A SaaS company trading at 4.8x EBITDA and ready to re-accelerate...?
...and 41% of its market cap is in cash
Disclaimer: The content on this website is for informational and educational purposes only. Nothing should be considered as investment advice or as a guarantee of profit. Please make sure to do your due diligence. The opinions expressed are those of the author and are subject to change without notice.
Well okay I’m not a fan of EBITDA and it’s more like 6x EBIT but I thought it’ll grab your attention (…sorry!) and its another microcap, I’ve been writing about a few of them but hope to share more write-ups on larger, liquid businesses too.
I’m sharing my quick-ish thoughts on a business I’ve looked at since I’ve been asked about this one a few times. I do not own it currently, but thought this might be helpful to those researching. I can see why it’s interesting/mispriced but I’ll also share some nuances worth considering.
Yes, I’m talking about that SaaS company called Atled, Ticker: 3969
Market capitalization: ¥10.9 billion ($70 million)
3-Year Revenue CAGR: 9.1%
Operating Margin: 42%
ROIC: 22.8%
Cash-adjusted P/E: 9 times
EV/EBIT: 6 times
Short Summary:
Atled is a “micro-cap death trapped” biz that saw significant selling by institutions post Covid leading to a 53% drawdown since its peak.
This is a high-margin, low-churn SaaS business with a solid offering trading at 6x EBIT with a potential to re-accelerate as it converts its clients from a license to SaaS.
Given the crackdown on parent-child listings, there is also a potential for Atled to be taken out by parentco Softcreate which, for better or for worse acts as a put option.
Its ample cash balance (40% of market cap) given the current climate on governance provides optionality.
The question I have is if and when revenues will re-accelerate.
The business:
Atled provides workflow management software, sort of like a monday.com MNDY 0.00%↑ (or should I say a subset of it), although there are some differences. It has 2 products: X-point and Agile Works. Both are almost the same product, just the former for SMBs and the latter for larger enterprise businesses.
The business generates 80% of revenues from a stable recurring business through subscriptions and maintenance (of its license product).
This is a quirky little solution that might be reflective of Japanese Business Culture more than anything else. Atled’s solution is used when multiple stakeholders are involved and certain documentation and actions require approval, in Japanese called Shōnin, (not to be confused with the hit TV drama Shōgun) from one or more parties. From things like claims, invoices, purchase agreements, and requests for paid time off from your a**hole manager. You can fill in a form digitally, and get it approved completely online. It sounds like a simple solution, but it’s important to understand many of these things are still done with paper in Japan. The additional complexity is that different scenarios require different workflows.
Let’s use an example of a purchase agreement on paper:
Say that you have a purchase agreement you received from your supplier. To go forward you usually need to get approval from your manager. Easy peasy. However, maybe this particular purchase agreement is for a transaction worth more than ¥100 million, and for that instead of just getting approval from your manager, he needs to ask his manager who’s on vacation, who might in turn, need approval from compliance. Compliance then might have a question on the terms of the purchases which might take another few days to review. But wait, given this purchase agreement is related to IT-related purchases, it only needs to be signed off by the CTO! By this point, you’ve already wasted a couple of days waiting for the others to get back to you.
… slightly exaggerated but as you can see your shōnin depends on several variables which you can probably imagine can be confusing and inefficient if done on paper. The benefit of using X-Point or Agileworks is thus the ability to simplify a process that could otherwise be prone to errors and poor use of time. It helps guide users through different workflows for different situations at a time without the fuss. That includes not being constrained to one physical location to approve something.
Doing it digitally also brings the benefit of improved governance - people can track what’s holding up the process - and you can manage documents digitally in a single place without accidentally losing them in your massive filing cabinet since you might need them in the future. Of course, you can also collect data for further analysis.
Remember, this is what the average business in Japan looks like…
The good news is that customers seem to love it. More than 4500 customers (and 2 million users) have installed its solutions with some pretty recognizable brands too:
IT Grid Review has ranked them as the category leader 9 times in a row and sees many favorable customer reviews.
But what differentiates them?
Although the solution may appear quite basic there are a few components thats given Atled an edge over the years:
Atled has industry recognition and strong branding as can be seen by the 3rd party reviews. Many will likely consider this solution first before any newcomers.
It’s built a network of product ‘ambassadors’ due to its long-standing partnerships with IT vendors and System Integrators (SIers) which offer Atled products to customers. This includes established companies like FujiFilm, SCSK and Hitachi.
UX: workflow processes described earlier can be complex and vary widely across customers and situations. Through 20 years of experience, its built a know-how reflected in its easy-to-use solution that can adapt to unique needs. One thing that many misunderstand is that Japanese businesses don’t look for software solutions that can overhaul their workflow, they look for solutions that minimize disruption to existing workflow. Atled’s solutions can integrate easily into customers’ existing IT systems like Salesforce.
Another point that customers seem to bring up is the strong customer support that it seems to provide - both for onboarding and after-market.
Atled says because of this X-Point Cloud’s monthly Churn is only 0.14% versus 0.79% for the average of top 30 listed SaaS companies in Japan. For a solution that might look easy to copy, that’s pretty impressive.
Overview of main partners:
An example of a form template for an approval document on X-Point that looks a lot like the paper one. This makes it more intuitive for employees to use, minimizing friction. Atled has 1000+ templates.
The market is still growing
Japan’s DX journey is still early and Atled will probably benefit from it for some time as corporate Japan does away with paper and goes for more digital.
The niche market of workflow management solutions is estimated to be worth ¥16 billion. This is expected to grow 10.5% a year through 2027. Cloud as a portion though is still 34% of the whole market and is expected to grow at a 22% CAGR in this period.
Deloitte reports Atled to be the market leader in Workflow management solutions with a share of 14%. Among SMBs, Atled claims to have a share of 45%.
Atled has several vectors for growth. It’s been gaining new customers as DX catches on in Japan. Moreover, it can “land and expand”. In most cases, after it lands a logo, it only gets used in one department and spreads through the organization gradually (i.e. number of seats will grow). Then there’s an upsell of functions that can also drive ARPU.
Right now, growth is 50:50 from Existing and New Customers and it sees additional opportunities to transition AgileWorks, its enterprise-grade solution, onto the cloud.
Management argues they haven’t done so yet bc enterprise customers have so far been reluctant to use cloud-based solutions (yes in 2024…)
Management
Atled originally started in 2003 as a division of SoftCreate Holdings $3771 and was then spun off in 2007. To this day there is a close collaboration between the two which characterizes a typical parent-child listing. Unsurprisingly, SoftCreate is a majority owner and with a 51% stake. The chairman of Atled is also the CEO of SoftCreate.
The CEO of Atled Okamoto-san is ex-SoftCreate, who joined the org in 1994, he has since left SoftCreate for other companies twice. Each time though, the founder of SoftCreate managed to convince him to return to the firm, the last time in 2017 and eventually appointing him to lead Atled in 2019. Quite something.
SoftCreate also looks interesting. Despite being a small business it has done quite well as a publically listed company.
So what happened:
I think this is a typical case of a company that’s fallen into what I like to call a ‘micro-cap death trap’. Businesses that were once highly valued (EV/Sales of 10x at peak) and were just large enough to be investible by institutions. For one reason or another, the market cap gets too small, leading to institutions selling sometimes unwillingly (i.e. no longer investible bc… compliance/mandate/risk management etc), followed by a negative spiral of lower liquidity eventually resulting in most institutions leaving. This can create an interesting setup for individual investors willing to look.
In the case of Atled I think 3 factors led to this.
1) is that it’s been sold off post-covid like rest of the SaaS cohort.
2) in 2022 when the TSE re-classified the markets, Atled re-listed on the standard exchange from the TSE 1st. Which might have made it harder for some funds to invest. (it doesn’t help it stopped providing any kind of English material whatsoever).
3) Atled has been switching X-Point to its cloud version quite aggressively as of late. This meant topline growth at the group level slowed down markedly over the last 2 years.
Compared to institutional ownership of 21.4% (16.05% foreign) just 2 years ago today only 10.2% is owned by institutional investors (of which 4.72% foreign) so it is clear that many have exited.
Why Atled is interesting:
In its most recent results (Q4 released 25 April) it forecasts an acceleration in its cloud revenue. According to the company, only 30% of its existing customers have shifted to the cloud providing them with lots of opportunities to keep growing this segment which is now 42.9% of overall turnover. Combined with the negative growth from license sales now much smaller, Atled could start to see a re-acceleration in group revenues that may cause a re-rating. Standard support for the X-Point license will end in 2025 and the extended support will end in 2027.
What’s more is it just released the cloud version of Agile Works, which I see as the final stage of its Saas transition that could provide them another leg up.
The TSE cracking down on governance could also provide opportunities since Atled is a great candidate for such a play.
a) Atled is a parent-child listing, which is viewed more harshly these days (you can also checkout
fantastic article on parent-child listings in Japan here ). This kind of listing can become cumbersome and expensive, which may lead to the management buying out the public float.b) 41% of its market cap is in cash. Most of which it doesn’t need as a profitable self-funding entity. Management may decide to return some of this capital as buybacks or dividends. It’s also looking at M&A as a use of its cash which could alleviate product reliance risk but also risks of fumbling given the track record of M&A in Japan.. (oh god).
Thinking about valuation for a second here, Atled would fall in the low growth category, but as a high single-digit to low teens grower that’s actually profitable, I’d like to think it deserves a higher multiple… (Currently 2.5 times EV/Sales)
Risks to consider
Now this might all sound very enticing but to balance it out I’ll share some nuances that I considered.
Product reliance: Atled is veeery reliant on providing a specific function in the form of software. This is typically a function that most ERPs can provide (though not to Atled’s extent). What happens if that changes? Will the Churn always be this low? If others provide something not quite as good but good enough, what will pricing dynamics look like? From a functionality perspective, I have limited evidence that it is differentiated enough.
Margins: One thing is to see a mouthwatering level of operating margin but it’s worth thinking how much more it can expand. I focus on businesses that are in the stage of growth where they can benefit from both revenue growth and operating leverage. Now, could this pull off an OBIC and do 60% margins? Maybe, but probabilistically I wouldn’t bet on it. There’s also something to be said about not investing a little bit more aggressively. I mean, it doesn’t need to go into the red - but going after customers more aggressively given the opportunity set might not be a crazy idea. It’s pure speculation from here but since the CEO is closely tied to SoftCreate but doesn’t own many shares himself, he might be playing it (too) safe.
Say that it does, and margins fall, the current shareholder base might not like that which is fine, but you might also end up with a low EPS grower since the rev growth gets canceled out by margin compression. This seems to be happening already as of last fiscal year. and acquisition of customers in this kind of SaaS biz becomes more costly as it scales... Running on a public cloud is not cheap either, it’s reported to be margin dilutive, which could add more weight on pushing margins down.
Sales decline: I always think about the incremental buyers in micro-cap land. What’s going to change such that it’ll gain the attention of retail investors? If the margin isn’t, the acceleration story is one - but this might happen much later than hoped. I’m trying not to forget that the Enterprise License version Agile works is still 45% of the total and it just launched the SaaS module. Depending on how quickly it decides to bring its license version to an end (which isn’t clear for now), it might cap the growth acceleration thesis at the group level for some time…
To Summarise
IMO Japan is still early in its DX Journey. Atled is a simple business in a good position with a sticky customer base that looks mispriced. The FCF Yield is 5.7%, for a growing, predictable revenue stream (10x EV/FCF) which looks asymmetric given the opportunity ahead.
So I can see why investors are interested. Just that this was ultimately not for me bc I prefer one with both growth and margin expansion. It’s not a super grower so the thesis will likely rely more on re-rating. Frankly, I’d also have liked a CEO that’s a little more ambitious. But hey, some of you might be okay with that! As they say, one man’s decent-looking micro-cap is another man’s treasure.
I’ll be following this one for any developments. Especially now that its launched the SaaS ver. of Agile Works, which might add a new growth engine. It’s also implemented a new pricing plan for x-point cloud which, if successful, should be positive for growth.
In general, there are some interesting opportunities that I might not invest in, but if there’s demand and I can see a good argument I might still write them like this. Let me know your thoughts on that.
Finally, thanks again for your support and interest! For those that live in Japan - hope you had an awesome golden week.
…and for those still in Omaha, if you see anyone who mentions stonks and Japan in the same sentence, feel free to share this with them! 😂
Disclaimer: The content on this website is for informational and educational purposes only. Nothing should be considered as investment advice or as a guarantee of profit. Please make sure to do your due diligence. The opinions expressed are those of the author and are subject to change without notice.