Day 8: Speee (4499)

Category: MarTech, X-Tech. Mkt cap: ¥38.6bn ($351mn), NTM EV/Sales: 2.6x, Gross margin: 55.6%, FY19-FY21e Sales CAGR: 23.2%, Founded: 2007

This is installment #8 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 of the post for the Key Takeaways. The goal of this newsletter is to fill the information gap on obscure Japanese small caps that have little or no analyst coverage.

Click on the button below to join 235 others to receive these posts in your email inbox for free. Feel free to reply to this email if you have any questions.


David and Goliath: Can Substack Take on Institutional Research?

I had a talk with Linda (@SubstackLinda), newly hired Director of Finance at Substack. She is recruiting investing writers to put their content on Substack, and also getting feedback from current writers on the platform, like myself. She encourages anyone with questions or requests to reach out to her.

During the call, I suggested to her to bundle investing content. For example, people may not pay for Japanese small caps content alone. But if it is bundled with other writers, like Japan Business Insights, and a few others that I probably don’t know about yet—you might get institutional-quality research on Substack.

Separately, I received the following email from Riccardo, Research Manager at Smartkarma, a Sequoia backed independent research network. Apparently, they are aggregating blogs for an institutional audience. If blogs are so valuable, and many of them are free, what happens to the expensive institutional research?


Call for Co-Founders: Would You Like to Partner With Me?

I want to create a niche Substack bundle with fellow Japan-focused investment content writers. If this sounds like you, please reach out to me by replying to this email. We can discuss ways to keep you anonymous, if that is necessary.

Premium content would be put behind a paywall and revenue would be shared. It won’t make much money. But the point is that it will be impactful. It’ll be an example of how Substack can be a cheaper alternative to sell-side research.


Speee (4499): Consulting and Matching Platform Biz w/ Client Data Moat, Blockchain Startup as LT Growth Driver


Overview

Speee (4499) offers marketing consulting, operates online matching platforms, and has a nascent blockchain/NFT business. The stock has fallen sharply since its IPO in July last year, from ¥5,720 to ¥3,740, down 35% (1 Apr close). But it rose from ¥2703 to ¥3740 in the past six trading days, with a 14.86% jump yesterday.

The recent surge in share price has followed its announcement of a technological partnership between its blockchain subsidiary, Datachain, and NTT Data. They have conducted demonstration experiments to achieve the world’s first “interoperability” between blockchains that don’t use Hyperledger Fabric.

The key point is that the experiment proved the efficacy of Cross Framework and IBC module developed by Datachain as ways to realize interoperability, without relying on a third party. [Interoperability is crucial for practically implementing blockchains in services (e.g. connecting blockchain to payment services.)]

But, a look at the Q1 FY20 (Oct-Dec ‘20) filings shows that the Data Platform business, under which Datachain is recognized, only had about $3,400 in sales, but posted a segment loss of about $741,000. In other words, it appears to be a seed stage R&D startup that’s burning a fair amount of cash.

So, putting the hype around this blockchain startup aside, a quick glance at the stock doesn’t give the impression of the stock being very cheap. A competitor in SEO consulting, Geo Code (7357), is trading at a fwd P/E of 39x, versus Speee’s 72.5x. A competitor in the matching platform space, Sharing Technology (3989), which runs losses, is also trading at significantly lower multiples.

The only business operated by Speee that currently justifies its lofty valuations is Ieul, in my opinion. Ieul is Japan’s largest matching platform between real estate sellers and brokers. One might think of it as a small Japanese version of Zillow or Redfin. According to Tokyo Shoko Research, Ieul ranks as the No. 1 real estate price estimation website (13,000 inquiries versus 9,300 at company in 2nd place).

Using Ieul to muscle into different verticals, such as a for sale by owner (FSBO) platform like SRE Holdings, may serve as a near-term catalyst.

Speee is a somewhat ambiguous bundle of businesses operating across multiple fields, including marketing consulting, matching platforms, and blockchain. On top of that, its materials are all in Japanese. So it’ll probably be hard for most foreign investors to take interest in the company.

But the company has an interesting moat around its business—namely, the locally-stored data it acquires from consulting customers. Therefore, I’m going to try to break down the business so that readers can get a better grasp of why I think the stock might have LT potential for growth.


1. Co-Founders Hideki Otsuka and Tetsushi Hisata

NewsPicks did an interview with the founder, Hideki Otsuka, here (in Japanese).

Otsuka reflects on his years as a student being a book worm reading the writings of business operators like Masayoshi Son, Susumu Fujita, and Takafumi Horie.

Otsuka left college when he was 19, deciding it would be quicker to start a business by first getting a job. He joined Recruit Staffing as a sales personnel. After about a year, he switched jobs to an online advertising startup.

In the job interview, he told the interviewer, “I only intend to work here for a year, because I want to start my own business.” Then, the interviewer responded, “There’s another person working here that says the same thing.” He was introduced to Tetsushi Hisata, who eventually became co-founder of Speee.

In 2007, Otsuka and Hisata started Speee with the goal of capturing mobile SEO demand. They chose to start a business in the media domain because of the high profitability, and focused on the cutting-edge space of mobile search. Their goal was to become “the No. 1 mobile search vendor in Japan within 2 years.”

They achieved this goal early on. But gathering personnel was a challenge. In the second year, about a third of employees left the company at once. In fact, Otsuka himself left Speee for a while to start another business. But he rejoined in 2011 when the smartphone boom brought a mega tailwind for Speee. He sold his other startup and brought all remaining employees to Speee.

Ever since, Otsuka has focused on management, while Hisata worked on new business development. Otsuka worked to steadily expand existing operations and Hisata went after the “home runs.” Over the next seven years, they attempted 20 new businesses, of which 9 remained.

Speee’s first success was in mobile search consulting. And that became part of their identity. Even though they’ve expanded into other businesses, all endeavors share a common development approach based on data analysis and algorithms.

They noticed legacy industries with low online commerce penetration, such as real estate and home renovation. That’s how they decided to develop Ieul. They noticed many independent nodes that weren’t networked yet. So they applied their development approach to create a matching platform.

Their future growth business is Datachain. Otsuka says that the major global IT companies dominate corporate data. But there are still unique data sets that are stored in local offline environments at companies. Through their consulting and matching platform operations, Speee is collecting these unique data sets that will eventually become a data platform based on blockchains and tokens.

They created their own token that can be used as a common currency for data transactions. They’re working on a data platform that would enable the transaction of data with tokens. They brought in some high-profile advisors like Takuya Oikawa and Masahiro Ihara, along with a host of talented engineers.

Otsuka envisions Datachain to create a data infrastructure that would optimize existing operations, such as marketing and consulting.


2. Business Portfolio: Consulting, Matching, Blockchain

Speee operates three business segments: MarTech (58% of total sales), X-Tech (42%), and Others (0%). Essentially, the nomenclatures are just catchy ways of saying marketing consulting, matching platform, and blockchain [much like “AI” being used as a byword in hopes of sounding like one is on the cutting edge.]

Services in marketing consulting mainly consist of the following.

  • Web analytics: Consulting aimed at improving SEO, PV, and conversion rates by changing the site content or structure.

  • Trading desk: End-to-end consulting of operations ranging from online ad placements to campaign design.

  • PAAM: Predictive analytics and marketing. Collect, integrate, and visualize customer data across multiple platforms to optimize ad efficiency.

  • UZOU: Native ad delivery platform. An ad network consisting of several hundred advertisers and media. Commissions are based on on the volume of ads placed by advertisers. Service continuation rates exceed 90% once ads are placed on this network.

The business model of marketing consulting is to (1) receive consulting fees, or (2) take a cut of the client’s marketing budget by handling all or part of their operations. The data collected from operations are stored in an internal system.

Matching platforms mainly include the following.

  • Ieul: One-stop real estate price estimation website. Matches sellers with up to 6 brokers. Gathers sellers from the platform and refers them to brokers in exchange for referral fees. Sellers use the platform because it allows them to get price estimates from multiple brokers at once.

  • Nurikae: Exterior wall painting matching platform. Individuals are matched with renovation service providers via online information and offline support. Over 700 registered service providers. Commissions are received upon referral and contract.

Others consist of the following:

  • Datachain: Uses blockchain technology to offer the following solutions: (1) transfer of ownership using NFT, (2) improvement of transparency in data transactions using blockchain, (3) automatic execution of conditional data transactions, and (4) secure key management in a blockchain network.

  • WorQ: Operated by subsidiary ThinQ Healthcare. Freemium project management software. Back-office support (e.g. to-do lists, task templates, deadlines and reminders, integration with Slack/Teams).


3. Growth Strategy

Presumably, Speee’s moat is the data it has accumulated from its consulting clients and users of its matching platforms. The data is combined with its matching algorithms to enable better prediction. Growth will likely hinge on using that data to optimize solutions for existing and new clients.

But, Speee’s LT growth driver is Datachain, its blockchain and NFT subsidiary [for which co-founder Hisada serves as CEO]. Speee’s success hinges on scaling its existing operations, so as to do two things: build its war chest to invest in Datachain (to fend off future competition), and collect more data from a broader group of clients in order to create a bigger network effect later on.

I understand that its existing operations hinge on (1) No. of clients, (2) Fees per client, and (3) input costs (i.e., SG&A such as personnel and advertising), the byproduct of which is for (4) access to locally-stored data. The secret is that (1)~(3) are only a means for obtaining (4), the key to unlocking value down the road.

In Q1 FY21, the marketing consulting segment posted sales of ¥1,634mn and OP of ¥462mn (OPM: 28.3%). The matching platform segment posted sales of ¥1,192mn and OP of ¥269mn (OPM: 22.6%). Net margin overall was 5%. Margins aren’t that bad, and there are cash and deposits totaling about 12% of market cap.

The problem I have with Speee is the slow growth in the number of employees (272 in FY9/18, 295 in FY9/19, and 325 in FY9/20). I assume that’s partly responsible for its modest sales growth (FY19-FY21coe CAGR: 23.2%).

With the solid profit margins and cash balance, Speee should be hiring more personnel to expand its consulting and matching platform operations. The key is to gather data from as many clients and users as possible before the market gets too crowded with competitors, especially from overseas.

In short, by scaling the business a faster and building a bigger war chest, Speee would be able to move more aggressively in its blockchain business when the time is ripe. At this stage, its focus should be to expand the number of clients while maintaining or increasing the current fees. To do so, I think the best approach is to allocate the sizable cash balance to ramp up hiring activities.


Key takeaways

  • Overview: Speee operates marketing consulting, matching platform, and blockchain businesses. Notably, it operates Ieul, the largest matching platform in Japan that connects real estate sellers and brokers. Recently, its share price has surged after announcing that its blockchain subsidiary, Datachain, has partnered with NTT Data (9613) to conduct experiments.

  • Business Model [Score: 3/5]: Revenues for the consulting business are based on consulting fees and consignment fees. Revenues for the matching platforms are based on referral fees. Both operations have solid operating profit margins: 28.3% and 22.6%, respectively. The blockchain business makes miniscule revenues and runs losses.

  • Moat [Score: 4/5]: Speee’s moat is the locally-stored data it collects from consulting clients and user data it gathers from its matching platforms. Down the road, it envisions creating a data infrastructure using blockchain technology to optimize existing operations and new businesses.

  • Strategy [Score: 3/5]: I would personally like to see a little more aggressive spending on hiring activities. Cash and deposits stand at approx. 12% of market cap. Management should consider ramping up activities to gather more clients before competitors start to crowd the market.

  • Valuation [Score: 3/5]: The stock doesn’t look cheap. Perhaps there is upside near term by expanding Ieul services into new verticals like FSBO. But, based on its current business lineup, the rich valuations seem to hinge largely on its blockchain startup, which still runs losses.


Reference


Income statement


Balance sheet


Governance

The co-founders and KK Print (which I believe is their asset management company) collectively own nearly 77% of the company. Adding director Shoji Watanabe’s shares to that would render a total of about 84%. Jun Hasebe, Chief Strategy Officer at COLOPL, serves as Outside Director.


Relevant links


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