GMO Internet Inc

TSE:9449

Earnings Call Analysis

GMO Internet Group Reports Mixed Q2 Results with Strong Infrastructure Growth

In Q2, GMO Internet Group saw net sales reach a quarterly high, driven by solid recurring revenues in its Infrastructure segment, which exceeded JPY 9 billion in operating profit for three consecutive quarters. However, overall profits were negatively impacted by a JPY 4.5 billion allowance for doubtful accounts in its Financial segment due to issues in Thailand. While the Advertising segment faced revenue declines, profits rose due to improved efficiency. Looking ahead, the company plans to continue growing its recurring revenue model, aiming for a 15% annual profit increase to meet long-term goals, with recent quarterly dividends set at JPY 6.9.

Strong Performance in Infrastructure Segment

In the latest financial results, the Infrastructure segment reported record net sales, achieving a quarterly high driven by solid recurring revenues. Operating profit in this segment exceeded JPY 9 billion for the third consecutive quarter, indicating its robust performance. This strength is attributed to the growth of infrastructure businesses, with the brand security business also contributing positively. The successful accumulation of overwhelming #1 services in this area has established a strong revenue base.

Mixed Results in Advertising and Media

The Advertising and Media segment experienced a decline in revenue, primarily attributed to weaker performance in the advertising agency sector. Despite this decline, profits improved due to successful in-house services by GMO Tech and GMO Media, indicating increased efficiency in their sales structure. The adjusted performance reflects a balance between challenges in sales and improvements in profit margins.

Challenges in Finance Segment

Conversely, the Finance segment faced significant challenges, marked by a decrease in sales and a provision for doubtful accounts amounting to JPY 4.5 billion in the Thai Securities business. As a result, this segment was evaluated negatively. Additionally, the decision to terminate margin trading services by year-end signals a strategic pivot to mitigate losses and focus on other profitable avenues.

Crypto Assets Positioning for Profitability

The company recorded a positive turnaround in its crypto assets segment, achieving profitability for the third consecutive quarter. This improvement is attributed to increased trading volume and effective revenue generation through GMO Coin. The steady growth in the crypto market despite risks underscores the segment's potential as a profitable venture moving forward.

Shareholder Returns and Buyback Plans

Regarding shareholder returns, the company maintains a policy aimed at a total return ratio of 50%, committing over 33% to dividends and the remaining 17% for share buybacks. Shareholders can expect a dividend of JPY 6.9 for the second quarter. Notably, the maximum share buyback limit has been raised to JPY 5 billion, marking an increase of JPY 2.59 billion from earlier plans. This enhances the focus on returning value to shareholders while balancing corporate equity.

Ambitious Long-Term Goals and Strategic Vision

Looking ahead, the company remains steadfast in pursuing its 55-year plan aimed at achieving JPY 10 trillion in sales and JPY 1 trillion in profit by 2051. To meet the high growth expectations, they have set a target to grow profits by 15% annually. This long-term vision underpins their commitment to innovation and expansion, particularly with the anticipated growth in AI and robotics sectors.

Future Growth Support through Organizational Changes

In anticipation of future challenges and opportunities, the company has initiated a transition to a holding company structure. This restructuring is designed to enable better management of subsidiaries and to bolster overall growth. Alongside this, the establishment of GMO AI & Robotics Corporation signals a proactive approach toward leveraging AI and robotics within their business model, aiming to meet expected workforce shortages in Japan by 2040.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone. Thank you very much for taking time out of your busy schedules today to participate in the GMO internet group Q2 Financial Results Briefing. I'd like to inform you about the speakers for today's briefing. Masashi Yasuda, Group Vice President and CFO, will appear first; followed by Noriko Inagaki, Group Executive Officer and General Manager of the Finance Department.

Today, we will provide an overview of the financial results, followed by a question-and-answer session. Presentation materials regarding financial results are available on the company's website. After this event, a link to the questionnaire will be displayed, and we'd appreciate it if you could answer the questions. We kindly ask for your cooperation.

Now Mr. Yasuda, Vice President, will give an explanation.

[Masashi Yasuda, executive]

I am Yasuda, CFO, GMO internet group. Thank you for attending today's financial results meeting. Since our company's fiscal year ends in December, we would like to explain our financial results for the period from April to June. I appreciate your cooperation.

As you can see, today's agenda is as follows: I, Yasuda will provide the overview, summary and the group's management strategy; and Ms. Inagaki, Group Executive Officer and General Manager of the Finance Department, will give you the rest of the presentation. I appreciate your cooperation.

The first is the financial summary. As you can see, the financial results showed an increase in revenue and decrease in profit. Although each of the infrastructure businesses performed very favorably, profits remained at the same level as the previous year due to a provision of allowance for doubtful accounts by a Thailand-based securities company, which pushed down profits.

Next is a summary for each segment. The qualitative evaluation by management is shown on the far right, together with that of the previous quarter.

First, the Infrastructure segment, this is a double circle. Net sales reached a quarterly high as we accumulated solid recurring revenues. As for the quarterly operating profit, it exceeded JPY 9 billion for the third consecutive quarter. In addition to the accumulation of figures in each of the infrastructure businesses, the brand security business also made a contribution this quarter. We have realized the solid recurring revenues that come from the aggregation of the overwhelming #1 service.

Next is Advertising and Media, which is triangular. Revenue decreased, but profit increased. Sales declined due to weak performance of advertising agency business, which accounts for a large percentage of net sales. But on the other hand, in-house services by GMO Tech and GMO Media performed well and the improved efficiency of the sales structure also contributed to an increase in profit.

And Finance is an X. In addition to a decrease in sales, the segment recorded losses due to provision of allowance for doubtful accounts of JPY 4.5 billion in Thai Securities business, which I mentioned at the beginning. For each product, FX is triangular due to a decrease from the previous year when it was strong. As for CFDs, both trading volume and revenues were strong, making it circle. The provision of allowance again occurred in Thailand, which is an X. It had an extremely large impact on this quarter, and we have no choice but to evaluate the whole segment as an X as well. With regard to Thai Securities, we have decided to terminate our margin trading services by the end of this year. We will continue to do our utmost to collect receivables, including responding to lawsuits.

Next, crypto assets. This is circle. Revenue increased and it turned profitable. It recorded profit for the third consecutive quarter. This was due to an increase in trading volume and the revenue from the exchange business developed by GMO Coin as the crypto asset market remained at risk. There has been no change in our stance to date, which is to build a system that will enable us to generate profits when required.

Next is an analysis of year-on-year changes in revenue and profit by segment. The left side shows net sales and the right side shows operating profit. Also, the infrastructure performance expanded and the crypto asset business returned to profitability due to the provision of allowance for doubtful accounts. In Thai Securities business, which I explained earlier, net sales increased by JPY 3.1 billion and profit decreased by JPY 0.5 billion.

As you saw, the infrastructure business was performing very well. And if we exclude the provision for the Thai Securities business, which would be hypothetical, operating profit would have been close to JPY 14 billion. The following are the cumulative figures for the period from January to June. As you can see, both sales and profits increased. Although onetime expenses increased compared to the previous year, the main reason for this is that the profit level of the infrastructure businesses has been further improved.

Next is shareholder returns. Our basic policy is a total return ratio of 50%. Of this amount, more than 33% is allocated to dividends and the remaining 17% is broken down to buyback and cancellation of treasury stock. Here is the dividend per share. Since the financial business and the cryptographic assets business are affected by market conditions, it is difficult to make earnings forecasts, and therefore, earnings and dividend forecasts are undisclosed for this fiscal year as well. For this reason, dividends are also announced on a quarterly basis. The dividend for the second quarter will be JPY 6.9.

Lastly, I'd like to discuss the expansion of the share repurchase limit. In order to improve capital efficiency, increase corporate value and quickly implement the long-term goal of share buybacks in accordance with our basic policy, we have decided to increase the maximum amount of share buybacks to JPY 5 billion, an increase of JPY 2.59 billion from the original plan.

In addition to the JPY 2.41 billion in share buybacks already announced at the financial results briefing in February of this year, which corresponds to a total return ratio of 17%, we are now announcing an additional JPY 2.59 billion in share buybacks. As a result, shareholder returns will exceed the 50% total return ratio. We will continue to steadily return profits to shareholders while maintaining a balance with our shareholders' equity.

Next topic is the following. Our group's management strategy based on GMOism, which we value the most. This is a topic that we have not quite shared with our investors at financial results briefings before.

First of all, please allow me to share our most important values. What we have always valued since the founding of the company is the sharing and thorough practice of the GMOism, which is the collective name for our corporate models. In addition to unwavering goals, this summary sheet of GMOism shows various management know-hows that comprise the GMOism. We have been chanting and practicing this GMOism since 1995 when we started our Internet business.

And now as you can see in the picture, 7,800 partners in Japan and overseas gather regularly to chant GMOism. By sharing the values of GMOism, we have all been able to run in the same direction and continue to grow even though we are an aggregation of many group companies.

Now when you think of a company model or corporate model, you may think of something that is set in stone, framed and mounted on the wall. But we have been updating this GMOism year after year. We believe that the reason we have been able to survive in the Internet industry is because we continue to improve and read out the GMOism and share and enforce it with all of our group partners. We hope you will take a look at the venture spirit declaration, which is part of our GMOism on our website.

Now I would like to talk about our 55-year plan, which is a very important ultra-long-term quantitative goal under GMOism. This plan was established in 1998 by Kumagai, the Founder, Chairman and Group CEO, and aims to become a corporate group with sales of JPY 10 trillion and profit of JPY 1 trillion by 2051. This is not a so-called medium-term management plan or a business plan that we commit to investors at IR meetings like today's, but rather a plan to achieve high growth as a group. It is a commitment goal shared by all the partners in the entire group.

Kumagai sent an e-mail out to all partners at that time in 1998. And since then, it has been shared with all group partners. This slide shows the 55-year plan in the graph. In the venture spirit declaration, there is a line that reads all quantitative objectives of the GMO internet group are to be planned based on 55-year plan, and it has become a common language for the group's partners as a premise for setting internal annual goals.

Now we were exactly in the middle of this 55-year plan in 2023. And the Internet revolution we are aiming to materialize is now in the second half. To achieve our 55-year plan, we will need to grow profits by 15% or more every fiscal year. We will continue to strive to achieve this 55-year plan through sustained growth.

Now here is a graph showing the cycle of past industrial revolutions. It shows that the global economy repeats its cycles in approximately 50-year cycles. Below the graph, the technological innovations that triggered the industrial revolutions are also shown. It is said that we are in the midst of the fourth industrial revolution. If we consider the launch of Windows 95 as the starting point of the Internet revolution, 29 years have passed since then.

As we hit the halfway point, we imagine that AI will play a leading role for the remaining 26 years. In the first half of the Internet revolution, Kumagai's vision that the Internet would expand has come true. And we are convinced that for the second half of this Internet revolution, AI will play the leading role and the world will become more convenient.

Now this past June, we announced our transition to a holding company structure to prepare for the second half of the Internet revolution. I'd like to talk about the purpose of this transition once again. The transition to a holding company structure has 3 objectives: First, to achieve our 55-year plan, which I have just explained; second, to promote the AI and robotics revolution; and third, to strengthen group management functions.

I will explain each of these in more detail. First objective is to achieve the 55-year plan, which is a super long-term goal. As I mentioned earlier, the GMO internet group is a group of people who have come together to achieve the unwavering goal of the 55-year plan. By transitioning to a holding company structure, we will establish an aggressive management structure and accelerate the pace of growth to achieve the 55-year plan.

The second is to promote the AI robotics revolution. The AI robotics revolution is set to be a technological innovation that will bring about dramatic changes in all aspects of society, the economy and daily life by enabling robots to learn and perform complex tasks autonomously through the fusion of AI and robotics.

In anticipation of significant progress in this AI robotics revolution, we established GMO AI & Robotics Corporation, also known as GMO AIR in June. The transition to a holding company structure will enable the group's operating companies to work side by side, organize their commercial distribution channels and create synergies more smoothly. In other words, we are putting in place a structure that will enable us to run through the AI robotics revolution as fast as possible.

The third objective is to strengthen group management functions. As the GMO internet group expands in size, we have been facing challenges in group management and group administrative functions under the business holding company structure. One example is the recent occurrence of bad debt in the securities business in Thailand. We are currently discussing within the company whether the group was able to exercise sufficient governance functions in response to this issue.

By shifting to a holding company structure, GMO internet group will be able to focus exclusively on group management functions, thereby further strengthening the structure to achieve sustained growth for the group as a whole.

I would like to continue with a brief explanation of this reorganization scheme within the group. On January 1 of next year, the effective date of the reorganization, target businesses from GMO internet group will be transferred to GMO Ad Partners through an absorption-type company split. GMO internet group will be allotted newly issued shares of GMO Ad Partners as consideration for the subject business. This will be 16x the number of shares currently issued by GMO Ad Partners, which will increase our equity stake in GMO Ad Partners from the current 57% to 97%.

Also, this business integration will boost our market capitalization as the total issued common shares of GMO Ad Partners will increase. Based on yesterday's closing stock price, GMO Ad Partners' market capitalization was JPY 6.7 billion. So a simple calculation shows that we will become a company with a market capitalization equivalent to JPY 115 billion or 17x this amount.

Here is a brief summary of the effects of this integration. We expect extremely strong synergies in customer acquisition as a result of this integration. The infrastructure businesses of GMO internet group, which are to be integrated, have a range of the #1 products in domain, cloud hosting and access businesses, which generates recurring revenues, and Internet is the main channel for attracting customers. By combining the market know-hows of GMO Ad Partners, a group of web marketing professionals, with our main businesses, we expect to attract more customers through the web channel and accelerate our growth.

Next, I would like to share about GMO AI & Robotics Corporation or GMO AIR, which I introduced earlier. It is predicted that Japan will be short of 11 million workers by 2040. In order to break through the predicted near future situation and promote the growth of the Japanese economy, we have established GMO AIR with the aim of encouraging the spread of AI, robotics and industrial drones in Japan.

We will gather information and goods related to AI and robotics from all over the world and combine them with the group's technologies and synergies to promote them in Japan, aiming to become a general trading company of AI and robotics as our company name suggests.

Since the announcement of our establishment in June, we have been receiving a lot of inquiries, and we are now in the process of determining the direction of our business through interviews with AI robot manufacturers and customers. We expect to monetize the business in the next fiscal year or later. So we'd like to update this matter to you as necessary.

Through these actions, we will further strengthen the foundation of our corporate group, which will continue to win over the next 100 years, accelerate our growth and achieve our ultra long-term goal of the 55-year plan.

I'd like to take this opportunity to thank you again for your continued support. With that, Ms. Inagaki, Group Executive Officer and General Manager of the Finance Department will give an explanation from the next part on our strength.

[Noriko Inagaki, executive]

Hello. I am Inagaki, GMO internet group Group Executive Officer. Before going into the details of our performance, I would like to explain about the strength of GMO internet group again. We added one more point from the last time. So there are 3 major strengths.

First is that we are particular about operations and development of our own technology. In a rapidly changing industry of the Internet, in order to continue to win, we believe we need to take on the challenge to offer #1 services. To that end, we believe we need to be a monozukuri or a manufacturing company that develops our own technology and operate ourselves. The key will be engineers, creators and directors, people who are engaged in monozukuri.

We call our employees partners. The number of partners as of the end of June was 7,500 plus. And out of this ratio of engineers and creators were 50%. As new companies joined our group. This ratio increased Q-on-Q. Also, we had more than 40 new graduates who joined us as new partners.

Some of you feel that this number may be small, but we have JPY 7.1 million annual income for new graduates program, and we aim to become #1 in hiring in the region. We changed our hiring policy since last year in order to hire talents with highest potential. Together with the new colleagues, we will support Japan's Internet.

We have started to hire mid-careers limited to AI talents only from Q2 last fiscal year. Of course, there are natural attrition. But as a result, you can see that we have been able to control the increase in head counts.

The second strength is a revenue model of solid recurring revenues, which is a GMO terminology. We have been able to grow sustainably since the founding, thanks to accumulation of solid recurring revenues. These are recurring revenues realized through indispensable products that will not disappear as long as the Internet exists.

This is a graph showing consolidated net sales. As you can see, we have achieved sustained growth since the founding of the company. This is a breakdown of net sales into recurring revenue and other revenue. The red line shows the ratio of solid recurring revenue out of the consolidated sales. Solid recurring revenue, including continuous recurring revenue coming from infrastructure and transaction revenue that are almost like recurring revenue. As you can see, solid recurring revenue are what supports our sustainable growth.

This is a breakdown of solid recurring revenue into unit price and number of contracts. Both the unit price and the number of contracts are continuing to increase. The current recurring revenue of JPY 145 billion is a result of multiplication of annual unit price of JPY 10,600 times circa 14 million contracts.

We have scrutinized the number of contracts, and that is reflected in this number shown on this slide. There are no changes to the revenue. This slide shows the number of Internet infrastructure contracts. In other words, this is a solid revenue base that supports the solid recurring revenue. Most recently, we have seen the number of domain users expand by 2.35 million to 15.06 million contracts. Please look forward to further growth.

Last of all, the third strength is risk diversification and independent management. At GMO internet group, each group company chooses its area of strength and inject managerial resources focusing on that area to become #1. This is our basic marketing strategy. And for the management of each business, it diversifies the risks by not relying on specific products, clients nor partners.

On this slide, you will be able to see the number of products, number of customers and the number of partners. For example, let's say, sales of JPY 100 million was generated, instead of generating cash from one specific customer, GMO internet group aims to collect cash of JPY 10,000 each from 10,000 customers. This is the management style that GMO internet group aims to achieve. This means that the business management is strong with diversified risks. As such, our group will not all of a sudden decline or disappear. We will continue to run business only in areas where we can aim to become #1 and through sustainable growth, build a group that continues for hundreds of years.

Now I'd like to explain about the group overview. This is the bird's eye view of our business segment. The size of the area shows the sales composition. On top of the number of contracts for infrastructure as a solid recurring revenue base, if we add the number of accounts for FX securities and crypto assets, our customer base will be 17.75 million.

This slide shows the 10 listed group companies and our equity share. The group's total market cap is around JPY 1 trillion, and our equity share stands at around JPY 350 billion. This is a slide on quarterly net sales by segment. Navy at the bottom, which represents infrastructure is mainly made up of highly sustainable and highly predictable solid recurring revenue. Growth trend based on this solid recurring revenue is continuing.

This is quarterly operating profit by segment. Based on the solid recurring revenue of Internet Infrastructure, we have not changed our view about favorable performance of Internet finance business. In this quarter, because of the provisioning at Thai Securities, profit declined temporarily, but based on the sustainable growth of the Internet Infrastructure, we are going to lead to V-shaped recovery.

Next is Internet Infrastructure. These are the services of Internet Infrastructure, domain, hosting and cloud, ASP chart, security, e-signature, cybersecurity, payment provider are a collection of #1 services that are indispensable and will never disappear in the Internet society. This is quarterly sales by subsegments. Leveraging the strength of collection of overwhelming #1 services, all businesses grew in a well-balanced way and renewed its quarterly high.

Year-on-year, sales growth rate may look a bit weak, but that is because the sales last year was very strong and due to a technical issue such as the change in accounting processes. There are no issues at all with the condition of the business environment. This is the quarterly operating profit trend. Along with accumulation of solid recurring revenue, profit is also on the expansion trend. We are able to show powerful growth exceeding JPY 9 billion for 3 consecutive quarters, as you can see. Profit increased by more than 50%. This is partially because there was a one-off cost posted at Freelance in year-on-year and also because of contribution from brand security this quarter.

Now I will explain about the progress of security business, which the group is enhancing. In order to respond to ever-accelerating security needs, Security business has a slogan of, "Safe and secure Internet for everyone." We have 3 areas of security businesses. First is encryption security, utilizing authentication technology. The second is cybersecurity offered by the world's most powerful white [ hat ] hackers and brand security offered by professionals of domains and trademarks.

This is about crypto security, GMO Sign. We are #1 in Japan, not just for the number of e-contract accounts, but also for the number of contracts sent as well. This is number of e-contract accounts. After Goodbye Seal campaign that was launched as a group collectively in May 2020 during COVID-19, through network effect and group synergies, we are continuing to see the customer base expand.

We are making good progress in having our service introduced at large enterprises, including the 2 mega banks, as is shown here. We believe the market is still in the expansion phase. Next is number of contracts sent. Number of contracts sent shows the level of activities by customers and is recognized as the most important KPI for us. Customers, mainly in industries with high activity levels such as real estate, are expanding the use steadily.

Next is ARR, which stands for annual recurring revenue, meaning revenue that is recurring in a year. This is an indicator showing stable revenue for the next fiscal year and can be used to see the growth of SaaS-type business and to understand the soundness of the business. Using our own technology, this is an important part of solid recurring revenue. GMO Sign's revenue model consists of recurring and transaction revenue. As the growth of number of contracts sent shows, as customers used increased and transaction revenue expanded, ARR grew to be close to JPY 1.3 billion now.

This is about our digital government initiatives. Utilizing the strength of owning authentication technology ourselves, we are making progress in introducing GMO Sign electronic seal. By changing the notifications issued in paper to electronic, we are supporting the promotion of digital transformation of our customers. We are on our way to become #1 in adoption of local governments. Already, 121 local governments have decided to introduce GMO Sign. In the previous quarter, it was 100. So we are steadily making progress. Together with the number of contract accounts, number of contracts sent, we would like to become #1 in the number of local governments as well and lead to further growth.

Next is about enhancement of structure in cybersecurity. I believe first half of the year was a time when cybersecurity was recognized as a material social issue more than before. This time, we have welcomed Mr. Daiki Fukumori joined cybersecurity by Ierae. He was a former criminal investigator at Interpol. Leveraging his intelligence, we will further enhance the cybercrime investigation team and promote R&D of detection of cyberattacks.

Next is Online Advertising & Media. This is quarterly sales and its breakdown. Although sales of in-house products of GMO Tech and GMO Media were solid, some of the sectors reduced advertising budgets and the transaction volume was weak. This is quarterly operating profit. On top of the increase in in-house products that are high margin, efficiency improvement of sales structure contributed to increasing profits.

Next is Internet Finance. This is quarterly performance. In Q2, compared to the vigorous FX a year ago, margin fell. We had also posted around JPY 4.5 billion of provision for nonperforming loans in Thai Securities business, making the business loss-making this quarter. This is sales by product. FX is shown in navy. Compared to last year when the market was much more vigorous, due to less volatility of the market, we saw a significant decrease.

On the other hand, CFD, in blue, performed strongly, reflecting favorable stock prices worldwide. This is a graph showing FX net sales and trading volume. Since Q4 of 2022, we had been operating this business attaching importance on profitability. Although transaction volume was narrowed, we improved profitability. In this quarter, transaction volume increased, but due to a rapid depreciation of the yen, both volatility and margin fell, resulting in lower profits for FX.

Next is crypto assets. This is quarterly performance. Since Q4 last year, since there were topics related to crypto assets, market is recovering in exchange business, which is operated by GMO Coin. With active trading, we posted profits for 3 consecutive quarters. Also, number of accounts at GMO Coin is steadily growing. We believe the results of efforts to take measures while the market was slow, is starting to appear now.

This is all for the briefing today. Thank you very much for your attention. Internet for everyone.

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