GMO Internet Inc

TSE:9449

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for joining us for GMO Internet Group's Second Quarter Earnings Call. This financial briefing is delivered from the GMO Internet tower in yoga, Setagaya. We are at the top floor of the building at the newly established GMO Global Studio. Let us present to you our speakers, we have our EVP and Group CFO, Masashi Yasuda, Group Executive Officer and General Manager of the Financial Department, Noriko Inagaki. Following the financial results, we will open the floor for questions and answers. Presentation materials can be found on our company website. At the end of the session, you will find a link to a questionnaire survey kindly help us in filling up the form.

Thank you for your collaboration in advance. Now we will have our EVP, Yasuda to start off the presentation.

[Masashi Yasuda, executive]

Hello, everyone. I am Yasuda, CFO. Thank you for joining us in the second quarter financial briefing for FY '23 ending December. Today, we are delivering this from our GMO Global Studio, which has newly opened in GMO Internet Tower located in Yoga, Setagaya. This studio has been designed to further expand our business. At this GMO Global studio, we use an LED panel and have implemented 3D CG and VFX technology. It is one of the cutting-edge studios in Japan. There are 2 differentiating factors which make our studio unique. First, it allows people to come and join us face to face. It is a participatory venue, and we can create a sense of unity with our audience.

Second, the studio [boast] a 10-meter high ceiling, which allows us to use 3D CG and VFX to come up with an overwhelming video. You can organize hybrid [indiscernible] events, have various corporate conferences, company events. You can have shooting for YouTubers and Tiktok creators and even do streamlining to the world. Starting April next year, the studio will be open to public. We are now currently preparing for that. So we hope you take the opportunity to use it in the future. Let's move on to the financial performance. Since December is our financial closing, we will cover our April to June performance today.

This will be the agenda for the session Here's the executive summary. As you see the numbers on the slide, our sales and profits decreased year-on-year. there are 2 major reasons. One is that last year, we sold off our shares in the incubation business and made over JPY 10 billion gain. Second, this year, extraordinary factors have been pulling down the numbers, which will be explained later on. Net profit has dropped drastically, but this is due to last year's sales of equity method company shares. Here's the summary for each segment. On the right side, we have the management's qualitative evaluation for the first and second quarters. Infrastructure ended with not a double but a single circle.

We expanded the collection of #1 services and hit a record high quarterly net sales. Off-line payments drove the sales, just like you did in the first quarter. On the other hand, for profit, the FREENANCE business under GMO Pepabo recognized overdue receivables with JPY 1 billion provision for bad debts, thus year-on-year growth stayed in single digit. But the business momentum is pretty strong. Well, yet we have kept the segment evaluation not at double circles, but to a single circle due to these matters being explained just now. Online ad and media is Triangle, both net sales and operating profit dipped.

Own Media was strong, but some of the out sectors showed a reactionary decline. Profit-wise, expenses increased since we have been increasing our headcount. Internet Finance has a circle evaluation. We ended with increased sales and profit. Net sales were second best to our first quarter record high. FX is evaluated with the circle. Our profitability measures taken from last year's fourth quarter have shown a good impact. CFD is circle too. Since commodity was strong last year. It dipped year-on-year but has been steady, driving growth following FX Overseas business ended with a cross or an X, Thai Securities ended with JPY 0.9 billion additional provision for bad debts.

We will enhance our risk management measures, take actions for litigation, confiscation of collateral and assets to recover the loss. Crypto assets come with a triangle. Sales dropped, and we incurred a loss. GMO Coin's exchange business is steadily growing the number of accounts. Market environment shows an increase of the Bitcoin prices, but transactions are still stagnant and the entire industry is slow. Mining business continues to operate at a low rate. Despite these situations, we still believe that the crypto assets market has potential. We continue to build a robust structure to generate profit when the best time comes. Incubation is as stated here. Last year, we partially divested the Coda payments equity and generated over JPY 10 billion of profit.

Here, we have the net sales and profit waterfall chart by segment. Left side shows net sales, right side shows the operating profit. Infrastructure and finance saw an increase in both sales and profits, due to extraordinary factors and drop in the VC, on a consolidated basis, we ended with JPY 5 billion down with sales and JPY 10.1 billion down with operating profit. Let me explain about the extraordinary factors for the second quarter. Starting from the outline. GMO Pepabo's group company rolls out the factoring services, freelance. We also have GMO Financial Holdings credit transaction business carried out by our group company in Thailand.

Large account customers in these 2 businesses ended with nonperforming loans, which led us to recognize provisions as stated on this slide. So why does this happen? We believe it is essentially due to the group's governance issue. Whilst the group continues to grow bigger, we were not able to keep sufficient governance. Of course, we will have each of the group companies to identify issues and take count measures. But from the group management perspective, we will take preventive measures to deal with these governance issues. As part of the met countermeasures, first, we have our ethos, which is like our company's so-called Mission, which is the GMO vision. We will thoroughly implement this. Second, we will strengthen our group management functions under the entire holding group.

And the Business Risk Committee will be established to assess and verify various business risks in a proactive manner. For GMO Pepabo and GMO Financial Holdings, please refer to the slide along with the presentation documents of each company. This slide shows our June year-to-date figures. As you can see here, year-on-year, we ended with higher net sales, lower profit. Major factors are same as earlier, backlash from the previous year's profit from the incubation business and the current fiscal year's extraordinary factors pulling down the numbers. Now about the shareholder return, our basic policy is to maintain a total shareholder return ratio of 50%. We break down, we'll be over 33% of dividend payout and 17% of share buyback and cancellation.

This shows the trend of dividend per share. We keep our dividend forecast and disclose this term, too. Thus dividend payout will be announced every quarter. Dividend for the first quarter is JPY 7.5. Before we deep dive into the details, let me explain about our share buyback. And our plan is to exercise a share acquisition of JPY 1.51 billion. And so far, it is on track. Now let me explain about our group's strengths. We have 2 key strengths. First is we stick to operations and development of our own technology. for us to survive in a rapidly changing market of Internet and for us still for the number on #1 services, we have to be able to create and operate things on our own. For us to achieve that our engineers, creators and directors will be essential. As of end of June, we had over 7,300 partners.

Among them, 49.9% are our talent involved in creating our own technology. We first set forth this creator ratio target in 2011. At the time, our target was 50%. We first disclosed this indicator to our investors in February 2014, which then was only 37.1%. Now that we have started to see confidence in hitting 50%, we stretched our target to 60% in February 2023. We need a refined sensibility in the world of Internet. We will add more creators on board so that people will recognize GMO for UI, UX and creativity. This April, 58 new graduate partners joined us. They are the first batch under the JPY 7.1 million annual salary and region's top hiring program in which we intend to hire only those top talent.

Together with our rookies, we continue to underpin Japan's internet industry. Our second strength is to have solid recurring revenues. This is a GMO terminology and our revenue model. The fact that we have been able to achieve growing sales and profits for 14 terms in a row is thanks to this solid recurring revenues. As long as Internet exists, our services will be ongoing and indispensable. That is why we benefit from this recurring business. This shows our consolidated sales trend. It is obvious that we have always shown a sustainable growth. This is a breakdown of our solid recurring revenues and other revenues. The red line shows the ratio of the solid recurring revenues against the consolidated sales.

The solid recurring revenues include our recurring sales from the infrastructure business and the transaction-based revenues that are similar to the recurring model. It is obvious that this drives our sustainable growth. Here, we split the solid recurring revenue into unit price and number of contracts. Both unit price and number of contracts continue to grow. The current JPY 130.1 billion revenue is generated from an annual unit price of roughly JPY 10,000, multiplied by approximately 13 million contracts. Even today, we get around 10,000 new contracts every day. Net growth is slightly smaller when including the churn rate.

But the more the Internet data and transaction increase, the bigger our business will become. This shows the Internet infrastructure business contracts. This is, in fact, the foundation of for solid recurring revenues. As of the end of June, we had 14.17 million customers. Due to product mix, the growth speed is not constant, but more or less, we have been adding around 810,000 contracts every year. Since the unit price increases, too, multiplying JPY 10,000 plus of unit price will add up to around JPY 10 billion net sales each year. I hope you look forward to it. Let me now hand it over to our Group Executive Officer and General Manager of the Financial Department Inagaki.

[Noriko Inagaki, executive]

Hello. My name is Inagaki, GMO Internet Group's Executive Officer and General Manager of the Financial Department. Let me touch on our group's and segment business overview. This is an overview of our business domains. The size of the areas show our net sales scale. As my colleague, Yasuda explained, we have 14.17 million customers for our infrastructure business, the core for a solid recurring business and customer base for FX securities, crypto assets at up to $16.71 million. This shows the total market cap in equity share of the 10 listed companies under our group. The group's total market cap is over JPY 1.3 trillion. Equity shares have exceeded JPY 400 billion. This shows the quarterly net sales trend by segment.

We changed the rules to post our net sales last fiscal year. But still, you can see that our growth trend continues as represented by the infrastructure business in Dark Blue. This shows the quarterly operating profit trend by segment. With the infrastructure solid recurring businesses as the foundation, we maintain a sustainable growth from the highly profitable finance business. Next is about infrastructure. Let me talk about our Internet infrastructure business, domain, hosting and cloud, e-commerce platform, SSL security, e-signature, cybersecurity, payment provider. These are a collection of ever-lasting and indispensable #1 services.

This shows the quarterly net sales trend in breakdown. We continue to renew our record high, and we have seen a 16% up of revenue year-on-year. The pale blue color payment business has driven the growth. GMO financial gate off-line payment has been strong. Following the first quarter, our large account contributed a lot, and our plans for long [tail] made a good fit with the cash listees and grew steadily. This is the quarterly operating profit trend. Due to the provisions for bad debt in our FREENANCE business, our growth rate remained in single digit. As part of our strategic business, we have the crypto security business, GMO sign. Let me give you some updates here.

Both in the number of e-contract accounts and number of contracts we have been the top. Starting with the number of e-contract accounts. In May 2020, following the outbreak of COVID, we launched the [indiscernible] campaign. Even after that, thanks to the network impact in the group synergy, we continue to grow our customer base as of end of June, it reached 1.46 million. As the Legos here show, we have a number of large accounts, but we still think the market is in an expansion phase. Some customers switched over from our competitors after evaluating our cost advantage. This shows the number of contracts. We believe that this is the most important KPI to show how active our customers are.

Customers with high activities like those in the real estate industry have been growing and leading us to benefit from sales growth. At GMO signed, we are enhancing our initiatives for a digital government. Our target is to be the top vendor for local governments. And so far, 60 local governments have decided to implement their services. Together with the number of e-contract accounts and contracts, we aim to be the top in this category for further growth. This shows the e-commerce solutions transaction volume. EC platforms, including [indiscernible] shop, MakeShop along with [indiscernible], FREENANCE compose these businesses. E-commerce sales of goods have been -- have seen a backlash from the stay home consumption and the entire industry is a bit slow.

Although our high-range platform the MakeShop grew steadily, overall business ended weak. Yet the entire transaction volume of the e-commerce market has become bigger compared to the pre-COVID tiimes. So we expect more growth in the midterm perspective here. Along the transaction volume, roughly 40% of the payment has been settled through GMO payment gateway. We believe there is a strong synergy created between the EC platform and payment. As for FREENANCE, we will rebuild our business strategy, as mentioned earlier. This is about the price increase and its impact, at the GMO Internet Group to offer the #1 services in all levels of specification and price range has been our motto.

Yet due to the recent hikes in electricity charges, weakening yen and the global semi-supply shortage, we no longer can absorb these through cost reduction. That is why we have been going for a price up as shown here. adjustment fees for maintaining services will not be increased constantly. It is like a surcharge and will be reviewed in line with the market trend. The price up hasn't affected our customer retention nor new customer acquisitions so far. Impact to our business performance is likewise small, thanks to the annual contracts we have. Even after renewal of contracts, both the net sales and costs will be leveled over a period. So we believe that the impact to our performance will be minor.

Next is Online Advertising & Media. This is quarterly sales and its breakdown. Internet media in dark blue performed strongly, reflecting an increase in number of TVs of our own media. However, online advertising in [pale] blue was weak because of a decline in some of the industries compared to the boom last year and unit price fall of ad network advertisement. This is quarterly operating profit. Just like the sales, our own media performed strongly, but on top of the termination of incentives at ad agencies and upfront costs due to head count increase, profits decreased year-on-year. Next is Internet Finance. This is the quarterly performance trend.

In this quarter, FX transactions continued to perform strongly and as profitability is continuing to improve due to enhancement of internal initiatives. Sales were the second highest following Q1, which marked a record high. On the other hand, when looking at profits, since Q4 last fiscal year, there has been provisioning of allowance for bad debt and securities business in Thailand. In this quarter, we posted circa JPY 900 million. However, we achieved 28.9% increase in profits year-on-year. This is net sales by product, FX in dark blue increased sales, thanks to profitability improvement. CFD in light blue decreased in transaction volume quarter-on-quarter as commodity trading was risked last quarter, but it has grown to be a major product.

We will continue to offer derivatives, which is our strength at each company and make efforts to proactively cross-sell. This is a graph showing FX net sales and trading volumes. Compared to the phase last year, when transaction volume kept on increasing with weakening yen, transaction volume decreased this quarter. However, sales increased due to our initiatives since Q4 to improve margin. While our margin improved our share of transaction volume decreased. Going forward, we will return profits generated by improving margin to our customers by employing a strategy to offer better services to encourage more transactions by broader customers to recover our transaction share over the midterm.

Next is Crypto assets, we have 3 businesses at, mining, exchange and payments under Crypto assets business. This is the quarterly sales and its breakdown. Market was sluggish for exchange business. Sales decreased along with the drop in transaction value. Despite continuing global headwinds, the number of accounts is growing steadily as we continue to add new issues and acquire new customers. This is the quarterly operating profit. Due to a decrease in sales, operating loss is continuing in this segment. Transaction volume at [indiscernible] is declining, making it difficult to generate the profits. As such, we are controlling our marketing investments. For the foreseeable future, we believe the market will remain to be challenging.

We will steadily take initiatives to build a structure to be able to enjoy profits once the market becomes brisk again. This was the status of each business segment. Last of all, CFO, Yasuda will explain about the latest topics.

[Masashi Yasuda, executive]

Last of all, I will share the latest topics. First, I will talk about our initiatives in security field. Safe and secure internet for everyone. This is the slogan for security business. I mentioned before that cyber attacks have become an imminent social issue as well as business risk. There are increasing media reporting about stronger counter measures taken at government institutions against cyber attacks inside and outside of Japan. In order to respond to accelerating security needs triggered by advancement of DX and online usage, we uphold this as a slogan to contribute to realizing safe nation and society.

I will again introduce the 3 fields in security business. First, crypto security, using authentication technologies such as SSL, the second, cybersecurity offered by Japan's strongest white hacker group. The third, brand security offered by professionals of domains and trademarks. Today, I will give an update on GMO cybersecurity by Ierae, Japan's strongest white hacker organization, which joined the group last January. First, let me share the cases of cybersecurity introduction. The biggest strength of GMO cybersecurity by Ierae is its technical capabilities. Cybersecurity assessment offered from attackers perspective by a group of what hackers are being used by many companies from broad industries inside and outside of Japan.

Furthermore, with group synergies, we are steadily expanding our trades with banks. This is the track record. In addition to being #1 in domestic and international contest, Ierae is helping to educate and train cyber units as the government national police agency and Ministry of Defense are taking full-scale measures to combat this issue. In return for our support, we received certificates of appreciation. We newly established a vulnerability investigation and research team this year and became the #1 team from Japan in all 4 global security contest we participated in. In our initiatives with public institutions, we cooperated in analysis of investigations using IoT forensic technology and received a certificate of appreciation from Nagano Prefecture of police headquarters.

We will continue to take on the challenge to participate in security contracts in a cloud of Japan to brush up our skills and through our technical support in cybersecurity field contribute to protecting Japan. I will share the progress of SaaS products, GMO cyber attack [indiscernible], which I introduced to you in the last earnings briefing. When you enter your domain, GMO cyber attack [indiscernible] will automatically check whether there are any holes in the site and gives you scores. Anybody can easily have high security level checking of the safety of their site. In May, METI released the ASM introduction guideline. ASM stands for attack surface management. It is attracting attention as a method to protect company's IT assets from cyber attacks. [indiscernible] is a tool to be categorized as ASM. We are intending to expand our share.

Monthly fee is JPY 980, but as was introduced the last time, it will be offered for free until the end of December this year. We are planning to integrate this with other products we have in the group using API from September onwards. We will make efforts to make [indiscernible], the next service that is inevitable. Please stay tuned. Last of all, I would like to talk about our approach to AI. At GMO Internet Group, we have 3 themes related to AI as is shown. First, is saving time and costs. Second is improving quality of existing services; and the third is offering new services to AI sector. We would only offer services if it would lead to saving time and cost or to improvement of quality of existing services offered to users or we, as a group of companies offering Internet infrastructure, provide new services that would lead to development of AI industry.

We are going to offer only services related to these themes. I will share the current status regarding each of these themes. First theme is saving time and cost. In order to improve productivity, all partners in the group need to familiarize themselves with AI as a first step to utilize it in actual work. To bolster education to deepen understanding of the cutting-edge trends and tools, we invited these 2 gentlemen who are proactively sending out information using social media as advisers and online seminars are held twice a month at our group. In order to promote work using AI, we have prepared a total reward of JPY 10 million as prizes to contest to use GPT for work. We are looking for ideas using AI for work or new services to utilize AI.

Other than that to measure whether AI literacy improved or it actually led to using AI for work. GMO AI Passport, which is an AI test will be implemented to see how much impact have been generated, targeting all partners. Through these initiatives, we are going to transform the mindsets of people to use AI to lead to saving time and cost. The second point is improving quality of existing services. to enhance functions using writing AIs, image creation AIs, generative AIs are starting to be used in services related to infrastructure and advertising and media. Last of all, is new services for AI sectors. GMO Internet Group will, of course, develop new services using AI ourselves. But we will also release new infrastructure services that support AI industry. [Likening] it to Goldrush, we will be offering jeans, shovel and pick axe.

For example, we have our service on the left side, which is GPU hosting service called ConoHa for AI. In developing large-scale language model, our generative AI model, massive calculation resources would be necessary. And massive CapEx, including initial investments in servers are an issue. In that sense, ConoHa for AI is made in Japan hosting service with large-scale infrastructure know-how accumulated over long years and is using NVIDIA's cutting-edge GPU.

Trial version is planned to be launched in mid-August. We are aiming for the final service launch within this year. GMO Internet group slogan is to become #1 group of companies that utilize AI. As such, we will proactively utilize AI in managing its business. In the era of AI through productivity improvements and cost reductions, we will offer #1 services to users and contribute to proactively activate AI market. We have covered all the agenda items for today. Thank you for your attention, internet for everyone.