[edit] Financial Summary

[edit] Recent Updates

[edit] Summary

On August 24, 2010 the company announced an upward revision to its dividend for FY09/10. The revised full year dividend was for 1,500 yen per share (vs. an earlier estimate of 1,000 yen per share). The company’s reason for the revision was that it expects the full year performance target to be achieved.

On the same day, the company announced that it decided to make “Life Depot” (an equity method affiliate, see Group Companies) into a fully-owned subsidiary on October 1, 2010. The company commented that there would be no impact on FY09/10 results, and that it would review how the action might impact their business in the future.

JBR released Q3 results on August 10, 2010.

JBR released Q2 (1H) results on May 11, 2010. On the same day, the company also announced that 1H dividend will be 500 yen.

JBR announced an upward revision of earnings and dividend forecasts for the cumulative Q2 (1H) and FY09/10 on April 27, 2010. Details of the revision:

Cumulative Q2 (1H) Consolidated:

Sales: 3.3 billion yen (8.7% over the previous forecast of 3.1 billion yen)

Operating income: 251 million yen (30.5% over the previous forecast of 192 million yen)

Recurring income: 261 million yen (57.4% over the previous forecast of 166 million yen)

Net income: 195 million yen (124.4% over the previous forecast of 86 million yen)

FY09/10 Consolidated:

Sales: 6.8 billion yen (+6.5% over the previous forecast of 6.4 billion yen)

Operating income: 528 million yen (-3.2% over the previous forecast of 546 million yen)

Recurring income: 500 million yen (maintained previous forecast of 500 million yen)

Net income: 326 million yen (+12.0% over the previous forecast of 291 million yen)

For 1H estimates, sales in Aquambulance are expected to increase by 283 million (45.6% increase vs. previous forecast) yen due to improved effectiveness of web advertising (Search Engine Optimization and Search Engine Marketing), and performance in the Membership business (increases in No Worries Residence Support and 24/7 Handyman Van membership).

For the full year, sales in Aquambulance are expected to increase by 531 million yen (42.2% increase vs. previous forecast), in part due to results from web advertisement. Daily Necessities memberships in Membership segment are expected to increase by 74 million. Operating profit was revised downward in part due to upfront investments related to the new car and motorcycle rental business.

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[edit] Trends & Outlook

Quarterly Trends

Q3 FY09/10 Results

JBR released Q3 FY09/10 results on August 10, 2010 (see the table above). As a percentage of the full year company forecast, the cumulative Q3 numbers are as follows:

• Sales: 74.1% (vs. full year forecast of 6.8 billion yen )

• Operating profit: 78.7% (vs. full year forecast of 528 million yen)

• Recurring profit: 81.7% (vs. full year forecast of 500 million yen)

• Net income: 95.0% ( vs. full year forecast of 326 million yen)

Sales increased YoY in every segment except the Member Shop business. Performance in the Corporate Tie-ups Business increased due to sales growth of Aquambulance, helped by improving effectiveness of web advertising - more potential customers became customers. In the Membership Business segment, No Worries Residence Support membership grew. The Member Shop segment posted an operating loss due to lower sales (commissions declined YoY) and higher advertising expenses.

There was no change to full year estimates. The company seems confident that it will achieve its full year earnings forecast.

According to the company, well-performing business segments and the reasons for their performance are as follows:

• Lock replacement service in the Call Center Business segment: The company is building up its network by increasing the number of Member and Cooperating Shops. The objective of building up the network is to reduce the number of cases in which an incoming call from a customer is cancelled because rapid service cannot be provided. The company suggests that previously such cases accounted for 15% of reasons for cancellation.
• Daily Necessities Membership in the Membership Business segment: Helped by a new partnership with a nationwide real estate agency. Also, the company increased the number of sales staff to secure Daily Necessities members and boosted sales activities aimed at universities to secure student members (the number of universities offering memberships already exceeds 100).
• Aquambulance in the Corporate Tie-ups Business segment: Web advertising has been effective. Aquambulance provides service more rapidly than the Asahi Glass’ Glass Ambulance, so the company’s network has helped the business.
• Small Amount Short Term Insurance segment: In addition to healthy growth in “New Residence Room Insurance”, the Life Support Pack, first offered in FY09/09, showed remarkable growth in FY09/10 (number of members: 260,000).

Business segments that the company suggests are struggling and the background reasons are as follows:

• Motorcycle Membership in the Membership Business segment: Increase in revenue; however gross profits decreased about 1.4% YoY due to an increase in road service dispatch costs which are included in the COGS for Motorcycle Membership.
• Asahi Glass’ Glass Ambulance in the Corporate Tie-ups Business segment: As well as being affected by the economic downturn due to the high price of security glass, competition has intensified (with building firms, for example).

Additionally, the company predicts that in the Car Chintai Business, started in Q2 FY09/10, there will be 120 units in operation at the end of FY09/10. The average unit cost for FY09/10 will be approximately 72,000 yen, sales will be 50 million yen, and the operating profit margin will be 15%. The company aims to have about 720 units in operation by the end of FY09/11.

The Q3 FY09/10 business overview is shown below.

Sales in the Call Center Business segment were 514 million yen (+30.0% YoY). Operating profit for the segment was 251 million yen (+55.8% YoY). Operating profit margin was 48.8%. The main components of sales were as follows:

• Lock replacement service: 281 million yen (+50.3% YoY)

• Computer-related sales: 72 million yen (+26.4% YoY)

Sales in the Membership Business segment were 1.8 billion yen (+15.8% YoY). Operating profit was 288 million yen (-8.1% YoY). Operating profit margin was 16.4%. The breakdown of sales were as follows:

• Motorcycle membership: 811 million yen (+3.6% YoY). Honda OEM memberships were 255 million yen (-2.8% YoY), Motorcycle Anshin memberships were 381 million yen (+21.2% YoY). The company reported 121,000 new memberships (31,000 renewals, 89,000 new members) during the quarter.

• Daily Necessities membership: 943 million yen (+30.5% YoY). No Worries Residence Support sales were 745 million yen (+25.1% YoY), Student Dial 110 sales were 79 million yen (+3.9% YoY). The company reported 158,000 new memberships (20,000 renewals, 138,000 new members) during the quarter.

Sales in the Corporate Tie-Ups segment were 2.6 billion yen (+15.4% YoY). Operating profit was 299 million yen (+142.8% YoY). Operating profit margin was 11.5%. Sales growth was due to successful Internet advertising campaigns and increased demand. The breakdown of the sales in the segment:

Aquambulance: 1.3 billion yen (+42.2% YoY)

Asahi Glass’ Glass Ambulance: 606 million yen (+3.9% YoY)

Consigned Call Center Operations: 612 million yen (+6.3% YoY)

The company indicated that the number of corporate clients using the service was 151.

Sales in the Member Shop segment were 132 million yen (-18.9% YoY). Operating profit was negative (loss) 409 million yen (compared to a loss of 214 million yen in Q3 FY09/09).

The total shop network was 1,318 at Q3 end: 451 Member Shops, 867 Cooperating Shops.

Sales in the Small Amount Short Term Insurance segment were 414 million yen (+346.8% YoY). Operating profit was 142 million yen (+349.7% YoY). Operating profit margin was 34.3%. The company mentioned that strong growth in mobile phone insurance and “New Residence Room Insurance” were the main factors.

Q2 FY09/10 Results

JBR released Q2 FY09/10 results on May 11, 2010 (see the table above). As a percentage of the full year company forecast, the cumulative Q2 numbers are as follows:

• Sales: 49.1% (vs. full year forecast of 6.8 billion yen)
• Operating profit: 52.5% (vs. full year forecast of 528 million yen)
• Recurring profit: 55.9% (vs. full year forecast of 500 million yen)
• Net income: 64.9% ( vs. full year forecast of 326 million yen)

Sales for each main segment were up YoY, with total 1H progress ahead of budget (see table above). . Operating profit for 1H was above budget mainly due to sales in the Corporate Tie-ups segment (OPM for the segment was 11.8% vs. 6.0% in 1H FY09/09) discussed below.

There was no change relative to the forecast revised on April 27, 2010. The company appears to be confident that it will at least clear FY09/10 estimates. It added that Q3 was off to a good start.

Sales in the Call Center Business segment were slightly weaker than expected (335 vs. 377 million yen budget), however the company indicated that sales momentum had been getting better in Q3. Locksmith services were strong contributors to the segment – increased advertising in telephone directories made positive impact; PC service grew as well.

Sales in the Membership Business segment were up YoY and vs. plan. Daily Necessities sales were strong due in part to the contribution of a new partner, a nationwide real estate agency. Total membership for Daily Necessities was approximately 103,000; new members added rose to 88,000 vs. 77,000 in 1H FY09/09. Total Motorcycle Membership was 67,000; new membership additions were stable YoY.

Sales from the Corporate Tie-ups Business segment were above internal budget, mainly due to better than expected sales of Aquambulance (up 45.5% YoY). Here, the internet advertising proved to be increasingly effective. Other sales results: Consigned Call Center Operations +7.7% YoY; Asahi Glass’ Glass Ambulance +4.7% YoY; SECOM Win -46.5% YoY.

Sales in Small Amount Short Term Insurance segment were slightly beneath the internal budget, but up strongly YoY. According to the company, it appears possible that 20,000 contracts could be reached by year end vs. initial estimates of 15,000.

Sales of Life Support Pack, mobile phone insurance service offered through Hikari Tsushin exhibited strong growth, with the number of members reaching 200,000 (JBR is hoping to get in excess of 400,000 by September end – this would be very positive for the overall earnings). In this service, if a customer loses her phone and it gets used by someone, or if the phone is broken, the customer gets paid 5,000 yen. Discounts of 10% to 30% on standard JBR services are also a part of the package. The customer pays 300 yen monthly premium which is split between Hikari Tsushin and JBR group companies. JBR points out that the incidence of insured events is low.

New Business

JBR started a new business during the quarter, Car Chintai (long-term car rental).

Basic Flow

• Customers select a specific car model.
• JBR buys the vehicle through the dealer auction system.
• JBR reconditions the car using an affiliate company, Dr. Paint.
• The customer rents the car for 6 months to 2 years; the car is owned by JBR subsidiary.
• The customer returns the car to the company
• At the end of the reconditioned car’s useful life, JBR sells the car through the dealer auction network

Rationale

Tougher laws (revisions of the Installment Sales Law) have meant that obtaining leases has become more difficult, and car loans have become more expensive. JBR can use its strong balance sheet to secure funding, and the liquidity of the dealer auction network means that inventory risk should be low.

Company assumptions:

Average rental contract term: 6 months (initial 2 month deposit)

Average monthly contract price: 80,000 yen

Years in JBR ownership per vehicle: 2 years (50% book value after 2 years)

Operating profit margin assumption: 15%

The company targets 200 contracts for the full year, and estimates that it could potentially reach up to 3,000. It appears that the business could add 450-500 million yen of sales for FY09/11 (67-75 million yen of OP). Considering the relatively high operating profit margins as discussed above, this could have a meaningful impact on overall earnings.

Q1 Results

JBR released Q1 FY09/10 results on February 10, 2010 (see the table above). As a percentage of the 1H company forecast, the Q1 numbers are as follows:

• Sales: 51.7% (vs. 1H forecast of 3.1bn yen )
• Operating profit: 50.5% (vs. 1H forecast of 192 million yen)
• Recurring profit: 60.3% (vs. 1H forecast of 166 million yen)
• Net income: 86.9% ( vs. 1H forecast of 86 million yen)

Q1 consolidated operating profit was 97 million yen (-8.0% YoY). The YoY decline was due to increased SG&A expenses of approximately 184 million yen (+37.9% YoY to 670 million yen). Advertising expenses were the largest contributor to the increase in SG&A expenses (100 million yen increase for Townpages, 25 million yen for Internet media). The advertising campaign was started in Q2 FY09/09, so YoY comparisons are affected.

There were no changes to the FY09/10 earnings forecasts.

Sales in the Call Center Business segment were 173 million yen (+62.3% YoY). Operating profit for the segment was 90 million yen (+83.5% YoY). Operating profit margin was 52.0%. The main components of sales were as follows:

• Lock replacement service: 92 million yen (+130.7% YoY)
• Computer-related sales: 25 million yen (+29.8% YoY)

Sales in the Membership Business segment were 496 million yen (+17.2% YoY). Operating profit was 63 million yen (-13.5% YoY). Operating profit margin was 12.8%. The breakdown of sales were as follows:

• Motorcycle membership: 256 million yen (+10.2% YoY). Honda OEM memberships were 75 million yen (-2.6% YoY), Motorcycle Anshin memberships were 118 million yen (+26.7% YoY). The company reported 33,000 new memberships (12,000 renewals, 21,000 new members) during the quarter.
• Daily Necessities membership: 238 million yen (+27.1% YoY). No Worries Residence Support sales were 184 million yen (+21.9% YoY), Student Dial 110 sales were 26 million yen (+4.5% YoY). The company reported 34,000 new memberships (4,000 renewals, 29,000 new members) during the quarter.

Sales in the Corporate Tie-Ups segment were 906 million yen (+18.2% YoY). Operating profit was 101 million yen (+212.6% YoY). Operating profit margin was 11.2%. Sales growth was due to successful Internet advertising campaigns and increased demand. The breakdown of the sales in the segment: Aquambulance – 456 million yen (+42.5% YoY) Asahi Glass’ Glass Ambulance – 216 million yen (+2.5% YoY) Consigned Call Center Operations — 204 million yen (+9.7% YoY). The company indicated that the number of corporate clients using the service was 146 (+12 from Q4 FY09/09).

Sales in the Member Shop segment were 42 million yen (-47.1% YoY). Operating profit was negative (loss) 157 million yen (compared to a loss of 22 million yen in Q1 FY09/09). The loss for this segment expanded due to aggressive advertising that the company commenced in 2009. (See discussion in Business Description)

The total shop network was 1,269 at Q1 end: 447 Member Shops, 822 Cooperating Shops.

Sales in the Small Amount Short Term Insurance segment were 98 million yen (+336.3% YoY). Operating profit was 45 million yen (+278.0% YoY). Operating profit margin was 46.3%. The company indicated that sales growth was significantly impacted by demand for insurance covering repair expenses for mobile phones, as well as “Residence Room Insurance α” movable insurance service (commenting that performance was “remarkable”).

Full Year (FY09/10) Outlook

• Sales

Company estimates for FY09/10 reflect a 1.2 billion yen increase in sales (+22.2% YoY), driven primarily by expectations of the Small Amount Short Term Insurance business. Performance in the core segments is expected to be strong; increases in both the Membership Business and the Corporate Tie-Ups Business.

Membership Business sales are expected to increase 383 million yen (+18.7% YoY) led by growth in Daily Necessities (expected +29.2% YoY). The company expects to grow motorcycle membership by focusing on students, and to pursue partnership initiatives to increase Daily Necessities memberships.

Sales in the Corporate Tie-Ups Business segment are expected to increase by 515 million yen (+17.1% YoY).

Sales in the Small Amount Short Term Insurance business are expected to increase by 447 million yen (+272.8% YoY), with an emphasis on the sales activities for mobile phone insurance.

• Gross Profit

Gross profit for the year is expected to increase by 700 million yen to 3.4 billion yen (+26.2% YoY). The gross profit margin is expected to increase by 1.6% YoY, mostly due to gross profit margin increases in the Corporate Tie-ups Business (from 15.4% to 20.0%).

• SG&A

The company expects the SG&A / sales ratio to be 41.7% for FY09/10; down from FY09/09 (42.4%).

• Operating Profit

The company’s estimate for FY09/10 operating profit reflects an approximate increase of 223 million yen (+73.4% YoY) compared to FY09/09. The operating profit margin expectation is 7.8%, an increase of 2.3% over FY09/09. The largest component of FY09/10 operating profit is expected to be from the Corporate Tie-ups Business. Operating profit margins in the Call Center Business are expected to improve YoY (from 42.0% operating profit margin in FY09/09 to 44.9% in FY09/10).

• Non Operating P&L, Recurring Profit

The recurring profit expectation of 500 million yen reflects an increase of 267 million yen (+114.0% YoY) compared to FY09/09. (The large percentage increase is due to quite large non-operating expenses related to devaluation on investments in FY09/09).

• Net Income / Profit

The company expects net income of 326 million yen for FY09/10, vs. a loss of 55 million yen in FY09/09. The company’s estimate represents a net profit margin of approximately 4.8%; exceeding the historical average of 3.4% from FY09/06 through FY09/09, but closer to levels achieved during FY09/05 through FY09/08.

The company expects to maintain the dividend payout of 1,000 yen per share.

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[edit] Business

[edit] Business Description

JBR provides nationwide service to help solve daily “life emergencies”. Customers call the company with problems: a broken window glass, a leaky faucet, or other small odd-jobs, and JBR dispatches a repairman from Member or Cooperating Shops.

Services can be classified into two categories: daily life needs (plumbing problems, broken window glass, lock replacement, etc.) and automobile and motorcycle services (dead battery, flat tires, empty fuel tank, towing a motorcycle, etc.).

JBR Handyman Van Source: Company Data

The company reports performance across 5 main segments, but the different businesses share a common theme: handling customer service requests and finding a capable response. JBR offers approximately 20 different services (as of FY09/09) including: motorcycle and automobile road service, lock replacement, glass repair, apartment and small item insurance, light plumbing services, pest control, roofing repair, small appliance repair, and garden maintenance.

Main Business Segments

Note: Although the company uses 5 segment classifications, the Call Center and Corporate Tie-Ups segments are essentially the same business but use different accounting treatment for sales, and the Member Shop segment essentially represents group advertising expenses offset by Member Shop contributions (company functions like an advertising agency). See segment descriptions below for more detail.

Call Center (246 million yen operating profit in FY09/09, 10.5% of FY09/09 sales)

The core business of JBR is Call Center Business – handling incoming service requests from individual customers and dispatching a response. The relatively minor contribution to sales obscures the segment’s importance to the company; JBR’s businesses are all supported by call center operations.

The operational flow for the Call Center Business is simple. A customer calls reporting a problem. The call center operator determines the nature of the problems, and then dispatches the work order to a Member Shop or a Cooperating Shop for service, following-up with the customer if necessary.

Member Shops are dedicated local repairmen that perform service work only for JBR, wearing JBR uniforms and driving company-branded vans. The relationship between the company and Member Shops is similar to a franchisee relationship but currently does not involve any fixed royalty payments. The company would provide Member Shops with workflow and advertising support in exchange for per-revenue commissions. The amount of commission varies by service type; the range is 20-30% of the amount paid by the customer (JBR sets the prices). Member Shops are mainly selected from Cooperating Shops, and membership agreements are renewed annually. Cooperating Shops are used by JBR to perform service calls when Member Shops are unavailable. Both Member and Cooperating Shops are screened for skill before selection. At the end of FY09/09, there were 449 Member Shops (37% of 1,211 total), mostly concentrated in areas near Tokyo and Osaka.

JBR has two call center locations, with a combined capacity of 80 seats. Call centers are staffed 24/7, handling approximately 20,000 calls per day, with approximately 650 (18.6%) requiring service dispatches (as of FY09/09 end).The company suggested that the current call center capacity (call volume) can be scaled easily to handle up to 35,000 calls per day. The limiting factor for expanding the current operations would be labor, a problem easily solved. A defining characteristic of call center businesses are the relatively low skills required and minimal infrastructure needs.

Corporate Tie-Ups Business (160 million yen operating profit in FY09/09, 54.0% of FY09/09 sales)

The Corporate Tie-Ups Business segment consists of two business types: tie-ups with corporate partners (74.5% of FY09/09 segment sales) and call center outsourcing for other companies (25.5% of FY09/09 segment sales). JBR runs the daily operations and the partner companies provide branding (the tie-ups are all JBR, except in name). JBR benefits from the tie-ups through increased sales leveraging well-recognized brands, partner companies benefit from additional sales of their products. Operations in the comprehensive tie-ups are identical to the company’s core Call Center Business. The two businesses differ in the accounting treatment of revenues. Sales in the Call Center Business are commissions from the work order, whereas revenues in the joint venture companies are the gross amount of the work order.

Joint Ventures and Business Tie-ups:

• “Mizu No Kyukyusha” (Aquambulance). A joint venture with INAX, a leading manufacturer of plumbing fixtures and porcelain bathroom equipment, that handles light plumbing service calls (blockages, leaky faucets, etc.). FY09/09 sales were 1.3 billion yen.

• “Asahi Glass Glass no Kyukyusha” (Asahi Glass’ Glass Ambulance). A business tie-up with Asahi Glass, manufacturer of glass and related products, that provides glass replacement. FY09/09 sales were 766 million yen.

• Secom Win Co., Ltd. A joint venture with Secom, a leading security company in Japan. Secom sells security glass to consumers, JBR Member and Cooperating Shops install it, and Secom Win manages the process. FY09/09 sales were 215 million yen.

Consigned Call Center Operations offer two services to other companies: either pure call center outsourcing (handling incoming calls from customers), or call center outsourcing that includes dispatching JBR’s Member Shops or Cooperating Shops – a good example of product cross selling which appears to permeate the company’s business. Typical examples of the call center with van service include maintenance calls for real estate firms, and maintenance requests for appliance manufacturers. Although call center outsourcing has typically been the smaller part of Corporate Tie-Ups Business segment sales (25.5% FY09/09), the business has growth potential. Call center outsourcing business exhibits economies of scale: increasing utilization lowers call center costs, which benefits both the call center operator (increased sales) and users of the service (lower costs). At the end of FY09/09 there were 134 client companies using JBR’s call center outsourcing.

Membership (386 million yen operating profit in FY09/09, 36.6% of FY09/09 sales)

The Membership segment provides the company’s services at discounted prices to members for the duration of the membership. The segment is classified in two main groups: Daily Necessities (over 350,000 members as of FY09/09) and Motorcycle Membership (approximately 180,000 members as of FY09/09). Daily Necessities memberships were 46.3% of segment sales in FY09/09, Motorcycle Memberships were 52.9% (Automobile Road Memberships comprised the remainder).

From the perspective of the purchaser, becoming a member means receiving services for free or paying only for materials and in many cases insurance is also a part of the package. Members get support 24/7 with JBR dispatching a handyman in 30-60 minutes.

There two main services under the Daily Necessities umbrella, “Students Dial 110” and “No Worries Residence Support”. The membership packages provide members with a package of services for a fixed periodic fee (typically plumbing, lock and key service, glass repair, short distance towing for cars and motorcycles).

• “Gakusei Seikatsu 110 Ban” (Students Dial 110) membership packages are sold to university students through University Cooperatives. The membership packages typically last for 4 years, and cost approximately 8,000 yen (covering the entire 4 year term). Sales of Students Dial 110 were approximately 100 million yen in FY09/09.
• “Anshin Nyukyo Support” (No Worries Residence Support) membership packages are offered to rental condo tenants through property agents. The membership packages typically last for 2 years (the standard apartment lease term in Japan), and sell for approximately 15,750 yen (for both years of membership). Sales of No Worries Residence Support were approximately 800 million yen in FY09/09.

The main services offered in the Daily Necessities segment are small plumbing jobs, glass repair, changing locks and locksmith services, as well as light service for motorcycles and cars. The number of Daily Necessities members (new and renewing) was approximately 167,000 at FY09/09 end.

Motorcycle Memberships are sold in two packages: “Bike!! Road Service” and “Bike Yokubari Anshin Club” (Rider’s Peace of Mind Club), under the company’s brands or as OEM services (for Honda and Yamaha motorcycles, as of FY09/09). “Bike!! Road Service” includes basic roadside service and related assistance (flat tires, dead battery, towing, etc.), “Bike Yokubari Anshin Club” extends the basic package with insurance coverage for theft or vandalism. The service provided is simple: when customers have a problem with their motorcycle, they call JBR and the company contacts one of 4,500 bike shops (that also perform repair services) to perform the work. “Bike!! Road Service” membership prices range from 4,000 to 8,000 yen per year, “Bike Yokubari Anshin Club” packages cost up to 59,000 yen per year (depending on options). Memberships are usually sold with new or used motorcycles at the time of purchase at bike shops.

At the end of FY09/09 the total number of active motorcycle members was approximately 180,000.

The company indicates that the Motorcycle Membership business is not expected to see substantial growth due to lower motorcycle sales. The company suggests that the number of motorcycle shops (the key distribution channel) has been in structural decline, at least partly due to emerging auction companies disrupting and possibly destroying the prevailing distribution value chain for used bikes. The total number of motorcycles on the road appears to be in decline as well (one of the reasons cited is the stricter enforcement of parking violations making scooter use less convenient). The number of registered motorcycles in Japan has decreased from a peak of 18.7 million in 1986 to 13.1 million in 2005 (see Market and Value Chain).

Automobile Road Membership (sales of approximately 17 million yen in FY09/09) is a small portion of the segment and is not expected to develop into a substantial part of the company business in the foreseeable future.

Member Shop (365 million yen operating loss in FY09/09, 3.5% of FY09/09 sales)

Sales in the Member Shop segment reflect contributions of member shops to SG&A expenses associated with advertising and promotions. The company used to charge a fixed fee to its member shops for advertising. From FY09/10 it pretty much stopped the practice, increasing the revenue-linked commission rates instead.

Other (62 million yen operating profit in FY09/09, 3.0% of FY09/09 sales)

Businesses in the Other segment have typically been minor for the company, however the acquisition of the small amount short term insurance business during FY09/09 makes the segment more interesting than the minor contribution to FY09/09 sales would suggest.

In the Small Amount Short Term Insurance segment, the company provides insurance covering repair expenses for mobile phones, as well as movable insurance under the “Residence Room Insurance α” service brand. Items insured in the movable insurance include apartment contents, items damaged due to fire or water, and theft (to a maximum of 10 million yen). Policies are priced between 15,000 and 27,000 yen and typically last for two years (matching the typical apartment lease).

Business Model

Japan Best Rescue’s core business is operating a call center for service calls. The company earns recurring fees from memberships, and commissions from non-member service calls. The biggest driver of revenues and earnings is volume: The company earns revenues from non-membership services and customer membership services. For non-membership services the revenues and costs are in linear relationship (provide the service – get paid); for membership service costs, the variable costs fluctuates depending on the number of dispatches (receives membership fees – and then provide services if called upon). The fixed cost of the business is overhead and call center costs. The advertising expenses are currently primarily a variable cost associated with non-membership businesses.

Source:Company Data Processed by SR Inc.

Revenues in the Call Center Business are commissions on service. Customers pay the person who performs the work (either a Cooperating or Member Shop), who in turn pays a commission to JBR (20%-35% depending on the service and contract relationship; as of FY09/09).

In the Membership segment, members make up-front payments to the company and receive service when needed either for free or discounted prices. The company recognizes the upfront payment as revenue (minus a commission if necessary), and costs are incurred when service is used (payment to Member or Cooperating Shops). Daily Necessities membership gross margins are high (69.1% FY09/09); Motorcycle membership gross margins are less (46.7% FY09/09).

Operations in the Corporate Tie-ups Business are the same as the Call Center Business – customers call for service, and the company dispatches either a Member shop or a cooperating shop specialist. Standard prices are set for the most typical services: 19,400 yen for the replacement of a standard glass pane, and 11,550 yen for the removal of bathroom blockages (FY09/09). Prices for Secom Win services vary, a result of the non-standard nature of the work (prices differ for materials, and labor costs are dependent on the size and complexity of the work). Segment gross profit margin was 23.1% in FY09/09, operating profit was 5.3%.

Cost Structure

The largest costs in the company’s business model are SG&A, dominated by labor and advertising expenses (averaged 44.5% of SG&A from FY09/04 through FY09/09). Advertising costs are variable, and labor costs are fixed.

JBR has historically advertised mostly in Townpages (the Japanese telephone directory), but uses Internet ads also. Initial response to Internet ads have been encouraging; approximately 600 million yen of FY09/09 sales were from online sources.

Full time employees mostly perform sales, operations management, and also manage call center operators (24 of 82 employees at FY09/09 end were management level employees). Outsourced labor costs (either Cooperating or Member Shops) represent costs of sales and are variable.

Profitability Snapshot, Financial Ratios

The company’s business has been characterized by relatively volatile operating profit margins, reflecting the company’s growth into new businesses. Operating profit margin for the company has averaged 7.2% from FY09/03 through FY09/09, within a wide range between 1.7% (FY09/03) and 9.7% (FY09/07). EBITDA (operating profit + depreciation) margins have been on an increasing trend from FY09/03 through FY09/09 (the decline in FY09/09 resulting from increased advertising spending).

Ratio analysis is most useful when comparing firms that have similar business models and accounting treatments. JBR’s business is relatively unique, and the fact that different accounting treatments are used for similar businesses (Call Center and Corporate Tie-Ups, see Income Statement discussion of sales) complicates finding suitable peers for ratio comparison.

SWOT Analysis

Strengths

• Strong financial position. TSE1 Listing. JBR has a substantial cash position (2.5 billion yen as of FY09/09), and is listed on the 1st Section of TSE. This is a powerful weapon in competition against unlisted rivals and the myriad of small businesses offering similar services. In a nutshell, it comes down to branding capabilities as well as corporate strength to provide consistent quality services 24/7.
• Ability to leverage the single fixed cost base (call centers) to provide a variety of services to customers.
• Diversity of services under one brand. A potential strength that is yet to materialize. Given a large number of services provided by JBR, associating all these services with one brand would likely produce a substantial crosspollination effect. Creating a single distinctive brand has been an elusive challenge. Customers find the company in a telephone book or online when they need a specific service and the provider of such service (e.g. a locksmith) is not incentivized to offer other company services. The names of the services themselves are long and proved to be somewhat confusing (a reference to an ‘ambulance’ causing medical associations). JBR probably needs to search for a catchy name. It would be a logical step to educate the consumer to associate all such services with one company that can help in different situations. This would become a major factor in accelerating growth and differentiating JBR from its competition.

Weaknesses

• Current inability to leverage a single brand identity. This weakness is highlighted by the low repeat customer ratio (approximately 6% at FY09/09 end). The lack of a clear identity creates a competitive weakness because competitors only have to compete with the individual service name in the market, instead of a larger JBR brand image. The company also faces relatively higher advertising spending to support the multiple service names.
• Reliance on Cooperating Shops for store network. Cooperating Shops are a large portion of the company’s service network (62.9% FY09/09). Unlike Member Shops, Cooperating Shops only have a relative loose contractual relationship with the company. JBR’s is a customer service business and reliance on Cooperating Shops introduces quality control, branding, and potentially reputational problems that competitors with directly managed store networks and/or employees would not share.

Group Companies

Source: Company Data Processed by SR Inc.

There were 4 fully-owned consolidated subsidiaries and 9 equity method holdings in the group as of FY09/09 end.

Consolidated subsidiaries (100% ownership) include:

• JBR Motorcycle – subsidiary responsible for providing motorcycle road service.
• JBR Bike Relations – subsidiary created mainly to market the Motorcycle Membership service on the Internet.
• JBR Insurance – subsidiary created to provide insurance to motorcycles, as well as Daily Necessities-related insurance under the under the No Worries Residence Support umbrella.
• Japan Small Amount Short Term Insurance – insurance company that is mainly engaged in selling mobile phone insurance (sold through the Life Depot subsidiary) and movable insurance.

Equity method holdings include (ownership amounts at FY09/09 end):

• Japan Lock Rescue Service (30.0%) – provides locksmith services.
• House Doctor (40.0%) – small home renovations and roof repair.
• Aquambulance (40.0%) –joint venture with INAX, provides light plumbing services.
• BAC (32.7%) – company that forms the core of the glass repair business in cooperation with Asahi Glass, performs window and glass replacement services. Operates under the service name “Asahi Glass’ Glass Ambulance”.
• Secom Win (33.3%) – a joint venture with security company Secom, installs Secom security glass.
• Dr Paint (17.2%) – Automobile body repair (painting and sheet metal repair)
• Japan Multimedia Service (15.1%) – involved in the corporate call center outsourcing business.
• Life Depot (49.0%) – a joint venture with Hikari Tsushin, established to sell mobile phone insurance (provided by the Japan Small Short Term Insurance subsidiary).
• Student Travel Japan (20.0%) – participates in customer acquisition for Students Dial 110.

Group Strategy

JBR’s business fits well within a group structure. The core operations of the business are essentially call center operations, and the group companies are used as vehicles to provide sell different service packages to consumers.

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[edit] Market & Value Chain

Market Overview

JBR suggests that the market size for all of the services it provides is at least 15 billion yen, however given the fact that the company’s main competitor, Qracian, generates revenues of approximately 10 billion yen per year, the total market size could exceed the company’s estimates.

Membership Business – No Worries Residence Support No Worries Residence Support packages are marketed predominantly to apartment renters and corporations that manage rental properties. The company estimates that the total market size for the No Worries Residence Support package is approximately 3 million households per year.

Membership Business – Students Dial 110 JBR sells the Student Dial 110 through University Cooperatives, and estimates that approximately 200,000 students per year enter universities with cooperatives, and that approximately 1.05 million students per year enter other universities and educational institutions; approximately 1.25 million students per year.

Membership Business – Motorcycle Membership The company’s motorcycle memberships are typically sold with new or used motorcycles. Data from the Japan Automobile Manufacturers Association indicates that there were 522,315 new motorcycles sold in Japan in 2008 (a decline of approximately 38% from the 836,959 units sold in 1999).

Market Growth

The Japanese traditionally relied on neighborhood handyman, called “benriya” to help in small emergencies. The changing shape of the Japanese demographic and residential landscape in the recent years probably means that the market needs for organized services like those provided by JBR can only grow. Traditionally, the benriya would open their business on local shopping streets. In recent years the “shutter street” problem became acute. Businesses in shopping streets are forced to close (owner’s old age, inability to compete with chain retailers), driving customers away to large scale suburban shopping malls and undermining few remaining retailers and service providers, including the benriya handymen. At the same time, the increasing number of people living alone (the number of households continues to grow well after the population starts to decline) means higher demand.

Customers

The company’s customers are generally constrained by the urgency and availability factors. They want the service ‘now’ be it day or night. That makes them price-takers, unlikely to shop around for the lowest bid. JBR admits to charging 20-30% more for its services that what is available from local independent handymen. However, it also solves problems quickly and anytime, using a trustworthy professional.

The customers who are members of a package services provided through 3rd parties (e.g. rental condo management companies) pay a fixed fee to JBR and are unlikely to comparison-shop. In the case of No Worries Residence Support for instance, the realty brokers who have the contract with JBR would recommend to new tenants to apply for the service when signing a new lease.

Suppliers

The main suppliers to the company’s business are the Member and Cooperating Shops – the company uses labor from both Member and Cooperating Shops to fill service requests. The relationship between the company and the Member and Cooperating Shops is mutually beneficial: JBR provides the shops with work, and the shops pay a commission to the company. The relationship is straightforward and interdependent. In the future, as JBR brand gets stronger, the company should have more leverage over its labor suppliers.

Barriers to Entry

In terms of individual local markets, the barriers to entry are limited, the smallest competitive unit being a handyman himself putting an ad in Townpages. To start a wide territorial or nationwide network however, would arguably require the capital and time similar to what JBR already spent on the business, giving the company a first-mover advantage.

Competition

JBR’s largest competitor is Qracian (unlisted), the largest plumbing related emergency maintenance services company in Japan. JBR estimates that Qracian’s sales during FY09/09 were approximately 10 billion. Other competitors include local maintenance and repair shops located throughout the country.

Substitutes

Substitutes for the services that the company provides are limited. For lock replacements for instance, there are no alternatives to calling a locksmith. The same is true for glass replacement and plumbing – both services require technical expertise and specialized tools.

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[edit] Strategy

From discussions with the company, it seems that the competitive strategy followed by the company has been to go after opportunities as they have been discovered and the management resources were available. The company has added services using the simple criteria of “if it satisfies customers and makes money, it is worth starting”. Such an approach has served the company well: sales have grown approximately 29x from FY09/00 through FY09/09.

One issue which has faced the company throughout its growth has been branding. The growth hasn’t yet addressed the issue of creating a brand image that can be used to market to all of the company’s customers. This becomes obvious when considering the multiple service names that the company uses: Key Doctor, Aquambulance, etc. The service names are effective in communicating the product to potential consumers, but the lack of a single brand identity across all of the services seems to be an ignored opportunity in the company’s marketing efforts.

A distinction needs to be drawn between the company’s advertising efforts and its marketing message. The company has been successful drawing in customers using various internet-based and traditional media campaigns. The company suggests that the repeat customer ratio is relatively low, approximately 4%, which supports the view that customer awareness of the company and its services is either forgotten quickly or not properly established.

It could be argued that although the company has been successful in various advertising efforts, a unifying brand image that can increase the repeat customer ratio through raising consumer awareness has been missing from the company’s strategy.

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[edit] Historical Financial Statements

[edit] Summary

Sales increased about 29-fold from FY09/00 through FY09/09

Highly liquid balance sheet with strong cash position

Stable simple free cash flow generation

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[edit] Income Statement

The company’s sales have been on an increasing YoY trend since FY09/00 through FY09/09 (45.4% CAGR). There was only one year of YoY decline (FY09/08, due to slow sales of Secom Win and weakness in the real estate market effecting sales of Daily Necessities memberships).

The largest contributing segment to total sales from FY09/04 through FY09/09 has been Corporate Tie-Ups Business. One reason for this effect is the accounting treatment of revenues earned in the segment. JBR recognizes the total amount of a service call for Corporate Tie-Ups Business on a gross basis. Services provided through the Corporate Tie-Ups Business segment are the same as those in the Call Center segment, however revenues recognized for Call Center business are commissions received from the Cooperating or Member Shops that perform the work.

Gross profit margins have averaged approximately 40.6% from FY09/04 through FY09/09, within a relatively wide range between 37.8% (FY09/06) and 47.8% (FY09/09). The volatility in gross profit margins has reflected the change in total product mix as the company has grown and added more services. Corporate Tie-Ups were introduced to the business during FY09/04, and the relatively lower gross margins (approximately 20%, as opposed to gross profit margins of almost 100% for Call Center and 57.0% for Membership businesses) have been affecting consolidated figures.

The SG&A / sales ratio has averaged 34.6% during the period under review, within a range between 28.4% (FY09/06) and 42.4% (FY09/09). The largest components of SG&A have been labor and advertising expenses (average of 44.5% of total SG&A from FY09/04 through FY09/09). The volatility of the SG&A / sales ratio is a result of shifts in SG&A spending, mostly on advertisements (see Business Model for more).

The operating profit margin has averaged 8.0% from FY09/04 through FY09/09, within a range of 2.8% (FY09/04) to 9.7% (FY09/07).

Non operating income and expenses have typically been negligible during the period under review. The non-operating balance of 71 million yen in FY09/09 was the result of an expense related to the redemption of deferred small amount insurance business assets.

Recurring profit margins have typically been similar to operating profit.

Extraordinary losses in FY09/08 and FY09/09 were the result of losses on investment securities. The company made investments with partner companies distributing the company’s products, and the weakness in the real estate market required a write-down on the investment.

The company’s average tax rate from FY09/00 through FY09/09 has been approximately 43.4%

Historical Performance vs Initial Estimates

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[edit] Balance Sheet

The company’s balance sheet has expanded approximately 11.7x from FY09/03 through FY09/09. While the company raised cash in the IPO and generally enjoyed positive cash flows, the level of relative indebtedness increased from FY09/08. This was due to increase advertising spending and equity investments (“only limited to companies where business synergies can be expected”, comments the company).

The balance sheet has been highly liquid; the balance sheet has been net cash (total interest bearing debt minus cash and equivalents) from FY09/03 through FY09/09. The quick ratio (the ratio of cash and accounts receivable to total current liabilities) has averaged 152.7% from FY09/04 through FY09/09. Interpret the quick ratio as follows: on average, the company could have paid all of its short term debts and had cash to spare during from FY09/04 through FY09/09.

Assets

Cash and equivalents represent the largest asset category on the company’s balance sheet. The company is a service business which requires minimal capital expenditures, and the company has a negligible amount of inventory.

Long term assets are mostly investment securities.

Liabilities

The company’s liabilities mix has historically been defined by a greater amount of short term liabilities than long term. The current ratio (the ratio of current assets to current liabilities) has averaged 173.3% from FY09/04 through FY09/09.

The value of yet unused membership services are reflected on the balance sheet in Member Allowance and Unearned Income liabilities on the balance sheet.

Total interest bearing debt was 2.3 billion yen at FY09/09 end.

Shareholders’ Equity

Changes in shareholders’ equity have been mostly due to net income (or loss) minus dividends paid. The company has conducted some treasury stock purchases and sales (FY09/09) however the balance has been minimal.

The company’s shares were split 4 times: 5-for-1 in 2004, 3-for-1 in 2005, 2-for-1 in 2006, and again 2-for-1 in 2007.

The company has maintained a dividend payout strategy based on stability of the dividend payment, as opposed to a specific payout rate of yearly earnings.

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[edit] Cash Flow Statement

Cash Flow from Operations

CFOs have been positive during the period under review with the exception of FY09/04 (the company used cash to reduce accounts payable). The largest component of CFO has typically been net income, reflecting a relatively small amount of non-cash expenses. The company’s use of cash has become more efficient as measured by the cash conversion cycle – from 40.8 days in FY09/03 to a negative 2.3 days in FY09/09 as illustrated below.

Cash Flow from Investment (CFI)

Mostly intangible assets (e.g. software) and securities purchases. Relatively large outflows between FY09/06 and FY09/08 were due to securities purchases averaging 482 million yen per year.

Cash Flow from Financing (CFF)

Notable items are the IPO proceeds (FY09/04) and funds from a subsequent equity financing (FY09/07). The company has also used debt financing, 900 million yen in FY09/08 and 600 million yen in FY09/09.

The simple free cash flows (the sum of net income and capital expenditures, minus working capital changes) have been volatile from FY09/03 through FY09/09, driven predominantly by the rise and fall of net income. The negative simple free cash flow in FY09/09 was due to the net loss for the period as well as a higher level of capital expenditures than previous periods.

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[edit] Other Information

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[edit] History

JBR was born out of personal need. The company’s founder, Nobuhiro Sakakibara had an experience in his college days when he helped a person whose bike broke down. Later, when he started working and was commuting on a scooter, Sakakibara would often work later than motorcycle shops were open, and often could not find help with his scooter when he needed some. Clearly, other motorcycle and scooter riders were facing similar problems but there no services offered to bikers similar to JAF (Japan Automobile Federation, an automobile service membership).

Sakakibara established Japan Motorcycle Road Service Corp., the predecessor of JBR, in 1997 to connect motorcycle riders in distress with motorcycle mechanics. He built the business from the ground up travelling across the country visiting all of the motorcycle shops to get them to use the company’s service. The concept was relatively novel at the time. The motorcycle service market was characterized by a large number of shops, but any degree of organization was generally lacking. Japan Motorcycle Road Service was an attempt to provide consumers with technical emergency help when and where they needed it.

In 1999 the company began adding other services. Sakakibara realized that the motorcycle business was highly cyclical – most riders kept their motorcycles off the road during in winter. Sakakibara started offering a lock replacement services to general consumer and followed with adding new service types that reach approximately 20 in 2010. The company name was changed to Japan Best Rescue Corporation in 1999.

The company began corporate tie-ups to boost growth by capitalizing on well recognized brands, launching the Asahi Glass’ Glass Ambulance, a glass replacement and repair service using Asahi Glass’ products, in 2002. In 2004 this was followed by SECOM Win, a joint venture with security company SECOM, and Aquambulance, a joint venture with INAX. Tie-ups became a considerable part of the total business -60.6% of FY09/04 revenues.

JBR listed on the Tokyo Stock Exchange (Mothers market) in August 2005, and moved to the first section in September 2007.

The company purchased a small amount short term insurance company in 2008. The acquisition provides a logical enhancement to the company’s membership products, and should become a visible earnings contributor.

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[edit] News & Topics

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[edit] Top Management

Nobuhiro Sakaibara, President and founder of the company. Sakakibara is the key person in the company, responsible for setting strategy and corporate direction.

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[edit] Employees

At the end of FY09/09, the company employed 129 employees (82 full-time, 47 part-time). The average employee age was 31 (working for the company on average for 3 years) with an average salary of 4.2 million yen.

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[edit] Major Shareholders

The company is effectively controlled by company founder and President, Nobuhiro Sakakibara.

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[edit] Dividends and Shareholder Benefits

The company’s shareholder benefit program offers benefits such as a 5,000 yen coupon for shareholders at the end of September usable for the company’s services (lock replacement, glass repair, and light plumbing services) etc.

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[edit] Investor Relations

Result meetings are held in Tokyo after the announcement of interim and fiscal year end results.

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[edit] By the Way

Source: Company Data Processed by SR Inc.

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[edit] Latest Q&A

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