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Estore Corporation (JP-4304) TSE JASDAQ ( I )

2018-10-09  提供機構:FISCO  作者:FISCO  點閱次數:2

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◆Summary

Adding marketing systems to EC systems and marketing services, and aiming to accelerate growth through these three businesses’ synergies

Estore Corporation <4304> (hereafter, also “the Company”) is a comprehensive provider of e-commerce (EC) support services. After starting from the Systems Business for the provision of ASP services as a framework for EC, it is currently focusing on consulting and operations management agency services to support revenue growth at customer companies. Going forward, it plans to strengthen sales promotion systems.

1. Although sales decreased in FY3/19 1Q, profits increased greatly

In the Company’s FY3/19 1Q results, although sales decreased slightly, profits increased greatly. Net sales were ¥1,206mn (down 1.0% year on year (YoY)) and operating profit was ¥144mn (up 33.5%). Sales declined slightly YoY because marketing services revenue and flow revenue within sales systems were sluggish. On the other hand, profits increased greatly, as the costs relating to growth investment, such as to acquire and develop human resources, were less than expected due to the delay in progressing this investment because of the impact of the labor shortage and other factors.

2. The essence of the growth strategy is realizing synergies from the three businesses; aiming for growth through increasing flow revenue

The Company’s business domain is EC support services, while for its specific business strategy, it has established a strategy of conducting its business on dividing it into four quadrants created from two axes; sales and sales promotions, and systems and services. In the fall of 2017, it launched Compare and Query, which are MA (marketing automation) tools, and started a marketing systems business, and it is aiming for growth through combining its three businesses, of this business and sales systems (the ASP service Shopserve) and marketing services (consulting and operations agency services). The essence of its growth strategy is to aim for mutual cooperation between these businesses and to pursue synergies. At the present time, the core of the growth scenario is to sell marketing services and marketing systems to Shopserve’s existing customers, to realize sales growth at customers, and then to increase the flow revenue that is linked to their sales.

3. Forecast is for higher sales but lower profits in FY3/19; from FY3/20 onwards, the focus will be on accelerating the increase in profits through growth investment and the restructuring

The Company conducted a large-scale restructuring in August 2017 to appoint young employees to executive posts throughout the Company. Even while accepting some opportunity loss, it carried out this upfront investment toward the timing of the return for the next high-growth recovery. The effects of this restructuring have clearly been seen in the past one year when speaking from the points of the ability to act and the ability to act immediately. Going forward, if these employees also acquire the ability to make and execute decisions, then there is the sense that the restructuring will achieve the results it initially intended. As previously mentioned, the Company will also conduct growth investment to acquire and develop human resources, so the forecast for FY3/19 is for higher sales but lower profits. But at FISCO, we think that this thorough investment in the current fiscal period in the costs to acquire human resources toward growth in the future will lead to an increase in shareholder returns in the medium to long term.

◆Business overview

Steadily strengthening the revenue base and customer base by shifting the focus business every seven years In 2018, is taking on the challenge of the fully fledged deployment of marketing systems

1. Company history and shifts in the focus business

Since the Company was established in 1999, it has grown by shifting its focus business roughly every seven years. As each business hit its stride and reached the stage of establishing an earnings base, the Company would use these earnings to expand into creating a new business to contribute to earnings in a repeated cycle. The details are given below, but the current year of 2018 is the period to shift from the third to the fourth cycle.

(1) 1999-around 2006

The Company’s business first started from shopping cart services. After that, it started the provision of rental servers that are needed in order to establish a website, and the rental server business became the main support for the Company’s early days. While retaining the rental server business as its core operation, the Company rolled out a series of services needed for conducting e-commerce in addition to its shopping cart services. These paved the way for the Shopserve ASP service providing comprehensive EC support, launched in 2006.

(2) 2006-2012

Over the seven years from 2006, the EC systems business in the form of the Shopserve ASP service providing comprehensive EC support became an earnings source for the Company. Shopserve is an ASP service that provides, as a single service, management of elements such as the store’s website, domain, email, payments, ordering, and customers. In terms of its revenue model, the Company collects monthly fees for the usage of the ASP service from customers, so it can be said to be a so-called stock-type model. Stock revenue is very effective for stabilizing the management foundation. The Shopserve customer base has steadily expanded and contributed significantly to the Company’s growth and management stabilization.

Once the EC systems business hit its stride, the Company began a parallel project of supporting the growth in sales at customer companies and expanding revenue by collecting a fixed percentage of net sales from customers as payment agency commissions (via store websites on Estore’s Shopserve). This type of revenue is described as flow-type revenue and is distinguished from the monthly fees from Shopserve (stock revenue) in revenue management, even though the revenue comes from the same customers.

(3) 2012-2018

The net sales from existing customers (EC system customers) expanded steadily, with a good compositional balance between stock revenue and flow revenue. Meanwhile, the Company began strengthening the Marketing Business with an eye to developing it as the core business for contributing to earnings. This involved commer­cializing the Company’s sales promotion support expertise for effectively expanding customers’ net sales. The two main points were 1) “commoditizing” its sales promotion support expertise and policies and acquiring fees from consulting and operations management agency services, and 2) selling these services to customers other than existing customers (EC system customers).

The Marketing Business initially consisted of two businesses, the “sales promotions business,” which provided consulting and operations management agency services, and the “media business,” which managed the PARK EC shopping mall. The Company has positioned the sales promotions business as the business domain it should focus on the most. It distinguishes it from the marketing systems business described below and it currently calls it the marketing services business. On the other hand, it has positioned the media business as a non-focus business, because it has powerful rivals, like Amazon, and it has fulfilled a certain purpose.

(4) From 2018 to the present day

While the previously mentioned Marketing Business is mainly sales promotions, it also covers creations for sales (including website production), and the key point is that the content of these services is created through the work of employees, such as consultants and website designers.

Therefore, the Company has been working on systems development for sales promotions, and in the fall of 2017, is began to provide two software packages, Estore Compare and Estore Query (in some cases, they are collectively called the Back Store Group). This sales promotion systems business is called the marketing systems business, and although it is the same as the sales promotion business, it is distinguished from the marketing services business that is conducted by a work force. From 2018, the Company’s strategy has been to fully expand sales of marketing systems, which is expected to lead to profit growth.

Deploys its businesses in four quadrants created from two axes; sales and sales promotion, and systems and services

2. The shift of the business segments and the current revenue structure

Reflecting the shift in the business field that it is focusing on as previously explained, the Company has changed its business segments and disclosure of their information.

The Company previously adopted a dual business structure comprising the Systems Business, which included the rental server business and the EC systems business, and the Marketing Business, which supported expansion of customers’ sales. However, in FY3/17, the Company merged the two businesses and shifted to a single EC Business segment. The reason for this change was that the objectives of these two previous businesses were the same, of supporting the growth in sales at customers, so the significance of distinguishing between them had diminished.

So the Company now has only one business segment, but its business domain can be divided into four quadrants created from two axes; sales and sales promotion, and systems (machinery and software) and services (human labor). Following the launch of the marketing systems business, it has in place a structure covering all four quadrants (please refer to the medium- to long-term growth strategy section).

Based on this, from the FY3/18 results, the Company has disclosed results by business type and by revenue type, and it discloses the breakdown of net sales by dividing them into from marketing services, sales systems (which are further broken down into flow and stock), sales promotion systems, and the media business. Revenue from the rental server business is included in sales systems, but this business is contracting and its impact on revenue is limited.

◆Results trends

Although sales decreased slightly, profit items from operating profit down increased greatly

• Summary of the FY3/19 1Q results

In the Company’s FY3/19 1Q results, sales decreased slightly but profits increased greatly, with net sales of ¥1,206mn (down 1.0% YoY), operating profit of ¥144mn (up 33.5%), recurring profit of ¥143mn (up 35.1%), and net profit of ¥97mn (up 36.0%).

For its FY3/18 full fiscal year results, the Company achieved higher sales and profits that greatly exceeded the initial forecasts, with net sales increasing 5.6% YoY and operating profit rising 36.1%. However, it is not the case that the Company was simply pleased with this performance as positive results. Although sales rose as targeted, the reason for the increase in profits was that it was not able to make progress in investing in the costs for growth investment as it had planned. For the Company at the present time, investment in growth means acquiring human resources. It is attempting to recruit human resources who already possess a certain level of skills and then to further develop them, but this is not progressing as planned (this situation has continued for the last few years).

The initial forecasts for FY3/19, which once again incorporated the implementation of growth investment, were for higher sales but lower profits. But in the 1Q results, while sales decreased slightly, profits increased greatly, which was the same structure as in the previous fiscal year. Therefore, naturally the Company’s own evaluation is the same as in the previous fiscal year.

Looking at the breakdown of net sales by business, marketing services net sales were ¥267mn (up 12.0% YoY). Compared to up to the previous fiscal period, the growth rate in FY3/19 1Q slowed down. This was because the Company was unable to acquire contracts for large-scale customers to the same extent as in the previous fiscal period, and it was also unable to make progress as planned for its aim of strengthening human resources toward business expansion (by acquiring human resources from outside the company or developing them inside the company), which seems to have kept down the growth in net sales.

Within sales systems, which is revenue from the ASP service Shopserve, stock revenue decreased 7.1% YoY to ¥442mn. In a situation in which a certain percentage of the approximately 12,000 existing contract holders cancel their contracts, for the acquisition of new contracts, the Company is focusing on the number of large-scale customers. As a result, a situation is continuing in which stock revenue is declining due to the net decrease in the number of contracts, but this in itself can be said to be in line with the Company’s expectation.

Flow revenue decreased 1.7% YoY to ¥486mn. Flow revenue is a major pillar of the Company’s growth strategy; therefore it is necessary to treat this decrease seriously. However, at FISCO we do not think it is a cause for concern, as the distribution amount per customer, which is the main source of flow revenue, increased 8% YoY, and we can say that flow revenue will also likely grow from the expansion in marketing services in the future.

Marketing systems (sales promotion systems) net sales were ¥2mn. The marketing systems business was launched in the fall of 2017 and fully fledged sales growth started from FY3/19. While it seems that ¥2mn is less than the Company expected, the feedback from customers using the services has been good, which can be expected to add momentum to customer numbers and sales in the future.

◆Medium-term growth strategy and progress

Deploys three businesses–EC systems, marketing services, and marketing systems–and is aiming for growth through pursuing synergies between each of the businesses

1. Overall image of the growth strategy

As described in the business overview section, since it was founded the Company has repeatedly shifted the business that serves as the main axis of profits, and thereby expanded the scope of its business, on a cycle of approximately seven years. It newly started the marketing systems business in the fall of 2017, and as a result, it currently has a three business structure, of EC systems, marketing services, and marketing systems.

On the other hand, the Company’s business domain can be divided into four quadrants created from two axes; sales and sales promotion, and systems (machinery and software) and services (human labor). The start of the marketing systems business means it has a structure in place that covers all four quadrants.

There is no doubt that each of the four business domains, from A to D, are important. But it is not the case that A to D exist separately (independently) from each other on the same plane, but rather that they are related to each other in various ways, such as having causal, substitution, and complementary relations. It can be said that they have an image close to the reality of a three-dimensional and multilayered existence according to their respective relations.

At FISCO, we do believe it is crucial to consider the Company’s growth strategy while constantly keeping this image in mind. This is because while there is no doubt that it is aiming to grow each of the three businesses as its growth strategy, on taking one more step beyond this, we see that the essence of its growth strategy is pursuing synergies by actively utilizing the relations that exist between these three businesses (or the four domains, from A to D).

The details are given below, but when looking on a medium-term time axis (assuming around three to five years), as a result of the growth measures that the Company is implementing for each business, at FISCO we expect it to realize its strategy in the form of the growth of flow revenue within EC systems and the growth in sales of marketing services that are highly related to this business. Looking at this from the opposite direction, the growth in these two types of sales is a key performance indicator (KPI), and it is not possible to evaluate profit growth without this indicator. On the contrary, if this KPI is present, then profits are sure to follow, whatever the profits at hand. We think that this is precisely the reason why in the last few years, the Company has focused on conducting growth investment even though this has meant having to sacrifice profit growth in the short term.

Aiming to once again accelerate the growth of flow revenue from synergies between marketing services and marketing systems

2. The EC systems growth strategy

The fundamental product in EC systems is Shopserve, which is an EC comprehensive support ASP service. It is an ASP service that integrates into one all of a store’s sales-related elements, such as its website, domain, email, payments, ordering and customer management. Its revenue model is that the Company collects monthly ASP service usage fees from customers, and this revenue is recorded as stock revenue. The Company supports the expansion of sales at customer companies, and it concludes contracts with Shopserve customers to collect a certain percentage of their net sales (via the store’s website on the Company’s Shopserve site), such as in the name of payment of agency fees. This sales-linked revenue is recorded as flow revenue. Since stock and flow are different types of revenue, naturally their growth strategies will also be different.

(1) The stock revenue growth strategy

Stock net sales are calculated as the product of the number of Shopserve contracted customers and the average spend per customer. Within these two, the Company has stated that it does not focus on the number of contracted customers and that rather, it focuses on raising up the average spend per customer.

Two conceivable approaches to increasing average spend per customer are changing the composition of the customers (increasing the ratio of large-scale customers) and raising the level of monthly fees by expanding the services used by the existing customers. The Company is working on both strategies but is focusing on the former. Under a slogan of “shift to good products, good stores,” the Company is approaching the acquisition of new customers by thoroughly focusing on stores that handle competitive products, stores with high profit growth potential, or medium-sized companies with large sales revenue and high monthly fees.

These measures have gradually borne fruit, with the average spend per customer steadily increasing. However, the declining trend in the number of customers continues. As a result, stock revenue is also continuing to trend downward. But the Company itself considers this point to be as expected and that it is absolutely not a cause for concern.

As described below, the policy of “shifting to good stores and good products” is also in order to grow flow revenue. In other words, even if the decline in stock revenue continues, this will be actually recovered by the increase in flow revenue. It would seem that this is one of the reasons why the Company is not concerned about the decline in stock revenue.

(2) The flow revenue growth strategy

As previously explained, flow revenue is actually one of the main engines that drive the Company’s growth, and it can be said that how to realize this growth is one of the priority issues for management.

The current state of flow revenue is that it is approaching a plateau, and so a key point will be whether or not the Company can get beyond this and return to a growth path.

Its two main initiatives are 1) supporting the marketing of existing customers and realizing their higher sales and 2) changing the customer company mix and increasing the percentage of customers with large sales.

In approach 1) the Company has made agreements with existing Shopserve customers in the marketing services business. With this initiative, an increase in customers’ net sales leads to expansion of the Company’s flow revenue. In essence, this approach is to pursue synergies between flow revenue and marketing revenue.

Approach 2) involves a compositional change by company scale in the Shopserve subscriber companies by advancing the stock revenue structural reform initiative “shift to good products, good stores.” With this initiative the Company is able to improve both stock revenue and flow revenue together.

In addition to these approaches, going forward we can expect flow revenue to grow from the synergies with the marketing systems business. Both Compare and Query (described below) provided through the marketing systems business are sales promotion support tools that aim to increase their users’ sales. With FY3/19 as the first year of their fully fledged deployment, the Company’s policy is to focus on sales to existing customers (in other words, customers who already have a Shopserve contract).

 

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