Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2022-Q4

[Operator]

[Interpreted] Good afternoon, and thank you for joining Rakuten Group's 2022 Full Year and Fourth Quarter Financial Results Meeting. We have disclosed the latest consolidated financial report at 3:00 p.m. today. You can view this data on our corporate website page for investors, along with the presentation document used in this meeting.

At first, Mr. Mikitani will give the greeting. Miki, please go ahead.

[Hiroshi Mikitani, executive]

[Interpreted] So this time, again, online streaming, so I would like to make a brief explanation through the online streaming. And so FY 2022 fourth quarter and FY 2022 full year consolidated financial results of Rakuten Group to be presented by myself.

So starting from summary. And first of all, domestic business and overseas business, I would like to explain one by one. In the domestic EC GMS, so globally the COVID seems to be over. So the EC companies have been struggling. However, our company is plus 12.3% Y-o-Y, and this is about JPY 5.6 trillion and particularly, Rakuten Group.

So we are very neutral. In other words, during the COVID, we were not able to travel, but the e-commerce business performance was pretty well. Once the COVID is over, because people started to move and the Rakuten Travel and Rakuten Card business performance gets better. So we have a quite well-established ecosystem. And as for Rakuten Travel, comparing to '19 plus 12.9% Y-o-Y, so even comparing to pre-COVID, we have been growing our business in travel.

And the subscribers, MNO and MVNO in total, 5.06 million, and I will elaborate mobile later. And the Rakuten Card Shopping GTV drastically grew and the Y-o-Y basis plus 25.8% and this is JPY 18.2 trillion. We have achieved to that level. It says Rakuten Card shopping GTV, but why do we have direct in securities in our accounts? Oh, this is the card issuance. The number of card, it's not GTV. Our card issued is plus 11.9% Y-o-Y. That is 28.08 million. And the Rakuten Securities General accounts, plus 21.1% Y-o-Y. And the nonconsolidated basis, this is a top growth rate. In the Rakuten Bank, the number of accounts is 13.39 million, that is plus 13.3% Y-o-Y growth.

So last year, with 25th anniversary of our company and in 1997, Rakuten Ichiba started its operation. From there, cumulatively on average, every year CAGR plus 56.9% we made. In the last year, as for GTV, 14.6% grew we made. So 26 as a term in consecutive manner, we have increased our top line. And the global GTV, so plus 39.2% starting from 2000, and over 23 years, it is growing. In the last year, it was JPY 33.8 trillion and Y-o-Y basis 23.0% growth.

And the presence in Japan and the presence in global market. And based on the consolidated revenue among the EC internet companies, we are overwhelming #1. And even if we look at ourselves from the global point of view, excluding U.S. and China, we are -- the revenue and the scale wise, we believe we should be #1. So now still the economy is unstable and global point of view, internet business, including advertisement revenue had been struggling, that's what we heard. However, Rakuten mainly on the shopping and then the consumers, we are very close to consumer's wallet.

So the last year Q4, it was plus 16% and 2022 revenue was JPY 183 billion. So we are about to reach JPY 200 billion. So we still have room to grow and who is supporting this is Rakuten ecosystem here in Japan. So these are the ecosystem. Well, the number of unique users is 39 million. And in a month, more than 39 million people have been using our service. This is plus 11.2% Y-o-Y. And then those -- the loyal customer using more than 2 services is 75.6%.

So one of the factors of this is Rakuten point attractiveness and you can save it and you can use it and you can have fun. So the last year, throughout the year, about JPY 620 billion, Rakuten Super Point was issued. So this lapse rate is about 2% means everyone is enjoying using this point service. And the aspect of this is SPU and Rakuten Mobile now joined this SPU, and it's a big growth factor today and average growth -- the rate is plus 22%. So as an ecosystem, we have quite a strong powerful ecosystem here.

And then what about the membership value? What about the membership value? So far, we have been showing this membership value data as of last year, and it's about JPY 8.3 trillion, and this is plus 28.6% Y-o-Y growth. And then the membership value, how do we calculate that? So either generating the profit current value, LTV, from LTV we exclude the CAC and the number of active users were multiplied to that. So the customers generating the profit to be calculated into the present value, which is about JPY 8.3 trillion on a profit basis. This is how we calculate membership value. And then these are the membership value is getting closer to market cap is what we want to do.

And particularly, mobile user, may not subscribe, but contribution is becoming great now. For example, Rakuten Super Sale and the GMS from MNO subscriber is about 25%, getting closer to 25%. And then this time, Rakuten Mobile joined this SPU. So we have to be aware of that, and the customers understand that. And because of having this system, they joined MNO subscriber, which is 22%. This is fair. And then economically good pricing plan and then ecosystem started to work in this arena.

And then about the paid subscriber, the growth accelerating. So we paid back the point and now it's finished. So now our users are paying to our subscription. As a result, as of end of January, actual number of paying subscribers is about 4.5 million. And comparing to year before, it's plus 294%, which is 4x.

And then new MNO applications, up until November, we had some termination period for the fleet use, but we strengthened our ecosystem and then in December, 5%. And then January this year, comparing to the year before, plus 16% growth was made. So it shows a steady growth in the Rakuten Mobile users number is recovering steadily.

And then the global KPI -- global GTV is plus 23% Y-o-Y and JPY 33.8 trillion. And the reward, this is a cash back site. This is 5.6% growth Y-o-Y, which is equivalent to $12.07 billion. So this is another performing thing and the brand recognition and then the -- I will show you the TV commercial, which was shown at the Super Bowl, I will show it later. And then the Kobo registered users plus 8.1% Y-o-Y and then the Rakuten TV, mainly in the European market, and the total users is 70 million, which is plus 48.3% Y-o-Y. And then the contents distribution to the global market, which is Rakuten Viki and the number of registered users is 66.8 million, which is plus 27.2% Y-o-Y. And the Viber from economic point of view, because of the Russia-Ukraine dispute, this became the deficit from the profit, but the number of registered users is still growing by plus 6.4% Y-o-Y.

Let me go one by one. The first one is Rakuten rewards revenue. So this is $990 million, and this is plus 13.3% and non-GAAP operating income is $62.8 million or the plus 12%. So it's showing steady growth. And then we are aggressively in terms of the marketing so that we believe we can grow profit some more extent.

And now -- so this is kind of [indiscernible] video, Rakuten America, the reward Super Bowl. This was shown there, and this is the TV commercial. And then on YouTube, about 30 million view was made for this video, so I would like you to enjoy the video.

[Presentation]

[Hiroshi Mikitani, executive]

[Interpreted] Okay. So Rakuten brand recognition is being accelerated in Taiwan and Europe, already above the 80%. And in the United States, close to 70%. The people know Rakuten brand and maybe with this TV commercial for Super Bowl, we believe this number will be improving.

So I would like to go deeper into different business segments and talk about the performance. So starting with Internet services. There are 4 segments here. Domestic EC is first, JYP 797 billion is the revenue and operating income JPY 95.6 billion, so very steady. It doesn't mention the unit, but it's billion. And minority investments, last year, there was this major profit coming from investment because of the market condition, it's a deficit of about JPY 10 billion. So minus JPY 44.6 billion year-on-year basis. But practically, for Internet Service segment, things are going quite well.

And then domestic e-commerce GMS, JPY 5.6 trillion year-on-year basis, plus 12.3%. And in the near future, we would like to reach JPY 10 trillion and one major measure for that is Rakuten Mobile. Domestic e-commerce financial highlights, let's look at the revenue. About JPY 800 billion in EC, it's going to reach almost JPY 100 billion. So this is 36.6% growth year-on-year. And so for the total amount, GMS, and although we have not announced this publicly, we are actually doing better than other companies. And one key factor is enhanced royalty. And I think we have this threshold for free shipment and also enhancement of services, among others, we have paid our -- made efforts to make improvements.

For different sections of our business; fashion, for example, Rakuten fashion, we have been exerting a lot of effort in. And ZOZO, one of our competitors. Compared to them, we are about 2.5x of ZOZO. So we have surpassed JPY 1 trillion already, and the growth rate is 10% or more year-on-year. So very steady domestic EC. In various sectors, all e-commerce is to be carried out or handled by ourselves. And so we have core businesses as well as growth investment businesses. So 2 major categories.

For core business, we have Rakuten Ichiba, Rakuten Travel and others, cashback, Rakuten Rebates and GORA. And investment growth businesses includes Rakuten Seiyu or Netsuper and Rakuten Rakuma and Fashion. And when you go into the details for the core business portion, you can see a steady growth here. On the other hand, when you look at the growth investment business, it's actually an improvement of about JPY 9.1 billion compared to before, and so we are growing what has been growing. And also for deficit-making businesses, we're turning them into [indiscernible]. And it is about to reach JPY 150 billion in non-GAAP operating income. So I think there is room for growth. And so 2022 sales is JPY 183 billion, and that is plus 15.9% year-on-year.

And FinTech; Rakuten Card, Rakuten Bank, Securities Business as well as Insurance Business, they are making improvements in operating income, so very steady. And on a per segment basis, plus 10.8% year-on-year and the key highlights include the following: Rakuten Card issued shopping transaction volume and it is going to reach almost 40 million accounts and securities also doing quite well. Rakuten Card, Triple 3, is what we are trying to realize. Card issued 30 million, shopping GTV JPY 30 trillion and also GTV share 30%. I think we're moving steadily towards those targets.

And for 2022, non-GAAP operating income for Rakuten Bank was, as we see here, JPY 38 billion. And so operating income is as you have seen here. And for securities, operating income JPY 18.7 billion and insurance company, also general as well as life insurance, doing quite well.

And then moving on to mobile and -- so we started mobile business from 2000, and that was mobile business player, and we have been aggressive and challenging to the industry. What we have done so far is, unlike other companies, we used mainly software and a fully virtualized environment, means software-oriented business. In other words, the mobile network to be managed through the Internet, via the Internet. That was the basic concept we started off with.

And the next one is unparalleled speed. We set up -- build out the base stations. It was kind of the financial burden was very heavy. And then the -- we used -- our initial plan is to spend 7 years to build out. However, it was accelerated for 3 years. With that, the future CapEx will become lighter than before. And then virtualization technology and received reliability from the global market in that context, so the customer base to be secured. And we initially conducted a free-of-charge campaign to capture the stable customer base. So in other words, 2000 to 2022 is a period to establish a foundation rapidly. And this year is a testing period.

So one of the things is we have to lower the cost and then become lean and then ultra-efficient structure to be established. And the second one, and the roaming, so the only the 4% data is the roaming, but there is an issue of handover. And then it incurs a huge cost. Therefore towards the end of the year, we would like to significantly reduce the running cost. And Symphony, we want to strengthen Symphony. And then the Amazon, well, their revenue is mainly from the AWS, just like that Symphony we want to promote.

And then the coverage, it is 98% plus. So we want to get it closer to 99% or over 99% of population coverage. With that, the coverage, so we would like to improve our financial status in a healthy manner and strengthen our ecosystem contribution. And the big initiatives to that end is the conventional mobile players more inclined to TV commercial, in other words, mass marketing.

So the mass marketing method was a major methodology for the advertisement. However, we actually switched our marketing towards Internet. And so far we do not see any negative impact, rather it's positive and also referral user to introduce different users. For this referral, we will do some referral marketing, paying fee to that referral. This is a new challenge in the global market. With that, in 2023, we want to establish a profit structure. This is how we position 2023. After that, the coverage -- well, we almost do cover the wide area, but the -- we want to accelerate the coverage for 2024 and then 2023 is to improve the cost structure drastically and also become -- use the efficient Internet marketing and also ecosystem synergy to be strengthened.

To be specific -- so we started this business from 2000 and building out the base station. In the past 3 years, it reached 52,000. So given the initial plan, the 47,000 was the initial plan. However, as of today, it's about more than 50,000. But towards the end of the year, another 8,000 base stations will be built out. We would like to have heavy users because they would contribute to our cost structure more than others. So the currently population coverage is 98%, so we want to increase it up to 99.2% or so before the end of this year.

And this is about the roaming traffic volume. And today it's about 4.2% or 4.3%. And that 4.2% the traffic is using other companies' roaming network, and we want to reduce this maximum by the end of December 2023, so that we can reduce the roaming cost and other costs to be drastically reduced throughout other initiatives and the CapEx. So we've already -- the build out is almost done. So once we complete it and toward the end of the fiscal year, the monthly operation cost to be reduced by JPY 15 billion. So per month and more than JPY 180 billion per year cost would be reduced. That is our plan.

So we do not do anything drastically. What we have been conducting so far, for example, Rakuten Ichiba or Rakuten Card, and we have been working on efficient things. And with that efficient initiatives, we can reduce the cost and we will be able to generate the profit. That is how we would like to move forward. And the cost reduction factor, for example, the CapEx or the buildout, the cost is now already done. And we have been transferring our people to support this. So because it is settled almost, so we will transfer our people to original places so that we can reduce the overall outsourcing fee as a Rakuten Group company and also the roaming cost reduction. And we still have MVNO, but we want to migrate it to MNO and also the shop because we want to make efficient shop operation optimization of the shops.

So how much CapEx did we spend? It was about JPY 300 billion annually. And then this year, we will spend the same amount. However, from next year and onward, it will become JPY 150 billion and then the 2 years after JPY 120 billion, that is the current plan. As a result, comparing to other players, how much do we have less cost. And so far today, comparing to other income, about the 20% is different.

And then additional CapEx amount will be the same level. So this unprecedented cost structure will be able to realize. And one of the highlights that support this and this year, we want to acquire Platinum Band and next year and onward from the Satellite and the nationwide in Japan, any area. So the difficulty we have and the coverage we want to geographically cover coverage of the 100% with this. And through the Platinum Band, how much can we change this to [indiscernible] like this.

So we will have a better coverage geographically through this. So once we are able to acquire this platinum band, I think this would become a very positive factor to our business, but I understand your concern. This may incur more cost. So the secret here is we use software centric approach means when we receive this new platinum band, which we can install them with negligible the cost because we can reuse existing post pole and the updated software. And this is -- unlike other companies, we have in-house developed software so that it won't cost any and then we can manage it. So this partner, 4G and 5G and satellite and this -- the structure will be realized.

And another point is for the Rakuten Mobile. So we want to democratize mobile services. So today, users are very careful not to use too much data. But when it comes to the unlimited usage, well, they use like about JPY 10,000, but we set the cap about around JPY 3,000 under the unlimited call and unlimited data and unlimited SMS. So this is our cost or the price difference with us and competitors. And they have some brands. But as you can see from the graph, even at the 50-gigabyte Rakuten Mobile is more reasonable. So the heavy users, particular younger generation, they used 130 mg or 200 mg on a daily basis. In such a case, this has a big price gap. So in any price range, we are able to sustain the price competitiveness and our recognition for that part is being accelerated. And then 18.4 gigabyte is our average data volume and other company is half of them or 9 gigabytes, so our users are much the heavy users in terms of the data volume.

ARPU is on the rise as well. As of December last year, the so-called ecosystem contribution included JPY 2,510. We started with 0, but it has gone up to JPY 2,510 ARPU, and that is thanks to the increase in heavy users. And also by adding rich services users are happier in using our services, and we're hoping that ARPU will go up further. And using 5G means more data requirement and so ARPU will increase as well. And I will come back to this later, but enterprise services is another one. We would like to also contribute -- make contribution to ecosystem. 75.2% year-on-year growth of revenue. So in the fourth quarter, JPY 114.0 billion.

And Q1, Q2 saw a major improvement in operating income or will. Q3, Q4, roaming is getting lighter and lighter and therefore, that would mean we can have much more improved profitability. And synergy with Rakuten Group is working quite well. And already by joining Rakuten Group, more than 10 trillion -- rather 10 million people are using our services. And actually, the average EMS lift by MNO is JPY 37,683 per year. And not just Rakuten Ichiba but Rakuten Travel as well, about 45% or almost 50% push up or lift thanks to more subscribers joining Rakuten Mobile and enterprise services has started Rakuten Group. More than 400,000 companies are actually our customers. The initial year, 1 million is what we are trying to target.

And we have started contracting with these customers and basically calls plus data for domestic unlimited calls domestically. And depending on the data, the price will be different, but maximum JPY 2,780 per month, and we're starting from JPY 100 or so. And so for the most part, things can be actually done for free, and 4G, 5G is available as well. Therefore very strong interest coming our way from our potential customers. And wireless is not the only one. Already we have installed fiber networks, and therefore, using our backbone Internet services provider business is going to be launched.

For Rakuten Symphony, I would like to hand this over to Tareq. So let me switch my microphone over to you, Tareq.

[Tareq Amin, executive]

Good afternoon. Rakuten Symphony is a platform company. We are young, but we're making extremely healthy revenue growth. If you look at the last 6 quarters since our establishment, we have achieved more than $0.5 billion in total revenue. And for fiscal year 2022, our total revenue was $476 million. But we're not stopping here. If you look at the growth in 2023 and what's beyond, we have a very healthy sales pipeline with over $4 billion of total revenue -- or total opportunities that we're pursuing, and our sales team is working hard to convert these opportunities into revenues. Today, in fact, we have closed 14 global contracts are closed and our team is in delivery phase. 8 global contracts are in final stages of closure, and we can't wait to convert those into real revenue opportunities.

And if we look at the technology that Rakuten Symphony has, the technology that was created, thanks to Rakuten Mobile, we see unprecedented demand in 3 big verticals in which Rakuten is an industry leader, #1, Open RAN. In fact, Rakuten is the company that really drove the architecture evolution of Open RAN, a very critical technology to change the cost of building and engineering and managing telecom infrastructure across the world. We are absolutely the world leader in this technology. We see a significant opportunity that is translating from proof of concepts in both brownfield and green field operator.

Cloud, we are in fact today, the largest edge cloud platform provider if you consider the number of workloads deployed in our infrastructure. And then last but not least, efficient operation. And if you look at all of these in total addressable market and the size of this market, it is significant, and that's why we're very, very excited about the opportunities in front of us in the near future.

And when I -- specifically about Open RAN, this is a topic that I think the industry as a whole debated for a very long time. And when I look at Rakuten and what we have achieved, especially in the mobile business in Japan, we now have recognized over $200 million of total revenue since establishment as a new start-up in an area that is highly contested, I think this is a significant progress in this architecture. In fact, we are the only real alternative to legacy platform deployment across the world. With over 300,000 sales on year globally, it officially makes Rakuten the world's largest Open RAN software platform provider. This is very, very healthy to see for us as far as opportunities is concerned.

Open RAN provided amazing agility to provide new features and advancements for mobile operators as well as consumers. With over 600 features continue to develop and evolve, we think our architecture, our feature reliability, our feature quality is matching what the customers are expecting.

So with this, what is our objective now in 2023? We have to flawlessly deliver to our customers, the 14 global customers that we have already signed contracts with continue to expand and really create a win-win opportunities for both to monetize this marketplace. We want to achieve a 40% revenue growth in the calendar year 2023 and truly set ourself as a true platform connectivity player equivalent to what you have seen with AWS and Amazon when they launched AWS initially. And we think Rakuten is the only company that is uniquely positioned to deliver on this promise.

And with that, thank you very much.

[Hiroshi Mikitani, executive]

[Interpreted] Thank you very much. So we have been talking about the each business strategy. Last not but least, I would like to talk about the financial strategy. So the first point is about the funding. We have been investing a huge amount of the funding to the Rakuten Mobile business and the finance business has become gigantic. So this interest-bearing debt amount is increasing. So my first point here is Rakuten Bank's IPO, this was already announced. It's on process, and we would like to work on that.

And then next one is Rakuten Securities Holdings IPO. Before the end of this fiscal year, we plan to make that happen. And other than that, parent company and subsidiary, the company based strategic business alliance and capital, the range to be flexibility considered so that we will be able to have a healthy balance so that we can grow in the Rakuten Mobile profitability, the structure improvement is what I've already covered before.

Finally, I'd like to talk about sustainability. At Rakuten, with regard to sustainability, we are taking this very seriously. And so JPY 33 trillion is the GMS. In other words, Rakuten Group's platform is the platform through which a lot of business deals or purchases are made. So sustainability of society is something that we own. We have this ownership and we think that we need to put a lot of importance on that. And as a corporate mission, we see sustainability as a very important piece. And we have subcommittees established to evaluate these different parts, environment, human rights and diversity and inclusion. So we have relevant subcommittees to come up with specific action plans.

And promoting that it's not limited to Rakuten Group, but it is through partnerships as well as with users, it's a collaborative effort that we are going to make in this field. For example, Rakuten Travel, we'll look at environment and other sustainability elements of clean energy and promotion of traveling is one and also enhancement of user awareness is another aspect. And so quizzes might be given or donations might be solicited using Rakuten points as well. So we would like to make certain efforts there.

And as a result, in sustainability indexes, Dow Jones Sustainability Indices is including Rakuten and also as for awards, fortunately, we have been receiving a lot of awards. We're very grateful.

And I'd like to give financial highlights here. As you can see here, Internet Services segment, Domestic EC at the center, very steady performance and for FinTech. Operating income, plus 11% approximately. And mobile segment, as I mentioned, the first phase required a lot of investments and costs. However, in 2023, this year, we are taking various measures to reduce costs and also marketing methods are using Internet as much as possible. And as a result, roaming cost is coming down. These measures is taking -- well, making -- getting fruits in 2023.

And then as we reach this stage, then of course, we will consult with the market as to what next steps we will be taking going forward. But in any case, for year 2023, Rakuten Mobile financial situation will dramatically improve. And we will actually conduct marketing to the masses, but we're not going to really go after users who are favoring free services, but rather focus on the subscribers that are loyal to us, to ecosystem overall as well as Rakuten Mobile so that we can have a sound growth going forward. So that is the direction in our policy.

Thank you very much for your attention.

[Operator]

[Interpreted] This concludes our 2022 full year and fourth quarter financial results presentation. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]