KAIKY

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A Japanese company offering a cloud-based, secure and open operating system for industrial IoT (Internet of Things), aiming to provide solutions for digital transformations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Kaiky is primarily focused on developing and marketing its KAIKY OS, an open operating system designed for industrial IoT applications, and its associated services. Their revenue streams consist mainly of:

  • Operating system licenses and subscriptions: This forms the core revenue, with recurring income from software licenses and subscriptions to its cloud-based services.
  • Professional services: A significant portion of their revenue also comes from helping customers integrate and implement the operating system.
  • Hardware sales: while not as central to the business as licensing, they also do have hardware sales.
  • Other services: In addition, the company provides support, training, and consulting services that accompany the core operating system.

Industry Trends:

The industrial IoT market is experiencing substantial growth due to an increase in manufacturing automation, connected devices, and digital transformation initiatives across various sectors such as manufacturing, utilities, transportation, construction, and healthcare. This trend is being driven by a need for improved efficiency, predictive maintenance, supply chain visibility, and enhanced operational data.

While it is a high-growth market, there is also a lot of competition and fragmentation with many different providers.

Competitive Landscape:

KAIKY operates in a competitive landscape with various types of players, such as:

  • Large incumbents: Large firms like Microsoft, AWS, Google, IBM, and Siemens also offer IoT platforms, but KAIKY is trying to differentiate itself by focusing solely on industrial IoT.
  • Smaller niche players: Smaller companies often focus on specialized vertical markets.
  • Proprietary systems: Many industrial companies still use internally developed systems, which provides KAIKY with an opportunity as well.

While KAIKY faces competition, there is a clear opportunity, since the industrial operating system market is becoming fragmented with many players vying for market share. This can be an opportunity for smaller, specialized companies to succeed.

What Makes KAIKY Different?

KAIKY aims to differentiate itself through several unique offerings:

  • Open and Secure Operating System: KAIKY OS is designed to be both open and secure, enabling custom configuration while also protecting data on the network. They claim to offer higher levels of both security and transparency than other providers.
  • Flexibility: KAIKY OS can be implemented in both cloud and on-premise environments and supports a variety of hardware devices.
  • Customization: KAIKY OS can be customized for specific purposes, which makes it attractive to companies with unique needs.

The management has stated the focus is on long-term partnerships and to not prioritize short-term revenue. This shows a high level of confidence in their offering.

Financial Analysis

KAIKY’s financials are not easy to analyze, since all financial information has been in terms of Japanese Yen (JPY), and the company is young. We will analyze what is available.

  • Revenue Growth: Revenue is growing at a high rate, which is expected with a company that aims for rapid expansion.
    • From the information available for Q1 2024, sales of 370 million JPY (compared to 185 million JPY in the same quarter 2023) show massive yearly growth.
    • From the fiscal year ending 2023 to the previous year, revenue doubled.
  • Gross Profitability: Gross margins for the company are good, showing that KAIKY is able to maintain a reasonable level of profitability on the operations side.
  • Operating Expenses: The company has spent heavily on marketing, sales, and research & development, as they try to grow and establish themselves as a leader in this new, growing industry. For example, a rise in R&D spending has resulted in a rise in costs during 2023.
  • Profitability: Although the company is currently unprofitable, the loss has been decreasing, and they expect to become profitable in the next years, which shows a clear pathway to profitability.
  • Share count: The share count has been increasing rapidly, which is typical for a tech company in growth phase.
  • Cash position: KAIKY seems to have enough cash on hand to continue funding its operations and growth.

Risks to Moat and Business Resilience:

  • Technological Disruption: Rapid technological changes could threaten the company’s core offering if other companies develop a better offering.
  • Dependence on Key Customers: Reliance on a small number of customers, which might lead to financial risk in case a customer leaves the company. This can also be a problem for pricing power.
  • Competition: An increase in competition may drive prices lower, negatively affecting profit margins.
  • Integration challenges: If customers struggle to integrate and use KAIKY OS, the company may lose them to other competitors.
  • Management changes: As the company grows and transitions to a more mature state, their management might struggle to adapt to the new needs, especially since the company is still early on its journey.
  • Difficulty in scaling: The company may have a hard time scaling given that there are few customers in a specialized market.

Moat: 2/5

Kaiky has the start of an economic moat, but it has vulnerabilities that need to be addressed. The core reasons for assigning it a 2 out of 5 rating are:

  • Intangible Assets (Weak): While KAIKY is attempting to build a strong brand, it has not been a focus of management so far, and a strong brand identity isn’t present. Also, the technical aspects of the operating system could be replicated by competitors. KAIKY OS has patents, but not many, and a large patent portfolio is also necessary to establish a wide moat in an industry where technology changes rapidly.
  • Switching Costs (Low): The switching costs involved in moving from one operating system to another could be high, but KAIKY’s implementation is still in a young state, meaning there are probably a lot of kinks that need to be ironed out. This makes the likelihood of switching to their competitor, if it’s better, highly probably for now.
  • Network Effects (Weak): There are no meaningful network effects at play.
  • Cost Advantage (Weak): KAIKY does not operate with a sustainable cost advantage compared to larger peers. While they use some efficiency gains, many other companies use the same processes.

Understandability: 3/5

While the core concept of an operating system is relatively easy to grasp, KAIKY’s technology and business model are hard to understand for those not familiar with software systems. For that reason, a 3 out of 5 has been given.

Balance Sheet Health: 4/5

Based on available data, KAIKY’s balance sheet demonstrates reasonable health. While they are still in a growth phase and unprofitable, they have enough cash and low liabilities. For that reason, a 4 out of 5 has been given.