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Omega Investment Co., Ltd.

BlueMeme (Company note – 3Q update)

Coverage
Share price (5/18) ￥1,180 Dividend Yield (24/3 CE) – %
52weeks high/low ￥2,350 / 1,029 ROE(TTM) 9.3 %
Avg Vol (3 month)  15.7 thou shrs Operating margin (TTM) 13.8 %
Market Cap ￥4.2 bn Beta (5Y Monthly) 0.16
Enterprise Value ￥2.5 bn Shares Outstanding 3.562 mn shrs
PER (24/3 CE) 20.06 X Listed market TSE Growth
PBR (23/3 act) 1.61 X    
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Pioneering Japan’s digital transformation (DX) with low-code and Agile development

Summary

◇BlueMeme is a Japanese pioneer in ‘low-code’ and ‘Agile’ development and has specialised in low-code development since its establishment in 2006. The company is actively investing in promoting its automation concepts, such as Digital Labour and Business Architect. The low-code platform advocated by the company has the potential to overcome the challenge of the shortage and uneven distribution of IT personnel in Japan and accelerate DX initiatives in large companies and SMEs. Therefore, although investment is ahead in the immediate term, a leap in profitability is expected when the development concept takes effect, and the automation of system development progresses.

◇Growth strategy: according to the medium-term management plan (published 14 November 2023), the target is to achieve sales of 4.1 billion yen and an operating profit of 920 million yen in FY3/2026 when the development of Digital Labour is underway, and 10 billion yen in sales by FY3/2028, when Digital Labour is fully applied, and partner businesses are expanded. The key measures to achieve this are as follows:

1) Strengthen the research and development system for Digital Labour and promote its practical application.

2) Shift the billing format from man-monthly person-hours to application generation volume.

3) Expand the number of business architects capable of providing high-unit-price services.

4) Expand indirect sales in collaboration with partner companies.

◇Summary of 3Q results for FY3/2024: Profit down due to planned upfront costs for growth despite higher revenues. The results for the period October-December 2023, announced on 14 February 2024, showed sales of 610 million yen (+9.7% YoY), gross profit of 300 million yen (+12.1% YoY) and operating profit of 49 million yen (-19.7% YoY). Sales in Professional Services, the current core business, grew steadily, and the COGS ratio improved by one percentage point YoY. On the other hand, operating profit fell as upfront costs for growth were recorded as planned. According to the company, sales are broadly in line with expectations, considering seasonality, and the company’s KPIs – order backlog and pro forma EBITDA – are also progressing well.

The company’s full-year forecasts for FY3/2024 remain unchanged. It should be noted that earnings tend to be weighted towards the fourth quarter, but progress so far appears to have been generally satisfactory.

◇’Agile On-demand for OutSystems‘ service launched: On 15 March 2024, the company announced the launch of its Digital Labour-based ‘Agile On-demand for OutSystems’ service and that MITSUI KNOWLEDGE INDUSTRY Co., Ltd, the company’s largest shareholder, would start selling this service. This is a new contract development service for Agile development projects utilising low-code, allowing customers to use low-code experts as and when required, eliminating the need for excessive engineers. As a result, the company expects to be able to charge based on the amount of applications generated rather than man-monthly person-hours and thus manage costs more efficiently. The company is also attracting a lot of attention as it aims to improve the productivity of its engineers and increase the number of customers interested in low-code development.

◇Share price trends: The share price fell briefly immediately after the announcement of the results on 15 February 2024 but quickly rebounded and has been on a steady rise, although there have been ups and downs since then. The share price also appears to have reacted positively to the above disclosure on 15 March. Investors rate the increased revenues and the solid KPIs of order backlog and pro forma EBITDA well, which is read as a favourable response to the profit pressure from upfront investment. The next focus will be on FY3/2024 results and FY3/2025 forecasts. Given the share price formation, the contribution of the above-mentioned new services and the progress of the Digital Labour development pipeline are considered essential.　

Table of contents

Summary1
Key financial data2
Financial results3
　3Q results for FY3/20243
　FY3/2024 full-year forecast4
Business development update5
Share price trends and the focus6
Financial data7

Key financial data

Fiscal Year 2019/3 2020/3 2021/3 2022/3 2023/3 2024/3
(Forecast)
Net sales 1,496 1,800 2,101 1,929 2,244 2,650
Cost of sales 1,036 1,275 1,410 885 1,132 –
Gross profit 461 524 691 1,044 1,111 –
SG&A expenses 374 492 515 680 801 –
Operating profit 87 31 175 363 309 310
Ordinary profit 86 30 174 348 310 310
Net profit 61 10 130 253 230 230
             
Current assets 814 1,073 1,179 2,754 2,794 –
　Cash and deposits 363 584 645 2,356 2,224 –
Non-current assets 202 199 206 201 222 –
Total assets 1,016 1,272 1,386 2,956 3,016 –
Total liabilities 668 914 862 601 429 –
Total net assets 348 358 523 2,354 2,587 –
Equity ratio (%) 34.3 28.1 37.8 79.6 85.8 –
             
Cash flow from operating activities -65 174 182 338 94 –
Cash flow from investing activities -148 -13 -21 -9 -46 –
Cash flow from financing activities 279 59 -100 1,381 -179 –
Cash and cash equivalents at end of period 363 584 645 2,356 2,224 –

Note: From FY3/2022, the new accounting standard for revenue recognition (new standard) is applied. Therefore, there is no continuity between FY3/2021 and FY3/2022 onwards.
Source: Omega Investment from company materials

Financial results

3Q results for FY3/2024: increased revenues but lower profits due to planned upfront costs for growth

The results for the period October-December 2023, announced on 14 February 2024, showed net sales of 610 million yen (+9.7% YoY), gross profit of 300 million yen (+12.1% YoY) and operating profit of 49 million yen (-19.7% YoY).

Sales of Professional Services (consulting and contracted development services using OutSystems and other low-code platforms and engineering training), the current core business, grew steadily, and the COGS ratio improved by one percentage point YoY.

Sales of Software License fell by 7.4% YoY in the quarter under review, but this is partly due to an increase in upgrades, etc., by existing customers in Q1. On a cumulative basis, sales were up +17.5% YoY, which can also be considered strong.

Source: Omega Investment from company materials

On the other hand, operating profit declined as upfront growth costs were recorded as planned. According to the company, sales are broadly in line with expectations, taking into account seasonality.

Source: Omega Investment from company materials

The company’s KPIs—order backlog and pro forma EBITDA—are also on track with the full-year plan.

Source: Omega Investment from company materials

FY3/2024 full-year forecast: forecasts were left unchanged. It should be noted that earnings tend to be weighted towards the fourth quarter, but progress so far appears to have been generally satisfactory.

  JPY, mn, % Net sales YoY Oper. YoY Ord. YoY Profit YoY EPS DPS
    % profit % profit % ATOP % (¥) (¥)
2020/3 1,800 20.3 31 99.1 30 99.0 10 -82.7 5.15 0.00
2021/3 2,101 16.8 175 448.8 174 465.3 130 1133.6 62.49 0.00
2022/3 1,929 – 363 – 348 – 253 – 78.48 0.00
2023/3 2,244 16.3 309 -14.9 310 -11.0 230 -9.0 65.64 0.00
2024/3 (CE) 2,650 18.1 310 0.0 310 -0.1 230 -0.1 65.40 0.00
2023/3 3Q  1,638 16.3 207 -27.6 208 -23.4 138 -25.9 39.53 0.00
2024/3 3Q 1,804 10.2 149 -27.9 151 -27.4 79 -42.2 22.99 0.00

Note: The new accounting standard for revenue recognition (new standard) is applied from FY3/2022. Therefore, there is no continuity between FY3/2021 and FY3/2022 onwards.

Business development update

Launch of ‘Agile On-demand for OutSystems‘ service

On 15 March 2024, the company announced the launch of the ‘Agile On-demand for OutSystems’ service using Digital Labour and that MITSUI KNOWLEDGE INDUSTRY Co., Ltd, the company’s largest shareholder, will start selling this service. This is a new contracted development service for Agile development projects utilising low-code, which allows customers to use low-code experts as and when required, thereby eliminating the need to have an excessive number of engineers on hand and efficient cost management as billing is based on the amount of applications generated rather than man-monthly person-hours. The company is also attracting a lot of attention as it aims to improve the productivity of its engineers and increase the number of customers interested in low-code development.

Source: Omega Investment from company materials

Source: Omega Investment from company materials

Share price trends and the focus

Share Price Trend

The share price fell briefly immediately after the results were announced on 15 February 2024 but quickly rebounded and has since been on a steady rise, albeit with some ups and downs. Furthermore, the share price has taken the aforementioned disclosure on 15 March positively. The stock market has taken a positive view of the increase in revenues and the solid KPIs of order backlog and pro forma EBITDA, which can be interpreted as a positive reaction to the pressure on profits due to upfront investment.

Points of interest from here on

Given this approach to share price formation in the stock market, the following points are of interest. -FY3/2024 results. Did the company firmly add to sales and pro forma EBITDA in 4Q, which is heavily weighted towards earnings due to seasonality? Are orders on track, and are upfront investments in line with expectations? -FY3/2025 forecasts: trends in revenue growth, order backlog forecast, and profitability. Contribution of the ‘Agile On-demand for OutSystems’ service. -Headcount plan. -Progress of the Digital Labour development pipeline.

The share price valuation could change significantly if the company can drive growth in the low-code development market and develop a business model with high marginal returns. The company’s quarterly progress will be the focus of increasing attention.

4069：BlueMeme share price move

Financial data (quarterly basis)

FY(\mn) 2021/3*       2022/3       2023/3       2023/3    
  1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
[Statements of income]                              
Net sales 485 541 482 594 426 463 519 521 502 578 556 606 617 576 610
　Year-on-year basis (%) – – – – – – – – 17.8% 25.0% 7.3% 16.3% 22.8% -0.3% 9.7%
　Professional Services – – – – 378 392 437 457 431 495 483 556 496 497 543
　　Year-on-year basis (%) – – – – – – – – 14.0% 26.1% 10.6% 21.5% 15.2% 0.4% 12.2%
　　Composition of sales – – – – 88.7% 84.8% 84.3% 87.8% 85.8% 85.6% 86.9% 91.8% 80.4% 86.2% 89.0%
　Software License Sales – – – – 48 70 84 63 71 83 72 49 120 79 67
　　Year-on-year basis (%) – – – – – – – – 48.0% 18.7% -10.6% -21.5% 69.1% -4.8% -7.4%
　　Composition of sales – – – – 11.3% 15.2% 15.7% 12.2% 14.2% 14.4% 13.1% 8.2% 19.6% 13.8% 11.0%
                               
Cost of sales 361 369 311 370 199 206 231 249 254 285 287 306 298 302 308
　Cost of sales margin 74.4% 68.2% 64.5% 62.3% 46.7% 44.4% 44.5% 47.8% 50.5% 49.5% 51.5% 50.5% 48.1% 52.5% 50.5%
Gross profit 125 171 171 224 227 258 288 271 248 293 269 300 319 274 302
SG&A expenses 124 124 127 141 153 160 173 194 203 194 207 198 239 256 253
　SG&A expenses margin 25.6% 22.9% 26.3% 23.7% 35.9% 34.5% 33.3% 37.2% 40.4% 33.6% 37.2% 32.7% 38.7% 44.4% 41.5%
Operating profit 0 49 43 83 74 96 114 78 45 99 62 103 80 18 49
　Year-on-year basis (%) – – – – – – – – -38.4% 2.7% -46.1% 32.1% 76.1% -81.0% -19.7%
　Operating profit margin (%) 0.0% 9.1% 8.9% 14.0% 17.6% 20.7% 22.2% 15.0% 9.1% 17.1% 11.1% 17.0% 13.1% 3.3% 8.0%
Non-operating income 0 0 0 2 0 0 0 0 0 0 1 1 1 1 1
Non-operating expenses 1 0 1 1 13 2 0 1 1 0 0 0 0 0 2
Ordinary profit 0 47 43 84 62 95 115 77 46 99 63 102 82 20 49
　Year-on-year basis (%) – – – – – – – – -26.6% 4.2% -45.2% 32.5% 78.3% -79.8% -23.0%
　Ordinary profit margin (%) 0.0% 8.7% 8.9% 14.1% 14.6% 20.5% 22.2% 14.8% 9.1% 17.1% 11.3% 16.8% 13.3% 3.5% 8.0%
Income before income taxes 0 47 43 84 62 95 115 77 46 99 63 91 82 17 50
Total income taxes 1 10 17 16 19 31 36 9 15 33 22 -2 34 17 18
Net income -1 37 26 68 43 64 79 67 30 67 41 92 48 0 32
　Year-on-year basis (%) – – – – – – – – -28.7% 4.7% -48.1% 37.3% 60.0% -99.5% -22.2%
　Net income margin (%) -0.2% 6.8% 5.4% 11.4% 10.1% 13.8% 15.2% 12.9% 6.0% 11.6% 7.4% 15.2% 7.8% 0.0% 5.2%
                               
[Balance Sheets]                              
Current assets 1,051 1,008 1,001 1,180 2,105 2,507 2,664 2,754 2,662 2,723 2,688 2,794 2,703 2,600 2,562
　Cash and deposits 590 520 555 645 1,826 2,202 2,271 2,356 2,267 2,392 2,377 2,224 2,193 2,190 2,070
　Notes and accounts receivable – trade, and contract assets 170 167 161 228 252 266 357 366 348 270 252 439 356 254 323
Non-current assets 205 208 207 206 197 199 197 201 191 188 181 222 239 284 314
　Property, plant and equipment 102 99 95 93 90 90 87 91 89 86 83 80 83 96 133
　Intangible assets 17 23 26 24 23 21 20 18 17 15 14 0 0 0 0
　Investments and other assets 86 86 86 89 85 88 90 91 85 86 84 141 155 187 181
Total assets 1,256 1,216 1,208 1,386 2,302 2,707 2,861 2,956 2,853 2,911 2,869 3,016 2,943 2,885 2,876
Current liabilities 683 639 632 733 398 425 521 564 420 410 325 393 383 375 335
Non-current liabilities 215 183 155 129 104 79 53 37 37 37 37 36 36 51 53
Total liabilities 897 822 787 862 502 503 575 601 458 447 362 429 420 427 388
Total net assets 358 395 421 524 1,800 2,204 2,286 2,354 2,395 2,464 2,506 2,587 2,523 2,457 2,488
Shareholders’ equity 358 394 421 524 1,800 2,203 2,286 2,354 2,395 2,463 2,506 2,587 2,522 2,455 2,488
　Share capital 189 189 189 206 790 959 962 962 967 968 969 970 970 971 971
　Capital surplus 180 180 180 197 781 950 953 953 958 959 960 961 961 962 962
　Retained earnings -11 26 52 120 229 293 372 439 470 537 578 669 717 717 750
　Treasury shares           0 0 0 0 0 0 -14 -127 -195 -196
Total liabilities and net assets 1,256 1,216 1,208 1,386 2,302 2,707 2,861 2,957 2,853 2,911 2,869 3,016 2,943 2,885 2,876

*: The new accounting standard for revenue recognition has been applied from FY3/2022; FY3/2021 figures are based on the old standard.
Note: Due to rounding, number of significant digits, etc., there may be minor discrepancies in figures.
Source: Omega Investment from company materials

Financial data (full-year basis)

FY(\mn) 2019/3 2020/3 2021/3 2022/3 2023/3
[Statements of income]          
Net sales 1,496 1,800 2,101 1,929 ２,244
　Year-on-year basis (%) 95.7 20.2 16.8 – 16.3
Cost of sales 1,036 1,275 1,410 885 1,132
Gross profit 461 524 691 1,044 1,111
　Gross profit margin (%) 30.8 29.2 32.9 54.1 49.5
SG&A expenses 374 492 515 680 801
Operating profit 87 31 175 363 309
　Year-on-year basis (%) 　– -63.2 446.9 – -14.9
　Operating profit ratio (%) 5.8 1.8 8.3 18.9 13.8
Non-operating income 0 0 2 0 1
Non-operating expenses 1 1 3 15 0
Ordinary profit 86 30 174 348 310
　Ordinary profit margin (%) 5.7 1.7 8.3 – -11.0
Extraordinary income   0 0 　– –
Extraordinary expenses 19     　– 11
Income before income taxes 67 30 174 348 298
Total income taxes 6 20 44 95 68
Net income 61 10 130 253 230
　Year-on-year basis (%)   -82.0 1,081.8 – -9.0
　Net income ratio (%) 4.1 0.6 6.2 13.1 10.3
           
[Balance Sheets]          
Current assets 814 1,073 1,179 2,754 2,794
　Cash and deposits 363 584 645 2,356 2,224
　Notes and accounts receivable – trade, and contract assets 264 294 227 366 439
Non-current assets 202 199 206 201 222
　Property, plant and equipment 116 105 92 91 80
　Intangible assets 0 7 24 18 0
　Investments and other assets 85 85 89 91 141
Total assets 1,016 1,272 1,386 2,956 3,016
Current liabilities 584 666 733 564 393
　Short-term borrowings 235 135 116 96 1
Non-current liabilities 84 247 129 37 36
　Long-term borrowings 53 212 96 4 3
Total liabilities 668 914 862 601 429
Total net assets 348 358 523 2,354 2,587
Shareholders’ equity 348 358 523 2,354 2,587
　Share capital 189 188 206 962 970
　Capital surplus 180 179 197 953 961
　Retained earnings -21 -10 120 439 669
　Treasury shares       -0 -14
Total liabilities and net assets 1,016 1,272 1,386 2,956 3,016
           
[Statements of cash flows]          
Cash flow from operating activities -65 174 182 338 94
Cash flow from investing  activities -148 -13 -21 –9 -46
Cash flow from financing activities 279 59 -100 1,381 -179
Free cash flow -213 162 162 328 48
Net increase in cash and cash equiv. 66 221 61 1,710 -131
Cash and cash equiv. at beginning of period 297 363 584 645 2,356
Cash and cash equiv. at end of period 363 584 645 2,356 2,224

Source: Omega Investment from company materials

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