freee (4478 JP)

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freee (44778 JP — US$1.1 billion) is a Japanese developer of cloud accounting software.

It was founded by a former Google executive called Daisuke (“Dice”) Sasaki, who had also run a start-up. Sasaki was shocked at how inefficient accounting processes were at his previous firm and other small- and medium-sized enterprises. So he decided to address the issue by writing software to automate mindless accounting tasks.

The result was "freee" – an enterprise resource planning system for Japanese SMEs:

It's an automated platform. Transaction data from bank accounts, credit cards, expense claims and payment services feed into the platform. Each transaction is then automatically categorized. Invoices can be created, sent and received on the platform. And outputs accounting data, including profit & loss statements, cash flow statements and balance sheet. So the entire process is seamless.

Over time, Sasaki and his team has added additional features to the platform, including through bolt-on acquisitions. There are now additional modules such as HR module, project management, workload tracking, tax filing, e-signatures, health check-up tracking, SaaS account management and more. Almost anything that you might need to run a small business.

There are significant tailwinds for the industry. Many of Japan's smaller businesses still use pen & paper or Excel to manage their accounting. Others use on-premise software that's not accessible online and doesn't connect to banks to download transaction feeds. The cloud accounting penetration rate is only 25% compared to 70% in Australia and 80% in the United States.

freee is also benefiting from several new laws that are accelerating the adoption of cloud accounting software. In 2023, for example, Japan introduced the Qualified Invoice System that requires businesses to send invoices with specific registration numbers that then need to be verified against a national database. freee's software can perform this task automatically. The revised Electronic Book Preservation Act also forces companies to store invoices digitally — another feature that's embedded into freee's accounting platform.

I think the platform is incredibly sticky. It's so simple to use that even non-accountants are able to do basic accounting and file tax returns. Transactions from thousands of Japanese banks feed into the platform. In addition, freee has an app store with 203 additional modules that add to the feature set. Migrating the data to another platform is impossible and would lead to a loss of comparability of accounting data across years.

Many foreign investors seem to think of Money Forward and freee as direct competitors. Both of them have been growing at almost identical rates of about 30% per year. So they assume that Japan will end up with an oligopoly within the cloud accounting sector.

I question that narrative. Money Forward's success comes from its ownership of the accountant referral channel. Its software replicates the manual journal entry interface that Japanese accountants have used for 50 years. It provides greater flexibility. That explains why Money Forward's software is now used by 80 of Japan's top 100 accounting firms.

However, I think that freee's software is more innovative and more disruptive. freee's software is closer to Australia's Xero in its feature set than Money Forward. In fact, the automation features are so strong that they make bookkeepers essentially redundant. I think a high degree of automation will help freee win the market, eventually.

freee's top-line growth is currently about 30% per year. The stock now trades at 3.7x EV/Sales on my FY2026 numbers. Xero makes 55% EBITDA margins in its home markets of Australia and New Zealand. Fortnox makes 50% EBITDA margins in Sweden. So, on a business-model-adjusted basis, you could reasonably argue that freee now trades below 10x EV/EBIT. And the business is now breaking even.

If there's anything to complain about, it's that Money Forward has a clear distribution advantage. Accountants may not have any incentives to change the way they work. Also note that freee started capitalizing software expenses in FY2025, leading to an additional boost in profit growth that won't be sustainable. On my LTV/CAC numbers, the return on marketing spend seems low, despite third-party claims of a corporate CAC payback period of just 17 months.

But the big picture is this: freee has spent ~JPY 50 billion to build an incredibly sticky platform used by over half a million Japanese businesses. freee thinks it corporate client base could triple in the medium term. The platform remains cheap to use at just $35/month for the starter plan. And as freee grows, it will add features that will make the platform even more valuable to its customers.

So I'm looking forward to seeing that Daisuke Sasaki can achieve. If he's right in his long-term vision, then freee is still in the early stage of its long-term growth story.

NOTE! This was just a summary of the actual deep dive. To view the full PowerPoint presentation, click the button below:

freee

freee.pdf

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