CYND houses their employees in a ~200 m2 barebones office with white-washed walls. Unlike their former employer Watanabe, Okuwaki and Takahashi do not have their own walled-up offices. The office layout is open and fully transparent. Okuwaki and Takahashi don’t believe in fancy offices. In their own words: “the more ‘high-tech’ looking the office is, the less ‘high-tech’ the employees.” Okuwaki’s desk does not even have a desktop screen, but just a MacAir laptop. They abide by the minimalist principle: less is more. 

Moreover, CYND employees do not work remotely at all. During my visit, they appeared all abuzz and highly motivated. From our interaction with the employees, we registered a respectful and collegial culture. There is no calling of persons by rank. 

They also embrace diversity. Takahashi likens CYND’s sales department to a “zoo”, or an animal enclosure with aggressive and diverse species with different personalities and unique ways to reach customers. Whereas the 2-3 Kanzashi sales employees are laid-back in their approach, partly due to their heavy reliance on customer acquisition via PoS (Point of Sales) channel partners.  

For more on their PoS customer acquisition channel, please see Growth. 

Unit Economics 

• CYND’s unit economics are similar to Temairazu’s, although we expect organic revenue growth to be higher in the short and medium term given CYND's low market penetration.  

• ROTC approaches infinity due to negative tangible capital, driven by low PP&E and negative working capital (~-12% of sales in FY23). ROIC is also expected to increase significantly over the medium term (>>25%) and approach infinity. Invested capital eventually turns negative as goodwill and other intangibles decline over time. 

• Gross revenue churn is 8.5% and declining. Management believe they can achieve Temairazu’s revenue churn rate (~6%) in the long term. Like Temairazu, CYND’s churn is mostly caused by stores whose businesses have folded. CYND's churn rate has consistently declined from >10% – a rate that is comparable to the level of industry churn. As they scale, they tend to acquire more profitable beauty salons with competent management. In addition, the number of beauty salons increases net of industry churn. The flipside of natural industry churn of 10-15% is that new beauty salons open every year.Many new salon owners, who formerly worked at salons already using CYND, are naturally inclined to use CYND’s software.  Thus, customer churn (net of new customers from beauty salon start-ups) is well below 9.5%. For more on the common reasons why beauty salons go out of business, please see Appendix III.   

• Recurring revenue is 90%. 

• Management expects ~100% Net Revenue Retention (NRR) rate for the next couple of years due to the ongoing integration of Kanzashi customers. But they expect to increase NRR back to the usual >110% in the medium term (in 2025).  

• LTV/CAC (measured in gross profit years) has declined from 13.2x to 7.2x in the period FY21-23. LTV has been increasing due to the declining revenue churn rate. But CAC has increased significantly in FY23 due to the slower revenue YoY growth of 20% (vs 30-50% historically). Management attributes this to post-covid normalisation, delays in recruiting new sales personnel, and decline in sales productivity. CAC has since declined as they improved their sales productivity. For more on measures to address the latter two issues, please see Growth.   

• CYND has consistently expanded EBIT margin from 12% to 28% in the period FY20-23. But management expects EBIT and net margins to be depressed over the next few years as they integrate with Kanzashi and expand market share aggressively (although not at all cost). From their time at Temairazu, Okuwaki and Takahashi have learnt the importance of the Rule of 40 in straddling the balance between sales growth and profitability. They intend to enhance sales productivity and hire more sales personnel whilst maintaining a strict minimum threshold of JPY 15mm revenue per employee during this period. Their goal is to reach Temairazu’s level of JPY 40-50mm over the long haul. For more on the risks of overhiring, please see Risks.  

• In the medium term, EBIT and net margins should be restored to high twenties % and high teens % respectively, as per historical levels.  

• In the long term, they aim to achieve Temairazu’s net margins of ~50%. We believe this is possible based on our forecasts of each operating cost line item: 

• Executive compensation and employee salary are expected to decline from 23.5% of total revenue to 10.4%, which approximates Temairazu’s level today (~10%), as compensation increases more gradually than sales. 

• Agency fee is expected to remain 5% of total revenue. This is variable in nature and is expected to grow in line with revenue. Agency fees are incentive fees paid out to PoS and distributors/ wholesalers for customer referrals. For more on CYND's channel partners, please see Growth. 

• The “other operating expenses” line item contains fixed costs such as office rent, audit fees, external consultants, payment processing fees, and marketing campaigns. This line item is where the most operating leverage is expected, and is forecasted to decrease from 26% of revenue currently to 6% by FY34. 

• All R&D costs (mostly labour costs) have been included under employee salary and are expensed. R&D as a percent of total revenue is expected to remain at 0.7%. Going forward, there are only minor R&D projects for BeautyMerit and Kanzashi, and hence no need for additional product development personnel.  

• Pacific Porter is expected to break even in FY24 and generate an EBITDA margin of 6.6%. Management believes they can raise their EBITDA margins to match CYND's 28% within the next few years by eliminating once-off IPO preparation expenses, reducing overhead costs, consolidating back-office functions to CYND, and gradually removing unnecessary external board members and product development personnel.  

• Pacific Porter acquires new salons mainly through its PoS partner channels. They have only 2-3 sales representatives, which is less than one tenth the number of CYND sales staff, despite having revenues of approximately one-third that of CYND’s. Most of its costs are fixed in nature, so they should gain operating leverage quickly as they scale. 

Growth  

CYND has grown its revenue at 33.4% CAGR in the period FY19-23 - driven predominantly by growth in the number of contracted stores (31% CAGR) rather than ARPU (~3% CAGR). This is in line with management’s current strategic preference for market share expansion over upselling or increasing prices.  

ARPU Growth 

This, however, does not mean they are reluctant to raise prices. In the medium term, management plans to do software upgrades which they will upsell. CYND’s pro-forma monthly ARPU is currently JPY ~9.1k (of which: Kanzashi JPY ~4.5k; Beauty Merit JPY ~15k).  

Beauty Merit has four pricing tiers. The middle tier, known as the ‘basic plan,’ is JPY 20k per month per store. Yet, Beauty Merit’s current monthly ARPU is only ~15k. This is due to certain discounts given to larger scale beauty chain operators. Management plans to remove these discounts over time, and nudge existing customers towards upgrading and incorporating new functionalities such as e-commerce, dynamic pricing, etc. Okuwaki intends to charge certain premium functions like e-commerce and online payments on a per transaction basisiv.  

It will be challenging to upgrade ALL existing and future Kanzashi customers to a full Beauty Merit solution. Management thinks most of them would migrate to at least a partial Beauty Merit solution because most salon owners will want to increase their number of repeat customers. Therefore, a long-term JPY ~13k monthly ARPU for Kanzashi customers is reasonable. 

In combination, CYND’s steady-state monthly ARPU should make it to the high teens of thousands JPY. At a certain point in the long run, once they have cornered the market sufficiently, management is eager to raise prices directly and aggressively, even possibly doubling prices in a short span of time. Therefore, management is confident long-term ARPU can reasonably reach at least JPY ~20k, if not higher.  

We conservatively forecast a monthly ARPU of JPY ~12.5k in FY35, which implies ARPU growing at 3.1% CAGR in the period FY25-35. 

The average store in Japan earns JPY 20-40mm in sales per year. They typically spend 5-10% of that on S&M on customer attraction sites like HPB, and other social media platforms. The rest would be paid out as rental expense, accounting services, personnel salary, etc. The resulting net margins are 5-10%. They currently spend 0.2-1.2% of revenue on CYND software. There is clearly room to increase ARPU. 

For more on how this compares to the average hotel owner that uses Temairazu, see Appendix IV. 

Store Count Growth 

Unlike the typical US SaaS company, direct spending on S&M for outreach to acquire customers is highly ineffective in Japan for cultural reasons such as the lack of trust or general inertia to adopt a new software system. This is especially true for a SME industry like beauty salons run by middle-aged operators. The more effective approach is to have salespeople field incoming leads from referrals, etc.  It is no wonder that CYND spends <2% of revenue on S&M outreach campaigns. Of their new customers per year: 

1. 30-50% are referrals from their channel partners – i.e. PoS and distributors/ wholesalers.  

2. 20-30% are referrals from existing customers without incentive fees.  

3. 10-20% are inbound phone/ online enquiries.  

4. 20-30% are 'actual direct sales,' i.e. from direct outreach to paying customer. 

Indirect Sales Channels 

CYND has long relied on wholesalers/ distributors of beauty products as their main channel for customer referrals. These wholesalers/ distributors supply beauty products to these salons and visit them periodically. For successful referrals, they pay 10-20% of the monthly ARPU to these wholesale trading/ distributor companies for the contract duration. If a store uses Beauty Merit's software, it allows for better information exchange with their supplier and more efficient inventory management. Store owners can also offer e-commerce on their apps/ website more efficiently.  Without Beauty Merit, the lead time between the order and delivery is usually long. When the store owner receives an order from a customer for which they do not have the stock, they will manually notify their suppliers to replenish the stock. By adopting Beauty Merit software, this process will be done automatically. It is a win-win for all stakeholders. 

On the other hand, Pacific Porter has relied on its PoS channel for their customer acquisition. Kanzashi offers a more accessible price point for store owners who have a lower willingness-to-pay when they are first-time software users. Its ARPU is JPY ~4.5k per month which is <1/3 the ARPU of Beauty Merit. Kanzashi’s software boasts a self-explanatory interface with simple-to-use functions, and it does not offer reservation management systems for the salon’s own app/ website. Pacific Porter has a strategic partnership with all twelve major PoS companies servicing beauty salons in Japan. They pay the PoS company an incentive fee of 10-20% of monthly ARPU for each successful customer referral for the contract duration. The PoS company effectively initiates and concludes the sales on behalf of Pacific Porter. This is how Pacific Porter has grown so rapidly relying on only 2-3x sales employees.  

In addition to the incentive fee, PoS providers encourage store owners to adopt Kanzashi because it makes their job easier. Customer data acquired via Kanzashi/ Beauty Merit is automatically transferred into the PoS accounting system. Without this, they have to do it manually. The store owners can also process payroll accurately by matching the end-customer data with the correct stylist. This ensures the commission incentive paid to a particular stylist matches the invoice from the corresponding end-customer.  

Management plans to strengthen this channel going forward. By offering Kanzashi as an entry-point product for customers with lower willingness-to-pay, CYND can expand their market share rapidly before upselling them additional Beauty Merit functionalities.  

Direct Sales  

CYND currently has a total of 30-40 sales personnel. These are those who make the appointments with potential leads, are customer support staff, and are field sales personnel who reach out to prospects and finalise the contract. Sales personnel salary is estimatedly 15-20% of total revenue.  

They receive many leads/ prospects from customer referrals and in-bound enquiries (excluding the referrals from channel partners). It is sometimes up to CYND’s field sales personnel to close the deals and convert them to paying customers. 

In H2 FY23, CYND’s YoY revenue growth slowed significantly to 16.4% (vs 46% in H2 FY22), as their leads-to-customer conversion rate declined. This was due to post-covid normalization, delays in the hiring of sales representatives and a decrease in their sales personnel productivity.  

Presently, CYND has 5 sales teams with 5-7 employees per team. Each sales employee covers 4-6 fresh leads per month. Management is trying to increase that to 10-20 leads per sales employee per month by more actively reaching out to channel partners and existing customers to provide introductions to the owners of new potential customer salons. This is ambitious but possible. For example, Paycom focuses on medium to large enterprises and they achieved 10-11x leads per sales employee per month in 2016.  

It is also our belief that SME-focused SaaS solutions are at lower risk of disruption by AI LLMs than most enterprise-focused SaaS. When a new SaaS solution does disrupt an existing solution, it typically takes time to do so. The moat for dominant SME vertical-specific SaaS solutions has never been in its technology, but rather its customer acquisition channels, high switching costs, and customer inertia to switch and re-learn new software that may disrupt their normal working process despite the marginal benefits it potentially offers. It takes time, high customer acquisition costs, and large cost savings for a new SaaS solution to take customers from an existing solution.  

A niche SaaS VMS like Beauty Merit/ Kanzashi is so deeply interwoven into its customers’ PoS and accounting software system that it is unlikely to be disrupted by AI. Unsophisticated SME owners in Japan have great inertia when it comes to switching away from something that is already serving them well for low cost. It is more likely that any personalized AI assistant would disrupt the customer attraction sites and be built to function on top of CYND’s reservation system; even if customer attraction sites are disrupted, salons would still need CYND’s reservation software . 

Moreover, AI will be used to augment Beauty Merit’s functions for store owners to better retain customers, maximize profits and enhance staff productivity. One example is the use of AI-driven dynamic pricing to maximize consumer surplus from each customer depending on their stickiness to a particular stylist. Dynamic pricing works also to lower prices when utilization is low, and raise prices when utilization is high.  

Why Does This Opportunity Exist? 

• CYND is a microcap stock. The shares are very illiquid with <24% effective free float. An average of $55-65k worth of shares are traded daily. 

• There are no English IR materials published by CYND. 

• Management has not had a sell-side analyst cover them properly leading to several misunderstandings being perpetuated by domestic investors: 

• One, domestic investors misunderstood that Kanzashi would replace Beauty Merit software, leading to a decline in ARPU. This is not the case at all. 

• Two, they felt that CYND overpaid for Pacific Porter which may seem to be the case at first blush. But, as explained in Appendix II, management was astute in having done that strategic deal.  

• Three, the share price has remained weak since the start of 2023 in part because Q4 ARR growth (16.2% yoy) fell short of the market's expectation. This was due to store count growth and customer growth normalizing after the Covid boost as store owners rushed to adopt online reservation systems, creating a tough comp.  

• Four, Kanzashi and Beauty Merit were originally in a competitive relationship, so there was a misunderstanding in which local investors presumed there are no functional differences between the two software, and hence the existing customers of Beauty Merit would automatically switch to Kanzashi's cheaper service.  

• Fifth, domestic investors focus on the decline in operating profit and fail to understand that non-cash expense such as goodwill and amortisation have increased significantly due to the Pacific Porter acquisition. 

Where we are conservative in our modelling assumptions: 

• We did not assume any share repurchases because we do not when/ if the stock will ever be liquid enough to allow for buybacks. 

• We did not assume CYND would ever have net debt on its balance sheet because we don’t foresee management needing the cash except to do buybacks which will not be possible unless the stock is sufficiently liquid. 

• We assumed monthly ARPU would reach JPY ~12.5k in FY35 to be conservative. Management thinks they can exceed that. 

• We assumed a 10% CAGR store count growth in the period FY25-35, which is significantly lower than 31% CAGR historical growth in the period FY18-23. We are conservative in that there may be structural difficulties we do not know of in acquiring new customers. 

Risks 

Many local investors have urged CYND’s management to quickly increase Kanzashi’s ARPU to better match Beauty Merit’s ARPU. But CYND has decided against it, as they are playing the long game. Their strategy is to first expand market share and ward off all potential new entrants. After cornering the market, it will be easier for them to raise prices without the threat of a low-cost disruptor entering the market and waging a price war. 

Appendix III 

• The most common reasons for beauty salon business folding are:  

• 1) Departure of key stylists leading to a significant loss of customers. Hence store owners are unable to cover their fixed costs.  

• 2) Low utilization rate due to the lack of new customers. This leads to persistent low profitability/ losses, making it no longer worthwhile to continue operations. 

Appendix IV 

The average hotel operator can generate revenues of JPY 120-240mm per year per site with net margins of 5-10%. Temairazu’s monthly ARPU (at JPY 30k per month per site) is about 3x that of CYND’s. Hence their average customer spends 0.08-0.3% of their revenue on Temairazu, which is lower than CYND’s average customer (0.2-1.2%). Note, however, that Temairazu provides only reservation management systems, but Beauty Merit does more than that; it is effectively an all-in-one CRM system for beauty salons. 

Also, unlike the average beauty salon that uses only a PoS (which includes their accounting, payroll and other basic software) and a reservation system, the average hotel does not receive the same functionality from their PoS and must use other function-specific software like ERP, accounting, payroll, travel expense management, etc. The typical monthly ARPU for these other SaaS services is JPY 50-100k per site.