Following up on CYND
More thoughts on this 'Rule of 40' SaaS Co trading at a FCF/EV yield of 11%...
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Disclosure: The author currently owns shares in the company as of 9 May 2025. The security could be sold at any point in time without prior notice.
CYND (Original post here) the VMS SaaS company catering to beauty salons initially saw a decent run since we first discussed it, but since Feb the stock price had abit of a, ahem… haircut😏close to 30% from local highs. This one also got wacked because of tariffs and hasn’t really recovered. (Apparently, Japanese Salons will use less SaaS because Japanese people will get fewer haircuts because of it…)
I thought this would be a good time to share how I’m thinking about the opportunity and what I’m doing with it.
Topics:
More details of CYND’s M&A of Kanzashi
Insights from Management/Nuances of the business
CYND’s Pricing Power
Valuation, thoughts on the upcoming fiscal year, and potential catalysts
Risks
On the M&A of Kanzashi
CYND’s CEO, Okuwaki-san, was recently on an interview with Bloom Capital a Sell-side M&A advisory.(Part 1, Part 2 - in Japanese) They specifically went through the details of their ‘controversial’ acquisition of Pacific Porter, which owns CYND’s main competitor, Kanzashi. It provided a peek into how they thought about the whole process, which I found insightful. Here were my key takeaways:
Kanzashi
Kanzashi has been focusing on a cost leadership strategy with a low ARPU.
They have a good/efficient sales strategy different to BeautyMerit (BM), which is CYND’s competing product
Marketing/Ad spend is not that effective for beauty Salons. So CYND has focused on sending their salespeople with major beauty product distributors alongside them to talk to Salon owners.
For Kanzashi, they had no salespeople but used a partnership strategy. In combination with their cost leadership strategy, it has been highly effective.
This means they partner with reservation sites as well as Point of Sales (POS) companies, which directly connected Kanzashi’s functions with POS partner solutions.
Prior to the acquisition, they’ve been investing heavily in growth using this strategy, hence why the margin has been lower than Beauty Merit. On the other hand, as Kanzashi scales, operating leverage potential is larger than that of CYND.
Kanzashi is a simple solution which focuses purely on reservation management, whereas BM has other ‘add-on’ solutions (increasingly more like a CRM type software)
Acquisition of Pacific Porter/Kanzashi
Some investors may believe the acquisition price was ‘expensive’, but the decision was ultimately based on the careful/detailed analysis for potential synergies, and concluded it was worthwhile.
Kanzashi had VC investors, which meant they needed an exit and were looking to IPO. So when CYND looked at their profitability, they knew there were costs related to it, which they realised they could immediately cut down post acquisition.
However, the fact that they were getting ready to IPO was important for CYND, as they wanted to make sure the acquisition target had good corporate governance/oversight. Kanzashi was organised in this respect.
Deep due diligence conducted and with DCF modelled out spanning 10 years
Was comfortable with drawing a 10-year projection due to the predictability of revenue/churn as a SaaS business.
CYND discloses overall churn and not by units, but this hasn’t changed after the acquisition, implying churn is similar for BM and Kanzashi
Taking into account some of the potential synergies:
One thing they knew going in was that a decent portion of Kanzashi’s churn was driven by customers switching to Beauty Merit – the reverse also happened, where BM users downgraded to Kanzashi. This was something they tracked closely even prior to the transaction, so they could already see revenue synergies here during the Due diligence phase. This effectively meant churn can improve. (Which it has)
They took into account the improvement in churn in their valuation. Even a 0.1% change in churn can lead to an outsized difference in LTV/cashflow/valuation over time.
These are synergies possible ONLY because CYND is the buyer. Such synergies are not possible.
Rather than Kanzashi raising prices, they saw the potential for NRR to increase significantly by customers switching from Kanzashi to BM! (I think this is an underrated ‘jump in ARPU’ component that you don’t see in the reported KPIs) As there’s essentially zero marketing costs required for this so incremental profitability of this is very high.
Okuwaki-san was quite involved in the modelling process himself when assessing this acquisition. It was their first acquisition so they were very careful with the process.
Everyone at CYND studied/knew Kanzashi well as the only key competitor and approved of this acquisition.
There was also a defensive rationale to the acquisition. Several companies do reservation management according to the CEO, but these solutions are too simple. For complex reservations that handle: different services, available time slots and shift management of Salon Staff and various other factors can only be done by Kanzashi and BM. Hence why CYND moved to acquire them - to kill the risk of Kanzashi getting acquired by a would-be competitor.
3 years later, would you still have bought Kanzashi? CEO’s answer was: Absolutely.
Across these comments, one thing I think is debatable if a 10-year DCF is really all that helpful, but I think the rationale at least makes sense. Despite the criticism for this acquisition an important part I took away from this acquisition process was that, as owner operators they were extremely careful in their due diligence process which was comforting to see, as often times such discipline can be surprisingly lacking by some younger companies IMO.
New insights and nuances of the business
Since I wrote the first article on CYND, they’ve been quite consistent in terms of execution. But as time goes on, you get to learn new things, and it certainly helps you build a more nuanced view. Here were some insights I found quite useful:
On the Mechanics of Growth and Margin
Marketing/ad spend is a variable cost and a great lever on margins for SaaS in theory but simply doesn’t work as well in the beauty salon industry, given the fragmented nature where owners need in-person support. So they need to hire salespeople, which is a fixed cost, and that’s not so easy to turn up or down, especially in Japan. Thus, it makes more sense to grow sustainably, albeit at a slower rate, while generating profits. On the other hand, CYND being able to scale the way it did and be profitable is something the CEO believes is difficult to achieve. (I’d agree - sustaining mid-teens growth while generating 20%+ margins is not easy)
One positive is that with the company now having operated for some time, they also have good data on roughly how much sales a salesperson should be able to generate on average. With this, they can work back how many salespeople they need to maintain a certain level of growth. i.e. this is something they can control pretty well. Conversely, if sales team productivity falls from the baseline, they instead focus on training the existing team to be more efficient. This dynamic should help them carefully balance growth and profitability. If you were wondering, CYND CEO does look at Rule of 40! and only listed when they cleared this hurdle.
While the company does not disclose their Customer Acquisition Cost (CAC), they mentioned the LTV/CAC is above the SaaS industry average, which is said to be around 3 times. (I suspect much higher)
This not to say that they don’t spend on marketing at all. They have 4 main sales channels: distributor partnerships, marketing/promotion, referral and direct sales. A key promotion channel they use are trade shows which is a valuable opportunity to generate leads. This includes events such as Beauty World - one of the bigger beauty salon expos in Japan.
On ARPU, I think this is a runway which I may have underestimated