GMO Internet Inc

TSE:9449

Earnings Call Transcript 2022-Q2

[Unknown Executive]

Good afternoon. Thank you all for joining us in the second quarter financial results presentation of GMO Internet Group for FY 2022 despite your busy schedule.

Let us introduce the presenter for today. Masatoshi Kumagai, Chairman and Group CEO, will only present on the financial result for the full year from now on. And therefore, the presenters for today are: Masashi Yasuda, Director, Executive Vice President and Group CFO; and Noriko Inagaki, Group Executive Officer, General Manager of Group Financial Department. Q&A session is scheduled after the presentation today.

Before we start the presentation, allow us to explain the changes in the rules of accounting. From this year, we have adopted the accounting rule for revenue recognition. The rule for sales recognition has been changed. In this presentation material, pre-changed numbers are indicated as all standard while post-change are shown as new standard idea to the sales and operating profit as shown on this page.

Now, as to the comparison with the prior year, we used the old standard for the affected areas of consolidated results, Internet Infrastructure, Online Advertisement and Media, so to allow the investors to understand the real state of the affairs of the business correctly. The comparison between the old and new standards are shown in the appendix.

As for the least affected divisions, we show the comparative calculations between the old and the new.

Now Yasuda, the Group CFO, will start the presentation.

[Masashi Yasuda, executive]

Good afternoon. I am Yasuda, the Group CFO. Thank you very much for joining us in this presentation session for FY 2022 Second Quarter Financial Results of GMO Internet Group. Our fiscal year ends in December, so the results we announce here today are for April to June of this year. The agenda for today is as shown on the slide.

The page shows the executive summary of our earnings for the second quarter of FY 2022. The blue highlighted column shows the numbers in all standard, with net sales of JPY 77.2 billion, operating profit of JPY 19.8 billion, ordinary profit of JPY 21.3 billion, a JPY 9 billion of net profit. Gain on sales of shares on one of our incubation businesses brought large increases in both sales and profits on a year-over-year basis, resulting in record high quarter.

Here is an analysis of the change in sales and profit by segment compared to the same period last year. On the left is sales, and on the right is operating profit. The effect of the changes in standards are also included.

First, sales were positive in Internet Infrastructure, Online Advertising, Media, Internet Finance and Incubation, absorbing the negative impact of Cryptoassets. Sales increased by JPY 18 billion under the old standard to JPY 77.2 billion. From this point, the impact of the change in standard resulted in JPY 69.4 billion under the new standard.

Next, we look at operating profit. The change in each business segment is the same as adding sales, with an increase of JPY 9.7 billion under the old standard to JPY 19.8 billion. There is almost no impact of the changing standards, with the level remaining the same under the new standard.

Now, let me share a summary of segment performance. Furthest right shows the qualitative assessment comments by the management. Internet Infrastructure was double circle or excellent. Each business is entering a profit expansion phase on the strength of its overwhelming #1 service aggregations and bedrock stock revenue business model, and both sales and income increased while handling the burden of goodwill amortization and strategic investments.

Online Advertisement and Media was double circle or excellent. The reshared recovery trend continues. In addition to the strong performance of our own media, the resumption of economic activity has led to strong growth in advertising agency business, resulting in increased sales and profits. In particular, sales which are usually busiest during the January-March period reached a record high this quarter.

Internet Finance was single circle or good. FX trading volume reached a record high, but profitability was weak due to the one-way depreciation of the yen against the U.S. dollar. On the other hand, CFD performed well due to brisk trading of commodities and stock indices. In addition, a new joiner to the group, Gaika ex byGMO, led to an increase in both revenue and profit.

And Cryptoassets was a triangle or neutral. In the exchange business developed by GMO Coin, the number of accounts and transaction share remained steady, but the market environment was difficult and trading volume remained weak in general due in part to lower volatility. The mining business also continued to experience a decline in operating rates. Although sales and profits declined from the booming year ago period, we are building a system in an unobtrusive manner so that we can generate a solid profit at the appropriate time.

Incubation was double circle or excellent, or even better than excellent. Just to explain the backdrop in brief, the GMO Global Payments fund, a fund specializing in Southeast Asian payments, was established in 2013. There was a partial sales of shares in Coda Payments, a company we worked with as the first investment case, resulting in a profit of over JPY 10 billion.

GMO Venture Partners, an incubation business, managing 6 funds since 2005, totaling about JPY 17 billion. More than JPY 25 billion has already been generated in cash as a return on investment from about JPY 10 billion worth of funds that are in the phase of enjoying the return on investment, and there is an annual rights profit of more than JPY 30 billion. We are also currently offering the #7 fund. Please look forward to this fund as well.

The slide shows the year-to-date results for January to June of 2022. As shown on the slide, from net sales to net profit, the result renewed the record highs.

Next, I would like to explain about the shareholders' return policy. Basic policy is total shareholders' return of 50%, of which the dividend accounts for 33% or more and the rest of 70% also appropriate to shares repurchase.

The slide shows the trend of the dividend. Since we will continue to not disclose earnings forecast for this fiscal year, we will also announce dividends on a quarterly basis. For the second quarter, we will pay a dividend of JPY 28, an increase of JPY 15.8 over the same period last year. In line with the record high net profit, the amount of the quarterly dividend will also be a record high.

Now before I go into the details of our quarterly results, I would like to take this opportunity to talk again about the bedrock stock earnings that support our sustained growth.

Now, here is a chart of consolidated net sales. Since the financial crisis in the loan and credit business in the mid-2000s, we have achieved sustained growth since our founding, as shown in the 13th consecutive fiscal year of revenue growth, so we have been achieving this sustainable growth since the founding of our company. Why could we achieve such sustainable growth? We believe it is because we have built up the so-called bedrock stock earnings business model.

Well then, what is the difference between bedrock stock earnings, a GMO term as a matter of fact, and MEA stock of recurring earnings? So it is the recurring revenue that comes from the continuous billing type products that will never disappear and will be indispensable as long as the Internet continues to exist. This is also the business structure of the GMO Internet Group that Kumagai, the founder, has been striving for since the company's founding.

Many investors may think of GMO as an Internet Infrastructure company. That is certainly true. So why is GMO Internet Group in the Internet Infrastructure business? The first question we asked ourselves was, as I have said earlier, what is the one continuous chargeable product that will never go away, that is indispensable? And the answer to this question was the Internet Infrastructure business, and the earnings generated from this business is what we call bedrock stock revenue.

Now, here shows a breakdown of consolidated net sales into bedrock stock revenue and the rest. The red line represents bedrock stock revenue as a percentage of consolidated net sales. Now, this bedrock stock revenues include those subscription-type revenues in the Internet Infrastructure business and transaction type revenues, which have a bedrock revenue base similar to that of subscription-type revenues. As you can see, sustainable growth is driven by bedrock stock revenues.

And this chart shows bedrock stock revenue divided into the unit price and the number of contracts. As shown, both the unit price and the number of contracts are on an increasing trend, and the current bedrock solid stock revenue of JPY 117.4 billion is generated from annual unit price of about JPY 10,000 multiplied by the numbers of contracts of about JPY 12 billion. And as for the number of contracts, we are currently receiving 10,000 new applications every day. Although the net growth will be a little smaller, we believe it will continue to grow as the volume of information and transactions on the Internet expands.

The resulting image of our consolidated revenue growth going forward is shown here. We expect that the blue-colored bedrock stock revenue will continue to build up steadily as the bedrock rock earnings base or the number of customers expand. We also expect that the other revenues shown in gray will expand, with some projects such as the Incubation business I mentioned at the beginning, although there will be some volatility. We will continue to aim for sustained growth in consolidated earnings with these 2 types of earnings.

And here is the current status of the number of contracts for Internet Infrastructure, which is a solid customer base that supports bedrock stock revenues, which totaled JPY 12.83 million as of the end of June.

Now, this is a bird's eye view of our business areas. The size of the areas indicates the sales composition ratio. The customer base as the bedrock revenue base, which includes the number of FX, securities and crypto asset accounts, in addition to the number of Internet Infrastructure contracts mentioned earlier, total to JPY 15.25 million.

Now Inagaki, Group Executive Officer and General Manager for Group Finance, will give an overview of the group earnings from the following section.

[Noriko Inagaki, executive]

Good afternoon. I am Inagaki of GMO Internet Group. Thank you for your interest in our company. Let me share the overview of the group's financials.

Here are the quarterly sales trends by segment. As Yasuda mentioned earlier, the growth trend is continuing, led by the Internet Infrastructure colored in dark blue at the bottom.

Next is the quarterly operating profit by segment. In addition to strong performance in Internet Infrastructure, Internet Finance and Online Advertising and Media, one-time earnings in Incubation helped the company achieve a significant new record high while offsetting a reactionary decline in Cryptoassets.

The page shows the market cap of the 10 listed group companies and our equity holdings. The total market cap of the group is approximately JPY 1.4 trillion and the equity in the group companies is close to JPY 500 billion.

Now, about our partners, we refer to our employees and staff as partners. At the end of June, we had 7,133 partners. Of these, 48.9% are engineers and creators with technical skills. Because we are a monozukuri company, or a company that creates, Kumagai set the target for the first time in 2011 to have 50% of our partners be engineers. When we disclosed the percentage for the first time at the financial results briefing in February 2014, it was 37.1%. We are now coming close to the target 50%, taking a decade.

In order to adapt to rapidly changing Internet market, we believe it is essential to develop and operate in-house. We will continue to grow as a monozukuri company in the future. Next is Internet Infrastructure. These are the services of the infrastructure business. Domain, Hosting and Cloud, E-commerce platform, Security, E-signature, Cybersecurity, Payment, Internet Service Providers. It is a collection of #1 services. These are all essential services that will never disappear in the Internet society.

This is quarterly sales and the breakdown based on the former accounting standard. With a good business environment such as online consumption becoming commonplace and advancement of DX, we are continuing to grow, leveraging the strength of a collection of #1 services.

Payment business is shown in blue. As METI announced, cashless payment ratio exceeded 30% for the first time, indicating continuing favorable business environment. Especially of note is sustained strong sales of stera terminal, a next-generation payment platform offered by GMO Financial Gate, which covers face-to-face payment area. We expect this to lead to future transaction revenue for us.

In Security business shown in green, the impact of the change in expiration date of SSL certification has ceased and is back on high growth track again. Also, sales starting this quarter includes GMO Cybersecurity by Ierae as well.

This page shows the quarterly operating profit. With businesses and investment and growth stage becoming profitable, each business has entered into a profit expansion phase, making up for amortization of goodwill due to start of consolidation of Ierae and strategic investments, and still achieving double-digit growth. Profit is trending relatively strongly in the first half, and we are planning to make a certain level of investments utilizing this in the second half.

This is an update of E-signature, GMO Sign, where we are continuing to make strategic investments. Even after the group-wide farewell Hanko Seal launched in June 2020 with COVID-19, customer n has continued to expand, thanks to the so-called network effect and the number of accounts as of the end of June grew 3.2 folds year-on-year to 730,000, marking it the #1 in Japan. As you can see, adoption by large enterprises is progressing steadily.

This is the number of e-contracts sent. This is the most important KPI for us since it indicates the level of customer activities. As you can see, the number has been growing steadily, and we are aiming to become #1 in Japan in this area as well.

We are strengthening initiatives to realize digital government to penetrate GMO Sign furthermore. As shown, 18 local governments and organizations have made their decisions to adopt GMO Sign. We will continue to support realization of efficient and effective digital society, with GMO signed for administrative reform DX.

This is the transaction value of e-commerce solutions in total. It consists of e-commerce platforms such as Color Me shop and MakeShop, and services such as minne, SUZURI and Freenance. Despite the reactionary decline of e-commerce merchandise sales for the industry overall from nesting demand triggered by COVID-19, our group performed steadily, centering around high-price range MakeShop. Out of the transaction value, roughly 40% is using GMO Payment Gateway's payment service. Majority of the transaction amount via payment agency services, for example, credit cards, are using our group service, demonstrating strong synergy between e-commerce platforms and payment business.

Next is Online Advertising and Media. This is quarterly sales of the breakdown based on the former accounting standard. January to March is usually the busy period, but we achieved record high sales in this quarter again. Due to the resumption of economic activities, advertisement agency service performed well. Favorable trend is continuing also for affiliate advertisement. Internet media continue to enjoy high level of PVs for own media. GMO Research was also strong, with research platforms for research firms. As a result, grew substantially.

This is quarterly operating profit trend. As you can see, we are continuing with the recovery trend since bottoming out 2 years ago. We are seeing a continuous trend of expansion of high-margin in-house products such as our own media and research platforms. We will continue to make investments to enhance in-house products in own media.

Next is Internet Finance. This is the quarterly performance trend. Both sales and profit increased year-on-year, thanks to contributions from Gaika ex byGMO. FX trading volume increased due to increased volatility of the market. But on the other hand, costs increased due to lower liquidity and covered transaction costs, leading to weaker results Q-on-Q. However, CFD continued to be strong, following Q1 on the back of buoyant commodity markets and stock indices.

This is FX trading volume and domestic market share. With rising market volatility and Gaika ex byGMO joining the group, transaction volume renewed its record high, enabling us to maintain #1 market share in Japan. We will continue to maintain the #1 position while exploring synergies and aim to expand our market share further and improve profitability. Please keep your eyes on the business.

Next is Cryptoassets. Cryptoassets has 3 business domains, mining, Exchange and Payment. This is the quarterly sales and the breakdown. Exchange business sales decreased. This is because the transaction volume of the market overall declined after the boom in the first half of last year. Mining business also continues to be sluggish due to a decline in operating rate of the data center and external impacts such as Cryptoassets prices and global hash rates.

This is the quarterly operating profit. Although Mining business remained profitable, decrease in profits of exchange business resulted in operating loss. On the other hand, in terms of the structure, the number of accounts in our share of transaction volume were strong in Exchange business. We are continuing to make efforts internally to build a structure to be able to capture opportunities to generate profits when the timing comes. We continue to control marketing investments for GMO Coin.

This is all for the status of each business. I'd like to pass on the microphone back to CFO, Yasuda, for the next part, latest updates.

[Masashi Yasuda, executive]

This is Yasuda again. Last of all, I'd like to cover 3 latest topics. First of all, I'd like to update you on the progress of GMO Cybersecurity by Ierae, Japan's most powerful white hat hacker group. We announced their joining of our Group in January. In order to create synergies with Ierae, we are currently focusing on these 4 activities. The first 2 pertain to strengthening cybersecurity within the group. The last 2 are initiatives to develop products and strengthen sales, making use of our synergies.

The first is our initiative to strengthen defensiveness of our group's services. The white hackers are diagnosing the vulnerabilities of our group services. This has already been completed for the high-priority sites within the group.

The second is the white hacker education within the group. In order to heighten awareness about security, we have started to give white hacker training to all partners within the group. We are considering selling this security training program externally in the future.

The third is GMO Cybersecurity for banks. Amidst the surge in cyberattacks, financial Services Agency updated its policy to enhance cybersecurity in financial sector. Against such a backdrop, there are needs to take measures to reduce risks further and strengthen online network. The first stage of our initiative is to introduce Ierae's service, GMO Cybersecurity for banks to our customer base, which has started this April. GMO Payment Gateway and Ierae have been cooperating to perform sales activities, and are receiving strong inquiries.

The fourth is development of SaaS products. We plan to expand the scale of our business by automating vulnerability diagnosis by white hackers and incorporating it on SaaS product. We have just started to promote collaboration with each service. Just please allow us some more time.

Next, I'd like to talk about our initiatives pertaining to Web3. Web3 is a general term for services utilizing blockchain and Cryptoassets, and is now a global trend.

Just to review, in the era of Web1, sender and recipient of information was clearly segregated. Web1 must mainly to look at services such as new sites and websites. In the era of Web2, anybody was able to send that information. It is exactly the situation we are in right now with the penetration of social media. On the other hand, there are concerns pointed out, such as megaplatformers have become too powerful such as by collecting users' personal information.

Now, Web3 is positioned as a service that users themselves can own through tokens. In Web2 era, services were being used based on users' desire to be recognized. However, in Web3 era, if a service is used, tokens will be granted, which means there would be economic incentives linked to using services. Since there are no overwhelming winners like megaplatformers of Web2, young entrepreneurs are starting to launch businesses in Web3 area now.

In the era of Web1 and Web2, GMO Internet Group has been offering platforms to help individuals and corporates communicate information. We have captured this as business opportunity to achieve sustainable growth, as was mentioned at the beginning when I talked about solid recurring revenue.

Then, how is GMO Internet Group going to be engaged in Web3? We believe Internet -- GMO Internet Group is a corporate group that was among the first to take initiatives in Web3 area. Since 2015, we have been engaged in blockchain and Cryptoassets business, and this have the parts necessary in order to start Web3 business, as is shown here. Recently, GMO Web3 Inc. has been established. It is a CVC, a corporate venture capital, which specializes on hands-on support for Web3 ventures.

This diagram shows the issues faced by Web3 inventors using a balance sheet. The right side of the balance sheet shows debt, equity or token financing. On the left side of the balance sheet is business growth. For these issues faced by Web3 ventures, we are going to support their growth by offering products that the group has and make investments in them at the same time. We have Web3 professionals from inside and outside our group at GMO Web3, Inc. as directors and advisers. We have established a structure to be able to capture this major trend. We are taking action every day now to meet many Web3 entrepreneurs. Please keep your eyes on this business.

Last of all, I would like to inform you of the change of the company name. As is shown here, we will be changing the company name from GMO Internet to GMO Internet Group on September 1. Up until today, we have been managing business with speed by diversifying authorities, sharing GMO-ism, including the founding spirit of venture spirit declaration and created group synergies to promote group management. This time, we are adding the word Group in the company name to clarify the center of the group. We will accelerate the group management further and aim to become a corporate group that continues to exist for hundreds of years. There are no changes to market segments or stock ticker number at all.

This is all for today's financial results briefly. Thank you very much for your attention. Internet for everyone.