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Breaking Down Rakus (TSE:3923): A Leading SMB SaaS Business in Japan

Rakus (TSE:3923) is one of the more successful publicly listed SaaS companies in Japan today. Founded in 2000 and bootstrapped until its IPO in late 2015, Rakus focuses on providing the roughly 4 million small-and-medium sized businesses (“SMBs”) in Japan with a digital toolkit to help them better run and manage their operations.

Rakus’ core offering is a set of SaaS based products that aim to digitize previously analog processes for small businesses. Their products are particularly attractive today as Japanese SMBs struggle to hire & retain staff in an environment where the ratio of effective job openings to job seekers is around 1.63 — any tools that support greater efficiency & time-savings are warmly welcomed by small business owners.

Rakus’ current cloud product portfolio includes six specific offerings:

  • Raku Raku Seisan — #2 player in Japan with a 27% market share (based on sales value), though the #1 player in terms of # of clients (6,086). The target market is estimated at ~100k domestic companies (those with 50 to 1,000 employees) & an aggregate sales value of ~$650M. With approximately 64% of potential target SMB clients still using paper & spreadsheets, Rakus is aiming to own 20% of the total addressable market, or roughly 14k net-new clients over the coming decade

  • Mail-Dealer — #1 player in Japan with with a 72% market share (based on sales value)

  • Rakus' emerging products include the recently elevated Meisai product as well as Hai Hai Mail, Curumeru & Hambai, which combine to account for an 8.7% market share today, the 5th largest player in Japan

The broader cloud portfolio has grown at an accelerating pace over the past several years from 21% in FY2016 to 33% in FY2020, with Rakus' digital expense management tool seeing exceptional, consistent annual growth of >50% from a relatively meaningful revenue base. It is worth mentioning, however, that Rakus does actively pursue M&A opportunities, which has helped both broaden the product portfolio and bolster growth in the cloud business.

While the company does provide an outsourced IT offering, it is increasingly non-core. Rakus’ overall Gross Margin of 66% is dampened by this profitable, albeit more resource heavy, division.

Below is a snapshot of Rakus’ most recent annual consolidated financial performance.

U.S. SaaS investors may scoff at the meaningful profitability of a business still arguably in the midst of its growth phase & thus question why every yen of profit isn't being poured into sales & marketing. It is a valid point, though we would caution that investors, as well as management teams, in Japan are not of the same mindset in many ways as their U.S. counterparts. This is particularly true when it comes to tech investing today— just take a peek at the Japanese venture capital ecosystem. While maturing, it still is far less sophisticated than that in the U.S. To further highlight this chasm, if you will, “growth stage” capital for Japanese startups is virtually non-existent today in Japan, with most young tech companies opting to IPO very early in their lives — often with only a few million in sales in many cases (note: there are powerful non-economic reasons to IPO in Japan as well, such as the credibility bump to support sales, recruiting & banking relationships).

Nonetheless, using the rather crude Rule of 40 metric for SaaS companies, Rakus falls at a respectable 46. On the valuation side of things, Rakus is currently valued at around $1.7Bn or roughly 12x NTM revenue (assuming ~30% growth in FY20). So, not necessarily “cheap”, but certainly not priced to perfection as some SaaS players are in the U.S.

A solid runway for growth still exists for the company in Japan as >50% of SMBs are still not yet on a cloud based management platform of any kind. Further up-selling of its currently fast-growing, less dominant products, such as Raku Raku Meisei, to existing clients should also help drive additional growth & operating leverage. One "concern" (for most any Japanese SaaS company frankly), however, is the ability of a highly Japan-centric product offering to be successfully sold abroad — while not a small market, Japan is no U.S. or China in terms of the overall market opportunity. Our initial take is that Rakus will be challenged in this regard. Their previous short-lived efforts in the U.S. had them ultimately sell the unit, and while a subsidiary does exist today in Vietnam, it appears there is little contribution, or even focus frankly, on global markets today.

Another challenge we anticipate, but are more sanguine about, is Raku’s ability to take their existing products up-market into larger customers. There is an existing, entrenched competitor in that space today, though the ability to out-innovative with a superior product may prove to be a winning strategy over time.

Metrics we’d like to further explore at greater length would include an historical cohort analysis of Rakus’ client basis & further details around their churn / net retention statistics - neither of which are openly shared or discussed. We would also like to get a better sense of management’s ability to execute M&A, particularly if one believes Rakus’ long-term future growth, both domestically & internationally, will be increasingly driven by bringing in outside muscle, if you will, alongside meaningful new product expansion. We often find that a CEO deeply experienced in organically building out a technology company is a bit of a different breed than one adept at strategically thinking about & intelligently executing more inorganic capital allocation decisions incorporating a host of different considerations, incentives & realities— exceptions to that “rule” exist though & the team recruited to surround that leader can make all the difference.

All in all, Rakus is a proven, fast-growing and profitable SaaS business playing in a geographic market & among a target client base where there remains ample room for growth for the foreseeable future. We look forward to watching CEO Nakamura-san and his team continue to execute.

Disclosure: no position; not investment advice

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