Mercari Inc

TSE:4385

Earnings Call Analysis

Record Highs Amid Future Growth Investment

The company marked its highest ever revenue and a 10% year-on-year growth in Gross Merchandise Volume (GMV), maintaining profitability with a core operating profit margin of 37%. Active user base increased by 9% to 23.5 million. Investments in the Mercard loyalty program fueled synergy and ARPU growth, alongside initiatives enhancing crossborder transactions and specific categories like smartphones and fashion. Fintech showed revenue growth with Mercard users crossing 2.5 million and credit balances over JPY 150 billion. The U.S. market faced a 12% drop in GMV due to inflation, even as user engagement improved. The company is poised for launches in on-demand labor and expects no increase in profits due to heightened investment in new ventures and user acquisition, especially in Fintech.

Mercari's Persistent Growth and Diverse Initiatives

Mercari, amid pursuing its mission to circulate all forms of value, has witnessed its highest revenue ever—a testament to the synergy and growth of its various business segments. This quarter, they've achieved balanced growth with a keen eye on profitability, successfully meeting their core operating profit expectations.

Marketplace Momentum and Fintech Expansion

Marketplace continues to thrive with GMV growth of 10% year-on-year and an impressive adjusted core operating margin of 37%. The loyalty program and crossborder transaction enhancements played a significant role in this growth. Meanwhile, Fintech's aggressive push, particularly with Mercard, has paid off with a substantial increase in cardholders to 2.5 million, a credit balance exceeding JPY 150 billion, and a remarkable collection rate of 99.1%.

Challenges and Adaptations in the U.S. Market

In the United States, despite economic headwinds like inflation leading to a 12% year-on-year decline in GMV, MAU has continued to increase. Through efficient marketing strategies, Mercari has managed to shrink its adjusted operating losses compared to the previous year.

Investment Strategy and Future Expectations

With substantial investments directed towards the Mercard user-acquisition and the on-demand labor business, Mercari does not anticipate a yearly increase in profits for the full fiscal year. As they expand into the on-demand labor market scheduled for spring 2024, the continued investment is set to provide additional momentum to their already diverse ecosystem.

Growing User Base and Blockchain Initiatives

Mercari is not just growing its user base but also enriching its service offerings. With the launch of a feature that allows payments with Bitcoin on the Mercari app and surpassing 1 million crypto asset accounts, the company underlines its commitment to financial service innovation.

Commitment to User Acquisition and Gen Z Engagement

The company is relentless in acquiring more Mercard users and is launching campaigns aimed at the Gen Z demographic. They are also adamant about maintaining their improved collection rates and expanding their financial safety nets through diverse fund procurement strategies.

Financial Policy and Shareholder Returns

Mercari is focused on managing liquidity risks and investing in growth while also ensuring a strong financial foundation. For now, the company has decided to reinvest in itself for long-term gain rather than distribute dividends to shareholders.

Earnings Call Transcript 2024-Q2

[Operator]

It is time. So we would like to begin Mercari's FY 2024 2nd quarter earnings briefing. The earnings briefing will be conducted by Executive Officer and CFO of Mercari, Sayaka Eda. Eda will take it from here. Thank you.

[江田 清香, executive]

Good afternoon. Thank you for taking part at Mercari's FY 2024 2nd quarter earnings briefing. I'm Eda Executive Officer and CFO of Mercari. So one year ago, we updated our group mission. Circular all forms of value to unleash the potential in all people. In order to achieve this new mission, group mission, we have worked towards this mission, and we have made great progress. This is the agenda that we will be covering today.

First, starting with the financial summary. These are the progress and highlights for FY 2024 2nd quarter. First, starting with the consolidated basis. We achieved our highest ever revenue as a result of steady growth of each business and group synergy. We have continued to invest in the future growth, and we have also managed the company by consciously balancing profitability. And as a result, we recorded core operating profit as expected.

Now looking at marketplace. Initiatives for the loyalty program in areas we wanted to enhance, including crossborder transactions, category growth, B2C contributed to GMV growth. As a result, GMV grew 10% year-on-year and adjusted core operating profit was roughly 37%, which were as expected. Next, Fintech. We strengthened our investment in Mercard. And as a result, as we said, the number of card issued reached 2.5 million and has been growing very rapidly. The credit balance has exceeded JPY 150 billion, and the collection rate improved to 99.1%. So these have also grown steadily more so than ever before.

And now looking at US, MAU has increased Q-on-Q for second consecutive quarters. On the other hand, External factors such as inflation has slowed down purchases and this situation has continued thus the GMV grew negatively at 12% year-on-year. As a result of efficient marketing, adjusted operating losses have decreased year-on-year. These are the second quarter KPI summary, Marketplace GMV, as we mentioned before, it grew 10% year-on-year, landing at JPY 280.9 billion.

Adjusted core operating margin was 37%. For Fintech, the number of users grew steadily to 16.83 million, and the credit balance was JPY 154.9 billion and the collection rate was 99.1%. For U.S. GMV decreased minus -- GMV decreased by 12% year-on-year to $239 million, and MAU dropped 2% to $5.07 million. This is the revenue and core operating profit by segment. The revenue, core operating profit by segment are as you see here.

Now moving on to the financial highlights for each business. First, on a consolidated basis, these are the revenues and core operating profit, we achieved record high revenues and core operating profit were as expected and as was the case in the first quarter, it grew significantly year-on-year. On the other hand, especially in the second half of the year, we will increase investment in Mercard and incrementally increase in investments into on-demand labor business, which we mentioned at the end of the first quarter announcements.

So we do not -- we will be investing in this new business. So we do not expect a year-on-year increase in profits for the full year. Moving on to marketplace. For the second quarter, this is a progress. At the beginning of the fiscal year, we announced this business policy. So we will make sure that we will be continuing with disciplined investments and focus on top line growth. So initiative for loyalty program and areas of enhancements contributed to the GMV growth rate of 10% year-on-year. So as I mentioned before, loyalty program in areas enhancements contributed to the GMV growth rate up 10% year-on-year. And the adjusted core operating margin landed at 37%.

So thus, we continue to achieve stable growth and high profitability as we announced at the end of the -- at the beginning of the fiscal year. Mercard users contributed to increase in ARPU, and we continue to see synergies from our loyalty program. And our initiatives are focused on areas of enhancement contributed to GMV growth as well. For example, with crossborder, we have expanded our partnerships. And we -- our joint programs with our partners for fruit and our efforts to strengthen categories such as smartphones that we started in end of September and also strengthening fashion in time with demand fluctuations at the end of the year yielded favorable results as well.

With regards to B2C, we are aiming to increase API partners and also expanding outlet and reuse a few years. This is the GMV and MAU for the marketplace. I already mentioned GMV, the MAU campaigns and also Alpine Initiatives, marking the tenth anniversary of our service launch resulted in greater exposure and higher MAU of 9% higher at 23.5 million. And this is the revenue and adjusted core operating profit. With the growth in GMV, we achieved steady growth of revenue and also continued high profitability.

This is the cost composition of the marketplace. By increasing investments in areas of enhancements for this fiscal year and initiatives that will contribute to midterm growth, the promotional cost ratio has increased quarter-on-quarter. For the second quarter, second quarter tends to be our high season, and we have focused on top line growth and profitability as well. This is something that we are focusing on throughout the year. So Q-on-Q fluctuates and we expect this fluctuation.

This is the progress product initiatives for GMV growth, and I touched upon this earlier, but I would like to go into more detail. During the first half, we focused on making marketing investments and product enhancement coinciding with a high demand period. So this is what we focused on during the first half, especially with respect to enhancing categories, the strengthening categories, we have improved UX because we expect midterm growth in this area, and this contributed to GMV as well.

If you can go back one page, again, for example, smartphone, iPhone , a new iPhone was released, so we offer smartphone data deletion service and listing fee refund campaign, at the end of September to coincide with high demand. And so we saw great activity in terms of smartphone, and this has continued in October, we are continuing to see positive impact. In fashion, we added a bundle purchase feature and implemented seasonal campaigns for the fashion categories as well, and we also saw GMV contribution for this category.

The on-demand labor business, which falls under Marketplace business. And we did mention this in the earnings briefing earlier, but we are going to be launching On-Demand Labor Business and this is going to be added to the Mercari ecosystem, so time and skill will be added to the Mercari ecosystem, we will accelerate the circulation of all forms of value. And we aim to launch it in spring 2024. So we are developing our product and signing up partners and these are the 3 strengths of our service as we enter the on-demand labor business market.

So first, we have a multi-generation base of over 23.54 million users across Japan. So we will be able to acquire crew quite efficiently. And we offer paid buy and sell, but we will add time and skills in the form of work. And this can all be completed in one app. So people will be able to experience the circulation of all forms of value. Number 3 is a safe and secure usage environment. So people can be rest assured trusted service and enjoy the new service we will be introducing.

After the service is launched, we want to make sure that this business will grow, so we will gradually invest to support the growth of this new business. Next, moving on to Fintech. This is the progress of the second quarter. At the beginning of the year, this is the business post that we introduced focus on acquiring Mercard holders and aim to enhance synergy. As I mentioned earlier we have strengthened our investment in Mercard user acquisition and our -- and we've surpassed 2.5 million cards issued.

It's been about a little over a year since we launched Mercard. Started issuing Mercard, and this is quite a fast speed for the industry. So we have been acquiring users at very rapid speed. And we are seeing car users are helping drive up the ARPU within Mercari, resulting in greater group synergies, such as GMV growth. As a result, during the second half of the fiscal year, we will further strengthen our investment in user acquisition.

So we will acquire Mercard users and expand smart payments and we have seen an increase in credit balances wallets. It has reached over JPY 150 billion. Collection rate has also both improved. So in the second quarter, we received non-recourse financing to improve liquidity. We hope to build -- we have built a solid service with a solid financial foundation. So we have struck a balance between both.

And also the number of Mercoin accounts, crypto accounts, after the service was launched 7 months ago, we have topped 1 million crypto asset accounts. New accounts during the 8 months from the end of February to end of October in Japan was JPY 1.77 million. So we are leading the growth in crypto asset accounts. We hope that crypto assets will become more accessible, and we will be adding a feature developing a feature that will allow users to make payments on Mercari and Bitcoin.

This is the revenue and core operating profit for Fintech. With the growth of fixed amount payments in Mercard, the revenue has increased. So Mercard has contributed to the growth group synergy. And so the second half of the year, we want to make sure that we are acquiring more users. This is a reminder, but this is the Mercard growth. We launched in November 2022, and this is a trajectory that we have traveled on.

And we have already surpassed 2.5 million cards issued. And there are 5 key benefits that we offer features that we offer. So we have 5 unique features. First, we provide unique credit base, credit based on behavior history in Mercard and Merpay. And based on activity, you will get more points back. So point back rate increases through the actions of paying, buying and selling. We also offer flexible control of repayment date and timing.

So we are offering more convenient features to our users and our Mercard is numberless card and a safe and secured design with all settings configured entirely using the Mercari Marketplace app. Users who have already verified their identity can apply for card on as little as a minute using the Mercari marketplace app. So with these features, we have acquired a lot of new users, but spring is when people start their new lifestyles, new chapters within their lives.

So we want to continue to capitalize on this opportunity and also continue to launch campaigns targeting Gen Z and acquire more users going forward. We already talked about, but credit balance is over JPY 150 billion, and the collection rate is now 99.1%, and we are regularly updating the credit logic and strengthening activities to collect payment. So we have surpassed the past collection rates, and we have achieved even higher collection rates. Sorry, we went back a page.

This is the financing for credit services. This is our thinking, summarized. FY 2023. So we wanted to make sure that the confidence in Merpay Smart Payments, credit itself rather than a company credit will be improved. So our credit services are growing, and we want to make sure that we have sufficient financing. So this is the procurement financing policy that we have implemented.

And going forward, we will focus on in nonrecourse financing to promote liquidity but we would also like to continue to diversify our fund procurement as well. This is a number of users and verified users. The number of users and verified users have increased suddenly and identity verification rate has surpassed 90%. As I mentioned in the past, we have a lot of verified users, which contributes to a safe and secure environment, and we have credit and crypto, and also on-demand labor business as well.

So the verify users contribute to a seamless user experience. This is the U.S. business progress up to the second quarter of this fiscal year. This is a business policy that we have announced at the beginning of the fiscal year, we will focus on refining the product to strength and retention on existing users and integrate back on track for growth focusing on engaging generation Z for the future growth. As of December, first half of the year, the growth rate was negative.

However, in the second quarter, we did see recovery of the birth rate and we also made disciplined investments despite the holiday season. As a result, adjusted operating losses continued to decrease year-on-year. Mainly we also have developed products to attract Gen Z. As you can see below, in order to attract Gen Z, we have launched POC, a face-to-face transaction in certain areas, and we have also introduced the community feature, which I will go into more detail later.

In order to -- we also have implemented new shipping fees as well, new plants, shipping costs to expand the scope and to promote purchases. We have effective implemented effective marketing initiatives as well. And so MAU has increased Q-on-Q for second consecutive quarters in a row. And long-lasting inflation has slowed down demand thus GMV grew negatively at minus 12% year-on-year, as I mentioned earlier.

This is the revenue and the adjusted operating profit. We significantly improved adjusted operating losses year-on-year due to robust management. This is the product development for the targeting the Gen Z. So we have implemented community functions. In terms of the community function, if somebody is interested in a specific category, from December, we are providing a community for people who are interested in a specific category, and they can comment on each other -- comment to each other and only coming to Mercari, when you transact, but they can talk about their hobbies and gather information about their hobbies as well.

So we want people to just come to the app and stay on our app longer. So this will help -- we want to help activate the community. And hopefully, this will lead to transactions as well as we added this feature. And after the second half onwards, we want to make sure that we're nurturing this community as well and thereby increasing the number of transactions and face-to-face transactions, Gen Z users are sensitive to shipping fees as well as the transaction fees as well.

And face-to-face transactions have become more commonplace in the U.S. as well. So we are collecting a POC of this face-to-face transaction feature. So we covered marketplace, Fintech in U.S. We went through each business' performance and I would like to summarize our approach to the second half of the fiscal year.

First, starting with the consolidated basis, we want to acquire Mercari uses for midterm growth and gradually increase investments for the on-demand labor business. And so because we will be entering the on-demand labor business, and we will gradually increase the investment. And because of this, we do not expect any earning increase in the revenue for the full year. For marketplace, we will continue with disciplined marketing and focus even more on product enhancement during the second half of the year.

Once the on-demand labor business launches in spring 2024, we plan to gradually increase investment for Fintech, we are seeing positive impact in the ARPU and group synergy. And as I mentioned before, in April, many people start new chapters of their lives. So in time with us, we want to increase our investment from Mercari user acquisition. We plan to invest more in the second half than the first year in Fintech and we anticipate an unadjusted core operating loss for this fiscal year for Fintech.

For U.S., we are anticipating similar levels of adjusted operating profit as the first half, in line with our policy to continue strict cost control. We will continue to develop product for Gen Z. We will continue to focus on developing products for Gen Z as well. This is a financial policy. So we will strengthen our capital through management focus on balancing growth and profitability. And we want to diversify debt financing methods, lengthening, financing periods and spread out repayment periods to strengthen financial foundation.

So this is the policy that has been in place, and we will continue to follow this policy. And with respect to Fintech to counterbalance the growth -- growing credit balance, as I mentioned before, in principle, we will focus on nonrecourse financing to improve liquidity and we will also maintain and improve our collection rate so that we can secure better terms for financing.

And through asset and liability management, we will control liquidity and interest risk. And we get asked this question quite often. So I have -- we have highlighted the shareholder returns here. For the time being, we will prioritize strengthening our financial foundation through investment in growth opportunities and our internal reserves, and this is how we would like to give back to our shareholders. Thus, we do not have any plans to pay out dividends at the moment.

That concludes our FY 2024 2nd quarter earnings briefing. Thank you.

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