Morningstar Equity Research Report 2020.04.02

Provide cloud service by SaaS / ASP

Recommendation rating（Apr 1）

Scala, Inc.

Overweight → Neutral（4845.TSE 1st）
Stock Price

Unit of Investment

412yen（20/4/1）

Market Cap

52-Week High

7.21Bil yen

100Shares

52-Week Low

830yen（20/4/1）

PER（E）

355yen（20/1/21）

ー（20/3/15）（20/4/1）

High expectations of newly launched engagement fund todrive mid and long-term growth■1H FY2020 prioritized strategic investment plans￥800 〜￥1,200

Estimated Share Price Range

Scala, Inc. reported its consolidated business results (non-GAAP base)for the ﬁrst six months (July ~ December 2019, 1H) of ﬁscal year ending
June 2020 (FY2020). In the period, sales revenue came to Yen 8,606
million (up 2.4% from the same period last year) but operating income
was down 27% y-o-y to Yen 828 million. The company achieved sales
growth thanks primarily to stable revenue from a long-lasting royal clientbase (referred to as ʻstock-based revenueʼ) while upfront investment
costs including personnel expenses borne by major business segments
dragged down its operating profit. With regard to segmental results,
the core SaaS/ASP business (a provider of wide-ranging applications via
the Internet and telephone lines) enjoyed solid orders for development
and product projects from non-life insurance clients, which attributed
to sales revenue growth. The business also continued to progress in
product-line changeover toward the mainstay ʻi-seriesʼ products it
proposes to clients in collaboration with Leo Connect Co., Ltd. (ʻLCʼ), a
customer support company. In the Softbrain (security code:4779) (ʻSBʼ) segment, the SFA business (a provider of ʻe-Sales Managerʼ and othersales support systems) and the Field Marketing business (offering,
among all, various on-site sales promotion support for retail and service
industries) contributed to higher stock-based revenue, however increased
development and staﬀ costs weighed on its proﬁt, resulting in postinghigher sales and lower profit compared with a year ago. The Customer
Support business disposed of unprofitable projects among its inbound callcenter operations. It promoted operational effectiveness with the help ofconsultation for the implementation of SaaS/AS services and other measures, resulting in lower sales and higher profit. Other businesses overall
posted a decrease in both sales and profit, as they suffered up-front
investment costs.

Yen

1,196

1,200

26 WeeksMoving Average

900

600

13 WeeksMoving Average

355

300
Volume13Weeks Moving Average

thousand
Shares

4,000
2,000
0

34

5

6

7

8

13 WeeksMoving Average

9

10

11

12

26 WeeksMoving Average

￥642

1

2

3

Volume（13 Weeks Average）￥742

1,302,146Shares(automatic responses to voice calls), ʻC7ʼ (cloud-based backbone
system) and other technologies. These services are cooperatively
oﬀered by Scalaʼs three businesses comprising the Connect Agency
business (CA), a provider of outbound services using a cloud-based
PBX (private branch telephone exchange), the LC business thatoﬀers various services to control the quality of inbound call center
operations and the existing SaaS/ASP business. Both CA and LC are
former Hikari Tsushin, Inc. (code 9435) group enterprises. Scala is
now able to approach a few thousand of their nationwide agents andcustomers (mostly SMEs) to promote its services.
Scala has formulated its medium-term management plan (ʻthe midterm planʼ). The plan sets out sales revenue and operating incometargets for two separate periods; one is to achieve sales revenue of Yen
100 billion (operating income of Yen 10 billion) by FY2025 ending June
2025 and the other Yen 500 billion (Yen 50 billion in operating income)by FY 2030 ending June 2030 (for details of the mid-term plan, see
ʻBusiness Environment and Outlookʼ noted later). During 4Q (April-June2020), Scala is set to launch ʻEngagement Fundʼ (an investment fundthat pursues long-term capital gains by investing in enterprises striving to enhance their corporate value with the help of AI). The company
expects to post fund management fees from this new business as sales
revenue in FY2021 ending June 2021.
Over recent months, the coronavirus pandemic has sent the stock
market into unprecedented panic. In light of this, we, Morningstar,
have revised our previous estimated share price range of Yen
1,600 ~ Yen 1,700. Our new estimated lower end price is Yen 800,
which is set at a level approximately 50% higher than the 52-weekhigh/low range, while the upper end is Yen 1,200, set around thehighest price of the 52-week high/low range. We have changed ourvaluation of the companyʼs shares from ʻOverweightʼ to ʻNeutralʼ.

■Promising high-value added services and crossselling opportunities
Scala did not disclose consolidated business results forecasts forfull FY2020 ending June 2020, on the grounds that its performancewas expected to be significantly influenced by the progress in new
businesses. Up-front investment costs were a squeeze on proﬁt for 1H
FY2020, but 2H is likely to see higher demand reflecting a seasonalpattern that most clients draw up an annual IT budget toward ﬁscal yearend in March, as well as an increase in proﬁtable projects. The companyʼse-design system ʻOne-click to get an estimate for automobile insurance premiumʼ developed for non-life insurers won the ʻGood Design Award 2019*ʼ
; it was the first online automobile insurance design to receive the prize. Its
function that helps users get an estimate of insurance premium by clicking
just once rather than the conventional around 30 times, has been received
very well. The technology employed in the system has been incorporated
into Scalaʼs modularization know-how that drives shorter developmenttime. This is expected to help the company enhance the value of SaaS/ASP development projects offered in 2H. Other promising developments
include the switching to or cross-selling of services that provide ʻIVRʼ

Financial Results （as of April 1, 2020）
Revenue（Yen Mil）
2018-6
2019-62020-62021-6

Past Results
Past Results
Company est.
MS est.
MS est.

YoY（％）

Operating Profit（Yen Mil）

Income Before
Income Taxes（Yen Mil）

YoY
（％）

YoY
（％）

Net Profit（Yen Mil）

YoY
（％）

EPS
（Yen）

12,829

20.3

1,546

11.3

1,535

11.1

707

28.0

41.9

17,112

33.4

2,153

39.2

2,137

39.1

946

33.8

55.9

‑

‑

‑

‑

‑

‑

‑

‑

‑

18,560

8.5

2,280

5.9

2,265

6.0

1,020

7.8

58.3

27,000

45.5

3,100

36.0

3,050

34.7

1,370

34.3

78.3

※ Scala, Inc. has prepared its ﬁnancial statements under IFRS (International Financial Reporting Standards) from the ﬁscal year ended June 2016,
but ﬁgures in the table (adjusted items that arose after the adoption of IFRS were excluded) are restated in line with non-GAAP.
This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

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Morningstar Equity Research Report 2020.04.02

Scala, Inc.（4845・TSE 1st）
We note that the share price may rise to test the upper end of the range,
providing the current panic market is restored to normal in a shortperiod of time and the bullish sentiment revived in the Japanese stock
market, prompting investors to favorably reevaluate the company share.

Sales revenue breakdown‫ٽ‬1H FY2019+)<

Total sales revenue:٧8.60 bn‫ٽ‬1H FY2020‫كپق‬Others（Takahiro Arimura）

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(Note) *The ʻGOOD DESIGN AWARD2019 was hosted and presented by the Japan
Institute of Design Promotion.

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An operator of services with core SaaS/ASP business models. In
July 2016, Scala, Inc. incorporated a major marketing support systemprovider Softbrain Co., Ltd., as its consolidated subsidiary. In August
2017, Scala acquired ʻplube Co., Ltd. (present Scala PLAYce, Inc.), an
operator of EC sites for trading matching game cards. In March andNovember 2018, Scala bought 66% and 51% stakes in Leoconnect, Inc.
and Connect Agency Inc. respectively, subsequently both incorporated as
its consolidated subsidiaries. The two companies were formerly ownedby the Hikari Tsushin Group (the former 100% owned and the lattersub-subsidiary). Scala also established Scala Next, Inc., with the aim ofplanning and developing new SaaS/ASP businesses and services. Thenin December 2018, it founded an offshore development base, Scala
Next Mandalay in Myanmar. Myanmar demonstrates relatively low
wage and price levels. Scala Next Mandalay is expected to recruit andnurture local IT engineers to win more projects and drive profitability
for the SaaS/ASP service. In August 2019, in line with its mid-term plan,
Scala announced that it had consolidated J-Phoenix Research Inc. whichprimarily engaged in supporting and consultation for the implementationof AI/IoT technology. At the same time, It established Scala Partners,
Inc. to provide ﬁnancial assistance and facilitate business developmentin AI and other ﬁelds. In March 2020, with the aim of pushing throughthe objective set out in the mid-term plan to deal with central and local
governments, the company incorporated Grid Group Holdings Co., Ltd.,a facilitator of regional revitalization and regeneration programs among
other services, as its wholly owned subsidiary.

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Total sales revenue:٧8.40 bn

.51 bQ

Source: Created by Morningstar Japan, based on the companyʼs information

Scala, Inc.ʼs service/product line
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Source: Created by Morningstar Japan, based on the companyʼs information■ Business Environment and Outlook
A c c o r d i n g t o t h e ʻ 2 0 1 9 W H I T E PA P E R : I n f o r m a t i o n a n dCommunicationsʼ released by the Japanese Ministry of Internal Affairs
and Communications, the penetration of AI (artiﬁcial intelligence) and IoT(Internet of Things) has shown marked growth, with the number of IoT
devices in use worldwide estimated to increase from roughly 30.7 billion
units in 2018 to 44.8 billion units by 2021. On the back of mounting
needs for further eﬃciency and labor saving across the board, the speedof adoption of AI technology is likely to accelerate.
Meanwhile, Scala has formulated the ʻMedium-term Management Plan:
COMMIT5000ʼ. The plan highlights the companyʼs three ʻcapabilitiesʼ
that have been acquired through the operation of SaaS/ASP services(comprising the capability to identify real issues; the capability to
discover the hidden value of resources; and the capability to maximize
value by proposing and executing an optimal combination of issues
and resources). To date, the company has developed and merchandised
projects or programs building on the three capabilities in order topropose them largely to listed companies in Japan. The new mid-term
plan, however, has implemented a new policy to further accelerateearnings growth. To this end, the plan sets out new goals to expand
its markets to government-affiliated enterprises, local authorities andoverseas companies, as well as enhancing the collaboration with partnercompanies to drive the entry into the peripheral business domain with
the SaaS/ASP model.

Although these three capabilities will be replaced with three businesssegments over the medium term, support for companies addressing the
AI/IoT ﬁelds seems to be an important initial task for the ﬁrst year of the
mid-term plan. We believe that structuring and managing engagement
funds as well as the development of AI-related systems will contribute to
Scalaʼs revenue growth.

Risk Factors
Scala commits to a service level agreement (SLA) with clientsof SaaS/AS services. SLA deﬁnes a certain-level of assurances forserver operations, care for service failures, notices of scheduled
maintenance among others. This indicates that the company may
face a large amount of indemnity, should its service, for whateverreason, fails to comply with the levels of assurance defined by
SLA. In addition, an outage or breakdown of service arising from
hardware/software defection or disorder, human error or network
line disturbance and service disruption or breakdown causedby the telecom carrier, cyberattack or system failure caused bynatural disasters or other factors are likely to aﬀect its earnings
and ﬁnancial standing.

Shareholder Return（As of Apr 1）■ Dividends■ Shareholder Special Beneﬁts

Dividend Per ShareFirst half

Second half

Annual2018-6

Past Results

¥10

¥10

¥20

2019-6

Past Results

¥12

¥12

¥24

2020-6Company est.

¥14

¥14

¥28

None

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

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Morningstar Equity Research Report 2020.04.02

Scala, Inc.（4845・TSE 1st）Competitor Comparison（If the number is better than rivals, it's highlighted by red character）（As of Apr 1）
Scala, Inc.
(4845・TSE 1st)
Stock Price
Basic Point

GrowthProfitability

Financial
HealthCybozu, Inc.

(4776・TSE 1st)￥412

￥1,100￥1,845

Unit of Investment

100Shares

100Shares

100Shares

Minimum Investment Amount￥41,200￥110,000￥184,500

June

February

December

―

12.1

132.3

3.5

21.2

1.1%

―

Fiscal Year End
Share Price
Indicator

PiPEDO HD, Inc.
(3919・TSE 1st)

PER（E）

1.0
6.8%

PBR
Dividend Yield（E）
Revenue Growth Rate（E）―

Operating Profit Growth Rate（E）―

EPS Growth Rate（E）―

Operating Margin
（E）

―

14.4%
251.5%
389.5%
22.3%

14.1%

5.9%

27.4%

12.2%

7.1%

22.3%

37.5%

41.1%

ROE
ROA
（Ordinary income/Total
assets）
Equity ratio
Debt-Equity Ratio
Current Ratio

12.9%▲23.6%▲36.8%
8.7%

85.3%

90.8%

203.9%

45.0%
0.0%

151.6%

97.8%

We selected PiPEDO HD, Inc. (code: 3919) and Cybozu, Inc. (code: 4776) as industry peers. Scala competes with the two companies on some operations of the Site Assistantand CRM Service businesses in the SaaS/ASP domain.

■Growth Potential■Profitability■ Financial Stability

Scala didn't disclose consolidated
business results forecasts for the full fiscal
2020, as its performance is expected tobe significantly influenced by the progressin new businesses. However, we note thatrevenue from the SB segment that operates
with particular emphasis on the stockbased business represents more than 50%
of total consolidated sale revenue and its
revenue has scaled up over the past few
years. Also, not only does the SaaS/ASP
business continue its upbeat performance,
but the steady growth of the Customer
Support, Cloud PBX Service and EC Site
Operations businesses is likely to remain.
As for industry peer comparisons, PiPEDO isentering into a period of reaping returns fromits aggressive investment in earnings growth
made until the previous fiscal year ended
February 2019. Although PiPEDOʼs revenue
for ﬁscal 2020 ended February 2020 is likely
to have fallen short of its initial projection, it isstill larger than that of Scala.

Scala did not disclose its forecast for
operating income margin for FY2020. It
should be noted, however, that the lowmargin Customer Support business has
significantly progressed in its serviceline changeover toward SaaS/ASP
services, therefore the business appears
to be improving its break-even points.
Operating margin for 1H FY2020 cameto an unimpressive 9.6%, as up-front
investment costs weighed down on profit.
However, given 2H is likely to see a jumpin demand thanks to the seasonal pattern
in which most clients tend to draw up
their annual IT budgets in the run-up to
fiscal year-end in March, as well as anincrease in proﬁtable projects, the company
is expected to maintain a double-digit
operating margin on a full-year basis.
Its ROE is at a relative low position in thepeer comparison but still at a high doubledigit level.

Scala has a low equity ratio and its debt
equity ratio is at a relative mid position.
Management pursues effective use ofinterest-bearing debts as it regards M&A(corporate mergers and acquisitions) as
its important business issue. On the other
hand, the company owns a large proportionof current assets, with its liquidity ratio
being higher than that of any other peer.
We believe that Scalaʼs balance sheet is wellcontrolled strategically, with no particularconcerns about its ﬁnancial standing.

Morningstar Japan K.K.
Research & Analysis Department
Analyst Takahiro Arimura+81-3-6229-0078
tarimura@morningstar.co.jp

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

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We ﬂexibly respond to any changes of observations regarding
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（4）Estimated Share Price Range in
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It shows the price range for a stock price in the next 6 months.
We determine upper and lower range of stock price based onfair value estimates from share price indicator, technical factors
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and such.

Analysis Points■ Analyst Comment■ Company Overview

most recent earnings trend and businesscompany is engaged in and how revenue

environment. It shows the most importantsources are defined. Also on the basis of

information for stock investment suchour research, it discusses what businesses

as evidence for investment decisions,the company will focus on in years toperspectives on earnings forecasts andcome and how it carries out mid-termbusiness prospects. Also to make sure it

business plan.

Each analyst reports and evaluates theis easy to comprehend, we write in 2-4
paragraphs and use bold to emphasize
important texts.

■ Revenue and Earnings Trend

It explains in detail what businesses the■ Risk factors
It shows the companyʼs risk factors anddescribes various aspects of risks such as
business, earnings and financials. Typicalstock market risks are also taken into
consideration.

■ Business Environment and Outlook

It discusses current circumstances andgrowth potential of the industry to which
the company belongs. A comprehensive

It reports earnings in past two ﬁscal years,

report on the industry from different

company forecasts and our forecasts forperspectives is provided through research

the current and next ﬁscal year. We predict

interviews to competitors. Speciﬁc ﬁgures

earnings based on research as well as pastof the industry data are also introduced.

quarterly earnings trend and analysis bysegments.

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.