GMO Internet Inc

TSE:9449

Earnings Call Transcript 2021-Q1

[Masatoshi Kumagai, executive]

Good afternoon, ladies and gentlemen. I am Kumagai, Group CEO of GMO Internet. Our fiscal year ends in December, so let me share with you the financial results of FY '21 first quarter, January to March of this year.

This page shows the agenda for today. The page shows the executive summary of our earnings for the first quarter of FY 2021. As you can see, we renewed our record-high results from the top line to the bottom line.

Now there are 3 points I would like to share with you as the highlight of the results this time. The first is that the Cryptoasset segment has grown to the extent where the profit occupies as much as 1/3 of the total. It means that we now have the third business pillar after Internet Infrastructure and Internet Finance businesses.

The second point is the recovery trend that is experienced by the online ad and media segment. Allow me to share the detailed numbers later on. The third point I would like to highlight is the continuous emergence of new projects that could be the source of our future growth, while the existing line of business performance are pretty good.

One example is the listing of the world's first regulated Japanese yen pegged stablecoin GYEN on the world's largest cryptoasset market of Binance of the United States. The actual listing, as a matter of fact, is happening almost now at 4:00 p.m. Japanese Standard Time. Moreover, today, the application of GMO Sign for both iPhone and Android were also launched. Furthermore, as announced the other day, we will soon open an easy-to-use, high-quality nonfungible token, NFT, marketplace called Adam, adam.jp. This will be our entry into the rapidly growing global NFT market.

So I would like to draw your attention to the fact that new projects are emerging one after the other, providing us with new source of growth, while the existing line of businesses are enjoying robustness.

So that was a brief summary of the quarter. I would now like to hand over to Yasuda, our group CFO, who will continue with the presentation.

[Masashi Yasuda, executive]

Good afternoon. I am Yasuda. I will take the part until Internet Finance segment report before Kumagai comes back again to present on Cryptoasset segment and NFT business.

Here's a summary of segment performance. Circles on the right-hand side indicate the overall assessment of the segment. Internet infrastructure was double circle or excellent. The segment grew both in net sales and profit. We have renewed a record high. We have been explaining that stay-at-home consumption and online consumption are not a fad but a new trend. The result this time was a proof of our belief. We displayed our strength as the collection of #1 ranked businesses, with e-commerce and payment maintaining high performance.

Online Ad & Media was a single circle or good. The segment grew both in net sales and profit, while we reinforce our effort in collaborating with customers that are less affected by the pandemic from last year. We managed to capture advertising demand at the end of the year. Recovery trend is continuing in both ad and media. We will continue to strengthen our effort in leveraging on our internal capabilities in both product and media.

Now Internet Finance was double circle or excellent. Although both net sales and profit declined on year-over-year, both FX and CFD trended well, allowing the performance level remaining to be high, close to that of the prior year that were positively affected by COVID-19.

Cryptoassets was double circle or excellent. Both net sales and profit were up, renewing its record high by far. Cryptoassets market thrived, while mining business and exchange business of GMO coins remained strong. Time of harvesting have started for Cryptoassets business after 5 years of investment since the launch of GMO coins in October 2016. We believe that the result is reflecting the presence of cryptoassets as the third pillar of business after Internet Infrastructure and Internet Finance.

Now the slide shows a bridge chart to analyze the ups and downs of the net sales and operating profit of business segments from the last year. The chart on the left is the net sales; and the right, operating profit. Cryptoasset is showing remarkable growth, but both infrastructure and advertising fared well, while finance maintained its high earnings. As a result, on a consolidated basis, net sales was up by JPY 7.5 billion, while profit grew by JPY 4.19 billion.

Next, I would like to explain about the shareholders' return policy. As shown at the top of the slide, our basic policy is total shareholders' return of 50%. Now out of this total shareholders' return of 50%, dividend accounts for 33% or more and the rest of 17% also appropriated to shares repurchased. The middle part of the slide shows dividend per share by quarter. Dividend per share for the first quarter is up by JPY 10.5 from the prior year at JPY 17.1. At the bottom of the slide, you can see the progress of the share buyback program. The total amount of the program is planned at JPY 5.63 billion this year, though no progress was made at the end of March.

Let me continue to provide further details of the financial results. The slide shows the quarterly trend of net sales by segment. Internet Infrastructure showed in dark blue color continue to grow, while Cryptoassets' contribution became larger, displaying the evolution of competition of our profits. This page shows the quarterly trend of operating profit by segment, with Cryptoassets' business, growing to the extent of becoming the third business pillar. Profit marked significant record high.

Now the group overview. The slide shows the market cap of 10 listed group companies and our equity share. As shown at the bottom, total market cap of the group is now at approximately JPY 1.5 trillion, and our equity share exceeded JPY 500 billion. The page provides you with a bird's eye view of 4 business segments. The size of the area occupied by the segment's expresses net sales breakdown percentage, number of contracts of Internet Infrastructure, FX securities and Cryptoassets reached 13.47 million as a solid basis for earnings.

Let me now explain about our partners, our employees and staff members. The number of partners at the end of March was 6,272, of which 45% are engineers and creators, those who have skills to create and manufacture. We have a goal to achieve more than 50% for the breakdown. In order to brush up our engineering capabilities, we are committed to this goal and are reinforcing our effort to successfully invite as many engineers and creators to our group.

Next is Internet Infrastructure business. The slide shows the overview of product and services of Internet Infrastructure segment, domain, cloud, hosting, ASP Cart, SSL securities Payment, Provider, the segment is a collection of #1 services in each of the market. Each and every service is considered to be indispensable for Internet and believed to be sustainable. The trend of net sales of the Infrastructure segment and the breakdown by quarter. Since second quarter of the last year where stay-at-home consumption and online consumption maintaining its high-performance level, the business continued to grow by leveraging on the strength of collection of #1 services.

The slide shows the trend of operating profit by quarter. Profit also continued to grow, marking a record high result.

This slide shows the breakdown of Infrastructure business profit into payment business, others and the cost distribution or allocation. While the growth of payment is continuing, others are also showing signs of recovery on quarter-on-quarter basis. This is what we meant by onetime decline due to cost distribution at the last presentation session. As confirmed by the quarterly net sales trend, the momentum remains to be robust, encouraging us to believe in a sustainable growth trend that is well balanced between payment and others. Number of contract of Internet infrastructure business reached 11.71 million.

The chart shows the trend of transaction value of E-commerce Solutions business. It is composed of new type of EC platform, including minne and SUZURI, rolled out on Color Me Shop and Makeup Shop. The value is now close to achieving JPY 120 billion for the quarter, maintaining a high speed of growth at 40% year-over-year. Of the total value, about 40% make use of payment function of GMO payment gateway. The number shows a strong synergy between EC Solution business and payment business.

Next topic is GMO Sign. First, the launch of smartphone application. At the time of business result announcement back in February of this year, Kumagai predicted the future of Japanese Hanko seal exists in a smartphone. There will be an application. Again, we announced today the official launch of the application. The seal or rather a contract is not something that will disappear altogether. GMO Sign will embed Hanko seals in smartphones as a reliable e-contract services that could be used anywhere at any time.

Now let me explain about the progress we have been making in digital government initiative designed for local governments. Proof-of-concept is underway with 19 local governments you see on the slide. In March of this year, Sanjo City of Niigata Prefecture decided to introduce the service. Sanjo City will be the first local government to introduce e-contract service in Japan. The city recognizes the efficiency of the service that allows a week long work of printing, seal affixing and posting to be done in a matter of several minutes at the shortest. We will continue to promote the adoption by different local governments in earnest.

The next is Ad & Media business. This shows the quarterly trend of the net sales of the segment and the breakdown. The segment grew 10.9% year-over-year. Both businesses managed to capture the advertising demand of clients, and the recovery trend is continuing. This slide shows the trend of operating profit of the segment by quarter. Thanks to both Ad & Media that have been dedicating much of the effort in capturing the advertising demand of the clients who are less affected by COVID-19, significant growth was achieved. Increase in ad tech product sales also made positive contribution to the profit. We will continue to invest in in-house products as well as in-house media.

Next is Internet Finance segment. Segment performance by quarter is shown on the slide. Both net sales and profit declined on a year-over-year basis due to a boom in the prior year affected by COVID-19. However, both net sales as well as profit grew on quarter-on-quarter basis. Both FX and CFD trended well during the quarter. The bar chart shows the trend of FX transaction volume as well as the market share. Transaction volume continued to trend at the highest level. With the conclusion of a spread narrowing campaign, FX domestic market share unfortunately have dropped. However, we managed to keep the #1 position in the market for the first quarter.

I will now hand over to Kumagai, who will present on Cryptoassets and beyond.

[Masatoshi Kumagai, executive]

Thank you. Now let me explain. I will be explaining about Cryptoassets business you see on the slide that has 3 subsegments of Mining, Exchange and Payment.

Over to the next page, trend of net sales of cryptoassets and the breakdown. Thanks to the favorable market condition, Exchange business in pale blue at the bottom as well as Mining business trended strong, achieving the growth of 377% year-over-year, a record high result.

I would like to share my personal view of the Cryptoassets market going forward. Investment products like equity market or real estate market all have a benchmark or a standard. In the case of equity, one such example will be EPS times PER. In the case of real estate, one can refer to posted land price, PLP, released by the national government on January 1, EBIA, or standard land price, SLP, released by each prefecture on July 1. On the other hand, the market of cryptoassets has no such thing as a benchmark or standard. So this is my idea.

If the participants and the money inflow continues to grow, the market with limited number of currencies and other limitation is likely to expand further with this price also rising. So this is exactly what is happening right now.

Major financial institutions, such as Goldman Sachs, and a major economy, such as United States, are considering to introduce ETF. Canada has already started distribution of ETF. Moreover, companies like Uber or Tesla led by Elon Musk or even, just the other day, art auction market announced the acceptance of cryptoassets as a method of settlement. It is descriptive of the current market situation where participants are expanding in different areas of economy. If this is what is happening in real, I am inclined to think that the market will continue to expand rather than to shrink. GMO is providing services that are indispensable for the cryptoassets market. So it gives me confidence to remain relatively bullish for the segment going forward.

Well, please move to the next page. This slide shows the quarterly operating profits. Since the mining business has entered into a stable operation phase, all sales and profits related to Cryptoassets will be presented in a combined way starting this fiscal year.

I would like to talk about 2 topics related to this segment. The first topic is the share of transaction volume of GMO Coin, our exchange business, in Japan in a single month of April has become the #1. We will continue to offer a series of #1 services to delight our customers to expand our market share.

The second topic is what I mentioned at the very beginning at 16:00 today at exactly the time when this financial briefing has started, GYEN has become listed on Binance, which is the world's largest exchange. What is significant about Binance is that, well, there aren't many clear figures available that I can share with you about market share. But my understanding is that they have the biggest trading volume in the world. Including spot and credit transactions, I believe about half of the trades are done on Binance.

As of fall last year, the market share of Binance was roughly 25%. I think you remember Coinbase, which went public in the U.S. market recently, reached a market cap of JPY 8 trillion at the time of IPO, exceeding those of Japanese megabanks. And I believe their share was around 20% back then, which means that Binance has a bigger market share than Coinbase. And GYEN was able to be listed on this market, enabling us to have a strong foothold to penetrate into the market. This was the second topic in the Cryptoassets segment.

Earlier, I mentioned that there are 3 projects, and out of them, I would like to explain about NFT market, which would surely attract attention in the future. NFT stands for nonfungible token. Even if you search NFT on the Internet, it seems complicated and hard to understand, and I will be using my own words to explain to make it easier to understand.

I would like to use an analogy of traditional books. Books have been around for a long time. I believe you went to bookstores to buy books. I'm sure you keep your favorite books in your book shelf. But for some books, you feel you might not read again, you might have sold them to used book stores like Book Off or small local used bookstores.

And thinking about the flow of cash in this transaction, when you buy a new book, the money flows to the bookstore to the publisher and to the author who wrote the book. But let's say, you brought your old book to Book Off or any other used bookstores, neither the publisher nor the copyright holder has been able to receive money. That is the conventional flow. This may still be the case, but this is how it has been traditionally.

And please take a look at the column in the middle. Many of you are reading e-books nowadays. A specific name would be Amazon's Kindle. This is how you are reading nowadays. Then what are you paying for? It is not the books you're buying, but the right to read. You are buying digital data that cannot be copied because of DRM technology. In other words, you are buying the right to read, which you cannot resell nor copy. Naturally, there are no secondary distribution. So X indicating no secondary distribution is shown in this table. Since there are no secondary distribution, copyright holders and publishers will not receive any money.

Windows 95 was the trigger for the rapid penetration of the Internet in Japan. So for 26 years, since 1995, writers, composers, musicians, publishers, and other IP holders, who own the copyrights have not been able to increase their income much, although the consumption volume has increased for 26 years since the launch of the Internet, or even worse, some have experienced a decline in income because of illegal copying. This has been the history of the Internet until now. We believe NFT has the potential to be the trigger to solve all these issues.

What will be distributed using NFT are tokens, as is described here. Secondary distribution is possible. Also, various ways to funnel money to IP holders are programmable. Please take a look at the next page. It is very easy to understand. At a glance, you will understand that everything that was not possible before will now become possible. Please take a look at the blue part, and you can understand.

Let me explain. The traditional paper books brought income to copyright holders, publishers and bookstores in the primary distribution. But once they were brought to used bookstores, no income was created. Used bookstores and sellers of these books were the only ones earning some money. And looking at e-books, like Kindle, where you are buying the right to read, there is no secondary distribution.

On the other hand, in case of NFT, if you sell, resell twice, three times, no matter how many times you sell to the used bookstores, depending on how it is programmed, there will be income created for the copyright holders and publishers. They would encourage you to resell many, many times. The conventional Internet, which has been functioning as a distribution base, will all of a sudden may have a very big potential to become a revenue source for them. And that will be made possible with NFT. We believe all contents will be NFT traded in the future. This is a real digital content distribution revolution.

As you know, I am one of the first to enter into Internet business as an Internet venture in Japan. I learned about the Internet for the first time 26 or 27 years ago, I was so impressed and decided to make it my business and started operation in 1995. Then after that, I encountered blockchain. Again, I thought this was a revolution. It generated a very big impact. I thought, "Wow, this is a technological innovation of storage cost. This will be used for many purposes," I thought. And this time, NFT. Of course, this is a service and an area enabled using blockchain technology. And application to billing using smart contract program was as much a shock to me as the encounter with the Internet and blockchain.

IP holders have been suffering in the past 26 years. Penetration of the Internet raised their name recognition, but it did not increase their income. I feel it will be a digital content distribution revolution that will change such a situation all at once.

This is my tweet on April 10. Nonfungible token has a potential. But if you use it yourself, it is still very difficult to use. It is hard to understand. You need to open accounts here and there and buy cryptoassets, which many of you are not familiar with yet. It is still very complicated. And through GMO Internet Group's technological capabilities and existing services, we want to create an extremely easy-to-understand market, and that is Adam market.

In simple terms, you will be able to buy with ease like shopping at Amazon or Rakuten using statutory currencies, credit cards, et cetera, and also be able to sell easily, like you sell at Mercari. Usability is not much different compared to the markets you are used to. The concept behind Adam is that you can do everything in one stop. We took the name Adam from Adam and Eve, Genesis. We are going to promote content revolution with www.adam.jp.

This is all for the briefing of the financial results for Q1. It seems that many people are viewing, and thank you very much. Internet for everyone.

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