Kakaku.com Inc

TSE:2371

Earnings Call Transcript 2019-Q3

[Shonosuke Hata, executive]

Greetings, everyone. My name is Hata. Thank you for taking the time off your busy schedules to attend today's earnings briefing.

Without further ado, I would like to start today's earnings briefing, covering the third quarter of the fiscal year ending in March 2019. As usual, we will be using a PowerPoint presentation.

Please turn to Page 2. The current slide contains an overview of the company's consolidated results for the third quarter of the fiscal year ending in March 2019. During the third quarter, we registered JPY 14.239 billion in revenue. The company also delivered JPY 6.513 billion in operating profit, JPY 6.440 billion in profit before taxes and finally JPY 4.422 billion in profit attributable to the owners of the parent company. Our operating margin stood at 45.7%. Revenue and operating profit were up 20.4% Y-o-Y and 14.3% Y-o-Y, respectively. The middle column from the right contains the company's aggregate earnings up until the end of the third quarter. Revenue on an aggregate basis grew 19.1% Y-o-Y, while operating profit and profit before taxes expanded 20.4% (sic) [ 12.4% ] Y-o-Y and 11.6% Y-o-Y, respectively. Finally, profit attributable to the owners of the parent company was also up on an aggregate basis, namely, 9.5% Y-o-Y. I mentioned this during the company's last earnings briefing for the second quarter, and as noted in the bottom left corner of the current slide, the reason for this slightly lower reading in terms of profit attributable to the owners of the parent company was due to the onetime nonrecurring recording of additional taxes during the first quarter. Our achievement ratio in relation to the company's full year forecast therefore stood at 76.7% in terms of revenue, 72.2% for operating profit and 72% for profit before taxes, respectively. Taking into account how the company continues on an upwards growth trajectory and accounting for seasonality factors, we believe these figures to be in line with company projections. We initially forecasted full year increase in operating profit of over 10% Y-o-Y. Since the annualized aggregate increase up until the end of the third quarter was 12.4%, we consider this to be in line with company estimates.

Please turn to Page 3, which contains a highlight in terms of revenue for the third quarter of the fiscal year ending in March 2019. We saw a revenue growth of 17.5% Y-o-Y during the first quarter, 19.2% during the second quarter and 20.4% during the third quarter. There isn't too much variance Q-on-Q but our performance for the third quarter slightly exceeded the previous 2 quarters.

Next, I would like to go over our earnings outline in terms of operating profit during the third quarter. Operating profit grew 9% Y-o-Y during the first quarter, 13.6% Y-o-Y during the second quarter and 14.3% Y-o-Y during the third quarter. Here, too, our performance for the third quarter slightly exceeded our results for the first 2 quarters.

Please turn to the graph on Page 6, where we provide a more detailed breakdown of these results, namely quarterly revenue by business segment. All figures provided are on a consolidated basis. We have divided the section into 3 business segments: Kakaku.com, which accounted for 41.3% of revenue during the third quarter; tabelog, which represented 44.7%; and the segment of new media solutions/finance, which held a 14% share. This breakdown, too, is in line with company projections.

Please turn to Page 7, which contains a quarterly breakdown of costs. All figures provided are on a consolidated basis. Compared to the first and second quarters, we saw a slight increase in expenses associated with advertising. However, these remain mostly consistent with advertising spend for the third quarter of last year. Advertising spend represented 19.4% and 19.6% of total expenses for the first and second quarters, respectively. The percentage for the third quarter was 22.5% on account of a mass advertising initiative associated with tabelog. There is some variance in terms of commissions, personnel costs and outsourcing costs. However, these continue to follow the trend set last year and in the first 2 quarters of the current fiscal year, and are, therefore, mostly in line with company guidance.

Next, I would like to give an outline for each business segment starting with Kakaku.com on Page 9. Kakaku.com is subdivided into shopping, service and advertising. The combined revenue for these 3 segments was JPY 5.885 billion during the third quarter. This translates into a 5% increase Y-o-Y. As such, the third quarter was our best recent showing, surpassing our results for the first and second quarters. Delving a little bit deeper into these results, we see that shopping grew 0.2% Y-o-Y, service registered a revenue growth of 5.2% Y-o-Y, while revenue associated with advertising was up 14% Y-o-Y. We therefore saw a particularly robust performance from the advertising segment.

Please turn to Page 10. Here I would like to go over the segments of shopping and service. I would now like to direct your attention to the first bullet point at the top of the page. I apologize for the smaller font, but as you can see, we registered a contraction in gross merchandising volume or GMV for consumables in the shopping segment of Kakaku.com. On the other hand, we saw an expansion in GMV associated with durable goods. This allowed us to increase revenue in the shopping segment to JPY 2.413 billion, which translates to a 0.2% increase Y-o-Y. Sales, therefore, remain mostly unchanged for this segment Y-o-Y. Please take a look at the vertical bar graph on the left, which deals with GMV for consumable goods. GMV associated with consumables was down 18.3% Y-o-Y during the third quarter, however, this was due to an intentional reduction of listing advertisements and other advertisements under the category of consumables during the third quarter. We did the same thing during the second quarter. GMV for consumables derived from organic search traffic registered a slight increase Y-o-Y. Next, I would like to go over the service segment. The service segment delivered a very robust performance, growing 5.2% Y-o-Y. Please take a look at the graph on the right. Revenue in the personal finance segment grew 10.7% Y-o-Y, while the automobile segment registered a growth of 8% Y-o-Y. The segment of moving companies was up 45% Y-o-Y. The segment of communications registered a slight contraction of 3.1% Y-o-Y.

Please turn to Page 11, which deals with the advertising business. Advertising revenue was up 14% Y-o-Y during the third quarter and stood at JPY 1.413 billion. We saw a slight expansion of 4.2% in revenue derived from network and listing ads. However, it was banner ads and tie-in advertorials that showed a very robust performance, growing 16.3% Y-o-Y. These are ads associated with Kakaku.com's own sales efforts and the efforts of the agencies. The absolute number of tie-up advertorials on the Kakaku.com platform also expanded tremendously during the third quarter growing 26% Y-o-Y.

Please turn to Page 12 where we detail our outlook for Kakaku.com. Starting with shopping, and as shown in the diagram on the left, we intend to expand customer referral support to offline retailers. We have been allocating resources, too, and nurturing this initiative over the past year. We want to expand it even further going forward. We included 2 examples in this slide where we work directly with manufacturers, the picture on the left; and high-volume electronics retailers, the picture on the right. Both cases involve customers making purchases at retail stores. We want to foster customer referral support initiatives with companies in a variety of fields, allowing us to convert online traffic into offline footfall. On the right, we outlined an initiative involving the delivery of video content through Kakaku.com magazine. Tie-up and advertorials have been doing extremely well. However, video content is becoming increasingly more important these days. This initiative's purpose isn't to increase the revenue for ads nor to improve our bottom line. It's an initiative designed to keep up with the evolution of the Internet in an effort to continue delivering relevant and helpful content to our users. We therefore want to challenge ourselves to expand the scope of our articles by including video content alongside with still images in our articles.

Please turn to Page 13, which deals with Priceprice.com, the overseas offshoot of Kakaku.com. Priceprice.com operates in Indonesia, the Philippines and Thailand. We used to offer our services in the Indian market as well, but now our operations focus exclusively on these 3 countries. Despite our exit from the Indian market, the monthly number of users for these 3 countries is 13.87 million. This translates into an increase of approximately 30% Y-o-Y. By being more selective in the number of countries we operate in, we were also able to improve the quality of the content found on Priceprice.com. As a result, we are pleased with our performance in these 3 countries. This concludes my overview of the shopping segment and of Kakaku.com as a whole.

This next section, starting on Page 15, deals with our operations at tabelog. Please turn to Page 15, which contains a quarterly breakdown of revenue for tabelog. Revenue at tabelog grew 22.1% Y-o-Y and stood at JPY 6.37 billion for the third quarter. tabelog is further subdivided into 3 segments: advertising, which delivered 6.9% revenue growth Y-o-Y; premium memberships, with a revenue growth of 3.1% Y-o-Y; and finally, the restaurant promotion segment. Revenue for this last segment grew 27.8% Y-o-Y. Revenue growth for tabelog, therefore, met and slightly exceeded our forecast for the third quarter.

Starting on Page 16, I would like to delve a little bit deeper into our results for the restaurant promotion segment, which delivered the highest annualized growth rate within tabelog. The number of fee-paying restaurants for the restaurant promotion business stood at 57,500 as of the end of December. Of these, 35,100 restaurants were subscribed to the new plans with a variable pricing structure. We keep a close eye on the total number of subscriptions, of course, but we also consider the percentage of restaurants subscribed to our new pricing plans, a key performance indicator. This indicator, too, has met and slightly exceeded our forecast.

Please turn to Page 17, which contains a graphical breakdown of 2 key performance indicators for tabelog: the number of online reservations and monthly revenue per restaurant. 8.94 million people used our online table reservation platform during the 3-month period that comprises the third quarter. This represents a growth of 51.6% Y-o-Y. The average revenue per restaurant for the third quarter also grew to JPY 29,000, again in line with company estimates.

Please turn to the next page, which deals with the segment of premium memberships and advertising. Regarding the segment of premium memberships, as of the end of December, 1.1 million people subscribed to our paid service. We continue to see a gradual decline in premium memberships. However, we made some changes to the terms of our contractual agreement with mobile carriers starting in September, allowing us to increase the average revenue per user, or ARPU. So while the absolute number of premium memberships is down, a higher ARPU has allowed us to grow revenue for the premium membership business by 3.1% Y-o-Y for the third quarter. These results were mostly in line with company estimates. Revenue for the advertising business grew 6.9% Y-o-Y, and stood at JPY 650 million at the end of the third quarter. The numbers for other restaurant-discovery websites and network advertising remained mostly unchanged. However, the revenue associated with in-house advertisements grew approximately twofold Y-o-Y. This, therefore, leaves us to believe the advertising business within tabelog has the potential to make a significant revenue contribution to the company as a whole.

Please turn to Page 19 where we break down our outlook for tabelog. As you can read on the second line from the top, we are committed to improving the quality of our content as well as provide even better and more detailed restaurant information on tabelog, allowing us to grow the number of online reservations through our platform. Our core strategy for tabelog, therefore, remains unchanged. We have included 2 strategies towards increasing the number of online reservations made using our platform. The first of these strategies involves the use of mass advertising. The use of this type of advertising allows us to improve brand recognition for tabelog, while also showing people how to use our service. By doing this, we hope to get people to become more familiarized with our service and actually try it out for themselves. This is the purpose of these television ads. Our second strategy for tabelog is to increase the number of users for the tabelog app. In fact, the number of online reservations made through the app almost doubled Y-o-Y. Online reservations made directly through the app are beneficial for us in terms of efficiency but also convenient for the user. For this reason, we want to continue dedicating our efforts towards increasing the number of people who use the tabelog app. This concludes my overview of tabelog.

Next, I would like to go over our operations within the segment of new media and solutions/finance, starting with an overview on Page 21. Overall, revenue stood at JPY 1.985 [ billion ] at the end of the third quarter. The segment of finance grew 45.4% Y-o-Y, while the segment of new media and solutions delivered a growth rate of 118.7% Y-o-Y. However, we consolidated 2 companies under the Kakaku.com group balance sheet in the fourth quarter of last year. So while the Y-o-Y comparison with the third quarter of last year yields these percentages, a comparison with the fourth quarter would involve comparing JPY 1.985 [ billion ] for the third quarter of the current fiscal year and JPY 1.815 billion for the previous fiscal year. However, seasonality effects are particularly pronounced during the fourth quarter more so than during the third quarter. For this reason, I believe a more accurate Y-o-Y comparison will be possible once the numbers for the fourth quarter become available.

Please turn to Page 22. This section provides a revenue breakdown for the segment of new media and solutions/finance. The vertical bar graph on the left contains Y-o-Y percentage revenue growth statistics for each segment within new media and solutions. Overall, a majority of segments performed in line with company projections. For example, Sumaity grew 16.2% Y-o-Y. 4travel grew 4.7% Y-o-Y. Kinarino grew 38.1% Y-o-Y. WebCG, which features content related to automobiles, registered a slight contraction of 10.4% Y-o-Y. Revenue at yoyaQ was down 87.6% Y-o-Y. We ceased operations at yoyaQ last summer. We saw a slight increase in reservations leading up to the summer, which accounts for this number. We expect revenue from yoyaQ to be close to 0 after the fourth quarter and to disappear completely starting next fiscal year. eiga.com grew 28.8% Y-o-Y, while Time Design delivered revenue growth of 77.4% Y-o-Y. We only really started our monetization efforts for Kyujin Box during the current fiscal year, so these percentages here don't mean much. The graph on the right shows the evolution in terms of the monthly number of users as well as quarterly revenue starting with December of 2017. We have already exceeded 2 million monthly users on Kyujin Box. So as you can see, the platform has reached a somewhat significant size. Historically, the months of October and November and December, which comprise the third quarter, aren't very good for job classified websites. However, we believe both the number of monthly users as well as revenue will pick up during the fourth quarter. As you can see from the graph on the right, we delivered a very strong performance in terms of revenue during the first and second quarters. This trend continued in the third quarter. It's too early to call a definite revenue estimate for the fourth quarter, but we believe we will be able to achieve strong growth.

Next, I would like to give you a select breakdown of our outlook for the segment of new media and solutions/finance. Please turn to Page 23. Advertisings on Kinarino Magazine have been performing particularly well. The contents itself found on Kinarino that is content geared towards female consumers as well as various types of topical media content based upon, for example, on the image of Northern Europe, it tracks a wider range of advertisers, including major players in the apparel market as well as advertisers for health products. We want to further expand our efforts when it comes to the sale of advertising space in these areas for Kinarino, but also for Kakaku.com and tabelog. The diagram on the right deals with the insurance business in the form of Kakaku.com Insurance. We have included statistics pertaining to new insurance policy sign-ups. Sign-ups for life insurance policies were up 53.2% Y-o-Y. Sign-ups for property insurance policies were also up 11.2% during the same period. So as you can see, the insurance and finance segment of Kakaku.com has performed particularly well during the current fiscal year. Online insurance policy sign-ups aren't widespread in Japan yet, so we believe there is still room for growth in this area. Insurance represents only a small portion of the total revenue for the Kakaku.com Group, so it never really warranted a more detailed explanation during the company's quarterly earnings briefings. However, since the segment registered a revenue growth of 45.4% Y-o-Y during the third quarter, this leads us to believe there is room for further growth in this segment.

Please turn to Page 24, which contains an example of our strategy designed to improve content quality at Kyujin Box and on Kakaku.com Insurance. For Kyujin Box, in particular, there is a great deal of competition in the form of job classified websites as well as services offered by Google or by websites like Indeed. For this reason, we want to expand Kyujin Box's original content library and offer people a better, more streamlined user experience. Finally, the diagram on the right deals with the Kakaku.com Insurance business. We offer chat support to our customers in addition to online sign-up forms. We have extended the chat support feature on our website, previously only available for a life insurance policy customers to fire insurance policy customers as well. This is part of an initiative to stay on top of the ever-evolving technological landscape that is currently dominated by smartphone use and which will include things like voice recognition in the feature.

This concludes my overview of the company's earnings results for each segment as well as for the Kakaku.com Group as a whole. Thank you for listening.