*The share price is the closing price on September 21. The number of shares issued, DPS, and EPS are taken from the brief financial report for FY2019 Jan. 2Q. ROE and BPS are based on previous term's results.

 

*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. We present this Bridge Report reviewing the first half of fiscal year January 2019 earnings results and other information about NEOJAPAN Inc.

 

 

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 3.8 million (as of the end of July 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 for 4 years in a row (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 3.8 million (as of the end of July 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 presented in 2018 by Nikkei Computer, NEOJAPAN Inc. won the highest rating in the item "cost" in the groupware section. Also, the Company received high scores in other items, i.e., "reliability" and "serviceability", and was judged that it gained the highest overall satisfaction for 4 years in a row. In addition, the Company was ranked No.1 in the groupware section of "Nikkei BP Government Technology: IT System Satisfaction Survey targeted at Municipalities 2018-2019". 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. The high evaluation from both customers and sales partners has become a strong competitive advantage of the Company's products. 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. ④ Increased efforts in health management NEOJAPAN Inc. offers groupware as its main product that contributes to "Work Style Reform" of the companies that have installed that groupware, for example, by improving their work efficiency and productivity. This company itself is increasing awareness of health management. "Health management" means to think about employees' healthcare from a management perspective and practice it strategically. Based on the corporate philosophy, it is expected that investing in employees' health will lead to revitalization of the organization including better vitality of employees and productivity, resulting in improvement in business performance as well as stock price (taken from the Ministry of Economy, Trade and Industry's website). President Saito, who likes sports, has always spoken to staff members about "the importance of exercise and meals", "balance between work and dream (personal life)", etc., but as mentioned in the top message on the Company's website for stockholders and investors, he has made a commitment to practice and promote health management in the future. "In order to practice the management philosophy and realize operations considering global expansion of the Company, we will improve the work environment, where everyone is sound in mind and body and is able to demonstrate his or her ability to the fullest, and promote health management." (Taken from the Company's website. Some parts have been modified by the writer.) To be more specific, the Company strives to obtain the certification of "Corporation that is excellent in health management", which is designed by the Ministry of Economy, Trade and Industry (METI) and recognized by Nippon Kenko Kaigi, and to be accepted as the "Health management brand", which is selected and announced jointly by METI and Tokyo Stock Exchange. 【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%. 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.

 

 

Double-digit increase in sales and profit. Results exceeded the initial forecast. Sales increased by 16.7% year on year to 1,316 million yen. Business of the cloud services was healthy, and the technological development business showed a significant growth. Although gross profit was 877 million yen, which was almost the same amount as that in the previous year, and gross margin ratio also dropped due to a rise in the software amortization expenses incurred from the release of desknet's NEO V5.0, usage fee for datacenters, license, etc., and the number of personnel as a result of increased cloud services, operating income grew by 23.1% year on year to 307 million yen as advertising and R&D expenses were reduced. (Holding in-house events in the previous term resulted in the decline in advertising expenses year on year, and the rise in manhours for business projects and version upgrade caused R&D expenses to decrease this term, while the expenses were incurred for AppSuite in the same period last year.) Sales and profit exceeded the initial estimates as the sales of the large-scale license of "desknet's NEO" and the licenses of "AppSuite" and "ChatLuck" exceeded the initial estimates and some operating expenses remained unused since the investment period of advertising expenses was changed from the first half to the second half of the fiscal year. *Cloud services The number of users of the could version of "desknet's NEO" exhibited a steady increase, exceeding 230,000 as of the end of July 2018. Sales of the could version of "desknet's NEO" increased by 29.0% to 560 million yen. Sales for ASPs declined by 1.2% from the previous term to 62 million yen. The number of users was over 150,000. *Products Sales of the Small License for the products targeted at small and medium sized users shrank by 11.0% from the previous term to 42 million yen as more customers wished to use cloud services. Sales of the Enterprise License targeted for large-scale users dropped 4.6% from the previous term to 96 million yen. Sales of AppSuite, which was released in October last year, were 24 million yen, exceeding the initial forecast. While there were customization projects for relatively large-scale financial institutions in the previous term last year, sales of customization decreased 76.9% from the previous term to 10 million yen as there was no major project in this term and also the number of projects in the first half of the fiscal year was smaller than the forecast. Sales of the support services of desknet's NEO (including the old products) grew steadily to 264 million yen, up 5.0% from the previous term. *Technological development Sales increased largely through development projects related to electronic commerce site, etc., and maintenance of the system entrusted in past fiscal years. Current assets went up by 108 million yen from the end of the previous term due to several factors, such as the increase in cash and deposits and trade receivables. Increase in investment securities (new acquisition of corporate bonds), etc. boosted noncurrent assets by 113 million and total assets went up to 4,314 million, up 222 million from the end of the previous term. The increase in unearned revenue etc. grew total liabilities to 1050 million yen by 79 million yen from the end of the previous term. Retained earnings grew net assets to 3264 million yen by 142 million from the end of the previous term. As a result, a capital-to- asset ratio was 75.6%, down by 0.7% from 76.3% at the end of the previous term. Operating CF grew further due to the profit increase. Increase in purchase of investment securities, etc., expanded the deficit of investing CF, but free CF remained in surplus. The deficit of financing CF expanded as the payment amount of dividends rose. The cash position improved. ④Topics ◎ Collaboration with MS-Japan. Supporting companies' management section and certified professionals through desknet's NEO and AppSuite In collaboration with MS-Japan Co., Ltd. (First Section of theTokyo Stock Exchange: 6539), the Company started offering "Manegy Senmonka App" and "Manegy News" for the users of groupware "desknets's NEO" and "AppSuite", a business application creation tool, in August 2018. Both companies strive to expand the service further and promote operational efficiency and better productivity of the management section, certified professionals and others who are involved in back-office operations. (About "Manegy Senmonka App") It is a collection of app templates that NEOJAPAN designed and developed as an application for "AppSuite", based on "Senmonka (experts) templates", which were created under the supervision of certified public accountants, tax accountants, lawyers, etc. and are available on "Manegy", a portal site for management sections such as accounting, finance, general affairs and personnel sections. The users of "AppSuite" can download any template and use it after customizing for their respective companies. This time, 3 applications were made available: "Attendance record table", "Labor Contract and Notice of Employment", and "Bonus assessment table". New applications will be added on a continuous basis. (About "Manegy News") It is a service that distributes "Manegy News" for the members of "Manegy" on the portal of "desknet's NEO". By setting up the special blog widget on the portal, users can obtain a wide range of information such as latest news that are useful for the management sections and professionals, basic knowledge, methods to brush up useful business skills and hints for Work Style Reform.

 

 

No change in the Earnings Estimates.Sales and profit expected to rise for the 7th consecutive term.The highest-ever sales and profit can be realized. Although the results for the first half of the term exceeded the initial forecast, sales for the full fiscal year ending January 2019 are expected to be in line with the initial forecast. On the other hand, no change is made in the forecast for the whole fiscal year as selling, general and administrative expenses are anticipated to rise since the Company is planning to invest advertising funds, which remained unused in the first-half, in the second-half of the term, in addition to an increase in cost. Sales is expected to be 2,6 billion, up 12.5% from the previous term. Each of three fields are planned to rise. Operating income will grow to 491 million, up 13.7% yoy and 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.

 

 

Although both sales and profit grew as per the Company's expectations, its stock price has been recently around its new low for this year and the relative stock price for six months fell below the prices of TOPIX and Cybozu Inc. (First Section of the Tokyo Stock Exchange: 4776), one of the major companies dealing with groupware. Reaction to the favorable performance in the past year is one aspect, but improvement in work efficiency, faster decision-making, information sharing across the organization, etc. through the Company's groupware are things that lead to "Work Style Reform" that every Japanese company should pursue, and the point that business environment is continuing to be favorable should be brought to attention once again. However, the value of PER is still about 50 even after being dropped to half the highest value, exceeding the market average largely. Therefore, the Company needs to transmit a more specific medium-to-long-term image including the progress of the growth strategy, in addition to the achievement of the targets for this term, for a full-fledged recovery of its stock price.

 

 

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.

 

 

◎ 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)>