: Overcoming of ‘2025 Digital Cliff’ Involving IT Systems and Full-fledged Development of Efforts for Digital Transformation,” METI). In Japan, where 70% of the IT engineers are employed by vendor companies, it is not uncommon for such companies to undertake outsourced development that starts from the specification of requirements. Base aims to secure orders and steadily expand its business by identifying the challenges and needs of its customers and providing corresponding solutions.
Base’s core business is the system development business and because it focuses on outsourced development, success in this business hinges to a large extent on building close relationships with customers. To maximize the value it provides to customers, Base pursues a growth strategy underpinned by advanced technical capabilities, quality, and rapid personnel deployment. The company says it maintains access to world-class technologies through its long-term relationships with major customers (large system integrators such as Fujitsu), and provides quality solutions underpinned by its training system that starts at an early stage.
In terms of rapid personnel deployment, the company is able to deploy a roughly equal number of Japanese and Chinese engineers, which results in twice the engineer deployment capacity and speed of many of its rivals. Against the backdrop of growing shortages of IT personnel and hiring difficulties in recent years, Base’s capability to instantly and flexibly deploy employees has been a competitive advantage in securing customers, according to the company.
Base also subcontracts work (to several dozen companies at the parent level, over 100 companies at the consolidated level) as necessary, but it ensures quality control by maintaining a high share of in-house development (full-time employee to external contractor ratio of 2:1). The company also encourages its employees to obtain various qualifications, not only related to IT but also in fields such as finance. It believes these can contribute to a deeper understanding of customer operations, and therefore prove useful in cultivating new customers or expanding business at existing customers. Base’s subcontracting ratio (number of external contractors [monthly average] / full-time employees [average for the fiscal year]) has increased in recent years, rising from roughly 25% in FY12/17 to about 44% in FY12/18, roughly 56% in FY12/19, about 60% in FY12/20 and about 69% in FY12/21. As labor shortages persist while orders continue to climb, its subcontracting ratio may increase further, but the company thinks it can maintain high quality by improving the development capabilities of its subcontracting partners.
|Consolidated no. of employees( )||553||606||749||855||890|
|No. of employees: parent (year-end)||396||500||621||717||743|
|No. of employees: parent (average)||384||448||561||669||730|
|No. of contract workers: parent (monthly avg.)||90+||200-||320-||400-||450-|
|Contract ratio (contract workers / employees; avg.)||％||25%||44%||56%||60%||About 69%|
|Advanced technical capabilities||Strong capability to instantly and flexibly deploy engineers||Quality Management|
|Has extensive development track record in broad range of fields||Has established or organization centered on homegrown employees||Expertise and management approaches developed through long-term relationship of trust with customers|
|Constantly pursues advanced technologies||Flat organization facilitates rapid decision making||Can bring together and manage a large number of partner companies|
|Hires and trains promising graduates from top universities||Has cultivated broad recruitment channels to secure domestic and overseas engineers||Able to undertake systems development for projects of different sizes and accommodate various development approaches|
Japanese law distinguishes between two broad types of outsourcing contracts: “ukeoi” (contracts for work) and “jun-inin” (quasi-mandate) contracts. Under contracts for work, remuneration is contingent upon completed work (that is to say, the objective of the contract is work completion), whereas under quasi-mandate contracts, remuneration is based on the actual amount of work performed. In other words, contractors have a responsibility to deliver a completed product under a contract for work, but not under a quasi-mandate contract.
Under contracts for work, outsourcing parties can delegate part of the development work to a contractor, thereby transferring responsibility for the allocated work (including management and education of personnel necessary to complete the work) and the accompanying risks to the contractor. They can also expect to ultimately receive a completed product. At the same time, these contracts impose a completion responsibility and defect liability on contractors. The completion responsibility means contractors have an obligation to deliver a completed work product to the outsourcing party. The defect liability requires contractors to fix any defects discovered in the completed work product without additional charges (however, this liability only applies during a predetermined period, which is typically one year following delivery).
Generally speaking, it is difficult to accurately define the completed product for a system development project in the initial stages of the project. If work that was not included in the original scope of the contract emerges, the contractor will bill additional charges to the outsourcing party, resulting in additional expenses at the latter. Conversely, if the contractor is unable to complete the product by the agreed deadline, or if defects are discovered in the product, the contractor will incur additional work hours, which will depress its own profit. Because IT systems have become increasingly complex in recent years, it is often not possible to discern detailed requirements at the time an outsourcing agreement is concluded.
Base’s contracts vary according to its business areas. The company generally concludes contracts for work and quasi-mandate contracts in the system development business. For the Operations & maintenance and Staffing service businesses, it either enters into a quasi-mandate contract or a worker dispatch contract. In the ERP solutions business, it principally uses contracts for work. Base mitigates risks specific to outsourced development by renewing its contracts every three to six months.
The Japanese software development industry currently has a multi-layer subcontracting structure. User companies fully delegate the software development process to large system integrators, which outsource the various stages of the development process (design, development, testing, and operation) to a series of vertically integrated subcontractors (e.g., first-tier, second-tier, and third-tier). This approach is problematic as it depresses the prices that can be charged by lower-ranked subcontractors in the vertical hierarchy, and leads to structural issues such as inefficiencies stemming from intermediary margins and bottlenecks. Within this structure, Base operates as the primary vendor or first-tier subcontractor for many of its customers.
Base offers outsourced development services to roughly 70 (large) companies operating in a broad range of industries including financial, industrials, logistics, telecommunications, public services, and infrastructure. The company’s strength has been in outsourced development for the financial industry (specifically securities companies), which accounts for roughly half of the company’s revenue. In recent years, the company has seen a rapid increase in revenue from industrials, which now brings in revenue on par with logistics.
Base sees expansion of business with existing customers as a top priority. It also aims to venture further into new customer fields such as industrials and insurance, and capture major projects related to retail brokerage in the securities field. The company’s major trade partners are industry-leading companies such as the Fujitsu group, Mizuho Securities, Nomura Research Institute, and NTT Data. Turning to sales channels, Base approaches customers either by using system integrators as an intermediary or via direct sales.
Coverage areas and major customers
Main trade partners (in Japanese syllabary order)
Base has undertaken outsourced development for a variety of companies in the financial industry (securities companies, banks, non-life insurers, leasing companies, and credit card companies), ranging from the development of core systems such as investment trust backbone systems (maintenance and management), time deposit systems for megabanks, and securities account systems, to non-life insurer call centers (with Computer Telephony Integration [CTI] support) and compliance systems for securities companies. In the distribution industry (retail, wholesale, transport, warehousing, e-commerce), the company has delivered systems for a wide array of backbone operations such as retail sales management systems, transport management systems, and call center systems. While Base does not yet have an extensive track record in building industrial systems, its outsourced development in this field has increased rapidly in recent years, growing into a third pillar on par with logistics. Compared to the financial, logistics, and industrials industries, the company has a relatively small presence in the public sector (social security, government agencies, postal services, and government-controlled competitive sports), telecommunications (cable TV, telecom carriers), and infrastructure (infrastructure construction, operation, and monitoring); it sees plenty of room to expand in these massive markets.
Base’s principal field of expertise is IT services for securities companies. As a prime vendor, the company provides IT support services tailored to the management themes of major traditional and online securities companies, leveraging its accumulated expertise in front, middle, and back-office IT systems and operations. Its engineers have securities sales representative qualifications, and can offer IT support underpinned by business and technical knowledge, says the company. Base has accumulated a track record as a prime vendor in the field for more than 10 years, and has developed relationships of trust with customers. The company is using the expertise gained from working with four securities companies to cultivate new customers in the field. It also provides BPO services for administrative operations related to account setup, NISA, My Number, and various notifications.
The company’s four major customers (Fujitsu, Mizuho Securities, Nomura Research Institute and NTT Data Global Solutions) account for a high and stable share of total revenue, at about 59%. That share rises to roughly 75% if adding in Fujitsu and Nomura Research Institute group companies and the NTT Data Group. Base has long-term relationships with its major customers. It has conducted business with Fujitsu since its inception in 1997, with Mizuho Securities since 2002, with Nomura Research Institute since 2013, and with NTT Data since 2017. Base continues to focus on order expansion at NTT Data, which it looks to develop into a fourth major customer. At the same time, the company aims to leverage its experience to date in the securities space to cultivate new end users as customers.
Fujitsu is one of the company’s main customer (generating 19.5% of revenue) and a major shareholder (with a stake of 8.6%). Since the company’s establishment, Base has conducted business with Fujitsu, and its Chinese subsidiary BCH is a joint venture with Fujitsu. Base is also a certified Core Partner of Fujitsu. It has in the past invited Fujitsu officers to serve as external directors on its board, and accepts personnel seconded by Fujitsu.
Base is recognized as a first-tier subcontractor by departments of its three major customers for which it has previously undertaken system development projects. However, it thinks there is plenty of room to further expand orders from these accounts. The company estimates the work it handles for the three companies corresponds to less than 1% of their total outsourced project costs. It therefore looks to expand revenue from each customer by capturing new orders from departments with previous dealings, as well as orders from other departments. For example, once the company develops logistics and/or manufacturing-related systems for a major customer, it will not only pursue vertical expansion but also seek to leverage that expertise horizontally to secure projects related to finance, public services, or other fields. In line with this strategy, the company undertook its first systems maintenance and management project (Operations & maintenance business) for Mizuho Securities in 2009.
NTT Data Group has been established as a major trading partner of the company. In FY12/21, revenue from NTT Data Global Solutions doubled from 5.5% in FY12/20 to 10.2% of total revenue. NTT Data operates across a range of industries, which opens the door for outsourced development projects in fields such as finance, logistics, social infrastructure, manufacturing, and SAP. Base has gone all out to deploy engineer resources to NTT Data and its group companies in fields in which it has a proven track record.
Base offers systems maintenance and management services in a broad range of fields. Thanks to its operational knowledge on specific businesses and its technical knowledge on system development, the company is able to complement its operation and maintenance services with management services. Base has served as the project management office (PMO) and conducted testing for large projects, and has built favorable relations not only with the IT divisions of its customers but also with divisions that use its systems as well as with other vendors. In addition, the company has experience in system risk management, including compliance with the Sarbanes-Oxley (SOX) Act, audit support, project risk monitoring (PRM), and cybersecurity.
Base takes measures to anticipate customer needs so that it can rapidly respond to unforeseen events while providing quality assurance. The Operations & maintenance and Staffing service businesses generate stable recurring revenue, and thus solidify the company’s earnings foundation. Base aims to keep a balance between its one-time revenue businesses (mainly system development) and its recurring-revenue businesses, which presently account for roughly 40% of revenue.
By dispatching its staff to customer sites, Base accumulates hands-on experience in customer operations, remains informed of project progress, and familiarizes itself with customers’ internal rules and procedures. In addition, the company employs a large number of engineers who can program RPA bots, and offers RPA integration support to IT and other departments that handle administrative work.
Base relies on the expertise and knowledge of its certified SAP consultants with 10 years plus industry experience to provide comprehensive solutions for SAP package integration, ranging from conceptual planning of systems to business design, system development, infrastructure construction, testing, migration, and post-launch support. When it comes to implementation of ERP systems such as S/4HANA and Hybris, the company leverages its advanced technical capabilities and mobility to offer optimized solutions in response to customer needs. Base shines in technical services that combine ERP and open-source systems, and the construction, quality control, and operation/maintenance of world-class systems by a team of multi-national engineers.
While ERP software giant SAP has thus far mostly offered traditional ERP solutions, its focus has been shifting to the succeeding S/4 HANA and innovation systems. SAP Leonardo is an innovation system that offers a portfolio of emerging technologies such as machine learning, blockchain, big data, Internet of Things (IoT), and analytics. Base provides comprehensive implementation support services for the SAP ERP platform, the SAP Cloud platform, and open platforms.
Base has regarded growth in operating profit as its most important KPI over the last 10 years. Because it prioritizes absolute levels of operating profit over revenue, the company has been able to avoid risky projects driven by a revenue-centric approach. Throughout its history, Base has undertaken very few projects that resulted in losses, and it has operated consistently in the black since its establishment. In FY12/21, Base reported OPM of 22.6%, which is higher than the 7.6% average for software companies and the 6.5% average for data processing and provision service companies (source: Ministry of Economy, Trade and Industry's 2021 Basic Survey on the Information and Communications Industry). The company also managed to ride out the global financial crisis with minimal impact. Base reduces the risk of contingencies and rework by using short-term contracts that are renewed every three to six months.
Base’s operating profit corresponds to revenue minus manufacturing costs and SG&A expenses. The company boasts a high productivity per engineer (operating profit per employee of JPY3.4mn in FY12/21 compared with an average of 1.7mn at four competitors), which is a reflection of the skill levels of its employees and a relatively high in-house development ratio (full-time employee to external contractor ratio of 2:1). Base reduces rework through the conclusion of short-term contracts that are renewed every three to six months, which effectively lowers its production costs. In addition, its high engineer employee ratio has kept its SG&A-to-revenue ratio down to around 10%. The company stations on-site managers with decision-making authority, and Shared Research believes this approach not only minimizes indirect expenses (because only decisions on high-risk projects are escalated to the headquarters), but also reduces the number of lost orders compared to rivals where all decision-making power is vested in the headquarters.
Base’s revenue is a function of its engineer rate, project duration, and number of engineers, but can also be expressed as the product of revenue per customer, project duration, and number of customers. Its engineer rate is on par with that of its rivals, so revenue growth hinges on engineer deployment capability (number of deployable engineers x deployment speed). To expand the number of deployable engineers, Base hires college graduates and mid-career engineers in Japan and China. To increase deployment speed, the company delegates decision-making authority to managers stationed at customer sites, allowing it to rapidly respond to customer needs without having to wait for sign-off by the headquarters, which sets it apart from competitors. Base also uses a proprietary man-hour management system (b.mat) that helps it maintain and manage systems by visualizing the work hours of each team. Based on collected data, the company effectively allocates resources by redirecting manpower from teams with spare capacity to those carrying heavy workloads.
Revenue growth is mainly driven by increases in the number of engineers, the number of customers, and revenue from major customers. The company increased its number of employees 2.4x (engineer-to-all employee ratio of 95%) from 372 (non-consolidated basis at end-FY12/16) to 890 (consolidated basis at end-FY12/21) over five years. Revenue from top customers Fujitsu and Mizuho Securities has remained stable at just over JPY2.0bn each (reflecting revenue shares of just under 20%), and revenue from Nomura Research Institute and NTT Data continues to grow rapidly. The company’s top four customers (Fujitsu group, Mizuho Securities, Nomura Research Institute group, and NTT Data group) generate roughly 75% of total revenue. Base sees ample room for further growth in revenue by cultivating new customers and capturing new orders from existing customers. It estimates that the work it handles for its major customers corresponds to less than 1% of their total outsourced project costs.
Base has leveraged the networks of its founders—President Katsunari Nakayama and Senior Managing Director Yoshimitsu Ito, who are Chinese IT engineers—to develop strong ties with reputable universities in China and thus gain access to Chinese engineers. President Nakayama believes the company’s growth is driven by synergies derived from the combined strengths of its Japanese and Chinese engineers, with the former contributing an emphasis on quality, strong team harmony, and an understanding of Japanese customs, and the latter an interest in new technologies, work speed, and a strong appetite for growth. According to the company, the Japanese and Chinese staff complement and inspire each other, and this international collaboration gives rise to added value and synergies. Base maintains an even balance between Japanese and Chinese employees in both regular and management positions. The key benefits of working with a mixed team are: (1) different value systems promote mutual encouragement and autonomous growth, (2) a balanced work environment increases motivation, and (3) access to job markets in Japan and China doubles the company’s recruiting capacity.
In addition to China, Base also recruits human resources in South Korea, Bangladesh, and India. However, it currently has few non-Chinese foreign nationals among its employees, and Shared Research believes the company could reap many benefits from further opening its doors to talented human resources from around the world.
As of end-October 2018, the Japanese information and communications industry employed 57,620 foreign nationals, with Chinese nationals making up just under half (27,088). The company says Base is naturally an attractive prospective employer for Chinese engineers who wish to work in Japan, since it offers a balanced work environment comprising a roughly equal number of Japanese and Chinese employees. the company is making headway in global recruitment, and in this sense resembles Tata Consultancy Services Japan, Ltd., the Japanese arm of India-based Tata Consultancy Services Limited.
|As of end-Oct. 2017||As of end-Oct. 2018||As of end-Oct. 2019|
China has the highest number of college students in the world at 37mn, according to the Chinese Ministry of Education. As the global college student population stands at 290mn, this means that one in seven or eight college students in the world (share of nearly 13%) studies at a Chinese university. Japan currently has 2.9mn college students, equivalent to a global share of only 1%. The university advancement rate in China appears to have increased from 40% in 2015 to 50% in 2019. Over the last 16 years, 678 new university faculties and graduate schools (including independent graduate schools) have been established in China, which is half of the total number of such institutions in the country. China has 339 prefectural-level municipalities (administrative unit that ranks somewhere between a province and a prefecture) and much larger number of cities. University faculties and graduate schools have now been established in 196 cities (coverage ratio of 57.8%), correcting the past overconcentration of such institutions in megacities such as Beijing and Shanghai. Meanwhile, industry observers have indicated that students graduating from Chinese engineering schools, which are closely tied to the development of the Chinese manufacturing industry, lack in the capacity to resolve complex problems and in work ethics.
|Ranking||Country||No. of college students||Share|
Since Base operates in a single segment of Outsourced Software Development, it does not release information by segment. However, the company discloses revenue for major customers with a revenue share of over 10%. Revenue from Fujitsu (the company started transactions in 1997) accounts for about 20% of Base's revenue, while Mizuho Securities (started from 2002) accounts for roughly 14%. The revenue share for Nomura Research Institute has increased each year since transactions began in 2013, and currently stands at around 15%.
Fujitsu is one of the company’s main customers (accounting for 19.5% of revenue in FY12/21) and a major shareholder (8.6% stake at end-FY12/20). Base has conducted business with Fujitsu since its establishment, and its Chinese subsidiary BCH is a joint venture with Fujitsu. Base is also a certified Core Partner of Fujitsu. It has in the past invited Fujitsu officers to serve as external directors on its board, and accepts personnel seconded by Fujitsu, all of which attest to the strong relationship between the two companies. Base regards Fujitsu as a top-priority customer, and feels indebted for the support it received since its early years. Base has similarly had a long business relationship with Mizuho Securities. This account started to contribute to Base’s earnings stability and earnings growth from 2009, when the company was mandated a systems maintenance and management project (Operation & Maintenance business) in the wake of the global financial crisis. The project marked the true beginning of the company’s recurring-revenue businesses, and the resulting earnings stability has allowed it to mitigate the negative impacts of the global financial crisis and Great East Japan Earthquake.
Base conducts business with over 60 other trade partners. Among these partners, NTT DATA that the company started business with in 2017, is rapidly increasing its presence as a new pillar. In FY12/2021, revenue from NTT Data Global Solutions rose to 10.2% of total revenue. Shared Research believes Base’s dealings with industry-leading companies continue to enhance its reputation in the IT space, creating a virtuous circle.
|Revenue by main client||FY12/17||FY12/18||FY12/19||FY12/20||FY12/21|
|% of total||29.7%||21.4%||21.4%||18.5%||14.3%|
|% of total||18.0%||25.8%||21.4%||18.0%||19.5%|
|Nomura Research Institute||711||1,211||1,514||1,865||1,933|
|% of total||12.1%||16.1%||15.6%||15.0%||14.5%|
|NTT Data Global Solutions||678||1,358|
|% of total||5.5%||10.2%|
|Nippon Securities Technology||1,511||710|
|% of total||12.2%||5.3%|
|% of total||40.2%||36.7%||41.6%||30.8%||36.1%|
Base has two consolidated subsidiaries: Base (Wuxi) Information Systems Co., Ltd. (commonly referred to as BCH; 59.8% of voting rights) and BCH Japan Co., Ltd. (59.8%). BCH, a Chinese subsidiary established in October 2008 with investment from three Fujitsu group members, develops systems as offshore solutions and for local Chinese companies. BCH Japan is a wholly owned subsidiary of BCH.
The original objective of offshore development was to reduce costs by leveraging price level differences in Japan and China. Today, offshore development is used not only to achieve cost reductions, but also to compensate for the shortage of systems engineers in Japan.
Base established bbc Co., Ltd. in July 2011, and made Goto Software Co., Ltd. a consolidated subsidiary via a share acquisition in January 2017. It absorbed both companies in January 2018 via an absorption-type merger. The company expects BCH to operate as an independent company in the Chinese market in the future. BCH contributes several percent of consolidated revenue, and lags the parent company in profitability. Base has refrained from actively pursuing expansion in China, where competition is fierce, and considers Japan its main target market.
|Gross profit margin||24.9%||24.9%||26.8%||27.5%||29.3%|
|Operating profit margin||13.5%||14.6%||17.3%||19.7%||22.6%|
|Total asset turnover||0.80||1.04||1.07||1.21||1.16|
|OCF / Current liabilities||-||0.57||0.47||0.89||0.49|
|OCF / Total liabilities||0.07||0.34||0.36||0.76||0.50|
|Cash conversion cycle (days)||-||38||30||25||27|
|Change in working capital||-||33||263||-141||506|
|Accounts receivable turnover||-||5.8||6.4||7.6||6.8|
|Days in accounts receivable||-||62.7||57.0||48.0||53.8|
|Days of inventories outstanding||-||4.9||5.7||4.3||3.6|
|Accounts payable turnover||-||18.5||16.9||19.2||15.6|
|Days in accounts payable||-||19.8||21.5||19.0||23.3|
|Tangible fixed asset turnover||-||352.5||452.4||502.2||273.7|
|Days in tangible fixed assets||-||1.0||0.8||0.7||1.3|
Base considers operating profit growth its most important KPI. While this may appear to be a somewhat elementary indicator at first glance, concentrating on this KPI leads to improvement in other profitability metrics. Growth in operating profit tends to contribute to improvements in GPM and OPM. Cash and deposits and capital stock have increased following Base’s listing, as the company has no major capital needs aside from investment in recruiting. Although the equity ratio has remained at high levels, its ROE should continue to improve as long as its total asset turnover ratio and net income margin expand further (ROE improved from 24.2% in FY12/18 to 28.2% in FY12/21).
The company’s cash cycle contracted in the space of a few years from 48 days to 27 days in FY12/21. Shared Research understands that Base is able to efficiently recover cash because (1) it uses short-term contracts (renewed every three to six months) for system development, and (2) it is increasing earnings of recurring-revenue businesses such as the Operations & maintenance and Staffing service businesses. While the company’s inventory turnover days and accounts payable turnover days have held more or less steady, its accounts receivable turnover days have contracted.
The company boasts a high level of productivity per engineer (operating profit per employee of JPY3.4mn in FY12/21 compared with an average of 1.7mn at four competitors), which is a reflection of the skill levels of its employees and a relatively high in-house development ratio (full-time employee to external contractor ratio of 2:1). Further, Base has reduced its manufacturing cost ratio by concluding short-term contracts that minimize rework, and kept its SG&A-to-revenue ratio down to around 6.7% by maintaining a high engineer (to all personnel) ratio of 95%. It reported industry-leading OPM of 22.6% in FY12/21.
Below, we take a look at the results of the “2021 Basic Survey on the Information and Communications Industry” (as of March 31, 2021) conducted by the Ministry of Internal Affairs and Communications (MIC) and Ministry of Economy, Trade, and Industry (METI). According to the survey, in FY2020, Japan was home to 5,987 companies that engaged in information and communications-related operations (meaning companies that are engaged in the information and telecommunications industry in any small way, whether as a main business or not), with FY2020 sales of JPY53.4tn (JPY74.2tn including revenue in areas other than the information and telecommunications industry). A breakdown by specialization indicated that telecommunications marked the highest revenue, followed by software, and data processing and provision services. Together, they accounted for 79.4% of the total information and communications industry with 33.4% from telecommunications, 31.2% from software, and 14.9% from data processing and provision services.
|Revenues related to information and communications industry||FY2017||FY2018||FY2019||FY2020|
|JPYtn||% of total||JPYtn||% of total||JPYtn||% of total||JPYtn||% of total|
|Data processing and provision services||6.4||12.9%||7.3||14.4%||7.2||13.9%||7.9||14.9%|
|Video production and distribution||0.9||1.8%||0.9||1.8%||0.9||1.7%||0.8||1.5%|
|Sound information production||0.2||0.3%||0.1||0.3%||0.1||0.2%||0.1||0.2%|
|Video/audio/text production related services||0.1||0.3%||0.2||0.4%||0.2||0.4%||0.2||0.3%|
|Other information and communications services||0.2||0.4%||0.2||0.4%||0.2||0.4%||0.2||0.4%|
In FY2020, revenue from information services providers stood at JPY18.8tn down JPY205.6bn compared to 2019. This was largely due to a JPY287.1bn decline in the mainstay contract development software business. Revenue per company was JPY5.0 bn (-3.1% YoY). By industry sector, the game software industry showed significant growth (+16.7% YoY). By industry, outsourced software development also had the greatest number of companies with a 46.7% share, followed by information processing services with 24.4%. The two industries accounted for approximately 70% of the total.
|Revenue related to information services||FY2017||FY2018||FY2019||FY2020|
|JPYtn||% of total||JPYtn||% of total||JPYtn||% of total||JPYtn||% of total|
|Outsourced software development||8.1||46.2%||8.6||46.3%||9.1||47.7%||8.8||46.7%|
|Market research/poll/social survey||0.2||1.3%||0.3||1.4%||0.2||1.0%||0.2||0.9%|
|Other information services||2.8||16.1%||2.7||14.3%||2.5||13.3%||2.6||13.9%|
|No. of companies in information service industry||3,433||3,443||3,494||3,501||3,498||3,636||3,660||3,735|
|Revenue related to information services(JPYtn)||14.4||14.9||17.3||16.7||17.5||18.5||19.0||18.8|
|Sales per company in information services industry(JPY100mn)||41.9||43.3||49.4||47.8||50.1||51.0||51.9||50.3|
METI has compiled a report, “Digital Transformation: Overcoming of ‘2025 Digital Cliff’ Involving IT Systems and Full-fledged Development of Efforts for Digital Transformation,” summarizing the Working Group discussions on the state and issues of software development in Japan that presents a hurdle for digital transformation (DX). The Working Group identified two structural problems unique to Japan that inhibit DX promotion: (1) existing systems being overly closed and complex, and (2) delays in upgrading the skillset of IT engineers. These problems are already manifesting as evidenced by the fact that major financial institutions are successively writing down system-related assets (examples include Mizuho Financial Group and Mitsubishi UFJ Financial Group’s credit card subsidiary).
The write-downs are mainly attributable to delays in post-integration processes, a worsening business environment, and slow adoption of new technologies. The rise of new technologies such as blockchain and fintech have turned traditional large systems into a “negative inheritance” for financial institutions. Enhancing the efficiency of system development has become a priority issue not only at leading financial institutions, where the sense of urgency is strong, but across all industries. Given this environment, vendor companies are called to provide value to user companies by leveraging personnel who can stay up to date with rapidly changing digital technologies.
According to a survey conducted by the Japan Users Association of Information Systems (JUAS) in FY2017, the IT systems used by Japanese companies are so-called legacy systems, and this is hampering DX in many cases. (Legacy systems are defined as systems that utilize outdated technology, and are bulky, complex, and closed. As a result, they undermine management and business strategy, and lead to high-cost structures.) In the survey, about 80% of the responding companies indicated they still used legacy systems, and roughly 70% said these legacy systems were holding back digitalization.
According to the “Corporate IT Trend Survey Report 2017,” 80% of Japanese companies’ IT-related budget was allocated to business maintenance and operation (“run the business”). In addition, the “run-the-business” budget accounted for over 90% at more than 40% of the surveyed companies. This creates problems such as not being able to sufficiently allocate funds and personnel to IT strategy, which is necessary to generate new added value. For specific investment trends, we look at the “2017 Survey on IT Operation at Japanese Companies” conducted by the Japan Electronics and Information Technology Industries Association (January 2018). According to this survey, Japanese companies tend to concentrate more on defensive IT investment aimed at enhancing efficiency and reducing costs than their US counterparts. Consequently, the reality is that Japanese companies have not made much headway with offensive IT investment in order to build new business models and services powered by IT. This means investment focused on value improvement has lagged.
Source: “Digital Transformation: Overcoming of ‘2025 Digital Cliff’ Involving IT Systems and Full-fledged Development of Efforts for Digital Transformation” issued by METI
In Japan, where over 70% of IT engineers work at vendor companies, it is not unusual for outsourcing contracts to cover all aspects of development processes starting from requirements analysis. In other words, user companies delegate the entire process from defining requirements to vendor companies, requesting the latter to work out what type of solution to develop. Vendor companies generally accept this mandate. Under such circumstances, it is not realistic to push for a development approach that requires a strong commitment from the user company, such as agile development (approach that uses an iterative cycle of software implementation and testing rather than a sequential progression through major stages of a project). As a first step, it is important for the user company to provide some indication of what it wishes to achieve. Although the requirements can be determined in collaboration with the vendor company, it is important to realize that the user company should make the final decision here.
Systems of Engagement (SoE) are systems with a strong focus on customer engagement that aim to flexibly respond to the changing needs and behavior patterns of customers. Working on the assumption that requirements vary constantly, SoE aim to strengthen engagement with customers through IT systems. Systems of Record (SoR), which have traditionally been used internally by companies, are systems focused on recording and managing important business data. They depend on a thorough initial specification of requirements based on corporate business data management and processing procedures. To promote DX, it is important to strike a balance between SoR and SoE, which requires an upgrade in the skillset of engineers. Through such a change, vendor companies are called to provide value to user companies by leveraging personnel who can remain up to date with rapidly changing technologies. On the flipside, user companies need to assess fair value, and move away from keeping IT engineer costs at low levels, which is the current reality.
Many vendor companies have thus far adopted a business model centered on outsourced operations. However, the market for such operations is expected to contract going forward as large-scale development winds down, post-integration information assets are shared, and cloud-based solutions gain traction. In seeking to adopt new business models and optimize existing systems, user and vendor companies face challenges that cannot be addressed independently. Consequently, user and vendor companies need to move toward a work style that redefines their relationship. Vendor companies need to transition away from operating as a subcontractor for system development work conducted in accordance with specifications provided by customers, toward functioning as a partner that works out new business models together with customers.
Source: “Digital Transformation: Overcoming of ‘2025 Digital Cliff’ Involving IT Systems and Full-fledged Development of Efforts for Digital Transformation” issued by METI
The Ministry of Economy, Trade, and Industry (METI) has warned the shortage of IT personnel while demand for IT is increasing over the long term: in its March 2019 Survey on IT Personnel Supply and Demand, the Ministry published a forecast for IT personnel shortages based on three scenarios (high, medium, and low level of shortage) for IT demand through 2030. According to the report, there will be a shortage of about 450,000 IT personnel in 2030 under the medium-shortage scenario and about 790,000 under the high-level shortage scenario. IT human resources include system consultants, designers, software developers, and data processing and communication engineers.
|No. of available IT resources||1,031,538||1,045,512||1,059,876||1,070,559||1,081,063||1,110,121||1,133,049|
|No. of shortages (mid-level scenario)||220,000||260,835||303,680||314,439||325,714||364,070||448,596|
|No. of shortages (high-level scenario)||220,000||-||-||-||-||-||790,000|
|No. of IT personnel||IT companies||Other companies||Total|
|The United States||1,453,300||2,741,810||4,195,110|
|Percentage (%)||IT companies||Other companies||Total|
|The United States||34.6%||65.4%||100.0%|
Among the large number of companies engaging in outsourced software development, Base regards R&D Computer Co., Ltd. (TSE1: 3924), System Information Co., Ltd. (TSE1: 3677), and NSD Co., Ltd. (TSE1: 9759) as peers or rivals. Shared Research has also added outsourced software testing company SHIFT to the group below because it resembles Base in that it is a relatively young company (with a similar average employee age) that operates in a single segment.
An independent system development company. System Information competes with Base for orders from NTT Data. The main customers are Mitsubishi Electric Information Systems, Dai-ichi Life Information Systems, and NTT Data (as at September 2021). By customer industry, Base derived 33.3% of revenue from insurance, 2.0% from public insurance, 22.6% from logistics and services, 9% from finance, 12.7% from manufacturing, 12.3% from telecommunications, and 8.0% from public agencies. Base and System Information used to have capital ties through cross shareholdings.
An independent systems integrator with three business segments: SI services (contract development), infrastructure solutions services (system infrastructure and network construction), and package-based SI services (software package products). Major clients are Fujitsu Group, Hitachi Group, and NTT Group (as of FY03/21). The revenue breakdown is SI Services (62%), Infrastructure Solution Services (16%), and Package-Based SI/Services (22%).
Base regards system integrator NSD as a benchmark company. NSD generates roughly 6x the revenue of Base, and boasts a comparatively high OPM of 14.9% (FY03/21). The revenue breakdown is System development (89%) and Solutions (11%). It employs some 3,000 engineers and leverages its engineer deployment capacity to provide services to the financial industry and a broad range of other fields. For FY03/21, it derived 31.4% of its revenue from the financial industry, 45.8% from manufacturing and social infrastructure IT, 12.2% from IT infrastructure, and 10.7% from solutions businesses.
SHIFT specializes in software verification testing. The third-party verification and quality assurance software testing business provides consulting, solutions, and a quality assurance platform to support customers' software testing operations. Its segments are enterprise (93%) and entertainment (7%). SHIFT continues to recruit personnel on a large scale (1,000 new hires per year) to increase its employee deployment capacity.
|Ticker||Listing||Company||Fiscal-year end||Latest FY results||OP per employee||Main features (% of revenue) (％)|
|Revenue||Operating profit||Operating profit margin||Equity ratio|
|4481||TSE1||Base||FY12/21||13,294||3,002||22.6%||73.1%||3.37||Fujitsu(19.5) , Nomura Research Institute(14.5) , Mizuho Securities(14.3) , NTT Data Global Solutions(10.2) , Nippon Securities Technology(5.3%) , Other(36.1％)|
|3677||TSE1||System Information||FY09/21||13,005||1,618||12.4%||68.4%||1.88||Insurance(33.3％) , Public insurance(2.0％) , Finance(9.0％) , Logistics and services(22.6％) , Manufacturing(12.7％) , Communications(12.3％) , Public agencies(8.0％) : Parent-only|
|3924||TSE1||R&D Computer||FY03/21||8,877||620||7.0%||68.7%||1.23||System integration services(62) , Infrastructure solutions services(16) , Package-based SI services(22)|
|9759||TSE1||NSD||FY03/21||66,184||9,842||14.9%||81.8%||2.79||System development (89) , Solutions(11)|
|3697||TSE1||SHIFT||FY08/21||46,004||3,994||8.7%||65.3%||0.90||Enterprise(93) , Entertainment(7)|
|Est'd||Number of employees||Average age||Average years of service||Average annual salary||Revenue per employee||OP per employee||Number of employees||No. of contracted workers|
|4481||TSE1||Base||FY12/21||Jan 1997||743||36.8||5.1||6,281||14.94||3.37||890||Less than 450|
|3677||TSE1||System Information||FY09/21||Jan 1980||555||37.3||7.8||5,832||15.09||1.88||862||NA|
|3924||TSE1||R&D Computer||FY03/21||Jan 1971||503||39.2||9.5||5,375||17.65||1.23||503||NA|
Revenue per employee tends to increase sharply with the deployment of external contractors. Base lags System Information, R&D Computer, and NSD in revenue per employee, but Shared Research suspects the divergence is attributable to a high reliance on subcontracting at the company’s three rivals (no related information disclosed in the securities reports of the three companies). Because subcontracting costs are included in cost of revenue, Shared Research believes operating profit per employee is a better indicator of productivity per employee. Operating profit per employee for FY12/21 was JPY3.4mn for Base, JPY2.8mn for NSD, JPY1.9mn for System Information, JPY1.2mn for R&D Computer, and JPY0.9mn for SHIFT.
Base’s OPM of 22.6% far exceeds those of the other companies. The company attributes this to its high engineer (to all personnel) ratio of 95% (compared to roughly 75% at the other companies), and the fact that it has managed to keep its SG&A-to-revenue ratio down to 6.7%. The SG&A-to-revenue ratio stands at 9.8% at R&D Computer, 6.3% at NSD, and 21.6% at SHIFT (all ratios based on most recent full-year results).
Base’s high OPM of 22.6% is a byproduct of its strong GPM of 29.3% (FY12/21). SHIFT has the highest GPM of 30.2% in our comparison group, but also the highest SG&A-to-revenue ratio of 21.6% due to heavy spending on recruiting and advertising, and this has kept its OPM down to 8.7% (FY08/21). Shared Research understands that Base’s GPM is higher than those of System Information, R&D Computer, and NSD because of a large percentage of major customers, low subcontracting expenses, and a low number of loss-making projects (the company’s engineer rate is on par with the other companies in our comparison group).
|(: JPYmn)||Base(4481)||System Information(3677)||R&D Computer(3924)|
|Operating profit margin||17.3%||19.7%||22.6%||11.1%||11.7%||12.4%||7.3%||7.8%||7.0%|
|Cash and deposits||5,868||7,181||7,487||2,097||2,823||3,647||2,048||2,155||2,367|
|Gross profit margin||26.8%||27.5%||29.3%||20.6%||21.1%||21.4%||18.1%||18.2%||16.8%|
|(: JPYmn)||NSD (9759)||SHIFT (3697)|
|Operating profit margin||13.8%||14.7%||14.9%||7.9%||8.2%||8.7%|
|Cash and deposits||22,681||25,172||29,030||8,691||6,524||14,147|
|Gross profit margin||21.3%||21.4%||21.2%||31.8%||31.2%||30.2%|
Base can efficiently increase the number of deployable engineers by hiring college graduates and mid-career engineers in Japan and China, and by keeping its engineer (to all personnel) ratio high (currently 95%). It has increased the number of engineers by 2.4x from 372 (non-consolidated basis at end-FY12/16) to 890 (consolidated basis at end-FY12/21) over five years. The company plans to rapidly establish a team of 1,000 full-time employees (with a full-time employee to external contractor ratio of 2:1) by adding at least 100 new employees per year on a net basis. Despite being a relatively young organization with a low average employee age of 36.8 years, Base has an average salary that is close to its competitors NSD and System Information, two companies with a longer history and an average employee age that is at least three years higher. The company says its salary levels give it a competitive edge in recruiting, which enables it to hire college graduates from 10 elite universities in China. The company encourages its employees to obtain various qualifications, not only related to IT but also in fields such as finance. It believes such qualifications can contribute to a deeper understanding of customer operations, help build relationships of trust with customers, and support sustainable business growth.
Base has captured major customers thanks to its decision-making speed and mobility. The company stations on-site managers at major customers who make frequent orders, and grants them decision-making authority. This allows Base to speed up decisions and capture projects ahead of competitors. Four major customers (Fujitsu group, Mizuho Securities, Nomura Research Institute group, and NTT Data group) generate about 75% of revenue. The company builds long-term relationships with its major customers. It has conducted business with Fujitsu since its inception in 1997, with Mizuho Securities since 2002, with Nomura Research Institute since 2013, and with NTT Data since 2017. It estimates the work it handles for these customers corresponds to less than 1% of their total outsourced project costs, and sees ample scope for further revenue growth at each by expanding orders in fields it has already built a track record in and capturing orders in new fields. For example, building on previous system development work, the company captured a system maintenance and management project (handled by its Operations & maintenance business) from Mizuho Securities in 2009. It also added NTT Data as a major customer a few years ago, and revenue from this customer continues to grow sharply.
The company considers growth in operating profit its most important performance indicator. In FY12/21, it reported operating profit per employee of JPY3.4mn and OPM of 22.6%, which is higher than the 7.6% average for software companies and the 6.5% average for data processing and provision service companies (source: Ministry of Economy, Trade and Industry's 2021 Basic Survey on the Information and Communications Industry). The high OPM level reflects a combination of a strong GPM (29.3%) and a low SG&A-to-revenue ratio (6.7%) in FY12/21. We understand that the company improves GPM by expanding revenue from existing customers, eliminating loss-making projects, and reducing its dependence on subcontracting. Base is able to recover cash efficiently by using short-term contracts for system development (renewed within three to six months) and increasing revenue from recurring-revenue businesses (Operation & Maintenance, Staffing Service). It has reduced its cash cycle from 48 days in FY12/16 to 27 days in FY12/21 by shortening its accounts receivable turnover days.
As a management policy, Base aims to “earnestly push ahead with the plain but steady business of outsourced development.” The company has thus far succeeded in fulfilling another policy—“firmly maintain high profitability and high growth”—by avoiding unnecessary SG&A expenses and streamlining labor-related costs (accounting for the bulk of cost of revenue) and labor-intensive structures. President Nakayama believes the multi-layer subcontracting structure of the Japanese software industry is a weakness that can be exploited to generate business opportunities. The industry has long suffered from ambiguity in areas such as productivity and designation of responsibility, and Base’s approach is to clearly define these areas in its contracts. Thanks to President Nakayama’s foresight, Base has increased customer satisfaction, successively won new and follow-up projects, and achieved above-industry growth. The company’s solid position as a first-tier subcontractor in the old-fashioned Japanese software industry has been the driving force behind its growth. However, if the present multi-layer subcontracting structure of the industry were to collapse and give way to a horizontal business division, Shared Research believes the company would have to change course and take on a more aggressive stance toward building proprietary development projects. We also believe it is difficult for the company to set a medium-term business plan with quantitative targets because its focus on outsourced development leaves it susceptible to software industry trends or earnings trends at major customers.
Base has grown its revenue to over JPY13.0bn while operating in the single segment of Outsourced Software Development. However, the work it undertakes for major customers corresponds to less than 1% of their total outsourced project costs. This means its customers are only outsourcing a fraction of their software production (mainly, specifications design and programming) and operation/maintenance tasks for large system development projects to the company. Base has pushed ahead with a transfer of decision-making authority to on-site managers. It selects managers based on an election system where candidates nominate themselves to the posts available; about an equal number of Japanese and Chinese candidates (aged in their mid-thirties to early forties) have thus far raised their hands to run as candidates, according to the company. Still, since the main responsibility of on-site managers is to supervise front-line operations, they cannot gain the necessary management experience to develop into a leader of the caliber of President Nakayama, who can steer the company into the future. A charismatic founder who owns and runs a company is generally difficult to replace, and it is not uncommon for the successor to take heed of what the founder (often serving as the chairman) has to say when it comes to running the company. Base could conceivably increase its current revenue levels several times while continuing to operate solely in the Outsourced Software Development segment. If so, it may need another expert manager at the helm once (1) it starts to diversify its customer fields (as rival NSD has done) (for example, the company has managed to build continuous relationships with financial customers with relative ease, but this is more difficult to achieve when handling projects for government agencies or in other industries), or (2) M&A activity starts to increase the importance of consolidated management. In addition, structural changes in the software industry may force the company to overhaul its business model. If the cultivation of executive candidates cannot keep pace with earnings growth, Base may need to consider hiring its executives from outside the company in the future. With that said, from 2021, the company has elected a new managing director (positioned as COO) who has experience as a senior executive officer and two new executive officers who have experience as department heads. As such, Shared Research believes the company is beginning to address the succession planning issue.
Base provides outsourced development services to around 70 customers (mostly large corporates) spanning a wide range of industries including financial, industrials, logistics, telecommunications, public services, and infrastructure. Meanwhile, the company says the financial industry (particularly securities), its area of strength, is the source of about half its revenue. By customer, about 59% of Base’s revenue comes from four major accounts (Fujitsu, Mizuho Securities, Nomura Research Institute and NTT Data Global Solutions), highlighting Base’s heavy dependence on a handful of large customers. That share rises to roughly 75% if adding in Fujitsu and Nomura Research Institute group companies and the NTT Data group. The company pushed forward business selection and concentration while taking into consideration its reliance on certain industries and companies, and this approach has indeed fueled Base’s growth. That said, it is also true that compared with independent system integrator NSD (a benchmark company for Base), the company’s operations are more heavily weighted toward certain industries. NSD, which boasts the ability to mobilize some 3,000 engineers, actively pitches for projects with companies across a wide range of industries starting with finance. A breakdown of NSD revenue by customer industry indicates that in FY03/20, 31.4% of total revenue came from the financial industry, 45.8% from manufacturing and social infrastructure IT, 12.2% from IT infrastructure, and 10.7% from solutions business. In order to be on par with NSD, we think Base will need to expand its customer universe for outsourced development by tapping into the non-finance space and public organizations.
|Cost of revenue||4,420||5,631||7,107||8,987||9,398|
|Gross profit margin||24.9%||24.9%||26.8%||27.5%||29.3%|
|Operating profit margin||13.5%||14.6%||17.3%||19.7%||22.6%|
|Gain on sales of investment securities||31||1||6||1||7|
|Loss on sales of investment securities||3||0||0||6||-|
|Foreign exchange losses||7||7||0||16||14|
|Recurring profit margin||13.8%||14.5%||17.0%||19.5%||22.6%|
|Implied tax rate||33.1%||34.0%||30.2%||26.9%||28.4%|
|Net income attributable to non-controlling interests||1||15||15||29||26|
|Net income attributable to owners of the parent||543||703||1,139||1,743||2,126|
|% of total||70.8%||64.1%||59.1%||58.0%||58.6%|
|% of total||23.8%||31.7%||37.1%||38.4%||39.1%|
|% of total||4.5%||4.2%||4.0%||3.3%||2.5%|
|Total manufacturing costs||3,645||5,232||6,729||8,499||8,864|
|WIP inventories (beginning of year)||67||33||41||54||29|
|WIP increase from merger||6||-||-||-|
|WIP inventories (year-end)||33||41||54||29||48|
|Cost of revenue||3,679||5,230||6,717||8,523||8,845|
|No. of employees (average)||384||448||561||669||730|
|Contract workers (monthly avg.)||90+||200-||320-||400-||Less than 450|
|Contract workers / Employees (approx.)||25%||44%||56%||60%||About 69%|
|Labor cost per engineer||7.1||7.9||7.5||7.8||7.5|
|Outsourcing cost per contract worker||9+||8+||8-||8+||8-|
|Salaries and allowances||131||129||149||160||161|
|% of total||32.7%||27.6%||22.8%||21.5%||23.2%|
|Salaries and allowances||88||100||124||137||128|
|% of total||17.5%||13.9%||14.3%||14.8%||15.3%|
|% of total||7.5%||16.1%||23.0%||19.3%||15.0%|
|% of total||0.2%||0.7%||0.1%||0.1%||0.1%|
|Amortization of goodwill||55||55||55||55|
|% of total||0.0%||7.7%||6.3%||5.9%||6.6%|
|% of total||42.1%||34.0%||33.4%||38.3%||39.8%|
|Balance sheet (JPYmn)||FY12/17||FY12/18||FY12/19||FY12/20||FY12/21|
|Cash and deposits||4,458||4,394||5,868||7,181||7,487|
|Notes and accounts receivable||1,196||1,383||1,651||1,608||2,309|
|Deferred tax assets||107||-||-|
|Allowance for doubtful assets|
|Total current assets||5,987||5,888||7,713||8,929||9,990|
|Buildings and structures||16||15||12||22||49|
|Tools, furniture, and fixtures||6||7|