Has the Kaonavi story changed? (4435 JP)

Its 2QFY2025 result shocked the market. Estimated reading time: 10 minutes

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Kaonavi’s CFO Kimitaka Hashimoto

On Monday, I had the great pleasure to speak to Kaonavi’s (4435 JP - US$131 million) CFO, Kimitaka Hashimoto.

He provided color on Kaonavi’s second-quarter earnings result, which were released on 13 November and led to a negative reaction from the market:

Table of contents:
1. Short introduction to Kaonavi
2. Steady top-line growth
3. Kaonavi’s rising expenses
4. Supposedly tough competition
5. Contribution from new products
6. Conclusion

1. Short introduction to Kaonavi

For those of you who haven’t read my original post on Kaonavi, you can check it out here:

Kaonavi (4435 JP)

In short, Kaonavi is a Japanese developer of talent management software. It helps companies manage their employees by solving staffing problems, designing their organizational structure, performance reviews, surveys, training, internal recruitment, etc.

Kaonavi has grown at a 35% compound annual growth rate in the past five years. Yet despite this growth, the return on its marketing expenditures (LTV/CAC) continues to be an impressive 10%. The monthly churn rate is now just 0.40%, thanks to high switching costs.

The secret sauce seems to be Kaonavi’s user-friendliness. While the software has been criticized for being simplistic, the company continuously adds new features.

Kaonavi only has about 4,000 customers － a small number compared to the 63,000 or so companies in Japan with more than 100 employees. If you include smaller companies, the total addressable market will grow to a few hundred thousand companies.

There’s been concern about competition in the industry, most notably from Plus Alpha Consulting’s (4071 JP - US$452 million) software suite Talent Palette. But there’s no sign of any fee pressure yet, and Kaonavi’s churn rate is low and falling.

Further, the number of Google search queries for Kaonavi’s software product has risen +37% over the past year, a momentum that exceeds that of Talent Palette.

Kaonavi trades at an EV/Sales multiple of 1.5x, with long-term operating margin guidance of 20-30%. But given the current hiring spree, the big question is how fast it will reach these margins.

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2. Steady top-line growth

After Kaonavi reported second-quarter earnings on 13 November, the stock price dived as margins contracted due to rapidly rising costs. In this post, I’ll provide some nuance and explain precisely what’s happened since July.

Here are the key metrics from the second quarter earnings report: