GMO Internet Inc

TSE:9449

Earnings Call Transcript 2019-Q3

[Masatoshi Kumagai, executive]

Let me present on the business results for the third quarter of FY 2019 for GMO Internet. This is the agenda for my presentation today.

I'd like to start with the overview. The page shows the executive summary for the third quarter, July-September of 2019. First, the consolidated results. The sales of shares of VC supported a large increase in both net sales and profits. As a result, we renewed a record high in net sales, operating profit and ordinary profit.

Here are the highlights of the third quarter, July-September of 2019. We achieved record high results just with the existing line of businesses, which included infrastructure and finance that trended well during the quarter. Infrastructure business continued to display its strength, marking record high results, with access and Payment taking the lead. As for finance, persisting downward trend in FX trading volume since the beginning of the year shown a temporary recovery in August. Profitability-wise, thanks to the initiatives, including big data analysis, we have maintained a high profitability that contributed to a high level of profit generation. As for VC and Incubation business, we posted a gain on sales of shares of ChatWork at the time of their IPO.

Now as for cryptocurrency exchange business, added to the decline in trading volume from the second quarter, we lowered our leverage from end of July, though certain level of revenue and profit were generated. Finally, cryptocurrency mining business, generation of profit is continuing as a result of decline in fixed cost. However, as to the delayed new site deployment, although electricity and the land was secured and the build-out being kicked off, we think that the fourth quarter is going to be the bottom, and I'm sure we'll be able to uptick our profit generation from the New Year.

The page shows the waterfall chart by segment on a Y-o-Y basis. The top of the page shows the net sales while the bottom of the page shows the operating profit. Let me walk you through the waterfall chart, starting from the left, the infrastructure segment. Infrastructure and finance, both the sales and profit were up, as explained in the highlight. Advertising & media, sales was down with profit increase. Performance-wise, it trended almost flat as compared to the prior year. Cryptocurrency, sales down, profit up due to decline in volume in the mining business as a result of the transfer. However, thanks to the reduction in cost, the segment broke even and started to generate profit. VC was up in both sales and profit. All in all, we managed to increase both net sales and profit on a consolidated basis, renewing a record high on quarterly performance significantly.

Next slide shows a waterfall chart on a Q-on-Q basis. Much of the explanation will be a repeat. So let me skip this page.

The page shows the segment summary. From the last quarter, we started to give a rating to each and every segment. This is my personal rating, a qualitative rating as opposed to quantitative. So this is very much by my personal rating. Now infrastructure is a double circle, which indicates excellent, not just limited to payment, the overall segment renewed its record high performance. We gave a cross or a poor for advertising & media. Although the segment posted positive profit despite declining sales, the profit was less than JPY 100 million. The reform of the segment is underway. However, the units within the segment is mixed, and the leveling off period, unfortunately, is persisting. As we had targeted, we are going to be pursuing an initiative to bring about V-shaped recovery.

Finance is one circle, which indicates good. Although there was a temporary slowdown at the beginning of the year, we understood the current trend is a steady recovery. Cryptocurrency is neutral, if not, poor. Although external environment of the exchange business is trending in a tough manner, we managed to generate reasonable level of profit. Mining continued to generate profit. However, the net sales was down coinciding the period of data center transfer.

The page shows the executive summary for January to September performance on a cumulative basis. As you can see, both net sales and profit grew year-to-date with net sales, operating profit and ordinary profit marking record high results.

The waterfall chart for year-to-date performances are shown on this page. Allow me to skip this explanation again.

Using this slide, I would now like to explain our shareholders' return policy. As being explained before, total shareholders' return ratio of 50% with a payout ratio of over 33% and shares buyback making up for the gap, so no change in our basic policy.

We are refraining from disclosing our guidance this year, again. That includes the expected amount of dividend. So please allow us to announce the dividend at the time of quarterly results announcement. Dividend per share for the third quarter is JPY 7.2. Payout ratio will be at 33.1%. As to the shares repurchase program of JPY 3.11 billion, which we announced at the time of end of fiscal year result presentation, has now been completed. And the repurchased shares have all been canceled as promised and announced.

I will now hand over the microphone to Group CFO, Yasuda.

[Masashi Yasuda, executive]

I am Yasuda, the Group CFO. Let me now go into the details of the financial results. The bar chart shows the quarterly net sales trend by segment over the past 6 years. Net sales was up by 11.1% year-on-year. Quarterly net sales have reached to JPY 50 billion, proving a continued growth as aimed by the company.

The page shows a bar chart of quarterly operating profit trend by segment. While there are some ups and downs from quarter-to-quarter, you can recognize a continued profit growth on a long term, led by infrastructure and finance.

Next, let me present the company's P&L summary.

Next, this page summarizes the company's balance sheet. Current asset, current liability increased due to customer base expansion in the finance segment.

Next, let me overview the group performance. This slide shows our market capitalization and our company's equity share of listed companies in the group, as you can see.

This is high level of overview of our 4 business segments. The size of segment represents its sales contribution, including the number of contracts of infrastructure business and the number of accounts of FX, securities, Cryptocurrency, customer base as solid revenue base totaled 12.46 million.

Next, let me show you the trend of partners and head counts. The number of partners came to 6,058 as of the end of September, 46.3% of which are engineers and creators with technical capability. Toward the goal that engineers and creators would account for more than 50% of total, we continue investment in human capital.

And this picture shows the second headquarters of our group, Shibuya Fukuras, which will plans grand open on December 5. This is a building complex with a commercial facility of Tokyu Plaza in front of Shibuya station, consolidating entities in the neighborhood of Shibuya station. Centering the core companies of finance and payment, we aim to generate further growth synergy and to strengthen the brand. This new office will send information at home and abroad as a technology hub of engineers and creators.

We are a technical-oriented group, where engineers and creators with cutting-edge and diverse technical capability as experts of infrastructure, network, security, payment, financial engineering, banking system, AI and blockchain accounts for about 50% of all partners. We organize weekly study group, weekly meetup, workshop so that many engineers leverage our sites to gain our knowledge and know-how on the new technology. Besides, through a weekly study group and meetup and workshop, we will organize event. And by the end of second quarter of 2020, we will host a large tech conference directed for engineers and creators. We hope that you join the conference.

Next, let me give you the update by segment. This is the breakdown of infrastructure business segment. The number of contracts exceeded 10 million as of the end of last month with continuous expansion. In Provider business, the share of optical network net additions surpassed 55%, with further growth of the number of subscribers. This infrastructure business is indispensable and everlasting for Internet and the aggregation of #1 service in our group.

This shows our quarterly revenue trend and its breakdown. It is really a solid revenue base of stock and transactions so-called. It accrued 2.5x in terms of revenue within 5 years. This dynamic growth was realized by aggregation of #1 services in the group.

Then this shows the trend of quarterly operating income. In addition to payment and provider business revenue increase, variation of marketing costs resulted in record high JPY 3.76 billion, 28.4% up. Then my personal rating of infrastructure segment is excellent.

Next, let me show you quarterly trend of infrastructure segment profit dividing Payment and others. Others include provider domain, cloud hosting, e-commerce support and security. Sometimes, I'll be asked by investors if other business in infrastructure segment can grow. Actually, this graph shows that each subsegment continues growth in well-balanced way. And the number of contracts of infrastructure business reached 10.93 million, 1.32 million increase year-on-year, 110,000 net addition monthly.

Let me now continue with the explanation on Freenance, financial support to freelancers as part of the initiative, where infrastructure meets finance, which we have started to present from the last results announcement. Our business is designed to purchase the receivables of the freelancers at a certain level of credit to improve the cash flow of the freelancers by making an immediate payment to the freelancers. By -- as to the Freenance, the customer base as well as the credit extension and financial services, by leveraging on the strength of all these different functions of the group companies, we make the services being available to our customers. As indicated by the dark blue bar chart, purchasing of receivables had grown by about 10x, led by the repeat users. The business, in fact, has been enjoying repeaters and has now grown to be stock-type businesses. We will further our effort to grow the data by making use of the credit extension data.

Now the slide shows a summary of Internet Infrastructure business, the short-term prospect and the mid- to long-term strategies. We have made no changes to this strategy from the previous quarter. Sorry to repeat myself, but the Infrastructure business is indispensable for Internet business. And they are collective line of services that never goes away. Moreover, they are a group of #1 services for us. In the short term, we will be strengthening our #1 products while pursuing synergy between and among different products to achieve sustainable growth.

With regard to mid- to long-term strategies, as a result of launching banking business, GMO Internet Group is now equipped with infrastructure and finance functions transforming our group to be very different from our competition. So we intend to accelerate the speed of growth by multiplying the solid revenue base of infrastructure business that enjoys 10 million-plus contracts with our finance business capabilities.

The next is Online Advertising & Media business. The bar chart shows the quarterly trend of the Online Advertising & Media segment as well as its breakdown. On a year-on-year base, the segment net sales was down by 1.3%. Advertising was down by 1.5% at JPY 7.7 billion. Both volume and performance of proprietary ad tech products is on the recovery trajectory, thanks to optimization of advertising standard. On the other hand, advertising agency business softened as there was a relatively sizable deal in the prior year. Media was down by 4% at JPY 2.7 billion. EC media trended well, while media targeted at teenage girls slowed down, coupled with a negative impact of discontinued products designed for SMEs in the first quarter.

Now this page shows the quarterly operating profit trend. As you can see, downward trend is persisting for some time. Profit started to increase from the last year. But the leveling-off period is still persisting. We will further effort to achieve V-shaped recovery. While we are confident with our initiative of strengthening our proprietary products and media, and we are generating some positive outcome, but since it is not propelling enough to bring about positive result, we have given a rating of poor.

Now the page shows a short-term prospect and mid- to long-term strategies of advertising & media business. As to the short-term prospect, although we are making a shift from existing products to the new, it has not been sufficient to turn around the downward trend of the existing proprietary products. So therefore, we intend to accelerate the speed of tuning to prepare ourselves for the peak period from the end of the year to the beginning of the next year.

On the mid- to long term, we made no changes to our policy to precede the development of our products as well as new stock-type products. Unaffected by the moves of the competition, we would further effort to build a solid business foundation.

So that was the short-term to mid- to long-term strategies, and we would of course further our effort in bringing about V-shaped recovery.

Next, we'd like to explain our Internet Finance business. Quarterly trend is shown on the slide. Both net sales and profit were up on Y-o-Y as well as Q-on-Q. The result was supported by a firm trend in FX business. Profitability marked a record high, thanks to improvement initiatives based on big data analysis, while the trading volume improved as a result of temporary improvement of volatility back in August of this year. While there was a temporary slowdown in the first quarter, but the recovery is continuing, giving us the confidence to give the rating to be good.

The slide shows the trend of FX trading volumes. Trading volume of the quarter exceeded the prior year's level after a long while as a result of temporary volatility improvement. The share was up by 1% year-on-year, up 21.7%.

The page shows a summary of short-term prospects and mid- to long-term strategies of the Internet Finance business. From mid-October, we lowered our spread for U.S. dollar-yen pair from USD 0.03 to USD 0.02, following the steps of our competition. In the short term, a negative impact is anticipated, but we are aiming to maintain and grow our shares. As a result of price optimization, price indication to the customers, that is the optimization of this, and enhancement of position management, we are enjoying our improvement in profitability, which gives us confidence to continue these initiatives. Other than FX, we intend to strengthen CFD. So to develop another pillar of business.

As to the long-term initiatives, we will further effort in improving our profitability, largely in the long run. In addition to the -- cover all this through interbank market, we intend to become full-fledged in new risk hedge method through open markets. We also aspire to expand our business into other areas other than FX.

Next, this shows the status of the initiatives of our company's finance and our payment segments.

Let me give you the update of Cryptocurrency business. This shows the result of quarterly performance of entire Cryptocurrency segment. Entire segment achieved revenue increase, returning to be profitable quarter-on-quarter. Let me present mining business and cryptocurrency exchange business individually.

First, cryptocurrency mining business, which recorded decrease in revenue and profit quarter-on-quarter. Supposing that top line is modification of unit price and volume, unit price rose, thanks to the improvement of cryptocurrency market price. Meanwhile, volume declined due to the company's hash rate as our mining center is in process of relocation. Meanwhile, cost reduced. Our cost, which is valuable cost, reduced because of lower hash rate. And regarding fixed cost, the burden of depreciation costs are lessened due to posting of impairment loss of fourth quarter of previous year. Besides, as for relocation plan, we completed to secure power and site to start construction of new site. Then my personal rating is neutral and poor.

Next, let me talk about cryptocurrency exchange business, which saw decrease in revenue and profit quarter-on-quarter in addition to reduction of transaction volume of cryptocurrency market. The business lowered leverage at early stage from July 31 to be compliant with bond trade restrictions set by JVCEA. Meanwhile, customer base increased steadily to maintain certain level of revenue. Then my personal rating is neutral and poor.

And this shows the summary of short-term outlook and the mid- and long-term strategy of Cryptocurrency business. In short term, because of impairment loss and lessened fixed cost, mining business stand to be profitable. And with respect to relocation project, we already completed to secure power and site to start construction of new site. Therefore, hash rate is expected to increase from early next year onwards. As for exchange business, due to shrinking spread, we promote to increase the share. And we want to increase profitability by leveraging know-how of our transaction cultivated in FX. Besides, we are making application to add transaction currency pair. In mid- and long term, as for mining, we intend profit contribution based on a low-cost strategy.

And with regard to exchange business, first priority is to expand domestic share, as mentioned before. And the situation of cryptocurrency payments stays unchanged compared with first quarter results briefing. And we want to issue Japanese yen-pegged stablecoin by the end of the year.

And let me present our finance, Payment, Cryptocurrency segment initiative. A year has passed in last July since starting Net Bank business. And this slide shows the status of securities connect -- account with GMO Click Securities. Because of promotion of simultaneous account opening, the number of accounts and our balance has been steadily underway and because of -- well appreciation of bank API initiative and direct deposit account and a corporate debit card to meet better convenience of our corporate customers, the number of corporate accounts and the partnership increased. And the number of partner increased to 10, and our public connection, which is so-called electronic payment service provider, connected with 4 companies. Meanwhile, our unique private connection by GMO Aozora Net Bank came to 6 companies. And our private connection, which is available to general enterprise, is developed from engineering-oriented few to enable easy connection that is highly appreciated by connected companies. And the background is webhook function or so-called send notification function. And a deposit to the bank is notified from a bank to connected customers as a push notification function, which seems self-evident in Internet industry, but not so common in banking industry. That is the reason why our service is well appreciated. From now on, by leveraging know-how cultivated in Internet service and engineering-oriented development, we'll trigger to achieve #1 position of our bank API connection.

And next slide assumes the status of overseas business. We have 70 locations in 23 countries globally. The number of overseas partner reached 1,480. And to speak of international sales, it comprises infrastructure business, finance business, mining business and overseas research business. And infrastructure is consisted of Z.com business, which is available in Southeast Asia; and SSL security business available globally and .shop. Infrastructure business grew. However, because of reduction in mining revenue, the business saw JPY 4.1 billion, 2.1% up year-on-year, with 8.2% of overseas sales ratio. And we want to go forward to import target, which is overseas sales ratio of -- come to 50% as long-term target.

In November, assembling overseas management, we organized GMO Global Summit to share group history and mind, which has been valued and our future strategy was shared through this communication.

In various segment of Internet service and in various region, we act as the assembly or aggregation of entrepreneurs to generate synergy by leveraging each competitive strength, and know-how that has been cultivated and could be shared with group companies to draw new innovation, to achieve sustainable growth at home and abroad.

Thank you very much for your attention. Internet for everyone.