Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2018-Q3

[Unknown Executive]

[Foreign Language] Thank you very much for waiting. Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome to Rakuten's 2018 Third Quarter Financial Results Meeting for Analysts and Investors.

First, I would like to introduce the Rakuten executives here today. In the front row, on the left, is Masayuki Hosaka, Kenji Hirose, Yoshihisa Yamada, Kentaro Hyakuno. In the second row from your left, Yasufumi Hirai, Makoto Arima, Kazunori Takeda, Naho Kono, Hiroshi Takasawa, Yuzo Hashiya. In the third row from your left, Noriaki Komori, Koichi Nakamura. These 12 executives will be present and available for questions at the end of the presentation.

Mr. Hiroshi, could you please go ahead?

[Hiroshi Mikitani, executive]

Good afternoon. Welcome to Rakuten's Fiscal Year 2018 Third Quarter Consolidated Financial Results. I'd like to give you an overall summary and each of the present executives will explain their portion of business.

First, I'd like to give you the results highlights. As for revenue growth, consolidated revenue growth, it was up 17.7% year-on-year, and it was the record high revenue and operating income year-to-date. And that would be the same for the operating income. Global GTV was up 19% year-on-year, very good result. Domestic E-Commerce GMS growth accelerated by 12.1% year-on-year. We will continue to focus on investments in logistics and marketing activities.

As for non-GAAP operating income, it was down 9.9% year-on-year. I will explain the details, but this includes investment business, up JPY 33.9 billion as well as the general insurance, this was down JPY 5.1 billion due to natural disasters. FinTech revenue growth was strong at -- up 28.3% year-on-year. It was -- the operating income, non-GAAP operating income for FinTech was down 9.6% year-on-year, but the non-GAAP OI, including general insurance, was up 18.8% year-on-year. Cooperation with KDDI to promote competition in payments, logistics and telecommunications was announced.

The consolidated results summary. As indicated, the revenue was at a record high at JPY 278.2 billion and the operating income, non-GAAP operating income, JPY 52.1 billion. It was up year-on-year excluding general insurance revenue was up 12.5%. And non-GAAP operating income down 1.2% and operating income down 1. -- 5%. And you see the breakdown for revenue, non-GAAP operating income, IFRS operating income for the fiscal year Q1 to Q3, at the bottom, which was the record high.

By segments. Domestic E-Commerce, it was up 5.2% for revenue, and our operating income was down 15.8%. Rakuten Direct and logistics also investments are still going on, but I believe that these investments are for the future. Takeda will explain the breakdown and the details. It has recovered from the previous quarter, even though the results were negative.

Communications and Sports, that was up 22.6% in revenue and operating income down 2.9%. This includes investments for MVNO.

Other Internet Services, this includes the investment business. So this was -- the revenue was up 27.6%.

As for the FinTech, excluding insurance, it was up by 18.8% in operating income, very good results.

Next I'd like to speak on the operating income. It was JPY 57.8 billion, operating income year-on-year. This includes the JPY 25.4 billion gains from investment business. So the operating income, excluding these gains, was JPY 32.4 billion. And the FinTech was up JPY 3.4 billion. As for Domestic E-Commerce, it was JPY 0.9 billion. This includes Books and Brand Avenue SPU impact. But I believe that this sector will also grow eventually.

The Communications and Sports, it was minus JPY 0.4 billion. This is because there were less 5 games for the -- baseball games because of the dates and climate.

Other Internet Service was minus JPY 2.1 billion. The Rakuten Marketing in U.S.A. and rakuten.com, rebuilding was reflected, also the logo change for France Minister was included also. So the operating income for this quarter was JPY 32.4 billion, same as last year. And then there was a minus JPY 5.1 billion one off cost, the insurance natural disaster claims as well as upfront investments of minus JPY 9.0 billion. So the Q3 operating income was JPY 52.1 billion.

Now let me speak about the profits for the investment business. This -- we did some -- sold some business as well as reorganized the company, so let me just speak on that. On July 1, we introduced the company structure. We have 7 companies, instead of 8. And we are also conducting other types of policy decisions, investments for innovative startups and comprehensive fund management for that.

Consequently, the Rakuten Group's unrealized gains on stocks of affiliate companies, that was held by Rakuten Capital, was measured based on the fair values through profit or loss measurement system. As is indicated here, what was solely for investment, which was scheduled to be evaluated as capital gain. Because of shares, we have decided to record them as investments. Through these measures, it isn't that we will have substantial profits at the time of the sale, but this will be evaluated on market value. So that would be on the accounting method for investments.

Now on the global -- total Global GTV, it was JPY 3.8 trillion, up 19% year-on-year, very strong growth. Later on, Yamada will explain the details on the cooperation and competition with KDDI.

As for the infrastructure, we will be cooperating so that we can utilize our assets in the most productive way. As for service areas, we will continue to engage in healthy competition. As for business areas, payments and also logistics and roaming for telecommunications, are the target business areas.

From here, for a massive expansion of the Rakuten system as of 1st of November, Kono became the CMO officially. She's going to explain. And after that, Hosaka is going to explain the financial segment. And Internet segment, Takeda, Yamada and Arima are going to explain.

Ms. Kono, please.

[Naho Kono, executive]

Good afternoon. Thank you very much. For a long time, I was focusing on business growth to contribute to Rakuten Ecosystem, that was my focus. And going forward, of course, I'd like to expand our business but not only that, I'd like to focus on Rakuten brands and also the foundation of Rakuten Ecosystem to promote each business growth. So I'd like to have multiple aspects in my role. So now I'd like to talk about massive expansion of the Rakuten Ecosystem.

The Membership Value here since the last time for Rakuten Ecosystem, this is an indicator of the growth of Rakuten Ecosystem. In Q3 this year, this membership value became JPY 4 trillion. And this membership value breakdown is unique user number and also how many services a user uses, so that means cross use and multiplied by LTV. So one contract, how much contribute to profit is indicated by this number. So right now, we have JPY 4 trillion, and that is our goal. The goal, final goal, is going to be a JPY 10 trillion.

So how should we expand this Rakuten Ecosystem? One of the indicators is cross-use ratio. As you can see from here, every quarter, very steadily we have users who are using more than 2 services. Right now, 9 -- 69.2%, very close to 70% of people are using those services Y-on-Y, plus 3% and compared to 2 years ago, plus 7.2%. So the growth is very steady.

So how should we enhance the value? This time, we have a very easily understood goals and scenarios. We have some samples, so could you please look at this to understand our strategies. The first one, well, this is a very simple case, cross use among commerce services. For example, from Rakuten Ichiba as they come in to Rakuten Group and using Rakuten Travel and Rakuten Books, because of the Super Point program, use program , we can expand it. Rakuten Ichiba was the first, but LTV becomes 6.2% -- 6.2x as much.

And another one, the majority of the new users are Rakuten Point cards, that's the inflow point. For example, after that, they come to Rakuten Ichiba online and they come in to Rakuten Card, and LTV becomes 10x as much after point card and after that, plus 3.8x as much, so that means totally 38x as much of LTV expansion.

Another one is cross use among FinTech services and commerce. For example, they come from Rakuten Ichiba and Rakuten Card is next, and Rakuten Bank account is opened, LTV becomes 12.7x as much. Since 2016, we have Super Point Up program launched. Using this program and using some other measures, we are trying to enhance more LTV.

And also another one is a FinTech -- cross-use example of FinTech businesses. Rakuten Card, Rakuten Bank and Rakuten Securities, the 3 cross-use cases. And those cross-use cases really increasing drastically, YoY the number is plus 43.4%, so more than 1.4x as much, that's the number of expansion of users. So going forward in Rakuten Group, we would like to acquire more customers and also, we would like to at the same time, focus on cross-use expansion.

Thank you.

[Masayuki Hosaka, executive]

Good afternoon. I am Hosaka, and I'm going to explain about the FinTech segment.

As for the results summary, the total, well, we had loss from the general insurance. But as was indicated, the year-on-year growth profit was plus 18.8%. Rakuten Card, Bank and Securities, all these 3 companies are growing their operating income and revenue. So in like manner as before, this -- we are doing very well.

This -- in the FinTech segment, how are we going to accelerate and grow our asset and our business, and this is the diagram that indicates that. The ID, we have about 100 million ID within the Internet. So how are we going link the ID. The card is doing very successfully, but what are we going to do with the banks and the securities? Well, then, that means we need to give points to grow the expansion opportunities, and that's why we decided to introduce SPU. Rakuten Bank and Rakuten Securities started with the SPU service. As a result, as you can see here, the number of daily average accounts, new accounts, grew by 2.6% (sic) [ 2.6x ] from 3 months ago. As for Rakuten Securities, daily average new accounts grew by 2.6x, it's a great success as a result of the introduction of this SPU system. There is a great business opportunity here.

And at the same time, the so-called cashless society is growing in FinTech. The government is promoting that. I believe that there is about JPY 60 trillion of cashless business, but we believe that, that is still small. By 2025, we want to grow that to JPY 120 trillion, that's what the government is saying. Therefore, we don't want to lag behind, but we want to be a leader in this business growth opportunity in cashless society, and we would like to do that in a comprehensive manner.

Now the key will be the mobile payment. We need to make this a success. And the key to that would be whether we have substantial amount of ID, which is 100 million over 100 million for us, who have the payment information. And combine that with point -- attractive points, Rakuten Points is over 1.2 trillion at the moment. So it is one of the largest in the industry. Actually, we have over -- superseded style, so it's -- this Rakuten Point, it can be used or accumulated in so many different places.

In addition to that, the member stores or locations, we have over 1.2 million locations where the cards can be used. So these are our payment locations. So even if you have IDs, you need to have locations to use the 1.2 -- excuse me, you need the locations to use those points and ID. So all these 3 segments are very important.

The payment service, of course, is important, and credit card as well as QR code is needed and we have that.

As for the results. As for the Rakuten Card, the revenue up 16.4% year-on-year. Operating income, up 12.3%, and as the -- it's still growing. The usage transaction value was over 22%, and the shopping revolving has exceeded JPY 600 billion. So we are seeing very, very stable as well as successful growth.

I mentioned about 16 million Rakuten Card holders. In order to grow 1 million cardholders, it took 7 months. But now we have reached 16 million. So American Express is now introduced as a new service. So we're expanding our business. Actually American Express, that's the brand that our customers are using. So we can acquire more customers.

Rakuten Bank results. The operating income, because of the card and because of the cost control, 22.8% year-on-year of the operating income was achieved. And also more than JPY 2 trillion of deposits overall. The ordinary deposits, about 30% year-on-year, and because of the low cost deposits and also Super Loan is about flat because of the environment. Housing loan, plus 40% year-on-year is the balance growth. And also Rakuten Securities, the market was fluctuating this time, but 16.5% year-on-year of operating income was achieved. And especially in Securities, we have such tied up with Rakuten services.

First, to save points, September 1 join SPU program started to acquire more customers, and also down on right using super point we -- taken by investment trusts. And also, use points at each part of the services. And also 27 of October, using Rakuten Card, they can buy investment trust. This is a very epoch-making service. And Rakuten Life Insurance results are here. The sales is negative. However, that is because of the reinsurance policies that were terminated. And because of that, now we had a decline in revenue. However, the insurance premiums continue to show strong growth, so the operating income was 98.9% year-on-year. This is a positive situation.

And life insurance business, life insurance. This is a KPI for our growth, annualized premium income year-on-year, 58% year-on-year, especially direct marketing channels, plus 64.1% year-on-year. And this is a very accelerated. And as for casualty insurance, we are going to have great opportunities as shown in here. This red ring is -- shows our company-based services. For example, cards, we have complementary insurance. We used to use other companies, but now we are doing it. And also, we sell casualty insurance to membership, and also we have fire insurance for homeowners. This is a must for us.

And to your left, golfer's insurance, life and leisure, and also travel insurance for overseas travelers. Well, we counted on other companies before, but now we obtained all of them.

And in Ichiba, we have now the super simple insurance, bicycle insurance and also we have home appliances extended warranty and group insurance for merchants.

So starting from our group, we would like to obtain more customers and also for all the membership, personalized services and products should be deployed so that we can gain more profit.

[Kazunori Takeda, executive]

Good afternoon. So I am going to talk about the commerce of the Internet services segment.

First, the Domestic E-Commerce GMS. We have been very successful and very strong growth as shown. The trend has changed substantially in recent months. It was up 12.1% year-on-year. We introduced new services. But Ichiba in September, grew over 10%. So when the core business is very healthy, I think the rest of the business is also impacted.

Next is the quarterly e-commerce results, revenue grew and also operating income. As Hiroshi explained, we -- it's still in the negative. But compared to the previous quarter, the contents of this operating income has changed. So I think this quarter, we have been able to change over to -- for the future growth.

Rakuten Brand Avenue, we're actually -- we have been following ZOZO. This is a quarterly YoY GMS growth. Per quarter, it was up 94.9%. In September and October, it was over 100%. So in the past, the apparel and fashion brands have been trying to seek successful venues. But including first retail, they are looking at seasonal marketing approaches. And as the number of users increase, we have more and more data. And this resulted in growth that was double the previous quarter.

At the same time. Rakuten Brand -- not just Rakuten Brand Avenue but other types of strategic investments are doing well, such as logistics. And we have also launched Netsuper from stores to warehouse type of grand opening, it took place in October. And Rakuten C2C from JPY 0 model to 3.5% model has been launched, and it is still growing substantially.

The first -- on distribution, on logistics. For the warehouse distribution centers, we have opened new distribution centers in -- we are going to be opening new distribution centers in Nagareyama and Hirakata in Osaka. So I think we believe that these -- the warehouses are filling up much faster than we had anticipated, and this is why we are thinking of the next strategy.

As for the last 1-mile area, we want to expand the delivery areas. The population coverage of 2% last year grew to almost 17 -- 18%, which means we are covering 1/5 of the total population. The number of consumers using this delivery system, not just Ichiba customers but using this system, not -- for even unattended delivery services, is transitioning very well.

Now on October 25, as was announced on television, we began this Netsuper market jointly operated with Seiyu, which covers Tokyo and the Kanto area. Please use this service and see how good this service is.

So e-commerce, existing business is growing steadily and we have gone through one transition, the turnaround. And now we are headed towards even further growth. And the next strategic investment is now being prepared to be launched.

So I think this summarizes this quarter. Now as was mentioned by Hosaka on SPU, the usage pattern has been learned and an effective program is now being planned by Kono and her team. So these new developments will take place, but I believe that the points are now being deployed in a much more effective manner.

Thank you very much.

[Yoshihisa Yamada, executive]

Next is on communications. I am Yamada. Hiroshi already presented on this point, the cooperation and competition with KDDI. This partnership has been announced. We will try to consolidate infrastructure in cooperation with KDDI, but we will continue to be in healthy competition with KDDI in terms of service.

So payment, logistics and communications. These are the 3 areas we will be communicating and competing.

So this is the progress. After the bandwidth allocation in April, the vendors are going to be selected around the middle, and also the roaming agreement has been concluded. And so stably has been progressing and the service launch is next year, October.

And the vendors, the media already covered this. But once again, I'd like to tell you about the structure. This is the detail, in every area, we have very limited number of vendors, with good experience. And we have very close connections with all of them. The progress has been good. As a result, as for the capital expenditure forecast, how we announced about JPY 600 billion. However, it's going to be lower for establishing the network and base station deployment. The Ministry of Communication, we have submitted to the ministry and this is the plan. March 2026, we have about 30,000 base stations to cover nationwide. However, we can accelerate the deployment drastically, that's our plan the key to that is to secure locations for the network, base stations. And after that, we have to install the equipment and the facilities and to secure the network locations.

As for this business, this is not only one business unit for us, this is going to be the foundation of our future strategy of Rakuten. So all group effort is exerted under Mikitani. And including everyone, we might -- we are using our resources. One floor of this building is occupied by all of the staff members of the group, and we have hundreds of people engaged in this project to contact companies of building owners so that we can secure locations for the network of base stations.

The next one is shop expansion. As MNO is expanded, this is the location. And as for the number, 358 nationwide. This is the expansion of shops.

Thank you.

[Makoto Arima, executive]

Good afternoon. My name is Arima. I'd like to talk about ad business. In this quarter, the business has been very stable. So external advertisers and internal advertisers and also external and internal inventories are presented here. Up until last year, most of them was because of the inventory of internal Rakuten sites by internal advisors. That was bottom left. However, our strategy is to utilize Rakuten data and also Rakuten inventory and also to expand external advertisers. This is the very first strategy of ours that we have presented already. And as shown here, YoY, 22.7% plus. So the progress has been very good. The driver is Rakuten Data Marketing, as shown on the right side. This is joint venture between Rakuten and Dentsu, 1.4x as much as last year. As this year, well, to cultivate more external advisors was a success this year.

And to capture external advisors, basically, that means that brand advertisers are included and so advertise. And also promotional expenses should be addressed. That means that we have to capture users' consumption, behavior and Rakuten is very strong in this area in terms of consumption. But before that, we have to capture awareness of the consumers and interest, action, repeat and boost loyalty, and we have to focus on all of them to maximize our sales. This year, we were doing a lot of activities and experiments using Rakuten data inventory and making good use of them in every stage of those 5 stages, and we can be very efficient and also we can deploy very unique advertisement product via the Rakuten marketing product home and Rakuten RMP conference took place.

More than 300 major manufacturers and brand advertisers came to this conference. That shows how high their expectations are. I'm not going into details, but RMP XX is the name of those products. We are ready for and so we can attract brand advertisers.

Next year, we again target those external advertisers. We would like to accelerate the process. At the same time, this is the biggest challenge for us. As we have mentioned before, external inventory, Rakuten data should be utilized, especially consumption data. And we can utilize so that we can update ads for external advertisers, and so we are developing our project. And a part of that is AdRoll. This is a retargeting company. We have a joint venture established with AdRoll Group to start the sales. And by the end of this month, we are going to make a public announcement and retargeting of Rakuten is, as you know, very well, we use Rakuten data, first of all, using the PCs, they can place orders and also they can use mobile to buy the products and vice versa using mobile, and they can view the data and they can use their PCs to consume. And so using IT, cross-device retargeting can be possible in Japan. And this is only Rakuten's approach. We are the only one who can do it, so and to capture external advertisers is an approach for next year, too.

Thank you.