GMO Internet Inc

TSE:9449

Earnings Call Transcript 2022-Q1

[Unknown Executive]

Before the presentation by CEO, Kumagai, I'd like to explain the changes in accounting rules regarding posting. From this fiscal year, we are adopting accounting standard for revenue recognition and rules for posting sales have changed. In this material, the figures before the change of the rules are described as former standard, and after the change are described as new standard. As was introduced at the last financial results briefing, the impact of the new rules will reduce the sales of Online Advertising & Media segment substantially. And Internet Infrastructure segment will have partial but limited impact. There are no impacts on Internet Finance, Cryptoassets and Incubation segments. Also, the impact on profits are limited.

As for the year-on-year comparison, the impacted segments, namely consolidated results, Internet Infrastructure, Online Advertising & Media are compared apple-to-apple using the former standard to show the businesses in real terms. For comparison of the former standard and the new standard, please refer to the appendix. For segments that are not impacted, former standard and new standard are calculated and compared.

Now CEO, Kumagai, will explain.

[Masatoshi Kumagai, executive]

Hello, everyone. I am Masatoshi Kumagai, Group CEO of GMO Internet. Thank you very much for your time today. Let me start.

As our group's fiscal year ends in December, let me share the financial results for January to March period. These are the agenda for today. This is the financial results summary for Q1 of fiscal 2022. Based on the figures from the former standard, net sales was JPY 64.1 billion, operating profit JPY 11.1 billion, ordinary profit, JPY 12 billion and net profit was JPY 6.4 billion. This net profit includes sales of investment securities, renewing its record high. Comparing year-on-year, sales increased, but operating profit declined.

Compared to Cryptoassets, which was booming last year, this quarter was sluggish. However, infrastructure and advertisement and media, both renewed record highs and Internet Finance was also strong with operating profit over JPY 11 billion. I believe we were able to demonstrate the solid revenue base of our group with the financial results.

This is a waterfall chart and analysis of Y-o-Y changes in net sales and operating profits by segment. The left graph shows net sales and the right shows operating profit. The impact of the new accounting standard are also shown. Net sales of infrastructure, advertisement and media and finance grew offsetting a decline in cryptoassets, resulting in net sales of JPY 64.1 billion, an increase of JPY 2.9 billion based on the former standard. From there, the impact of a new standard will reduce net sales by JPY 8 billion to JPY 55.8 billion.

Operating profits fluctuated in the same way as net sales. Based on the former standard base, OP decreased by JPY 1.3 billion to JPY 11.1 billion. There are hardly any impact on the changes in accounting standard and the result is similar based on the new standard. If we compare using the former standard, the result was sales increase and a profit decrease.

Next is the summary of each segment. Signs on the right are my subjective qualitative evaluation. These signs of double circle, a single circle X and triangle are purely my subjective views. Internet Infrastructure is double circle or excellent. We achieved increase in both sales and profit, marking record highs. Quarterly profit exceeded JPY 5 billion for the first time in last quarter in the October to December period. And for the first time, it exceeded JPY 6 billion this quarter. This segment is a collection of #1 services. Also with its strength of stock and transaction business model, each business entered into a profit expansion phase.

Online Advertising & Media is also double circle or excellent. It is still on its way to full v-shaped recovery, but our own media performed strongly, marking increase in sales and profits, renewing its record high, although just by a narrow margin.

Internet Finance is a single circle, meaning good. FX transaction volume increased. The Japanese yen weakened against the U.S. dollar and profitability was x or poor.

On the other hand, CFD, a convenience store of investments is a single circle or good, reflecting the booming commodity market and stock index. The segment enjoyed increase in both sales and profits, thanks to Gaika ex by GMO joining our group. As the segment has an x circle circle, my evaluation of the segment will be a single circle.

Next, Cryptoassets is a triangle or fair. The market environment was an x or bad. Volatility declined mainly in exchange business operated by GMO Coin, reducing the transaction volume for the industry overall. On the other hand, the number of accounts and deposit assets are growing strongly, making the evaluation for internal initiatives, a circle, thus putting them together would be a triangle made up of a circle and an x. Despite the decline in both sales and profits compared to the strong performance in the same quarter last year, we are currently steadily building a structure to generate profits at appropriate timing.

This was the summary of the financial results for Q1, January to March period. And from here on, the details will be explained by Executive Vice President, Yasuda.

[Masashi Yasuda, executive]

Hello. I am Yasuda. I'd like to explain about the overview of financial results and segment reports. This is the quarterly net sales by segment. As the bottom in dark blue shows, growth trend is continuing mainly in infrastructure. This is the quarterly operating profit by segment. Despite the reactionary fall of Cryptoasset segment, Infrastructure Finance, Advertisement & Media were strong, achieving the second highest operating profit over JPY 11 billion.

This is about the shareholder return. Basically, our policy is 50% total payout ratio. Out of this, dividends will account for 33% or more and the remaining 17% will be appropriated to share buyback. This graph shows the trends of dividend per share. We will be announcing the dividend per share per quarter as we will not disclose our financial forecast this fiscal year again. The first quarter dividend will be JPY 19.6, an increase of JPY 2.5 year-on-year.

This is the group overview. Total market cap of 10 listed companies in the group and our equity share are shown. As is described at the bottom, total market cap of the group stands at approximately JPY 1.2 trillion, and our equity share is approximately JPY 400 billion.

This slide shows our 4 major segments. The size of each segment shows sales composition ratio. Our customer base has reached a total of $15.25 million, including a number of infrastructure contracts, number of FX, securities and Cryptoassets accounts.

I'd like to explain about our partners. We call our employees and staff, partners. The number of partners as of the end of March was 7,042. Out of this, the ratio of engineers and creators who possess technical capabilities to create, accounts for 49.3%. As we are a monozukuri company, CEO Kumagai set a target for the first time more than 10 years ago in 2011 at 50%. At the time of the financial results briefing in February 2014, when we first communicated this ratio to you, it stood at 37.1%. Taking 10 years, we are getting close to our target of 50%, thanks partly to the largest white hacker group in Japan, GMO Cybersecurity by Ierae joining our group.

In-house development and in-house operation is our model. We will continue to grow as a monozukuri company. So please look forward to our future.

Next is Internet Infrastructure segment. First, I'd like to explain about the changes in subsegments. In Infrastructure segment, we are changing digital certificate and e-signature business to security business. And the security business -- this brand security business that used to be a part of domain business as well as cybersecurity, which we have entered into on a full-fledged basis in January will be transferred to security business. The P&L consolidation of cybersecurity will be Q2 onwards.

This new security business will be covering 3 domains. The first is cryptosecurity, such as SSL and others utilizing certification technology. The second is cybersecurity offered by the most powerful white hacker group in Japan. And the third is brand security offered by domain and trademark professionals. CEO Kumagai will explain the background of this reclassification and the future strategies about the new security business later.

Next is the Internet Infrastructure segment content. It is a collection of #1 services made up domain, hosting and cloud, e-commerce platform, security, e-signature, newly added cybersecurity, payment and provider. These are all indispensable. Most of services for the ever-expanding Internet and the society playing a key role as Infrastructure, which will never disappear.

This is the quarterly sales trends of Internet Infrastructure by segment and their breakdown based on the former accounting standard. In addition to online being entrenched, leveraging our strength as a collection of #1 services, we have continued to grow, as you can see.

In the Payments segment in light blue, sales of stera Terminal next-generation payment platform launched by GMO Financial Gateway covering face-to-face payment is strong. We have expectations that it will lead to future transaction revenues. Also, security business in green is enjoying recovery to high growth. Again, after the cycling of the impact of the change in exploration period of SSL in hosting and cloud, mainly services for individuals performed strongly marking double-digit growth. And Provider shown in gray, which accounts for a large portion of sales, increased Q-on-Q. Although January to March is a busy period, we are seeing the effect of product review of the mobile lines.

The page shows the quarterly operating income figures. In the previous quarter, the profit reach the JPY 5 billion range for the first time. And in this quarter, the range shifted further to JPY 6 billion, with 33% increase year-over-year, a significant renewal of its best performance. Each business has entered the profit expansion phase, including businesses under investment and development becoming profitable.

The number of infrastructure contracts reached JPY 12.88 million. Among these, e-contract GMO Sign is showing strong growth. Since the group-wide farewell hanko seal campaign launched at the end of June last year, the customer base has continued to expand due to the so-called network effect and the number of accounts reached 580,000 at the end of March, up 3.1x compared to the same period last year, marking it the #1 service in Japan. As you can see, the introduction of the service to major company is also progressing steadily.

Next is the number of contracts. We consider the number of contracts as the most important KPI that indicates the high level of customer activity. As you can see, the number has been growing steadily, and we are aiming to be #1 in Japan in this area as well.

GMO Sign is also strengthening its partnership with local governments to further promote the service. As you can see, 12 local governments and organizations have confirmed the adoption of GMO Sign. We will continue to support business efficiency through GMO Sign for digital government. The page shows the total transaction value of the e-commerce solutions business. It consists of services such as Color me shop and minne, SUZURI, Freenance, e-commerce platforms developed by MAKESHOP.

The transaction value amount is as shown on the bar chart. Approximately 40% of the total amount are settled by GMO Payment Gateway. We believe that a strong synergy between our EC platform and payment business can be confirmed.

Next is the Online Advertising & Media business. The page shows the trend of quarterly sales on a former accounting rule basis and its breakdown in advertising, while affiliate advertising and others performed well, ad network advertising remained weak due to the impact of stricter screening standards since the third quarter of the previous year.

Media, on the other hand, performed well due to an increase in the number of PVs of its own media. GMO Research also trending well, thanks to strong sales of research platform for research firms.

The chart shows the quarterly operating profit trend. As you can see, the recovery trend continues after bottoming out in the year before last, we have achieved a modest but record performance, thanks to the expansion of a high-margin in-house commercial products such as owned media and research platforms. We will continue to invest in strengthening our own products and media.

Next is the Internet finance business. The quarterly trend are shown on the page. Both sales and profits increased due, in part to Gaika ex byGMO joining the group. By product, CFDs performed well on the back of brilliant commodity markets and stock indices. On the other hand, FX remained weak due to increased cover transaction costs despite a year-over-year increase in trading volume.

The chart shows the trend of FX trading volume and domestic market share. Trading volume remained at a high level due to the rapid depreciation of the yen against the U.S. dollar and the rising volatility. In addition to the effect of the new business joining the group in the fourth quarter of the previous year, we will continue to pursue synergies to become the overwhelming #1 while aiming to expand market share and improve profitability. Please keep your eyes on the business.

Next is the Cryptoasset business. The Cryptoasset business has 3 business domains. They are mining, exchange and payment. The slide shows the quarterly trend of net sales and its breakdown. The exchange business has been experiencing a lower volatility and consequent reduction in trading volume since the boom in the first half of the previous year. On the other hand, our customer base in terms of the number of accounts and assets under custody as well as our share of domestic transactions is expanding, and we have created a structure that will enable us to generate solid profits when the time is right.

The mining business also experienced weak performance versus the previous quarter due to a temporary drop in data center utilization rate and external impacts such as Cryptoasset price and global hash rates. The bar chart shows the trend of quarterly operating profit. Although the mining business remained profitable, the decrease in profit in the exchange business resulted in a significant decrease from the same period of the previous year.

Marketing investments in GMO Coin are planned in a restrained manner due to the market environment.

Now I would like to hand back to Kumagai, who will now explain the next strategic initiatives. So that is all for me. Thank you very much.

[Masatoshi Kumagai, executive]

So the next topic is strategic initiatives. I would like to talk about the organization of the security business domain, which we briefly explained in the Infrastructure business part. I will start with the explanation of social issues. As I mentioned in our last briefing, cyber attacks are increasing while our lives are becoming more convenient due to the digital shift.

Now fewer days go by, when you don't hear this word in the news, don't you, ransomware attacks on large corporations, the rise of malware called Emotet, targeted attacks, supply chain attacks, phishing scams, fraudulent use of credit card information, et cetera, are all increasing, just to mention a few. The risks to information security are increasing, just as the government has warned about cybersecurity measures.

Under these circumstances, GMO Internet Group will contribute to the realization of a safe nation and society under the slogan, safe and secure Internet for everyone. In order to meet the need for security, which will accelerate in the future with the development of DX and online services.

Our security business consists of 3 pillars, as you see. The first is cryptographic security such as SSL using authentication technology. The second is cybersecurity by one of the most powerful group in Japan or White Hat Hackers. And the third is brand security by domain trademark professionals. We will discuss the strength of each of these businesses.

Now first is the cryptographic security business. We are deploying a service by making use of our encryption technology on a global scale, centering on electronic authentication and e-contracts. On this trend, our only domestic certification on authority with global operations under the GMO GlobalSign brand. The GMO Internet Group, as a whole, has an undeniable advantage in this field.

By the way, although it is not impossible, creating a certification authority and also up and run it, although it requires a great deal of technical expertise, but it is not, of course, completely impossible. However, the certification authority must be recognized also by the browser companies must go into all the currently popular equipment, devices such as PCs, smartphones and tablets and et cetera. So it is not just certification authority, but you would have to set it up on the browser as well. So having the both, of course, is not impossible. However, this realistically requires a considerable number of years in the order of tens of years, which is what differentiates us and makes us competitive.

Next is the Cybersecurity business. Please allow me to reintroduce GMO cybersecurity by Ierae, which was known as Ierae before. And we made the announcement as a new company joining our group back in January. Ierae is Japan's strongest group of white hat hackers according to filming assumption. The vulnerability assessment performed by white hatter hackers with an attacker's point of view have been used by companies in a wide range of industries and sectors, both in Japan and abroad.

And the CEO, Mr. Makita, is also a white hat hacker himself. And the company is a group of cybersecurity professionals with a strong track record in domestic and international hacking context. In addition to providing the highest quality services, the company is also committed to creating an engineer's paradise, a comfortable work environment for engineers. And as a result, the company was certified as a platinum white company in 2021.

Finally, the Brand Security business. As I mentioned at the beginning, brand protection on the Internet has become essential for companies due to the spread of DX and online, and this trend is expected to accelerate in the future. GMO brand security changed its name from GMO Bright Consulting only yesterday or May 11, 2022. So as a group of trademark and domain and professionals, we will specialize in brands and provide solutions for all types of brand damage. GMO Internet Group, which operates in the 3 areas of cryptographic security, cybersecurity and brand security to make the Internet safer and more secure is striving to become the only listed company group that provides one-stop solutions for security issues. Please look forward to our future development.

So that is all for myself. I have just covered the first quarter results of this fiscal period. Thank you for watching. Internet for everyone.

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