Bengo4.com Inc (6027)
Share price: ¥8,930 | Market cap: $2bn | EV/Rev: 37x
Japanese business culture is deeply rooted in face-to-face meetings and paper - lots and lots of paper. In the wake of Corona, many businesses had to change how they operate, and now digital transformation is more essential than ever. Previously, the office manager had to travel to the office just to stamp paper documents, but under work-from-home, this was not possible. Along with the obvious benefits of teleworking, digitizing the entire contracting process also has other benefits, such as improving efficiency and minimizing costs. Bengo4.com introduced CloudSign in 2016, Japan's answer to Docusign, and today 8 in 10 companies opt for CloudSign when they adopt digital contracts.
The 4M framework: In order to analyze Bengo4.com's long-term prospects, we look at its 4M framework: business Model, Market, Moat, and Management.
MODEL Bengo4.com consists of 4 key business areas. They are the platform sites (1) Bengo4.com, (2) Zeirishi.com site, (3) a portal that offers Support for lawyers, and (4) CloudSign. Currently, CloudSign accounts for one third of sales, but will be the core earnings driver for the company over the next few years.
(1) Bengo4.com is a platform that connects consumers to lawyers, providing easy access to legal services, including consultations. The platform has over 11 million monthly users, providing access to over 21,000 lawyers. The platform offers lawyer profiles, capabilities, legal counseling, and news related to legal issues. The revenue model is based on an annual usage fee of $300 that is paid by lawyers seeking to market their business.
(2) Zeirishi.com provides a tax consultation portal. Tax accountant referrals, consultations, accountant profiles, and news search services are offered. There are approximately 6,000 tax accounts on the site, which receives about 1 million monthly visitors.
(3) Business Lawyers' legal affairs portal focuses on legal issues. A business law library, online compliance training services, and explanations of recent legal revisions are among these services. Each month, approximately 700,000 lawyers visit the site. Since the launch in 2017, the site's membership has grown every quarter, and now numbers over 58,000 members.
(4) CloudSign is a cloud-based digital contracting service that allows users to electronically sign documents. Typical examples of these documents are construction contracts, non-disclosure agreements, franchise agreements, and memorandums of understanding. Cloud-based signing has several benefits, including speed, lower costs, and more robust compliance. Bengo4.com's CloudSign is tailored to Japanese laws, and the interface is designed to accommodate Japanese business practices.
Currently, CloudSign uses a freemium business model, where a single user can sign up for five contracts free of charge. The most popular paid plan for businesses is the Standard plan, which costs ¥10,000/month + ¥200/contract. CloudSign has seen phenomenal growth in its customer base. By March 2021, the number of contracts sent numbered 904,000 versus 390,000 a year ago. Toyota, ANA, NTT Docomo, and other blue-chip Japanese companies are among the company's clients and CloudSign continues to target large enterprise customers.
CloudSign: Bengo4.com estimates the TAM (total addressable Market) for digital contracts to be around $4b. The company estimates the current market size of digital contracts to be around $50-100 million in Japan, with CloudSign accounting for around 15-20% market share. Among its competitors are DocuSign from the US and GMO Sign from Japan. Additionally, Freee and Money Forward have introduced a digital contract signing service.
Bengo4.com: Considering 43,000 lawyers and a monthly rate of $300, the TAM for Bengo4.com is estimated to be around $160m. This space is dominated by Bengo4.com, which has 23,000 lawyers on its platform. However, ASIRO, a company that is soon to be listed under the ticker 7378 JP, is a smaller competitor.
MOAT Our goal is to gauge whether there is a moat for the CloudSign business that will support future growth. Electronic signatures are still in their infancy in Japan, but it is a rapidly growing market, where CloudSign is the largest and best-known domestic player. By aggressively acquiring large clients - both in the public and private sectors - the company is starting to build a moat through a network effect. Furthermore, CloudSign is tailored to Japanese laws and business practices, where the company believes it has an advantage over competitors like DocuSign. As a result, CloudSign could become the de facto digital contract signing solution for Japanese companies. For now, they have an advantage based on their strong name recognition.
MANAGEMENT In 2005, Taichiro Motoe founded Bengo4.com Inc. In September 2020, after being elected to the Japanese Diet, he left the company. Yosuke Uchida, the current CEO, joined the company in late 2020 after holding senior roles at other companies, including director of corporate planning at Kakaku.com. Even after leaving the company, Motoe-san still owns a majority 67% stake, valued at $ 1.2 billion. New CEO Uchida holds more than 160,000 shares worth more than $15 million, and several board members - including the outside directors - own stock, aligning incentives with long-term value creation.
Uchida-san is working to expand into new growth areas while maintaining its position as the industry leader. Bengo4.com will continue promoting DX in legal operations to make it an indispensable service for lawyers. Nevertheless, with such a large addressable market, CloudSign will be the key growth driver for the next five years. Currently, CloudSign is focused on acquiring large clients and deepening alliances with leading product and sales partners in order to achieve network effects.
VALUATION We compare Bengo4.com Inc with other small-cap growth stocks. With a LTM EV/REV ratio of 38x, the stock seems rich compared to the group. The caveat is that the table's numbers are backward-looking, and CloudSign's multi-year growth potential continues to be untapped.