Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2021-Q1

[アルトマン 京子, executive]

Welcome to Rakuten's 2021 First Quarter Financial Results. We're off to a strong start for the year. Our e-commerce and fintech businesses delivered double-digit profit year-on-year growth and solid retention of new users. Our advertising business also continued to outperform, seizing the momentum driven by digital transformation. And our mobile business accelerated customer acquisition and now offers the iPhone. We also received additional spectrum from the government, having globally proved the quality and capability of a fully virtualized network.

Our investments in mobile increased in line with the accelerated network build-out. This led to another consolidated operating loss. To ensure financial soundness, we raised capital through a third-party allotment of shares and issuance of permanent subordinated bonds.

We continue to take bold action for future growth. Our strategic partnership with Japan Post is an online to off-line transformation that will further power the growth of Rakuten's unique ecosystem.

For the details and the strategy, you'll hear from our leaders of each core business and CFO in just a moment. But first, here's our CEO, Mickey Mikitani, who will share the group's strategy.

[Presentation]

[Kazunori Takeda, executive]

Total domestic ecommerce GMS and total shopping ecommerce GMS increased steadily in the first quarter, continuing the strong momentum from the previous quarter. Here is revenue and operating income. Anchored by Rakuten Ichiba, many businesses performed well and the logistics business as well. Operating income increased significantly as a result of improved profitability.

Looking more closely at operating income. The marketplace type business centered on Rakuten Ichiba and Rakuten Travel improved. While we continue to invest in the logistics business, we are also reducing expansion of the loss from the previous year. In recent years, digital transformation across many industries has accelerated. With the changes driven by the pandemic, society is seeing a type of transformation, which only happens once a century.

Rakuten is working with merchants to improve our appeal as a platform in line with our core principle of empowerment and shopping and entertainment. In addition to accelerating digitalization, the many efforts we have made so far have been successful. We have outperformed the industry growth rate in e-commerce from the start of the pandemic to the present. We continue to increase our presence in the market.

The repeat user ratio of Rakuten Ichiba continues to increase and cross-use of our other EC service is also expanding significantly. Looking at this graph, we can see that the amount of spending per household and the growth rate for households using e-commerce accelerated from 2019 to 2020. The proportion of household consumption spend on e-commerce is also increasing. In these conditions, Rakuten Ichiba performed well as in the previous quarter with strong year-on-year growth in purchases and purchase frequency.

In addition, in response to the acceleration of digitalization and the expansion of users' EC usage, the number of users of our various EC services is steadily increasing. With continuing digitalization, demand of e-commerce service is expected to grow. In order to fully leverage Rakuten's strength, we will focus on building our own logistic network, which is essential to our continuous growth while, at the same time, accelerating digital transformation. We will also establish a new joint venture with Japan Post to jointly operate the logistics business. We aim to create sustainable developments through digitization by converging the strength of Japan Post and Rakuten.

[Noriaki Komori, executive]

After the end of April, we agreed with Japan Post to jointly establish a new company to be known as JP Rakuten Logistics. Our logistics business will be split off from the Rakuten group in order to be operated by the new company. We are targeting July 1 for completion of investment by both bodies into the new company and transfer of our logistics operations.

We have a total of 8 fulfillment centers in several locations focused on Ichiba merchants and our first-party business because the growth in Rakuten is super. We will open 3 new fulfillment centers in Tama, Yao and Fukuoka by 2023. We will consolidate these fulfillment centers under the new JP Rakuten Logistics as we create an efficient logistics platform that is seamlessly combined with Japan Post delivery network.

With the establishment of the new company, we look forward to accelerating the digital transformation of logistics by improving customer experience to cater to diverse delivery needs, reducing leading time for deliveries, including same-day delivery, and introducing new technology will improve efficiencies and expand capacity.

Our new platform for the digital transformation of logistics will contribute to improving the condition of the logistics industry as a whole and realizing sustainable society. It will not only support Rakuten Ichiba but also open up to other delivery companies and the shippers.

The number of merchant and shipping volume for Rakuten Super Logistics continued to increase significantly in the first quarter. The GMS growth rate of a merchant using Rakuten Super Logistics is significantly more than the average GMS growth rate of GMS of all Rakuten Ichiba stores. Using Rakuten Super Logistics contribute to increasing revenue and profit for the merchant by optimizing shipping costs, contributing to the further growth of Rakuten Ichiba. Rakuten Group will continue to provide logistics services that contribute to merchant growth after new logistics company is funded.

Next, I will share an update on our Rakuten Seiyu Netsuper online supermarket business. It has been over a year since the pandemic began, and while sales at brick-and-mortar supermarket have stagnated, our online supermarket business continued to grow steadily. Rakuten Seiyu Netsuper GMS in the first quarter grew 29.9% year-on-year.

The fulfillment center in Kohoku, Kanagawa Prefecture dedicated to handling online groceries we launched in January of this year is steadily increasing its capacity. We will also open a center in Ibaraki, Osaka Prefecture. We plan to finish preparation this year and launch full operations in 2022. This new center will greatly expand our service area in the Kansai region.

In order to provide new delivery solutions, we started trialing a supermarket product delivery service for a limited time using our automated [ usable ] delivery robot on public roads. We aim to expand this effort, and Rakuten will continue working to provide innovative solutions to social challenges and bring greater level of convenience to consumers through next-generation technology.

[Masayuki Hosaka, executive]

The strong growth of Rakuten Card has contributed significantly to the growth of fintech companies as well as to the expansion of the Rakuten Group entire ecosystem, including Rakuten Ichiba.

First, I would like to explain the performance of the FinTech segment. We achieved double-digit profit growth year-on-year with a steady expansion of our customer base and the use of each service as our users' main service. Rakuten Card shopping transaction volume continued to maintain double-digit growth, driving business performance. As a result of outperforming the industry, we expanded our market share. And as of February, our share exceeded 20%.

In addition, the pace of membership acquisition has accelerated further, achieving an increase of 1 million members in just 3 months, breaking our previous record and exceeded 22 million members in February. With the progress of digital transformation during the pandemic, the spread of cashless payment has accelerated and the number of Rakuten Card members has expanded dramatically.

In our FinTech business, we are building a strong ecosystem with Rakuten Card as a hub. Starting with the expansion of Rakuten Card customer base, the number of Rakuten Bank and Rakuten Securities accounts has also expanded. As a result, it has led to the expansion of the asset business that can earn stable profit with a high margin.

The growth of Rakuten Card also contributes to the high growth of Rakuten Ichiba. The ratio of Rakuten Card payment to the total GMS of Rakuten Ichiba continued to increase and reached almost 70%. In addition, our unique marketing initiatives, which offer increased [ user ] point when using Rakuten Card for shopping at Rakuten Ichiba on days ending with 0 or 5 led to the growth of GMS on Rakuten Ichiba.

As the trend of promoting cashless payments continue, Rakuten Payment continued its effort to consistently improve customer convenience and have established a solid position in the cashless market. We are also implementing unique and advanced initiatives such as combating crypto asset to Rakuten cash to shop. FinTech group continued to contribute to the growth of the Rakuten Group by creating synergy through the variety of collaborations in addition to the growth of each fintech company.

[Hiroyuki Nagai, executive]

Here are Rakuten Bank's financial results for the first quarter. The profits of many banks were sluggish due to the negative interest rate policy of the Bank of Japan and the influence of the pandemic. But Rakuten Bank significantly increased profit by increasing service revenue through greater numbers of payment transactions. And so we continue to secure higher sales and profits.

The number of transactions increased by 31% year-on-year and the number of payroll accounts and direct debit transactions, which are directly linked to customers' daily lives, increased by 50% and 32%, respectively, as Rakuten Bank is increasing becomingly the main account used by customers.

Increasing usage as the main account is extremely important for us and will be the basis for Rakuten Bank's future profit expansion. In January, we reached the milestone of 10 million accounts, a new record for Internet banks in Japan. Since January, the number of new accounts has been accelerating due to the strengthening of group synergies. We expect to exceed 11 million accounts in the coming months.

In addition, by improving customer convenience through collaboration with fintech companies, we have realized not only mutual business growth but also mutual profit increase. Indeed, the expansion of the Rakuten ecosystem has led to the growth of each business and the improvement of profits. Rakuten Bank aims to continue expanding the number of accounts and main account usage for customers, thereby accelerating business growth and contributing to the expansion of the Rakuten ecosystem.

[楠 雄治, executive]

Here are the results for the current fiscal year. Continuing from the previous quarter, the market has again been booming and the trading volume of domestic stocks and the U.S. stocks increased, resulting in continuous growth in both revenue and profit. The number of new account openings accelerated even further with 250,000 monthly accounts opened in March and 650,000 opened over the 3-month period of January through March.

As a result, the number of accounts has risen to the #2 position in the industry with 5.72 million accounts. And the gap between Rakuten Securities and the industry leader is rapidly closing. As a result of industry-leading measures, which allowed Rakuten Points to be used for investments, Rakuten Securities has succeeded in attracting beginner investors and expanding its asset business. With the trend toward free stock commissions, expanding the asset business, which generates stable profit, is an important strategy.

The number of tsumitate NISA accounts has also increased, and our market share is 29%, the highest among domestic financial institutions. Tsumitate NISA accounts are used by investors who desire long-term asset formation. And retail investors are only able to create one tsumitate account at one financial institution. Due to the synergy effect at Rakuten, the number of people choosing us is rapidly increasing.

The number of investment trusts to reserve accounts set with Rakuten Card payments exceeded 1 million in April. Users have chosen Rakuten Card because of the high point redemption rate and the convenience of not requiring advanced payment. In addition, the amount of investment trust results has exceeded JPY 45 billion per month, the highest standard in the industry.

Rakuten Securities will continue to be customer-oriented with a focus on services that take advantage of synergies within the Rakuten ecosystem. We will continue to strive to be the most selected online broker for a wide range of people, from general consumers to day traders.

[Yuzo Hashiya, executive]

Here is the earnings performance of the Insurance business. Sales of life insurance and pet insurance expanded steadily, while sales of non-life insurance decreased slightly year-on-year due to careful selection of contracts to improve profitability. Operating income increased by JPY 1 billion year-on-year due to improved insurance underwriting income and cost reduction. We are now in a position to generate stable profit.

After the introduction of Rakuten Points into Rakuten Insurance, online-based insurance sales have increased significantly. In the first quarter, Rakuten general insurance, auto insurance and fire insurance each increased by more than 100% year-on-year, and Rakuten life insurance also increased by 25% year-on-year.

Rakuten general insurance won first place in the automobile insurance satisfaction survey last year, conducted by J.D. Power. This year, Rakuten life insurance won first place in the Oricon customer satisfaction survey in female segment. We gained approval from customers for its affordable premium and robust coverage.

In addition, through our ongoing efforts, we have consolidated our office from 922 that were based in large cities such as Tokyo and Osaka to Nagasaki and Matsuyama. We expect this consolidation to not only reduce cost but also improve productivity and employee skills.

Going forward, we will expand our alliance with the Japan Post Group in the insurance business as well. We will continue to create new value in the future through collaboration between the Japan Post Group and Japan Post Insurance. The Rakuten Insurance Group will continue to empower people and societies so that customers can lead their daily lives with peace of mind.

[Koichi Nakamura, executive]

Rakuten Payment is working to improve customer convenience with our industry-first service points payment instant charging launched in November 2020. Over-the-counter payments can be completed simply by presenting your Rakuten Point card. This has both reduces it burden on users and affiliated stores and have further increased the level of convenience provided by Rakuten Points.

In the past, when trying to make payments using points, it was necessary to make up for any shortfalls in point balance with cash or other payment methods. This service instantly charges Rakuten Cash on the spot and enable payment even when the user's point balance is insufficient. Strategically, it means replacing payment methods provided by businesses other than Rakuten with Rakuten services, thus expanding the Rakuten ecosystem.

In January, it became possible to make instant payments from Rakuten Bank accounts using the Rakuten Pay app. Instant payments by bank account via QR payment is one of the factors that differentiates us from other companies. This service provision makes full use of Rakuten FinTech assets, which also contribute to the value proposition of Rakuten Bank.

In addition, this February, we released the function through Rakuten Wallet that allows customers to charge Rakuten cash with cryptocurrency such as Bitcoin and Ethereum without any handling fees. This is a cutting-edge initiative that converts a customer's crypt assets to Rakuten cash, allowing it to be used for purchases at stores affiliated with Rakuten Pay and Rakuten Point Card nationwide as well as variety of Rakuten services. We will continue to create services that meet the diverse needs of customers.

[Yoshihisa Yamada, executive]

Rakuten Mobile celebrated the first anniversary in April. We continue to disrupt the mobile industry and launch Rakuten UN-LIMIT VI service plan in January. With a simple fee structure that flexibly adjusts in line with customer data use, we are supporting the diverse needs of all users, and this has been very well received.

As you can see, applications have accelerated since the announcement of Rakuten UN-LIMIT VI. Even when other carriers launched new competitive service plans in mid- to late March, the pace of the applications for Rakuten Mobile was not impacted. In fact, the ratio of users from other carriers is increasing.

As part of our business alliance with Japan Post, we plan to set up application counters for Rakuten Mobile at event spaces within the nationwide network of post offices. This will also drive expansion of our service to customers looking for more off-line support. In April, we announced that Rakuten Mobile will begin offering iPhone and also that we will support all models of iPhone running iOS 14.4 or later.

Rakuten Mobile continues to offer more attractive services for all customers and is working to further expand its customer base. At the same time, we are rapidly expanding our own network area so that users can experience the benefits of unlimited data usage.

As for 4G population coverage, we achieved our initial target of reaching 80% by March. We are on track to achieve 96% population coverage this summer. As for 5G, we started limited service in all prefectures in March. In April, we received additional 5G spectrum from the government. This will enable us to expand our 5G service coverage and accelerate deployment of our 5G service to mobile users.

In the first quarter, base station-related costs increased in line with our aggressive base station deployment plans. Roaming costs also increased due to the rapid acceleration in customer acquisition. With the end of the 1-year free campaign period, we expect more revenues from the second quarter onward. With population coverage of 96% to be achieved this summer, base station-related costs and roaming costs will be reined in. Mobile business office are expected to decline gradually after 2021.

Finally, as you can see in this graph, compared to the user's data traffic in the month following the application, the user's traffic in the ninth month has increased by more than 40%. This increase in data usage demonstrates how users are becoming more accustomed to the benefits of unlimited data. It also shows the competitiveness of Rakuten Mobile and sets the stage for our ability to drive increases in average revenue per user.

Rakuten Mobile is strengthening 4G and 5G networks and expanding attractive services to all customer groups. By continuing to grow our subscriber base, we aim to achieve breakeven and in fiscal year 2023.

[Tareq Amin, executive]

Our vision is turning into reality. Key innovations we introduced in our network at Japan are disrupting the global telecom industry. Examples of these innovations are complete adoption of OpenRAN across 100% of the network; the implementation of highly advanced edge network platform architecture; last but not least, full automation in our network operation, resulting in significant reduction of our operational expenditures.

I am very pleased with our network performance so far. However, I am more pleased with the speed of improvements. For example, we have been leading an uplink throughput experience in Japan. And now we are also leading in voice application experience, which is a testament of our network quality and resiliency for our cloud-native platform architecture. However, we're not stopping there. We see further improvements in the future to achieve our aspiration goal to lead the mobile market within Japan.

Our unique architecture of distributed mobile edge network will enable enhanced experiences of our customers. Those edge centers are enabling unique mobile services that serve consumers and enterprises for low latency and real-time applications.

Automation is usually an afterthought in traditional mobile network. However, it is in our DNA. Just last week, we were recognized as the best automated network leader in the industry after just 1 year of commercial service, and we are not stopping here. My vision for the network is to achieve a Class IV autonomous network maturity by enabling a true auto scaling, auto healing, self-optimizing and self-organizing network across all of our network domains.

Our adoption of rich communication services for basic voice and messaging is getting accolades in terms of experience and performance. More than 85% of calls in our network are being made through Rakuten Link app. But we're not stopping there. Rakuten Link Superapp is continuing to evolve, enabling richer and more immersive experience for our users. We are introducing numerous Rakuten ecosystem services in Rakuten Link, but we're also opening the platform to third-party companies. We are leading the world, not only in technology architecture but also in business model development.

Our vision is to take our innovative model in Japan to the rest of the world. I am very pleased with the progress we have made introducing RCP into the telco industry. Many telcos around the world are starting to adopt our architecture. From a specific model domain, such as OSS and our end-to-end platform stack, the Rakuten model is becoming de facto industry reference for next-generation cloud-native telco networks. Thank you very much.

[Naho Kono, executive]

Amid changing [ derived tariffs ] during the pandemic, Rakuten continued to grow significantly in the first quarter. The Rakuten ecosystem, which enhances our synergies between services, has been clearly successful. While the number of [ the main ] active users of the Rakuten Group is growing strongly, the percentage of the users who use 2 or more services also continue to increase steadily. With the strong Rakuten Mobile, the Rakuten ecosystem will become even stronger. [indiscernible] has passed since the [indiscernible] launch and the Rakuten Mobile customer base is expanding. The contribution of Rakuten Mobile to the ecosystem has gradually become apparent.

This data shows the Rakuten Mobile is one gateway to their ecosystem for those who never used Rakuten before. Currently, nearly 20% of total Rakuten Mobile subscribers are new users of the ecosystem. You can see how over time the mobile business is capturing an increasing number of the people from outside of ecosystem.

Furthermore, within 6 months to a year, after joining Rakuten Mobile, 1 in 3 people start using the Rakuten Ichiba; 1 in 6 start using Rakuten Pay; 1 in 7 starts using Rakuten Card; and 1 in 10 start using Rakuten Bank for the first time. In this way, it can be seen that the Rakuten Mobile subscriber has already begun cross-use with many services in a short period of time.

Also working at the usage status focused on fintech services, as of March, 65% of the total use Rakuten Card, more than 30% are using Rakuten Bank, and Rakuten Pay and Rakuten Securities is also used by as many as 70% of users. Hence, you can see the affinity between Rakuten Mobile and our fintech businesses.

Rakuten Mobile provide ideal price for everyone, and it's expected not only to function as an entrance to the ecosystem but also to encourage the cross-use. We expect that this will further accelerate the growth of each service and further expand the Rakuten ecosystem.

[Makoto Arima, executive]

At Rakuten, we have a huge amount of user data generated to buy over 100 million IDs. This data enable us to provide unique and rapidly growing ad business. Ad revenue in the first quarter grew steadily, mainly by the strong performance of Rakuten Ichiba driven by digitalization. We strongly outperformed the growth rate of the whole Internet ad industry.

This is a breakdown of our ad revenue growth rate in the first quarter. The growth rate of Rakuten's own internal ad inventory on the left side of the chart accelerated due to our EC growth. Also, in the area of external advertisers and ad inventory at the top right of the chart, LinkShare Japan, which provides affiliate-oriented marketing services, performed very well. As a result, ad sales growth for external advertisers are particularly noteworthy. Specifically, our major clients, including major consumer goods manufacturers, accelerated their advertising on Rakuten Ichiba, which resulted in the expansion of our ad sales.

In addition, we are currently providing online sales channels and marketing solutions for public sectors such as local governments to support revitalization of local regions. It also contributes to the expansion of our external advertisers' revenue.

In 2020, the Internet ad market remained strong, while the entire ad industry was stagnant due to COVID. In particular, ad spending on e-commerce platforms grew significantly by 24.2% year-on-year. Rakuten own the significant market share in this area, and we will keep on leading it going forward.

[Kenji Hirose, executive]

Here are the results for the first quarter. Revenue increased by double-digit year-on-year due to strong growth at Rakuten Ichiba and our fintech businesses. In the mobile business, depreciation expense increased due to acceleration of base station construction. Non-GAAP operating income decreased, but if we exclude mobile logistics underinvestments, it showed a strong year-on-year increase.

Here is a waterfall chart of non-GAAP operating income trends. Domestic e-commerce and fintech increased profit and drove our business performance. Rakuten Ichiba continues to enjoy a strong loyal user base, and as a result of favorable growth in purchases and purchase frequency, domestic EC operating income increased 19% year-on-year.

In fintech, profits increased by double-digit as each businesses expanded their customer base and strengthened their position as the customers' main service. While overall profit declined due to upfront investment in the mobile businesses, base station construction is progressing well, and our coverage area is steadily expanding toward a population coverage rate of 96% this summer.

Here are the details from non-GAAP operating income to net income. This variation gain was recorded in financial income, and negative goodwill of approximately JPY 20 billion was recorded in equity method investment gains and losses. [indiscernible] Seiyu become an equity method affiliate on March 1. As a result, net loss improved by more than JPY 10 billion year-on-year.

In March 2021, we issued new shares and disposed of treasury stock through a third-party allotment. We raised JPY 242.3 billion that is planned for use as a capital investment in the mobile businesses, in particular, the construction of base station for the future.

Through our strategic alliance with Japan Post Group, we continue to promote the corporate value of both groups. We announced on April 28 that we will jointly establish a new company in which both Japan Post and Rakuten will invest. We will continue to promote efficient logistics businesses operations and further strengthen collaboration in fields such as mobile, data transformation, fintech and e-commerce.

In April, we issued a foreign currency-denominated subordinated bond, raising approximately JPY 320 billion. The subordinated debt has a certain level of capital in terms of credit ratings and is 100% capital in IFRS accounting. We will continue to pursue a financial strategy with due attention to ensuring financial soundness.

In addition, the group will promote further expansion of Rakuten ecosystem outside the group through collaboration with partner companies. We have decided to transfer and consolidate our restaurant-related businesses to Gurunavi by promoting close use of services, including eat-in reservations, delivery and takeout. We look forward to further improving the value of this business. We will continue to collaborate with Gurunavi by use of Rakuten IDs and Rakuten Points, aiming to further expand the Rakuten ecosystem.

Membership value, which Rakuten Group has set as an important index, is steadily expanding towards our target of JPY 10 trillion due to the contribution of an increase in active users on Rakuten Ichiba and Rakuten Securities and an increase in the lifetime value of our users.

Due to the initial 1-year free campaign in the mobile businesses, the number of paying user is currently limited. While we are not yet adding mobile to the calculation of membership value, we believe that it will be central to ongoing use of our services and its contribution to the ecosystem is very high. In the future, we will continue to enhance disclosure about the contribution of mobile to the Rakuten ecosystem. The Rakuten Group aims to continue to expand its ecosystem and increase corporate value.

[アルトマン 京子, executive]

Thank you for watching our 2021 first quarter financial results. As we drive digital transformation through strategic partnerships in our core businesses, one thing will not change, that is our founding mission to empower society through innovation. We'll continue to walk together with all stakeholders to ensure sustainable growth of our Rakuten ecosystem. Please feel free to reach out with any questions. Thank you again for joining.