TT-965 (Tourism Edition) -- Bumps on the Road for Evolable Asia - A Local Company that Gets Travel IT

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, Oct 10, 2018, Issue No. 965

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+++ Bumps on the Road for Evolable Asia -- A Local Company that Gets
Travel IT

One company that I follow regularly as a travel business operator is
Evolable Asia. You have probably never heard of this company, although
it is listed on the Tokyo Stock Exchange (TSE) Mothers under the code
6191. They're interesting because they are one of the few Japanese SI
companies that has a viable travel sector IT business, using a properly
thought out, if yet developing, platform-based business strategy. They
started out in 1995, and after setting up an offshore center in Vietnam
a few years ago they started getting contract work for the usual custom
software development that Japanese large corporations demand. Now they
use that same development team to drastically reduce costs and to
productize their travel know how.

The off-shoring move and Vietnam have let Evolable Asia earn good money
outsourcing engineers and off-shoring projects. However, from the
company's publicly available income segment information and PR
announcements, we can easily see that while the IT makes money, the
CEO's real interest is still in travel, and after a pause in that
sector, he has now redirected his resources with a vengeance to
make-or-break the firm's travel services business. His initial focus has
been API-connected domestic airline tickets, and now other travel
services are being added regularly.

As a result, Evolable Asia is the leader in the sector of domestic and
Japanese outbound air ticketing - a market that is worth about JPY1.5trn
annually. Estimates are that the company sells about 2.6% of all
domestic flights. To get to this level of market share, the company
correctly surmised that buying air tickets was both cumbersome and in
peak periods, unpredictable, and so its strategy of real time inventory
sourced from 12 of the 18 airlines operating in the Japanese domestic
sector has paid off. In fact, and this isn't solely because of Evolable
Asia, the online airline ticketing has grown at a rapid clip of 30% a
year for the last five years, while in comparison the general airline
ticketing market has only grown 3% a year.

But despite the rapid growth of the business, looking at Evolable Asia's
operating profits on a segmented basis we can see that all is not well
with selling tickets. While the company enjoyed a 10% increase in
offshore IT development, registering a JPY135m operating profit in Q2,
it also suffered a JPY178m operating loss in the OTA segment in the same
period. As a result, after soaring SG&A costs (up 42.4% vs. sales up
37.6%), the company lost JPY385m. All was not lost, however, because the
company was still able to "rescue" its profit numbers by selling off
some securities that the CEO invests in as a hobby.

[Continued below...]

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[...Article continues]

The fact is that making money out of air tickets is tough anywhere in
the world, especially now that airlines have such a dim view of online
resellers and have made it so much tougher to get bulk discounts. Thus,
to get traction in the sector, Evolable Asia has had to do three key
things: i) create API connectivity with as many of the major domestic
airlines as possible, so that they can get direct real-time access to
inventory and purchasing - this is hugely expensive, ii) buying tickets
in bulk so as to get meager but necessary discounts, then trying to
mitigate the risk of unused inventory, and iii) marketing like hell
online in the hope that they can get more customers coming in than they
have tickets. It's this last activity that seems to have come undone,
and the company itself did mention excessive marketing costs as one
cause for the red ink.

Despite the messy profit contributions, in my opinion Evolable Asia is
nonetheless a real trail blazer. They are creating a shared economy
where there isn't really a fertile base to grow one, and they are
bringing convenience and choice to consumers, where individual airlines
would normally never cooperate. I respect the firm for that reason. For
younger firms looking to find a way forward in the Japanese online
travel sector, the company shows how you can combine a market need with
ingenuity and tenacity to create a solution. Certainly I refer to their
business model as a framework for developing some of our own strategic
moves at Japan Travel KK.

But at the same time, the company does have this fundamental problem
that it's more expensive to market their bulk purchased tickets than
they are worth. This can only be fixed in one of two ways: i) either to
back off and go back to where the money can be made (custom software
development in Vietnam), or ii) to double down. And this is where
Evolable Asia is headed. In April this year, the company bought out the
DeNA Travel business from the eponymous firm, and renamed the business
AirTrip Corp. The acquisition was done for JPY1.2bn in cash, so while
the cost of the asset goes on the Balance Sheet, the DeNA site has so
much traffic that Evolable Asia can now do away with most of its
expensive outside advertising (60% of the commission they earned on
tickets) AND they no longer have to offer end-user incentives such as
the 2% discounts they did previously. So the DeNA Travel acquisition has
substantially reduced the overhead levels recorded on the P&L.

Nice financial engineering, when you can get it.

Where does Evolable Asia go now, given that it's just doubled the size
of its company through the DeNA Travel acquisition? Well, they have big
plans and think that air tickets alone are too limiting (I agree). Now
they will create similar platforms for other services such as rental
cars, rental SIMs, and traveler financial services. Because there are so
few competitors with the IT engineering horsepower (at low cost) as this
company - they now have over 900 engineers - I suspect that they will be
a real threat to competitors across the spectrum. In fact, now that they
have shown they can acquire their way into the B2C market sector (with
DeNA Travel = retail travel) I wouldn't be surprised to see them move
into the B2B2C sector targeting a firm that has actually already figured
out how to make money from Travel IT. Someone like one of the hotel
bookings aggregators - TL-Lincoln, Temairazu, or someone similar.

Is this a company that I would invest in? It's hard to say. Currently
the firm clearly hasn't really cracked the travel market itself, and
moving from being a back office technology company to becoming an
effective online retailer isn't a natural straight-line evolution. I
suspect that they will have problems trying to manage and motivate the
DeNA Travel retail/publishing team, and many will leave what is
typically a harsh environment in the IT sector. Furthermore, Evolable
Asia does seem to be a "one-man shacho" managed business and since he's
an young but "old-school" autocratic type, one wonders if the business
has the management depth to really be scaled outside his efforts to
tinker and support the growth of his vision. My feeling is that the
travel business part of the company is all still rather superficial and
contrived.

But the CEO is smart, having made a number of savvy investment deals and
sexy tie-up announcements, and so the Japanese stock market loves his
company. Tie-ups with JR for Shinkansen, AirAsia, and a luxury ryokan
company make for great PR and he seems to know how to time these moves.
I often tell investors that to see just what's possible after listing in
the Japanese markets, just watch Evolable Asia as an example. Currently
they have a sky-high PER of 47, on Q2 revenue of JPY2.882bn and income
of -JPY319m, and still the company has a market valuation of JPY43bn!

Obviously the CEO tells a good story.

...The information janitors/

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