*The share price is the closing price on May 11. The number of shares issued, ROE, DPS, EPS and BPS were taken from the brief financial report for the term ended in January 2018.

 

*The forecasted values were provided by NEOJAPAN Inc. The Company split shares at ratios of 200 for 1 as of Sep. 8, 2015, 3 for 1 as of Feb. 1, 2016, 2 for 1 as of July 1, 2017, and 2 for 1 as of Nov. 16, 2017. EPS as well as DPS has been recalculated retroactively. The commemorative dividends of 1.00 yen per share were included in the dividends paid in the term ended Jan. 2018.

This bridge report includes the overview of NEOJAPAN Inc., interview with President Saito, and other matters.

 

 

With the managerial philosophy: "Contribute to the formation of an abundant society through real IT communications," NEOJAPAN Inc. is assisting companies in improving operational efficiency and cutting down on costs through development and sale of "groupware (*)," an online technology-based business communication tool, and provision of cloud services. The cumulative total number of users of its major "desknet's" product stands at 3.7 million (as of the end of January 2018). A multitude of aspects of "desknet's," such as the price, functions, reliability, and support system, have been well reputed, gaining the greatest satisfaction rating from customers and sales partners (in the groupware category; according to the magazine Nikkei Computer). The Company has embarked on entering overseas markets, aiming at further growth. (What is groupware?) Groupware is software developed for information sharing using the network of a company. On the server of the network set by an administrator, the members of a group can share information, manage schedules, and share document information databases. For example, when a schedule for a meeting needs to be arranged, groupware enables its users to grasp the schedules of group members at a glance, easily register dates when each of them is available in a timetable, send and receive e-mails about various matters and decisions, and share documents. The number of companies and organizations that are propelling introduction of groupware keeps going up these days because of its useful aspects, including improvement of operational efficiency, cost reduction, speed-up of decision-making, and cross-departmental information sharing. 1-1 Corporate history Mr. Akinori Saito (current Representative Director and President of NEOJAPAN Inc.), who engaged in research into optical communication systems with extensive know-how of communication technology for which he was highly acclaimed at Nippon Telegraph and Telephone Public Corporation (Current NIPPON TELEGRAPH AND TELEPHONE CORPORATION), transferred to a medium-sized software company in Japan, and then participated in a communications and infrastructure project led by Tokyo Electric Power Company Holdings, Inc. (TEPCO) and served as chief technology officer. At that time, Mr. Saito, who was among the first to take interest in the Internet that was barely understood and wholly new, was attracted to the possibility that he might be able to make a massive change in the society with the Internet. In 1992, therefore, after the abovementioned project was completed, he founded NEOJAPAN Inc. at the age of 29. At the beginning, NEOJAPAN conducted development entrusted by TEPCO and other electric power companies. Then, President Saito by himself developed a calendar system, which is one of the functions of groupware, in order to manage schedules of outsourced work. The calendar was very practical, and he received requests from outside companies for permission to use the calendar system. In those days, although groupware had already been developed, it was designed only for large companies and available at a high price; however, thinking that it was possible to develop groupware at the cost of one-tenth of such expensive software and, more than anything else, that groupware was truly convenient and, therefore, a number of small- and medium-sized companies would be willing to use groupware if one was offered at a low price, President Saito started to sell NEOJAPAN's original groupware "iOffice2000" in 1999 and, in 2002, released its successor model, "desknet's." Issuance of the license and downloading of the software were conducted via the Internet, which is taken for granted today but was an epoch-making sales method around that time. The Company successfully took in the needs of companies that were reluctant to adopt the software as expected, and its business expanded rapidly. NEOJAPAN began offering "desknet's NEO," its current major product, in 2012 and released the cloud version in 2013. The cumulative number of users has exceeded 3 million. Considering that it is necessary to strive for corporate management that is healthier than ever before in order to fulfill the social responsibility towards numerous users, NEOJAPAN got listed on TSE Mothers in 2015. 1-2 Managerial philosophy, etc. NEOJAPAN Inc. engages in business with the aim of supporting all workers and contributing to social prosperity through development and sale of online technology-based business communication tools. With ideas that overthrow the established theories and attentiveness unique to Japanese companies, the Company is endeavoring to continuously provide high-quality products and services to society. (Origin of the Company's name) The Company has been named "NEOJAPAN (which means a new Japan)" in hopes of bringing advantages of superior information technology (IT) not only to some advanced companies but also to all companies, and changing communication between Japanese companies and the society using the power of computers. 1-3 Market environment ◎Trend in the groupware market The groupware market in Japan was worth 116.0 billion yen, accounting for about 10% of the Japanese software market worth around 1.2 trillion yen in the fiscal 2016 and creating a relatively large market. The groupware market will grow to 198.6 billion yen by fiscal 2021, with an annual growth rate estimated at 11.4% which exceeds the 6.7% growth rate of the entire software market. While it is projected that sales of the product version that requires an installation of a server by each company will decrease, sales of the cloud version which does not require any initial costs and is easy to install are expected to keep growing at an annual rate of 13.3%. 1-4 Business content With a focus on its major groupware product, "desknet's NEO," NEOJAPAN develops and sells various products and services, including business chat, online databases, online e-mail systems for companies, systems for sending and receiving large-capacity files, sales management systems, and customer information management systems. Sales are made up by the following 3 segments; the "cloud services" that provides groupware and related products via the Internet, the "products" that sells the license for the groupware and related products, and the "technological development" that develops software as commissioned by other companies. (1) "desknet's NEO," the major product As mentioned in 1-1 Corporate History, NEOJAPAN has thrived by developing and selling groupware, and what will grow its business further is the groupware product, "desknet's NEO." "desknet's NEO" is one of the groupware developed independently by NEOJAPAN that consistently follows a thorough "hands-on approach." The software has incorporated design features suited to the work styles and commercial practices in Japan, aiming to contribute to the revitalization of companies as well as boosting daily operational efficiency, and possesses the following characteristics: (Characteristics) *Usability The simple and consistent screen design has established an interface that is easy to see and use by anyone, including those who are new to the groupware. The "user-friendliness" and "simplicity" of "desknet's NEO" improve the situations of the working sites and supports work. Users can use the groupware without stress on multiple kinds of devices, such as smartphones and tablets. *High performance In addition to basic functions, including schedules, information, and online e-mail, 25 full-fledged applications which are capable of dealing with workflow, internal SNS, and global design have been installed by default. The applications are coordinated with each other. "desknet's NEO" not only possesses various functions, such as schedules, booking of meeting rooms, and e-mails but also, outside the scope of groupware, offers solutions to issues confronted in working sites. 25 applications installed by default Furthermore, use of "AppSuite," a tool with which custom-made business apps can be created, enables users to build apps in 4 steps based on a wide range of on-site operations. Apps so developed can be used as one of the functions of "desknet's NEO," and therefore, on-site business processing can be further streamlined according to the situations of each company's work sites. *Adoption cases A multitude of companies and organizations, including over 820 public agencies and local governments in 47 prefectures in Japan, have installed the groupware, regardless of industries, business types, and scales. The cumulative total number of users (accounts) have reached about 3.7 million (as of the end of January 2018). (Form of providing the groupware) The groupware has been offered in 2 forms: the cloud version and the package version. Lately, however, the cloud version of the software is showing a significant growth, following the soring needs by companies, such as "unwillingness to spend time and effort in installing groupware," "unavailability of dedicated administrators due to a lack of staff who have extensive knowledge and experience regarding IT," "desire to operate in a reliable security environment," and "desire to cut down on initial expenses and operational costs as much as possible." (Sales structure) NEOJAPAN itself sells its products and services; however, the Company specializes, in principle, in development and its products have been sold mainly via a total of about 600 agencies and Application Software Providers (ASPs) (*), who are referred to as partners. (*) Application Software Providers (ASPs) An Application Software Provider (ASP) is an operator that engages in the business of providing functions of application software as services to customers via networks. (2) Sales segment ① Cloud services NEOJAPAN offers the groupware products and services developed by itself, with "desknet's NEO" deemed its major product, and related products on demand at a low price and in a highly reliable cloud environment. As long as an Internet environment is available, users can use the services without any special investment in systems, such as servers, or knowledge about systems. Customers are required only to pay a monthly fee or an annual fee for the number of users who will use the services, and they need not pay any initial expenses. The minimum number of users for subscription is 5, and no upper limit has been set. The monthly fee per user is 400 yen, which is the lowest in the cloud services industry. ② Products The Company sells the licenses for its groupware products and services, including the major product "desknet's NEO," and related products. It also provides incidental services, such as customization, labor services, and support services. Customers purchase the licenses and then install the groupware products and services in relevant internal servers, virtual environment, rental servers, and cloud environment. The "Small License" and the "Enterprise License" are available to small- and medium-sized customers with 5 - 300 users and large-sized customers with over 300 users, respectively. ③ Technological development The Company engages in development of individual business applications related to the Internet and Intranet as outsourced by other companies, comprehensively offering a variety of system-related services, ranging from consulting to planning, designing, development, and network infrastructure establishment regarding application systems. With the aim of cultivating techniques, the Company accepts orders mainly for development projects that are expected to lead to development of products and services for the "cloud services" and "products" segments. 1-5 Characteristics and strengths ① Great customers' and sales partners' satisfaction According to the survey conducted in 2017 by Nikkei Computer, NEOJAPAN Inc. earned higher scores than the averages in all the items in the groupware section and ranked No. 1 in 4 items: "cost," "reliability," `support," and "serviceability." As a result, NEOJAPAN was judged, for 3 years in a row, that it gained the highest customer satisfaction. The Company was also highly regarded by its sales partners, obtaining the top scores in 6 items, including "price competitiveness," "profitability," "technical support," "point of contact," "flexibility," and "delivery date," and taking the greatest partner satisfaction. Nikkei Computer said that there were no other products but NEOJAPAN's product that earned the highest satisfaction from both customers and sales partners. The Company has taken a considerable lead in the industry with not only its outstanding technological abilities realized by the fact that about 60% of its employees are working in development-related departments, but also its comprehensive capabilities, including the user-friendliness and support structure. ② Competitive edge with services and costs Considering the main players in the groupware market, leading vendors, including foreign companies, have held a large market share; however, NEOJAPAN has a competitive edge with services and costs, which has led to the abovementioned satisfaction rating. As for functions, products of Japanese vendors have garnered higher reputation than those of foreign companies because support provided by foreign companies, such as localization (systems supporting Japanese, and commercial and business practices in Japan), is not satisfactory. Twenty-five basic applications have been installed in the systems of NEOJAPAN by default, which has topped the number of functions in services offered by other Japanese vendors. Installation cost and cost per unit of foreign vendors' products and services tend to be expensive because they are targeted chiefly at large companies. The introduction and operating costs of NEOJAPAN's systems are the lowest in the industry, with the monthly fee for the cloud services being about one-half and that for the products (installation basis, including on-site hardware services) also being approximately one-half of other Japanese vendors' systems. ③ Business model that realizes stable earnings Fixed costs are kept at a low level as the Company's products are sold mainly via partners. Furthermore, in addition to the fact that, once the Company's products have been adopted, multifarious customers continue to use them because of the user-friendliness and low cost, another characteristic of NEOJAPAN is a recurring-revenue business in which sales rise every month on a cumulative basis mainly through monthly billing, a business model that realizes stable earnings. 1-6 Shareholder return NEOJAPAN has deemed shareholder return as an important business challenge and raised the rough indication of the dividend payout ratio to over 20% from the conventional ratio of over 10%. In addition, the Company carries out a shareholder benefit program, in which it presents quo cards worth 500 yen to shareholders holding100 shares or more but less than 200 shares, and 1,000 yen's worth of quo cards to shareholders who hold over 200 shares as of the end of an interim period and the end of each term, respectively.

 

 

Sales and profit increased nearly as forecasted. Sales grew 9.2% from the previous term to 2,312 million yen, hitting a record high. Sales in the cloud services and technological development segments increased by double digits. Operating income stood at 432 million yen, up 10.4% from the previous term. The rise in various fees, including fees for using the data center and license fees, boosted cost of goods sold by 10.1% from the previous term, while profit showed a double-digit growth with selling, general and administrative (SG&A) expenses, which rose due to the increasing advertising expenses and the transfer to the first section of TSE, being offset by the effect of the sales increase. The business performance was near as forecasted, achieving sales and profit growth for 6 consecutive terms. *Cloud services The number of users of the cloud version of “desknet’s NEO” exhibited a steady increase, reaching 200,000 as of the end of January 2018. In addition, the Company has retained over 150,000 users via ASPs. *Products Sales of the Small License for the products targeted at small- and medium-sized users shrank by 16.7% from the previous term. Sales of customization grew healthily by 13.7% as the Company earned orders for large-scale projects. Support services also showed a steady rise. *Technological development The Company accepted orders for development projects that may be linked to its products. Current assets went up by 148 million yen from the end of the previous term due to several factors, such as a rise in cash and deposits. A growth in investment securities boosted noncurrent assets by 216 million yen from the end of the previous term, resulting in total assets of 4,092 million yen, up 365 million yen from the end of the previous term. Other payables and unearned revenue rose, which grew total liabilities to 971 million yen by 71 million yen from the end of the previous term. Net assets stood at 3,121 million yen, up 294 million yen from the end of the previous term due to the growing retained earnings. As a result, a capital-to-asset ratio was 76.3%, up 0.4% from 75.9% at the end of the previous term. Operating CF grew further due to the profit increase. Although a further decline in investing CF resulted from the increase in purchase of intangible assets, free CF remained in surplus. Earnings from issuance of shares shrank, turning financing CF into deficit. The cash position improved. The Company expects sales and profit to increase for 7 consecutive terms, aiming to mark record highs. Sales are estimated to be 2.6 billion yen, up 12.5% from the previous term. NEOJAPAN forecasts sales increases in all of the 3 business segments. Operating income will grow 13.7% from the previous term to 491 million yen. Sales and profit are expected to rise for the 7th consecutive term. The amount of dividends is scheduled to be 5.00 yen per share, up 0.50 yen per share as the commemorative dividends of 1.00 yen per share were included in the dividends of 5.50 yen per share distributed in the previous term. The payout ratio is to be 21.8%. (Managerial policies, managerial measures) To continue enriching functions of the existing products and strengthening the development of new products, "AppSuite" and "ChatLuck," with the aim of making them profitable as early as possible To steadily grow a stable earnings model by expanding market share of products and services designed for enterprises, which the Company specializes in, to the stable stock-based business of the cloud services and support services With the aim of a healthy growth of the cloud services, to organize and strengthen a management system that enables the Company to provide the cloud services on a stable basis To enhance sales and marketing capabilities, and to address a new core challenge of nurturing and strengthening personnel with a particular focus on the development of engineers *Cloud services Along with the expansion of sales of "desknet's NEO," it is projected that sales of AppSuite and ChatLuck will grow through cross-selling. Orders for large-scale projects are expected as well. *Products Sales from public agencies and local governments will exhibit a healthy growth. It is also anticipated that sales of AppSuite will increase through cross-selling. *Technological development The Company predicts sales from outsourced projects for which the Company has already received orders and maintenance projects for existing systems.

 

 

NEOJAPAN has cited the following 3 points as its future growth strategy: (1) Further expansion of share in the groupware market The Company aims to expand its market share by enhancing its sales capabilities and improving added value through higher performance. (Future market environment) With regard to medium-sized and larger offices, it is projected that Japanese leading vendors will not give focus to groupware services, and therefore, the Company will strive proactively to get the market share currently held by other companies, including foreign ones. With regard to small- and medium-scale offices which are expected to adopt groupware in the future, accelerating installation of cloud-based systems that are less expensive and easier to install is anticipated. The Company, thus, will broaden the appeal of its competitive edge with its products in terms of localization, security, and cost performance in order to secure market share. (Specific policies) "Improvement of market awareness" As the Company has focused its management resources on technological development, the "desknet's" products have held a relatively weak presence in the market. Following the realization of transfer to the first section of TSE from the Mothers market, NEOJAPAN will endeavor not only to increase its corporate creditworthiness but also to boost market awareness of its brand. "Enhancement of sales structure/organization of local business bases" Using funds raised through the stock listing, the Company will strengthen its sales structure. It will open offices in various major cities in an effort to attract local partners. "Systemization of services" The Company will move ahead with systemization of its services in order to simplify the installation and management processes, as well as achieve greater efficiency. "Securing human resources" The Company will address a challenge of securing and developing "human capital" that will display a positive attitude toward creation of strong products and new approaches. (2) Improvement of added value through expansion of product lineup Besides the existing 25 default applications, the Company will add functions through incorporation of the latest communication tools and middleware, aiming to differentiate its products and services from those of other companies. Means of business communication are undergoing rapid evolution and change from the conventional e-mail to a multitude of means, such as SNSs and real-time communication of chat. The Company will in earnest enter the field of real-time communication based on Web Real-Time Communication (WebRTC) and opportunely strengthen functions in order to provide products and services in anticipation of user needs. Based on its advanced technological development capabilities, the Company will establish a secure position as a leading company in the industry by continuously proposing and providing new services, ahead of any other competitor. In addition to the existing 25 functions and update of additional functions, the Company has added a business chat function, "ChatLuck." Furthermore, it is considering adding a broad range of other functions, besides provision of the 26th function, "AppSuite," a tool for creating operational applications enable customers to easily build necessary operational applications on their own. The Company will offer system administrators a portal function that can be customized. By allowing existing internal systems to have a portal function, the Company aims to realize the further unity of systems and improvement of user-friendliness. It will strive to take in customer demand for services associated with peripheral functions by taking advantage of the experience of the introduction of "desknet's NEO." (3) Overseas business expansion Starting off with Malaysia, the Company plans to break into the groupware market in Southeast Asia. It is expected that the real GDP of various Southeast Asian countries will grow at a rate of 3 to 6% toward 2020 and the ICT-related markets will boom greatly. The Company has considered that there is room for entering the groupware market in Southeast Asia because of the similarity between the business practices in Japan and those in Southeast Asia (such as the ring decision-making system (requests circulated for approval) and methods for information sharing). The Company has already forged ahead with language localization and plans to sell its products and services in Southeast Asia, starting off with Malaysia. Furthermore, from a medium- and long-term perspective, with a focus on the existing groupware, the Company aims to develop communication tools essential for business and continue to provide products and services that lead the industry at all times.

 

 

We asked the president, Akinori Saito, about NEOJAPAN 's strengths, future growth strategies, messages to investors, etc. Q: "What do you think are the strengths of NEOJAPAN?" A: "Our formidable technical skills. We will continue to develop our abilities to meet the needs of the Internet's ever-changing environment." "Our company's greatest strength is our formidable technical skill. There aren't many companies that specialize on the Internet and have developed software for problem-solving. Although on a small scale, we have continued to grow over the past 27 years by refining our strong technical skills. We will continue to capture the needs of customers, solve problems in the field, and quickly incorporate new technology as necessary. The Internet's environment undergoes constant drastic changes, and we have to adapt to those changes." "Consider the word `metamorphosis.' `Metamorphosis' is the process in which, for example, the egg of a cicada becomes a larva, then a pupa, and finally emerges and becomes an adult, growing and changing shape while responding to the environment. In the same way, our company must keep `metamorphosis' in mind, always studying, always meeting challenges, and polishing our skills. I communicate this to our employees whenever possible." Q: "Can you tell us about future growth strategies?" A: "We will strengthen our sales force and aggressively pursue large-scale markets in addition to the current medium-sized markets. We will also work to develop promising ASEAN markets, starting in Malaysia." "First, we will strengthen our sales force. For companies that are medium-sized or larger, it is expected that major domestic vendors will not view groupware services as efficient investments, and our company will gain a greater advantage. Meanwhile, in large companies, previously there was a strong tendency to avoid cloud environments for safety reasons, but recent advances and the spread of cloud environments has lessened resistance. We are probably the only company that provides large companies with technology which is capable of handling more than 10,000 users on a single server. By using these advantages, we will aggressively pursue large-scale markets in addition to the current small and medium-sized markets." "Government offices and municipalities are also promising customers. There are roughly 4000 government offices and municipalities in Japan, and more than 820 of those are currently our clients. We gained a lot of new clients over the last 3-4 years as a result of the personal identification number system being introduced. Many municipalities are finally recognizing the usefulness of the Internet, and the number of users is likely to increase even further. I don't think that the number of companies and organizations in Japan will increase significantly in the future, but the markets we can develop are extremely large." "Currently, we have around 600 sales partners, but it is necessary to increase that number even further, and expand our support base. In January 2017, we established a sales office in Osaka to strengthen sales and consolidate business structure in the Kansai area, and we also are considering entering other big metropolitan areas such as Nagoya and Fukuoka." "Second, we will expand overseas. We chose to expand into Malaysia first because of factors such as its geographical advantage in central Asia, business practices similar to those in Japan, high IT literacy, and the fact that many Japanese companies, particularly automobile manufacturers, are operating the business there. Regarding the selection of overseas sales partners, field research has been completed, and we are in the negotiations stage with several candidates. Many of our local sales partners are companies which handle Japan-made OA equipment, and we believe that building relationships will be a smooth process. We will work to develop promising ASEAN markets, starting in Malaysia." Q: "Finally, please give a message to shareholders and investors." A: "It's time to plant the seeds that will grow into great flowers, and become a company that everyone knows about. All of our employees are striving toward this goal, so I would like to ask for support from a medium and long-term perspective." A: "It's time to plant the seeds that will grow into great flowers, and become a company that everyone knows about. All of our employees are striving toward this goal, so I would like to ask for support from a medium and long-term perspective." "Currently, the total number of users is about 3.7 million (as of the end of Jan. 2018), but by strengthening the sales force and improving product functionality, we believe that the number of users can reach 10 million in the future. In other words, the majority of working people would be using our products. In such a situation, awareness of the Company and corporate value would definitely improve." "Also, if the number of users grows to that extent, network effects will not only increase work efficiency but will also make it possible to provide users with a variety of added value, such as job matching and providing individual skills. Additionally, even if the user isn't in a big city like Tokyo if similar performance and the rewards that come with it can be obtained by using the communication tool, I think it might provide one solution to `working-style reforms,' currently a widely discussed subject. More than ever, I strongly feel it is our company's important mission to live up to the name, `NEOJAPAN = New Japan." "Although we are now listed in the first section of the TSE, unfortunately, the popularity of the Company is still low. It's time to plant the seeds that will grow into great flowers and become a company that everyone knows about. All of our employees are striving toward this goal, so I would like to ask for support from a medium and long-term perspective."

 

 

NEOJAPAN's shares have been rising well beyond the benchmark since the latter half of the previous year. In addition to the healthy business performance, the transfer to the first section of Tokyo Stock Exchange (TSE) seems to have gained public favor. While the business environment surrounding NEOJAPAN Inc. will continue to be favorable, in order to maintain satisfactory performance under the PER and PBR considerably exceeding their respective market averages, it will be required not only to certainly achieve the targets for this term, but also to make steady progress with the 3 policies of the growth strategy and release them.

 

 

◎ Corporate Governance Report Last update date: Apr. 25, 2018 <Basic Concept> NEOJAPAN's managerial philosophy is to "contribute to the formation of an abundant society through real IT communications." Under the managerial philosophy, all the directors and employees of NEOJAPAN will comply with laws and articles of incorporation, fulfill their respective duties based on healthy social norms, and engage in corporate activities. <Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)> <Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>