GMO Internet Inc

TSE:9449

Earnings Call Transcript 2020-Q2

[Masatoshi Kumagai, executive]

Good afternoon, ladies and gentlemen. I am Masatoshi Kumagai, Group CEO of GMO Internet. Let me share with you the FY '20 second quarter financial results of GMO Internet Group. The page shows the executive summary of our earnings for the second quarter or April to June of 2020.

Net sales were up. We achieved significant increase in both operating profit and ordinary profit. Please refer to the next page. Just like the previous quarter, I'd like to explain the impact of COVID-19 to our earnings. Internet Infrastructure business enjoyed stock business expansion due to demand increase for our products. Stronger demand was driven by robust trend in e-commerce and payment due to stay-at-home consumption growth as well as promotion of remote works.

Internet Finance business continue to enjoy large transaction volume as well as booming CFD market that drove the business performance strongly. On the other hand, online ad and media were affected negatively by the COVID-19 outbreak that slowed down the market and pushed down the ad unit price. Cryptoassets business experienced delay in building a new mining site caused by the lockdown. In spite of some negative factors, the consolidated earnings posted a positive result. We believe that various Internet services we have been providing over the past 25 years are utilized as an essential service for digitization and promotion of online, supporting digital transformation and new business style of our society.

Now this page summarizes our group's response to COVID-19 outbreak. It has been more than 6 months since 80% of our partners -- we call our employee's partners, by the way, so it has been more than 6 months since 80% of partners started to work from home from January 27. The decision for the major shift was one of the earliest among the Japanese companies, and I am renewing my conviction that it was not a wrong or a bad decision. Being fully aware of our mission to continue offering stable services as infrastructure provider, we will continue to protect the lives of our partners and provide safe working environment by cautiously watching over the development of the spread of the virus.

We started a program to share the cost cut benefit with partners, thanks to reduction in utilities and other costs by work from home. To enhance internal communication, we are trying different ways such as providing support for online drinking sessions by partners. As part of the new business style, we made a statement to completely abolish usage of our hanko seal. We are offering our electronic seal service agree to anyone who wishes to make use of the service at free-of-charge until the approval of vaccine for COVID-19 here in Japan. We aspire to continue to make positive contribution to our society by providing indispensable services as comprehensive Internet business group.

Now Masashi Yasuda, our group CFO, will explain the overview of the earnings for this quarter from the next page.

[Masashi Yasuda, executive]

Good afternoon. I am Yasuda. Thank you for your interest in our business performance. Let me begin by sharing a summary of segment performance shown on the slide. Circles, triangle and the cross mark on the right-hand side indicate the overall assessment of the segment. Internet Infrastructure was double circle or excellent. Positive impact from COVID-19 update became more obvious from the second quarter. Expansion of stay-at-home consumption boosted e-commerce, payment and provider business, allowing the earnings to renew its record high.

On the other hand, online ad and media was a cross mark of bad, affected by the pandemic. Some advertisers reduced their marketing budget and with a decline in ad unit price, we generated operating loss in the segment. Internet Finance was double circle or excellent. Continuing from the first quarter, transaction volume remained high. CFD recorded significant increase and contributed to the earnings renewing its record high.

Now our FX market share ranking in Japan was second in the first quarter, but we went back to the first this quarter. Cryptoassets was triangle or neutral. Both Mining business and Exchange business of GMO Coins were affected by the market and resulted in a slow down. However, we started to foresee positive turnaround of Mining business with its reconstruction expected to conclude in the fourth quarter.

The slide shows a bridge out to analyze the ups and downs of the net sales and operating profit of business segments. The chart at the top shows the net sales and the bottom, the operating profit. Internet Infrastructure, both net sales and operating profit, were up. Continued expansion of the client base and the growth of stay-at-home consumption were the tailwind. Internet Finance, both net sales and operating profit increase. CFD function to be a strong driver by increasing the net sales by more than JPY 1.8 billion. Online ad and media, both net sales and operating profit were down, affected negatively by COVID-19 outbreak.

Cryptoassets, both net sales and operating profit were down due to the delay in the site transfer and [ hashing ] event. Exchange business was affected negatively by a temporary deterioration of cover trade profitability. Other businesses experienced decline in branding cost. On the consolidated basis, net income was up by JPY 3.6 billion, while operating profit was up by JPY 2.18 billion.

The slide shows the year-to-date results for January to June of 2020. As shown on the slide, net sales, operating profit and ordinary income renewed their record highs in the first half of FY '20. However, there were special factors that pushed down the net profit by about 6% in the second quarter. The special factors were effective tax rate for consolidated earnings and minority interest.

Going forward, we expect the special factors to be settled, loss at overseas subsidiary subject to consolidated taxation to be reduced and by making the consolidation taxation applicable to new business investment. We strive to further improve the bottom line.

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%, of which the dividend accounts for 33% or more, and the rest of 17% or so appropriated to shares repurchased. The middle part of the slide shows dividend per share by quarter. We will not disclose our forecast for the full year earnings. No dividend again this time. So please allow us to share them by quarter.

Dividend per share for the second quarter is up by JPY 0.2 year-on-year at JPY 6.2. 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 15 billion, JPY 9.34 billion worth of repurchase has been completed as at the end of June.

Let me continue in providing further details of the financial results. The slide shows the quarterly trend of net sales by segment. The bar chart depicts continued growth of our businesses, led by Internet infrastructure shown in dark blue color. This page shows the quarterly trend of operating profit by segment, a strong growing trend led by Internet Infrastructure, dark blue; and Internet Finance, pale blue, can be confirmed through the chart.

Now the overview of the group. I would first like to report the change in the trade name of GMO Cloud that offers cloud and SSL securities in our group. From September 1, the trade name will be changed to GMO GlobalSign Holdings. By leveraging the brand equity of GlobalSign, the world's leading certification authority that is well recognized by, not just Japan, but globally, we aspire to further raise the brand awareness to enhance the corporate value.

The next we would like to report to you that on July 15, GMO Financial Gate was listed on the TSE [ models. ] This marked the 10th listed company in the group. GMO Financial Gate offer offline payment service or cashless payment service for brick-and-mortar stores. The company was founded in 1999 with the aim to become #1 cashless platformer and joined the group of GMO Payment Gateway in 2010. The terminal you see on the slide is stera, the next-generation payment platform deployed with Sumitomo Mitsui Card and Visa.

You will also recognize the terminal in the current commercial film of Visa. It accommodates a full range of electronic payments, including credit card, e-money, QR code and contactless payment, and thereby offering a one-stop payment solution for brick-and-mortar stores. At GMO, GMO Payment Gateway deals with online payment, whereas GMO Financial Gate deals with off-line payment that requires physical terminals. With the backdrop of complex Japanese payment market, we now operate both the infrastructure function as well as the payment center function together as one, so to cater to the one-stop requirement of businesses that operate both online and off-line stores.

The market is expected to grow further by promotion of new lifestyle due to COVID-19 as well as the revitalization of cashless market. Please look forward to the future development of these businesses. The table on this slide shows names of all 10 listed group companies, including GMO Financial Gate, with their market capitalization and their equity share. The bottom line shows the group total market cap, which is around JPY 1.5 trillion, and the group total for equity shares which exceeded JPY 500 billion.

The page provides you with a bird's eye view of 4 business segments. The size of area occupied by the segments expresses net sales breakdown percentage, number of contracts of Internet infrastructure, FX securities and cryptoassets reached 13.21 million, a solid client base.

Let me now explain about our partners, our employees and staff members. Number of partners at the end of June was 5,958, of which 40.9% are engineers and creators, those who have skills to create and manufacture. We plan to continue investing in human resources with the aim to achieve more than 50% for the breakdown. The number shows a slight decline from the first quarter. Overseas payment subsidiary made nonconsolidated was a major reason for the decline.

Now we held an online event called Developers Day at the end of July. The event was a tech conference to share our technology and other undertakings for service development. Although it was the first attempt, it attracted about 1,200 participants. And through various topics, including fintech, 5G, AI, data science and new work style for engineers is served as a forum for technological exchanges by engineers throughout Japan.

As already announced, the building of local 5G experimental lab is underway. We would very much like to contribute to the enhancement of technological capabilities of engineers in Japan by providing an opportunity like this for exchange of information.

Next is the Internet Infrastructure business. The slide shows the overview of product and services of Internet Infrastructure segment, domain cloud hosting, ASP cloud, SSL securities payment provider. The segment is a collection of #1 services in each of the markets. Each and every service is considered to be indispensable for Internet and believe to be sustainable.

This is the quarterly sales of Infrastructure business and its breakdown. As you can see, the segment overall enjoyed increase in sales by 18.1% and continued to renew its record high. The second quarter performed exceptionally well since there was an expansion in stay-at-home consumption and teleworking demand. Provider increased 24.9%, e-commerce solutions increased 30.9% and payment increased 18%. The growth of the Payment business sales was 18%, including the impact of overseas subsidiary deconsolidation. Excluding that impact, the growth rate of the continuing business was around 30%. It will be a repetition every time, but continuous growth of the Infrastructure business is due to the combination of recurring-type and transactional-type earnings model and ever-expanding customer base, which forms a solid revenue base.

We are able to realize this powerful growth because we have been able to achieve an aggregate of #1 services. This is the quarterly operating profit trend. There was a very big profit growth contribution from e-commerce solutions and payment, renewing the record high profit at JPY 4.67 billion in a single quarter.

This slide shows the Infrastructure business profit. Dividing them into payment business, nonpayment business and the cost distribution. You can see that they are growing in a well-balanced manner. The number of infrastructure contracts reached 11.56 million and the customer base is continuing to expand.

Next is about GMO electronic seal, Agree, offered by GMO Cloud. With the recent trend of promoting remote work due to COVID-19, there is increasing needs for sealless contracts, and our group declared a statement to eliminate the use of seals on April 15. This diagram is a matrix of electronic contracts and its legal binding force. By offering electronic certificates issued by electronic authentication authority operated by GlobalSign, our group company, and by offering time stamp function, we are ensuring the reliability of electronic contracts that are tamper-free. We have the top share in Japan for electronic signature-type electronic contract service, which has the highest level legal binding force on par with registered seals.

Digital transformation is accelerating in the society, such as government recommendation to utilize electronic signature and shifting out to online administrative procedures. We are going to promote more convenient and safer platform for electronic contracts between companies also. This slide shows the number of contracted accounts for GMO electronic seal, Agree. The group has launched sayonara seal campaign from the end of June, enabling many users to experience eliminating the use of seals, taking this opportunity for free of charge for up to 2 years.

Thanks to the campaign, the number of accounts increased to 8,864, a year-on-year increase by around 230%. The group will continue to promote the penetration and development of electronic contracts utilizing our strength of offering electronic authentication authority service.

Next is Advertising & Media business. This is the quarterly sales trend and the breakdown of Advertising & Media business. Sales decreased by 7.2% year-on-year. Advertisement in light blue at the very bottom decreased by 3.3% to JPY 7.7 billion. With an increase in users' time spent on the Internet, distribution volume increased contributing to strong performance of ad tech products.

On the other hand, for ad agency, there was a significant marketing budget reduction of some advertisers impacted by COVID-19, and we could not offset this decrease by other well-performing departments and less-impacted sectors and the marked -- and marked a decrease year-on-year. Blue above this is Media, which decreased by 18.1% to JPY 2.2 billion, with an increase in time spent on the Internet, the number of PVs to our site increased, but advertisement unit price continued to decrease from the previous quarter, which is a quarterly operating profit trend.

AD Tech products enjoyed increase in sales, but purchase price for advertisement slots increased and the profit contribution was limited. And also with the decline in sales for ad agency and media, operating profit decreased by JPY 140 million year-on-year to negative JPY 50 million.

Next is the Finance business. This is the historical performance by quarter. Continuing on from the last quarter, OTC derivative trades, including FX and CFD, performed strongly due to increased market volatility, achieving record-high operating profit of JPY 3.81 billion. This slide shows the FX trading volume and our domestic market share. Trading volume continued to remain high. Our FX market share in the first quarter was the second, but now we are back to #1 share by reducing the spread and others.

Before talking about Cryptoassets, I would like to show you this slide about our efforts in Finance, Payment and Cryptoassets. Let me start with the Cryptoassets business. This is a quarterly performance of Cryptoassets in total. Both revenue and profit decreased year-on-year and Q -- quarter-on-quarter for the whole segment.

I would like to take you through the Mining business and Trading business, respectively. This is the Mining business. Sales decreased slightly Q-on-Q and the loss increased. Operation at the new location started from the beginning of June, gradually, and we were operating both the old and the new sites at the same time in the second quarter and as a result of operation at 2 sites, our hash rate started to increase. However, in the middle of May, we reached half-life and the mining profitability went down and bitcoin mining decreased.

This is our hash rate and bitcoin mining volume. The blue line is the hash rate at the end of the month. The yellow line is the average of the month. We also have a bar graph showing reference revenue, which is a multiplication of the end-of-the-month rate and the mining volume. Because the new site has started operating gradually from the beginning of June, there is a gap between the numbers at the end of the month and the average during the month. The old site has been closed at the end of June. And with this, the mining reconstruction has been completed. This means that from July onwards, we will only have the new center operating with low electricity costs, and we expect to turn profitable from the third quarter onwards.

This is inside the new mining center. The building is 300 meters long. Many mining machines are placed on the rack. This is the mining center from outside. It took longer than we had expected till the completion of the reconstruction, but we would like to steadily recover the cash from here on. This is Cryptoassets Trading business. There was a decline in both revenue and profit Q-on-Q and Y-on-Y and we posted a loss. GMO Coin was profitable, but our Thai entity had posted cost to prepare for its opening. Currently, GMO Coin is facing a challenge to improve profitability due to increasing cover trade cost, but we will continue to do tuning, utilizing our FX and other know-how.

Next is GMO Aozora Net Bank. This July, 2 years have passed since the launch of this business in 2018. Based on the concept of a platform bank that we have upheld from the launch of this business, we have been steadily accumulating the number of contracts. First, let me start with API connections. The number of bank API contracts increased by 13 to 48 companies from the last quarter. In June, JTB adopted it in their corporate version of hometown tax program. Utilizing our strength of API lineup and ease of connectivity, we will continue to aim to become #1 in number of bank API connections.

We have also started to introduce initiatives to improve user convenience to various corporate accounts. I would like to introduce 2 such cases. First is advanced salary service. By combining infrastructure and finance, we launched GMO advanced salary at our group company in GMO Commerce. Salary can be received before pay day and the company can pay in advance without any financing impacts.

The second case is GMO Aozora prime, which was launched on August 9. This is the first bank transfer fee subscription model by a Japanese bank. With a monthly fixed fee of JPY 1,980, bank transfers to other banks can be made at JPY 180 per transaction without any limits. About 70% of our corporate accounts transactions are money transfers of JPY 30,000 or more to other banks. We designed this service so that the bank transfer fee can be reduced from the current JPY 261 to JPY 180 in the subscription model without any limit.

In general, payment methods between companies are bank transfers. This is very first service by a Japanese bank to reduce the cost for companies that make many bank transfers. We would like to fulfill various needs of customers by providing new format of banking service, expanding ways to improve convenience for customers. This is all for me. And last of all, Mr. Kumagai will give an outlook.

[Masatoshi Kumagai, executive]

And last of all, I would like to give an overview of the future outlook. The pressure put on the society to evolve triggered by novel coronavirus is not all negative, but there are some positives as well. I feel that people started to recognize this in this quarter. For example, remote work is contributing to reduction in number of traffic accidents and traffic jams. At the same time, it is improving the lives of people such as less environmental pollution.

I feel confident that DX in society will evaluate even more and at least until the end of next year, I think it will continue to accelerate because of the pressure to evolve, triggered by coronavirus. With this as an assumption, I would like to explain the outlook by segment.

Updates from the first quarter are shown in blue letters and red letters. First, starting with Infrastructure business. To prepare for additional shift in all industries, utilizing our strength as a comprehensive Internet group, we will be working on creating new value. To be specific, we are taking on new challenges, including GMO electronic seal, Agree, IoT device dedicated domain .gmo, local 5G initiatives.

In Finance, it is difficult to forecast the market. But we will focus on developing our own products to improve profitability further and aim to become overwhelming #1. For Cryptoassets business, rebuilding of mining has been completed, as you have seen earlier. We expect to see profitability improvements going forward, and thus, steadily continue to recover our investments. The stable coin GYEN is expected to receive approval soon. We will update you once the launch is fixed. Please watch the progress.

This was the overview of our group's financial results for the second quarter. We renewed our awareness about the significant social responsibility we have as an infrastructure business that supports the Internet under COVID-19 environment. We will strive to fight this long-expected battle against novel coronavirus, combining the power of 6,000 employees in 102 group companies providing support with the Internet, which we have 25 continuous years of experience in. GMO Internet group will continue to evolve. Thank you very much for your attention. Internet for everyone.