GMO Internet Inc

TSE:9449

Earnings Call Transcript 2020-Q3

[Masatoshi Kumagai, executive]

Hello, everyone. This is Kumagai from GMO Internet Group. Allow me to explain the third quarter earnings report. This slide shows the summary of the financial results of third quarter, July to September. The proceeds from the VC business disposition from last year has been booked. And the decrease in profit from our financial businesses has unfortunately resulted to decrease in revenue and profit year-on-year.

Overview by segment. The general score is listed on the right. Infrastructure business was a double circle. From the second quarter, the EC payment provider drove great performance. Home nesting consumption and online consumption expanded. This is not a one-off trend, but a new trend. Our group's profit gaining opportunity has further boosted. We believe this trend will continue and I would also like to touch on the outlook for each of the businesses.

Advertising & Media business performance was a triangle. Online advertising business is showing signs of recovery. Advertising agent business increased in revenue by capturing the online demand. On the other hand, media business continues to be weak, and we believe this trend will continue. Hence, our evaluation of this business is a triangle.

The recent performance of our finance business is a triangle. We have reduced the foreign exchange spread to retain #1 share in Japan and to expand the business. As a result, the number of transaction has increased significantly, and we remain to be #1 in the domestic market. In order to make sure that we can reinforce our solid business foundation in the long run, this action was required, although there was a negative impact in the short term. CFD volatility was high compared to the April to June month period. However, due to the expansion of our customer base, we landed at a high level. We expect this business to further grow as a second pillar, subsequent to our foreign exchange business. Strategies to grow the CFD business and foreign exchange share expansion is progressing steadily, and our outlook for this segment is a circle.

Recent performance of Cryptoassets business is a triangle. The exchange business, we operate through GMO Coin has nearly added Altcoin and the increase in transaction has elevated our performance. On the other hand, the mining business has started the operation in the new site. Cost structure, including energy cost, has improved and as a result, the deficit has decreased.

The 3 points of this business are firm performance of Bitcoin, the global hash rate trend and our expandable opportunity of the data center. With these business, our outlook is a circle.

Details will be explained from our CFO, Mr. Yasuda. So from here and onwards, Yasuda will explain the details.

[Masashi Yasuda, executive]

Starting with the executive summary of our year-on-year comparison by segment. The top is net sales and the bottom is operating profit. In conclusion, the VC and finance business impact was significant. And on a consolidated basis, we resulted in decrease in revenue by JPY 100 million and decrease in profit by JPY 287 billion.

Next is the YTD results from January to September of this year. Net sales, OP and ordinary profit were all in all-time high.

Next slide explains our shareholder return policy. As you can see on the top part of the slide, our basic shareholder return policy is total shareholder return ratio of 50%. Out of this, over 33% is dividend, and the remaining 17% will be allocated for share buyback. In the middle part of the slide, we show the dividend per share. We will not be disclosing our performance outlook. Therefore, dividend will be announced each quarter. The third quarter dividend is an increase of JPY 0.2 at JPY 7.4.

On the bottom of the slide, we have the share buyback progress update. The total cost of share acquisition for this year is planned to be JPY 15 billion. And as of end of September, we have acquired JPY 9.34 billion.

Now moving on to the financial results. This slide shows the net sales by segment by quarter. Due to the impact from VC and finance business, we resulted in a negative revenue. However, we have been able to generate continuous growth centered around the infrastructure business shown on the very bottom dark blue bar.

Next slide shows the profit by segment by quarter. VC share was sold during the same period last year, resulting in a record high profit. However, the profit decreased from last year. The trend in profit is also showing growth, led by 2 segments, the bottom blue infrastructure business as well as the light blue finance business, although it has volatility.

Moving on to the group overview. This slide shows the market capitalization and equity share of our 10 listed group companies. As you can see on the bottom, the group market capitalization is JPY 1.6 trillion, and our equity share has exceeded JPY 580 billion.

Next slide shows the composition of our 4 business segments. The size of the pie represents the revenue contribution. The number of contracts in infrastructure business and the number of accounts in our foreign exchange trading, securities trading and Cryptoassets, all make up our solid earnings foundation. It has now totaled to 13.19 million customers.

Next slide shows our workforce. We call our employees partners. As of end of September, our partner has totaled to 6,048. Engineers and creators, who have technological expertise account for 45.7%. Our target is to reach 50% or above of creators, and we will continue to invest on talent.

Next topic is the infrastructure business. This slide is a highlight of our infrastructure business. Domain Registry, hosting & cloud, e-commerce, security, Payment and Provider, all are in aggregate of #1 service. All of them also are inevitable services for Internet, and it is also a business that will never disappear.

This slide shows the revenue breakdown of the infrastructure business by quarter. The entire segment grew revenue by 15%. It has declined from the second quarter. However, this is due to deconsolidation of an overseas payment subsidiary. From fourth quarter and onwards, we will return to growth trend Q-on-Q.

From second quarter, the home nesting trend continues to expand consumption. With the demand coming from people working from home, Provider business grew by 26.6%, EC support by 32.6%. Payment also would have grown by 30% if the deconsolidation of the subsidiary is excluded. I mention this every time, the infrastructure business is a business that continues to grow. The stock and transaction type business model enables growth. And with the combination of a customer base, that also continues to grow. We call this our solid foundation of revenue, and it is becoming even more robust. This powerful growth is realized because this business is an aggregate of #1 service.

This slide shows the quarterly OP trend of our infrastructure business. The growth driven by the ST support and provider businesses totaled to JPY 4.01 billion.

This slide shows the profit composition of our infrastructure business. It is broken down by Payment, nonpayment business, and we also show the total cost. For Payment, the end of year bonus provision led to a decrease in profit from second quarter. However, the growth is well balanced. The number of contracts has now reached 11.51 million. It has slightly decreased from second quarter. However, this is due to a decline in domains caused by the change in Google algorithm. The other products are doing great. So please be reassured.

Now even within this business, the GMO digital stamp Agree is doing substantially great. From June, the entire company initiated a goodbye stamp campaign. And as a result, the number of accounts has grown to 48,000, which is 16 folds year-on-year, 16 folds. The vision of the CMO digital stamp Agree will be explained by Mr. Kumagai later on in his presentation.

Now the EC support business did well this quarter. I would like to talk about ASP cart, which is the business we call the platform of EC. When looking at the business on a consolidated basis, the online shop creation service is called MakeShop or Color me and the payment service call -- is called GMO Payment Gateway and GMO Epsilon. Each have different business models. Online shop creation service is a stock business where we charge a fixed monthly fee. The payment is a transaction type linked with GMV. The online shop creation revenue is based on unit price and the number of stores. And it is booked in the EC support segment. On the other hand, payment service revenue is based on the commission set against the GMV and is booked into the payment segment.

In summary, the stock in transaction generate profit through natural cross-sell. This is the characteristic of our ASP cart business on a consolidated basis.

This slide shows the EC support business, including EC platform. The total circulation amount exceeds JPY 110 billion. And on this distribution amount, 40% is used through the GMO Payment, minne and SUZURI are new forms of EC, and they are also growing healthily.

Next is the Advertising & Media business. This would be the trend of the quarterly revenue. On an year-on-year basis, we have been able to grow by 0.6%. On the very bottom, we have the advertising business. It is a 5% increase at JPY 8.1 billion. Advertising agent business performs differently by industry. But by capturing online consumption, we are trending favorably. The blue media part, as you can see, has declined by 10.7% at JPY 2.4 billion. The ad unit price is recovering. However, there is impact from the finance sector and the advertising placement is being held back.

Next slide shows the operating profit trend on a quarterly basis. There were some promotions that were executed in the new business. And therefore, there is a decrease on an year-on-year basis.

Next is the finance business. The performance trend is as you can see on the slide. While the CFD performs well, the foreign exchange maintains to be #1 share in Japan. We were able to achieve this by reducing the spread. And therefore, we decreased in both revenue and profit.

This slide shows the foreign exchange transaction in domestic share. Transaction continued to trend at a high level, and we continue to be share #1 in the third quarter and we will continue to maintain our #1 share.

These are our finance, payment, cryptocurrency business domains. This is cryptocurrency business. This chart shows quarterly performance of cryptocurrency business. The segment has had sales growth quarter-over-quarter and have been profitable since Q2.

I will explain mining business and exchange business, respectively. The mining business had higher sales and lower losses than the previous quarter. By the end of June, we closed the former location. And in June, we started a new facility. Our hash rate is on the rise, but we had an issue, suspension of electricity supply for the new facility. So we failed to have the stable operation at the beginning. Because of halving event in mid-May, mining profitability lowered and the growth of mined amount was limited. This is our company's hash rate and mined amount. The blue line is the hash rate at the end of 8 months. The yellow one is the monthly average rate. The bar chart shows yen amount of mined Bitcoin calculated by multiplying month end rate by mined amount due to relocation, monthly average hash rate in yellow fluctuates, but current rate is 525 petahash.

In Q4 and onwards, 2 external factors, coin prices and global hash rate will improve. An internal factor, higher utilization of depreciated machines will lead to better profitability. Business performance will bottom out. The exchange business enjoyed an increase in sales and profit Q-on-Q and year-on-year. Trading value was low, but increasing transactions of newly added Altcoins led to better profitability.

Now GMO Aozora Net Bank. This bank works as a technology bank, aggressively opening APIs so that banking functions can be utilized through our customers' services and systems. Existing banking services, balance inquiries, deposit withdrawal inquiries, bank transfers have been provided to branches and ATMs, but API connection with our user systems has promoted automation and efficiency. The number of API users has grown to 67, not only digital payment agencies, but also general enterprises are interested in our services. To promote digital transformation for financial services, we allow wholesale customers to open bank account without signatures and subscription services to business customers, which is the first of its kind by Japanese banks. We would like to be agile enough to provide new services.

Now, I would like to hand over the microphone to our CEO, Mr. Kumagai.

[Masatoshi Kumagai, executive]

Also our group CFO, Mr. Yasuda explained, I would like to share with you our focus business, the signature service agri. I would like to share with you various KPIs. This is the number of accounts. Group by signature campaign was completed by the end of September. As a result, we received 40,000 applications for 3 months from July through September, and the number of accounts have grown to 48,000, 16x growth compared to a year before. And on November 8, the number of accounts exceeded 70,000. We are getting closer to 100,000. We see strong need of e-signature as it is more recognized as a convenient tool.

Cloud sign operated by Bengo4.com is our partner to promote signature-free society in Japan. When their accounts are combined, we have 170,000 accounts in Japan. There are 6 million companies, including self-employed here in this market. So we will continue to help them make their operation more efficient.

This chart shows the number of contracts. This is the first time we ever disclosed this KPI. We will continue this disclosure. This is the number of requests to conclude e-contract, send to counterpart, showing how actively our services are utilized. As you can see from this chart, this KPI grew 2.5x compared to a year before, exceeding 300,000. This KPI's growth is milder than that of the number of account, because there are still many new customers. But once this service is utilized, users can utilize for many other occasions and the counterpart to realize the convenience of this service, so there will be a continuous user Internet strength, network impact works very well. So I believe this KPI will grow virally.

We already announced our revision of our plans starting in December. Under the strong leadership led by Mr. Suga, Prime Minister, Susa, e-signature acts and relevant regulations have been enacted to promote digital transformation. Capturing this opportunity, we decided to integrate our plan and reduce our prices significantly. And taking advantage of our capability of certificate authority, we will provide one digital certificate for free of charge to our users. Complying with the e-signature Act, Agree is available for both digital signatures as well as electronic signatures.

We conducted goodbye signature campaign, but we received 25,000 feedback and opinions from our customers. Some of them said ready-made field and sealed certifications are very important. Others introduced actual examples of digitalization in some municipalities. We don't want to deny or reject Japanese culture personal fields, but secure and convenient IT products are necessary to make contracts and operations more efficient.

Based on our customers' feedback, we believe our services should be #1, and our prices have to be reasonable. This will accelerate DX in Japan. Our certificate authority function has enabled us to design and provide highly advanced security services flexibly and agilely. Certificate authority is a bit difficult for you to understand. Therefore, let me explain this.

GMO Global Sign is one of the only 7 certificate authorities in the world. The padlock appearing in the address part tells the security technology is in place. This technology encrypts information moving from browsers to servers to protect personal information. This is one and the only technology to protect the Internet. We do have a track record of 24 years. Now certificate authority can be established by ventures, but it is important to provide security to receiving end of browsers with site seals on them. We have covered 99.8% of browsers. Even if a venture can establish certificate authority, it may take decades to achieve 99.8% penetration. So in reality, nobody can enter this field, certificate authority field.

Our capability of certificate authority is our excellent value and differentiation. We have provided our technology to websites of Prime Minister Suga, former Prime Minister Abe, Microsoft 365 and Google. I believe you Google everyday. And usually, on top of that search, Wikipedia is appearing. Therefore, you see Wikipedia every day. 50% of SSL of Wikipedia has been provided by us. Our capability and the technology of certificate authority has been injected into services provided by Agree. And by providing 1 electric certificate for free of charge to our users, we would like to spread e-signature as quickly as possible in Japan.

DocuSign and Adobe Sign also utilize our technology. There are 2 entities in Japan, which have certificate authority. Secom only provides in Japan, but we provide this technology globally. By taking advantage of our strength, certificate authority, we will provide KYC functions together with electronic certificates supported by official certificates and ID, password. The government is enacting laws and regulations to establish signature-free society. Our GMO Electric -- e and digital signature Agree has drawn attention, e-signatures for everyone. Based on the slogan, we are determined to continue our effort to provide and spread secure e-contract services.

When we started our Internet services 25 years ago, our company was fragile. But due to your support, we went public on the JASDAQ on August 27, 1999. Since then, we've provided comprehensive services centering on infrastructure services, and we have developed to be a beautiful company. Now DX is extrapolated by the COVID-19 pandemic. So we are playing an important role as an essential company.

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.]