Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2019-Q1

[Unknown Executive]

So once again, good afternoon, and thank you for joining the 2019 first quarter financial results meeting for investors and analysts.

Let me introduce the participants. In the front row, on your left, is Kenji Hirose, Masayuki Hosaka, Yoshihisa Yamada, Kentaro Hyakuno. And then in the second row from your left, Hiroyuki Nagai, Yasufumi Hirai, Makoto Arima, Kazunori Takeda, Naho Kono, Hiroshi Takasawa. In the third row from the left, Koichi Nakamura, Noriaki Komori. We have 12 executives present.

I'd like to ask CFO, Mr. Hirose, to make the presentation.

[Kenji Hirose, executive]

Now I'd like to report to you the results of the first quarter of 2019. The first highlights, as you see here, the revenue was up 15.9% year-on-year and EC GSM as well as the Global GTV, both of them achieved a robust growth. Non-GAAP operating income was 370.5% (sic) [ 270.5% ] up year-on-year which was quite significant. For FinTech the revenue was up 22.1% year-on-year and Rakuten Securities suffered some setback due to the situation in the market. But when it is excluded, then the operating income was up 13.7%. And the -- on April 10, the MIC allocated us the 5G frequency band and we plan to start 4G MNO service in October this year. And currently, the preparation is going on quite smoothly. And we also released the new Rakuten Pay app. This is a summary of the consolidated results.

The revenue, JPY 280.3 billion and non-GAAP operating income, JPY 118 billion and IFRS operating income, JPY 113.7 billion. And in fact, operating income achieved a record high level by segment. Starting this year -- or this fiscal year, that we have changed into 3 segments, that is Mobile segment is now contained as an independent segment. And for each segment, as you see, the numbers are given here. And in terms of the change in the revenues as well as operating income are shown in the next graph. The last quarter -- last -- the first quarter 2018, that was the JPY 31.8 billion. And now there was the operating income of JPY 26.6 billion. FinTech, that was about the leveling off due to the Securities reflecting market situation. On the other hand, intermarket -- Internet Services and others suffered some setback and also there was the loss in the Mobile operation, and therefore, the operating income was JPY 18.5 billion. And now the upfront investment is excluded, resulting in the operating income of JPY 118 billion for the current quarter for this year.

Now turning to Mobile business. 5G service, the -- in 3.7 gigahertz, the 100 megahertz band and in the 28 gigahertz band, 400 megahertz band, the radio station establishment plan was approved by March 2025. We plan to make a capital investment for 5G totaling JPY 300 billion (sic) [ JPY 200 billion ].

For existing 4G service, here is a timeline. In May, the investment into Altiomaster -- Altiostar that was already complete and then the large-scale demonstration project was started. And at a certain time, which is appropriate, we'd like to disclose the pricing plan. There may be questions related to the pricing plan and I'd like to pass this question to the person in charge.

Now Rakuten ecosystem and its mega expansion, the membership value has been explained since last year. And for the current fiscal year -- I mean, the current fiscal quarter, JPY 4.7 trillion, which was up 5.5% year-on-year. Toward the future, we would like to increase the quarterly active users by promoting cross-use and also LTV for different business be upgraded so that we will achieve JPY 10 trillion as the value of the membership value. And this is the result of the analysis into different components, that is, the cross-use active user and the LTV. As you see, throughout the 12-month period, active user, that is increasing, and now we expect JPY 140 billion addition. And by promoting cross-use, that results in JPY 370 billion increase for marketing by the streamlining. We see some improvement. On the other hand, LTV, it is in the negative figure. That is, according to our formula, this does not reflect the future revenue but rather profit rate is multiplied, and as a result, the Ebates rebranding costs as well as logistics-related investment and the reduction in margin in Securities, they are taken into consideration as a profit rate which is factored in. And as a result, the number is negative, yet the overall, we see increase, thanks to active user increase together with the expanded cross-use, and we believe that is quite significant. For cross-use, the -- we have now reached 70.1%.

Through innovation, we want to empower merchants, the people and society, so that we can further expand Rakuten Ecosystem. That's how we are promoting our business, especially in Japan. The regional strategy is quite important, and that's what we are focusing on right now. This is through partnership and cooperation with the different regional municipalities trying to empower local economy. And in addition to that, online as well as off-line in relation to payment and logistics are the ones that we want to offer facilitated service to local residents so that we can further increase cross-use and LTV and the active users in different areas. That's how we are implementing various activities.

This is the comprehensive partnership agreement with local governments, with 32 local governments, 12 prefectures, 17 cities and 3 towns. In the future, we will continue to expand that partnership and try to be more dominant in the regional -- in the regions. In the off-line area, what is going to be important is payment.

And now I want to talk about the cashless payment strategy for Rakuten. We are focusing on the ID/IF layer. With 1 ID several multiple services can be used and the loyalty will also be given to the users, so we have a very strong, robust ID/IF protection layer. Now as for the funds, the payment source layer, we are #1 in the credit card area. Also, points and online banks, we are #1 in these payment source layers. So we'll continue to consolidate this layer so that we can provide an easy-to-use service. As for protocol layer, we have Bluetooth, FeliCa, other types of tools or QR codes. Other types of protocols can also be used. So multiple protocols, multiple payment source layers is the interface that we have for this cashless payment strategy. So this cashless economy is expanding, continuing to expand. Noevir Stadium or the Rakuten Seimei Park in Miyagi are implementing these cashless payment structure, and they are doing very well. Food and drink purchase compared to cash is increasing in these stadiums. As for the Rakuten Pay application, downloads have been increasing since its launch and the next version will also be introduced shortly.

Rakuten's -- in the Rakuten Ecosystem, in order to acquire new users, this -- the point partner business is contributing greatly. So with national chains and other stores, we are trying to expand this point partner as a service. GTV is going on beyond here and Zensho is now going to join as a partner. Another point for the regional strategy is this One Delivery expansion. So Rakuten Express has -- is now covering 21% of the population, which is going to continue to increase. On the other hand, the logistics will be upgraded and its business will be improved in terms of revenue. One is the alliance with Wowma!, et cetera. With this alliance with BIC CAMERA, the functions that we do not have, such as the delivery of large-scale electronic products, will be provided by the BIC CAMERA companies, so that more functionality can be provided.

Now FinTech segment. This is the entire [ section ], as I said earlier, for Rakuten Securities. It suffered some setback due to the market situation. Rakuten Card. It is growing quite briskly. The -- in terms of the shopping transaction volume as well as the revolving balance, the operating income has achieved 18.1% growth year-on-year and the revolving balance and the cash advance, they are also growing, making the foundation further solid for Rakuten Card business. The Rakuten Card membership is expanding and it is still growing. And in fact, the pace of adding additional 1 million is the fastest. In March, we reached 17 million.

Rakuten Bank, the operating income as well as revenue, they are growing successfully at JPY 6.2 trillion of the deposit balance was achieved, and this is about the loan receivables. As to the card loan, it is leveling off but housing loan as well as other types of loans are growing and thereby increasing the overall loan receivables. Rakuten Securities, as I said earlier, we see stagnation in the Japanese stock market, and therefore operating income was down nearly 40% year-on-year. Rakuten Life, we terminated the reinsurance policy which suffered low margin. And ever since, both revenue as well as operating income are growing, and we hope that the pace of improvement would accelerate even further.

Next, the Internet Services segment. The domestic E-Commerce GMS was 13.3% year-on-year, very robust growth. Domestic E-Commerce results for the quarter, it was -- operating loss was minus 17.5% year-on-year. Revenue, well, you see the operating loss because it excluded investments and logistics-related costs. Now this is the breakdown. The so-called marketplace business grew by JPY 2 billion year-on-year. The investment phase business like Rakuma, Rakuten Brand Avenue, are the areas where we made investments, so it went down and then logistics-related investments, it was minus JPY 4 billion, and the total was JPY 13.8 billion. Now the Mobile segment, the MNO business and the Mobile shop network, those are the -- mostly the costs.

Now this is the number of physical shops. As of May, the number of physical shops was 500. On the other hand, through the MVNE business, we are beginning to understand the following: the synergy of Ecosystem is very important, Ichiba's service was 90%, Rakuten Card, 74%. So as we try to expand the Ecosystem, I believe the Mobile business is going to contribute greatly.

Next, Ad Business. As for the Ad Business, in the first quarter, it was 17.6% increase year-on-year. The internal inventory and internal clients as well as external clients are our ad customers and we also sell external inventories to our internal customers. This is the way in which we are trying to expand our ad business. This is our service lineup. There is a new attempt which is called Rakuten Pasha. As you know, the clients will provide campaigns and we show that -- demonstrate that to our users and they can buy products at these stores and they will take a photo and they will receive points. So we can do this off-line for our customers. So together with our internal inventory, we are going to be trying to expand our business through these external advertisers.

So that was a brief introduction of the various business segments. From now on I'd like to move on to the question-and-answer session. Thank you.

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