Description

Roland is an international electronic musical instruments company listed in Japan which struggled from 2008-2013 due to severe price competitions. Roland delisted in 2013-2014 with an MBO backed by a U.S investment-VC fund, Pacific Partners, which has a subsidiary, Taiyo Pacific Partners LP. Roland.

With improvements by changing manufacturing and sales distribution, Roland decided to relist in 2019-2020. Roland has been improving their return on capital and, for the past 2 or 3 years, has allocated capital better than the market leader Yamaha.

Roland aims to increase users through a subscription service for software and will continue to sell hardware licensed under their name instead of having the capital-intensive manufacturing bits. Roland has sales (approx. usd700 to 750M) approximately a quarter of Yamaha (approx. usd3 to 3.2B). Taiyo Pacific is still a 34% shareholder.

The launch of of Roland Cloud subscription business in 2020 software streaming has offered customer from entry level to professional the pleasure of creating music.

There’s a lot of technology in search of a customer. Just because things are technically possible does not mean people will buy them. The Nintendo switch isn’t as powerful as an Xbox or PlayStation, but its interface brings value allows it to penetrate a niche market.

The hard thing is to figure out what people really truly want and make sure it can’t be easily replicated by other companies. They need a definite reason to purchase new instrument, i.e., extremely compact design, dream features and the like that give them satisfaction and greater progress in performance or value that satisfies the user.  When people think of electronic drums, or piano players, they know Roland provides high-end instrument and you’re going to get quality.

CEO turnover a problem

Despite recent changes for the better, Jyunichi Miki retired in 2022, and Gordon Raison who was CFO since 2013 became CEO. His biggest contribution was acquiring Drum Workshop. He will step down on June 30, 2024, due to “family issues,” and current COO and CIO, Masahiro Minowa will assume the role of CEO.

This churning of CEOs is a warning sign, be it internal politics or “family issues,” 2 years for Gordon Raison is a very short tenure.

Expansion overseas

Founded in 1972, Roland manufactures and sells digital pianos, synthesizers, guitar-related instruments, and electronic drums in Japan. Roland started expanding overseas aggressively in 1976 by setting up sales subsidiaries in major countries, with sales mainly directed towards musical instrument stores.

In 1996, Roland developed a mesh head which was revolutionary as it was able to duplicate the feel of acoustic drums. As a result, Roland was able to become a global leader in the electronic drum market.

Roland is now a global brand, with 90% of sales generated overseas— 28% from Europe, 36% from North America, 10% from Japan, 10% from China, and 16% from other countries.

In North America, Roland expects demand to continue to be steady, but dealer inventories are currently high and will be normalized in 2024. The demand in Japan and Europe are stable, while in China, short term recovery will be difficult.

Roland is trying to enter markets with faster growth. They entered Indonesia (+36.1%yoy) and India. Improved comparable store sales in Czech Republic, Denmark, Latin America (+5.3%yoy) and USA. China is (-11.9% yoy)

Sales Mix

Keyboard instruments make up 31% of sales, wind and percussion instruments make up 24% of sales, guitar related instruments make up 25%, and creation related products and other sales make up the last 20%. Roland also handles DJ equipment (think spin discs), proprietary sound source LSIs, as well as “Roland Cloud” subscription services for music.

Total Addressable Market and Competitors

Global musical instruments market of approximately 19 to 20B, with 50% of the market driven by North America. Yamaha is by far the market leader, but Roland is catching up.

Depending on the model, electronic pianos and drums are usually cheaper and more customizable than their acoustic counterpart. With the purchase of Drum Workshop, Roland not only has the leading market share for electronic drums in the United States, soon their acoustic drum sales will be reflected in the bottom line. 

Price competition from imports and struggles

After the financial crisis of 2008, business performance was significantly affected by the economic slump and the rapid and long-term appreciation of the yen. Roland’s high-priced products, weakened from cheaper imports, prolonged deflation, and the appreciation of the yen. 2009 to 2013 were consecutive years of loss. Roland gradually lost market share due to an inability to keep up with changes in preferences of users.

2014-2019 Restructuring

Roland implemented structural reforms such as staff cuts and in 2014, relocating their production base to Malaysia, and hired CEO Jyunichi Miki, who saw a need for change.

“After I assumed the CEO position in 2013, we took a bold step to streamline operation under the new management team. We had to restructure our business, and at the same time desperately needed effective growth plans.”

“MBO plan in 2014 came as a natural course. I happened to have an opportunity to talk with a young owner of a venture company during the 2014 NAMM Show. His company rapidly grew. He led a very young vibrant management team, and it reminded me of the early times of Roland. He took completely different approach in product distribution and philosophy on product design from Roland. He moved quickly. I got inspired from him.”

 –Jyunichi Miki

Roland’s restructuring plan included closing a manufacturing base in Italy, selling off a U.S. factory, and consolidating 3 factories in Japan which were already in progress before the delisting. In 2015 Roland opened a factory in Malaysia as their main manufacturing base.

Roland aimed to optimize inventory, logistics and distribution. In 2013, Roland intensively used overseas warehouses and integrated 8 distribution units in Europe to a single holding company and settled their distribution problems in U.S, China, and Japan. 

In addition, Roland sold off the bad parts of their business such as the concentrated manufacturing bases, organ business, and their music school business. Roland sold off Detroit based Rodgers Organ and then their software music creator Cakewalk, and realigned domestic music teaching operations.

During delisting Roland also solved the situation of the parent company and subsidiary relationship of Roland and Roland D.G (a printing business which is also listed where Brother is trying to initiate a hostile takeover).

All these efforts paid off and the business quickly rebounded by 2016 with 10% operating profit, one year earlier than Roland’s initial plan. While revenue was once USD 800M to 1B annually in the 2008-2009 period, operating income fluctuated, and net income was 10-30M. With changes made, revenue was 650-750M annually in 2022-2023, but operating earnings are a steady USD65-85M, with net income reaching 50-75M.

Covid and Relisting

Roland experienced a host of unprecedented incidents during the lockdown.

During Covid, Roland’s sales declined, and distribution network collapsed, and their Malaysian factory closed for 2 months. Due to families and students staying at home, the demands grew for easy to play musical instruments, and shift to Ecommerce accelerated especially for manufacturers of electronic musical instruments. Roland’s factory in Malaysia resumed full-scale operation, and piled back orders were properly resolved.

Roland relisted on the Tokyo stock exchange in 2020. With a new CEO Gordon Raison, Roland strengthened its North American sales by acquiring Drum Workshop (2022) and launched its first convertible drum DWe.

Current Situation and purchase of Drum Workshop for U.S expansion

Roland is trying to focus on electronic instruments with growth potential. However, what I like about Roland is that they’re honest. For their 2024 forecast/budget it assumes that volumes will decline. It won’t get investors with unrealistic high hopes.

Electronic Pianos

Stay at home demand for electronic pianos has gone after covid, resulting in bloated inventories. Sales for 2024 are expected to be ¥25B (160M) for the keyboard (-3.7% forecast for 2024). China’s reform on education which is called the Double Reduction Policy has negatively affected the demand for music lessons in China.

Roland plans to develop electric pianos with higher added value to avoid a price war with cheaper models from competitors. Roland’s selling price compared to their cost was not as favourable as raw materials remained high despite inventory optimization.

Higher quality equipment means a higher average sales price. This means that in terms of instrument quality, the touch and feel, tonal quality, response, all matter. Other technical differentiators are custom LSI, DSP technology, sensor technology, sound sampling, etc.

Percussion and Wind Instruments (mainly Electronic and Acoustic drums)

Roland is a bit more optimistic for drums, percussion, and wind instruments with a sales forecast of ¥28B or usd185-190M for 2024 up 1 to 2% year on year. Roland acquired the American percussion products maker Drum workshop last for USD 65M which will expand its U.S presence and will introduce more conventional drum models to the product line. Drum Workshop is widely recognized as the global leader in acoustic drums and percussion, and designs, manufactures and sells an industry-leading portfolio of brands including DW Drums and Hardware, Pacific Drums and Percussion (PDP), Latin Percussion (LP), Gretsch Drums and Slingerland. 

Fred Gretsch still owns the Gretsch brand, while DW/Roland own the license to manufacture and distribute Gretsch drums, which was a brilliant business move by Fred. His former staff still make all the drums but all the headaches of selling and distributing the drums goes to DW/Roland. Fred also has the option to back out of this agreement whenever he wants to.

Before the acquisition, Roland had ¥19B (usd133M) in sales for drums in 2021. DW reported sales of USD63M for 2021. Drum Workshop is one of the leaders in the American acoustic drum market, and is on par with Pearl, Tama, and Yamaha.

DW also brings in some innovation with their wireless trigger solution that enables up to 10 zones and 16 velocities per drum, giving the player a truly authentic range of dynamics for playing. In addition, by using DW’s Soundworks advanced trigger setting editing, you can define up to 18 layers of multi-articulation per instrument. These wireless new head triggers work perfectly with practically 0 latency, even from 15 ft away, which will revolutionize digital drum technology.

Guitar Products

Guitar related instruments remained strong due to the delivery of backorders and was positively impacted by new products. Sales for 2024 are expected to be ¥25B (160M).

Clearing Inventory, ST to LT debt, and ROIC

With discounts and the help of distributors, Roland has done a better job of clearing inventory than Yamaha. Yamaha still inventories in China worth 2 years in stock.

The electronic musical instrument business does not require large capital investments and can generate cashflow with a low amount of fixed assets. To combat a decline on return on capital, Roland has also reduced inventories by ¥3.8B (usd24M) in 2023. SG&A also improved due to marine transportation lowering their costs after covid.

Roland’s debt was previously short-term debt, and they finally had the foresight to use long term debt for their operations. Short term debt was lowered in 2023 for Roland—¥17B of short-term borrowings in 2022, by 2023, it was ¥4.3B. LT borrowings was ¥7.57B in 2022 and was increased to ¥10B in 2023. ROIC can return to 20 to 30% due to the expansion from the DW acquisition, and improvements in inventory levels.

Cashflow generation and ROIC

My rough estimates of ROIC

Capital deployed is around ¥86B (USD550M).

Fixed assets + working capital = capital employed = 58B + 28B = ¥86B

Capital generated which is roughly ¥11-13B (USD75M). As mentioned before, cashflow from investing activities and purchase of PPE, and additional capital expenditures can be kept low and steady. This is roughly similar to operating earnings.

12/86 = 13% ROIC, which I think is reasonable, and will improve to close to 20% in 2 to 3 years.

Roland’s cloud business, subscription members, and sound generators
and Increase lifetime value with Roland Cloud

Roland’s cloud business is critical for future growth. Roland has consolidated every content and sound generator Roland developed in the past to work on one single platform. The synthesizers, dance, DJ sound generators, elements of digital pianos, drums, Aerophone, and analog synthesizers will be reflected in future product development.

Customers and musicians have got almost everything they want today. Synthesizers players have a workstation, controller, and peripherals. They are not impressed by minor upgrade of tonal quality or playability. Synthesizers are used for the composition of electronic music and in live performance. The intricate apparatus of the sound synthesizer generates wave forms and then subjects them to alteration in intensity, duration, frequency, and timbre, as selected by the composer or musician.

Roland Cloud started providing high-quality plug-in sound generators and software. Roland has a growing number of members with professionals and high-end amateurs as a core base. Roland had over 100,000 paid users in 2023 and by the end of 2025 should reach over 150,000 members. Paid users are the total of subscribers and single purchasers.

Roland Account takes into account both all users and subscribers and has improved from 2.3M to 2.7B in 2023. I think by the end of 2024, they can reach 3 million users. Paid users generate more hardware sales and create a virtuous cycle which helps promotes lifetime value for Roland.

Roland is now trying to integrate music activities from music video production, share of performance data to online music lesson and user community on smartphone by evolving its digital signal processing technology, with custom LSI (The LSI is an N-MOS chip containing 1500 gates and packaged in a 40 pin DIP).

Roland has also added fun-oriented services for entry-level players as ZENOLOGY and Zenbeats to help boost their business.

Roland introduced a series of products including ZEN-core Synthesis System since 2019 with BMC and Zen-Core sound generators to be used as a universal platform, which allows the user to deliver sound produced on a stage piano or music produced by a synthesizer. You can even play along with music produced by your favourite professional.

The core sound generator platform provides an unrestricted approach to various genre of hardware. Roland even has an audio mixer for game streaming and other various activities called BGM cast for Bridge cast with which provides royalty free background music. https://www.youtube.com/watch?v=yndDqP6n_tI

 Risks

It seems like Roland is doing all the right things in changing their business strategy and moving their manufacturing to a cheaper country like Malaysia with an improved emphasis on distribution. ROIC and concern for investors has been done well. I hope their user interface and Cloud project for customers remain user friendly, as new users are key to growth especially in electronic pianos and guitar products. If customers get frustrated with their software or interface and it's not user friendly enough, Roland's brand name could be tarnished. 

The greatest risk now is not from debt or from technological obsolescence, my main worry is that there may be too many people arguing at the executive suite as there's been a few management changes despite the company heading in the right direction. We still have to observe if there's any turnover. 

Catalyst

- Cloud Subscriptions improve user base for both hardware and software

- Acquisition of DW for acoustic drums improves percussion sales

- Further consolidation of dominance in drums for both electronic and acoustic in North America

- The efforts of changing distribution, logistics, and manufacturing begin to bear fruit as Roland closes the gap in market share with Yamaha

- Capital Generated exceeds capital employed by a lot, as capex is fixed and minimal, thus improving ROIC