GMO Internet Inc

TSE:9449

Earnings Call Transcript 2019-Q2

[Masatoshi Kumagai, executive]

This is Kumagai. I would like to commence the GMO Internet Fiscal Year 2019 Second Quarter Results Presentation. Today's agenda is as shown on the slide.

Let me start with the overview. This is the executive summary of the April to June second quarter financial results.

Regarding the consolidated results. Last year, during the same period, VC incubation business sold off shares and marked the highest performance. Due to this, this term had no one-off factors; and therefore, the results were increase in revenue, decrease in profit.

Next is the highlight from April to June. Infrastructure business is doing extremely well, continuously driven by our provider and payment business.

Finance market environment is sluggish, especially with low foreign exchange transaction. Under such circumstances, our initiative on improving profitability through big data analysis has contributed to the highest profit margin.

We faced a challenging start during the January to March period. However, our effort in big data analysis, which is our strength, paid off, and I believe it is fair to say business has resurged.

Cryptocurrency business performed strongly with the rise in Bitcoin price from April. Volatility recovered and trading value increased. Business is doing very strong.

On the other hand, the mining business restored profitability in quarter 2 with the rise of Bitcoin price. However, the reestablishment business is behind our initial plan.

Regardless of the fact that we had an opportunity when the Bitcoin price inflated, we were unable to secure that opportunity of a lifetime. I am personally very disappointed of the mining business result. This financial result was a regretful result.

This slide is the year-on-year analysis. The upper chart is revenue, and the bottom will be the OP by segment.

Allow me to explain from the left, the Infrastructure segment. Infrastructure business achieved significant increase in both revenue and profit. Payment and provider business continues to drive favorable growth of all services. Finance business decreased in both revenue and profit, resulting to a slight negative compared to the favorable market environment of last year. Advertising & Media increased in both revenue and profit. However, profit level remains low. The recovery is not exactly a V-formed recovery.

Cryptocurrency business decreased in revenue and increased in profit. The reason behind the decrease in revenue is, as mentioned earlier, which is due to the decline in BTC mining volume in our mining business.

On the other hand, costs decreased, which helped turn the Cryptocurrency business to surplus. The total segment landed in decrease in revenue and increase in profit.

VC decreased in both revenue and profit. This is due to the selling of shares last year same period. The consolidated result was increase in revenue and decrease in profit.

Next slide is the quarter-on-quarter analysis. Consolidated result is increase in revenue and profit. As you can see, the Finance and Cryptocurrency segment are the main drivers. We experienced a tentative downturn in the beginning of the year due to sudden market change, however, have managed to recover. Cryptocurrency has turned to surplus in both mining and exchange business.

This is the summary of each segment. On the right, the scorecard of each segment is listed. This is my personal qualitative evaluation.

Infrastructure is, as you can see, it is excellent. Advertising & Media. The advertising agency business recovered from prior year, while AD Tech and owned media showed weakness. The results were increase in revenue and profit. However, the profit was very low. And therefore, my evaluation would be poor.

Finance segment is, as you can see, I believe it is doing good. There was a slight decrease in revenue and profit, however. Given the China and U.S. trade war and the market volatility, we have been able to retain at a sufficient level; and therefore, Finance segment I believe is good.

Exchange business I believe was good. On the other hand, mining, as I mentioned earlier, we were not able to secure the opportunity. Therefore, I would evaluate it as poor or very poor.

This slide shows the summary of January to June financial results. As you can see, the results were an increase in revenue and decrease in profit. Profit increased on a quarter-on-quarter basis, influenced significantly by VC of prior year, as mentioned before.

Allow me to explain about our shareholder return policy. The total payout ratio is 50%. Out of this, 33% or more is dividend payout ratio, and the remaining will be appropriated to share buyback. The basic policy remains to be the same. We will not disclose the performance forecast for this term as well. Therefore, dividend forecast also will not be disclosed. The dividend amount will be disclosed every quarter.

The second quarter dividend per share is JPY 6. Dividend payout ratio is 34%. The JPY 3.11 billion of share buyback that was announced for this account settlement has been completed as committed, and all acquired shares have been canceled as disclosed.

Next is the revenue by quarter by segment of the past 6 years. We achieved 3.4% growth in revenue year-on-year. This quarter shows tentative weakness due to VC and decrease in revenue in our mining business.

This slide shows the operating profit by quarter by segment. The variation year-on-year and quarter-on-quarter has already been explained. However, when you take a look at the results in a longer span, you can see that the profit is expanding in the Infrastructure business.

Next slide shows the P&L summary. The asset valuated as 0 last year in the mining business was partially sold and is included in the extraordinary profit and loss item. JPY 870 million of extraordinary profit was booked from this sale.

Next slide is the balance sheet summary. The increase in current assets, current liabilities is due to the customer foundation in the Finance business.

Next is the group overview. Our listed group companies' market capitalization and corresponding equity is as shown in the slide.

This slide shows the 4 business sectors of our business. The sales contribution illustrates the size of each sector. The customer foundation, which is our solid revenue base totaling the number of contracts in Infrastructure, the number of accounts for foreign exchange and securities and cryptocurrency, is now 12.22 million. These figures are the number of active accounts.

Next slide shows the number of our partners. We do not use words that express hierarchical tiers such as employees or subsidiaries. We call our employees partners. The number of partners as of the end of June has exceeded 6,000. Out of this, 45.6% are engineers and creators, who are specialized talent in creation. We will continue to invest on talent towards the target of exceeding the ratio of creators above 50%.

Next is the status of each of the segments. This slide shows the subsegments of the Infrastructure business. Our Infrastructure business will continue to exist as long as Internet continues to exist. It is an inevitable service. So it will be an everlasting service.

As you can see, we are #1 aggregator of service. And the numbers that I would like you to focus on would be the address of Internet or the registries of domains. The market share of this is close to 90%. Every day, all of you use smartphones or your computers to search on Google Japan. When you search Google Japan, 90% would be co.jp.com or .net, .shop or .tokyo domains that we provide. They are website addresses or e-mail addresses that are used online, and 90% of that is provided by GMO.

Another figure that I would like you to focus on would be the SSL security. The other day we released a news release. And for the first time, we have been able to secure a 50% market share in Japan. In a part of the country, the market share goes up to 70% or close to 80%. However, historically, Japan has started from scratch. And in 10 years, we have been able to increase our share up to 50%. And I believe this would be an accomplishment as a group company based upon the synergy of the group companies.

Furthermore, please take a look at the 55% of the provider business in the year from last year. This would be the number of optical network incremental shares. And half of that or more than half of that was from GMO. There are a part of analysts that say that GMO Infrastructure is only growing in the Payment segment. Such false reports are mentioned by the analysts, but that is not true. As you can see, at GMO all infrastructure services are showing tangible growth.

Next page, please. This slide shows the quarterly results of the Infrastructure business and breakdown, as you can see, the figure on the very left and the figure on the very right. The servers are competing in the cloud business with Amazon and Microsoft or the high unit price products are being canceled and switching to low unit price products. We are increasing in volume, but because of the shift to low unit products, there are efforts that are required in growing the revenue in this area. But for other business, as you can see, the figures are going close to double. So please carefully take a look at the figures.

Next page, please. This slide is the operating profit by quarter. We, unfortunately, could not break the highest record. However, with the revenue growth of all services, we have been able to achieve a result of 29.5% growth at JPY 3.58 billion. With such reasons, the Infrastructure segment, personally, I would evaluate it as excellent.

Next slide is a new slide shared from the previous results presentation. It shows the Infrastructure business profit breakdown of payment and nonpayment business by quarter. There are false reports saying that Payment segment is the only segment growing in Infrastructure. However, we would like to share the data to make sure we share the fact. The nonpayment business includes provider, domain, cloud hosting, EC support and security.

Next page, please. The number of infrastructure contracts is not a cumulative figure. It would be active number of contracts, and we have experienced an increase of 380,000 since previous quarter, incremental of roughly 130,000. On a daily average, it would be 10,000. New contracts are 10,000. We have cancellations as well. And so the monthly net number of contracts are 130,000. The number of contracts are increasing every day and demonstrates how promising the business is.

Now Freenance is a fuse of infrastructure and finance service. Currently, GMO Internet Group has 4 core businesses, especially Infrastructure and Finance. This is a business that I have envisioned from 26 years ago. I have been conducting a research on the form of growth of the family-run conglomerates in Japan. Ever since the business was initiated, I had envisioned this based upon the form of growth. An infrastructure that will be everlasting. For railroads, they have extended the railroads, developed the land and they had set amusement parks in the very end and in the very front department stores. They have used the commuting traffic as the base to grow the overall group business.

Mitsubishi, Sumitomo family brand conglomerates also focused on transportation, mining or finance, which are everlasting businesses as well. And we would also like to do the same, where we fuse the infrastructure and finance service. And we would like to achieve high growth with the synergy of these 2 businesses.

One of the products which is still small is the Freenance product. These would be business where we by the accounts receivables bill from the freelancers and unincorporated enterprises and pay on the same day. This improves the funding of users and supports the revenue stability. This targets freelancers and unincorporated enterprises who use our infrastructure service as our customer foundation. It is a factoring service where GMO Payment Gateway will conduct the credit and GMO Aozora Net Bank will use the virtual account as the designation for transfer.

As you can see, the customer touch points multiplied by credit, multiplied by finance function utilizes the strength of each of the groups to create new value.

This is for your reference. Purchased receivables grew 10x from the beginning of the year to July this year even though the basis is small. So not a significant amount, showing high needs of entrepreneurs and freelancers. In going forward, we proactively promote our revenue model of multiplying formula, infrastructure times finance, to offer new values and convenience to realize further growth of the whole group. Please look forward to our future services in our Finance business. This is a short-term outlook in the summary of mid- to long-term strategy of the Internet Infrastructure business. Internet Infrastructure business is integral to Internet business, an aggregate of enduring and #1 services. In short term, we enhance our #1 products even stronger and pursue synergies across our products for continuous growth.

In the mid- to long term, with the start of a banking business in April 17 last year, we transformed to be a corporate group with functions of infrastructure and finance different from others and aim for further growth.

Next, please. Online Advertising & Media. Quarterly trend and the breakdown of Online Advertising & Media segment. The revenue grew by 5.1% year-over-year. Qualitative evaluation is poor. Advertising agency business made some progress with higher budget of existing customers and acquiring new large accounts.

So not a smooth progress, but performed fair. Advertising technology products are now in recovery trend after hitting the bottom of our distribution volume based on more stringent placement criteria.

On the other hand, media continued to face a headwind, down 15.1%. In essence, GAFA owns a hilt of the sword or the bottom of the knife. That's the form of the business. And we need to change it. So we ourselves have to own and use the hilt of the sword. That's how we need to transform ourselves, and each media entities are changing its direction in the course.

Quarterly operating profit trend. Qualitatively, the score is poor.

Next, please. The short-term outlook and the summary of our mid- to long-term strategy of the Online Advertising & Media business. As I said, we have to own the hilt of the sword ourselves to engage in the business, specifically in-house product development and be accepted by many customers.

Next, please. Next on Internet Finance business. This is the trend of a quarterly performance. Trading volume continued to stay somewhat low as in Q1, resulted in decrease in revenue and profit Y-o-Y, but margin improvement measures such as big data analytics and achieved the highest margin. It is on a recovery trend, increasing in revenue and profit on a Q-on-Q basis. Despite the tough market, we decreased the revenue and the profit slightly; but qualitatively, it's fair. And as you know that today's market is fluctuating, and our FX is significantly fluctuating. But we are showing a solid recovery at this conjunction.

The trend of FX trade volume. The volume trended low, impacted by lower volatility, but the share increased to 22.5%. The short-term outlook in summary of mid- to long-term strategy of the Internet Finance business. Please read through.

Next on cryptocurrency business. This is a quarterly performance trend of overall cryptocurrency business. The total segment increased revenue on quarter-on-quarter and restored profitability.

I will explain in each cryptocurrency mining business and exchange business. In terms of scores, exchange business was fair. Mining business was very poor. That is my qualitative evaluation.

First, on mining business. In terms of a top line of unit price times volume, unit price increased driven by the cryptocurrency market, but the mining volume decreased due to lower in-house hash rate impacted by delay in relocation plan of a mining facility. Therefore, scored very poor.

On the other hand, the cost significantly decreased versus last year with the reduction of the power cost, variable cost with lower hash rate; and we earned the -- was lowest electricity cost and eliminated depreciation and amortization, a fixed cost due to impairment loss treatment in the last fiscal year.

However, it has scored very poor. Next, on the Exchange business. Q-on-Q, cryptocurrency market has been getting active again, and we increased trade volume and revenue and restored profitability. GMO Click Securities and FX services differentiated highly unique technology, including big data analytics. With the highly refined technologies, we were able to restore profitability and I expect future growth. In this segment, short-term outlook and the mid- to long-term strategy of the cryptocurrency business. What we need to do is to accelerate the mining facility relocation and installation and refurbishment.

Next on global operations. The group is deployed to 22 countries, 68 locations and 1,430 global partners.

Global sales consist of Infrastructure business, deploying the Z.com brand focusing on Southeast Asia Finance business and mining business. Qualitative score, I give poor score. The fair score is given to Z.com. This month it is expected to deliver a profit as a single month. The partners globally are putting their utmost efforts.

So making some delay -- we are seeing some delay, but they are achieving a solid performance. On the other hand, on mining, as I said, score is very poor. So overall score is poor.

Lastly, on GMO Aozora Net Bank. We are promoting opening of accounts with connected securities account to GMO Click Securities at the same time and achieving a steady growth in number of accounts and balance.

GMO Aozora Net Bank aspires to become a platform bank actively releasing APIs to increase connections for us to engaging in a banking business.

Even though it is an Internet bank, we cannot do the same as others to win the game. We opened the GMO Internet Securities in 2005. That evolved to GMO Click Securities. Many investors and analysts asked a question, why are you going to launch an Internet banking business?

At the time, I didn't want to make a big mouth or referring to a formal jibe or 2 from the [ round ] of conglomerates. But as a latecomer, our playbook was different from others.

Technology as the core, I had a playbook to win to be centralized around the technology-run banking, and we are ranked in #1 in FX for 7 consecutive years. Internet securities trading is at the [ flow ], still more to go. So far, we have made a fair progress.

Banking. It's same as other business. We cannot do the same as others like major banks, city banks or regional banks or SBI and Ericsson, our forerunners. We have to be different. We will be completely a technology bank, a platform bank, and if people use our services without noticing that they are using our services. And what's critical is APIs. Offering APIs and establishing connections. It has to be friendly to engineers. So our APIs are different from other banks' offering.

As a technology manufacturing company, we will keep offering user-friendly APIs to engineers and creators. We will be a best choice for them.

And from now to end of the year, we will be deploying various APIs and services. As a service, using a newly released [ read ] API, we will enrich a new financial service connecting with banking functions and intercompany settlement service to guarantee receivables and form deployed by H.I.S. Impact Finance from H.I.S. group. This is an example of API bank and a platform bank.

GMO Aozora Net Bank performs as a white-label bank offering finance, infrastructure, APIs, meeting needs of engineers and creators of connected entities. This will lead us to a horizon of new financial business.

That is all for GMO Internet Group second quarter financial results. Internet for everyone. Thank you very much for your kind attention.

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