Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2019-Q3

[Operator]

So thank you waiting. We'd like to start Rakuten's 2019 Third Quarter Financial Results Meeting for the Investors and Analysts. Let me introduce the participants. In the front row, on your left is Hiroshi Mikitani, Kenji Hirose, Masayuki Hosaka, Yoshihisa Yamada, Tareq Amin. In the second row from left, Kentaro Hyakuno, Yasufumi Hirai, Makoto Arima, Kazunori Takeda, Hiroshi Takasawa. In the third row from left, Koichi Nakamura, Noriaki Komori. These 12 executives will be present for questions at the end of the presentation.

So we'll ask Mr. Mikitani, CEO, to speak about the overall business. And then Tareq will speak about Mobile, and then the rest by Mr. Hosaka.

[Hiroshi Mikitani, executive]

So FY 2019 third quarter financial results. So walk together is the new catch phrase for Rakuten. Various technology and knowledge will be utilized to help merchants, people, corporations to empower these stakeholders. Walk together is going to be our new mission statement going forward.

First, on Mobile. I'm going to ask Tareq to explain. Basically, we have 3 components. So technically, the technology has to be able to function properly. What kind of efficiency or availability there is and customer acquisition and then the radio station build-out. These are the 3 brands of Rakuten, so that we can go into the so-called major 3 carriers and become the fourth player in this field.

So I'm going to ask Tareq Amin to explain about the Mobile business.

[Tareq Amin, executive]

Good afternoon. So I want to just give you a presentation today that gives you an update on where we stand on the Mobile side, specifically focused on 3 areas: where are we with core technologies, where are we with radio station build-out and highlight some of the key customer acquisition strategies.

In the core technologies, I always spoke to you before, not in just this forum about the dream that we had to build the world's end-to-end cloud native technology, build in Japan, engineered, operated and deployed.

Today, I will tell you there's something that we are delighted about. Rakuten Mobile have become the world's largest virtual network function operator across 1,400 different operators. So this has been a big, big accomplishment. It is no longer a hypothesis or a dream. This has now been deployed, operational, secure and, most importantly, validated for resiliency architecture, and I'm going to speak to you briefly about the resiliency. So many times, when new technologies get introduced, I always get asked, is this reliable? Is this going to have Japan quality? Is it going to work? I always argued that cloud technologies offer resiliencies that are much, much better than what you find today in traditional telecommunication networks. We have built this network in a resiliency with our resiliency DNA, I would argue, you will not find in any telecom network across the world. Across 2 of our large data centers, every application today is fully redundant in an active, active, active, active configuration. And in fact, we almost shut down this network during the day just to simulate what happened for disasters. And the resiliency was just outstanding. How the sessions recover for voice, for data, for continuity? We were very, very happy and pleasant with our results.

The other part that I think is extremely important. When you look at financials for telecommunication companies, and you ask, where is billions of U.S. dollars spent? It is not spent on the core, by the way. This is where it's spent, radio. And if you look at the spend for 5G, it gets worse. The story doesn't get better. That's why we spend most of our energy on trying to virtualize the radio access because the cost impact and the economics and the benefits that this will bring to Rakuten is too important and tremendous for our future growth, not just in Japan as we globalize this market. That's another big story I will share with you today. We officially became the world's largest virtual radio access RAN vendor. We provided this together with Altiostar, solved very, very complex technical problems. This is in 2018 in June. People said, we cannot do this. It is now fully operational, carrying massive amount of traffic in the network, fully resilient, fully redundant. We are extremely happy about the structure and the strategy for the radio access. This has always been my favorite to show, when we build our eNode base, they are much simpler, these macro antenna base stations. If you compare Rakuten Mobile versus any other telecom in the world, you will notice the elegance and simplicity that we do. Our sites hardly have any electronics at location. We have moved all our workloads to our edge data centers, that made things easier for deployment, construction costs are cheaper, operation and maintenance requirements are substantially cheaper than traditional networks. We think this is the future, this is how you build telecoms of the future. And in fact, hundreds of telecom mobile operators have came to Rakuten Mobile to learn. This is incredible. By the way, we become an institute of education about how to build future network.

I've shown you this before, but this is also the open RAN architecture that we have, not just for 4G, but 5G. One thing specific about 5G. I think we're the only few operator today that is also focused on supply chain and manufacturing in Japan for the massive MIMO product. So we've talked about this. It's not longer, i.e., idea. This has been deployed, fitted, and the reliability that we have seen. We're very, very satisfied where we are in the core technologies.

Now the dream that we had. Of course, we have to get Japan perfect. But imagine now the day in which this cloud connectivity could be deployed not just locally, globally. And that's what we've been talking about with a lot of telecom partners across the world. How could we export this technology from Japan to the rest of the globe. And I think this is where it sets the potential opportunity for Rakuten Mobile post our successful Japan launch.

On customer acquisition. This is -- I mean, I'll tell you my own story. This is a dream company to have, a dream company because of the opportunity to leverage all of the ecosystem of Rakuten Mobile. We already have north of 100 million plus Rakuten ID in our system. Each one of those customers or ID members are potential customers of our new mobile network. This is an exciting opportunity for the potential on leveraging our ecosystem.

Also, let's not forget that MVNO already exist in Rakuten, and we are the #1 MVNO player in Japan. We've seen some healthy growth for MVNO and in the future, that's the opportunity of migration of MVNO to MNO customers, but we are at 2.2 million customers on the MVNO network.

Another very exciting thing for those of you that travel a lot, for the first time, I think a mobile operator is going to offer unlimited data roaming abroad. There is no need for you to look for WiFi, there is no need for you to worry about your data consumption, there is no need for you to look for prepaid SIM card. The arrangements that we have done with Orange gives us access to 200-plus countries across the world. So this is another big, big thing, power up your phone, you'll see Rakuten Mobile everywhere you go in the world, and you have full data roaming at the LTE speeds.

And then radio station build-out. That's a very, very important topic. I think Miki talked about this many times before about the recovery that we have done, the acceleration that we have done. The simplicity of the sites have enabled us to really achieve a level of turning on sites per day that I personally have not seen in any other telecom.

Almost every day, 60 to 70 sites come on air daily. So we are very confident that by end of the year, we will have about 3,000 sites on air, if not even more. By the way, lease is signed, we already have 4,500 contracts signed with landlords. And 6,500 highly confident to get this also completed. So when you look at this picture, I think the core technologies, we're very confident that we have validated the model of our technologies. Coverage, we're increasing daily and it's going to get better as time progress. And I think this is a good story for us. So -- and then lastly, when we offered the free supporter program, the whole idea behind this program is to gather input from what these 5,000 customers look like. And in fact, Miki talked about it earlier today, the consumption that we're seeing from these people is incredible, it's remarkable. What they're consuming in our network, what they're doing and it's giving us the confidence that this network really is built to scale.

And so far, out of everybody, almost 98% of all the free supporter program are daily consuming, using the network. And I think it really sets a good picture of what we could expect in the future, and we would love to see data consumption increase in our network, obviously, once we go commercial launch.

So when you look at the opportunities for us, we talked about really doing something that no other telecom industry done, and we've done this. It's completely now deployed, end-to-end fully virtualized network. We have exceeded, by the way, the number of edge locations that we have built, if I give you contracts even to Amazon. We have built more edge locations than even Amazon have done in the U.S. And then synergies with other records and services, I think that really is a tremendous opportunity. I think Rakuten is in a very, very unique situation to how to leverage mobile and all the other services for our members and the mobile.

So with that, thank you very much.

[Hiroshi Mikitani, executive]

So we just heard from Tareq, but to summarize, the biggest point is that it's going to be the world's first, well, maybe you may not think that it's any meaning -- there's any meaning to not being #1 in the world. But to -- if you envision up to 5G, the cost is going to be cut down significantly. There is tremendous flexibility. So the former -- or the existing telecoms, telecom companies, I think they were being dominated by hardware manufacturers, but with us, we can do everything by ourselves. That is the kind of world that we will be creating or we have created.

So the rest is about building radio stations, which is a physical work that we just have to keep doing. The difficult part has been cleared. We have solved that. So the whole world, I think, is watching us.

Now about logistics. To put it simply, well, we have to do logistics for this business. In 2021 -- by 2021, the Rakuten Super logistics coverage will reach 50%. So Rakuten warehouses, the affiliated warehouses will be the place where the goods will be shipped from in Rakuten EXPRESS. And within this year, we will reach population coverage of 60% within end of this year. Rakuten trucks, so could be outsourcing by the cloud or maybe the newspaper delivery companies will become our affiliated companies. So comprehensively, the logistics costs will be cut down and Rakuten Ichiba's growth will also increase.

Now these are the highlights -- or the financial highlights. The core business is doing very well. The revenue was JPY 319 billion and Global GTV, JPY 4.8 trillion, which was 27.1% increase year-on-year. Very good numbers. Domestic EC, GMS, this was before the consumption tax was raised, but it was 18.4% increase year-on-year. Rakuten card shopping GTV was 28.9% increase year-on-year.

Now because of this cashless trend, Rakuten Card, Rakuten Pay and Rakuten bank accounts are increasing. The Rakuten bank accounts surpassed 8 million, and revenue was 24.4% up year-on-year. It's a very high revenue business. So I think this will be a very good to our business. And it says here that, unfortunately, Lyft stock price went down. There was JPY 103 billion impairment loss from Lyft that was recorded. Personally, I will say that this can be recovered. We will approach this business in a conservative manner, and this is the reason why we have recorded this impairment of loss.

Now Rakuten Ichiba, Rakuten Travel, these core businesses, the revenue went up 20.2% year-on-year and OI went up 50.8% year-on-year, doing very well.

Now as for the digital business, I know that you were worried about the digital business, but Kobo, Viber and Viki, all became lucrative or black in surplus. It took a long time, but it will now give better revenue figure. So that was on the segment.

Here is a segment information. Let's set aside those numbers for your information, and this is about Lyft. The valuation as given here, that is $1.28 billion and that's the return. And the membership value has increased by 15.8%, which is equivalent to JPY 5.3 trillion, especially the -- we are seeing the highly loyal users that are growing, Diamond users, the 45.4%, that being the share of the Diamond customers, and we're enjoying the good growth for other sectors as well. The gross user, this is also going very well.

FinTech segment. The Rakuten Card has surpassed 18 million in 6 months, 1 million people have joined, and maybe we can even accelerate that 20 million people. I think we will reach 20 million soon.

Now this is Rakuten Card results. What's this number here. 5 trillion, sorry, that's revenue.

Maybe I should go to the next page, the Rakuten Card KPIs. Transaction value was up by 28.9% year-on-year, that was JPY 2.4 billion, and then shopping revolving balance was up 20.3% year-on-year. And Rakuten Card KPIs, I've been saying that 1 trillion is the goal for the Rakuten Card and I think we are reaching that.

And then Rakuten Bank results, I think this is also doing well. The 7.2% revenue growth, together with number of accounts. The topping the 8 million, and the 10 million is now within reach and deposit, the saving, the amount that is also growing. As of the size, it is also growing.

In Rakuten Securities, we see some sign of recovery. The situation is mostly attributable to the market situation. But now with the payment can be made by card, therefore, the balance of investment made by the customers is increasing. And therefore, the -- when we look at the market share of Rakuten Securities, it is now 23.5% in Q3 compared to some mid-teen number some time ago.

Rakuten Life Insurance, it is growing successfully.

And finally, we can promote marketing with the good portfolio. And therefore, we can make a one-stop shopping kind of the sales of the insurance products.

As to payment, while other competitors may be trying to do the same, but in our case, it is 13.9x the more, it is explosively growing compared to others. This may be somewhat moderate in terms of market reach because we take into account revenue and profitability, that is how we have been achieving the growth.

E-commerce. It will increase by 18% -- over 18%. It's doing very well.

Marketplace business. The operating income was up 12-point -- 12% year-on-year. Profitability is also increasing. And the market, as I said, the customer loyalty is also increasing, going up.

And orders and purchasers, the number of purchasers increased by 6.3%. Number of orders increased by 12.4%. Before the consumption tax hike happened, it went -- it did very well. It's because we put a lot of effort into Mobile and Mobile GMS ratio was 74.1% year-on-year.

We have a synergy with Rakuten Card. The Rakuten Card share was 63.1%. In the U.S., the former Ebates, Rakuten Reward, GMS is doing well as well. In the third quarter, it was about USD 2.9 billion. So it's transitioning very well. $1.5 trillion is almost reachable. In terms of operating income, it's also doing very well. Up until last year, we did a lot of branding ads in the U.S. The brand recognition has reached almost 60%. So the 75% goal is almost in view.

As for investment business, it's a relatively stable investment. Lyft stock prices, yes, it did go down, but besides Lyft, I think it's doing very well.

Fashion. We see the high level of expectation from various brands included. And therefore, so far, we have an operating Rakuten Brand Avenue, which is now rebranded as Rakuten Fashion. So that we're trying to promote fashion industry, especially by way of Internet shopping rather than taking away the share of brands, rather we want to work together, so that with the brands, I mean, and therefore, it could be sending customers to physical stores with demand projection or they are offering a wide range of services. And for Rakuten Fashion website, we asked Ms. Nakajima, the former editor-in-chief of GINZA who is now nominated as Executive Fashion Creative Director. So within Rakuten headquarters, currently, she is now working for Rakuten Fashion. Some say that Rakuten Fashion has only a huge volume, but we are now trying to make it more sophisticated brand.

Content business, right, a brand and is doing well. And Viki, we believe this would turn into black next year for Viki.

For Mobile segment, we are making investments for future growth, and that is why operating loss was the JPY 14.5 billion. But first, we want to establish the shop network. Well, still -- our target is somewhat modest, like 600 compared to others, though are trying to operate about 1,000 stores.

And now the IDs, the Viber, that topped 1.1 billion. We are now seeing the possibility of turning into profit.

And advertising business, it is quite doing well, especially for the sales of advertisement to outside brands, 33.4% growth was achieved and ad network business that was up by 24.8%. Thus, overall, the advertisement sales was up by 24.4%.

The online purchase data is the basis for launching, targeting the ad or promotion, utilizing ad. And so far, those initiatives are quite popular.

Finally, about sustainability, or ESG, throughout the organization, we're promoting ESG-related initiatives in Rakuten Group. Now that we have more than 20,000 employees, sustainability is something that we need to work on and focus on even further. Thank you. This concludes my presentation. Thank you.

So we'd like to move on to the Q&A session.

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