Kakaku.com Inc

TSE:2371

Earnings Call Transcript 2018-Q3

[Shonosuke Hata, executive]

Thank you for taking the time off your busy schedules to come here today. Without further ado, I would like to begin Kakaku.com's earnings briefing for the third quarter of the fiscal year 2018. I kindly ask you to follow along with this presentation by referring either to the printed materials we handed out at the entrance or the PowerPoint slides on the big screen.

Please refer to Page 3, to the slide entitled Third Quarter Fiscal Year 2018 Consolidated Results/IFRS. From the period comprising the months of October, November and December, we've registered JPY 11.8 billion in sales. This translated into JPY 5.7 billion in operating income, JPY 5.69 billion in ordinary income and JPY 3.89 billion in net income attributable to shareholders of the parent company. This represents an increase of 6.6% for sales, 3.5% for operating income, 3.2% in ordinary income and 4.3% in net income attributable to shareholders of the parent company, respectively. Our operating margin also stood at 48.2% during the third quarter of the current fiscal year.

Looking at the aggregate data from the period comprising the months of April through December, this represents an increase Y-o-Y of 5% and 3.5% for sales and operating income, respectively. The second column from the left lists our projections for the current fiscal year. As you can see from the graph, we're currently at 69.8% of our sales target of JPY 48 billion for the fiscal year of 2018 and 69.5% towards achieving our goal of JPY 23.3 billion for the metric of operating income.

Please turn to Page 4. This slide outlines the highlights for the third quarter. As I mentioned in the previous slide, we are currently at about 70% of our projected estimates for the financial year 2018. In particular, the Tabelog arm of Kakaku.com delivered solid results, thanks to an increase in the number of fee-paying restaurants on the platform.

Our results for Kakaku.com in the subsegments of shopping, services and advertising were in line with our expectations. By contrast, we saw a decline in ad revenue as well as fees from premium users on the Tabelog platform. These 2 segments fell short of our expectations.

I would now like to refer your attention to the graph on Slide #5. The current graph breaks down the sales composition ratio for each segment on a quarterly basis. Please bear in mind, there will be some minor discrepancies between the fiscal year 2017 and the current fiscal year due to accounting artifacts resulting from our shift towards IFRS accounting starting in the fiscal year 2018. Still, as you'll appreciate from the graph, we saw a solid increase in sales during the third quarter compared to a relatively stagnant third and second quarters for the fiscal year 2017.

The graph on Slide #6 provides a quarterly breakdown of the costs associated with the company's operations on a consolidated basis. As you'll appreciate from the graph, we saw a slight increase in expenses associated with advertising and commissions during the third quarter of the current fiscal year, which translated into higher operating costs for the company as a whole. These can be explained away as being expenses related to advertising campaigns carried out by the Services segment of the Kakaku.com platform as well as marketing activity geared towards the acquisition of new fee-paying restaurants on the Tabelog platform, both of which saw a significant increase in sales and profitability. This boost in sales naturally leads to a spike in associated expenses.

I would now like to go over each component domain of our company individually. Please now turn to Page 8, which pertains to Kakaku.com. Our business at Kakaku.com can be subdivided into 3 categories namely Shopping, Services and Advertising. During the third quarter, our business for Kakaku.com grew 3.9% Y-o-Y. Looking at each segment individually, you can see that shopping registered an increase of 1.8% while advertising and services grew 3.8% and 6.6% Y-o-Y, respectively.

I would now like to refer your attention to Page 9, which further breaks down our results for each segment. As I mentioned in the previous slide, we registered an increase in sales to the tune of 1.8% Y-o-Y for the category of Shopping. A contributing factor to this is the graph on the right titled Total Amount of Consumer Goods in Circulation.

Ever since we announced our strategy to focus on consumer products and up until last quarter, sales had been steadily increasing by around 5% annually. During the third quarter however, through our efforts to better our content and improve usability, we were able to grow 26.3% Y-o-Y.

The graph on the left refers to our initiative directed toward driving traffic to brick-and-mortar stores. This initiative, which started with a strategic partnership with Big Camera and now with Joshin Denki is still in its infancy, but we hope to develop further business relationships with other companies and expand the scope of the project. Volume has already quadrupled from when we first started this initiative back in October.

Please turn to Page 10. This slide pertains to our activities in the sectors of Service and Advertising for Kakaku.com. Services grew at an annualized rate of 6.6%, but the rate of growth hasn't been even among our various products and service line. Take automobile insurance, for instance, which saw a slight contraction of 29.4%. On the other hand, comparison services for credit cards and loans did well and registered an increase of 13.7%. The same applies to telecom, which grew 27.3% Y-o-Y. This translated into a growth of 6.6% for the Services segment as a whole.

Regarding the segment of Advertising as a whole, sales remained mostly flat Y-o-Y. Worthy of particular mention though are the subsegments of reservation ads, which grew at an annualized rate of 1.4%, and network advertising. This latter category, which includes listing advertisements, saw an increase in sales to the tune of 15.4% Y-o-Y. As a whole, the segment of Advertising grew 3.8% Y-o-Y.

The slide on Page 11 refers to the overseas operations of Kakaku.com. We currently make our services available in India, Thailand, the Philippines and Indonesia through the domain name Priceprice.com. During the third quarter, we registered an increase of 8.3% Y-o-Y for the Priceprice.com platform. We did see a slight dip in the number of unique monthly users in India and Thailand, but we're mostly concentrating our efforts in Indonesia now where we intend to start actively monetizing our services. User traffic in Indonesia almost doubled and we are currently in the process of forming a series of strategic partnerships in Indonesia which we believe will allow us to increase our revenue stream.

I would now like to provide you with a status update on our operations at Tabelog. The slide on Page 13 contains a summary of various user and sales metrics for Tabelog. More specifically, the graphs on Page 13 represent aggregate sales during the third quarter as a function of the number of fee-paying restaurants, premium user memberships and advertising. During the third quarter, Tabelog as a whole grew 7.7% Y-o-Y. Of particular interest is the category of premium user memberships, which saw an annualized contraction to the tune of 23.4%. On the other hand, revenue from fee-paying restaurants, which is our core business at Tabelog, grew 22.2% Y-o-Y during the third quarter of the current fiscal year. Regarding the subsegment of Advertising, I shall go into a little bit more detail in the latter part of this presentation.

Please now turn to Page 14. This slide provides a graphical representation of the number of fee-paying restaurants currently subscribing to our platform. For the month of December, 15,900 restaurants subscribed to our new pricing plans. These are very strong numbers. This information can also be found in our financial statement on the website. But I'm proud to announce here that for the month of January, the cumulative number of restaurants subscribing to our new pricing plans reached 18,000. We expect this trend to continue towards the month of March and into the new fiscal year.

Please turn to Page 15. This section details the number of online reservations in the context of fee-paying restaurants on our platform. There's an element of seasonality involved, of course, that is generally known that people tend to eat out more often during the month of December. But nevertheless, we processed 5.9 million reservations through our platform during the month of December. This represents an increase of 123.7% Y-o-Y.

This, combined with the higher percentage of restaurants using our new pricing plans, allowed us to increase monthly average revenue per restaurant to JPY 23,600. These are very solid numbers, taking into account the target we set for ourselves by the fourth quarter ending this March, which was an average of JPY 24,000 per restaurant.

I would now like to refer your attention to Page #16. This slide deals with the subsegments of premium memberships and advertising. During the third quarter, we saw a contraction in terms of revenue from premium memberships to the tune of 24.3% Y-o-Y. The graph on the left illustrates the evolution of the number of membership fee-paying users. A slightly reduced user base, coupled with changes to the revenue-sharing structure we have with partner merchants, accounts for this decline in profitability.

Moving on to the subsegment of Advertising. Although the total number of listings has gone up, we still registered a slight decrease Y-o-Y. As you may recall, we had a series of prominent tie-up advertisements, which skewed the results somewhat. All in all, we saw a contraction of 17.7% for our advertising segment as a whole.

I would like to refer your attention to the rectangle colored yellow on the graph though. It represents sales from a new initiative generating revenue from other food and gourmet websites who decide to advertise on our platform. As we add more and more websites to our client portfolio, we expect to be able to continue expanding our revenue in this category.

Please turn to Page 18, which contains a brief overview of our operations in the category of New Media & Finance. The combined sectors of New Media and Finance delivered a very robust growth of 17.8% during the third quarter. Worthy of particular mention within this category, we have Kakaku.com Insurance, which grew at an annualized rate of 46%, as well as Kinarino, 4travel and a constellation of other websites in New Media, which grew at 8.9% Y-o-Y. We are generally pleased with these results.

Please now turn to Page 19. This slide provides a categorical breakdown for the sector of New Media & Finance. So Kinarino grew at an annualized rate of 122.2% during the third quarter, while 4travel not just posted a very significant increase in website traffic but also in revenue terms for a 37% increase Y-o-Y.

Regarding Kyujin Box and icotto, and while both websites represent a very tiny portion in terms of revenue, these websites continued to grow in terms of unique user traffic. Of the 2, we were able to successfully monetize Kyujin Box, as you can see from the section colored purple on the bar graph.

Please turn to Page 20. This slide deals with our operations at Time Design. As you can see from the graph on the previous page, Time Design registered an annualized contraction of 42.7% during the third quarter of the current fiscal year. This contraction was mostly due to a decrease in revenue related to system administration.

If you zoom out and view Time Design's results for the entire fiscal year, you'll see that revenue stayed mostly unchanged Y-o-Y. But on a quarterly basis, we registered a contraction of 42.7%. However, market trends and conditions have been favorable for the type of dynamic travel packages at the core of Time Design's business. So we expect to continue to be able to expand sales in this area.

As I've mentioned in the last earnings briefing, Time Design has entered a partnership with Halekulani Hotel in Hawaii in an attempt to capture a larger share of the outbound tourism market. In addition to Halekulani Hotel, we have also formed a strategic partnership with Ayana Resort and Spa in the island of Bali. We have also improved our payment processing interface to allow customers to pay using 6 international currencies on our website.

I would like to refer your attention to Page 21. The current slide provides a brief overview of the type of content you can find on our websites for Kyujin Box and Kinarino. Kyujin Box is an aggregation service which lists and organizes hiring information from other websites. We have recently decided to take this business model one step further to allow companies to post classified listings directly on our website through a new interface we have termed Hiring Board.

Regarding Kinarino, we have recently released a brand-new app for the Android Marketplace. The level of traffic, user engagement and ultimately, sales, is higher for app users than for users visiting the website directly from the browser. So we expect this new app to be a great success.

I would like to conclude this presentation by outlining our plans for Kakaku.com for the next quarter and beyond. Please refer to Pages 22 through 24.

Let us start with Page 23. We have recently acquired a new wholly owned corporation in the form of LCL, Ltd., which offers price comparison services for overnight bus transportation. The chart on the left contains sales and earnings information for LCL, Ltd. over the past 3 years. The company generated JPY 225 million in operating profits on JPY 668 million in sales. This is a small amount in absolute terms but quite significant as it pertains to profitability. Not just that, it is estimated the market for these types of overnight bus services will continue to grow in the future. So we have high hopes for LCL, Ltd. going forward.

Also worthy of particular mention is the user demographics associated with this type of service, namely young women in their 20s. This is particularly useful for us because of the overlap with the audience for our other services in New Media.

Please turn to Page 24. This slide deals with our involvement with LoveBonito Holdings, a fashion company out of Singapore. While we're not a majority stakeholder in the company, which is still a very small sized venture, LoveBonito has strong brand recognition in its native Singapore. In fact, I don't think it would be an exaggeration to say there isn't a single human being in Singapore who has never heard of LoveBonito. It is a company renowned not just for the manufacturing and sales of clothing products, but also for the effective use of social media in their marketing efforts.

We feel we would like to absorb some of that operational know-how and similarly, use our experience and skill set to benefit them as well. LoveBonito has plans for expansion in Southeast Asia, which aligns with our growth strategy for Kakaku.com. This partnership also allows us to diversify our content portfolio.

This concludes my presentation. Thank you for listening.