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十一选五玩法 www.yhyqa.cn ◆Summary
R&D investments in FY2/19 to set the stage for accelerated growth from FY2/20
System Integrator <3826> is an independent software development company. Its SI Object Browser software commands a large share of the database development support tool market in Japan and is highly profitable. The Company also sells packaged software including GRANDIT Web-ERP package for medium-sized companies and SI Web Shopping for construction EC (e-commerce) websites. As indicated by its corporate slogan, “We make software that saves you time, not takes it,” System Integrator focuses on developing new products and services aimed at corporate users increase productivity. It also actively supports childcare assistance and other contributions to society.
1. FY2/18 results
For FY2/18, the Company reported sales of ¥3,767mn (+18.6% YoY) and a recurring profit of ¥496mn (+123.0%), both new record highs. Aided by growing business investment in IT, the Company’s ERP business and EC and Omni Channel business saw strong double-digit growth in sales. On the earnings front, the company posted a ¥280mn provision for loss on orders received in the ERP business in FY2/17, but this was the increase in profit because it reversed all of this amount in FY2/18.
2. FY2/19 forecast
For FY2/19, the Company is forecasting sales of ¥4,000mn (+6.2% YoY) and a recurring profit of ¥503mn (+1.3%). The ERP business and the EC and Omni Channel business are again expected to be the main growth drivers. The outlook for sluggish earnings growth reflects plans for increased investment spending to support future growth, including R&D spending on new products and new AI technology-based services, as well as investments aimed at increasing productivity. The total for these strategic investments is expected to come to ¥430mn, or ¥280mn more than in FY2/18. With respect to new services, the Company noted that its new TOPSIC programming skill evaluation service has gotten off to a good start after its inaugural launch in January 2018, signing up a total of 16 companies by the end of April. Programming skills are hard to judge from an individual’s resume, but with TOPSIC programming skills can be verified through online testing. The Company sees strong potential for growth in this area as TOPSIC can not only help client companies looking to hire top-class engineers, it also has applications in other areas, including use as an internal training aid in companies and also in schools.
3. Medium-term business plan: Break 2018
The Company has released its medium-term business plan that will take it through FY2/21. Dubbed Break 2018, the new plan lays out a five-part action plan under which the Company aims to expand existing businesses, establish offices overseas, establish an AI business, increase the skill level of employees, and streamline operations. In terms of numerical performance targets, the plan is targeting FY2/21 sales of ¥5,300mn and recurring profit of ¥684mn. Reaching these targets will require double-digit growth in sales and earnings from FY2/20; almost all of the growth in sales is expected to come from existing businesses and almost none from the new AI services that it plans to roll out. Among the new AI services under development is a company list search service that allows users to do detailed searches by industry and business line; this is expected to be launched in the fall of 2018. Another service expected to be completed and on the market before the end of 2018 is an anomaly detection service that uses AI image recognition technology.
4. Shareholder return policy
As a means of shareholder return, the Company has set a standard dividend payout ratio of at least 30%, thereby linking its dividend payments to its profits. For FY2/19, the Company plans to pay dividends of ¥19.0 per share, the same as for FY2/18. This would result in a dividend payout ratio of 30.2%. In addition, the Company presents a gift of koshihikari rice grown in Niigata Prefecture to shareholders who hold the Company’s shares for more than six months.
Independent software developer with a high share of the Japanese market for tools to support development
Founded in 1995, System Integrator is an independent software development company. In addition to the development and sales of packaged software, the Company also has a maintenance service and consulting business. The Company is mainly looking to develop new products that can be offered as a cloud service. Mainstay existing products include database development support tool SI Object Browser and integrated project management tool SI Object Browser PM (OBPM), and package software such as SI Web Shopping for constructing EC websites and GRANDIT Web-ERP package. The Company breaks it business lines down into three main segments: the Object Browser business, the ERP business, and the EC and Omni Channel business. Starting in FY2/18, it also added an “Other business” segment for reporting the results of new businesses.
The ERP business accounts for the majority of sales at 64.7% in FY2/18. Contributions are more balanced at the operating profit level, though, with the ERP business accounting for 45.2% of operating profit, the Object Browser business 39.2%, and the EC and Omni Channel business 19.8%. The Object Browser business in particular stands out as a stable source of revenues and earnings, as it consistently maintains a high market share and gets a relatively large portion of revenues from recurring monthly service fees. As for the Other business segment, because it consists of new businesses that are still in the investment phase, it is running a modest loss. The breakdown of sales and operating profit by segment are shown in the figure below.
1. The Object Browser Business
The Object Browser Business develops and sells software products, such as the SI Object Browser series, including the SI Object Browser to support the development of databases and the SI Object Browser ER tool to support the design of databases, the OBPM for integrated project management, and the SI Object Browser Designer (OBDZ) tool for the design of applications, which was released in June 2013. OBPM, OBDZ, and other in the SI Object Browser services are available for either on-premise installation or as cloud services. As for contributions to segment sales, the SI Object Browser series currently accounts for just under 50% of sales and OBPM just over 50%, these figures having reversed over the course of just the last year as number of OBPM contracts has continued to rise. As for OBDZ, with only a few dozen contracts, it does not have a material impact on segment results at this time.
Since it was launched in 1997, the SI Object Browser series has been installed in 16,000 companies in Japan and has become the de facto standard in Japan. Maintenance fees comprise 29% of the sales generated by the SI Object Browser series. These fees constitute a stable source of sales each year and require almost no sales costs. Thus, they contribute to approximately 90% gross profit margin on sales of this series.
OBPM is an integrated project management tool. It helps prevent unprofitable projects by allowing careful tracking and management of the project’s schedule, costs, work team, quality, and profitability, and also helps increase the productivity of software development departments. OBPM is the only such product in Japan that conforms to PMBOK* standards. Since OBPM was launched in 2008 it has been adopted for use by more 160 companies (as of May 2018). As there are no competing products on the Japanese market, it has a high 63% gross profit margin. Most of the companies that use OBPM are established, medium-sized IT companies. Larger companies usually use similar tools for project management they have developed in house while SMEs typically buy software on the market (such as Excel). However, as OBPM’s reputation has grown and its quality has improved over the year, even some large IT companies have started to consider using it. The Company has also started to receive inquiries about OBPM from manufacturing companies. In response to this growing interest, in FY2/17 the Company came out with a cloud-based light version of OBPM with limited functions suitable for use by individual departments inside large companies, as well as a cloud-based engineering version designed for use by manufacturers.
* PMBOK (Project Management Body of Knowledge): A set of standard terminology and guidelines (i.e., a body of knowledge) for project management. “A Guide to the Project Management Body of Knowledge” was first published in 1987 by the non-profit Project Management Institute (PMI). PMBOK has evolved over time and is now accepted as the industry standard around the world.
OBDZ is a tool that helps improve productivity and quality in software development by streamlining, standardizing, and systemizing the upstream software development processes (the basic design phase and detailed design phase). In the past, engineers worked individually in Excel or Word, but changes in specifications made maintenance and change management difficult and could end up delaying development. By providing comprehensive management of the design specifications in the form of a database, labor efficiency can be increased as processes are standardized and automated, making a tool such as ideal for use in core systems development work and other large development projects. Since OBDZ was first released in 2013 its functionality has gradually been improved. There are a total 26 companies currently using OBDZ and that number is starting to increase bit by bit.
2. The EC and Omni Channel Business
The EC and Omni Channel Business mainly develops and sells the Company’s mainstay product of SI Web Shopping, which is Japan’s first EC sites construction package. A feature of SI Web Shopping is its strength in large-scale EC sites. More specifically, if possesses scalability, being able to process large-volume transactions for sales amounts of several tens of billions of yen; high-level security functions; mobile-compliance functions, including for its use with smartphones; and is also compliant with multiple languages, such as English and Chinese. For its cumulative sales total since its launch, it has been used to build more than 1,100 EC sites.
As for the Company’s position in the market for packaged software for EC website construction, if we narrow the scope to packaged software for large-scale website operators we find the market dominated by three companies: System Integrator, ECBEING CORP. (subsidiary of SOFTCREATE HOLDINGS CORP. <3371>), and Commerce21 Corporation. However, as demands for additional functions (such as connectivity to other business systems) have become more varied in recent years, the value of individual orders has increased (from a few dozen million yen to more than ¥100mn), and this in turn has attracted more competition from systems integration companies.
With regard to SOCS, the omni-channel services, integrated management analysis cloud service released in 2015, the Company said that, after determining it would be difficult to make SOCS profitable, it terminated all related development work by 1H FY2/18, and by the end of FY2/17 had fully depreciated all related software assets.
3. The ERP Business
The ERP Business sells the GRANDIT of Web-ERP packaged software. This software is sold by a consortium of 13 IT companies. Since this consortium was established in 2004, the Company has been involved in planning and developing a new software product and has contributed to the market diffusion of this product. The GRANDIT of Web-ERP packaged software is targeted to well-established, medium-sized companies and has been sold to more than 950 companies by the consortium. A distinctive feature of the GRANDIT software is that it is completely based on the Web. Therefore, customers can easily upgrade their software without maintenance. The software can also be used on smart devices. As the software is independent of hardware, it can be used anywhere in the environment where the Web operates. Because the GRANDIT software is jointly developed by the consortium of 13 companies, it offers a highly competitive performance.
The Company has a track record well over 100 companies selling the product and it has the best results within the consortium. It is currently expanding sales of a production management add-on module and an continuing transaction management add-on module for the manufacturing industry that enhances GRANDIT’s basic functions, and a Project Management Template (IT template) that is linked to OBPM for the software industry have been developed in-house. In response to the growth in the market for cloud-based ERP software, the Company brought out GRANDIT on AWS for use on Amazon Web Services.
The Japanese market for ERP software was estimated to be worth about ¥90.3bn in 2017, and is forecasted to continue growing at the rate of roughly 10% as large companies move ahead with the rebuilding of core systems and more companies migrate to cloud-based systems. The business of ERP system vendors is largely split based on the size of their customers, with SAP and Oracle dominating the market for ERP systems for large corporations. The Company sells mainly to well-established, medium-sized companies, where it faces competition from the GLOVIA software of FUJITSU LIMITED. (6702) and the OBIC 7 from OBIC Co., Ltd. (4684). As the needs of client companies have grown more diverse in recent years the average value per order climbed well above the normal ¥100mn price-tag seen in the past; with more and more ERP systems now costing more than ¥500mn as a result of extensive customization. The gross profit margin on ERP system projects varies greatly depending on the applications in the system and technical specifications, making it difficult to generalize. However, the average gross margin appears to be in the 20%–30% range.
Sales, operating profit, and recurring profit set new highs in FY2/18
1. Summary of the FY2/18 results
For FY2/18, the Company reported sales of ¥3,767mn (+18.6% YoY), an operating profit of ¥494mn (+126.0%), recurring profit of ¥496mn (+123.0%), and net profit of ¥345mn (+151.9%). Sales were slightly below the Company’s initial forecast; earnings at all levels finished ahead of plan. Sales set a new record high for the first time in four fiscal years while operating profit and recurring profit set new highs for the first time in two fiscal years. (The previous high for net profit was ¥364mn, set in FY2/16.)
Losses from an unprofitable project under the ERP business that started in FY2/17 continued to weigh on earnings in 1H FY2/18, but the pickup in Japanese IT investment spending along with big project wins at the EC and Omni Channel business and ERP business offset the drag and led to double-digit gains in both sales and earnings for the full year. On the plus side, operating profit got a large boost from the drawdown of the ¥280mn addition to reserve for unprofitable orders made the previous year to cover the losses on orders at the ERP business, and also the strong top-line growth at the EC and Omni Channel business. On the minus side, operating profit was hurt by an increase in strategic investment spending, including spending on new product development, spending aimed at increasing productivity, and the acquisition of marketing automation tools to help improve marketing. Under SG&A spending, the main increases were a ¥46mn increase in R&D spending and ¥33mn increase in personnel spending.
With regard to the money-losing project that started in FY2/15, the Company said it was currently in the adjustment phase that would lead to the final disposition of the contract, and that it did not expect any new expenses to push it over the roughly ¥900mn in provisioning for losses on orders already made to cover the losses on this project.
Launching two new services, AI-based AISI∀ and TOPSIC programming skills verification service
2. Earnings by business segment
(1) The Object Browser Business
The Object Browser business reported FY2/18 sales of ¥628mn (+1.4% YoY), a new record high, and an operating profit of ¥376mn (-5.1%). The SI Object Browser series of software development productivity enhancement tools saw basically flat sales as it is already the de facto industry standard and, as such, already widely in use. The main growth driver at the segment was the OBPM integrated project management tool, where the number of users rose from just over 140 companies at the end of FY2/17 to over 150. The Company attributed the growth in OBPM’s user base to the new contract wins following the introduction of a “light” version and also a special “engineering” version designed to meet the needs of manufacturing companies. With regard to the OBDZ application design tool, the Company said the functional enhancements it made led to a steady increase in sales and now there are more than 20 companies using OBDZ. On the earnings front, segment operating profit was weighed down by increases in internet advertising and other marketing expenses (which had been held down last year) and increase in personnel spending. That said, with an operating profit margin still close to 60%, the Object Browser business remains a stable source of revenues and earnings for the Company.
(2) The EC and Omni Channel Business
The EC and Omni Channel business reported FY2/18 sales of ¥699mn (+16.5%) and an operating profit of ¥190mn (+189.4%). As the Japanese EC market has grown, so too has the number of software vendors. However, after years of seeing sales in this area decline, the Company saw sales in this area increase for the first time in four fiscal years. The top-line gains were due in large part to several large project wins, all of which came at the expense of competitors as the Company was asked to replace the systems that were put in place by other vendors. As EC websites grow larger and larger and include a broader range of functions, these project wins by the Company over the original vendor is an indication that client companies value its EC website development capabilities and more than 20 years of experience in this field.
On the earnings front, the EC and Omni Channel business benefited greatly from its careful screening of development projects from the order stage and its renewed focus on high value-added projects, both of which led to higher gross margins on projects. Additional help came from the termination of SOCS, its omni-channel services integrated management analysis cloud service, as eliminating the depreciation of R&D spending on SOCS accounted for most of ¥71mn reduction in depreciation at the segment.
(3) The ERP Business
The ERP business reported FY2/18 sales of ¥2,438mn (+24.6% YoY) and an operating profit of ¥433mn (+187.0%), with both sales and earnings hitting new highs for the first time in two years. The strong top-line gains reflected continued strong growth in investment spending by corporations on information technology and easy comparisons with the prior year, when sales were temporarily depressed by an unprofitable project. At the individual product level, the Company saw more orders for its proprietary Production Management Add-on Modules to manufacturers and increased sales of its IT Template (for IT companies) that works in conjunction with OBPM. Thanks to increasing demand for customized features, the average order value also rose. With regard to cloud-based GRANDIT on AWS, the Company noted that it is now up and running at several client companies and is generating a solid track record. On the earnings front, the sharp jump in operating profit was attributed to the dropout of the large addition to reserve for unprofitable orders that made the prior year in connection with an unprofitable project.
(4) Other business
FY2/18 is the first year that new businesses are being reported under the Other business segment. Segment sales of ¥1.0mn were accompanied by a ¥40mn operating loss. The Company started two new businesses during the year, as detailed below.
a) AI service AISI∀
During FY2/18 the Company put together a dedicated team to start a full-fledged AI business. Going under the service name “AISI∀ (Aishia),” the first service created was AISI∀ -DR (DesignRecognition). Unveiled by the Company in October 2017, the AISI∀ DesignRecognition reverse engineers design specifications from a screen. In short, AISI∀ DesignRecognition is a kind reversing engineering software that creates design specifications based on real objects. As this is the first time someone in the software industry has created such a program, a patent application has also been filed. Sales of AISI∀ DesignRecognition began in March 2018 and the companies that are using the new service on a trial basis report good results and an image recognition rate that makes it suitable for practical use. AISI∀ DesignRecognition is meant to be used in conjunction with the Company’s OBDZ software; ideally, users could use AISI∀ DesignRecognition to “reverse engineer design specifications from a screen and then the OBDZ could be used to efficiently handle the maintenance.” The Company has set a sales target for AISI∀ DesignRecognition of approximately ¥300mn over the next three years (starting in FY2/19).
The second service developed by the new AI team was AISI∀ FlowerName, a service that uses AI image recognition technology to distinguish between different types of flowers based a photograph. AISI∀ FlowerName is available on the Company’s website at no charge, as its main purpose is to increase public recognition of the Company’s expertise in AI technology.
b) Programming skill evaluation service TOPSIC
The Company’s new TOPSIC programming skill evaluation service was launched in January 2018. Like TOEIC® (Test of English for International Communication), TOPSIC quantifies programming skills with a numerical score so it easy to see where individuals rank in terms of programming skills. As this gives companies that are looking to hire system engineers or select subcontractors a way to assess programming skills, it is a low-cost way of finding the right job candidate or the right subcontractor. And, because the TOPSIC test is also offered in English, it can also help companies when they are looking to hire non-Japanese system engineers. TOPSIC can also be used for in-house training of employees.
The Company also anticipates demand for use of TOPSIC at schools as interest in programming education is expected to continue to grow in the years ahead as Japanese schools make programming a required subject at the elementary school level starting in FY2020. Indeed, some private middle and high schools in Tokyo have already started using TOPSIC. Looking at just the potential in the education market, if TOPSIC can get the same type of market share that TOEIC® has, it could become a major source of revenues and earnings for System Integrator in the future. TOPSIC users pay either an annual fee of ¥300,000 plus ¥8,000 for each test taken or a fixed charge for individual users. The Company is targeting approximately ¥400mn in revenues from TOPSIC over the next three years (starting in FY2/19). The actual contents of the programming skills tests are put together by a partner company, AtCoder Inc.
Healthy financial conditions with debt-free operations
3. Financial position and management indicators
As of the end of FY2/18, the Company’s balance sheet showed total assets of ¥3,189mn, down ¥20mn versus the end of FY2/17. Current assets of ¥2,789mn were up ¥27mn, with cash and deposits increasing by ¥192mn, inventories of goods in process declining by ¥107mn, and deferred taxes declining by ¥84mn. Non-current assets of ¥399mn were down ¥48mn, with ¥37mn of the decline accounted for by software assets.
Total liabilities at the end of FY2/18 came to ¥1,619mn, down ¥339mn versus the end of FY2/17. Most of the decline stemmed from a ¥273mn decline in reserve for unprofitable orders and ¥94mn decline in corporate taxes payable. Reserves for losses on orders totaled ¥982mn, most of which is related to a large order from a specific client that was received in FY2/15; this amount is expected to be completely drawn down during the course of FY2/19. Net assets of ¥1,570mn were up ¥318mn; most of the change stemmed from the ¥345mn in net profit booked for the year and the ¥44mn in dividends paid.
Looking at key performance indicators, we find an equity ratio of 49.2%, up 10.2ppts versus the end of FY2/17. If the ¥972mn in reserve for unprofitable orders were excluded, the equity ratio would top 70%. With no interest-bearing debt outstanding, the Company remains in a strong financial position. With respect to profitability ratios, we find both the operating profit margin and ROE rising sharply over the previous year, the operating profit margin hitting 13.1% and ROE 24.5%. With the unprofitable project that weighed on earnings in FY2/17 having now cleared the inspection phase and the Company having put in place to measure that will help it avoid similarly unprofitable projects in the future, we expect profit margins to remain high and stable going forward.