Well it’s been a loooong but fruitful year! To be clear mistakes were also made. I wanted to wrap up the year with a few remarks on recent quarter earnings, some changes to the portfolio as we go into 2026 including some notable sales and also a reflection on some of my bigger mistakes! I’ll be covering names like Dream Arts, Alpha Purchase, CYND and… Genda etc. Some of which have become attractive IRR opportunities again. This will be my last post for this year, and I wanted to wish you a heartfelt thank you for all the support and for the wonderful interactions I’ve had with everyone both online and offline! Wishing you all a very happy new year! Earnings of noteDream Arts (Ticker:4811) +35% since initial write up As is always the case with this company, Management did not initially upgrade their guidance after their Q3 figures exceeded their full-year target! Consequently, they finally did in December. It goes to show again that I think DreamArts management tends to be conservative in their forecasts, which is something I like. The results for Q3 were as expected, which showed decent revenue growth and margins. The Horizontal SaaS segment grew 17.5% in Q3. Which marks somewhat of a slowdown - though most of this was expected due to some churn the company was anticipating as some old customers decided not to renew upon moving away from the old architecture. Dream Arts has been calling this the ‘pruning’ strategy. This is reflected in the NRR growth which slowed +9.7 YoY. One the other hand customer’s in the horizontal SaaS segment grew 15% yoy marking strong QoQ growth as well. A good sign that they seem to be seeing strong traction. Year to date there were 7 customer churns which seems like alot for a biz like DA but 4 were small accounts with limited revenue impact. Small is considered ~400k JPY monthly revenue per accounts (4.8mn annualised) so there is limited impact on revenue. The small revenue likely indicates there were limited usage by the customers to begin with. Of the remaining 3 one was acquired by another company which also turns out to be a DreamArts customer - meaning that this churn is more or less consolidating 2 contracts into one. One other was due to a client being acquired by a foreign firm. Though the ‘slowdown’ in horizontal SaaS is expected to continue through early next year, much of the pruning is set to be complete this year and Dream Arts only anticipates potential pruning for smaller accounts. Their expanding distribution partnerships with System integrators are promising, though DA doesn’t seem to be relying on it to grow - this could be an upside surprise. On the margin side, this has exceeded initial expectations. I initially feared if this could've been due to underutilising their marketing budget - but thankfully this was not the case. The reason more so was effective cost reduction in the server/IT infrastructure side which is a sustainable cost reduction. Going forward in addition to the operating leverage from the inherent business model, as some existing customers move away from the old, cost heavy architecture, this should help lift margins directly for Dream Arts. Keep in mind however that for Q4 this year, it’s better not to extrapolate the margins in Q1-Q3 as they expect performance incentives for the employees which will weigh down on margins. The flipside to this though, is that they may come out with conservative guidance again for the coming fiscal year, which may cause some short term volatility simply because we live in a market that tends to care more about the short term. We saw this play out when Q4 earnings came out last year. If I had to guess FY26 will be another ‘investment year’ for DreamArts which entails further hiring/promotional costs in order to ultimately accelerate their business for their MT target. The MT goal doesn’t provide any numerical targets for next year but I would assume this to be the case based on the suggestion that the acceleration should occur in the latter half of the MT plan. We should also continue to see some ‘pruning’ early next year, I think this will also negatively impact sales somewhat. This on the other hand means we could see some acceleration in Q2 or Q3.
Dream Arts has had a decent run this year although it’s pulled back a bit. I continue to like this business despite the fears around AI disruption. Theres a case to be made that AI can be more complementary for solutions like Dream Arts. Furthermore, in enterprise I think it’s going to be extremely difficult to simply vibe code a solution - the requirements for compliance and security is paramount and on top of that, I’d like to remind you we’re in bureaucracy loving Japan - and vibe coding makes it difficult to audit. On the other hand, Dream Arts already provides the environment in which it already clears these strict compliance requirements making it alot more logical to implement AI on top of it. Interestingly one of the main reason DreamArts Practical AI (DAPA) came about was because they’ve been hearing from customers that many weren’t able to effectively use AI Agents within the companies. Timely is that the CEO of Cursor AI also recently talked about the pitfalls of vibe coding I’ve already shared this on the chat but there was an interesting interview from Rakus on the practical challenges of why AI won’t be able to kill SaaS. Overall I continue to be impressed by the logos the company continues to win, and looking further out I think there is still a huge market they can continue to address with sustainable double digit growth. On an NTM basis, the stock only trades at 1.7x EV/Sales and 1.8x ARR by my estimates. CYND (Ticker: 4256) +124%* since initial write up *Note that this was during the market melt down from the JPY carry trade unwinds in August 2024. Strategic? Yes, but Repeatability is questionable. Returns on subsequent days would be ~+95%.This business was up on the most recent earnings release. But I’d consider this a textbook example of “Being right for the wrong reason”. The earnings looked decent overall, but not a blow out. Firstly, overall the results looked decent. Beauty Merit and and Kanzashi delivered and group churn remained stable. I note that Kanashi especially continued to grow ARR 19.5% in Q2 and EBITDA margin came in at 19.3%. Which is impressive given that this acquisition was only at breakeven just 24 months ago - whilst sustaining high growth rates. It’s worth noting that margins are unlikely to go any higher and it may even decline in the short term. CYND is looking to hire more sales people and establish new sales channels for Kanzashi, though this in turn would mean there is a potential for Kanazashi’s revenue to accelerate. Beauty Merit on the other hand grew ARR at +11% and EBITDA margin 32.6%. With the margins it was good to see that alot of the one-off elements (office move costs, large marketing costs in Q1) have finally seemed to have subsided showing massive sequential improvement from Q2 (23.4%) and relieving some concerns. On the other hand, revenue growth here continued to slow which seems to have been a direct result of customer growth also slowing from 14.8% in Q1 to 11.7% in Q2. I’ve been told by the company this was due to a reshuffle in their sales org in order to create a dedicated team focused on large chains. With the change being so soon this failed to show in the Q2 results, although they claim to see some progress after the reporting period. We should then see some improvements in Q3. However, the main driver of the stock was undoubtedly due to the announcement of their new shareholder gift (which, understandably, most foreign investors hate). The gifting policy is also pretty chunky. For owning 200 shares, you get a gift card worth ¥16,000. resulting in a shareholder-gift yield of 8.2% on the date of announcement. I’m thinking of writing a piece on shareholder gifting all together as there may be a logic to why many companies still continue to this day. For CYND they are likely looking to attract more retail investors, in turn to improve the liquidity of the stock. Doing so makes it easier for other sophisticated investors to take a position. Some may ask why not just pay a dividend - I believe the answer, as silly as it may sound, is simply because it’s cheaper to do this to create liquidity than pay out dividends. Overall I think the situation is more illustrative of the fact that fundamental’s isn’t all that matters especially in small Japanese stocks, and that depending on who the incremental investors are the stock may move for other reasons. Some people make a fortune figuring this out. Full disclosure: I also trimmed this to take a small position in another SaaS idea I wrote about recently. (here) Kusurino Madoguchi (Ticker: 5592) -12.2% since initial write up This has so far given back a decent amount of my gains versus my initial cost. I felt the Q2 results were overall satisfactory whilst the market was like underwhelmed after an extremely strong Q1. I flagged that Q2/Q3 were likely to be weak given the strong one-off growth it saw last year and this seems to be exactly what’s happening. Despite this being clear in their IR materials, the market still punished the stock severely. Q2 Group revenues grew a mere +3% whilst recurring revenues grew +14.8%. EBIT grew +11%. All KPIs across key divisions were positive indicating continued growth in recurring revenues and customers. Of note here is that their Medicine Notebook platform are winning some major drug chains. Most recently they reported integration with Tsuruha Holdings a drug store major, showing that the flywheel is continuing to turn. Another factor that likely affected the sell off was due to the exit of NBSE Health Tech fund which was an early backer which owned 28% of the fund fully exited, partially sparked by the need for KSM’s float to meet the 25% threshold which they have been shy of. Post sale the float is now 34.2%. EPARK, a subsidiary of Hikari Tsushin and parent of KSM has increased it’s holding from 27.9% to now 38% to absorb some of the sale. This creates further alignment with Hikari which is a net positive. Overall however as of Q2 the progress rate versus guidance is 47% and 57% which if anything is ahead of expectations. Given their focus on recurring revenues it seems highly likely that they’ll get there. The company trades at a steep discount to major Japanese Medical Platforms like M3 and Medley (15x and 20x EBITDA respectively). I continue to see this as a long term hold for me as a ‘jocky bet’ on an IRR focused management team that was trained at the “Berkshire” of Japan. 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Tuesday, December 30, 2025
Year End Earnings Review
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