Yappli - Mobile Tech for all
Japan Disruptive Innovation
Yappli (4168) | Quick look:
Share price: ¥4,200 | Market Cap: $445m | EV/REV: 23x
Apps have changed the World. Innovative companies such as Uber, Instagram, and LINE all emerged in the App Economy. Before the mobile revolution, the internet had done the same for online businesses like Amazon and Facebook. Companies that didn’t have their own website engineers were left behind until cloud-based platform providers, like WIX, allowed any company to create a website with simple drag and drop tools. Yappli allows companies that do not have skilled IT personnel to easily build mobile apps using its no-code development platform.
MODEL
Yappli’s revenue has grown at a CAGR of 60% between FY17-FY20. For the most recent quarter, 2Q FY21, revenue grew at 42% YoY, despite the Covid pandemic. The Average Recurring Revenue (ARR) is tracking at $25 million, +38% YoY. As of the end of 2Q 2021, the number of apps deployed reached 610, up from 492 a year earlier and 583 the previous quarter. The clients include a growing list of blue-chip companies, including Toyota, Kyocera, Fujitsu, and Yamaha Corp.
The company's no-code platform spans four broad areas:
a no-code approach to app building,
a content management system (CMS),
data analysis, and
an update of app features.
The all-in-one platform provides an efficient and cheaper solution to the traditional process of app development. The traditional development process spans Digital Agencies (app planning and design); Systems Integrators (development and planning); Digital Agencies (operation and analysis); and System Integrators (systems updates and maintenance). Customers use the platform due to the speed of implementation, ease of use, and strong data analytics.
The company has two main solutions for clients:
Yappli for Marketing is focused on Online to Offline B2C marketing efforts for companies
Yappli for Company helps businesses with internal and company communication such as digitizing product catalogs and employee training.
The revenue model consists of three parts: a one-time set fee, a monthly base fee, and an additional fee for add-ons.
Go To Market strategy
Yappli’s focus is on growing the number of apps in use on its platform. Investments in marketing have risen significantly over the past three years, with 2Q spending reaching $3.9 million, up from $1 million a year earlier. The Sales & Marketing/Sales ratio is high, staying above 50% over the past six quarters, and hitting a high of 76.4% in the most recent quarter. The sharp rise in marketing spend is due to TV commercials during the quarter, following up on the first TV campaign in 4Q FY20. This is an essential part of the strategy to improve product awareness and expand the market. Despite the relatively high spending, Yappli has room to be even more aggressive when using the Lifetime Value/Customer Acquisition Cost (LTV/CAC) ratio, which is around 5x.
The basic process of connecting to customers involves three parts: customer acquisition, customer onboarding, and operations. Customer acquisition involves offline and online marketing, inside sales, and in-person sales. Once acquired, clients are onboarded by helping with app design and initial set up. At this stage, Yappli’s 12-strong customer success team connects with the client helping with training, and consultation to help with customer retention and to upsell products. The final stage is operations, where the platform is self-operated and managed by the client company.
MARKET
Despite the widespread use of the mobile handsets in Japan, the market for enterprise apps remains full of potential, with a significant gap between the eventual total addressable market (TAM) and the current serviceable market (SAM). The TAM is estimated (company data) at $38 billion, while the SAM is seen at $1.5 billion.
SaaS adoption in Japan is significantly lagging in advanced developed markets like the US. According to Japan's Ministry of Internal Affairs and Communication, the SaaS adoption rate in Japan was running at 41% in Japan vs. 79% in the US in 2018. Covid-19, as well as moves by the Japanese government on DX initiatives, has accelerated this trend. The Japanese SaaS market's current size was estimated to be about $6 billion in 2019 and projected to exceed over $11 billion by 2024, indicating high projected growth. Another factor supporting the adoption of SaaS solutions is the dire lack of IT skills in Japan. Japan, already facing significant labor shortages, has the lowest share of IT engineers to the total population, with this running at 0.86% in 2020, vs. 1.47% in the US, 1.41% in the UK, and 1.29% in Korea. This factor provides additional impetus for enterprise adoption of Yappli’s no-code solutions.
MOAT
First mover advantage: no-code app development is an emerging industry. Previously, firms would have to rely on internal IT talent or employ expensive system development/SI firms to design and operate an app. However, Yappli has built a technological leadership, in the same way that WIX enabled anyone to build a website. Since 2013, Yappli has developed and improved its platform by investing and acquiring IT talent. As of the end of 2Q, IT engineers represented 35% of the growing workforce of 193.
Customer switching costs: Yappli’s business model creates high switching costs for clients. There are very few competitors providing a full no-coding solution like Yappli, and once adopted, the product is very sticky, with churn consistently less than 1% reflective of this.
MANAGEMENT
The senior leadership of the company includes the founders, Yasubumi Ihara (CEO), Masafumi Sano (CTO), and Masumi Kuroda (Chief Designer), all ex-Yahoo Japan with significant backgrounds in product development. Senior management's long-term incentives are well aligned with the long-term success of Yappli as the three founders hold a combined over 38% of the company.
Growth Strategy
Increasing market penetration: This also includes finding new solutions outside the core makret of ecommerce (e.g., Media, Education, Government). For example, the university, Aoyama Gakuin, has adopted Yappli as a solution to connect with students.
Expand value by connecting to external services via APIs: This expands the value proposition as it allows the use of functionality such as location-based services, authentication, push API, and the use of services such as online banking and access to sophisticated data analytics.
Greater data analysis: By using the Yappli Data Hub to apply advanced features such as push notifications, personalized recommendations, and ad targeting.
VALUATION
The company targets revenue growth of 30-50%, with an initial sales target of $100 million. Long-term OPM is seen between 20-30%.
Current market cap of $445m
23x EV/Rev versus high growth (>40% sales) peers: Freee (40x), Money Forward (33x).
Thank you for reading this week’s edition of the NipponNuggets. Our aim is to highlight Japanese companies benefitting from Digital Transformation and Innovation. You can see all the key names here: Japan Disruptive Innovation Index