Day 10: SpiderPlus (4192)
Category: Construction Tech. Mkt cap: ¥51.7bn ($470mn), FY20 ARR: ¥1.67bn ($15.2mn), Gross margin: 53.2%, 5yr Sales CAGR: 123%, Founded: 2000
This is installment #10 of my 200-day challenge to do write-ups on 200 Japanese small caps, at the end of which I plan to publish a book (tentative title: Japan Small Caps Handbook). I’m writing these unedited versions in a stream of consciousness style, and they will be refined before being finalized later on.
If you don’t have time, I encourage you to jump to the end for the Key Takeaways. The goal of this newsletter is to fill the information gap on Japanese small caps that have little or no analyst coverage.
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Life Streaming: Discussion with a Friend
“Perhaps in the future, each fund manager will just subscribe to 50 Substacks to generate new ideas”—this was the message I got from a Twitter acquaintance today, a former Asia analyst and portfolio manager.
His last firm paid $20,000 per year to a certain research firm, and $50,000 per year for another. “Of course they provide others service as well, like allocations in IPOs,” he said. But that won’t last forever.
The problem is that “it doesn’t make sense for the best analysts to subsidize the mediocre performers.” He kindly pointed me to arguably one of the best articles talking about Substack: “Sovereign Writers and Substack” by Ben Thompson.
In the article, he talks about Substack Pro, a one-off advance payment made to convince writers to become Substack writers. Substack agreed to pay Matthew Yglesias, formerly writing for Vox, $250,000 along with 15% of subscription revenue to lure him to the platform.
But the catch is that Yglesias had around 9,800 paying subscribers, generating around $860,000 a year. Keeping 90% of that (without the advance) would have made him $775,000. But under the Substack Pro contract, he only made $250,000 plus 15% of $860,000, amounting to roughly $380,000.
Long story short, I think Substack can do the same for star analysts. Substack has better access to capital than sell-side research firms that are budget-bound due to MIFID. Why can’t it hire 10 star analysts based on contract terms like it did with Yglesias? That would make a good start to a game-changing narrative.
SpiderPlus (4192): Construction management SaaS business growing sales at 5yr CAGR of 123% w/ 145% NRR
SpiderPlus (Spider+) is a construction tech company. For convenience’s sake, one might just refer to it a Japanese version of Procore (LY revenue: $289mn, last round valuation: $5bn).
But Spider+ is somewhat smaller. LY revenue (FY12/20) was ¥1,973mn (approx. $17.9mn) and market cap of ¥51.7bn (as of 5 Apr close; approx. $470mn). Hence, one might say Spider+ is a Japanese version of Procore that’s 1/10 of its size.
But Procore stock isn’t publicly traded, because it’s IPO was delayed due to COVID. The point I’m trying to make is this: Spider+ is an opportunity to get in at a very early stage of a company that could grow to become 10x to match Procore in size.
But, as always, nothing I write is investment advice. I also don’t have a position in this stock yet, because with TTM ARR at ¥1.67bn and current market cap at ¥51.7bn, that’s a valuation too lofty for my risk tolerance. But I’m sure there are some out there hunting for multi-baggers. And this could potentially be one.
1/ Business Model: SaaS w/ over 38,000 IDs @ ¥3,000/ID w/ 145% NRR.
Frankly, I don’t have much information available to me about this stock. All I have are the following: research report by Holistic (in Japanese), IPO deck (in Japanese), infographics (in Japanese but can use Google Translate), and interview of CEO on Construction IT World (in Japanese). I also had a 15-minute call with the IR rep today, just to check some nuances about their disclosures.
First off, as shown on Slide 2 of the IPO deck, Spider+ has two business segments: Engineering and ICT.
The Engineering business is its original business started in February 2000 dealing with building insulation (FY20: 24.8% of total sales).
The ICT business comprises its SaaS product for construction management, SpiderPlus, first released in September 2011 (FY20: 75.2% of total sales).
On Slide 4, shown below, you can find an overview of the business model.
The business model is based on subscription revenues from SpiderPlus (construction management software). Each ID is ¥3,000 (total of over 38,000 IDs as of end-Dec 2020). On top of that, the company charges server usage fees and optional fees (mainly inspection and measurement tools).
The gist of the business model is to store and share data in the cloud. In the past, construction management data was stored in different locations, creating inefficiencies where people would have to travel to different sites. Drawings, photos, inspection records, and reports are all stored in the cloud.
The point that stands out about Spider+ is its NRR at 145%. [This post here by Tomasz Tunguz, a VC at Redpoint, regarding the compounding effects of NRR is helpful in understanding the LT impact of a high NRR.] I asked the IR Rep why NRR is so high. He pointed me to Slide 15 of the IPO deck.
Spider+ is usually adopted at specific construction sites. Then its usage spreads to departments within the contractor. Then branch offices. And so on. Typically, they see a jump in the number of IDs in Year 3.
I asked the Rep what exactly is meant by “IDs” and he said it’s equivalent to the number of “tablets.” Roughly speaking, you can imagine a few construction managers having a tablet in their hands in Year 1. Then, you see that tablet being used across the department in Year 2. And then the entire branch office using it in Year 3.
Meanwhile, the company holds about 2,000 seminars a year, and has a support center staffed with full-time employees. Moreover, it’s Engineering business gives on-the-ground feedback on how to improve features. Presumably, that is what has contributed to the low customer churn of 0.6%.
2/ Moat: Distinguishes itself by targeting enterprise customers
The first thing that I thought when I saw this stock was this: Does it compete with ANDPAD, a construction management SAAS valued at $309 million in the latest funding round in October 2020. As shown on its website below, ANDPAD has 60,000 clients and 170,000 users, far outnumbering Spider+’s 793 and 38,560.
Based on what I’ve read here, ANDPAD is mainly used by home builders. That’s why its IDs are cheaper (¥600/ID but starting with a minimum of 60 IDs) and the number of clients is larger. On the other hand, Spider+ serves large enterprises, including head contractors like Kajima. According to the company, over 70% of head contractors and developers are already using SpiderPlus.
Although there’s risk that ANDPAD may move aggressively into targeting larger contractors. But Spider+ likely has a first-mover advantage and better capital access via public markets. Ideally, it should be ramping up leverage (cash burn shouldn’t be feared) to beef up R&D and marketing at this stage, in order to build a large moat that would fend off ANDPAD or other competitors down the road.
As shown below on Slide 15 of the IPO deck, Spider+ already has extensive coverage of general contractors, developers, electric insulation contractors, and A/C & plumbing contractors. Furthermore, it typically sees a jump in the number of IDs in Year 3 of adoption (for reasons explained earlier).
With a 5yr (FY16-FY20) sales CAGR of 123%, churn rate of 0.6%, and NRR of 145%, one could reasonably expect Spider+ to remain a leading player in the construction management software space targeting enterprise customers for the foreseeable future.
3/ Strategy: Expanding in Asia through existing Japanese clients
The foremost reason why I contacted the IR team was to check on the nuances about FY21 guidance. As shown on Slide 40 of the IPO deck below, management forecasts the following:
Sales: ¥2,216mn (+12.3% y/y)
SG&A: ¥1,627mn (+74.0% y/y)
Operating loss: ¥540mn (vs. OP of ¥106mn LY)
Net loss: ¥593mn (vs. NI of ¥103mn LY)
Basically, what I asked was about the sales growth rate. Management expects the Engineering business sales to decline 46.4% y/y, citing its intention not to conduct active sales but instead focusing on R&D. => I thought this was understandable, given that the Engineering business has a much lower gross margin (16.2% in FY20) compared to the ICT business (65.3% in FY20). For that matter, I personally wouldn’t care if they dispose the legacy business altogether.
Rather, the problem I had was the slowdown in the ICT business’s growth rate, from 56.4% y/y in FY20 to only 31% y/y in FY21. I especially thought this was strange, given that they are ramping up SG&A (hiring expenses +66.7% y/y, advertising expenses +163.5% y/y). => Apparently, a large amount of these expenses are being allocated to system development. And sales activities are being hindered by the pandemic. Hence, the current year’s investments should start taking shape as results from the next fiscal year onward.
Finally, I wanted a more granular image of their sales strategy in Asia. On Twitter, I asked CEO Kenji Ito two questions: (1) How does Spider+ intend to catch up with Procore? (2) Does Spider+ have distribution channels in Asia? He gave me the following response.
I was especially keen about distribution channels, because oftentimes the startups with the best distribution channels would dominate over the LT. Apparently, in Japan, they have leasing companies that handle their receivables, and also serve as a distributor (for approx. 10% commissions). => I asked if they have such distributors in Asia. The answer, as also pointed out by the CEO above, was that “Japanese contractors and developers already have construction sites abroad.” The strategy is to have these big contractors and developers use SpiderPlus at their overseas construction sites, too. Furthermore, the IR Rep noted that Procore’s overseas sales ratio is only 10% or so, and there’s still significant room for growth in the Asian market.
On Slide 27 of the IPO deck, the company estimates that the Asian TAM for construction tech to be around ¥4trn ($36.4bn), versus ¥900bn ($8.2bn) in Japan. These numbers compare with SpiderPlus’s FY20 ARR of just ¥1.6bn ($14.5mn). => If Spider+ moves fast enough to capture the Asian market through its existing Japanese contractors/developers, it may have a shot at matching Procore’s valuation down the road. However, that will likely require it to ramp up investments to localize, build out features, and market its product abroad.
Overview: For convenience’s sake, one could consider Spider+ as a Japanese version of Procore (construction management software company valued at $5bn) but only 1/10 of its size. If Spider+ can catch up with Procore, then the stock will likely be a multi-bagger. Spider+ has two business segments: ICT (comprising its SaaS product, SpiderPlus) and Engineering (its original business dating back to 2000 that deals with building insulation).
Business Model [Score: 4/5]: The problem I have with its business model is the legacy Engineering business with a gross margin of only 16.2% in FY20. I find it questionable that Spider+ needs to keep this business, even for R&D purposes (can’t they gather user feedback in a more capital efficient way?). Besides the legacy business, the SaaS business model is on a solid footing. I especially like the NRR at 145%, which will compound sales down the road.
Moat [Score: 4/5]: I’m still slightly skeptical whether Spider+ can turn out to be superior to ANDPAD. I understand that Spider+ is focused on large enterprises, versus ANDPAD that focuses mainly on home builders. I’m worried about a scenario in which ANDPAD would come out with a cheaper version with better UI/UX, resulting in the commoditization of SpiderPlus.
Strategy [Score: 3/5]: I’m not fully convinced about Spider+’s explanation about the slowdown in topline growth. I think a 31% y/y growth rate at an NRR of 145% is lackluster. Furthermore, it’s storyline about tapping the Asian market is attractive. But it’s unclear how long it will take to materialize. They don’t provide any numerical sales data or targets in Asia.
Valuation [Score: 3/5]: Personally, it is still too early for me to be invested in Spider+. I would first need to confirm that sales growth in the ICT business has re-accelerated. Second, I would like to see some numerical data to be presented with regard to progress in the Asia market. Lastly, I think the Engineering business will no longer be necessary when Spider+ grows into becoming an “Asian business” rather than just a local “Japanese business.”
I don’t have any additional information to share today, because Spider+’s data isn’t available on TIKR.com yet. If you’d like, you can reach the IR team through the contact form here. I might also be able to help arrange a call with the IR rep. If interested, just reply to this email or reach me at email@example.com.
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