ORO (3983) | First Look

Share Price: ¥3,540, Market Cap: $550m, EV/Rev: 10x

ORO is a provider of ERP (Enterprise Resource Planning) software for small service sector companies – typically IT, Advertising, and Consulting firms. Japanese corporates have fallen behind in introducing ERP software to address sales, sourcing, accounting, planning, and production. This under-investment has caused severe productivity gaps in back-office functions. However, with growing awareness of digital transformation (DX) in Japan, companies are now adopting new technologies to lower costs, improve operational efficiency, and give management greater visibility and accuracy in decision-making. ORO provides an integrated ERP system for its chosen service sector niche.

MODEL

Over the past ten years, Oro’s sales have grown at a CAGR of 12%. For the current FY12/21, revenue is guided to reach ¥6.1b (+16% YoY) and operating profit to hit ¥1.9b (+13% YoY). The company has two divisions: Cloud Solutions (~60% of sales) and Digital Transformation (~40% of sales).

The Cloud SolutionsBusiness has two project-focused ERP software solutions, where IT and consulting clients are largely project driven. The main product, ZAC, is geared towards companies with 50-300 employees. The product has up to 15,000 parameters, which can deliver all functions without the need for additional software development. Oro supports product installation by providing in-depth training for the first 3-5 months. Reforma, the 2nd product, targets start-up firms with up to 50 employees. Reforma has subset of the functionality of ZAC, with limited support and user training.

The number of active licenses for ZAC has grown incrementally every quarter to reach 209,000 currently, spread over 1,000 companies.

The pricing model of ZAC consists of three components: (1) an initial one-time licensing fee based on the number of users (2) a fee for training and support, and (3) a recurring monthly charge. Reforma's pricing basis based on a straight monthly subscription, with no upfront charges. The DX business provides a full suite of services that help design and implement client online marketing strategies. This includes marketing promotion, website production, ad optimization, website integration, and various support services. The DX business is focused on two main clients: Aeon and Nissan.

MARKET ORO has narrowly defined its target market for the Cloud Business to IT, Media, and Consulting companies with 50-300 employees. This totals around 44,000 firms. Assuming an average number of licenses per company at 200 (around the current average), the TAM would be around 8.8m licenses, worth around ¥64b yen. ORO is initially targeting 4,000 companies. This would imply an annual recurring revenue (ARR) target of around ¥6b versus the LTM recurring revenue of ¥1.4b.

In theory, Germany’s SAP could be classified as a competitor, but SAP tends to target larger global enterprises in Japan. The most direct competitor is OBIC (4684), which offers order-built ERP solutions, competing at the top end of the market with ZAC.

MOAT The competitive moat for ZAC lies in the specialized technology embodied in over 15,000 parameters geared towards industry specific use-cases and functional enhancements. This allows for a high degree of customization for each firm by switching on services quickly, without the need for lengthy software development. This provides both a cost and time advantage over OBIC, which requires individual customisation to be developed from scratch each time.

MANAGEMENT ORO was founded in 1999 by Atsushi Kawata and Yasuhisa Hino, both graduates of the respected Tokyo Institute of Technology, the largest STEM institution in Japan. The founders developed and expanded the firm's scope from website management to the current ERP focus. They have also cautiously expanded overseas into China and SE Asia. The founders hold a combined 9.1mn shares or 58% if the company, worth around $300m. With this stake, management incentives are aligned with long-term value creation.

The strategic focus is to grow ZAC in Japan, looking to quadruple the number of companies using the product. Despite low market penetration, client acquisition is constrained by the lack of consultants required to onboard and train clients. This bottleneck to near-term growth is, however, well recognized by management. Besides seeking to expand hiring, management has been taking short-term measures to get clients on the platform, including guiding them to the Reforma product and looking to work with system integrator partners to assist with training. Oro continues to hire engineering talent to further develop the core product offering. ZAC integrates with accounting software such as Freee and Money Forward, where ORO does not have any strength. Further development will be focused on additional integrations that are useful to clients but are not part of the ZAC menu. ORO has taken a proactive but cautious approach to overseas expansion. Currently, they have 100 employees in China and SE Asia, mainly focused on the DX business. Eventually, this will expand to ZAC and is likely to involve working with local partners.

VALUATION ORO trades at an LTM EV/Rev of 10x versus the domestic peer group median of 14x. A score of 54% for the Rule of 40, is primarily due to the higher margins. The valuation discount may be due to its lower revenue growth at just 12% in the most recent quarter. The valuation discount suggests that the market is focused more on near-term top-line growth - management may need to solve its bottle neck in customer acquisition to command a premium valuation.