Mercari Inc

TSE:4385

Earnings Call Transcript 2020-Q2

[Unknown Executive]

So it is time. We would like to begin the second quarter briefing session for Mercari for FY 2020 ending in June. So we will start with a presentation from our COO, Fumiaki Koizumi; and CFO, Kei Nagasawa. And we will follow that with a Q&A, and we will finish at 6:00 p.m.

So we would like to pass the stage over to Koizumi.

[Fumiaki Koizumi, executive]

My name is Koizumi. Thank you very much for coming today. So we would like to -- I would like to go over the results for the second quarter. If you have the document, please turn to the summary.

At the beginning of the year, fiscal year, we issued 3 key principles for our business. So with respect to Mercari Japan, we will focus on listing. And for Merpay, we want to enter the next phase of business. Mercari US, we were aiming to achieve a monthly GMV of USD 100 million. So we were focusing on how we launch these 3 key pillars, and we have been investing in the growth in these areas. And this year was going to be key for us, and this is something that we described at the beginning of our fiscal year.

So we just finished the second quarter, so we finished half a year now. And we will go into the details later, but with respect to the highlights, Mercari Japan, we focused on the balance between listing and buying. And so we've been able to optimize the balance with a lot more listing as well. Until now, we did focus on buying campaigns for a while, and we had CRM initiatives for our buyers, so we didn't see as many listings. So the balance was off between ship -- listing and buying, but now we're seeing more listing.

And with respect to Merpay, we have focused on Merpay Smart Payments. And so this is going to be the next phase, but we just announced about our Origami and also DOCOMO partnership, but we are starting to enter the next phase.

And in terms of the U.S., we have grown at 40% or so. So we have been able to maintain a certain level of growth. But in terms of GMV of $100 million, we're still halfway there. So we believe that the obstacle is quite high.

Amid the environment, here are the key KPIs. Consolidated, the GMV was JPY 168.3 billion and net sales was JPY 18.4 billion, and operating profit was minus JPY 6.8 billion.

With respect to each business, Mercari Japan, year-on-year, grew by 20%. So we saw some impact from the warm winter, especially apparel. Apparel actually is a large category for us. So the warm winter impacted the apparel sales. On the other hand, we also optimized the ad spend as well, so we were able to adjust some operating margin at 32%.

And with respect to Merpay, we announced that the number of users last -- just recently, that it was 6 million instead of 5 million. And the number of merchants is 1.7 million. And Mercari US is growing by 46% year-on-year, and MAU is nearly 30 -- 3 million, so these are growing steadily. Financial highlights will be given by Nagasawa.

[Kei Nagasawa, executive]

If you would turn to Page 7, I will start the explanation. In terms of the consolidated financial net sales and operating income, so we had record sales of JPY 18.4 billion and 36% year -- 39% year-on-year growth. And the operating income was minus JPY 6.8 billion, which is a little bit less than last quarter. And Koizumi touched upon this, but we -- actually, they're JPY 4.5 billion in operating income. But we have been making investments in Merpay in the U.S. So this is why the operating income is at a negative.

Now moving on to the Japan business. GMV, I'm sure you're mostly interested in that, but while our year-on-year growth was about 20%, there's 2 reasons why the year-on-year growth is lower than last quarter. I mentioned this last quarter as well, but we did a lot of buyer initiatives in that, so we're seeing impact from that. And also, the warm winter is impacting apparel sales, and apparel is a large category for us. So we're actually being impacted somewhat by the warm winter. And that is why the year-on-year growth has been about 20%, and you're probably wondering what will happen going forward.

Third quarter onwards, the growth rate, we hope to improve a bit in the third quarter onwards. And we had actually originally estimated the GMV year-on-year growth rate at around 30%, but we're -- we've actually adjusted the target to mid-20s.

Moving on to PL. So JPY 14.4 billion is the net sales. This is a high record sales, net sales as well. And year-on-year is 18%, and the margin is 32% in Japan as well. So the operating margin is quite improved from the past. And I will talk about the factors later on.

On Page 10, this is the first and second quarter aggregate results, so I will skip over that. And I already talked about the margin. So going back to the margin, 30% is the OP margin. It's the darkest blue here. And the other blue shades are the costs. So as you can see, why the operating margin has come up is the promotion and also payroll, personnel expenses. These ratios have come down, unlike the past. Especially in terms of the promotions, ad spend, we have been keeping a close eye on ROI and focusing our ad spend as well.

And we also invested in CRM in the previous quarters, but we are actually keeping an eye on ROI and seeing what is more effective. And we've also focused on hiring only key personnel, and we're seeing a leverage happen from these efforts.

Moving on to each business, so I will pass the microphone over to Koizumi again.

[Fumiaki Koizumi, executive]

So I will go into the detail of each business. First, starting with Mercari Japan. I mentioned the listing and buying ratio, which is very important. Until last year, we actually focused on a lot of promotions for buyers to try to gain GMV growth. And the last sell-through rate was very high. And listing is actually our inventory and it's very hard for us to control listing, but we need to actually have more listing or we won't have inventory.

So this year, we started to focus on listing. So as you can see on the left, the chart, the ratio between listers and buyers, you can see that the balance has actually come back up to more of a healthy balance, a healthy ratio. So of course, in the short term, we will see better GMV if we focus on buyers, but we have been trying to resolve this imbalance between listers and buyers.

So -- and on the right, we have new listers. We actually had super listing festivals this year, this quarter. So we can see that we have a lot of new listers as well. So listing is very easy for Mercari, and that's what -- that's our strength. And there's a lot of different services out there, but selling is of our forte and we have a unique position in that respect. So we want to use utilize AI, improve our product to make sure that our listing is very easy and to acquire more listers. And this becomes our inventory and contribute to the GMV overall. So this is an area that we have been able to focus well this fiscal year.

And I will talk about this later as well, but we've been working together with DOCOMO and also the Shinkin Central Banks, utilizing their networks to conduct workshops in the Mercari -- Mercari Workshops in actual venues, physical venues. And we've seen a lot of participants listing after taking part in the Workshops as well, so those are having -- to have effects as well.

Moving on to the next page. Over the last 3 months, this, plus the marketing initiatives, promotional initiatives, so Mercari and Merpay, of course, these are 2 growing businesses for us, but we want to ensure that the -- our customers, our Mercari users, are shifting towards Merpay as well. And we want to optimize the ad spend here as well.

So in October and November, we did a lot of listing campaigns. And December is colder, and also, many people get their bonuses as well, so in December, we had buying initiatives as well, campaigns as well.

So we actually had a listing campaign and a buying campaign, so one after the other. And we also optimized our focus on campaigns that would actually contribute to Merpay as well. So the super listing festival that we did in October is so when a user lists on Mercari, they would get free handling to our service charge. So they would actually get points for listing goods on Mercari, and then they would have to submit proof of identification and we would give them points.

We award them with points, which would actually give them -- it proved to be a trigger for utilizing Merpay. So we don't want to say just use Merpay, we wanted to actually encourage people to use Merpay through Mercari. So it actually promoted both.

So those are the types of campaigns that we have been doing. And Mercari, the monthly MAU, is about 14.5 million and Merpay is about 6 million. So there's a lot of customers who's on -- utilizing Mercari that are not using Merpay yet. So we want to make sure that we're going to be launching campaigns that are going to be beneficial for both.

And we also talked about our -- just announced our collaboration with the Japan Post or Japan Postal Bank. So there's a lot of users who are in rural areas who only have their bank accounts at the Japan Post Bank. So the ROI for them is not be as great because they couldn't -- they only have one bank account with the post office. So now that the -- we're working with them and they joined, they're collaborating with us, we hope that, that will prove to be fruitful. And hopefully, that will also have a positive effect on the MAU going forward as well.

And we already talked about this as well, but Mercari Workshops is doing very well and it's quite popular, and there's a waiting list actually. So we've seen a lot of interesting data. People who participated, about 80% of the participants list products within a week and average about 7 items. And they actually have a good experience. They can sell their products.

So watching 15-, 30-second commercials is not -- does not provide enough encouragement for people to try Mercari because they might think it's still tedious to list, but we want them to experience that's very easy, that they can use barcodes to enlist their products that are in their home. And then when they sell something, they might be encouraged to sell something more or buy something or utilize Merpay. So we want to make sure that people who have low Internet literacy are onboard as well, and that's going to be very important to us.

So even though we're an Internet company, we want to make off-line efforts like these, are very important to us as well. So if they can list this much, then the [ CPE ] is actually going to come out to be equivalent as online.

And moving on to Merpay. This is the policy that we actually announced at the beginning of the fiscal year. So we had a couple of phases. So Phase 1 is upfront investments. We want to make sure that our service is going to be a part of everyday -- people's everyday lives. So we've increased the number of merchants. And we wanted to connect Merpay and Mercari seamlessly by offering smart pay.

And then in Phase 3, we want to issue Merpay services, standalone services, to make sure that we can monetize Merpay. This is the plan that we issued at the beginning of the fiscal year. But there were 2 key developments. So I would like to go over that at this moment. January 23, we merged with Origami, Merpay merged with Origami. And also, we announced a business alliance with the Shinkin Central Bank.

Starting with the left side of the slide, Origami service, we integrated that with the Merpay service. So there's not that much overlap because these merchants, there's -- they don't overlap with our merchants, so they're going to be part of that network as well. Because Merpay actually focused on developing merchants in the major cities, whereas Origami, because of their relationship with the Shinkin Central Bank, they had relationships with the more regional, local, small, medium-sized businesses. So these are our different forte, so we want to combine that and also add even more merchants.

So the integration with Origami is one, but we want to also -- we announced the business on with Shinkin Central Bank at the same time, on the same day. And we were working with Shinkin Central Bank. We wanted to promote cashlessness and also empower local economies.

And so working with Mercari as well, we wanted to help develop the local economies and local areas. So the -- they have 256 Shinkin Banks and also 7,300 branches. So we want to utilize both of our resources well so that they will join the Merpay network, the regional small- and medium-sized businesses.

So of course, Mercari will also conduct workshops in local communities and other activities. So we hope to have their support in this area as well. But over the mid- to long term, we hope that many merchants we can invite very efficiently through the integration with Origami and business alliance with Shinkin Central Bank.

So in the media, they only cover the Origami integration, but actually, this is twofold. So we have a business alliance with Shinkin Central Bank. So this is a more -- there's a wider perspective to this.

Next, many of you may be wondering that by buying Origami, that we may be incurring even more losses. But by integrating the services, we wanted to make sure that we get reduced redundant costs. So by doing so, we do not -- we want to make sure that Merpay does not incur any additional losses going for beyond FY 2020 fourth quarter.

So starting with the left, we'll have more number of merchants and we will have increased revenues from fees as well. So we want to utilize our resources well to make sure that we're getting more merchants without much overlap. And also, we used to conduct promotions separately, but we want to integrate the promotions and reduce promotional costs.

And on the far right, we want to streamline the organization, consolidate offices and thereby reducing fixed costs. So there might be one-off costs that we will incur. Having said that, after the fourth quarter, we want to make sure that we keep the cost in sight to make sure that we're not going to incur any additional losses.

Next, on February 4 this week, we also announced our partnership with the NTT DOCOMO. So there is an overlap with the announcement materials that we've already disclosed, but DOCOMO has about a 73 million user base. And they have -- they issue 200 billion points annually. And our MAU is 15.3 million, and our annual GMV is JPY 500 billion. So these assets that we have and DOCOMO has and the existing services, we want to utilize that well to integrate the IDs and also wallets and also share merchants. And by doing so and taking advantage of our fortes, our strengths, we want to expand our business.

More specifically, on the next page, we will be focusing on these 5 domains. First of all, as I already mentioned, Mercari ID and the d ACCOUNTs will be integrated fully to make sure that we can expand the user base. And of course, the d ACCOUNTs, there are a lot of Mercari users who probably don't have the accounts as well, so we want to make sure that we expand the user base by encouraging that as well. And then we also want to integrate d POINTs as well. By doing so, people will be able to gain or use d POINTs on Mercari.

Next, mobile payment integration, by allowing people to actually get or use d POINTs on Merpay. We want to actually share the balance on Merpay and d Barai as well. And we also want to share and collaboratively acquire merchants, so we want to have the same accounts and make sure that the points or the balances are shared as well as merchants.

And on top of that, we want to collaborate with DOCOMO shops as well. So workshops for Mercari and working together with some shops, we are already doing that with some of the DOCOMO shops, but we want to expand this network.

And the fifth point, this is more of a mid- to long-term goal. We want to utilize the second -- data from the secondary markets, secondary marketplace and use the data of both companies to develop marketing and fintech services. So it's data that both parties will own, but we will make sure that we observe privacy issues and bear that in mind while we develop new services. So we will focus on payment, but we want to collaborate in many other areas going forward.

So far, it's an overview of what we've already announced over the last couple of days, but this will show the impact of the business alliance with DOCOMO and Shinkin Central Bank, the merger with Origami. So there might be some overlap on the left. There are benefits -- list of benefits for Mercari on the right. There are listed benefits for Merpay.

So with respect to Mercari, we want to do joint initiatives to optimize promotional costs and then also focus more on listing as well. And with respect to Merpay, user acquisition, as I mentioned before, we want to acquire users of various services effectively and make sure that we're getting the -- hitting the ROI. And merchant acquisition as well, it impacts costs. So we want to add existing merchants.

And going forward, we want to utilize our partners' networks and sales force to add merchants. So small and medium businesses, we will not be going after that ourselves. So for small- and medium-sized merchants, we will be working together with our partners to encourage them to come on our platform.

Lastly, fixed costs. As Nagasawa mentioned earlier, we want to focus on key personnel, to make sure that we have good control over the headcount as well, just focusing on the necessary personnel.

Lastly, our third pillar business, U.S. This is a chart over the last 3.5 years. It has grown, as you can see, but it has dropped to -- in order to improve the operations. And we focused on operational improvement and getting the right business team and management team in place, so it has come back up. And right now, we're seeing, this quarter, we saw 46% year-on-year growth. And we see these numbers are quite good, but we wanted to hit $100 million monthly GMV, but we won't be able to reach this yet.

And this is the road map. So these are the 3 key areas we're focusing on in the U.S. So how do we raise awareness is one. The second one is making selling very easy, so improving products. So that's something that we need to focus on. And so -- and the third point is making sure that we can establish price confidence. So this is the road map. And let me go over what we've done in each area.

In terms of price confidence, we want to make sure that we're suggesting prices that will increase -- improve sell-through rates. So the reason why people want to continue to sell on Mercari is that their products are selling on our platform, and this is going to be very important. So on the left, we provided a service where we suggest the right price. And this will improve the sell-through rate, and the stickiness improves. So this is now -- has rolled out 100%.

On the right, in terms of the high average order value products, we are offering a service that authenticates these products, such as handbags. So we provide 48-hour authentication service. We -- this will help the sell-through rates and also the credibility of our marketplace. So this is actually benefiting us in many areas. And we want to make sure that we're a trustworthy market and thereby improve the sell-through rate.

On the next page, if I can start from the right side, we want to make selling easy. So when you sell, shipping is actually a very big pain point for our users. So small products, we want to provide very cheap shipping options. From last year, in the U.S. as well, we want to -- we wanted to provide a very cheap flat rate for shipping anywhere in the U.S. But we've actually started to offer this for very small products. So about 20% of all listings are very small packages. So we want to improve convenience in this way gradually.

So we talked about prices and convenience. So this is the bottom part of the road map. So we want to improve our product even more. And this is -- we finished the second quarter already, and we've done a very good job in these other 2 areas. So we're focusing on raising awareness, so TV commercials, radio and off-line ads. And we've also done online as well. We tested them and looked at the ROI in the web as well, what has been important in the U.S.

So this quarter onwards, brand awareness is an area that we will also focus on. But we want to make sure that we keep an eye on ROI. And we think that we have the right products to build awareness at the moment. So this is the direction in which we will shift towards and make sure that we're starting to go -- we're going to start to hit the $100 million. But of course, we don't want to negatively impact the OP, so we will keep an eye on ROI and make disciplined investments.

That's it in terms of the results and what we've been doing quite recently. But this is the results and what we've done in the last 6 months.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]