Share Price: ¥1,020, Market Cap: $350m, EV/Rev: 16x
Chatwork is a fast-growing business communication app that allows companies to communicate internally, externally, quickly and conveniently over its network. The company’s software links various media - including video, email, and voice - to enable conversations, tasks, and information to be organised, and searchable, ensuring that teams remain coordinated. The company targets small and medium sized Japanese companies, which are low in IT skills but in need of more efficient alternatives for business collaboration. MODEL A significant improvement over email, Chatwork combines several features that allow better connectivity, whether via chat, task management, file sharing, video calls, or contact management. The company’s core product, Chatwork Business, accounts for over 90% of total revenue, with the remainder made up of IT security resales. Between 2018-2020, overall sales grew at 24% CAGR. For the most recent quarter ended March 2021, Chatwork Business revenue grew at 34% YoY. The company’s gross profit margins held steady at 74% despite ongoing recruitment of engineers to facilitate the next stage of growth. The company has four key KPIs: Registered IDs, Daily Active users, Number of Paying IDs and ARPU. All four have recorded consecutive YoY growth over the last 12 quarters. The Table below details the status of the KPIs. However, of note is that the ratio of paying IDs to registered users has not kept pace with the growth in Registered IDs. That said, other metrics indicate a high degree of stickiness as Net Revenue Retention Rate and Churn Rate was 120% and 0.3% respectively.
The company’s pricing is based on a Freemium model with 3 categories: Free, Business, and Enterprise. The respective pricing and service offering is detailed below.
MARKET Japan lags major developed countries in the use of business chat apps, with a penetration rate of just 24% versus 67% in the US, 56% in UK, and 51% in Germany. The rate of adoption has been growing rapidly, due to an obvious need for improved productivity as well as the shift to Telework during the COVID-19 pandemic. The company estimates the addressable market for business chat users in Japan is around 23 million SME workers. Assuming a monthly rate of ¥800/user, this equates to around $2b. Given Chatwork’s LTM sales are just 1% of the TAM, and low market penetration overall, there is a long runway for growth as smaller companies adapt to a more digital and flexible workforce. Chatwork’s key competitors are Slack Technologies (owned by Salesforce) and Microsoft Teams. The latter is less of a direct competitor due to its focus on large enterprises with IT departments. Slack, on the other hand, is more of a competitor; it also focuses on ease-of-use, with open-source integration, and has a similar freemium model. MOAT As with most SaaS products, the service is sticky and this is borne out by the low churn rate. Switching costs are high, once the product becomes widely adopted within an organisation. The availability of chat history, project flow, and ease of use, as well as the advantages over email, all help to tie the user to the platform. There is also a network effect with Chat Apps once they become ubiquitous. Given its current size, it is not yet clear that Chatwork will emerge as the dominant enterprise chat app in Japan, given a similar business model and pricing strategy to Slack. MANAGEMENT Founder, President, and CEO Masaki Yamamoto started the company in 2000, while a student in university. He is a technology engineer who also doubles as the company's Chief Technology Officer (CTO). Yamamoto owns 21m shares (over $200m) out of the 36m shares outstanding, and thus incentives are aligned with the long-term future of the company. He brings a strong technology background to an area that is aligned digitally with the future. The company has a two phase growth plan: Medium Term (2021-2024) and Long Term (2025 and beyond). Initially, Chatwork will accelerate sales growth to over 40% to gain market share, achieving ¥10b in sales by 2024. To hit this target, the company will accelerate product development; grow into new horizontal and vertical markets by responding to industry specific needs; and develop DX solutions.
Beyond 2025, the company intends to upgrade Chatwork to a “Super app platform” by incorporating a broad range of services including HR and financial services.
VALUATION Within our universe of Japanese SaaS companies, we primarily use EV/Rev as a valuation benchmark. At 16x, the stock trades in the middle of the pack, as it does with the Rule of 40 (a measure of growth and profitability). In order to command a higher market cap and premium valuation, the plans outlined in the MTP will have to bear fruit. There is an opportunity, but a lot will depend on how quickly the company can execute to gain a critical foothold in the Business Chat App market versus global peers like Slack, and emerging competition from Z-Holdings’ LINE.