Mercari Inc

TSE:4385

Earnings Call Transcript 2021-Q4

[Unknown Executive]

It is time, so we would like to begin Mercari, Inc.'s results briefing session for the full year fiscal ending in June 2021. In consideration of the spread of COVID-19, we will only be live streaming this event.

We would like to first welcome CEO, Yamada Shintaro, to go through the mid- to long-term result policy; and then the CFO, Sayaka Eda, will take you through the financial highlights and results for the financial year in question; and lastly, Fumiaki Koizumi will talk about the business objectives for the next fiscal year ending in June 2022.

Yamada will first take the floor. Thank you very much.

[Shintaro Yamada, executive]

Thank you for taking part in Mercari's full year results briefing. I'm Shintaro Yamada, CEO of Mercari. Today, myself, as well as our Chairman, Koizumi; and CFO, Eda, will take you through our results for this fiscal year ending in June 2021.

First of all, for myself, I would like to take you through the mid- to long-term policy. Mercari will -- our mission is to create value in a global marketplace where anyone can buy and sell. When I first started the company in 2013, I believed that the Internet has a power to bring people together and to cherish limited resources and to create, enrich people's lives all around the world. I still carry this belief. And after launching the Mercari Japan business in 2013, I launched Mercari US, Merpay and then most recently, Souzoh and Mercoin, so we have created new businesses, and as an entire group, we are putting our effort into realizing this mission.

So after we achieve this mission, I would like to talk about what the world may look like. So this is the future that we envision. Once we achieve our mission not only in Japan and U.S., we will have customers all around the world and cross-border transactions will be standard. And, of course, not only individuals but business owners can also use this marketplace. And Mercari users, customers will have accumulated all our credit information. And based on the information, before the transactions are complete, listers can get paid immediately.

So for example, a lister can list a product and, immediately after, be paid. So this is the kind of experience that we can realize. And if buyers, if we know that they will actually list the products sometime in the future, we can deduct that amount from the actual payment amount, and they will be able to purchase these products at a discount.

Mercari has a lot of appraisal data and we will know the value of things and goods. That is why we will trust the customers to list the products once again and offer them a discount upon purchase. And we believe that shipping will change in the future as well. So for example, like solar and wind power, we can use renewable energy to use robots and drones and use ways to ship products that has less carbon footprints. And also, we will not only be trading goods, skills and digital assets can also be traded. For example, using blockchain technology, you will be able to sell something you created as non-fungible tokens.

So we hope to encourage people to be creative and enjoy life. So once we achieve our mission, this is the kind of lifestyle that we will be able to bring to life. And we also would like to achieve a planet-positive world. This is a term that we have coined -- a new term that we have coined. So we hope that we will share the limited resources of our planet with various life -- living organisms and contribute to solving the environmental challenges and create new value.

And through are services enterprise, we hope that we -- by passing on these goods to other people, we can actually reduce CO2 and reduce the burden on our environment. So we hope to change people's consumption behavior to something that is more sustainable. In Japan, a regular household will use 7.6 tons of CO2 a year and that is their lifestyle carbon footprint. If you look at the apparel and electronics, the carbon footprint for that -- those goods are approximately 1 ton, so that's approximately 13%. So by promoting the use of Mercari and from encouraging people to reuse items, we can significantly contribute to cutting their carbon footprint.

So we will continue to aspire to promote planet-positive. And in the 3 to 5 years, we believe that there are 2 basic key milestones. One is to become -- pave the way for a circular economy, a circular society by connecting the first and secondary distribution. So we want to share data between the first and secondary distribution. And by actively sharing the data and also credit information, we hope to create a more seamless society, sustainable society in the marketplace. This is what we can do to help bring about a circular society.

And next, we -- as a group, we are focusing on the U.S. business but we hope to accelerate our efforts into going global. We believe that we can extend to other markets. And by expanding our service area, we hope to do our best to promote our cross-border business as well. So depending on the area, the regulations environment, the maturity of the market and the culture will differ, but we will put our group power to use and aspire to go global.

And we have focused in the past to see a marketplace business. We have offered in both Japan and the U.S. a focus on some consumers and also Merpay, which offers payment as well as credit creation as well. And there's -- we still believe that there's ample possibility for these 3 pillars of business. But we also believe that there's potential for [ To B ] As well. So that is why we pre-opened in July 28 as Mercari Shops for businesses, and we have crypto assets as well that we have -- we will be offering through Mercoin. So we believe that we can go global and also there are other possibilities in other unexplored territory as well.

So this is the areas. This is what we want to achieve in 3 years and what areas we would like to invest. And we will -- this is a breakdown of what we want to do for each business pillar as well. So overall, we would like to continue to hire engineers and global talent as well. This is a very important focal area for us. And AI, blockchain, information security will help evolve our services, so this is also an area that we need to invest. So we will fortify our efforts in this area.

And in terms of what we want to become in 3 years, in the domestic marketplace, we want to become a leader in circular society. In the financial industry, we want to utilize our group synergy to offer new financial cultures by promoting circular financing. And in the global market, we want to make sure that everybody knows what Mercari is and also provide our services in multiple markets. This is our mid- to long-term objectives.

As Mercari Group, in addition to these 3 key pillars, we have launched Souzoh's Mercari Shop as well as new businesses and sports businesses. So we hope to use our group synergy as much as possible to expand each of these business areas. Through these challenges, we hope to create opportunities for our businesses to grow, and we believe we will continue to grow as a group. That is it for myself, and I would like to pass baton to Eda now. Thank you.

[Sayaka Eda, executive]

Good afternoon. I'm Eda, the CFO of Mercari Group. So I will give you the -- I will take you through the financial highlights and results of the fiscal year ending in June 2021. So this fiscal year, we started on a safe mode, curtailing investments. But as a group as a whole, due to the impact from people staying at home due to COVID, we have restarted the investments. However, in the second quarter, and we believe the GMV grew and the user base grew significantly in both Japan and U.S.

And in terms of profitability, Mercari Japan, Mercari US and Merpay as well, we have improved the profit foundation, so the entire group has ended in the black. And we have also established Souzoh and Mercoin, so we have spent the year making preparations to make sure that we can grow over the midterm.

For Mercari JP, we try to simplify listing, and by doing so, we were striving to achieve GMV year-on-year 20% -- over 20% a year -- 20% year-on-year growth and adjusted 30% -- OP of 30% -- over 30%, but GMV grew by 25% and the adjusted OP by 32% so we far surpassed our targets.

And of course, we have focused on credit and improving our profitability for Merpay, and we wanted to build a more safe and secure usage environment. And as a result, the adjusted OP, including payment commission income from Mercari JP, we have achieved profitability in the single month of May. And this may be temporary but we did achieve profitability for that month. And also, we have over 80% of users who have now completed identity verification.

And for the Mercari US, it has grown by 70%, far higher than the over 50% year-on-year target. And also, we have improved the take rate and so in the fourth quarter, we have ended in the black as well. We have made profits. And these are the KPI summary. So the year-on-year growth was 39% in terms of net sales and we landed at JPY 106.1 billion and operating income improved by JPY 24.4 billion, landing at JPY 5.1 billion.

Mercari JP GMV growth rate, as I mentioned before, was 25% year-on-year. Adjusted operating margin was 32%. The Merpay number of users was more than 10 million, 10.6 million, to be exact. In Mercari US, GMV grew by 72% year-on-year and MAU was 4.6 million. And as a group for each business as well, we made sure that we took advantage of our growth opportunities, so we made great advancements in the last year.

And the reason why we have been able to improve our OP by JPY 24.4 billion is summarized here. The top line grows significantly so our profit structure has improved. So this increase in net sales, which is sales minus related expenses, ended up at JPY 21.8 billion. In the first half of the year, we didn't know what kind of impact COVID-19 will have so we did curtail investments such as advertising, and this has also led to improvements in OP.

Next, moving on to Mercari JP. We have simplified shipping to acquire new users. New user acquisition, we targeted not only core users but also a wider audience, including middle-aged and older users. And so we simplified shipping. We partnered with other companies and we have product initiatives and off-line marketing as well. And as a result, GMV grew by JPY 784.5 billion, a 25% year-on-year growth. So this has been a high growth as well as adjusted OP was 32%, which helped us achieve a high profitability.

This is the GMV and MAU graph. So for the fourth quarter, GMV and MAU actually grew by 40%. But even though the hurdle was high, it was 40% the previous year and the hurdle was quite high, but thanks to invitation campaigns, it grew safely at 15%. So as you can see from this list, we have grown significantly at a high pace for both GMV, MAU, net sales as well as adjusted OP.

This is the cost breakdown cost structure against net sales. Over the 3, 4 years, the advertising expenses and the labor cost has -- the proportion of that has come down. And we are becoming a highly profitable business if you look at the adjusted OP. And going forward, as long as we can see the same trends and the top line continues to grow, we will -- we believe that we will be able to achieve the adjusted OP of 40%, which is one of our midterm targets.

Merpay, we want to build -- we would like to build trust for a seamless society. That's our vision, and we are going to -- we have been focusing on payment, credit and Growing Wallet this fiscal year. For each area, we wanted to improve convenience as well as experience and also issue virtual cards, offer fixed rate payments as well and grow funds for Growing Wallet, and we have tried to improve our profitability. As a result, the percent -- the number of users grew to 10.6 million. And before deduction of payment commission income from Mercari, we did achieve same month profitability in May.

In order to create a more secure and safe environment, we have started identify verification, and over 80% of Merpay users have completed identity verification. And this high percentage will contribute to improving the safety and security of users as well as helping us smoothly roll out new services in the credit area. So we hope to continue to -- it will be key for this credit business as well.

And this is for a summary of making a single wallet. So for Merpay, we have started offering a single wallet for payment, credit and Growing Wallet features. So this is evolving into a more convenient wallet, and we will continue to add new services and new functions to improve convenience and UX.

And next, going forward to Mercari US. Over the last year, we had to keep an eye on the COVID-19 situation, but we have improved awareness and use -- acquired new users, thanks to TV commercials, such as the Superbowl ads. And we also improved the search accuracy as well and also offer same-day shipping as well, represented by Mercari Local in 3 regions. So the GMV, as a result, has grown by $1.17 billion, 72% year-on-year and MAU has reached 4.6 million, growing by 8%.

In the fourth quarter, we did have a high hurdle, and due to seasonality issues as well, and there were changes in the consumption behavior as well post COVID. But the GMV, still, we maintained to grow at 6% and capped the level at $300 million. And if you look at MAU in the fourth quarter, it has dropped slightly. But we will continue to invest in user acquisition and improving functions. And so we believe that this is going to bottom out, and we will continue to grow rapidly as well going forward.

On the other hand, we have changed the take rate in the second quarter from 10% to 15%. So the profitability has improved, profit structure has improved. As I mentioned, GMV grew 6% year-on-year but the sales has grown by 75% year-on-year. So the profit structure has improved significantly, as you can see.

This is for Mercari US sales and adjusted OP. In terms of sales, the GMV has grown. And as I explained earlier, the effective take rate has improved, so you can see that the sales has increased. And in addition to sales increase, fourth quarter tends to be a low season, and we had made disciplined investments. So Mercari US, we have been able to book profits for the first time over the last quarter.

And we did not disclose -- we only disclose GMV and MAU and we did not disclose PL numbers in the past. But for -- going forward, we will be disclosing sales as well as adjusted OP. Mercari's official reports are created based on JGAAP, but for IR documents, we will meet the disclosure requirements and standards of other companies as well and create our IR documents based on U.S. GAAP. This is a GMV and MAU, adjusted OP, this is the annual shift trends.

Next, Koizumi will take you through the business objectives for the next fiscal year.

[Fumiaki Koizumi, executive]

This is Koizumi. Thank you very much. So from now on, I will take you through the business objectives for the next fiscal year.

As a group, overall, Mercari JP, Merpay, Mercari US, we will continue to grow the 3 key pillars and Souzoh, Mercoin and global releases as well. So we would like to grow -- expand -- explore new areas to make sure that we can create opportunities for growth for the entire group.

And we hope to have a positive impact for the environment and society as well, so we want to make sure that we're effectively carefully using limited resources and make sure that we help create a society where people can create value. And we will also address climate change as well as D&I as well. These will be our focal areas for the next fiscal year.

For Mercari JP, new user acquisition has helped us increase MAU, and we will also improve ARPU for the existing users. And for GMV year-on-year, we hope to grow more than 20%, adjusted OP by 30% , over 30%. And so that's what we will aspire to do. And with Souzoh last -- the other days, July 28, we soft-launched the Mercari Shops. And MAU, we have more than 19 million users and we will use that user base and we want to make sure that people will be able to sell very easily.

So with respect to Merpay, we will focus on credit and make sure that we can create a stable profit structure. And we will continue with identity verification and make sure that there's no fraudulent transactions to help create an even more safe and secure usage environment.

And for Mercari US, we will focus on personalization more so than we have done in the past. And we will keep an eye on COVID-19, but GMV year-on-year, we hope to do more than 20%.

With Mercoin, with crypto assets, we are going to -- we are aspiring to get licenses to make sure that we can develop functions that uses Bitcoin. And also with NFT, we will work with Mercari to make sure that we have the necessary platforms in the technologies and conduct POC as well.

Kashima Antlers will be celebrating its 30th anniversary this year, but we hope to improve the profitability of the football business and make sure that we can actually improve stadium operation and consulting business that is not relying on team's achievements.

And this is the Mercari JP business objectives. As I mentioned before in the past, we have focused on older audiences but we want to focus on new user acquisition and improve MAU and also do personalization and improve on categories and marketing initiatives to improve ARPU of the existing users. So we will focus on both to make sure that we can continue to grow GMV at a high pace.

In order to get an idea of how many new users we can still acquire, we did conduct a survey in April 2021, the same survey conducted in April 2019. This helped identify potential users who know Mercari but have not used it yet. Two years ago, when we conducted a survey, our MAU was about 13 million. Most recently, our MAU had grown by 6 million, around 20 million, a little bit less than 20 million. And based on the survey, the potential listers were basically are the same, 36 million.

By simplifying packaging and shipping off-line initiatives as well, we have actually discovered new potential users as well. So we have our awareness has grown, so the potential users has remained around the same. And as the survey has proven, we believe that Mercari JP still has ample room for growth, so we will continue to acquire new users.

So we would like to also focus on activating existing users. Improving ARPU for the existing users, there's basically 3 initiatives. One is utilizing AI for personalization. We did implement a recommendation tab, and we have implemented other personalized initiatives, but we want to improve quality, the accuracy of the recommended products as well as volume to improve the personalization areas. So we would like to focus on both quantity and quality.

And we want to also start recommending products that they wouldn't come into contact with regularly. So that is something -- that's also an area that we want to improve as well, improve the discovery experience. We want to make sure that Mercari continues to be an app that's -- where people can come have fun and discover new products.

And the second area is improving categories. So it's not just the app but we also want to focus on the web as well. We want to create a marketplace that's easy to purchase for many people. In the U.S., we have already made efforts to improve the web experience. But in Japan, we believe that there's still ample room to improve the web. And by utilizing the listing data metadata, we can actually improve the display accuracy of relevant products.

And lastly, for the marketing initiatives, purchase listing and Merpay payment. These functions, we want to cross-promote the use of these functions. And we believe by using all these 3 services, customers will be more satisfied so we will do more to market the cross-use of these functions.

Next, moving on to Souzoh. As I mentioned before, last July 28, we launched Mercari Shops. So as long as you have a smartphone and anybody can actually open a net e-commerce, a net shop. So it's a very simple-to-use e-commerce platform. So it's for small-scale business owners or producers, and we want people to have experience of selling, easy to sell.

And there's 2 main strength of Mercari Shops is that you can actually use Mercari UX to create a very -- a Mercari Shop very easily. And we have an MAU of 19 million so you don't have to try to gather new customers. We already have a wide user base and people can easily sell as well. So these are our 2 key benefits, the strengths that we offer. And the reason why we developed this is that we knew that there was a big potential for this area from before, but COVID-19 has posed new challenges and we believe that this will help alleviate some of those challenges.

Producers, small business owners as well as medium business owners, they don't have their own EC sites. And EC penetration overall in Japan is only 8.1% so it's very small. And also when I -- when we asked people who have EC shops, only 25% say they're selling well on EC. So we wanted to provide a solution that will answer or resolve the challenges for business owners who want to sell. So we thought that there was a big business opportunity there.

And we believe that there were 2 key lifestyle changes that helped us. So with COVID-19, many people couldn't sell face-to-face, and people were working from home. And with the state of emergency, people are staying at home, and even if they go out, the shops are closed. So many people have started to shop online more so than ever. And that is why even if you don't have -- you have poor online literacy or you don't have the skills, we wanted to create a place where anybody can sell very easily. And we thought that, that kind of platform is necessary, and we thought that we can actually draw on Mercari's strength. And that is why we decided to open Mercari Shops. So we hope that business owners and producers can use this platform to sell their products online.

And Souzoh is focused on B2C but we will work together with Mercari JP and Merpay to help grow this business. And this is the business objectives for Merpay. For Merpay, we wanted to provide services that was used convenient for Mercari users and create an environment. And we also want to focus on improving profitability for Merpay. But this fiscal year, as a next step, we want to promote circular finance. And so we will continue to focus on payment, credit and Growing Wallet and continue to further improve profitability.

We the first use -- we used the circular financing for the first time, but we've -- we have focused on circulating goods and also money. And so we hope to -- without being constrained by traditional attribute data, we hope to offer credit to as many people as possible based on their usage history in Mercari Merpay. By using your credit that you have built on Mercari Merpay, you will be able to get credit. So that is something that we want to create, and this is what we are calling as circular finance and we want to help continue to grow this.

What we will do more specifically is written here. In terms of payment, we would like to promote the existing services, the usage of existing services. So we will actually welcome more merchants that people are actually using during -- in their lifestyle and also promote usage and add more convenient functions and services. And credit is an area that we will focus on, but we have offered fixed rate payment as well. In August 3, we started Merpay Smart Money as well. We launched Merpay Smart Money, and we will continue to create a safe and secure usage environment and promote identity verification, and I will go more into detail about Smart Money. And in addition, we will obtain AI credit license as well to make sure -- to enable us to consider expanding the business further.

In terms of the Growing Wallet, from last year, we have started offering funds but we want to launch a third series, and we also want to consider asset management using Bitcoin as well.

August 3, as I mentioned before, we launched Merpay Smart Money. So we don't want to focus our credit on traditional attribute data. We want to utilize the usage data on Mercari and use our own algorithm to offer small financing and offer personalized interest and usage limit as well. And in terms of Mercari app, in addition to the Mercari app, we want to make sure that it's transparent. You will know how much you can actually -- how much financing you will be able to get, and also a very flexible payment support as well, which was not offered in traditional financing services.

So Merpay Smart Payment is basically a lump sum and fixed rate payment, but Merpay Smart Money is Smart Money plus Smart Payment, but we hope to realize a circular finance based on these 2 services.

And moving on to Mercoin. We just launched this company. And we're still preparing so we cannot disclose details, but we will acquire the necessary licenses and also develop the necessary technologies to make sure that we're not used for money laundering. So we are making the necessary preparations to launch this business.

And moving on to Mercari US. In terms of GMV growth rate for -- in the fourth quarter last fiscal year and first quarter, this quarter year, we believe that GMV will bottom out and then improve. So we believe -- we hope to achieve over 20% GMV growth in the next fiscal year. So the last fiscal year, GMV grew quite rapidly so that year-on-year hurdle is quite high.

And COVID-19, the situation with COVID-19, the situation is still uncertain, but we hope to keep an eye on the situation and continue to grow at a high pace. And we will also develop new functions and products, acquire the necessary talent to develop necessary strong profit structure as well as the organization as well to make sure that we can grow rapidly over the midterm as well. So this will be the first year of our midterm span.

And by strengthening the platform necessary for growth, we hope to further accelerate our GMV growth in FY 2023. More in detail, AI using data for automation personalization, shipping innovation app, web integration, we will focus in these areas to acquire new users.

For the U.S. market, we want to make sure that we're -- [ original ] C2C marketplace that is extremely easy to use and safe. So as an [ original ] C2C marketplace, many people would like to ship large items as well. And we also want to -- we also have provided -- started to provide the option to ship bigger products and also same-day shipping as well. And we believe that this will improve our positioning in the U.S. market.

And we also have put effort into the local shipment as well. So for items that are better transacted face-to-face, we are starting to offer services that enables users to do so.

So Mercari Local. For Mercari Local, July 20, we actually struck -- signed a partnership with Uber for Mercari Local. And for this partnership, in over 4,100 cities, about 80% of the households in the U.S. can be covered and can use Mercari Local. So you don't need to ramp products and you can ship the same day. So interior goods, fitness equipment, you can utilize the service for large objects. So this is actually -- will help promote demand for products that we weren't able to before. And also -- this is also -- people can use this for more expensive products as well. So we are planning to offer lump sum payments by installments as well and help further improve user convenience and improve user experience as well.

And moving on to Kashima Antlers business objectives. For the football business, with COVID-19, there are limits to the number of spectators, but this year will be a 30th anniversary year as well. So we want to sell anniversary goods as well and have commemorative matches. And we hope to continue to improve momentum for the football business. And we also want to effectively use stadiums when there are no games and also embark on consulting businesses as well to expand the non-football business so we're not dependent on the team performance.

Lastly, for the next fiscal year ending in June 2022, we want to -- we have yet to accomplish our mission, create value in a global marketplace where anyone can buy and sell, but we will continue to make headway towards that mission this year and focus on the 3 pillars of business. And also, environment. We hope to have a positive impact on the society. So we will do our best to achieve our mission and have a positive impact on the society and environment. And this concludes our results briefing for the fiscal year ending in June 2021.

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