Morningstar Equity Research Report 2020.10.13

A provider of SaaS/ASP-based cloud service

Recommendation rating（Oct 12）

Scala, Inc.

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

Unit of Investment

1,016yen（10/12）

100Shares

Market Cap

52-Week High17.79Bil yen

52-Week Low

1,135yen（10/12）PER（E）

355yen（20/10/2）

6.1（20/3/15）（10/12）

Scala deploys AI Engagement Fund to win DX
and management support projects■Growth and development investment costs weighed
down FY2020 earnings￥1,000 〜￥1,500

Estimated Share Price Range
Yen

Scala, Inc. reported its consolidated business results (non-GAAP base)for the full ﬁscal year 2020, ended June 2020 (FY2020). In the period,
sales revenue came to Yen 17,025 million (down 0.5% year-on-year)
and operating income was Yen 1,045 million (down 51.5% y-o-y). The
moderate fall in sales was in large part attributable to the disposal of lowmargin projects in the Customer Support business. The company suffereda sharp profit decline, as its mainstay SaaS/ASP business (the provider ofwide-ranging applications via the Internet and phone lines) increased operational development/ growth investment and faced higher manpower
costs. In addition, restraints in client activity amidst the new coronavirus
pandemic put pressure on proﬁt margins for the SFA and Field Marketingbusinesses within the segment of Softbrain Co., Ltd. (security code: 4779;
hereinafter ʻSBʼ).

1,500
1,200

1,135

26 WeeksMoving Average

900
600
thousand
Shares355

300

13 WeeksMoving Average

20,000Volume10,00013Weeks Moving Average0
10 11 121

2

13 WeeksMoving Average

4

5

6

26 WeeksMoving Average￥764■Investment in profitable projects using proceedsfrom sale of SB shares

3

7

8

9

10

Volume（13 Weeks Average）￥695

4,546,538Sharesvalue. Early staged DX projects are funded by SCSV fundʼs capitalbut in subsequent stages they are charged with monthly usage fees,
therefore Scala can expect to record a stable monthly fee revenue.
Separately, as SCSV enhances its corporate value, Scala is expected
to generate gains on its disposal.

In August 2019, Scala formulated its ʻMedium-term Management
Plan COMMIT5000ʼ (details in ʻBusiness Environment and Outlookʼ
noted later); FY2020 was the period to lay the groundwork for theplanʼs success. The SaaS/ASP business has built up the modularization
technology enabling a shorter time for the development of projects.
Going forward, the company is set to deploy this technology with theaim of acquiring in-house capability to develop new digital transformation(ʻDXʼ) projects. In December 2018, Scala founded an offshore developmentbase in Myanmar. Since, the company has dedicated itself to the development of local IT engineers. As the location can offer high-level technological performance with relatively low personnel costs, it helps the company
facilitate its low-cost operations. Further into 2020, Scala invested in
MyanCare Co., a local remote medical care service provider; it also set upa joint venture with a major local IT enterprise, Ace Data Systems. The JV
is to grapple with solving social issues in the education, healthcare andagriculture areas by means of AI/IT/IoT/technologies. Scala now plans
to place Myanmar not only as its technology development base but also
a foothold to oﬀer social issue solutions, in line with the goal set by its
Medium-term Management Plan.

Meanwhile, the social issue solution-oriented business is expected
to post sales from FY2022 ending June 2022. The business is tobe partially managed by its recently consolidated-as-subsidiary,
Grit Group Holdings (ʻGGHʼ). However, it is currently serving as asource of manpower for the (Scala) Group. Employment supportbased subsidiaries under the GGH umbrella have business relations
with the University of Tokyo and 476 other Japanese universities.
Graduates from this university network have been employed by
Saas/ASP and other operating subsidiaries of the Scala group.
A notable development concerning selection and focus ofmanagement resources is the disposal of total shares in Softbrain Co.,
Ltd. while and investing the proceeds into highly profitable projects.
Scala has finalized the list of investees to allocate the full amount of
capital from SCSV No.1, launched in FY2019. In light of this, the company is now highly likely to launch SCSV No.2 by the end of FY2021,
promising upside potential for its forecast earnings.

One of its two main business objectives is the acquisition of projects in
the AI/IT/IoT and DX areas, the other is supporting added value-oriented
management. Scala identifies and signs up a contract with listed companies
positively promoting digital transformation and promising to be revaluated in the future. The company invests in those companies through its
AI Engagement Fund (an investment limited partnership designated asʻScala Co-creating Shared Valueʼ (SCSV) No.1). The typical contract term isaround five years, during which Scala receives various orders from theseinvestees for their DX system development projects, while providing themwith its business support packages designed to assist them create added

Recently, the companyʼs share price renewed its year-to-datehigh on October 2, following the news of its business alliance with
Public dots & Company with its proven record of successful local
government DX projects, among others. Morningstar predicts that
Scala will raise the possibility of achieving the goals set by the
Medium-term Management Plan through a robust earnings model inwhich SCSV will extend its DX market, driven primarily by the Saas/
ASP business. Our estimated low end of the price range equals a
support level at which the dividend yield stands at around 3%. The

Financial Results （as of Oct 12, 2020）
Revenue（Yen Mil）
2019-62020-62021-62022-6

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

Operating Profit

17,112

33.4

2,153

39.2

2,137

39.1

17,025

▲0.5

1,045

▲51.5

1,018

▲52.3

10,000

▲41.3

3,100

3.0倍

3,100

11,500

▲32.5

3,250

3.1倍

30,000

2.6倍

4,100

26.2

（Yen Mil）

YoY（％）

Income Before
Income Taxes（Yen Mil）

YoY
（％）

YoY
（％）

Net Profit（Yen Mil）

YoY
（％）

EPS
（Yen）

946

33.8

55.9

431

▲54.4

24.8

3.0倍

2,900

6.7倍

165.6

3,250

3.2倍

3,050

7.1倍

174.2

4,100

26.2

3,850

26.2

220.7

※ 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.

（1/3）

Morningstar Equity Research Report 2020.10.13

Scala, Inc.（4845・TSE 1st）high end price is set at the resistance level of ￥1,324, a 10-year highposted on July 13, 2018; but should the share price break through thislevel, the next higher turning point of ￥1,500 will be in sight. We
have changed our valuation of the companyʼs shares from ʻNeutralʼ toʻOverweightʼ.

Sales revenue breakdown‫<)ٽ‬（Takahiro Arimura）

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■Company Overview
Scala, Inc. is an operator of services with core SaaS/ASP businessmodels. In July 2016, the company incorporated a major marketing
support system provider Softbrain Co., Ltd., (SB) as its consolidated
subsidiary. In August 2017, it acquired ʻplube Co., Ltd. (present Scala
PLAYce, Inc.), an operator of EC sites to trade matching game cards. In
March and November 2018, Scala incorporated respectively Leoconnect,
Inc., then a subsidiary of Hikari Tsushin, Inc., and Connect Agency Inc.,a sub-subsidiary of Hikari Tsushin, as its consolidated subsidiaries. The
company also established Scala Next, Inc., with the aim of planning anddeveloping new SaaS/ASP businesses and services. In August 2019, inline with its mid-term plan, Scala announced that it had consolidated
J-Phoenix Research Inc. which primarily engaged in supporting andconsultation for the implementation of AI/IoT technology. At the sametime, it established Scala Partners, Inc. an enterprise that provides
ﬁnancial assistance and develops companies in the AI and other ﬁelds. In
March 2020, with the aim of pushing through the 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. Further in August 2020, Scala and Branding
Technology Inc. (security code: 7067) established a joint venture, Social
Studio Co., Ltd., to support administrative bodies and local municipalities
in their promotion of DX programs. Meanwhile, this August, Scala
adopted a resolution to sell its entire stakes in SB, through a sharetransfer method scheduled for March 2021.

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SaaS/ASP
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Total sales revenue: ￥17.11bn
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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 2 0 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 and IoT has shown marked
progress, with t he number of IoT devices in use worldwide estimated toincrease from roughly 25.4 billion units in 2019 to 34.8 billion units by
the end of 2022. On the back of mounting needs for further eﬃciency
and labor saving across the board, the speed of adoption of AI technology
appears to accelerate going forward.
Meanwhile, Scala, Inc. has formulated its ʻMedium-term Management
Plan COMMIT5000ʼ. The plan outlines the companyʼs three ʻcapabilitiesʼ
that have been acquired through the operation of SaaS/ASP services (1.
The capability of discovering real issues; 2. The capability of revealing
the hidden value of resources; and 3. The capability of proposing andexecuting an optimal combination of issues and resources to maximize
value.) With an eye to eﬀectively implementing the three capabilities,
the company has newly established the following segments that will aassume the objective: 1. An added value-based management support
business; 2. An IT/AI/IoT-related business; 3. A social issue solutionoriented business. In line with the Medium-term Management Plan,
Scala is set to rearrange the existing and new businesses into the threesegments, with a view to generating an organic alliance between themand three capabilities to maximize customer value. With the fulﬁllment of
this vision, the plan has set dual-period earnings projections. One is toachieve Yen 100 billion in sales revenue (operating income of Yen
10 billion) by FY2025 and the other Yen 500 billion in sales revenue(operating income of Yen 50 billion) by FY2030. To date, the company
has developed and commercialized projects or programs building on its
three capabilities, aimed mainly at listed companies in Japan. However,
it now plans to expand its markets to target government-affiliatedenterprises, local authorities and overseas companies.

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, notice concerningscheduled maintenance, among others. This indicates that thecompany may face a large amount of indemnity should its service
fails, for whatever reason, 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, humanerror or network line disturbance and service disruption or
breakdown caused by the telecom carrier, cyberattack, system
failure caused by natural disasters or other factors are likely toaﬀect its earnings and ﬁnancial standing.

Shareholder Return（As of Oct 12）■ Dividends■ Shareholder Special Beneﬁts

Dividend Per ShareFirst half

Second half

Annual2019-6

Past Results

¥12

¥12

¥24

2020-6

Past Results

¥14

¥14

¥28

2021-6Company est.

¥16

¥16

¥32

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 2020.10.13

Scala, Inc.（4845・TSE 1st）Competitor Comparison（If the number is better than rivals, it's highlighted by red character）（As of Oct 12）
Scala, Inc.
(4845・TSE 1st)
Stock Price
Basic Point

Growth￥1,765￥3,370

Unit of Investment

100Shares

100Shares

100Shares

Minimum Investment Amount￥101,600￥176,500￥337,000

June

February

December

6.1
2.4
3.1%

20.2

241.6

PER（E）PBR
Dividend Yield
（E）

38.7

―

0.3%

▲41.3%▲6.6%

196.7%
797.2%
31.0%

15.4%

Operating Profit Growth Rate（E）

▲28.1%

13.7%

▲2.1%

▲35.9%

17.2%

12.7%

4.5%

21.9%

27.4%

4.2%

21.6%

22.3%

29.7%

54.4%

Operating Margin（E）

Financial
Health

3.7

Revenue Growth Rate（E）
EPS Growth Rate
（E）

Profitability

Cybozu, Inc.

(4776・TSE 1st)

￥1,016

Fiscal Year End
Share Price
Indicator

PiPEDO HD, Inc.
(3919・TSE 1st)

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

155.8%

36.8%

145.5%

45.0%
0.0%

197.6%

97.8%

We selected PiPEDO HD, Inc. (security code: 3919) and Cybozu, Inc. (security code: 4776) as industry peers. Scala competes with these on some operations as the Site Assistantand CRM Services in the SaaS/ASP business ﬁeld.
※ The latest earnings outlook ﬁgures shown above represent the low end of their company guidance ranges.

■Growth Potential■Profitability■ Financial Stability

The consolidated earnings outlook for
FY2021 ending June 2021 shows a steep
decline in sales revenue due to the exclusionof SB from the scope of consolidation.
However, the recognition of a gain fromthe sale of SB shares is expected to boost
operating income as well as the other income
items presented under it. As a result, Scalaʼs operating income margin and EPS growthrate are relatively larger than those of its
peers. The company has replaced its contact
centerʼs human operator jobs with an AIbased telephone interactive voice response
service at its business segments with primary
focus on the mainstay SaaS/ASP business.
As the company promotes this type ofchange in service provision (from laborintensive to DX-conversional operations), its
proﬁtability is likely to improve going forward.
Of the industry peers, Cybozu, Inc., hasrelatively higher sales growth. Cybozu has
revised its full-year sales outlook after, among
other factors, its cloud service marked strong
performance in 1Q of ﬁscal year ending March
2021. On the contrary, PiPEDO HD, Inc.
announced a negative growth outlook on bothsales and operating income for FY2021 ending
February 2021. As at the announcement of
earnings for 1Q of FY2021, it discounted
uncertainties associated with the COVID-19
pandemic into its full-year earnings outlook.
Each of the above earnings figures forcomparison represents the low end of its

Scala forecasts that its operating income
margin for FY2021 will be 31% (the low
end of its forecast range). The recognitionof a gain from sales of SB shares is
expected to boost the margin. Meanwhile,
its proactive investment in growth anddevelopment programs implemented in
FY2020 lowered levels of operating income
as well as the other income items presented
under it, thereby its ROE and ROA are
relatively lower than those of its peers.

At the end of FY2020, Scalaʼs equity ratio
was relatively lower than those of its peers.
Its debt equity ratio was greater than 100%,
meaning its debt, including borrowings, wasin excess of its equity capital. Nevertheless,the company management regards M&A(corporate mergers and acquisitions) as
an important business issue therefore, theeﬀective use of interest-bearing debt can beviewed as its strategic intent. On the other
hand, the company owns a large proportionof current assets, with its liquidity ratio in
the mid-position in the competition table.
We believe that Scalaʼs balance sheet iswell controlled overall, with no particularconcern about its ﬁnancial standing.

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

company guideline range.

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.

（3/3）

How to Read Morningstar Equity Research Report
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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
such as chart points, most recent high and low prices, trendline and moving average, trading volume in each price range
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.