Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2018-Q2

[Unknown Executive]

Good afternoon, ladies and gentlemen. We will soon be joined with Mr. Arima. He will be late. Welcome to Rakuten's 2018 Second Quarter Financial Results Meeting for Analysts and Investors.

First, I'd like to introduce the Rakuten's executives here today. In the front row on your left is Masayuki Hosaka, Kenji Hirose, Yoshihisa Yamada, Tareq Amin, Kentaro Hyakuno. In the second row from your left, Yasufumi Hirai, Kazunori Takeda, Naho Kono, Noriaki Komori and Koichi Nakamura. When Arima joins us, these 11 executives will be present and available for questions at the end of the presentation.

Now Mr. Hosaka, please go ahead.

[Masayuki Hosaka, executive]

Good afternoon. So I'd like to start the financial results for the fiscal year 2018 second quarter.

First consolidated -- before consolidated results, we have 8 highlights. First, about the revenue. It's -- the growth is very strong. It's up by 18.5% year-on-year. Global GTV was up 16.4% year-on-year. Especially, the Domestic E-Commerce is keeping good momentum.

And the next one is Domestic E-Commerce, the revenue stream is diversifying. One Delivery, One Payment has been introduced. So we have this opportunity to capture revenue from the diversified business.

FinTech business, it's also growing very strongly. The revenue up by 28.2% year-on-year, and non-GAAP operating income was up 31.5% year-on-year. And we will be making more money. Ad revenue is the area that we are focusing with much attention. It's growing -- its growth is accelerating.

Investment business, Lyft rideshare. The valuation value -- valuation outside of Japan, the share prices are taken into account. And as rideshare, the gains from investment business, which, of course, includes the strategic partners, was JPY 30.6 billion.

As for Rakuten Ecosystem, MNO and One Delivery, these logistics -- these strategic investments are being made in order to massively expand Rakuten Ecosystem. So ongoing investments are being conducted. From July 1, the brand logo has been changed globally. So this indicates that we are going to go to the next stage in our challenge.

Next, consolidated results, the summary. The revenue was -- went up by 18.5% year-on-year to JPY 270 billion. Non-GAAP operating income went up by 83.1% year-on-year to JPY 58.4 billion. And IFRS operating income, 118.3% increase, JPY 61.6 billion.

And as for the different businesses, the Domestic E-Commerce, the top line is expanding, it's growing. Revenue was up by 6.8%. Operating income, as I said earlier, the 1:1 -- sorry, One Delivery or C2C. I'm sorry, I'm a little nervous. When I see your faces, I feel really -- but anyway, we're doing a lot of investments, so it was minus 19.1%. It was JPY 14.8 billion.

Communications and sports, we did very well. Revenue, operating income -- revenue in Viber is becoming profitable. On the other hand, we are conducting investments so the operating income was down by 0.3%. So strategic investments, the valuation prices have contributed, which resulted in the Other Internet Services going up by 27.2% year-on-year. Internet service segment, plus 15.8%; and then FinTech, 28.2%.

Operating income breakdown year-on-year. FinTech was JPY 5.7 billion, which includes the insurance consolidation, plus JPY 2.2 billion. I said the delivery cost is going up, SPU cost. C2C marketing has to be strengthened. And overseas PriceMinister change resulted in a negative. So the operating income was JPY 58.4 billion.

As for overall strategy, first, the Rakuten Ecosystem. The concept of Rakuten Ecosystem, we have one platform called Rakuten, and we have membership brand and content in order to grow data and to grow the ecosystem. MNOs and logistics will be a part of the platform. These are important businesses that we will try to focus a lot of effort on.

Now One Strategy. So in this one platform, we will have one ID/UX -- one ID, one UX. One brand, one membership, One Payment will all be incorporated, and on top of that, various services will be provided with one ID. So this cross-use has to be augmented. Of course, new services will be introduced, but cross-service will be augmented.

If you break this down. So the total unique users will be multiplied by cross-use, which becomes the total service usage. This total service usage will be multiplied by the lifetime value of each business, and that will produce -- generate the Rakuten Ecosystem membership value.

Now at the moment, the membership value is JPY 4 trillion. I think we have some financial people here. But insurance is like the embedded value, which will be accrued in the future. So this JPY 4 trillion will grow to JPY 10 trillion in the near future.

The current focus areas. For e-commerce, it's One Delivery. For FinTech, of course, payment is where we focus. And then communications, of course, MNO. And Big Data global network will be utilized to generate revenue in the advertising business as well as to do investments in new businesses.

Now we are going to transition to a new group structure. A year ago, we introduced the company system so that we have a clearer structure of responsibility. And finally, this new group structure is going to be launched. The background has changed as a result of MNO, logistics. We have great opportunity.

So by taking that into account, we need very swift decision-making for the company, and this is why we decided to introduce a new group structure. We had a board meeting in the morning, and this was approved. So on April 1, 2019, this new group structure will be in place.

Now under Rakuten, these business companies such as mobile network, card, bank, securities, insurance, overseas subsidiaries, these are not operations. These are business units. These will change, too. Of course, Rakuten is a listed company, which will remain -- which will handle IDs, points, data, brand, and the company will be split into Internet Services and then another one will be FinTech. Of course, we will have other businesses underneath that. And then mobile or mobile network services.

So in the Internet service, we'll have -- do -- we'll handle commerce company and the media and sports company. So these 3 companies will be in place. This time line, we are doing the financial results today. In February, the company split plan will be resolved at the Board of Directors and then Annual Shareholders Meeting in March, and effective date will be April.

Now talking about main strategy. You see One Delivery. For FinTech, it is payment that we'll be focused on, of course. This is the matter, of course. And MNO in communications. So these are the areas of main focus, and furthermore, we leverage data and global network for advertisement and other businesses. So there are 4 segments.

And from here on, Mr. Takeda of commerce company will explain to us about One Delivery.

[Kazunori Takeda, executive]

Good afternoon. Takeda is my name. Effective July, e-commerce company and life and leisure company were integrated to become commerce company, and I'm in charge of that company. And today, I'd like to talk about most important strategy for us, that is One Delivery.

As you may know already, the term, One Delivery, is significant of its own for users, for merchants and for Rakuten. It is important for user. That means that they can buy anytime, anything that they want in one step. This is quite important for logistics.

Suppose that a user buys goods from different merchants. And if they arrive on different occasions and if you're not there at home, then you have go pick up again and again or have to ask for multiple deliveries instead.

The one-step delivery would satisfy users. And for that, we need to turn to merchants. From order to delivery, the one process would be crucial. OMS, order management system is what we have, and there, different kinds of orders would be involved and together with that, the time or schedule that customers want for shipment. When they are combined, then that would result in delivery of goods that users want at the time users want in one step.

And then, this requires one end-to-end logistics service. And Rakuten is supposed to play that role and improve service by such a -- one end-to-end logistics service.

This is one example. First, we have to have the one main pillar, Asuraku. Today, we are trying to cover more than 90% nationwide in Hirakata and Nagareyama. We have new warehouses so that we can run the operation throughout the year. And for last 1 mile, Rakuten EXPRESS is there. It's already in operation. And then this will be spread all over Tokyo Metropolitan area.

More specifically, in case of shipment, what is important is where customers want to pick up goods. So that's about the diversification of pickup locations, such as convenience store or lockers that are installed in public place. And at the same time, if customers want delivery at home, then the notice has to be given beforehand in case the -- of a need of unattended deliveries might be made. And in fact, many users now express that they prefer unattended deliveries as well, and this is something that we want to promote as well.

Lastly, scheduling time and place for deliveries away from home. This would result in more attentive and meticulous care for -- as a service for customers. This is about one process to cover all and one end-to-end management. The -- then we have data. That will be the basis for scheduling such deliveries.

Now to visualize what I mean, I'd like to show you the video clip. Hope that you would put yourself in customers' shoes and enjoy the video.

[Presentation]

[Kazunori Takeda, executive]

I hope you like it. Six years ago, for logistics, we introduced various measures and initiatives. Back then, for last 1 mile, we have some concern and some crisis. And I would say that, that was quite different from where we stand today.

The -- we are seeing rising expenses for delivery, shortage of capacity resulting in limitation on cargoes to be shipped. There are many challenges. Now with one process, if we can make an improvement, I would say it is only Rakuten that can make such an improvement. That is because we have old data, including order and shipment data from customers, that is exposed to customers as well and then -- that we've shared with merchants for optimized delivery and shipping.

Some time ago, we were more aggressive -- or rather we lacked aggressiveness, rather, to do everything. But now from the warehouse, through shipment all the way to last 1 mile delivery, we are now working together with our partners to establish one process for better service.

Thank you. Now I'd like to turn to the next speaker for FinTech.

[Masayuki Hosaka, executive]

Now please turn to Page 39. Before talking about payment, I'd like to talk about major businesses and profits. So of course, the revenue is good and the operating income is also good.

Bank -- the bank results. The operating income went up, and also, we're seeing good growth of loan receivables balance. It was up by 16.3% year-on-year.

Securities. All 3 companies was over 16% increase, and it's like over JPY 20 billion in revenue.

And insurance, the mutual insurance has now been integrated into a new insurance holding company. As you can see, we have general insurance, life insurance, pet insurance, online brokerage, face-to-face brokerage. So all the products can be -- or have been consolidated by one Rakuten insurance holdings company. So as a result of introducing this mutual life insurance business, we are now able to produce products we have never had before.

Now as for the payments, that would be -- could you please go back, sorry. About the introduction of the payment service, well, I hesitate to state other players' names. But in fact, in view of that, we have already realized more than 1.2 million payment network certain members. There is no double counting. That includes all those under RPay or Rakuten Pay, Rakuten ID, Rakuten Point, Rakuten Card.

For Rakuten Pay, it's a frontrunner. And that's the size of the business, and therefore, that's far larger than competitors. And now we want to increase it to 2 million. That will be the one landmark. It could be even more.

And if you turn to next page. With one platform, like a smartphone, all the payment services would be incorporated in here. And there, with the application downloaded, you can enjoy the payment for all different services. And then that will be used for payment at different merchants.

So I would say we are the frontrunner in implementing such a payment platform. And then there will be also other function for consumer-to-consumer fund transfer as well. Therefore, in terms of payment, I would say that we are ahead of others, and we're going to steadily grow this service.

Now we have to turn to MNO.

[Yoshihisa Yamada, executive]

Yamada is my name. I'm in charge of MNO or mobile business. Just briefly about where we stand in terms of preparation. The capital investment was announced as JPY 600 billion. And to MIC, we also submitted a plan that includes that number. There are some areas that are not yet finalized, but we are now seeing that are more clearly about the actual capital investment that could be made, that could be less than JPY 600 billion for MNO business.

There are different reasons. I'd like to touch on them later on. For instance, now that we have new CTO, the new advanced network is going to be established. The -- we have a kind of advantage, so to speak. We are not bound by legacy, and therefore, with that, we believe we can offer MNO that is affordable with more advanced technologies.

And in expanding our network, as of 2019, we will first center around the major cities, Tokyo, Nagoya and Osaka. And then base stations would be established, eventually expanding to other big cities by 2025 or 2026. In March 2026, we want to cover 95% of the population nationwide.

That's -- that was the original plan, but we want to achieve that coverage with a base station sooner, and therefore, we are trying to advance various initiatives to achieve that. And as has been already reported by mass media, the -- about 2 years ago, in India, we went -- entered into that market for mobile business, and It has grown very rapidly. In 2 years after launch, [ 320 ] million subscribers were achieved then, therefore, globally.

In this mobile business, the -- Tareq Amin, who was in charge of that Indian business, is now invited as the Chief Technology Officer. And therefore, I'd like to ask him to say a few words at this juncture.

[Tareq Amin, executive]

Thank you, Yoshi. Good evening -- or almost evening. So very delighted to be here. Actually, very excited to be in Japan. So as Yoshi talked about, my life journey took me from U.S., India and now Japan.

And the goal is very simple: How do we build the most disruptive network not just in Japan but in the world? So the cost structures that Yoshi talked about is just a glimpse of what you're going to see very soon in terms of technology disruption, cloud-native network and a lot differentiated services to end consumers in Japan.

So the mobile network business is a key focus area for Rakuten, and there's a very good reason for it. So I hope, in the next few months, we will start sharing glimpses of all of the advancements that we have done in building this network. We're making tremendous progress. We're on schedule, on budget and most importantly, building this disruptive technology.

So wait to see a little bit more. I think at the end of the year, hopefully, we'll be able to start sharing glimpses of what makes this network very different than anything you have seen in Japan. And actually, frankly speaking, not just in Japan, but I think globally. So as Yoshi talked about, not having legacy is a very big plus for us. So this is just the beginning, a quick introduction. Hopefully, we'll speak more in the future.

Thanks, Yoshi and the team. Looking forward to it. Thank you.

[Yoshihisa Yamada, executive]

That's all for me.

[Makoto Arima, executive]

As a result of reorganization, the media and sport company is in my responsibility. Arima is my name. In addition to advertisement that I have been in charge, video on demand, both within Japan and outside of Japan; the digital content, including Kobo, OverDrive, other additional content; as well as Rakuten Eagles, the Vissel Kobe, the professional baseball and football teams, those activities are within my responsibility. And today, I'd like to talk about advertisement.

It was a year ago that I joined the company, and as you see on the left, this is the strategy that we mapped out, JPY 79 billion as revenue, which is expected to grow to JPY 200 billion in 2021. So far, we have been dealing with the internal inventory that was sold to internal advertisers.

But now -- first, in addition to internal inventories, we want to attract the outside advertisers, mainly the leading brands. And then, as a second step, vis-à-vis outside media and external inventory, we want to create a platform that can deal with that as well. And then as a second step, we want to realize JPY 200 billion as a revenue.

And 1 year after I joined the company, that is, so far, we have grown successfully. The Dentsu is now forming joint venture with us, and that's quite representative as first step, that is to sell the internal inventory to external advertisers.

As you see on the right, this is the amount that we have achieved. And the Rakuten Ichiba advertisement and the travel as well, they're included. Last year, 12.6% year-on-year growth was achieved. Now it is up by 5 percentage points to reach 17.8% as of now year-on-year.

And even as I'm speaking, we are creating such a global advertisement platform. Once this is created, and then we can start dealing with the external inventory as well, which could be sold both into internal and external advertisers, and that would boost up revenue.

And LOB, the ad tech venture, that is engineering company. We successfully acquired the company, and therefore, the global advertisement platform establishment will be accelerated. And if you just calculate this year, we aim at JPY 100 billion. In 3 years, we want to achieve JPY 200 billion. That means 26.7% CAGR is required, and also, we have to step up growth on a year-on-year basis in order to realize that. by acquiring LOB, we are currently involved in development of the platform. And so far, the project has been advancing quite successfully.

That's all from myself. Thank you very much.