GMO Internet Inc

TSE:9449

Earnings Call Transcript 2018-Q2

[Masashi Yasuda, executive]

Good afternoon. My name is Yasuda. This slide shows today's agenda. I'll present the first half of today's presentation, focusing on performance and the overview of the segment report, after which Kumagai will share about the global operations, Cryptocurrency Business and the GMO Aozora Net Bank.

I'll get started right away. Today, we're announcing the second quarter financial results. Net sales increased by 22.8% to JPY 91.27 billion year-on-year, operating profit by 57.2% to JPY 11.78 billion, ordinary profit by 53.6% to JPY 11.33 billion, and net profit by 116.8% to JPY 4.23 billion.

Net sales operating profit and ordinary profit achieved a record high. This is an analysis of the year-on-year growth in operating profit from April to June. Quarterly operating profit increased by JPY 2.55 billion to JPY 6.51 billion, year-on-year, achieving a record high.

For our Incubation Business, some of GMO venture partners' investees have achieved IPOs and an accompanying stock sale led to increase in operating profit by JPY 1.46 billion.

Operating profit in Internet Infrastructure business increased by JPY 960 million, achieving a record high. Operating profit in our new Cryptocurrency Business increased by JPY 330 million.

Finances FX continues to perform favorably, and the operating profit increased by JPY 250 million.

In Online Advertising & Media, operating profit decreased by JPY 120 million due to the impact of ad fraud issues.

As a result, the operating profit for Q2 was JPY 6.51 billion.

Next is the summary of each segment. Operating profit reached a record high of JPY 2.76 billion due to a 53.7% increase, year-on-year, in Internet Infrastructure.

Each business area grew, including payment, e-commerce, SSL and provider.

Operating profit decreased 66.4% to JPY 60 million, year-on-year, in Online Advertising & Media.

Online advertisement market is affected by ad fraud issues. We will continue to put effort into changing this trend.

Next, profit in the Finance segment increased by 10.7% to JPY 2.6 billion, year-on-year. Finance continues to perform favorably due to improvements in FX profitability.

In the Cryptocurrency segment, the figures turned to positive and the profit was JPY 250 million. While cryptocurrency exchange business incurred a one-off loss in Q1, it built a revenue base steadily in Q2.

Cryptocurrency Mining business was affected by the change in environment such as the increase in the total hash rate and the decline in Bitcoin price.

Kumagai will explain the reasons and the measures later on.

As for dividends, we have adopted a quarterly dividend system, but since we will not disclose our guidance, we will also not disclose our dividend forecast. So we will announce the amount of dividend every quarter.

The company will pay a dividend of JPY 6.20 per share for the second quarter based on consolidated net profit. The payout ratio is 33.1%. That is an increase of JPY 0.20 compared to this time last year.

Next is the summary of second quarter financial results. Shown here are each segment's revenue trends by quarter over the past 5 years.

As you can see, the growth of GMO Internet Group's net sales has accelerated since last year.

Net sales for the second quarter increased by 24.2% to JPY 47.5 billion, year-on-year. As for the operating profit, its growth has accelerated since Q1 last year.

In Q2, operating profit increased as we posted gain by a sale of funds.

Here, you can see an overview of profit and loss. We made a good start in Q1. Q2 saw record-high earnings, and the profits from January to June were better than expected compared to the same period last year.

Next -- the next slide shows the balance sheet. On the one hand, interest-bearing debt increased as one of our listed-group companies, GMO Payment Gateway, issued convertible bonds.

On the other hand, the fixed asset increased due to the investment in data centers for the Cryptocurrency Mining business.

This slide shows the consolidated cash flow for Q1. As mentioned earlier, investing cash flow increased mainly due to the investment in Cryptocurrency Mining business, and financing cash flow increased as interest-bearing debt increased mainly because GMO Payment Gateway issued convertible bonds.

Moving on to the group overview. This slide shows the market cap and equity share of our listed companies.

This diagram shows the GMO Internet's 4 segments. The segment sizes are based on the net sales ratio. Our customer base, which is our solid revenue base, expanded to JPY 10.5 million with growth in infrastructure contracts and customer accounts in FX, securities and cryptocurrencies.

At the end of June, the number of partners totaled 5,670 people. 44.9% of our partners are engineers and creators who have technological strengths. We will continue to invest in human resources to see the ratio of creators to pass 50%.

Next is Internet Infrastructure. This is the business structure of this segment.

As you can see, this segment is comprised of the #1 services. This business structure leads to solid growth in the earnings of Internet Infrastructure segment.

This is net sales and Internet infrastructure and its breakdown. As mentioned earlier, recurring revenue continues to see an upward trend and the net sales increased twofold over the past 3 years.

Revenue and provider services was JPY 6.4 billion, and is, again, growing into core products. Shown here are Internet Infrastructure segment's profit trends by quarter over the past 5 years.

Operating profit achieved a record high, as high margin product such as Payment and SSL performed favorably and provided services recovered. In Internet Infrastructure, the number of contracts came to a total of JPY 9.27 million, reaching a record high. These contracts are the source of recurring revenue.

Infrastructure segment performed favorably due to mainly 2 reasons. One is SSL. Encryption of data transmission by using SSL on payment screens of e-commerce sites have been required in the past. In recent years, the environment in which users can use more secure websites are required and all web pages should use SSL.

For the new Google Chrome, a warning will appear in the address part when the websites are not encrypted. This SSL has lots of advantages for website operators because the website security will be ensured. They will appear at the top of the Google search results, and they will be shown fast. Therefore, the number of registration is increasing.

At GMO Internet Group, GMO Global Fund is operating its own certificate authority and it's selling digital certificates globally.

We will actively promote sales of SSL targeting our domain, server and ASP shopping cart users.

The other is Ginko Pay, a new cashless service provided by GMO Payment Gateway.

Ginko Pay is a smartphone payment service linked with bank accounts. Customers will be able to make a payment instantly by using a smartphone app linked to their bank accounts and to use it to read a QR code displayed on the merchant's tablets or smartphones when shopping.

Yokohama Bank, Japan Post Bank, Resona Bank and other financial institutions are using this service.

We will continue to support financial institutions to expand the availability of cashless payment and offer safe and convenient services to our customers.

This is net sales in Online Advertising & Media and its breakdown.

While in-feed ad kind of grew, certain clients reduced their advertisement budget temporarily due to ad fraud issues. So net sales in this segment increased slightly, year-on-year.

Next is each segment's operating profit. Our current situation was discussed earlier. Online advertisement market is affected by ad fraud issues.

We will continue to put effort into changing this trend by strengthening our in-house products and solving the issues our customers face.

Next is Internet Finance. This slide shows performance trends by quarter. We saw 2-digit growth in the net sales and the profits compared to last year, but they decreased, quarter-on-quarter, due to decreased FX transaction volume.

Profitability is improving through announces of big data despite the impact of decreased FX transaction volume compared to Q1. Strong trends in Internet Finance are maintained.

Shown here are FX trading volume trends by quarter. We've achieved the highest trading volume globally for six connective years. The trading volume declined slightly.

Next is the Incubation business, which contributed significantly to the earnings in Q2. This is because 2 of our investees, [ Roxel ] and Mercari, went public as shown on this slide.

The strengths of our Incubation business are that they follow-up after making investments and the synergies between GMO Internet Group's businesses.

Major IPOs and the major holdings are shown on this slide. We established a new fund called the GMO Global Fintech Fund, which is focused on investing in the Global Fintech space.

GMO Global Fintech Fund will support particular aspects of startups such as business development with Fintech companies, GMO Financial Holdings and Money Forward as our strategic partners.

Not only GMO Internet Group, but also Money Forward made investments when the fund was established, and then Daiwa Securities Group also made investments. And so far we have reached JPY 4 billion.

We're looking for more investments. That concludes my part of the presentation. Kumagai would like to now explain the global operations, Cryptocurrency Business and GMO Aozora Net Bank. Thank you for listening.

[Masatoshi Kumagai, executive]

Good afternoon. GMO Internet Group invests in new businesses to sustain a high growth rate. GMO Internet Group have been and will invest in mainly 2 areas over the next 5 to 10 years. One is overseas. This is because we believe that if we focus only on Japan, which is facing an issue of aging population, the growth rate of the Internet industry will decline over the next 5 to 10 years.

We are accelerating the new businesses through exporting #1 product, such as infrastructure and FX.

The other is Internet Finance. I'd like to explain these 2 areas. GMO Internet Group has already expanded to 63 locations in 23 countries. The number of partners exceeds 5,600, which includes 1,300 global partners.

On this map, dark blue is infrastructure and light blue is finance. We provide FX trading services in London and Hong Kong and online security services in Thailand.

Orange is cryptocurrency. As far our Cryptocurrency Mining business, we set up mining centers in 2 countries in Northern Europe with the Swiss office as the regional headquarter.

Next, the overseas sales ratio increased 130% to 11% year-on-year. For net sales and profit, our target ratio is 50%.

Next for Internet Finance, this year's corporate slogan is a new era of synergies between cryptocurrencies and the new Internet bank and our goal is to see these 2 businesses grow.

I'd like to first explain the cryptocurrency-related services. Cryptocurrency-related businesses can be divided into 3 categories. One is the Cryptocurrency Mining business. Another is the cryptocurrency exchange business. The other is cryptocurrency payment business.

History will decide if cryptocurrency will simply be a method to store an asset, like gold, or use as a currency. Only time will tell.

However, I believe that cryptocurrency is, at least, a method to store an asset. GMO Internet Group strongly believes that cryptocurrency is like gold. If so, Cryptocurrency Mining and exchange businesses will be profitable. That is why we are focusing on these 2 businesses.

It's uncertain whether cryptocurrency will become a currency. We'll invest in this business in the future, but right now, we're watching how it develops.

Cryptocurrency Mining comprises 3 areas, in-house mining, develop, manufacture and sell mining machines, and cloud mining.

GMO Internet rents out part of its mining facilities, secure power supply into machines and to manage the facilities full of mining machines.

People who succeeded the most during the gold rush were not only those mining but also those who sold jeans and shovels, and Levi's was the winner during the gold rush.

[indiscernible] established the current parent organizations through diversified operations, which were based on funding that was raised through mining gold and silver. We'll expand into the business of Cryptocurrency Mining by adopting both Levi's and [indiscernible] strategies to challenge ourselves in new ways.

Next, we launched the Cryptocurrency Business only a year ago. We launched the Cryptocurrency Mining business only 6 months ago but achieved net sales of JPY 2.6 billion in Q2.

We launched Internet Finance business 13 years ago and its net sales were JPY 7.5 billion in Q2. The net sales in Cryptocurrency Mining are equivalent to 1/3 of that in Internet Finance.

We launched Internet infrastructure business 23 years ago, and Internet sales were JPY 25 billion in Q2.

Cryptocurrency Mining business generated 10th of that revenue in just a year. We strongly believe that the Cryptocurrency Business will be profitable. Operating profit in Q3, Q4, Q1 and Q2 were minus JPY 230 million, JPY 530 million, minus JPY 730 million and JPY 250 million, respectively, which was against our expectations.

In conclusion, our cryptocurrency exchange and Cryptocurrency Mining businesses still require some time and tweaking to become profitable.

Next. This slide shows the capital-based relationships in Cryptocurrency Business. For cryptocurrency exchange GMO Coin, GMO Internet holds 28% stake and GMO Financial Holdings, which is the parent company of GMO Click Securities, holds a 58% stake.

For Cryptocurrency Mining, GMO Internet holds 100% stake in GMO's Z.com Switzerland.

Next, GMO Coin's revenue increased 7.3 fold quarter-on-quarter, achieving positive figures in Q2.

In Q1, GMO Coin posted a loss of JPY 760 million, mainly due to the proprietary position and a loss on valuation of our Bitcoin inventory as the cryptocurrency price has declined.

In Q2, we did not take a proprietary position, so the revenue was not affected by price fluctuations, and therefore, the figures turned positive and profit was JPY 550 million.

We are currently focusing on cryptocurrency FX and do not yet have a pure exchange, like Coincheck.

We're planning to launch the exchange on August 15. We will acquire some customers through marketing and improve the profitability of the exchange.

Regarding the advertisement costs, we're spending between JPY 150 million and JPY 200 million every month on customer acquisition, which includes affiliates, and we'll continue spending at this rate throughout the year.

We are not yet planning to launch full-scale marketing, such as TV commercials. We will continue to put effort into sales.

Next, the number of customer account is growing and reached 177,000. We're starting to see progress in the field of cryptocurrency.

GMO Click Securities announced their plan in 2005 and launched its services in 2006.

The number of FX account is currently 720,000. The number of customer account exceeds 1 million, which includes securities. The number of GMO Coin's account reached 177,000 in just a year as we're seeing progress in the field of cryptocurrency.

Next, I'd like to explain the Cryptocurrency Mining business. The net sales increased 91.8% quarter-on-quarter. Our hash rate is increasing as expected.

However, the profit was minus JPY 360 million, which was unexpected. And therefore, we changed our policy. I'll come back to this later.

Next, this bar graph shows our hash rate. Our hash rate continued to grow until June, as disclosed. And the amount of mined bitcoin increased as planned.

However, our hash rate increase flattened out in July due to the change in policy.

Next, I'd like to explain briefly this business' profitability. Mining is conducted every 10 minutes. 144 blocks are generated each day. Revenue from mining is 12.5 bitcoins per block. People worldwide share computer resources on a single blockchain as they mine.

Bitcoins are issued as a reward to the first person who has succeeded in mining. So 12.5 bitcoins times 144 blocks times Bitcoin's market value on the given day equals the miner's revenue.

Our global share of computer resources is equivalent to our chance of succeeding in mining.

Regarding the in-house Bitcoin mining, we definitely have a global market share of 1% according to statistics.

So 12.5 Bitcoins times 144 blocks times 1% times Bitcoin's market value on the given day equals our revenue.

Next, the blue line graph shows global hash rate, which is a computing power.

Orange is Bitcoin price. Profitability depends on global hash rate and Bitcoin price. This profitability is not as high as initially expected.

Next, we changed our policy as the profitability is not as high as initially expected. We will explain the external and internal factors.

There are 2 external factors. One is that Bitcoin price has been declining against our expectations. The other is increasing global hash rate.

We cannot control these 2 factors. Accordingly, we have changed the priority of the 3 areas of business. I'll come back to this later.

Next, there are 3 internal factors. Only the third one is controllable. So we're focusing on this one.

Points 1 and 2 are related to the mining operations in Northern Europe. We launched the operation before we succeeded in developing our own machines. So we used standard mining machines produced by our competitors.

The price of mining machines depends on the Bitcoin price. They're currently sold at around JPY 60,000, but in December last year, the price was around to JPY 260,000. The depreciation cost is slightly higher because of these expensive machines.

Cryptocurrency market changes fast, and the depreciation period of this sort of machines is usually 5 years. But following our discussion with auditors, we decided to make it 2 years.

Therefore, the depreciation cost is high. We cannot control points 1 and 2, so we will focus on point 3. Regarding point 3, the electricity cost in Japan is about JPY 20 per kilowatt-hour depending on the time period in terms of the contract. But this is relatively high. Therefore, we're not planning to operate mining centers in Japan.

We also want to use clean energy at our mining facilities. We do not want to pollute the atmosphere by mining gold, so we want to use clean energy at our mining facilities.

We chose to operate mining centers in Northern Europe to secure clean and inexpensive power supply.

In Northern Europe, the electricity cost is about JPY 5, JPY 6 or JPY 7 per kilowatt-hour. However, there are other areas where the clean energy is available at JPY 1 or JPY 2.

It can be less than JPY 1 in some areas, so we're considering to secure power supply in these areas to minimize costs.

Next, we initially planned to offer our services in the following order of priority: In-house mining, as explained in the previous financial results announcement; cloud mining; and the sales of mining machines.

Our expectation was to achieve a computing power of 3,000 petahash per second by the end of 2017.

I would like to announce that we have, again, revised our expectations. Our top priority now is to sell our mining machines.

If our mining machines are not sold out, we will mine on our own in a region where the electricity cost is JPY 0.01 or JPY 0.02 per kilowatt-hour. If there is a demand, we will offer cloud mining service, and we will adjust the order of priority accordingly.

Our aim is to control the investment amount and early payback.

Next, regarding the sales of mining machines, which is now our top priority. We have completed the design and development and are currently preparing for the launch.

These are the machines. GMO miner B2 was launched on June 6. This is the world's first mining machine equipped with a cutting-edge 7-nanometer process-based semiconductor chip, which we have designed and developed. This is sold out.

We are currently selling GMO miner B3, which is the newer version of GMO miner B2.

Next, we held an information session of GMO miner. On June 6, we held a press conference and information session at Cerulean tower, where we are based, and hundreds of customers gathered.

Afterward, we held the information session in nine locations worldwide, and the last one was held in Moscow on July 30.

Next, this our plan. The product will be shipped in October. We have received lots of inquiries and preorders from customers in 80 countries. For miners, we have received inquiries from more than 1,000 customers.

We're surprised by the customers' reaction. I would like to share my opinion on bitcoin price. This line graph was created based on the quantitative data available on the website blockchain.com. This is the trend and the number of blockchain.com wallet users.

Wallet users are those trying to purchase bitcoin or other cryptocurrencies. They cannot purchase cryptocurrencies without a wallet. The number of blockchain.com wallet users was 26.98 million, as of July 2018, as shown on this slide. I believe that there is still room for growth, considering that the world population is 7 billion.

At blockchain.com, 30,000 people, on average, are creating wallets for cryptocurrencies every day.

You can see that the growth in the number of wallet users is accelerating again.

Last year, Bitcoin price reached JPY 2 million, and the exchanges all over the world, including GMO Coin acquired lots of new customers, but we did not have enough staff to handle the paperwork, such as verifying the identity of the customers, so we had to increase the number of staff.

Afterward, the bitcoin price dropped and the growth in the number of wallet users decelerated.

And now it is accelerating again. This is because the USA's SEC is reviewing the ETF.

They will make a conclusion at the end of September. I'm sure you remember that when gold was adopted, its price soared.

We believe that the number of wallet users is increasing because they expect that the cryptocurrency price will soar and I also believe that the price will be affected by such speculation.

Next is the GMO Aozora Net Bank. GMO Internet Group will invest in mainly 2 areas over the next 5 to 10 years. One is overseas and the other is Internet Finance, as discussed earlier.

We launched GMO Aozora Net Bank on July 17. Aozora Bank holds 85% stake and GMO Internet Group holds about 15% stake in GMO Aozora Net Bank, as shown on this slide.

On either the date on which the GMO group companies obtain necessary authorization from the relevant authority to become a major shareholder of GMO Aozora Net Bank or 5 years from the official launch date of the Internet bank, whichever comes first, the GMO Group companies may convert any class shares acquired to common shares and increase the stake in the net bank to 50%.

Next, the corporate slogan of GMO Aozora Net Bank is aiming to be the #1 technology bank. We will leverage our technological strength and accumulated know-how on financial services. With the technological strength, such as achieving the highest trading volume globally for 6 consecutive years and the management expertise of Aozora Bank Group, the GMO Internet Group will offer new services.

Other banks usually promote their services through TV commercials. At our new bank, we will promote services by gathering engineers in a conference room and hold seminars to explain how to use our API.

We want these engineers to learn how to use our API and to use it in their own applications or web services. This will allow us to acquire customers.

You may think that our net bank is the same as any other net banks or that our services are still lacking, however, our bank is a technology bank, as discussed earlier.

Next, we want our net bank to be a hub, which connects various existing services that have a solid customer base of 10.5 million, which is our strength.

At this new bank, we develop basically all services on our own, as is done at GMO Click Securities.

As a result, we can minimize the cost and increase the speed, so the bank has price competitiveness, and we believe that we can launch various innovative services.

Next, this service is available 24 hours a day, every day. We offer smartphone application and plan to offer high-security debit card next spring.

Our services are made available at the ATMs of Seven Bank and will also be made available at those of AEON Bank next spring.

Next, regarding the breakdown of 10.5 million customers for infrastructure, the number of customers is 9.27 million, including e-commerce merchants such as Satoriz websites where you can purchase beers and whiskeys.

Satoriz is one of the 73,000 paid stores as opposed to [ Zozo ] or [ Roxton ] that offer shopping malls, and it is one of the largest.

73,000 paid source, GMO payment gateways 93,000 merchants, 1.06 million securities and FX accounts and 177,000 cryptocurrency accounts. We want all of these customers to use GMO Aozora Net Bank services.

Next, the concept and vision of the Net Bank include collaboration between banking and securities, integration between e-commerce and virtual accounts, adoption of open API and payment. And for infrastructure, we want our customers to have both business and individual accounts. We believe that GMO Aozora Net Bank will become the hub of all services.

Next, customer first at any time to become the #1 technology bank. We are proud to have this opportunity to create smiles by offering banking services which are the core of financial services. For this effort to be successful, we will continue to work hard.

Thank you for listening. Internet for Everyone.