Business Brain Showa-Ota provides its clients with a full range of services, from business process consulting (e.g., issue identification and system implementation support) to system development, adoption, and maintenance. Founded in 1967 by a certified public accountant, the company expanded its business by providing business process consulting services to clients of accounting firms. As of June 2021, the company had about 30 CPAs on staff (3.5% of its consulting and system development employees) and specialized in consulting and system development in the accounting field, such as providing account settlement support through its (in-house) CPA consultants (Consulting and System Development segment).

The company also provides business process outsourcing (BPO) services through which its clients outsource payroll and accounting operations to the company (Management Services [BPO] segment).

In FY03/21, the company reported revenue of JPY29.2bn (+2.5% YoY) and operating profit of JPY2.2bn (-0.6% YoY). The Consulting and System Development segment contributed to 73.5% of revenue and 77.1% of operating profit, while the Management Services (BPO) segment accounted for 26.5% of revenue and 22.9% of operating profit.

In its Consulting and System Development business, the company’s main clients are medium-sized companies with sales of between JPY300bn and JPY500bn. In FY03/21, it had about 900 clients (+6% YoY), with revenue per client of around JPY23mn (-5% YoY). The infrastructure sector, which includes construction companies, accounted for about JPY3.0bn (approximately 14% of revenue) and the mobility sector, which includes major automakers, accounted for around JPY2.0bn (approx. 9%).

The company is able to boost revenue per client by first undertaking consulting and system development in the accounting field for new clients, then expanding its service area to other departments such as procurement and purchasing within the same client. The accounting department of a company gathers all information related to procurement, sales, and other departments. Participating in the planning, design and development of the accounting system enables the company to identify issues in the operations and systems of other departments.

In addition, the company operates a call center and dispatches system engineers to client sites for maintenance and servicing. Thanks to that, the company is able to identify issues with client systems and make new proposals to capture new orders. As client companies rebuild their systems every five to six years, the company is also able to take on system update orders from existing clients (over 90% of revenue came from existing clients in FY03/21).

While the outsourced software development market grew by 27.5% over the five years from FY2014 to FY2019, the company’s revenue rose by 150% and operating profit doubled over the same period. According to the company, its integrated service offering covering everything from consulting to system development has been successful. It also noted that its focus on higher margin work amid the market expansion was one of the factors behind its improved margins.

In its Management Services (BPO) segment, the company mainly provides payroll and accounting services. As of FY03/21, it had about 600 clients, with revenue per client at around JPY13mn. Its BPO business includes advanced tasks such as account settlement and disclosure material preparation.

However, clients do not outsource this work to the company unless it leads to lower costs. As a result, the OPM in this business was 6.7% in FY03/21, lower than the 8.7% for the Consulting and System Development segment. Offsetting the lower profitability of the segment is its higher revenue stability. Valuing this stability, the company aims to raise the revenue of Management Services (BPO) to 30% of the total revenue.

Earnings trends

In FY03/22, the company reported revenue of JPY32.3bn (+10.9% YoY), operating profit of JPY2.7bn (+24.8% YoY), pre-tax profit of JPY2.8bn (+20.7% YoY), and net income attributable to owners of the parent of JPY1.8bn (+13.5% YoY). Orders have been steadily increasing since the beginning of the year and are up significantly YoY. In terms of revenue, although some businesses struggled, the information security business continued its strong run YoY. In addition, outsourcing services for global companies remained strong in FY03/22, as performance in system development for the financial industry began to recover, resulting in a YoY increase.

For FY03/23, the company forecasts revenue of JPY36.0bn (+11.3% YoY), operating profit of JPY3.0bn (+9.3% YoY), pre-tax profit of JPY3.0bn (+7.4% YoY), and profit attributable to owners of the parent of JPY1.8bn (+2.0% YoY). In the Consulting and System Development segment, the information security consulting business is expected to experience continued growth, with the segment as a whole expected to see an increase in sales of about 15%. The Management Services (BPO) segment is basically a recurring-revenue business, with revenue expected to increase by about 6% as a result of steady growth.

In May 2021, the company announced its medium-term management plan, setting its 2030 targets at JPY100bn for revenue (+13.1% CAGR) and JPY10bn for profit (+16.3% CAGR), and its 2023 targets at JPY40bn for revenue (+11.1% CAGR) and JPY3.4bn for profit (+15.6% CAGR). Profit here refers to operating profit under Japanese GAAP (excluding non-operating profit and loss). The company aims to raise the revenue mix of Management Services (BPO) to 30% with an overall ROE target of 10%.

Strengths and weaknesses

Strengths:

Integrated service offering that covers everything from system consulting to development, which makes it easier to reflect client requests compared to competitors and has resulted in higher client satisfaction.

Specialization and advantage in system development in the accounting field built on a long history of consulting in collaboration with an accounting firm, as well as its account settlement support services by CPA consultants.

Ability to boost revenue per client through developing systems for accounting departments that tie into all business operations, which helps to identify operational and system issues in other departments, and can be linked to new proposals.

Weaknesses:

Focus on stable revenue leads to lower margins compared to peers.

Issues with project management capabilities as seen in past unprofitable projects that have had a substantial impact on business results.

Difficulties in effective cross-selling between the Consulting and System Development segment and the Management Services (BPO) segment as the clients’ department in charge differs.

Key financial data

Japanese GAAP (IFRS from FY03/21)

Income statement			FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Revenue			15,374	15,978	16,973	18,336	20,540	23,016	23,509	24,819	28,351	29,087
	YoY		6.5%	3.9%	6.2%	8.0%	12.0%	12.1%	2.1%	5.6%	14.2%	2.6%
Gross profit			3,029	3,040	3,407	3,494	3,619	3,885	4,489	5,251	6,034	6,559
	YoY		19.1%	0.4%	12.1%	2.5%	3.6%	7.3%	15.6%	17.0%	14.9%	8.7%
	Gross profit margin		19.7%	19.0%	20.1%	19.1%	17.6%	16.9%	19.1%	21.2%	21.3%	22.5%
Operating profit			845	781	1,003	1,045	891	817	1,159	1,723	2,130	2,408
	YoY		86.7%	-7.5%	28.5%	4.1%	-14.7%	-8.3%	41.9%	48.6%	23.7%	13.1%
	Operating profit margin		5.5%	4.9%	5.9%	5.7%	4.3%	3.6%	4.9%	6.9%	7.5%	8.3%
Recurring profit			866	811	1,022	1,067	918	751	1,135	1,653	2,256	2,490
	YoY		84.8%	-6.4%	26.1%	4.4%	-14.0%	-18.2%	51.2%	45.6%	36.5%	10.4%
	Recurring profit margin		5.6%	5.1%	6.0%	5.8%	4.5%	3.3%	4.8%	6.7%	8.0%	8.6%
Net income			251	464	567	632	551	440	733	994	1,427	1,650
	YoY		10.1%	84.7%	22.2%	11.4%	-12.8%	-20.2%	66.7%	35.6%	43.6%	15.6%
	Net margin		1.6%	2.9%	3.3%	3.4%	2.7%	1.9%	3.1%	4.0%	5.0%	5.7%
Per-share data (split-adjusted; JPY)
No. of shares outstanding('000 shares)			18,092	18,092	18,092	16,000	16,000	16,000	16,000	16,000	16,000	16,000
		Treasury shares ('000)	3,246	7,846	7,935	5,564	4,959	4,838	4,370	4,345	4,269	4,195
EPS (JPY)			15.8	32.9	55.1	61.2	51.8	39.6	64.1	85.4	122.0	132.0
EPS (fully diluted; JPY)			-	-	-	-	-	-	-	-	-	131.6
Dividend per share (JPY)			6.0	7.5	9.5	11.0	14.0	15.0	17.5	20.0	27.5	30.0
Book value per share (JPY)			390	485	527	576	597	624	661	731	827	903
Balance sheet (JPYmn)
		Cash and cash equivalents	4,713	4,943	4,890	5,265	5,104	4,160	5,628	6,707	7,108	8,919
Total current assets			8,275	8,302	8,678	8,929	9,482	9,445	10,897	12,054	13,812	15,787
Tangible fixed assets			116	201	177	177	245	359	304	329	328	285
Investments and other assets			1,805	1,710	1,697	2,252	2,481	2,919	2,856	3,156	2,926	3,625
Intangible assets			95	87	108	335	433	525	538	587	560	454
Total assets			10,291	10,300	10,660	11,693	12,642	13,248	14,595	16,126	17,627	22,786
		Short-term debt	4	359	209	209	109	106	6	9	5	53
Total current liabilities			2,626	2,638	2,735	3,125	3,349	3,822	4,207	4,382	4,696	5,648
		Long-term debt	14	639	431	222	116	10	9	365	287	342
Total fixed liabilities			1,689	2,502	2,376	2,190	2,294	2,195	2,458	2,953	2,887	2,941
Total liabilities			4,315	5,140	5,110	5,315	5,644	6,017	6,665	7,335	7,583	8,589
		Shareholders' equity	5,783	4,988	5,355	6,014	6,591	6,961	7,686	8,516	9,704	11,131
Total net assets			5,977	5,160	5,550	6,379	6,998	7,231	7,930	8,791	10,043	11,562
Total liabilities and net assets			10,291	10,300	10,660	11,693	12,642	13,248	14,595	16,126	17,627	20,151
Total interest-bearing debt			18	998	639	431	226	116	14	373	292	395
Cash flow statement(JPYmn)
Cash flows from operating activities			815	615	422	1,120	255	202	1,781	1,079	938	3,075
Cash flows from investing activities			-378	612	-73	-524	-354	-427	-12	-230	-468	-529
Cash flows from financing activities			-700	-397	-502	-135	-61	-419	-301	129	-269	-186
Financial ratios
ROA (RP-based)			8.5%	7.9%	9.8%	9.6%	7.5%	5.8%	8.2%	10.8%	13.4%	12.3%
ROE			4.2%	8.6%	11.0%	11.1%	8.7%	6.5%	10.0%	12.3%	15.7%	15.8%
		Equity ratio	56.2%	48.4%	50.2%	51.4%	52.1%	52.5%	52.7%	52.8%	55.1%	48.9%
		Total asset turnover	150.9%	155.2%	162.0%	164.0%	168.8%	177.8%	168.9%	161.6%	168.0%	144.0%
		Net margin	1.6%	2.9%	3.3%	3.4%	2.7%	1.9%	3.1%	4.0%	5.0%	5.7%

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company carried out a 2-for-1 stock split of common stock with a record date of June 30, 2020. Figures for FY03/20 and earlier have been adjusted to reflect the stock split.

IFRS

Income statement			FY03/20	FY03/21	FY03/22	FY03/23
(JPYmn)			Cons.	Cons.	Cons.	Est.
Revenue			28,439	29,159	32,346	36,000
	YoY		-	2.5%	10.9%	11.3%
Gross profit			5,994	6,373	8,030
	YoY		-	6.3%	26.0%
	Gross profit margin		21.1%	21.9%	24.8%
Operating profit			2,214	2,200	2,745	3,000
	YoY		-	-0.6%	24.8%	9.3%
	Operating profit margin		7.8%	7.5%	8.5%	8.3%
Pre-tax profit			2,219	2,312	2,792	3,000
	YoY		-	4.2%	20.7%	7.4%
	Pre-tax profit margin		7.8%	7.9%	8.6%	8.3%
Profit attributable to owners of the parent			1,460	1,554	1,764	1,800
	YoY		-	6.4%	13.5%	2.0%
	Profit margin		5.1%	5.3%	5.5%	5.0%
Per-share data (split-adjusted; JPY)
No. of shares outstanding('000 shares)			16,000	16,000	12,725
		Treasury shares ('000)	4,269	4,195	814
EPS (JPY)			122.0	132.0	148.7	151.7
EPS (fully diluted; JPY)			-	131.6	146.1
Dividend per share (JPY)			27.5	30.0	45.0	45.0
Book value per share (JPY)			827	903	1,082
Balance sheet (JPYmn)
		Cash and cash equivalents	6,441	8,262	8,639
Total current assets			14,019	15,966	18,543
Tangible fixed assets			459	348	954
Intangible assets			493	424	453
Total assets			20,651	22,786	28,296
		Short-term debt	811	611	1,070
Total current liabilities			6,153	6,968	8,687
		Long-term debt	2,048	1,735	3,453
Total noncurrent assets			6,631	6,819	9,843
Total liabilities			11,060	11,743	14,254
		Shareholders' equity	9,266	10,630	12,892
Total equity			9,591	11,043	14,042
Total liabilities and net assets			20,651	22,786	28,296
Total interest-bearing debt			2,858	2,346	4,523
Cash flow statement(JPYmn)
Cash flows from operating activities			1,459	3,075	682
Cash flows from investing activities			-479	-529	-845
Cash flows from financing activities			-782	-720	535
Financial ratios
ROA (RP-based)			-	10.6%	10.9%
ROE			-	15.6%	15.0%
		Equity ratio	44.9%	46.7%	45.6%
		Total asset turnover	-	134.3%	126.6%
		Net margin	5.1%	5.3%	5.5%

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
*The company carried out a 2-for-1 stock split of common stock with a record date of June 30, 2020. Figures for FY03/20 and earlier have been adjusted to reflect the stock split.

Recent updates

Company hikes fiscal year-end dividend for FY03/22

2022-05-02

On April 28, 2022, Business Brain Showa-Ota Inc. announced that its board of directors approved a fiscal year-end dividend of JPY29.0 per share to be paid out of retained earnings to shareholders of record as of March 31, 2022.

Dividends per share: JPY29.0 (versus fiscal year-end dividend of JPY15.00 in FY03/21)
Total dividend payments: JPY367mn
Payment date: June 24, 2022

Since its founding, the company has always made distributing profits to shareholders one of its core management principles. When setting dividend payments from retained earnings, the company's basic policy is to allocate profit in line with actual performance, factoring in the need to bolster internal reserves and ensure a sound financial position, maintaining a stable dividend payout ratio of 30%.

Under this policy, the company's board of directors arrived at a decision to pay a fiscal year-end dividend of JPY29.0 per share for FY03/22, an increase of JPY7.0 over the previous indication of JPY22.0 per share.

Acquisition of shares in systems engineering company BSC Co., Ltd.

2022-03-31

On March 31, 2022, Business Brain Showa-Ota Inc. announced that it had entered an agreement to acquire shares in BSC Co., Ltd., a systems engineering company specializing in core systems design/construction and low-code development.

Explaining its decision to acquire shares in BSC, the company said the addition of BSC to its group would help it reach the FY03/23 revenue target of JPY40.0bn set under its BBS2023 medium-term business plan (covering FY03/21 through FY03/23). More specifically, the company said the acquisition was expected to aid the execution of its digital transformation initiative and would also speed up its expansion, particularly in Western Japan. With Business Brain Showa-Ota's own focus being in the field of management accounting, the addition of BSC to its group is also aimed at creating a stronger business structure with the added businesses and people needed to sustain growth going forward.

Founded in 1989, BSC has its head office in Osaka and boasts a staff of more than 100 system engineers. By combining the top-flight system engineers of BSC with its own consulting specialists in management accounting, Business Brain Showa-Ota is looking to offer new services that will create new value for client companies beyond the management accounting-related services it currently offers.

BSC, in addition to its expertise in design and construction of core systems (including the management accounting systems that are the specialty of Business Brain Showa-Ota), also specializes in the low-code development work that is essential to the digital transformation process. The addition of BSC is expected to bolster the group's management accounting consulting business as well as its solutions business (systems design/construction), thus benefiting two out of its three cycles. With offices in Hiroshima and Fukuoka, BSC is also expected to provide additional resources on both the sales and technical fronts that should greatly aid the expansion of the group's footprint in Western Japan.

In the long term, the addition of BSC to the Business Brain Showa-Ota group is also expected to accelerate the company's progress towards its annual revenue target of JPY100.0bn by FY03/30 set under its Make Hybrid Innovations initiative in its BBS2023 medium-term plan.

Retirement of treasury shares

2022-02-28

On February 25, 2022, Business Brain Showa-Ota Inc. announced that its board of directors, at a meeting held that same day, voted to approve plans to retire treasury shares, as detailed below.

Overview of planned retirement of treasury shares

Types of shares to be retired: common stock
Number of shares to be retired: 3,275,000 (equal to 20.47% of issued shares, before retirement)
Scheduled retirement date: Friday, March 18, 2022

Trends and outlook

Quarterly trends and results: IFRS

Cumulative		FY03/21				FY03/22				FY03/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	% of Est.	FY Est.
Revenue		6,979	14,133	21,275	29,159	7,372	15,037	23,354	32,346	101.1%	32,000
	YoY	-	-	-	2.5%	5.6%	6.4%	9.8%	10.9%		9.7%
Gross profit		1,466	3,022	4,741	6,373	1,672	3,552	5,653	8,030
	YoY	-	-	-	6.3%	14.0%	17.5%	19.2%	26.0%
	Gross profit margin	21.0%	21.4%	22.3%	21.9%	22.7%	23.6%	24.2%	24.8%
SG&A expenses		944	1,931	2,973	4,190	1,123	2,402	3,821	5,343
	YoY	-	-	-	9.4%	19.0%	24.4%	28.5%	27.5%
	SG&A ratio	13.5%	13.7%	14.0%	14.4%	15.2%	16.0%	16.4%	16.5%
Operating profit		527	1,103	1,796	2,200	556	1,167	1,850	2,745	109.8%	2,500
	YoY	-	-	-	-0.6%	5.4%	5.8%	3.0%	24.8%		13.6%
	Operating profit margin	7.5%	7.8%	8.4%	7.5%	7.5%	7.8%	7.9%	8.5%		7.8%
Pre-tax profit		565	1,152	1,871	2,312	574	1,205	1,905	2,792	111.7%	2,500
	YoY	-	-	-	4.2%	1.7%	4.6%	1.8%	20.7%		8.1%
	Pre-tax profit margin	8.1%	8.1%	8.8%	7.9%	7.8%	8.0%	8.2%	8.6%		7.8%
Profit attributable to owners of the parent		336	670	1,126	1,554	342	752	1,206	1,764	110.2%	1,600
	YoY	-	-	-	6.4%	1.9%	12.3%	7.1%	13.5%		3.0%
	Profit margin	4.8%	4.7%	5.3%	5.3%	4.6%	5.0%	5.2%	5.5%		5.0%
Quarterly		FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue		6,979	7,153	7,143	7,883	7,372	7,665	8,317	8,991
	YoY	-	-	-	-	5.6%	7.1%	16.4%	14.1%
Gross profit		1,466	1,556	1,719	1,632	1,672	1,880	2,101	2,377
	YoY	-	-	-	-	14.0%	20.8%	22.3%	45.7%
	Gross profit margin	21.0%	21.8%	24.1%	20.7%	22.7%	24.5%	25.3%	26.4%
SG&A expenses		944	987	1,042	1,217	1,123	1,279	1,419	1,522
	YoY	-	-	-	-	19.0%	29.5%	36.2%	25.1%
	SG&A ratio	13.5%	13.8%	14.6%	15.4%	15.2%	16.7%	17.1%	16.9%
Operating profit		527	576	693	404	556	612	683	895
	YoY	-	-	-	-	5.4%	6.1%	-1.4%	121.5%
	Operating profit margin	7.5%	8.1%	9.7%	5.1%	7.5%	8.0%	8.2%	9.9%
Pre-tax profit		565	587	719	442	574	631	700	887
	YoY	-	-	-	-	1.7%	7.5%	-2.6%	100.8%
	Pre-tax profit margin	8.1%	8.2%	10.1%	5.6%	7.8%	8.2%	8.4%	9.9%
Profit attributable to owners of the parent		336	334	456	427	342	410	453	558
	YoY	-	-	-	-	1.9%	22.7%	-0.6%	30.6%
	Profit margin	4.8%	4.7%	6.4%	5.4%	4.6%	5.4%	5.5%	6.2%

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company used Japanese GAAP in FY03/21, so the quarterly results available for the fiscal year are only those that were disclosed.

Results by segment

By segment (cumulative)				FY03/21				FY03/22
(JPYmn)				Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Revenue				6,979	14,133	21,275	29,159	7,372	15,037	23,354	32,346
	YoY			-	-	-	2.5%	5.6%	6.4%	9.8%	10.9%
	Consulting & System Development			5,267	10,699	16,023	21,680	5,532	11,402	17,752	24,682
		YoY		-	-	-	1.0%	5.0%	6.6%	10.8%	13.8%
		Consulting & development for accounting system		3,414	6,816	9,978	13,329	3,269	6,688	10,555
			YoY	-	-	-	0.2%	-4.2%	-1.9%	5.8%
		System development for the financial industry		1,196	2,372	3,566	4,824	1,332	2,670	3,935
			YoY	-	-	-	-7.6%	11.4%	12.6%	10.4%
		Information security consulting		514	1,190	2,011	2,916	845	1,902	3,081
			YoY	-	-	-	29.4%	64.4%	59.8%	53.2%
		PLM support solution		211	449	666	875	147	347	529
			YoY	-	-	-	-4.9%	-30.3%	-22.7%	-20.6%
		Adjustments		-68	-128	-199	-264	-61	-205	-348
	Management Services (BPO)			1,785	3,593	5,510	7,823	1,950	3,856	5,927	8,190
		YoY		-	-	-	6.7%	9.2%	7.3%	7.6%	4.7%
		HR & payroll outsourcing		725	1,438	2,206	3,272	757	1,444	2,240
			YoY	-	-	-	5.1%	4.4%	0.4%	1.5%
		Outsourcing services for global companies		319	636	998	1,421	448	927	1,443
			YoY	-	-	-	1.9%	40.4%	45.8%	44.7%
		Outsourcing services for foreign companies		209	413	620	875	200	403	624
			YoY	-	-	-	1.9%	-4.3%	-2.4%	0.6%
		On-site BPO		542	1,131	1,727	2,301	550	1,102	1,681
			YoY	-	-	-	11.6%	1.5%	-2.6%	-2.7%
		Adjustments		-10	-25	-41	-46	-5	-20	-61
	Eliminations, company-wide			-72	-160	-258	-345	-109	-221	-324	-527
Operating profit				527	1,103	1,796	2,200	556	1,167	1,850	2,745
	YoY			-	-	-	-0.6%	5.4%	5.8%	3.0%	24.8%
	Operating profit margin			7.5%	7.8%	8.4%	7.5%	7.5%	7.8%	7.9%	8.5%
	Consulting & System Development			431	951	1,461	1,691	410	904	1,470	2,168
		YoY		-	-	-	-4.5%	-4.9%	-4.9%	0.6%	28.2%
		Operating profit margin		8.2%	8.9%	9.1%	7.8%	7.4%	7.9%	8.3%	8.8%
		Consulting & development for accounting system		437	780	1,043	1,224	299	618	1,006
			YoY	-	-	-	-8.8%	-31.6%	-20.8%	-3.5%
			Operating profit margin	12.8%	11.4%	10.5%	9.2%	9.1%	9.2%	9.5%
		System development for the financial industry		12	68	131	119	43	105	168
			YoY	-	-	-	-29.6%	258.3%	54.4%	28.2%
			Operating profit margin	1.0%	2.9%	3.7%	2.5%	3.2%	3.9%	4.3%
		Information security consulting		-29	69	196	231	87	208	324
			YoY	-	-	-	68.6%	-	201.4%	65.3%
			Operating profit margin	-	5.8%	9.7%	7.9%	10.3%	10.9%	10.5%
		PLM support solution		19	66	96	118	-16	10	40
			YoY	-	-	-	-18.6%	-	-84.8%	-58.3%
			Operating profit margin	9.0%	14.7%	14.4%	13.5%	-	2.9%	7.6%
		Adjustments		-8	-32	-5	-1	-3	-37	-68
	Management Services (BPO)			90	146	324	502	146	265	380	576
		YoY		-	-	-	20.1%	62.2%	81.5%	17.0%	14.8%
		Operating profit margin		5.0%	4.1%	5.9%	6.4%	7.5%	6.9%	6.4%	7.0%
		HR & payroll outsourcing		106	203	314	410	63	111	164
			YoY	-	-	-	10.8%	-40.6%	-45.3%	-47.8%
			Operating profit margin	14.6%	14.1%	14.2%	12.5%	8.3%	7.7%	7.3%
		Outsourcing services for global companies		-36	-132	-112	-62	47	103	152
			YoY	-	-	-	-	-	-	-
			Operating profit margin	-	-	-	-	10.5%	11.1%	10.5%
		Outsourcing services for foreign companies		-3	11	15	64	4	14	21
			YoY	-	-	-	0.0%	-	27.3%	40.0%
			Operating profit margin	-	2.7%	2.4%	7.3%	2.0%	3.5%	3.4%
		On-site BPO		20	64	100	102	25	60	95
			YoY	-	-	-	52.2%	25.0%	-6.3%	-5.0%
			Operating profit margin	3.7%	5.7%	5.8%	4.4%	4.5%	5.4%	5.7%
		Adjustments		3	0	7	-12	7	-23	-52
	Eliminations, company-wide			5	6	11	7	-1	-2	1	0

By segment (quarterly)				FY03/21				FY03/22
(JPYmn)				Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Revenue				6,979	7,153	7,143	7,883	7,372	7,665	8,317	8,991
	YoY			-	-	-	-	5.6%	7.1%	16.4%	14.1%
	Consulting & System Development			5,267	5,432	5,324	5,657	5,532	5,870	6,350	6,931
		YoY		-	-	-	-	5.0%	8.1%	19.3%	22.5%
		Consulting & development for accounting system		3,414	3,402	3,162	3,351	3,269	3,419	3,867
			YoY	-	-	-	-	-4.2%	0.5%	22.3%
		System development for the financial industry		1,196	1,176	1,194	1,258	1,332	1,338	1,265
			YoY	-	-	-	-	11.4%	13.8%	6.0%
		Information security consulting		514	676	821	905	845	1,057	1,179
			YoY	-	-	-	-	64.4%	56.4%	43.5%
		PLM support solution		211	238	217	209	147	200	182
			YoY	-	-	-	-	-30.3%	-16.0%	-16.3%
		Adjustments		-68	-60	-71	-65	-61	-144	-143
	Management Services (BPO)			1,785	1,808	1,917	2,313	1,950	1,906	2,071	2,263
		YoY		-	-	-	-	9.2%	5.4%	8.0%	-2.1%
		HR & payroll outsourcing		725	713	768	1,066	757	687	796
			YoY	-	-	-	-	4.4%	-3.6%	3.6%
		Outsourcing services for global companies		319	317	362	423	448	479	516
			YoY	-	-	-	-	40.4%	51.1%	42.8%
		Outsourcing services for foreign companies		209	204	207	255	200	203	221
			YoY	-	-	-	-	-4.3%	-0.5%	6.7%
		On-site BPO		542	589	596	574	550	552	579
			YoY	-	-	-	-	1.5%	-6.3%	-2.9%
		Adjustments		-10	-15	-16	-5	-5	-15	-41
	Eliminations, company-wide			-72	-88	-98	-87	-109	-112	-103	-203
Operating profit				527	576	693	404	556	612	683	895
	YoY			-	-	-	-	5.4%	6.1%	-1.4%	121.5%
	Consulting & System Development			431	520	510	230	410	494	566	698
		YoY		-	-	-	-	-4.9%	-5.0%	11.1%	203.2%
		Operating profit margin		8.2%	9.6%	9.6%	4.1%	7.4%	8.4%	8.9%	10.1%
		Consulting & development for accounting system		437	343	263	181	299	319	388
			YoY	-	-	-	-	-31.6%	-7.0%	47.5%
			Operating profit margin	12.8%	10.1%	8.3%	5.4%	9.1%	9.3%	10.0%
		System development for the financial industry		12	56	63	-12	43	62	63
			YoY	-	-	-	-	258.3%	10.7%	0.0%
			Operating profit margin	1.0%	4.8%	5.3%	-	3.2%	4.6%	5.0%
		Information security consulting		-29	98	127	35	87	121	116
			YoY	-	-	-	-	148.6%	23.5%	-8.7%
			Operating profit margin	-	14.5%	15.5%	3.9%	10.3%	11.4%	9.8%
		PLM support solution		19	47	30	22	-16	26	30
			YoY	-	-	-	-	-	-44.7%	0.0%
			Operating profit margin	9.0%	19.7%	13.8%	10.5%	-	13.0%	16.5%
		Adjustments		-8	-24	27	4	-3	-34	-31
	Management Services (BPO)			90	56	178	178	146	119	115	197
		YoY		-	-	-	-	62.2%	112.5%	-35.8%	10.7%
		Operating profit margin		5.0%	3.1%	9.3%	7.7%	7.5%	6.2%	5.5%	8.7%
		HR & payroll outsourcing		106	97	111	96	63	48	53
			YoY	-	-	-	-	-40.6%	-50.5%	-52.3%
			Operating profit margin	14.6%	13.6%	14.4%	9.0%	8.3%	7.0%	6.7%
		Outsourcing services for global companies		-36	-96	20	50	47	56	49
			YoY	-	-	-	-	-	-	145.0%
			Operating profit margin	-	-	5.5%	11.8%	10.5%	11.7%	9.5%
		Outsourcing services for foreign companies		-3	14	4	49	4	10	7
			YoY	-	-	-	-	-	-28.6%	75.0%
			Operating profit margin	-	6.9%	1.9%	19.3%	2.0%	4.9%	3.2%
		On-site BPO		20	44	36	2	25	35	35
			YoY	-	-	-	-	25.0%	-20.5%	-2.8%
			Operating profit margin	3.7%	7.5%	6.0%	0.3%	4.5%	6.3%	6.0%
		Adjustments		3	-3	7	-19	7	-30	-29
	Eliminations, company-wide			5	1	5	-4	-1	-2	3	-0

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
No quarterly results available for FY03/21 as the company used Japanese GAAP.

Full-year FY03/22 results

Summary

Revenue: JPY32.3bn (+10.9% YoY)
Operating profit: JPY2.7bn (+24.8% YoY)
Pre-tax profit: JPY2.8bn (+20.7% YoY)
Profit: JPY1.8bn (+13.5% YoY)

Orders have been steadily increasing since the beginning of the year and were significantly up YoY. Revenue remained robust in the information security consulting business following on from FY03/21, although some businesses struggled when it came to sales revenue. In addition, revenue in outsourcing services for global companies were solid from the start of FY03/22 while system development for the financial industry showed signs of recovery, leading to higher revenue YoY. Gross profit rose in line with revenue growth.

SG&A expenses came in higher YoY owing to increases in personnel and advertising expenses for business expansion, as well as expenses incurred in relocation of the head office.

The company's target performance indicators, consolidated operating profit margin and return on equity (ROE), were 8.5% (+1.0pp YoY) and 15.0% (-0.6pp YoY), with each topping their targets by 10% and 7% respectively.

At the beginning of the term, head office relocation costs were expected to be JPY450mn, but actually came in JPY58mn lower, at JPY392mn, due to lower restoration costs. Regarding the impact of IFRS adjustments on operating profit, excluding other revenues and expenses, expenses decreased by JPY244mn YoY due to a decline in the company's stock price toward the end of the fiscal year, which led to a JPY60mn decline.

For cumulative Q3 FY03/22, progress versus the revised forecast on October 28, 2021 was 101.1% for revenue, 109.8% for operating profit, 111.7% for pre-tax profit, and 110.2% for net income.

Results by segment

Consulting and System Development

Revenue: JPY24.7bn (+13.8% YoY)
Segment profit: JPY2.2bn (+28.2% YoY)

In terms of orders and revenue, the PLM support solution business declined as major customers scaled back investment activities. On the other hand, other businesses performed well, and the Consulting and System Development segment as a whole recorded an increase in revenue.

In terms of profit, profit declined in the PLM support solutions due to lower sales, but other segments saw strong orders and sales. As a whole, the Consulting and System Development segment profit exceeded the previous year's level, despite factors such as the relocation of the head office and increased SG&A expenses.

Management Services (BPO)

Revenue: JPY8.2bn (+4.7% YoY)
Segment profit: JPY576mn (+14.8% YoY)

Orders remained firm and all businesses were up YoY. Although the HR and payroll outsourcing and on-site BPO businesses were unchanged YoY as a result of failed projects and reactions to the strong performance of the previous year, growth in the outsourcing services for global companies contributed to the Management Service (BPO) segment as a whole being up YoY.

Profits also declined in HR and payroll outsourcing due to some underperforming projects. However, the Management Service (BPO) segment as a whole was up YoY because other businesses generally were able to maintain results at the previous year's level.

For details on previous quarterly and annual results, please refer to the Historical performance and financial statements section.

Full-year FY03/23 earnings forecast

Summary

		FY03/22			FY03/23
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Est.	2H Est.	FY Est.
Revenue		15,037	17,309	32,346	17,000	19,000	36,000
Cost of revenue		11,485	12,830	24,315
Gross profit		3,552	4,479	8,030
	Gross profit margin	23.6%	25.9%	24.8%
SG&A expenses		2,402	2,941	5,343
	SG&A ratio	16.0%	17.0%	16.5%
Operating profit		1,167	1,578	2,745	1,300	1,700	3,000
	Operating profit margin	7.8%	9.1%	8.5%	7.6%	8.9%	8.3%
Pre-tax profit		1,205	1,587	2,792	1,300	1,700	3,000
	Pre-tax profit margin	8.0%	9.2%	8.6%	7.6%	8.9%	8.3%
Profit attributable to owners of the parent		752	1,011	1,764	770	1,030	1,800
	Profit margin	5.0%	5.8%	5.5%	4.5%	5.4%	5.0%

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

The company's FY03/23 forecast calls for revenue of JPY36.0bn (+11.3% YoY), operating profit of JPY3.0bn (+9.3% YoY), pre-tax profit of JPY3.0bn (+7.4% YoY), and profit of JPY1.8bn (+2.0% YoY).

Consulting and System Development

In the Consulting and System Development segment, the information security consulting business is expected to continue growing. In addition to a favorable business environment, over the year contributions to the accounting system consulting and development business are also expected from Joyworks Inc., acquired in August 2021, and BSC Co., Ltd., acquired in April 2022. Furthermore, the PLM support solution business, which struggled in FY03/22, still finds itself in a difficult business environment, but the effects of measures taken by the company are beginning to bear fruit, and the company believes that it will manage to top its FY03/22 performance. System development for the financial industry is expected to grow steadily, with resulting sales expected to increase by about 15% for the entire segment.

Management Services (BPO)

The Management Service (BPO) segment is basically a recurring-revenue business. Having continued to perform steadily, it expects to finish addressing unprofitable projects that occurred in FY03/22, leading to steady growth and expansion of revenue of about 6%.

Based on the above, the company as a whole expects a 12% increase in sales.

On the other hand, regarding profit and loss, declining profit margins as a result of a return of the employee utilization rate to a stable level in the Consulting and System Development segment, and a strategic investment of JPY300mn to secure core human resources, improve quality, open costs for the new Kagoshima BPO center, and other measures, is expected to help lift operating profit by 9.3%.

Past earnings forecasts vs. results

Results vs. Initial Est.		FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.
	Revenue (Initial Est.)	23,000	23,200	24,000	26,000	-
	Revenue (Results)	23,016	23,509	24,819	28,351	29,087
Results vs. Initial Est.		0.1%	1.3%	3.4%	9.0%	-
	Operating profit (Initial Est.)	1,000	1,000	1,200	1,750	-
	Operating profit (Results)	817	1,159	1,723	2,130	2,408
Results vs. Initial Est.		-18.3%	15.9%	43.5%	21.7%	-
	Recurring profit (Initial Est.)	1,020	1,000	1,200	1,700	-
	Recurring profit (Results)	751	1,135	1,653	2,256	2,492
Results vs. Initial Est.		-26.4%	13.5%	37.7%	32.7%	-
	Net income attributable to owners of the parent(Initial Est)	620	600	740	1,000	-
	Net income attributable to owners of the parent(Act.)	440	733	994	1,427	1,650
Results vs. Initial Est.		-29.1%	22.1%	34.3%	42.7%	-

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
*Initial estimates for FY03/21 are not shown as the company is not certain as to when the COVID-19 pandemic will recede or how much impact it will have on its results.

The company prepares its earnings forecast based on information collected from employees working on-site. While revenue forecasts are highly accurate as they reflect client contracts and order backlogs, profit forecasts are made conservatively, taking into account the risks involved in system development. As a result, actual revenue generally deviates little from the company’s forecast, while profit lines from operating profit down tend to deviate widely.

Medium-term management plan

Business Brain Showa-Ota announced its medium-term management plan in May 2021, which lays out its long-term targets of JPY100bn in revenue and JPY10bn in profit by 2030. Profit here refers to operating profit under Japanese GAAP (excludes non-operating profit and loss).

The company believes that its revenue target of JPY100bn by 2030 is important from a branding standpoint, noting that clients feel more comfortable working with large companies, which in turn would make it easier to raise prices. It also believes that scaling up the business will help with securing large development projects, which tend to be more profitable.

The company’s basic strategy is to boost revenue, and it needs people to accomplish this. Its biggest talent shortage is in people who can step up and become project managers when it secures new projects. Its definition of a project manager is someone experienced in the entire system development process, who can negotiate with clients and manage on-site operations. The company needs a project manager for each client contract it secures, and the challenge lies in figuring out how to develop project management talent. It provides both classroom training and on-the-job training to help employees acquire accounting knowledge as well as specialized knowledge of the products they handle.

The medium-term targets do not include M&A activities. In terms of capital allocation, the company plans to invest in M&As aimed at securing personnel and in new technology development. It is also looking into acquiring BPO* companies with a sufficient client base.

*BPO stands for Business Process Outsourcing and refers to the outsourcing of a company’s business processes to an external company.
Outsourced operations generally do not include a company’s core operations, but more often are non-core operations that do not directly contribute to profits, operations for which the outsourcing company has no in-house knowledge, and operations of back office departments such as general affairs, accounting, finance, procurement, human resources, recruitment, and call centers.

The company has defined seven action items that will form the foundation of its business.

(1) Promote mutual understanding and coordination of services among group companies: The company aims to drive sales by promoting mutual understanding of services within the group.

(2) Acquire services and technologies to expand coverage: Business Brain Showa-Ota plans to identify services and technologies that are missing in its business, and hire people and study these missing parts internally. If there are packaged software products that can make up for the services the company lacks, it may form alliances with the companies providing them. Aside from packaged software, if the company lacks necessary know-how or technology, it will form alliances with companies with the know-how and technology to jointly capture orders.

(3) Further improvement of quality: The company’s service quality has stabilized and it no longer produces major losses, but minor quality issues still occur. Losses have often been caused by unclear definitions when determining requirements with clients, unreasonable project timelines, and taking on projects in areas where the company is not well-versed. The company aims to prevent these issues by providing stable quality.

(4) Strengthen BBS branding: The company has a 50-year history centered on its expertise in accounting systems and aims to raise its corporate profile. It believes that greater name recognition will be an edge in recruiting, making sales pitches, and pricing. To boost its profile, the company has been making video commercials, changed its logo, and increased its news distribution. Since the company is in the systems industry, it plans to produce commercials aimed at increased exposure on YouTube and other online news sites.

(5) Expand group client base: The company has not noticeably expanded its new client base. It plans to undertake activities with the intention of increasing new clients going forward.

(6) Deepen ties with clients: In addition to (5), the company aims to boost its share of work from each client by going beyond accounting systems to handle other system projects.

(7) Boost proposal capabilities: Implementing (1)–(6) requires strong proposal capabilities. Employees working on-site contributed to making creative proposals in the past, but the company plans to conduct in-house training sessions going forward. It is working to unify the group image, such as by using the same logo when running a promotion.

Key performance indicators

The company’s target management indicators call for a consolidated operating profit margin of 7%, ROE of 10%, and Management Services (BPO) segment revenue mix of 30%. The Consulting and System Development segment produces high margins, but is susceptible to economic fluctuations as it is affected by capital investment trends of client companies. On the other hand, the Management Services (BPO) segment is a stable but low-margin business. The Management Services (BPO) segment accounted for 26.6% of FY03/21 revenue.

Business

Business model overview

Business Brain Showa-Ota provides its clients with a full range of services, from consulting to system development, adoption, and maintenance. The company was founded by a certified public accountant and had about 30 CPAs on staff (as of June 2021), with expertise in system development in the accounting field. When a company adopts a new accounting standard, it needs to revise its accounting system to comply with the new standard, and revising a system also requires revising business processes. This is where the company leverages its in-house CPAs’ expertise in business management, as well as in financial and managerial accounting to provide consulting and system development and maintenance services for accounting and other back-office operations.

The company starts by working with new clients in the accounting field, then expands its services to include procurement, sales, and other finance-related areas. All information, including transaction data, are collected in the accounting system. Accordingly, the company is able to identify issues, such as the inability to capture information with an existing sales management system, for processing in the accounting system. This is one example of how the company expands its services from accounting systems to other systems. Systems are rebuilt every five or six years. The company dispatches system engineers to client sites for maintenance work and operates call centers to identify issues and make new proposals. In addition to maintenance and servicing, the company is also focused on BPO.

In the upstream process, for example when introducing an accounting system, Business Brain Showa-Ota makes proposals to streamline accounting operations by referring to examples of other companies. The company believes that installing a system is meaningless if the system does not boost efficiency, and hence provides consulting services to help clients operate efficiently. With a wealth of reference points from other companies, the company also provides examples of how other companies carry out operations. As streamlining operations involves changing workflows and procedures, the company proposes labor-saving solutions to clients, including solutions that incorporate AI and robotic process automation (RPA).

In addition, the company also provides business process outsourcing (BPO) services, through which its clients outsource payroll and accounting operations to the company. The BPO business goes beyond simple tasks and includes advanced tasks as well. This makes it necessary for the company to first provide consulting services and then streamline operations.

As an example, for expense reimbursements, the client writes receipts and sends over the data, and a simple BPO task involves checking the receipts, the data, the amount, and the date. Taking this a step further would include breaking the reimbursements down by individual, creating graphs, and checking for errors. The company also compiles figures and prepares parts of its clients’ annual securities reports. This requires accounting knowledge to sort out which expenses are entertainment expenses, office expenses, etc., but the company is able to handle this operation as it has people with the appropriate skillset. Typically, BPO companies simply handle the same work that the client is already doing; however, advanced BPO services include consulting to understand the client’s business and figure out how to organize and take over the work.

Business Brain Showa-Ota’s BPO offices are located in Kumamoto, Niigata, and Shizuoka prefectures. The company believes that having Japanese staff in Japan is more appropriate for providing high quality services.

The company has local subsidiaries in Thailand and Vietnam that provide consulting services to Japanese companies operating in Southeast Asia. The local subsidiaries mainly provide systems and frameworks that enable their Japanese clients to view and control local figures in Japan.

Having BPO services has become an advantage when introducing consulting services. This is because an increasing number of clients are concerned about future labor shortages and would prefer to outsource rather than handle all administrative tasks on their own. Meanwhile, the company recognizes that its cross-selling rate for BPO and system development clients is low at below 10%. The BPO and consulting and system development businesses were established separately, and have been operated separately. Also, the departments in charge at client companies are different between the two businesses. The Consulting and System Development segment works with system and planning departments, while the BPO business works with on-site accounting and human resource departments. Working with HR departments in the BPO business almost never leads to discussions about systems. However, there are cases where system implementations lead to discussions about shifting toward shared services (where a company consisting of multiple group companies and divisions consolidates and centralizes some of the work performed by back-office departments), and then to discussions about implementing BPO services.

Business model

Consulting and System Development

While many companies offer either the consulting service or the system development service, the company offers an integrated service ranging from consulting to system development.

Depending on the client’s needs, it may undertake consulting or system development only, but in most cases takes on both. The same consultant handles everything from requirements definition and basic design to development.

Sometimes, client companies ask for sales pitches for consulting and system development separately. This is because system development costs can be lowered by soliciting bids for system development after the consultation phase. Separating the consulting and system development phases also lowers system development costs by putting the company that drafted the system design against system development companies. Meanwhile, since companies that only offer consulting services do not go beyond creating the design, there are many cases where client companies cannot go through with system development as the costs get prohibitively high when the system development company enters the picture.

One of the benefits of an integrated approach is that the company remains realistic in the consulting phase with an eye on system development and will not design a glamorized system that it cannot deliver. In addition, the integrated approach helps prevent misunderstandings and removes the need for clients to explain the same thing twice. The company focuses on a narrow area of systems, specializing in accounting systems. It believes that its expertise, technology, and knowledge in accounting is superior to those of its competitors.

For new clients, the company starts with consulting on accounting systems, and gradually expands into other areas that also involve numbers (i.e., finance-related), such as procurement and sales. Many companies in Japan need to introduce systems to streamline operations to address labor shortages stemming from the declining working population, and this presents a business opportunity for the company. In addition, changes in accounting systems, such as the introduction of IFRS, and the trend toward paperless accounting in accordance with SDGs, which calls for electronic recordkeeping, also present business opportunities for the company. Demand also expanded when the J-SOX internal control reporting system was introduced in 2008. From 2020 onward, demand for information security consulting services has grown the most, fueled by the adoption of telework driven by the spread of COVID-19.

In the Consulting and System Development segment, the company determines prices by estimating costs based on headcount x duration x man-month while taking risks into account. It manages consulting and system development work on a segmented project basis.

GPM was only 23.8% at the parent in FY03/21, but the company aims to further improve profitability. The cost-of-revenue ratio was 76.2% with outsourcing costs accounting for about 45.0% of cost of revenue. Employees are a fixed cost, and in the system industry, where demand fluctuates, having too high of a fixed cost is a risk. As such, the company believes the optimal ratio of in-house personnel costs to outsourcing costs is around 1:1. As of end-FY03/21, the company had about 300 subcontractors.

The company does not promote any particular product, but rather forms alliances with other companies. It offers templates along with its own packages, which are customized and sold according to client needs. A template is like a component and is different from a package. Since each client has its own requirements, a number of core components are prepared without customization. These components are combined with other parts according to the client’s requirements, and the surrounding areas are customized for the system to work as a whole. This has the benefit of providing clients with the functions they need. Some of the company’s hallmark in-house developed products include the ACT series, its accounting system, and PLMconsole, a production management system for manufacturers.

Business Brain Showa-Ota also purchases packaged systems from external companies, primarily selling Biz Integral from NTT Data Biz Integral Corporation. The company opts for Biz Integral for clients looking for a relatively quick and easy implementation, and uses templates for clients who want something more tailored to their needs. The sales mix of packaged systems and template systems is split evenly, with no significant difference in profit margins. For packaged systems, the company does not just install software for client companies, but also custom develops related items centered around the packaged system. The cost of purchasing packaged systems does not account for a particularly large portion of cost of revenue, with development-related personnel costs accounting for a higher portion. Shared Research estimates that the cost of packaged systems accounts for less than 0.7% of cost of revenue, as it was not listed as a key line item in the company’s breakdown of cost of revenue in FY03/13, the last time it disclosed a parent-level cost of revenue breakdown.

System development for the financial industry

The company provides system engineering services (SES) to the financial industry. SES refers to services that dispatch engineers to perform tasks such as system development, maintenance, and operation. The difference between SES and temporary staffing contracts is the reporting structure. Unlike temporary staffing contracts, where people work under the direction of clients, the hiring company (Business Brain Showa-Ota) is in charge for SES contracts. Costs primarily consist of personnel costs of the company’s dispatched employees. System development for the financial industry is a relatively low-margin business with an OPM of 3.9% in FY03/21, compared to 8.7% for the Consulting and System Development segment.

Information security consulting

Malicious e-mails that spread computer viruses are believed to account for 90% of server attacks. The spread of COVID-19 has boosted adoption of telework, and attacks targeting vulnerabilities in VPN systems are also drawing attention. The company provides training services for employees of client companies to deal with these sort of targeted e-mail attacks. According to a survey conducted by ITR Corporation, the company’s email training service had the largest market share based on revenue in the targeted email attack training service market in Japan, for companies with 1,000—5,000 employees in FY2019.

The business model of information security consulting is different from that of accounting system consulting and development. For e-mail training services, pricing is based on the number of client employees. However, the company’s workload does not increase 100-fold when training a company with 10,000 employees versus a company with 100 employees. The process of creating a malicious email to be sent at the beginning of the training session is the same. The training business consisted of creating content and gathering about 50 people in a room for a training session prior to the pandemic, but there are no restrictions on the number of attendees now that the sessions are held online. Accordingly, the information security consulting business model has a higher marginal profit ratio, with margins expanding with scale.

While consulting and system development work is often done at client sites, information security consulting work is often done at the company’s offices or at client companies’ security centers.

Management Services (BPO)

The two main BPO services the company provides are HR-related payroll and accounting. It primarily handles HR-related services out of its centers in Shizuoka Prefecture and Niigata Prefecture, and accounting services out of Kumamoto Prefecture. In terms of overseas operations, the company has a subsidiary in Vietnam, which performs more standardized parts of the work done in the Kumamoto center. Overseas personnel costs are lower, making it more cost effective, but there are challenges when overseas staff communicate on accounting matters with Japanese staff, even if the company recruits people fluent in Japanese. For this reason, the company can only delegate fairly simple and routine tasks overseas. Its overseas operations handle simple tasks such as processing daily slips for deposits and withdrawals, while its Japan-based centers handle more sophisticated tasks such as account settlement. Japanese staff at the Kumamoto center handle account settlement and disclosure material preparation work to add value and charge higher prices in order to operate a profitable business in Japan.

The company is unique in that in addition to consulting, it also offers BPO services involving highly skilled personnel such as certified public accountants. CPAs are particularly proficient in preparing disclosure materials and performing tax calculations. Although the actual work is done by non-CPA employees, the company has established a system where CPAs are involved at key points and can provide appropriate advice and guidance.

The BPO business involves the company taking on work that was previously performed by clients, but clients will not outsource this work to the company unless doing so results in lower costs. For this reason, other companies often outsource their BPO work to Dalian, China, and other places where personnel costs are lower. However, as the company prioritizes service quality, it performs the work in Kumamoto Prefecture. Although GPM targets vary from project to project, the company aims for a minimum GPM of 10–20%.

In the Management Services segment, the company’s outsourcing services for global companies have produced losses from FY03/19 to FY03/21. There are two underlying factors for this. One is that Payment Technology Japan, which the company acquired in 2018, has been operating at a loss. This has been rectified as Payment Technology Japan achieved monthly profitability during FY03/21. The other factor is that, in an accounting operations outsourcing contract with a major company, the company had expected to turn a profit by streamlining processes after accepting the contract, but was unable to do so and produced losses. The loss recorded in FY03/21 was attributable to the company booking a loss provision for this contract. As the contract spans five years, the company provided for loss of five years.

Contract period

For its BPO services, Business Brain Showa-Ota typically signs one-year contracts. The company had previously signed five-year contracts, especially for large clients in its outsourcing business for global corporations, but switched to one-year contracts owing to the higher risk posed by five-year contracts, including changes in the business environment such as rising personnel costs. The company had originally only engaged in system development, which is not always stable as the business is susceptible to economic trends, but decided to start its BPO business as it felt the need to build a business that continuously generated revenue. To this end, the company had signed five-year contracts as it figured longer-term contracts would work better. However, when prices are set for five years, it may not be profitable down the line for various reasons such as rising personnel costs or changes in the clients’ business operations. With one-year contracts, prices can be negotiated when renewing the contract.

It is not easy for clients to switch to another BPO provider as switching costs are high, involving duplicate costs during transition. There are also times when the company turns down clients because it cannot agree on a price. Contracts are automatically renewed for payroll clients with 100–200 employees.

Client base and revenue per project

Business Brain Showa-Ota had approximately 1,500 clients as of FY03/21, of which 900 were Consulting and System Development clients and 600 were Management Services (BPO) clients. In terms of size, its Consulting and System Development clients are companies with sales of around JPY500.0bn. Dividing the Consulting and System Development revenue of JPY21.6bn in FY03/21 by 934 clients amounts to revenue per client of about JPY23mn. Revenue is calculated as headcount x duration x man-month, and this translates into a headcount of four or five people, a duration of about three months, and man-month of around JPY1.7mn (ranging from just under JPY1mn up to about JPY2.5mn for project leaders). The headcount on a project varies widely from 3–4 people to 100 people.

Contract format

Projects involving a full replacement of large systems can span three years, generating revenue of between JPY3.0–4.0bn per project. Smaller projects can last about six months and generate revenue of around JPY30–50mn per project. If a project is just for consulting, revenue can get as small as JPY2–3mn. If a project to fully revamp a client system is expected to take three years, the company will first offer consulting services, then proceed with system development. After this, it will test the system and provide the client with training on how to use the new system. When going live, the company also provides call center support, which can bring total revenue to around JPY3.0bn.

Business Brain Showa-Ota does not pitch a JPY3.0bn price at the outset, but divides the project into phases, and breaks down the phases into even smaller contracts. While the company provides a rough estimate for the project, contracts are generally three to six months long, and extend up to around a year for system development. Even within these contracts, the company makes smaller contracts individually by function, such as for accounting function. In terms of contract size, a JPY50mn contract is considered large, with the largest contracts amounting to around JPY100mn. Splitting the contracts into smaller increments helps both the company and its clients mitigate risk.

Contracts for the preliminary stages of system development, such as requirements definition and design stages, are in the form of a delegation contract where the company works under the direction of the client. Program development contracts take the form of a service contract, with contract amounts determined based on deliverables. The company notes that while its peers use similar contract formats, it tries to make the portion under service contracts smaller to minimize risk.

In FY03/21, the Management Services (BPO) segment reported revenue of JPY7.8bn and a client base of around 600 companies, which puts revenue per client at about JPY13mn. Revenue per client varies by client. The company provides high-value BPO services to major companies from its Kumamoto center, supporting about a dozen clients with around 300 employees.

Information security

System consulting projects, such as vulnerability assessments, generate around JPY20–30mn per project. Email training produces about JPY3–4mn for clients with about 100 employees, and the training business yields around JPY200,000–300,000 per person.

PLM support solutions

The company has its own template software called PLMconsole, which it implements for clients. It is basically a production management system for manufacturers, with a client base currently consisting mainly of automakers, but the company is making an effort to introduce this to other types of manufacturers. Revenue per project is generally around JPY20–30mn.

Revenue recognition method and payback period

The company breaks down contracts into separate phases and records revenue according to progress. The upstream consulting phase takes two to three months and the requirements definition phase* takes three to four months. System development is also divided into phases, such as the development and test phase. The company’s accounts receivable turnover in FY03/21 was 71.5 days. For some large project contracts, it takes about six months from recording revenue to receiving payment. Management Services (BPO) contracts range from one to five years, but the company records revenue on a monthly basis.

*Requirements definition is the process of clarifying what the user needs the system to do as well as the expected roles and effects of the system, and defining the necessary functions, performance, and other requirements to achieve the set goals.

Client composition

The company’s primary target is medium-sized companies with revenue of JPY300–500bn. To broaden its target base, the company also provides IPO support to approach potential clients at an early stage. Its target is companies that do not have an enterprise resource planning (ERP) system*. Only large companies can implement SAP, one of the leading ERP systems, as it costs about JPY5–10bn. However, some of the company’s existing clients include major automakers to which the company specifically provides accounting-related support. Large companies either build their own systems or implement systems offered by major global systems companies. The company’s services do not include core systems** used by large companies as it specializes in back-office operations.

*An enterprise resource planning (ERP) system is a system designed to centrally manage all resources held by a company for effective management. By implementing ERP systems, companies can centrally manage various types of information, and all departments can access the same information.
**A core system is a system that incorporates the core functions of a company.

Sales via third-party channels account for about half of the Consulting and System Development segment revenue. The third party here refers to a company that serves as a middleman between the company and the end user. In this case, the channel company is the prime contractor and Business Brain Showa-Ota is the tier-one subcontractor, but the company often signs a contract directly with the end user. Channel companies choose Business Brain Showa-Ota because of its track record and expertise in accounting, as well as trust built with the person making the referral. Channel companies include major system integrators, manufacturers, system subsidiaries of financial institutions, and major auditing firms. Profit margins are lower for subcontracted work compared to when the company has a direct contract with the end user. Management Services (BPO) clients are all direct clients.

The revenue mix for FY03/21 consisted of 70.4% existing clients and 3.3% new clients in the Consulting and System Development segment, and 25.3% existing clients and 0.9% new clients in the Management Services (BPO) segment. On a consolidated basis, existing clients accounted for 95.8% of revenue while new clients accounted for 4.2%. In the Consulting and System Development segment, the top 10 existing clients contributed to 44.8% of segment revenue, with new clients accounting for 1.6%. In the Management Services (BPO) segment, existing clients contributed to 41.8% of revenue, with new clients accounting for 2.8%. These figures differ from the figures in the company’s annual securities report because they are simple sums that do not take financial adjustments into account.

In terms of client industries, the company has relatively high exposure to the infrastructure industry (e.g., construction companies) and the mobility industry (e.g., major automakers). Revenue from the infrastructure industry comes to about JPY3.0bn (14% of Consulting and System Development segment revenue) while the mobility industry accounts for about JPY2.0bn (approximately 9%).

Staff composition

CPAs, management consultants, and system engineers work closely together in the Consulting and System Development segment. In FY03/21, there were a total of 603 employees under the parent company, comprising about 30 CPAs, 50 business consultants, and 50 salespeople. The remaining 450 employees were system engineers, including system consultants, making up the largest portion of the employee makeup. The company starts with business consulting, then moves onto basic design, then to system development, adoption and maintenance, and finally over to BPO service implementation. As a result, it has fewer personnel allocated in upstream processes. Sales personnel handle all services and are in charge of the same client from start to finish. There are separate project managers and leaders for each phase.

Business by segment

The company categorizes its business domains within segments by subsidiary for easier tracking. The domains and major subsidiaries are listed below.

Consulting and System Development

Accounting system consulting and development: Business Brain Showa-Ota (parent), BBS (Thailand) Co., Ltd.

Business Brain Showa-Ota (parent) and BBS (Thailand) Co., Ltd. provide clients with a full range of services, from consulting on accounting operations to system development, adoption, and maintenance.

System development for the financial industry: Financial Brain Systems Inc.

Financial Brain Systems Inc. provides system engineering service (SES) and other services for the financial industry, including banks and securities brokers.

Information security consulting: Global Security Experts Inc.

Global Security Experts Inc. provides consulting services on information security, including vulnerability assessment services, training services for employees of client companies to handle targeted e-mail attacks, and training services for IT department personnel of client companies.

PLM support solutions: PLM Japan Inc.

PLM Japan Inc. provides services centered on PLMconsole, an in-house developed package software aimed at improving product design efficiency, mainly for the manufacturing industry.

Management Services (BPO)

HR and payroll outsourcing: Business Brain Showa-Ota (parent), BBS Outsourcing Service Inc.

Business Brain Showa-Ota (parent) and BBS Outsourcing Service Inc. provide outsourcing services from their operations centers for human resources and payroll-related operations.

Outsourcing for global corporations: Business Brain Showa-Ota (parent), BBS Outsourcing Kumamoto Inc., Payment Technology Japan, Inc., and Business Brain Showa-Ota Vietnam Co., Ltd.

The companies provide outsourcing services including accounting and human resources operations and various card payment processing services to large Japanese companies with global operations.

Outsourcing for foreign enterprises: EP Consulting Services Corp.

EP Consulting Services Corporation provides accounting, finance, and other outsourcing services mainly to foreign companies with subsidiaries or branches in Japan.

On-site BPO: Medical & Welfare Information Center of Showa-Ota Inc., Technowarethink Inc.

On-site BPO involves going directly to a client’s facility to perform work. The service ranges from dispatching a few people to multi-person units (5–40 people).

Segment revenue and operating profit

Japanese GAAP

By segment				FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)				Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.
Revenue				15,374	15,978	16,973	18,336	20,540	23,016	23,509	24,819	28,351	29,087
	YoY			6.5%	3.9%	6.2%	8.0%	12.0%	12.1%	2.1%	5.6%	14.2%	2.6%
	Consulting & System Development			11,954	12,777	13,679	15,086	16,327	17,124	17,056	17,819	21,386	21,612
		YoY		8.1%	6.9%	7.1%	10.3%	8.2%	4.9%	-0.4%	4.5%	20.0%	1.1%
		Consulting & development for accounting system								10,195	10,815	13,210	13,260
			YoY							-	6.1%	22.1%	0.4%
		System development for the financial industry								5,180	5,195	5,221	4,824
			YoY							-	0.3%	0.5%	-7.6%
		Information security consulting								1,222	1,303	2,253	2,916
			YoY							-	6.6%	72.9%	29.4%
		PLM support solution								672	772	920	875
			YoY							-	14.9%	19.2%	-4.9%
		Adjustments								-213	-266	-218	-263
	Management Services (BPO)			3,584	3,399	3,552	3,501	4,502	6,186	6,809	7,351	7,331	7,821
		YoY		2.7%	-5.2%	4.5%	-1.4%	28.6%	37.4%	10.1%	8.0%	-0.3%	6.7%
		HR & payroll outsourcing								3,013	3,066	3,112	3,272
			YoY							-	1.8%	1.5%	5.1%
		Outsourcing services for global companies								816	1,109	1,392	1,418
			YoY							-	35.9%	25.5%	1.9%
		Outsourcing services for foreign companies								1,358	1,410	859	875
			YoY							-	3.8%	-39.1%	1.9%
		On-site BPO								1,737	1,919	2,061	2,301
			YoY							-	10.5%	7.4%	11.6%
		Adjustments								-115	-153	-93	-45
	Eliminations, company-wide			-164	-198	-258	-251	-289	-293	-356	-352	-365	-346
Operating profit				845	781	1,003	1,045	891	817	1,159	1,723	2,130	2,408
	YoY			86.9%	-7.6%	28.4%	4.2%	-14.7%	-8.3%	41.9%	48.7%	23.6%	13.1%
	Operating profit margin			5.5%	4.9%	5.9%	5.7%	4.3%	3.5%	4.9%	6.9%	7.5%	8.3%
	Consulting & System Development			822	665	830	945	705	868	747	1,258	1,718	1,875
		YoY		94.8%	-19.1%	24.8%	13.9%	-25.4%	23.1%	-13.9%	68.4%	36.6%	9.1%
		Operating profit margin		6.9%	5.2%	6.1%	6.3%	4.3%	5.1%	4.4%	7.1%	8.0%	8.7%
		Consulting & development for accounting system								472	933	1,289	1,343
			YoY							-	97.7%	38.2%	4.2%
			Operating profit margin							4.6%	8.6%	9.8%	10.1%
		System development for the financial industry								234	224	168	186
			YoY							-	-4.3%	-25.0%	10.7%
			Operating profit margin							4.5%	4.3%	3.2%	3.9%
		Information security consulting								-9	39	136	247
			YoY							-	-	248.7%	81.6%
			Operating profit margin							-	3.0%	6.0%	8.5%
		PLM support solution								48	102	148	120
			YoY							-	112.5%	45.1%	-18.9%
			Operating profit margin							7.1%	13.2%	16.1%	13.7%
		Adjustments								2	40	-23	-21
	Management Services (BPO)			13	107	167	108	190	-57	412	468	387	526
		YoY		-61.8%	723.1%	56.1%	-35.3%	75.9%	-	-	13.6%	-17.3%	35.9%
		Operating profit margin		0.4%	3.1%	4.7%	3.1%	4.2%	-	6.1%	6.4%	5.3%	6.7%
		HR & payroll outsourcing								256	347	345	417
			YoY							-	35.5%	-0.6%	20.9%
			Operating profit margin							8.5%	11.3%	11.1%	12.7%
		Outsourcing services for global companies								22	-76	-102	-78
			YoY							-	-	-	-
			Operating profit margin							2.7%	-	-	-
		Outsourcing services for foreign companies								109	120	69	68
			YoY							-	10.1%	-42.5%	-1.4%
			Operating profit margin							8.0%	8.5%	8.0%	7.8%
		On-site BPO								34	77	76	109
			YoY							-	126.5%	-1.3%	43.4%
			Operating profit margin							2.0%	4.0%	3.7%	4.7%
		Adjustments								-9	0	-1	10
	Eliminations, company-wide			9	9	7	-8	-4	6	-	-4	25	7

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company transferred part of the business of its consolidated subsidiary EP Consulting Services to Global Security Experts in FY03/21. As a result, the business previously included in the Management Services (BPO) segment is now included in the Consulting and System Development segment. Segment information for FY03/20 reflects the new segment classification.

The drop in profits in FY03/16 was primarily attributed to a large unprofitable project in the accounting system consulting and development business under the Consulting and System Development segment.

The drop in profits in FY03/17 reflected the acquisition and restructuring of BBS Outsourcing Service Inc. under the Management Services (BPO) segment. In addition to BBS Outsourcing Service producing losses at the time of acquisition, the company incurred restructuring costs as a result of cost-cutting measures such as downsizing data centers. The restructuring efforts bore fruit and BBS Outsourcing Service started posting operating profits from FY03/18 onward.

Factors behind the rise in OPM from FY03/19 onward are primarily attributed to the accounting system consulting and development business. The company has been able to selectively accept orders with better terms as a result of the increasingly noticeable labor shortage in Japan and higher demand. In addition, the company itself has felt the effects of the labor shortage and has raised its billing rate per person. Furthermore, it managed to secure large projects with relatively high profit margins because of their complexity.

IFRS

By segment				FY03/20	FY03/21
(JPYmn)				Act.	Act.
Revenue				28,439	29,159
	YoY			-	2.5%
	Consulting & System Development			21,473	21,680
		YoY		-	1.0%
		Consulting & development for accounting system		13,297	13,329
			YoY	-	0.2%
		System development for the financial industry		5,221	4,824
			YoY	-	-7.6%
		Information security consulting		2,253	2,916
			YoY	-	29.4%
		PLM support solution		920	875
			YoY	-	-4.9%
		Adjustments		-218	-264
	Management Services (BPO)			7,333	7,823
		YoY		-	6.7%
		HR & payroll outsourcing		3,112	3,272
			YoY	-	5.1%
		Outsourcing services for global companies		1,394	1,421
			YoY	-	1.9%
		Outsourcing services for foreign companies		859	875
			YoY	-	1.9%
		On-site BPO		2,061	2,301
			YoY	-	11.6%
		Adjustments		-93	-46
	Eliminations, company-wide			-367	-345
Operating profit				2,130	2,408
	YoY			-	13.1%
	Operating profit margin			7.5%	8.3%
	Consulting & System Development			1,771	1,691
		YoY		-	-4.5%
		Operating profit margin		8.2%	7.8%
		Consulting & development for accounting system		1,342	1,224
			YoY	-	-8.8%
			Operating profit margin	10.1%	9.2%
		System development for the financial industry		169	119
			YoY	-	-29.6%
			Operating profit margin	3.2%	2.5%
		Information security consulting		137	231
			YoY	-	68.6%
			Operating profit margin	6.1%	7.9%
		PLM support solution		145	118
			YoY	-	-18.6%
			Operating profit margin	15.8%	13.5%
		Adjustments		-22	-1
	Management Services (BPO)			418	502
		YoY		-	20.1%
		Operating profit margin		5.7%	6.4%
		HR & payroll outsourcing		370	410
			YoY	-	10.8%
			Operating profit margin	11.9%	12.5%
		Outsourcing services for global companies		-82	-62
			YoY	-	-
			Operating profit margin	-	-
		Outsourcing services for foreign companies		64	64
			YoY	-	0.0%
			Operating profit margin	7.5%	7.3%
		On-site BPO		67	102
			YoY	-	52.2%
			Operating profit margin	3.3%	4.4%
		Adjustments		-1	-12
	Eliminations, company-wide			25	7

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

Segment production, orders, and order backlog

By segment			FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)			Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.
Production			15,691	15,944	17,236	18,694	20,931	23,314	23,797	25,400	28,139	29,119
	YoY		7.7%	1.6%	8.1%	8.5%	12.0%	11.4%	2.1%	6.7%	10.8%	3.5%
	Consulting & System Development		12,107	12,544	13,684	15,183	16,411	17,129	16,983	18,023	20,420	21,486
		YoY	9.2%	3.6%	9.1%	11.0%	8.1%	4.4%	-0.9%	6.1%	13.3%	5.2%
	Management Services (BPO)		3,584	3,400	3,552	3,510	4,520	6,185	6,814	7,378	7,720	7,633
		YoY	2.7%	-5.1%	4.5%	-1.2%	28.8%	36.8%	10.2%	8.3%	4.6%	-1.1%
Orders			15,800	15,873	16,663	19,315	20,284	24,434	23,998	26,023	29,852	28,163
	YoY		5.6%	0.5%	5.0%	15.9%	5.0%	20.5%	-1.8%	8.4%	14.7%	-5.7%
	Consulting & System Development		11,807	12,365	13,415	15,076	16,256	17,293	16,721	19,079	22,063	20,607
		YoY	1.5%	4.7%	8.5%	12.4%	7.8%	6.4%	-3.3%	14.1%	15.6%	-6.6%
	Management Services (BPO)		3,994	3,508	3,247	4,239	4,028	7,141	7,277	6,944	7,789	7,555
		YoY	19.9%	-12.2%	-7.4%	30.6%	-5.0%	77.3%	1.9%	-4.6%	12.2%	-3.0%
Order backlog			4,342	4,237	3,927	4,906	6,300	7,717	8,207	9,411	10,912	9,947
	YoY		11.0%	-2.4%	-7.3%	24.9%	28.4%	22.5%	6.3%	14.7%	15.9%	-8.8%
	Consulting & System Development		3,240	2,843	2,660	2,707	2,712	2,927	2,728	4,073	5,498	4,791
		YoY	-4.1%	-12.3%	-6.4%	1.8%	0.2%	7.9%	-6.8%	49.3%	35.0%	-12.9%
	Management Services (BPO)		1,102	1,394	1,267	2,199	3,587	4,790	5,479	5,338	5,415	5,156
		YoY	106.8%	26.5%	-9.1%	73.6%	63.1%	33.5%	14.4%	-2.6%	1.4%	-4.8%

Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
Figures are according to Japanese GAAP until FY03/20 and IFRS from FY03/21 onward.

Market and value chain

System development market

Information service industry

According to the 2020 Basic Survey on Information and Communication Industry published by the Ministry of Internal Affairs and Communications, the market size of Japan’s information service industry in FY2019 was JPY19.0tn (+2.5% YoY). The company’s business falls into the contract development software industry, which had a market size of JPY9.5tn (+5.6% YoY). The outsourcing cost per company was at JPY1.5bn.

Information service industry: Number of companies and market size

		Number of companies			Revenue (JPYmn)			Revenue per company (JPYmn)
		FY2018	FY2019	YoY (%)	FY2018	FY2019	YoY (%)	FY2018	FY2019	YoY (%)
Total		3,636	3,660	0.7	18,533,405	18,998,425	2.5	5,097	5,191	1.8
	Contract development software	2,386	2,383	-0.1	8,576,839	9,054,441	5.6	3,595	3,800	5.7
	Embedded software	252	238	-5.6	326,860	349,539	6.9	1,297	1,469	13.2
	Packaged software	692	704	1.7	1,151,941	1,188,588	3.2	1,665	1,688	1.4
	Game software	89	79	-11.2	657,138	359,581	0.4	7,384	8,349	13.1
	Information processing services	1,105	1,084	-1.9	4,557,174	4,649,348	2.0	4,124	4,289	4.0
	Information provision services	210	207	-1.4	356,304	381,500	7.1	1,697	1,843	8.6
	Market/public opinion/social research	100	105	5.0	250,496	181,300	-27.6	2,505	1,727	-31.1
	Other information services	1,113	1,140	2.4	2,656,653	2,534,128	-4.6	2,387	2,223	-6.9

Source: Shared Research based on the 2020 Basic Survey on Information and Communication Industry

Sales trends in the contract development software industry

	FY2010	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019
	12,129	13,622	13,998	14,380	14,899	17,268	16,729	17,509	18,533	18,998
YoY		12.3%	2.8%	2.7%	3.6%	15.9%	-3.1%	4.7%	5.8%	2.5%

Source: Shared Research based on the 2020 Basic Survey on Information and Communication Industry

The number of companies by prime contractor and subcontractor is shown in the table below. The overall distribution of companies is 49.2% prime contractors, 32.1% tier-one subcontractors, 14.3% tier-two subcontractors, and 4.4% tier-three and lower subcontractors (multiple responses accepted). The ratio of prime contractors increases with a higher capital base. For companies with a capital base of JPY300mn or more, the distribution was 62.8% prime contractors, 30.4% tier-one subcontractors, 5.6% tier-two subcontractors, and 1.3% tier-three and lower subcontractors.

Number of prime contractors and subcontractors by capital base

		No. of respondents	By capital base
			JPY30–100mn	JPY100–300mn	JPY300mn or more
	Prime contractors	2,022	1,417	359	246
	Tier-one subcontractors	1,319	992	208	119
	Tier-two subcontractors	587	498	67	22
	Tier-three and lower	182	158	19	5
Total		2,325	1,675	396	254

Source: Shared Research based on the 2020 Basic Survey on Information and Communication Industry

Changes in the Japanese accounting system

Changes in the Japanese accounting system include the full-scale adoption of consolidated accounting, disclosure of quarterly financial results, timely disclosure of financial results, systemization of the Japanese SOX Act, and discussions on the introduction of IFRS.

Full-scale adoption of consolidated accounting

The Japanese accounting system began prioritizing consolidated financial statements over non-consolidated financial statements from FY03/00. Until then, reports were mainly filed on non-consolidated basis, even though consolidated financial statements were made mandatory in 1978, and there were various criticisms of the inadequacies of the Japanese accounting system compared to that of developed countries such as the US. At the same time, preparing consolidated cash flow statements became mandatory, and full consolidation of subsidiaries became a requirement, except in cases where the subsidiary was deemed immaterial.

The series of moves to bring Japan’s accounting system closer to international accounting standards that began in the late 1990s, including the 1997 revision of the principles for consolidated financial statements, was referred to as the Big Bang of Japanese accounting. Shared Research believes these moves provided a tailwind during the company’s initial growth stage soon after its founding in 1997.

Disclosure of quarterly financial results

Submitting quarterly financial statements used to be voluntary, but the Tokyo Stock Exchange introduced its own rules requiring listed companies to disclose them in FY03/04. In addition, beginning in FY03/09, the Financial Instruments and Exchange Law mandated that quarterly securities reports be submitted to the Prime Minister within 45 days of the end of each quarter. Previously, financial statements were prepared twice a year, once for full-year results and once for interim-results. However, this was changed to four times per year, increasing the workload for accounting departments and other responsible departments.

Timely disclosure of financial results

The timely disclosure of financial results has been in place as a request from the Tokyo Stock Exchange since FY03/07. Until then, the common practice was to disclose financial results within 60 days of the end of the fiscal year, but this was changed to disclosing within 45 days. In addition, guidelines for preparing annual and quarterly earnings reports issued by the Tokyo Stock Exchange in February 2017 stated that “it is appropriate to compile the contents and disclose them within 45 days of the end of the fiscal year at the latest,” with an added request that “disclosure within 30 days of the end of the fiscal year is preferred.”

As mentioned above, the deadline for companies to prepare financial documents was shortened, and this has spurred demand for consulting services to boost efficiency of consolidated accounting systems as well as outsourcing services to take over the entire process.

Systemization of the Japanese SOX Act

The Financial Instruments and Exchange Law began tightening internal controls for companies in FY2008, modeled after the US Sarbanes-Oxley (SOX) Act. Specifically, companies were required to submit an internal control report, which evaluates the internal control system necessary to ensure the appropriateness of financial information, within three months after the end of the fiscal year. This prompted companies that had previously used their own methods for preparing consolidated financial results to introduce external systems for consolidated financial accounting, as they were pressured to ensure the appropriateness of their results.

Introduction of IFRS

In 2009, the Business Accounting Council of the Financial Services Agency (FSA) compiled an interim report and approved the preparation of consolidated financial statements based on International Financial Reporting Standards (IFRS) starting in FY03/10. The time frame for mandatory adoption of IFRS was initially planned for 2015 to 2016, but this has not been implemented and the timing of mandatory adoption is still not clear. In addition to IFRS differing significantly from Japanese accounting standards, the adoption of it will also make the preparation of footnotes and other information more complicated, which in turn is expected to boost demand for consulting services.

Key accounting changes in Japan

Changes	Period	Detail
Full-scale adoption of consolidated accounting	From FY03/00 closing	In 1997, consolidated financial statement principles were revised prior to the adoption. The shift from non-consolidated to consolidated accounting and preparation of consolidated cashflow statements were referred to as the Big Bang of Japanese accounting system
Disclosure of quarterly financial results	FY04/03 onward	Own rules of TSE. Became mandatory since FY03/09 after the Financial Instrument and Exchange Law was revised
Timely disclosure of financial results	From FY03/07 closing	TSE requested disclosure within 45 days of the end of the fiscal year, specifying that disclosure within 30 days is preferred. Previously, common practice was to disclose within 60 days
Systemization of Japanese SOX act	FY04/08 onward	Internal control system reform with the US SOX Act as a model, requiring listed companies to submit an internal control report
Introduction of IFRS	TBD	Voluntary adoption started in FY03/10. Mandatory adoption was initially planned for 2015 at the earliest, but was postponed

Source: Shared Research

Frequent release of accounting standards creates demand for maintenance services

In addition, as long as a company’s shares are listed on a stock exchange, it is bound to the timely disclosure system established in accordance with the rules of the exchange, and the company is required by law to submit an annual securities report to the Prime Minister within three months of the end of the fiscal year under the Financial Instruments and Exchange Law. Financial statements such as balance sheets, income statements, and cash flow statements are based on corporate accounting principles, but in reality they are in accordance with corporate accounting standards and guidelines for the standards prepared by the Accounting Standards Board of Japan (ASBJ).

New standards and guidelines are frequently released by the ASBJ, and companies are required to report their financial results in accordance with them. In some cases, this necessitates upgrading consolidated accounting systems, rather than simply maintaining it. In addition, preparing footnotes and researching examples of other companies must be done in accordance with the new accounting standards, and lacking expertise in either systems or accounting may jeopardize proper execution. This has created demand for maintenance services and outsourcing businesses.

Among the recently released corporate accounting standards, the Accounting Standard for Tax Effect Accounting released in February 2018, the Accounting Standard for Equity Method released in March 2015, the Accounting Standard for Business Divestitures in September 2013, and the Accounting Standard for Consolidated Financial Statements released in September 2013 are believed to have forced changes in the consolidated accounting process.

Digital-related business consulting market

According to IDC, the digital-related business consulting market was worth JPY133.7bn (+29.3% YoY) in 2020. The growth was driven by expansion in digital transformation support projects that cover multiple domains among service lines ranging from strategy to operations, business improvement, finance and accounting, human resources and organization, and risk management. IDC predicts that the market will continue to grow at a high 30.1% CAGR from 2020 to 2025 with spending expected to reach JPY498.6bn by 2025, fueled by project scopes expanding in line with the scope of digital transformation, as well as an increase in ongoing support projects.

Outlook of Japan’s workforce

According to the National Institute of Population and Social Security Research’s future population projections for Japan published in 2017, the working population aged 15–64 was 77.3mn people in 2015 (60.8% of the total population), but is expected to decline to 45.3mn people in 2065 (51.4%; -1.1% CAGR).

Japanese population projections (median birth rate, death rate)

Year	Population ('000)				％
Year	Total	Age (0–14)	Age (15–64)	Age (65–)	Age (0–14)	Age (15–64)	Age (65–)
2015	127,095	15,945	77,282	33,868	12.5	60.8	26.6
2020	125,325	15,075	74,058	36,192	12.0	59.1	28.9
2025	122,544	14,073	71,701	36,771	11.5	58.5	30.0
2030	119,125	13,212	68,754	37,160	11.1	57.7	31.2
2035	115,216	12,457	64,942	37,817	10.8	56.4	32.8
2040	110,919	11,936	59,777	39,206	10.8	53.9	35.3
2045	106,421	11,384	55,845	39,192	10.7	52.5	36.8
2050	101,923	10,767	52,750	38,406	10.6	51.8	37.7
2055	97,441	10,123	50,276	37,042	10.4	51.6	38.0
2060	92,840	9,508	47,928	35,403	10.2	51.6	38.1
2065	88,077	8,975	45,291	33,810	10.2	51.4	38.4

Source: Shared Research based on National Institute of Population and Social Security Research

IT personnel supply and demand

According to the 2019 survey on the supply of IT human resource by the Ministry of Economy, Trade and Industry, the gap (shortage) between demand and supply of IT personnel is projected to be 300,000 in 2020, 360,000 in 2025, and 450,000 in 2030. This is based on the assumption that the demand for IT personnel will grow at about a 2.7% CAGR while labor productivity increases at a 0.7% CAGR.

Outsourcing market

Yano Research Institute estimates the total market size of BPO services (the sum of IT and non-IT-related BPO) at JPY4.3tn (+3.3% YoY) on a revenue basis in FY2019. The IT-related BPO market size was estimated at JPY2.6tn (+4.0% YoY) and the non-IT-related BPO market size at JPY1.8tn (+2.2% YoY). The economic downturn caused by the spread of the COVID-19 pandemic in 2020 had a negative impact on the BPO market, but this is being more than offset by a growing number of companies working to improve business efficiency and transform their operations through work style reforms and digital transformation efforts. In addition, companies are stepping up business optimization efforts alongside the adoption and expansion of telework as people refrain from going out, and this is driving up interest in outsourcing operations. As such, Yano Research Institute believes that the market as a whole is headed toward expansion with positive factors outweighing the negatives.

Domestic BPO market projections

(JPYbn)	FY2017	FY2018	FY2019	FY2020	FY2021	FY2022	FY2023	FY2024	CAGR
(JPYbn)	Act.	Act.	Act.	Forecast	Forecast	Forecast	Forecast	Forecast	CAGR
IT BPO	2,384	2,476	2,576	2,614	2,667	2,727	2,782	2,835	1.9%
Non-IT BPO	1,703	1,735	1,773	1,825	1,820	1,852	1,884	1,915	1.6%
Total	4,087	4,211	4,349	4,439	4,487	4,579	4,666	4,750	1.8%

Source: Shared Research based on Yano Research Institute data

Main competitors

Consulting and system development

In the consulting industry, IT-related players include Accenture Japan Ltd (Japanese subsidiary of Accenture Plc [NYSE: ACN]), IBM Japan, Ltd. (Japanese subsidiary of IBM Corp. [NYSE: IBM]), and ABeam Consulting Ltd. (unlisted). Accenture and IBM Japan develop and sell core systems, but Business Brain Showa-Ota is not in direct competition with them as the company develops and sells back-office systems. Competing accounting firms include EY Strategy & Consulting Co., Ltd. (unlisted), Deloitte Tohmatsu Consulting LLC (unlisted), and PwC Consulting LLC (unlisted). The company falls between IT consulting and accounting firms.

Consulting and system development work progresses in phases. The first phase is the consulting phase, where the ground design, which is an outline of how a system should be built, is created. After this, specific package systems are brought into consideration. Business Brain Showa-Ota competes with IT-related players and consulting arms of accounting firms in these areas. However, there is no direct competition as the company targets medium-sized companies with annual sales of JPY30–50mn while competitors target large companies. The company competes with other firms when they target large companies on the smaller end of the scale.

The system integration industry is divided into user-oriented, manufacturer-oriented, and independent sectors. The independent sector is further subdivided into custom developed system and package system categories, and the company falls into the custom developed system category. Competitors in the custom developed system category include NSD Co., Ltd. (TSE1: 9759), DTS Corp. (TSE1: 9682), TIS Inc. (TSE1: 3626), SRA Holdings, Inc. (TSE1: 3817), Ines Corp. (TSE1: 9742), Cresco, Ltd. (TSE1: 4674), IX Knowledge Inc. (TSE1: 9753), and Himacs, Ltd. (TSE1: 4299). The company competes in the system integration industry in the system development phase.

Business Brain Showa-Ota is unique in that it is better versed in systems than accounting firms and more knowledgeable in accounting compared to system vendors. Systems need to be operated and maintained after implementation, and the company provides these services. Further, systems need to be maintained and updated to reflect changes in regulations, e.g., annual changes in resident tax rates and income tax rates.

Competitor comparisons

9759NSD

	(JPYmn)		FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Revenue			33,334	34,412	36,632	40,286	42,991	51,586	55,235	58,081	61,945	65,064	66,184
Operating profit			3,582	3,387	4,484	4,849	5,145	6,379	7,173	7,919	8,655	9,545	9,843
	Operating profit margin		10.7%	9.8%	12.2%	12.0%	12.0%	12.4%	13.0%	13.6%	14.0%	14.7%	14.9%
Revenue	System development (financial IT)											20,560	20,791
	System development (industrial IT/social infrastructure)											29,746	30,254
	System development (IT infrastructure)											7,651	8,052
	Solutions											7,107	7,087
	System solution services		31,273	32,371	34,822	38,652	42,680	51,220	54,858	57,705	61,573
	Real-estate leasing		377	442	423	380	311	366	376	376	372
	Temporary staffing		1,684	1,600	1,387	1,254
	SUM		33,334	34,412	36,632	40,286	42,991	51,586	55,235	58,081	61,945	65,064	66,184
	Eliminations, company-wide
	Total		33,334	34,412	36,632	40,286	42,991	51,586	55,235	58,081	61,945	65,064	66,184
Operating profit	System development (financial IT)											3,398	3,597
		Operating profit margin										16.5%	17.3%
	System development (industrial IT/social infrastructure)											4,751	4,694
		Operating profit margin										16.0%	15.5%
	System development (IT infrastructure)											1,118	1,167
		Operating profit margin										14.6%	14.5%
	Solutions											495	573
		Operating profit margin										7.0%	8.1%
	System solution services		3,434	3,219	4,371	4,644	5,126	6,362	7,103	7,845	8,547
		Operating profit margin	11.0%	9.9%	12.6%	12.0%	12.0%	12.4%	12.9%	13.6%	13.9%
	Real-estate leasing		94	132	103	144	62	66	119	119	162
		Operating profit margin	24.9%	29.9%	24.3%	37.9%	19.9%	18.0%	31.6%	31.6%	43.5%
	Temporary staffing		55	36	47	93
		Operating profit margin	3.3%	2.3%	3.4%	7.4%
	SUM		3,582	3,387	4,521	4,881	5,188	6,428	7,222	7,964	8,709	9,761	10,031
		Operating profit margin	10.7%	9.8%	12.3%	12.1%	12.1%	12.5%	13.1%	13.7%	14.1%	15.0%	15.2%
	Eliminations, company-wide		0	0	-37	-32	-44	-49	-48	-46	-55	-216	-189
	Total		3,582	3,387	4,484	4,849	5,145	6,379	7,173	7,919	8,655	9,545	9,843
		Operating profit margin	10.7%	9.8%	12.2%	12.0%	12.0%	12.4%	13.0%	13.6%	14.0%	14.7%	14.9%

9682DTS

	(JPYmn)	FY03/11	FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Revenue		58,504	57,385	61,040	64,175	74,609	82,538	79,858	83,163	86,717	94,619	90,493
Operating profit		2,296	2,973	4,003	4,742	6,432	7,600	7,986	8,524	9,790	10,674	10,817
	Operating profit margin	3.9%	5.2%	6.6%	7.4%	8.6%	9.2%	10.0%	10.2%	11.3%	11.3%	12.0%
Revenue	Financial/Social										30,836	28,445
	Corporate solutions							20,200	23,807	26,747	27,650	26,366
	Operation BPO							12,184	12,323	13,387	24,880	25,238
	Regional/Overseas							18,242	20,423	20,859	11,254	10,444