Rakuten Group Inc

TSE:4755

Earnings Call Analysis

Rakuten's Strong Q2 Performance and Future Outlook

Rakuten Group’s Q2 2024 showed strong results with a revenue increase of 8.1% year-on-year, reaching JPY 537.3 billion driven by growth in internet and international e-commerce. The operating income improved significantly by JPY 27.6 billion year-on-year. Mobile segment subscriber growth boosted revenue by JPY 15.6 billion. FinTech revenue rose by 12% year-on-year to JPY 202.7 billion with a 28.1% jump in operating income. Rakuten Mobile turned cash flow positive. Initiatives in AI and enhanced services contributed to strong user engagement, with plans to continue expanding 5G coverage and improving profitability. Financial stability was ensured through strategic fundraising, targeting substantial debt reduction.

Introduction

Rakuten Group hosted its Q2 2024 earnings call, revealing significant progress across its diverse business segments. The call covered various key areas including mobile, internet services, fintech, and AI initiatives.

Financial Performance Overview

Rakuten's consolidated revenue reached an all-time high of JPY 537.3 billion, marking an 8.1% increase year-over-year. The company also achieved a notable improvement in operating income, with a JPY 27.6 billion increase from the previous year, reaching JPY 66.8 billion in EBITDA. This improvement was driven by strong performance across its internet, FinTech, and mobile segments.

Internet Services Segment

The Internet Services segment reported revenues of JPY 303.9 billion, a 3.1% year-over-year increase. Operating income surged by 30.3% to JPY 18.9 billion, thanks to revisions in their SPU (Super Point Up) program and strong measures targeting heavy users. Domestic EC revenue experienced growth and profitability improvement due to these strategic changes. Rakuten Travel and Domestic Hotel Checkout grew by 34% compared to FY 2019.

Mobile Segment

Rakuten Mobile’s performance has been a focal point, with total subscribers reaching 7.7 million. The segment posted a JPY 15.6 billion year-over-year revenue increase. They also reported a positive pre-marketing cash flow. Notably, several initiatives are underway to enhance network quality and coverage, including the rollout of the Platinum Band and advancements in 5G technology.

FinTech Segment

Rakuten's FinTech segment reported revenues of JPY 202.7 billion, a 12% year-over-year increase. Operating income grew by 28.1%, reaching JPY 42.3 billion. Rakuten Card’s Shopping Gross Transaction Value (GTV) rose nearly 14% to JPY 5.9 trillion. Other FinTech services, including Rakuten Securities and Rakuten Bank, show steady growth and robust account increases.

AI Initiatives

Rakuten is positioning itself as an AI empowerment company. Key AI projects include Rakuten AI for Business and internal productivity tools used by thousands of employees daily. AI is being leveraged to enhance customer experience through advanced search capabilities and personalized recommendations. Cost efficiency measures have led to a 43% reduction in operation costs.

Financial Health and Strategy

The company's financial position has strengthened significantly, with sufficient liquidity to cover obligations until 2025, partly due to foreign bond issuance and finance lease arrangements. Cash flow generated by Internet Services and FinTech businesses will be used to reduce interest-bearing debts, further improving financial stability.

Conclusion

Rakuten's diverse business portfolio has shown significant growth and improvements across all major segments. Their strategic focus on enhancing profitability, operational efficiency, and leveraging AI and technology underpins future growth potential, making it a compelling consideration for investors.

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Good afternoon, and thank you for joining Rakuten Group's 2024 second quarter financial results meeting. We have disclosed the latest consolidated financial reports at 3 p.m. today. You can view this data on our corporate website's page for investors, along with the presentation documents used in this meeting. And if your voice is cut, and then please, you can use the different IC server.

And then now, Mr. Mikitani will give you a presentation. Mikitani-san, please go ahead.

[Hiroshi Mikitani, executive]

Good afternoon, everyone. Some hot days are continuing in 2024 Q2 financial results meeting is held today. And first of all today, so I'm sure you are paying attention on here, Rakuten Mobile. So looking at the total subscribers, 7.7 million, and then MNO plus -- MNVE is 7.26 million, and this is as of August 7th data. And then looking at the subscribers number of this Q2 and the B2C subscribers are increasing drastically. And then this is what area that you have to pay attention.

So the Rakuten Mobile non-consolidated pre-marketing cash flow, this is before marketing means acquiring customers or retain customers. And the marketing cost related to that, if we exclude that marketing related cost, and then in Q2 Rakuten Mobile non-consolidated basis pre-marketing cash flow achieved profit.

So this is more detailed information with chart. As you can see, this graph started from 2022, and then this was a quite challenging and exciting Rakuten Mobile project that we kicked off, and Rakuten Mobile's contribution to the entire Rakuten Group. Rakuten Ichiba or Rakuten Travel and Rakuten Card. And then given that entire group, so at the group level, the cash flow already turned into positive. So this project itself, looking from the entire group perspective, it's already turned into positive from cash flow perspective. And I think you can read it from this chart.

And then let me talk about the Q2 highlight. First, on a consolidated basis, the revenue is shown here. Against last year, year-on-year, 8.1% plus. So the record high, JPY 537.3 billion was the consolidated revenue. And the Internet segment and also overseas EC or international EC and contents basis have been expanded. And that contributed to revenue growth. And in the FinTech segment, each of the services or the segments are doing well. And the Mobile segment, we have subscribers increase and so boosted revenue by JPY 15.6 billion year-on-year.

Now, looking at the operating income, dramatic improvement. So, improvement of JPY 27.6 billion year-on-year. It was minus JPY 11.8 billion, but EBITDA, we actually had JPY 66.8 billion in EBITDA and also non-FinTech posted EBITDA profit of JPY 9.9 billion as well.

And as for the financial situation in the first half, because of the foreign bonds being issued, the liquidity gap until 2025 have all been addressed. And we will explain this later. But the finance lease fundraising of Rakuten Mobile has been announced. And with this funding, self-funding in the mobile business is already established. And therefore, with this going forward, Internet services, in other words, Shopping and Travel or FinTech businesses, generated cash can be, or cash flow can be used to reduce the interest-bearing debt at Rakuten Group Incorporated. So you can see there's a tremendous improvement in the financial situation as well.

So this is by segment business update and the internet segment. First of all, Internet Services segment. So the revenue was JPY 303.9 billion. And then this is the plus 3.1% Y-o-Y basis. And then the operating income, which was increased by 30.3% Y-o-Y, which is JPY 18.9 billion. And this is because the SPU revision was made. And then also -- there were SPU improvement, and then we are implementing the measures to our heavy users.

With that, the domestic EC revenue growth rate and revenue went up, and also the profitability recovered because of these measures. On the other hand, so minority investment. So there is a variation loss that happened last year. So that portion was shrunk drastically. And then looking into detail of this business segment, first of all, EC business. So there are many changes. Also the nationwide travel support happened last year. That does not happen this year. So these various conditions, if we annualize them, and then comparing to the year before, plus 3.1%. So the fundamental became strong.

And then also the good transaction on the good customers, we are dealing our businesses with good customers. And then Rakuten Travel and Domestic Hotel Checkout, GTV, is plus 34% comparing to the FY 2019. So this is comparing to the pre-COVID. And then as for the advertising business, plus 8.4% growth.

And then looking at the overseas businesses, first of all Rakuten TV, number of users is 112.1 million and plus 44.2% Y-o-Y. Rakuten Kobo also already making a profit and the users registration is 66.6 million, which is plus 6.2% Y-o-Y. And Viber, this is also making profit and number of users, 1.5 billion, plus 5.3% Y-o-Y. And Viki, this is also profitable business. And then about 90 million users are using this service. So the overseas businesses overall, we are performing pretty well.

Looking at the domestic EC, I mentioned some one-time factor, and if we exclude those one-time, we mentioned it was increased by plus 3.8%. So if we exclude them, one-off condition, then -- if exclude them we have grown by 25%, as you can see from this chart. And the next is for the GMS. It's steadily recovering.

In the last year, we did the SPU 0/5 revision. There are some impact of these revisions, but the total Ichiba GMS remained steady. So Q3, so the last year, we had the home tax, the revision, the last minute demand happened. So how will it be impacting into this Q3 is something we need to worry. And then this fall overseas businesses overall, steadily growing, and then making a big profit out of this business.

And then last but not least, Internet Service related topic here, as you know, so Rakuten Group, thinking of the empowerment of the local government, and these are the hometown tax so that we can contribute to the regional and the community growth, and then we are actively working on to support regional economy increase, and then a point were burdened on our company, and then grant them to our users, but from MIC, so they made this notice, and they did not obtain our consensus, but they went announcement of this, and then about 2 million people signed about this petition, and then we will ask to revoke this notice strongly.

FinTech Segment, so JPY 202.7 billion in revenue, so that was plus 12% year-on-year, and operating income, JPY 42.3 billion, 28.1% positive year-on-year, so very steady, and for the different FinTech Segments, these are the highlights, Rakuten Card Shopping GTV was JPY 5.9 trillion, a little less than 14% increase, and Rakuten Securities General accounts is increasing, JPY 11.33 million accounts, and Rakuten Securities deposited assets has grown to be large at JPY 32.3 trillion, and Rakuten Banks accounts, almost JPY 16 million now approaching that, and on an independent basis, stand-alone basis, the deposit balance of the bank is JPY 10.9 trillion.

So starting with Rakuten Card, continuous growth is seen, 13.9% year-on-year growth has been seen, and that's in Shopping GTV, and operating income is improving, 19% is the margin and non-GAAP operating income, JPY 15.8 billion, therefore this is an increase of 18.4% year-on-year.

Now Rakuten Securities, the number of general accounts, as I mentioned, is grown to JPY 11.33 million, and so there has been some impacts from the commissions, the zero commission, it did plummet once, but it has recovered quite well. And Rakuten Bank, there has been independent announcements made, but ordinary profit, or rather, ordinary income, JPY 40.8 billion, 25% year-on-year, and ordinary profit, JPY 15.2 billion, and ROE, 16.4%, and therefore this is an increase of 2.5 points year-on-year, and as for the capital adequacy ratio, 11.3%, which is quite high enough, I would say.

Now the number of accounts, 15.8 million accounts of the bank, actually it's already above the 16 million mark right now, and Rakuten Payment, again, very strong, revenue, JPY 22.5 billion, which is a plus of 23.5 year-on-year, that's percentage, and operating income, JPY 1.2 trillion finally, so it's in the profit-making area, so it's a competitive sector, now other companies are struggling, but for Rakuten Payment, we have already become profitable. And as you know, in January 2025, we're going to have this reorganization of FinTech come into effect.

So moving to the Mobile segment, for Rakuten Mobile, we have more subscribers coming, and then Symphony, and then focusing on the existing project, and then increased revenue, and then try working hard to make this profitable as early as possible, and Rakuten Energy, and achieved increased in the revenue substantially, and as shown on this table, for example, EBITDA, comparing to the year before, on quarter basis, plus JPY 25.3 billion in improvement was made, and then this is a graph in time series, chronical way, and as you can see from this chart, our business has been growing steadily, as you can see here.

So among that, MNO, the major business, MNO, and this is about the subscriber's number, 7.7 million, and also the adjusted MNO churn rate. So targeting point, and become a new subscriber to us, and they have become our users only for a short period, and then churn the service, and then we have not granted our points to those subscribers, so it can be counted as part of churn, so if we exclude those cancellation, and then that adjusted MNO churn rate has become the 1.04%, so it's below, it's almost getting closer to below the 1% we are getting there, and the ARPU is JPY 2,331. So this is about number of subscribers, so it's growing steadily, as you can see from here.

And the next page, and I think this is very important index, so the continuing the same number, which is MNP. So we now have this data available, so Rakuten starting from January, and we have net increase of this MNO subscribers, MNP, so these people are using our line mainly, and they are contributing to pushing up our ARPU, and then this is after the adjustment, and MNO churn rate went down to 1.04%, and also we are improving our communications quality, network quality, and we haven't heard that the -- it will not be connected, but we have to have the strongest one.

So we will be applying the platinum bond, and also the interference with the satellite communications to be mitigating so-called Sub6 5G area to coverage to be expanded, and also the software improvement will contribute to push up the quality, and that is what we would like to do. So this is a unique software, we have a unique software development capability, that's why this is possible initiative to be taken.

Now, so once, because Platinum Band is now rolled out, here's a TV commercial, please watch.

[ Presentation ]

[Hiroshi Mikitani, executive]

Okay, so good connection, really good connection, but we will become the strongest and the best connected network of all. So this is the low band, Platinum Band effectiveness being shown, and of course, we had connection, that was quite good already, but we will have even bigger coverage in small alleys or deep indoors, the so-called deep indoors, really inside buildings still, there will be signals. And so this is the roll-out plan of the Platinum Band, and we have front-loaded this by more than 1 year against the plan, and we would like to front-load it as much as possible, 1.7 gigahertz, that original area, had this front-loading earlier deployment by 3 years against the plan, so we would like to do the same or similar things with the Platinum Band as well, and therefore, we will be quite aggressive in installing or establishing the necessary infrastructure.

And 5G, which is really much talked about, well, 5G, there are 2 parts to that, or 2 kinds, the conventional 5G antennas, that is 44R, what I mean by that is the antenna that will send and receive antennas, it will be 4 by 4, that means 16, but beam-forming is another one, which is called the massive MIMO, which is another type, and the power is tremendously different, the distance it can travel is much longer, and also the quality is different as well, so in case of Rakuten Mobile, you can actually say that MIMO's proportion is much, much larger, and therefore we can have better coverage and stronger signals.

And so the question is, once 5G is connected, what is it going to be like in terms of improvement? People who are connected to 5G, compared to the previous time, the number, the traffic has been increased by 2.3-fold, and there are increasing number of unique users connected to 5G as well, and this is not only about Rakuten and other carriers as well, but we were able to increase the quality by mitigating the interference, and so this is the data that is being used, so on the average, 30 gigabytes per month, almost approaching that level of 30 gigabytes, and so we will soon go beyond that 30 gigabyte mark.

And in addition, the indoor signal quality is improving quite dramatically as well, at a very fast speed. And on the other hand, we are trying to increase the users, and of course, within the group, we have joint campaigns with Ichiba and also Rakuten Card, and these campaigns made a great contribution to the increased subscribers, and this is new data that we are disclosing for the first time, and quite impressive, I would say, what you can see here.

Now, please take a look at the fact that the mobile and internet heavy users are in certain age segments, 23 to 29, 30 to 34, and 35 to 39, and 40 to 44, these are the different age segments, for example, 30 to 34 years old, the share is 10.2% already, they're using Rakuten Mobile, and for 23 to 29 age bracket, 8.6% is the Rakuten Mobile share in that age bracket, and in the past half a year, 1.5 fold increase has been seen, and within this year, I think this 23 to 29 age segment will likely go beyond the 10% mark. And so I think the penetration will go up by 2% to 3%, in other words, the heavy users are joining Rakuten Mobile user base, and they will use more of the Rakuten's Services.

So next is about increasing ARPU and Rakuten Group, and first of all, Rakuten Mobile non-consolidated basis profit generation, but we are looking at the entire group performance, and then including contribution to the entire group, and we calculated this ARPU based on that, which is about JPY 3,030. So 2.5 years ago, which was JPY 1,546, it already went up by double.

And then as we move forward, so the advertised revenue, advertisement, would sold in AR use new service to be rolled out through these efforts, and to users, we can make them delight, and then they can pay to our services, that's how we would like to roll out our services to them.

And then this is about the ARPU increase chart, so last but not least, about the Rakuten Mobile contribution to the Rakuten Ecosystem, as you can see from this graph, and I'm sure you understand here, and first of all, they are coming to our ecosystem, which is started from zero, and comparing to this, and then first of all, to become our subscriber, and then 1.25 services are being used by that new subscribers, and when they joined us, and then it will be increased up to 3.21 in 2 years, so how Rakuten Mobile is contributing to create value to our Rakuten Ecosystem users, and that can be read from this graph.

And for example, Rakuten Ichiba, 49.7% subscribers are spending more GTV comparing to non-subscribers, and also Rakuten Card, 25.9% increase of subscriber basis, as you can see from here, so the synergy impact from this, so if we consider this by quarter basis, it goes beyond JPY 1 million, and our profit contribution is done to the entire group by that, and on an annual basis, it's JPY 4 million, so that will be including up to the JPY 100 billion or JPY 200 billion, JPY 300 billion, I am expecting that to happen, last but not least.

And as I mentioned, the hometown tax issue, and this is about NTT Law, and this is very important, Japanese citizens, telecommunications, and also Japanese people's human right, which is the communications, and it is regulated, and this is very important law, essential law for that purpose. So now, more than 180 telecommunication operators are against this abolishment, and then we will be strongly object this, for this NTT Law, and this is about the business side explanation.

And now, so let me repeat what I mentioned, the first one is that Rakuten Mobile is steadily growing, and the second one is Internet Services, so quality improvement is something we have focused on, and then the JTV is growing steadily, and also the revenue recovered drastically, and FinTech business overall, and in all business segment of FinTech, performing pretty well. And overseas businesses, the revenue started to be generated, and these are the 4 highlights from the business perspective, and that's all for myself.

And then I will hand this over to Hirose -san about the financing.

[Kenji Hirose, executive]

Good afternoon, ladies and gentlemen, Hirose-san, my name, I'm the CFO. I would like to present on the finance, so this is a repeat. This is our commitment, disciplined financial policy, we're going to aim for financial soundness in the midterm, and so profitability improvement, and efficiency improvement, and financial soundness is what we are striving to achieve.

Now, as for the refinancing risk in 2025 and '25, they have been addressed, as Ms. Mikitani mentioned, and so we already have 2024 addressed, and also the senior notes. We have already taken measures to address them. And the first call will come for the 2025 domestic hybrid bonds, and we are going to use the products that receive equivalent equity certifications, and we have various measures of fundraising, so we will make sure that we address this issue.

And also, this sales and leaseback financing was announced yesterday, and this is a major finance lease, and this period is 10 years, and for the time being, Rakuten Mobile's funding needs will be satisfied, and therefore, for our company, we believe that the liquidity of the capital will improve, and therefore, the cash flow coming from Internet Services and FinTech businesses, among others, can be utilized to reduce the interest-bearing debt. And this is the self-funding path, as you can see here, graphically represented.

In this fiscal year, internal cash flow can be used for mobile businesses, as well as interest payment. We will be able to establish a mechanism to enable us to do that. In addition, we have the sales and leaseback added on to that, and therefore, the cash flow can be leveraged to pay back the debt, for example. And these are something that the market has been receiving positively, and this is the graphs that shows the yield and also the price trends in the secondary market, and you can see that the market is taking this as a positive.

In other words, the yield has been coming down, and therefore, this is a positive for procurement going forward -- for fundraising going forward. And international cash increasing, this year, we targeted JPY 50 billion from non-FinTech business, but we already surpassed that, and we have already reached JPY 57 billion, and we intend to do further so that the financial base will be further strengthened. And so this concludes my presentation on the finance.

And the next is about AI, explained by Ting.

[Ting Cai, executive]

Good afternoon, everyone. Konnichiwa. Today, I'm very excited to share an update on our AI strategy and how it delivers meaningful impact to our employee, customers, and partners. Rakuten is on the highest level. Rakuten is becoming an AI empowerment company. We are uniquely positioned to become a business leader in AI. Our approach of deploying Rakuten AI is practical and cost-effective. We try to understand the fundamental technology we build things from ground up. And therefore, we can amplify our impact across the Rakuten Ecosystem.

And we're also very focused and prioritized towards delivering our business objective that is Triple 20, improve 20% percent operation efficiency, marketing efficiency, and client efficiency.

Let me share a few reasons on why we believe Rakuten is well-positioned to become a business leader of AI. Since Optimism Conference last year, we laid out our vision to augment human creativity with the power of AI. We want to leverage our unique data set, data asset, including trillions number of transaction data. In addition, we have behavioral data, conversation data, and by leveraging these data, we can make our model higher quality with more efficiency.

In addition, we have ubiquitous channel, online and offline, so we can help the technology to reach millions of customers across almost every categories from FinTech, Mobile, and Commerce.

In addition, since we did Englishnization many years ago, we can attract global talent, and in fact, our large language model team, including talent from many countries, from Singapore, Tokyo, India, and U.S.

And lastly, we have a unique culture. Once we determined to focus an objective, we can conquer any challenges. And let me share with a couple of things we are doing, how we are making our Rakuten AI practical and cost-effective.

First, we're focusing on fundamentals we built from ground up. For example, we build embeddings for every entity in our system from people, place, and things. With that fundamental understanding, we can uncover new insight, make new connections across the entire Rakuten Group ecosystem. And number 2, we leverage our domain expert, human intelligence, plus artificial intelligence, so we can train the best model and leverage our expertise in so many categories from so many professionals and deliver the best services for our customer. And lastly, we ride the wave, and as you probably notice, all the large language model performance improving, cost is reducing, and we can take advantage of this market improvement for free.

And strategy is nothing without execution. Since last year, we have been steadily moving forward, executing our strategy in 3 waves. Number one, we are scaling our deep learning application through our fundamental understanding of embedding, deep learning, and language model technology. And number two, we launched Rakuten AI for business, and we're also incubating Rakuten AI for consumers.

Let me give you a few examples. So, our deep learning application helps customers to discover what they want. It's not only applied to semantic search, but recently we have deployed technology to recommendations, help people to find related items, and also we can -- through transactions, we learn user profile, we can recommend more relevant ads to our users.

We launched a semantic search on Fashion last year and Ichiba this year, and we are on the road launching semantic search to all of the Rakuten group services. In fact, a couple weeks ago, we launched a semantic search on Rakuten and Rakuma. And the usage patterns and improvement are consistent across the board by reducing zero hit ratio, increasing user engagement, using our searching more, coming back to our services more, and therefore generating more benefit and revenue to our merchant and business partners.

And another example is recommendation. We're applying the same semantic technology to recommendation. We deployed a state-of-the-art recommendation system in Rakuma, for example, and also to Ichiba. We observed that user engagement, click-through rate, in particular, improved 92% on Rakuten Ichiba. And the GMS from our recommendation system increased to 9% from the top feed on Rakuma.

And we also launched visual search, a new way for user to discover our product. And this is an example. On the left, you see a picture, took at a karaoke party. I couldn't even read the label on the soda can, but AI can help us. And in the middle, you see the visual system we had before deep learning. We used a third-party system, but the results are less relevant than after we deployed our latest Rakuten AI deep learning system. With the latest visual search capability, we can not only deliver better quality for our customers, but also reduce operation cost by 43%.

And on the business front, we launched Rakuten AI business services for Ichiba customer earlier this year. But everything we deploy to our external customer, we try and test ourselves. Since the beginning of this year, we launched Rakuten AI for Rakutenians, and 25,000 Rakutenians have used the service. On every day, on a daily basis, 7,000 people within Rakuten are using Rakuten AI. And they use Rakuten AI for a variety of tasks, such as coding, translation, knowledge inquiry, summary, and meeting recap. There are so many tasks that we are helping Rakuten employees to improve their productivity.

On the consumer front, we are also continuously incubating new technology. We announced that we are working on universal concierge that delivers unique personalized services to our customer. Users can interact with our service in multi-modality, whether it's image, conversations, or search, so we can help them to discover what they want. And lastly, they can use this service to discover all of the services across the Rakuten Group.

Lastly, we are also going to launch Rakuten Mobile AI Assistant very soon, so you -- our potential customer, can ask this AI agent questions about Rakuten Mobile 24/7. We can recommend services based on users' history with us and deliver the answer they want without any delay.

Thank you very much. We are on the road to deliver material impact to our employees, partners, and customers. Thank you very much.

[Unknown Executive]

This concludes the briefing session for the results of Q2. Thank you very much.