GMO Internet Inc

TSE:9449

Earnings Call Transcript 2018-Q3

[Masatoshi Kumagai, executive]

Thank you very much for coming today. This will be today's agenda. I will be presenting from the beginning, and Yasuda will be explaining the latter part.

For starters, this is the third quarter executive summary. Net sales increased by 22% at JPY 137.1 billion (sic) [ JPY 137.16 billion ]. Operating profit increased by 44% at JPY 17.3 billion. Ordinary profit increased by 40% at JPY 16.5 billion. Net profit increased by 62.5% at JPY 6.1 billion. Net sales all the way to ordinary profit has marked a record high.

Next page. I would like to explain about our analysis of the third quarter July to September operating profit changes. Last year's operating profit was JPY 4.49 billion and has increased by JPY 1.04 billion year-to-year.

Allow me to explain the breakdown. Infrastructure business marked a record high of plus JPY 900 million. Our new business, Cryptocurrency business, increased by JPY 330 million with exchange business offsetting the negative mining business. The momentum of Internet Finance business continued to grow by JPY 240 million. On the other hand, Online Advertising & Media business was impacted by the ad fraud issues and declined by JPY 220 million. The Incubation business did not have any major stock selling and declined by JPY 260 million.

Next would be the summary of each segment. Internet Infrastructure business operating profit grew by 44.8% against prior year at JPY 2.93 billion, marking a record high for 4 consecutive quarters. Payment, EC, SSL and provider drove the business of each sector.

Online Advertising & Media business declined by 79.2% against prior year at JPY 50 million. Given the ad fraud issue, we are making changes to adapt to the changing net advertising market. However, we are facing difficulty in profitability. We will continue to focus our efforts on original service development and reinforcing them as our group's primary focus.

Operational profit of finance business grew by 10.7% at JPY 2.58 billion. Foreign exchange transaction continues to decline. However, our past initiatives in improving profit margin have come to fruit, resulting in the continued positive performance.

Cryptocurrency business operating profit has returned to the black at JPY 100 million. Exchange business progressed in establishing its revenue base, low booking as surplus continued from the April-to-June term. On the other hand, our mining business at the moment would basically be figures of our in-house mining business, was impacted by the macro environment such as the falling price of Bitcoin and the global hash rate increase, booking a loss following the April-to-June term.

Next, I would like to explain our dividend policy. Our group makes quarterly dividend payments. Since we do not disclose our business forecast, we also do not disclose dividend forecasts. Therefore, we announced dividend payment amount every quarter. The end of third quarter dividend per stock is JPY 5.5, and the dividend payout ratio, which we have committed from this year, is 33.1%.

That would be all for me.

[Masashi Yasuda, executive]

From the next topic and onwards, Yasuda, myself will explain. This is the financial highlights. What you are looking at is the quarterly net sales by segment for the past 6 years. We have experienced a 20.6% growth in net sales year-on-year. We feel the growth trend has further strengthened from last year.

Next, allow me to explain the operating profit by segment. The operating profit also has accelerated growth from 2017. Compared to the previous quarter, the figure is negative due to a one-off factor of fund sales. However, profit is expanding, driven by infrastructure and finance business.

Next is the consolidated P&L from January to September. Finance and Incubation businesses, which have high profit margin are growing. Hence, the 12.6% of profit margin. The remaining information is self-explanatory.

Next is our consolidated balance sheet. On the procurement side, there was an increase in interest-bearing liabilities due to our listed company, GMO Payment Gateway's convertible bond issuance. Assets on the other hand resulted in an increase of fixed assets due to investment to the mining business.

Our next slide shows the consolidated cash flow. This is redundant with my explanation of the balance sheet. Investing cash flow increases due to investment to our mining business, and financing cash flow increased, as was explained earlier, is mainly due to the increase of interest-bearing liabilities from Payment Gateway's convertible bond issuance.

Next I would like to explain the group overview. First of all, our listed group companies market capitalization and equity share is as shown in the slide. Amongst our group companies, GMO Financial Holdings' liquidity in the market had been the challenge from before. To solve this, we have sold a part of the company's stock on October 12. Through this, our company's shareholding ratio has become 61.9%.

Next slide shows the 4 business sectors of our business in a nutshell. The sales contribution illustrates the size of each sector. The number of contracts in infrastructure, the number of accounts for foreign exchange trading and securities trading and cryptocurrency, all of these are our solid revenue base. We have in total 10.9 million customers and are 100% active accounts. The number has increased by 1.13 million in a single year, equivalent to 100,000 incremental per month.

Next, I would explain about the group partners and workforce. The number of group partners as of end of September was 5,691 people, out of which 45.5% are engineers and creators, the people who have technology to create things. We will continue to invest on people towards achieving our goal of exceeding 50%.

Next topic of each segment is the infrastructure segment. This slide is shared every quarter, which is the Internet Infrastructure segment composition. Infrastructure business, as you can see, is an aggregate of #1 ranked services. The robust growth is realized because we are the aggregate of the top ranked services.

Next slide shows the net sales by segment of our infrastructure business by quarter. In addition to our steady revenue of recurring business and solid revenue business, the buildup of the transaction type revenue model has accelerated our growth.

Next slide is the operating income trend on a quarterly basis. Payment and SSL, which have high profit margins, remain to show favorable performance, which is a trend that has continued from the previous quarter. Especially for this quarter, both the domestic and international SSL performance was strong due to the impact of always-on SSL, which was explained in the prior explanatory session.

The number of Internet Infrastructure contracts, as you can see, is 9.6 million, marking the highest record. I know I'm repeating myself, but this contract volume represents the profit model such as the recurring business or the solid revenue business, which are the foundations of our solid revenue.

The next segment is Online Advertising & Media. This slide shows the quarterly net sales trend and breakdown by segment. On the very bottom, the light blue bar represents the online advertising. Advertising agency business has recovered from prior quarter, growing by double digit. On the other hand, for the dark blue bar, representing media struggled with existing service and has declined year-on-year.

The next slide shows the quarterly operating profit. The impact from ad fraud issue and the changes in the online advertising market remains to be tough. At the moment, to enhance our credibility in ad network, we have set more rigid standards to strengthen mid-, long-term competitiveness. We will continue our efforts in changing the current market trend by taking initiatives on challenges our customers face. Our focus will be on developing and selling original service, utilizing our group's technology.

Next, I would like to explain about our Internet Finance segment. This slide shows the Internet Finance performance on a quarterly basis. As the foreign exchange transaction continues to decline, our earnings grew double digits year-on-year. This is a result of earnings rate improvement from big data analysis and transaction increase of high-yield currency pair.

Next slide shows the foreign exchange transaction trend. For 6 consecutive years, we have continued to be world #1 in annual number of transactions. Our performance has remained stable for the past year.

Next segment is other businesses and the status of our game business. The game business has been segmented in other businesses starting this term. Since the new titles are showing positive performance, allow me to touch on the status. The soccer game, Captain Tsubasa, well known to many, was released on October 18 and has achieved 1 million downloads in less than 3 weeks. Although the game business is segmented as others, we are starting to see signs of recovery to surplus in the fourth quarter.

Next year, the title projected on the slide is planned to be released. Houshinengi, this is how you read it. It is an IP that has strong following, and we are receiving many advance registrations. Next to it is REALIVE. This is a title we are developing in our joint venture with Gentosha and Avex.

Next topic is global operations. We operate in 23 countries with 64 sites. We now have 1,298 global partners.

The net sales ratio of global operations currently stands at 9%. By rolling out infrastructure, finance and mining businesses under our Z.com brand, we aim to raise the global sales ratio.

Next, our finance, payments and Cryptocurrency businesses. First, our major policies for the Cryptocurrency businesses. Mining and exchange businesses, I will touch upon later. As for the third area, which is payment, we recently announced to issue stablecoin. This is a potential to become a new financial infrastructure. I will cover this topic in the later slides.

Based on such initiatives, we changed the signal for this business from the cross to a dotted bind circle. First, this slide shows the Cryptocurrency business performance. In its first year since launch, the quarterly revenue marked a JPY 2.6 billion and profit was JPY 100 million. Within this segment, the exchange business saw trading volume decline quarter-on-quarter but minus a [ 2 seen ] increasing profit through various measures.

We are offering cryptocurrency cash trading and leverage tradings. The business model is the same as the GMO Click Securities FX trading. Tuning our positions in cover models proved the result for. We're building a revenue base that is not affected by volatilities.

This blue bar graph shows the trading volume of the cryptocurrencies. The orange line graph is the number of customer accounts. Bitcoin price trended weak, therefore, trading volume is not so large. But number of accounts are growing steadily to contribute to steady profit growth. Also, Exchange Service started on September 7. We now offer customers trading opportunities with more degree of freedom.

Next, Cryptocurrency mining business. We installed additional machines in our proprietary mining facility during the July-September period as planned. So our in-house hash trade increased and more coins were mined, therefore, revenue was up. But externally, the global hash rate exceeded to 50,000 petahash and Bitcoin prices were weak. Also, as an internal factor, the depreciation cost increased because the mining machines purchased in the past was expensive and had a negative impact on P&L for the quarter to result in a profit decline.

This is the monthly disclosed figures for our hash rate and our mined amount. The blue line graph is hash rate. As of end of October, 674 petahash. We mine Bitcoin and Bitcoin Cash. For these 2 currencies, the month-end rate multiplied by the mined volume is the referenced revenue value shown in the bar chart. As of end of October, 674 petahash. If 100% of all hash power were mined for Bitcoins, our share is about 1%. And if 100% was mined for Bitcoin Cash, our share is about 15%. We expect to reach 800 petahash for in-house mining by the end of the year.

Next, this is the actual Bitcoin macro environment. The price of Bitcoin is shown in orange line, and the total global hash rate trend is shown in blue. The price of Bitcoin, which is shown in orange, is trading at around $7,000 to $8,000. On the other hand, the blue global hash rate continues to go up. It reached 43,000 petahash at the end of July and is reasonably exceeding 50,000 petahash. And after surpassing the 50,000 petahash mark, it is plateauing around that level.

Next is the situation for the GMO miner B3, which we were expecting for external sales. Due to some difficulties in sourcing the electronic parts, the shipment is delayed. We're still making adjustments for the parts procurement. We will make announcements when the shipment becomes available.

Next, on October 9, we announced the stablecoin, GMO Japanese YEN. Since the announcement, we saw good media coverage. Amid high expectations and positive feedbacks, we also received opinions that the abbreviated ticker symbol GJY is difficult to read and not easy to memorize. So we changed it to GYEN. This is the new logo.

I'd like to explain about the stablecoin. Following is the background. We started preparation to enter into payments with cryptocurrency. We're targeting to issue stablecoin, which the value is less volatile by 2019. As of today, it is often pointed out that cryptocurrency is not optimally suited for payment transactions because it's too volatile. We will issue a yen-pegged stablecoin, which is linked to a stable [ fee ] currency, the Japanese yen. We will be the issuer of this GYEN and secure the equivalent value of the amounts issued.

To give you a specific example, for instance, if 1 GYEN was issued at JPY 1 equivalent and can be used in exchanges. This is a cryptocurrency with stable value that is pegged to Japanese yen so that it offers liquidity and stability and will ultimately lead to an expansion of cryptocurrencies. First, we are targeting to be listed not in Japan but in overseas exchanges, mainly in Asia. We will realize border-less trading through the issuance of cryptocurrency with the low price volatility.

Lastly, I'd like to talk about GMO Aozora Net Bank. The service took off smoothly on July 17. Currently, GMO Internet Group and our group company, GMO Financial Holding, together has 14.9% ownership stake. Going forward, after obtaining major shareholder approval from FSA, the Financial Service Agency, we're in agreement with Aozora Bank to ultimately increase our ownership up to 50% as an equal partner. This is the initial scheme. We target to turn into profit within the next 3 years. Currently, we are beginning the alliance of various services within the group.

The connecting security account that links the Click Securities and the bank accounts for immediate transfer is being offered. Also from middle of November, GMO Coin will similarly start the immediate transfer alliance. As a group, our company and GMO Financial Holdings became authorized as bank agent, so we began to make referrals of back account openings to customers using our group's services.

This is the service road map. Inter-linkages of the group's various services in all of our business domain is beginning to take place. We will not just provide expected functions of a banking service but also proactively promote convenience and API alliances accommodating to various services.

We appreciate your continued interest in our future strategies. This concludes today's presentation. Thank you very much for your attention. Internet for Everyone.