Deal Memorandum

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Best regards,

Jorel

1. Executive Summary

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Money Forward (TYO:3994) is a SaaS company specializing in finance-related products for businesses and households alike.

As of 18 Apr 2021, Money Forward was trading at:

  • Market Cap: JPY 248bn
  • Stock Price: JPY 5,190
  • PSR: 20x
  • Annual Revenue (TTM): JPY 12.4bn
  • ARR: JPY 8.25bn
  • Gross Profit: JPY 8.4bn

Further details can be found in the "Business Overview" section.

2. Investment Thesis

2.1 Recommendation

Our investment recommendation is a BUY.

2.2 Thesis

Our investment thesis is justified by the following:

  1. Steadily growing macro tailwinds in cloud adoption driven by technology, covid-19 and policy implementation.
  2. Strong, diversified product with stable cashflows from main 2B business, and scalable nascent cashflows from auxiliary 2C, consulting and financing businesses.
  3. Oligopolistic domination as a fully horizontal SaaS product with increasingly higher barriers to entry for new market entrants, due to network effects generated by massive API integrations, and diversified pool of products.

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NA

3. Macro Landscape

3.1 Tailwinds

Technological Tailwind: Rise in Back Office SaaS

Technology is continuing to accelerate cloud adoption, driving up the total addressable market for SaaS businesses in Japan. According to Fuji Chimera Research Institute, businesses are steadily migrating their businesses away from on-premise/package software, and onto the cloud via SaaS applications. This trend is likely to continue, expanding the overall software market from JPY 1.5t to JPY 2.0t, with SaaS occupying 56.2% of overall software market share.

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Accordingly, all subsegments of software are projected to grow by 2024, led by digital marketing and collaboration softwares at 166% and 161% respectively against 2019 figures. Specifically, back office (業務システム) software, which most of Money Forward's product offerings fall within, is set to grow at a moderate pace of 140% against 2019 figures, or 7% CAGR.

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Event-Driven Tailwind: Covid-19 as Catalyst for Cloud Adoption

The Covid-19 pandemic, which began in the beginning of 2020, has catalyzed a protracted influence on cloud adoption overall, especially for enterprises, due to the increased need to decentralize staff away from the office and enable sustained remote work. In particular, this has seen a sharp increase in SaaS demand for HR management (59.6% yoy), business communication (29.2% yoy), e-signature (36.2% yoy) and video conferencing (29.0% yoy).

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While Covid-19 as a one-off event has catalyzed a deep rethinking on the part of enterprises with respect to their approach to work arrangements and overall productivity, its effects are not one-off but structural, and therefore ought to be taken as long-term. Simply put, it is highly unlikely that an enterprise which has invested to improve productivity via cloud-based SaaS tools to regress back to manual labor after the pandemic subsides.

Policy-Driven Tailwind: Governmental Push for Digitalization

The long-term structural effect of the pandemic has been further augmented by a timely push for digitalization by the new Suga administration, possibly driven in part by the lack of readiness in terms of government infrastructure to tackle the pandemic, especially with the public having expressed disappointment by the confusion surrounding online applications for the special cash payments extended to all residents and the months of delay in receiving these funds, as well as the fact that all the information exchanged by the public health centers has been done by fax.

In response, this government's push for digitalization has manifested itself in concrete action, such as the passing of the bill to remove hanko procedures, the setting up of a digital agency, as well as the planned relaxation of requirements for the retention of scanned data under the Electronic Books Maintenance Act.

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While the longevity or stability of this policy direction may be in part dependent on the next administration after Suga, the pragmatic, apolitical nature of digitalization provides assurance that the push is likely to stay regardless of cabinet shuffle.

3.2 Headwinds

Change in Working Styles and Business Negotiations

The shift to remote work for many enterprises means that business meetings are increasingly implemented online. This admittedly makes it more challenging to correctly identify the decision-maker for the sales, resulting in longer sales cycle. This is nonetheless a short-term headwind - when the pandemic subsides and companies return to hybrid work, there will be opportunities to resume face-to-face interactions that would likely revert sales cycles approximately back to pre-covid lengths.

4. Business Overview

4.1 Company

Money Forward provides money-related services for enterprises and households alike. Its main product offerings can be categorized into 4 segments: Money Forward Cloud (2B SaaS), Money Forward ME (2C SaaS), X (2B consulting) and Finance (2B and 2C financing and settlement).

Money Forward was founded in 2012, and its current CEO is Yosuke Tsuji. It listed on the TYO in Sep 2017, and currently has 800+ employees.

4.2 Product

Money Forward has 4 main product lines, which are populated further by a variety of diverse offerings, most of which are within the Money Forward Business and Home lines.

Specifically, the various products they offer are as follows:

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Money Forward's offerings are centered around the idea of making money-related processes more efficient and accessible to everyone through cloud-based technology. Within Money Forward Cloud, its business line, there are a wide range of services such as accounting, tax return, invoice creation, salary calculation, attendance management, expenses reimbursement, etc. They also provide personal finance book-keeping apps in Money Forward Home their line for households. In addition, they have been diversifying into other types, such as SaaS market platforms, settlement services, inside sales consulting and even most recently, a VC fund.

4.3 Performance

Money Forward (by General Metrics)

General MetricMoney Forward.
Market Capitalization
JPY 248bn
PSR
20x
Annual Revenue (TTM)
JPY 12.4bn
Fiscal Year Ending
Nov
Latest IR Used
2020 Q4
Qtrly Revenue (Latest IR)
JPY 3.3bn
Qtrly Revenue Growth % (Latest IR)
44.8% yoy
ARR (Latest IR)
JPY 8.25bn
ARR Growth % (Latest IR)
32.7% yoy

Reasonable Valuation and Healthy Growth

Money Forward is trading at a relatively healthy PSR of 20x (median SaaS PSR in Japan is currently 16~18x), which means, at a brief glance, that the current valuation is not unreasonable. Revenue and ARR Growth are also at 44.8% and 32.7% respectively, which is healthy for an emerging high-growth company.

Money Forward (by SaaS Metrics)

SaaS MetricMoney ForwardSaaS Standard
Churn Rate
0.8%
< 3%
Gross Margin
73.3%
60-80%
Opex Breakdown
R&D 7.3%, S&M 42.5%, G&A 50.2%
R&D 30%, S&M 50%, G&A 20%
Growth Rate + Profit Margin
47.2% = 44.8% + 2.3%
> 40%

Overall Outperformance as a SaaS company

Money Forward outperformances across the main SaaS heuristics, with a low churn rate of 0.8%, healthy gross margin at 73.3%, and a balance between growth rate and profit margin at 44.8% and 2.3% respectively.

*One area that would require further clarity is the opex breakdown: while S&M and G&A figures were derived from the latest IR materials, R&D was not clearly specified. Nonetheless, even conservatively we see a rather large spend on G&A, mainly due to personnel expenses. Additionally, ad spend - as part of S&M - was also greatly increased in the latest quarter, due to large-scale marketing investment made in the Business domain, including TV commercials, so the average should be lower.

4.4 Strategy

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Money Forward asserts that it will continue to focus its efforts on its business customers, more specifically enterprises, so as to expand their user base. As the ARPA of business enterprise accounts is ~7x of sole proprietors, their main priority remains with business to keep ARPA high and maintain cost efficiency.

In order to increase the scale of their business activities, they are continuing to invest in brand recognition via marketing activities and launching new businesses. In order to maintain competitiveness, they are also committed to investing in skilled technological hires. Looked at together, this may mean that in the short-run, there may be sustained increase in COGS (tech hires) and Opex (marketing and ads) which may affect bottomline. With these ongoing efforts, it is important to monitor how CAC and profit margin would be changing and if there is a proportional positive effect to topline.

5. Competition

5.1 Competitor Case Study

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Freee (TYO: 4478) is the main competitor of Money Forward. It is also a SaaS company that offers almost identical main product offerings as Money Forward, albeit more focused on enterprises.

Money Forward vs Freee (Financial)

Financial CriteriaMoney ForwardFreee
Market Capitalization
JPY 248bn
JPY 489bn
PSR
20x
58x
Annual Revenue (TTM)
JPY 12.4bn
JPY 8.4bn
Fiscal Year Ending
Nov
Jun
Latest IR Referenced
2020 Q4
2021 Q2
Qtrly Revenue (Latest IR)
JPY 3.3bn
JPY 2.4bn
Qtrly Revenue Growth % (Latest IR)
44.8% yoy
51.3% yoy
ARR (Latest IR)
JPY 8.25bn
JPY 9.27bn
ARR Growth % (Latest IR)
32.7% yoy
49.9% yoy
Gross Profit (Latest IR)
JPY 8.4bn
JPY 6.6bn
Gross Profit Margin % (Latest IR)
68.1%
79.2%

Higher Revenue but Lower Growth Rate

Overall, Money Forward performs stronger than Freee in revenue (JPY 3.3bn vs JPY 2.4bn) and gross profit (JPY 8.4bn vs JPY 6.6bn), albeit demonstrating lower capital efficiency by ~10% (68.1% vs 79.2%).

Money Forward is growing at a slower rate than Freee in terms of Qtrly Revenue (44.8% vs 51.3%) and ARR (32.7% vs 49.9%), although 40% is considered already relatively high-growth for a company with positive net income.

For both companies, the main revenue driver is the SaaS component from their 2B product offerings.

While the pandemic had equally caused a continued prolongation of the sales cycle especially for SMBs, a likely reason why Freee is able to maintain higher growth rate is due to its quick revisions in pricing, especially in the self-employed segments, while Money Forward's strategy was focused on acquiring individuals through offline events which had to be cancelled.

Money Forward vs Freee (Business)

Business CriteriaMoney ForwardFreee
2B SaaS
Money Forward Cloud
Freee 法人, Freee 個人
2C SaaS
Money Forward ME (Personal Finance)
NA
Consulting
Money Forward X
Undisclosed
Settlements
Money Forward Finance
Not a fully-separate service
Other Offerings
Boxil (SaaS Marketing Platform), VC Fund
Project Management tool (coming soon)
No. of API Integrations
1000+
1000+
No. of Paid Users
420k
245k
ARPU
JPY 71.6k for 2B
JPY 37.8k

Equally Strong but more Diversified

Both Money Forward and Freee's main product and cashflow-generating product line is in their 2B SaaS. They also both boast a large network of API integrations. However, in terms of no. of paid users and ARPU, Money Forward outperforms by about 2x (420k vs 245k users, JPY 71.6k vs JPY 37.8k).

Money Forward also demonstrates scalability through its product diversification, from only 2B SaaS to also provide other streams of revenue such as 2C SaaS, financing, SaaS marketing and even a VC fund. In fact, the main business line that Money Forward did not meet initial forecast was in 2C SaaS, as their largest annual offline event "Money Expo", which was expected to generate JPY 230m, had been cancelled due to Covid-19. While in the short-term, diversification increases its risk profile exposure, in the long-term when the new businesses stabilize, they offer new forms of scaling new businesses for sustained growth.

6. Risks & Mitigants

6.1 Exogenous Risks

Competition from Freee and other SaaS Entrants

Mid risk. Unlike other technological verticals, SaaS in general has relatively low barriers to entry. This is because, compared to other sectors such as health-tech or mobility which requires high initial capex at the onset, the initial cost of SaaS is low and scales with revenue after achieving product-market fit. In other words, a lack of capital will not be the main reason to deter a new SaaS market entrant.

Mitigant: The main deterrent would therefore be network effects generated by oligopolistic domination, which Money Forward and Freee have demonstrated. Boasting 1000+ API integrations with financial institutions, it would be hard-pressed for a new market entrant with similar product offerings to 1) negotiate with security-tight financial institutions to allow them API access, and 2) convince potential users to use their platform with less than the 1000+ API integrations of Money Forward and Freee.

Over-Valuation of SaaS by Capital Markets

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Mid risk. PSR multiples have considerably risen to record highs recently, especially ever since covid-19 began. The median was around 10-12x in early 2020, but has now risen to 17x by the start of 2021. This has raised concerns as to whether there is a valuation bubble in Japan SaaS.

Mitigant: While there is no direct mitigant, since no entity can single-handedly control market sentiment, there is a particular assurance that Money Forward is trading at a relatively reasonable forward PSR than its competitor Freee (17.9x vs 55.9x). Moreover, there is legacy infrastructure to disrupt within the market that lends credence to the argument that there is not yet a bubble - compared to the US, where startups occupy 30% of market cap, Japan's startups still only occupy 1%, signifying potential room for growth yet. While potential growth does not necessary directly justify high trading multiples at this point in time, it does justify the forward-looking nature of cashflows as the total addressable market grows accordingly, and therefore the possibility of higher multiples even from now on.

6.2 Endogenous Risks

High Marketing Spend % of EBITDA

Over the past year, Money Forward had been invested heavily in ad spend in order to increase brand recognition and acquire new sales leads. The effects of ad spend is usually only identified in the subsequent periods after spend, so it may be difficult to monitor how ad spend directly impacts topline.

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Mitigant: Excluding ad spend, Money Forward's EBITDA has actually turned positive, even outperformed forecast, at JPY 1.2bn in the latest FY. Considering that ad spend is not a direct topline driver, there is comfort in the fact that it is a lever that can be reduced or switched off in the unlikely event of negative performance such as slowing growth or deficient cash balance.

6.3 ESG Risks

Environmental

Low risk. No major environmental concerns as Money Forward operates a software company with low carbon footprint.

Social

Low risk. Money Forward centers its product offerings across different sectors of society, including households as well. In addition, during the covid-119 pandemic, it took initiative to provide information for relief programs available for corporates and individuals alike, as well as added new functions to help businesses figure out if they were eligible for business subsidies from the government.

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Governance

Low risk. Money Forward had actively reviewed the composition of the Board of Directors as part of their initiatives toward strengthening ESG measures: To reinforce the supervisory and governance functions, while at the same time increasing the speed of management execution, they plan to revise the structure by reducing the number of internal directors to four and having outside directors account for the majority of the Board.

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6.4 Material Risks

No material risks to report.

7. Valuation

7.1 Revenue Projections

As Money Forward is a SaaS company, for valuation purposes, we will be focusing on topline revenue for projections and deriving valuation via PSR. Money Forward's revenue will be analyzed on an overall basis, and then further split into the SaaS components and non-SaaS components respectively, in order to clearly identify the strength and stability of key revenue drivers.

SaaS and Non-SaaS Components

  • Business: downtrending ~70-90% SaaS, comprises of Business Corporates and Business Sole Proprietor
  • Home: uptrending ~50-70% SaaS, comprising of Home Premium Charges
  • X: 15~40% recurring revenue, mostly consulting other financial institutions on digitalization
  • Finance: 0% recurring revenue

To access the full financial model, please click here.

7.2 Range of Possible Returns

3 scenarios have been generated, Base Case, Upside and Downside. Upside and Downside assumptions are generally percentage-adjusted based on Base Case assumptions.

As most of Money Forward's key business lines have not been negatively affected by Covid-19 (except for Business Sole Proprietor and Home) since it is a SaaS model, for most line items, the model take guidance from latest forecasts and extends it in terms of both SaaS growth rate, SaaS % of overall revenue, and overall growth rate.

Only Business Sole Proprietor and Home Premium Charges will have custom assumptions, since they had been negatively affected by Covid-19, so we estimate recovery based on taking a % of the average of the past 2 years i.e. pre-covid and post-covid figures. Please refer to the "Drivers & Summary" sheet within the Financial Model for more details.

Finally, in order to generate a final valuation and IRR for relative comparison purposes, an arbitrary investment cash flow has been added. They hold the following assumptions:

  • Entry date: 18 Apr 2021
  • Entry PSR: 20x (spot PSR)
  • Entry Valuation: JPY 248bn (spot market cap)
  • Equity injected: JPY 1.5bn
  • Exit PSR: 16x (assume overheating moderately cools after covid-19 subsides)
  • Exit % shareholding: entry % shareholding * 75% (assume subsequent dilution)

Returns

  • Base Case: 38.4%
  • Upside: 44.5%
  • Downside: 32.5%

All of the returns beat the minimum hurdle rate of 30%, and therefore we recommend a BUY.

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Appendix

Appendix I - Financial Model

This is the end of the Deal Memorandum.