GMO Internet Inc

TSE:9449

Earnings Call Transcript 2022-Q3

[Unknown Executive]

Good afternoon. Thank you very much for joining us in the Third Quarter financial result announcement of GMO Internet Group despite of your busy schedule. Let us first of all, introduce the presenters today.

Executive Vice President and Group CFO, Masashi Yasuda, and Group Executive Officer, General Manager of Group Financial Department, Noriko Inagaki. The presentation will be followed by Q&A session. Before the presentation, we would like to explain the change in the recording rules. On The accounting standard for revenue recognition has been applied from this fiscal year. The rules for reporting sales have been changed. In this presentation, figures before the rule change are indicated as old standard and those after the application are indicated as a new standard.

The concept of net sales and operating profit is as described here. Now regarding the comparison with the same period of the previous year, for the affected sectors. That is to say, consolidation, infrastructure and online advertising and media, we use the old standard to use the same yard stick so to accurately report the actual status of the business. Please refer to the appendix for the comparison of all standard and new standard.

In addition, we have also made comparative calculation of all standard and new standard for the divisions that are not affected by the new standard.

Yasuda, Group CFO, will now give a presentation.

[Masashi Yasuda, executive]

I am Yasuda, Group CFO of GMO Internet Group. Thank you very much for joining us today at the GMO Internet Group's Third Quarter Financial Results Briefing for the fiscal year ending December 31, 2022. Since our fiscal year ends in December, I will explain our financial results for the period of July to September. Today's agenda is as shown on the slide.

The slide shows the summary of financial results for the third quarter. The figures in the center highlighted in blue based on the old standard. Net sales were JPY 65.2 billion, operating profit was JPY 6.8 billion, ordinary profit was JPY 8.7 billion, and net loss was JPY 1.8 billion due to the extraordinary loss on the shares of GMO Aozora Net Bank.

Here on this slide is an analysis of changes in sales and profit by segment. Sales on the left and operating profit on that is on the right. The impact of the changes in standards is also included. First, sales grew in infrastructure, finance, and advertising and media. Total sales was JPY 65.2 billion, an increase of JPY 8.8 billion. under the old standard, absorbing the reactionary decline in Cryptoassets. Now from here, there was a negative impact from the change in standards, resulting in JPY 57.5 billion under the new standard.

As for operating profit, profit increase for Infrastructure and Advertising and Media due to higher sales. On the other hand, the financial business remained flat due to the decline in profitability of the FX business, due to a reactionary decline in the Cryptoasset, business profit decreased by JPY 1.1 billion; under the old standard at JPY 6.8 billion. The level of profit was almost the same by the new standard.

Next is a summary of each segment. A qualitative assessment by management is attached on the third right. Assessment of each business is generally unchanged from the second quarter.

Now Infrastructure is double circle or excellent. Performance continues to grow on the strength of its overwhelming #1 service aggregation and rock solid recurring earnings business model. Growth rate of sales is backed at double digits, thanks to the expansion of security business and recovery of access business. And as a result, both sales and profit increase while handling the burden of goodwill amortization and strategic investments.

And the next is Advertising & Media. Double circle or excellent. The V-shaped recovery trend continues. In addition to the strong performance of our own media, online advertising also performed well as the economic activity resumed, resulting in an increase in both revenue and profit. Sales which usually peaks during the January-March period reached a quarterly high for the second consecutive quarter.

Now Finance is single circle or good. FX continues to face challenging conditions, although trading volume reached a record high following the second quarter. The dollar-yen exchange rate has depreciated in one direction against the yen, making profitability and issue resulting in x or bad. On the other hand, CFDs continue to trend favorably with commodities and stock indices booming, resulting in single cirle or good. Both sales and profit increased due in part to Gaika ex byGMO joining the group.

Cryptoassets are triangle or neutral. Unlike the prior year that enjoy the boom, the quarter ended with a decline in both sales and profit. In the exchange business developed by GMO Coin, the number of accounts and market share of transactions remain steady, but the market was difficult with trading volume trended lower for the entire industry. The mining business also continues to experience a decline in operating rates. Despite the difficult conditions, we have not changed our side that the Cryptoassets business is a market with potential.

We are building a system in an obtuse manner so that we can make a solid profit when the time is right. The slide shows the cumulative figures for January through to September. Thanks to the contribution from the Incubation business in the second quarter, record high results were achieved from the top line to the bottom line.

Next, I would like to discuss shareholders' return policy. The basic policy is, total return ratio of 50%. Of this, 33% or more should be composed of dividend and the remaining 17% by shares buyback. Now since we pay out our dividend quarterly, dividend will be JPY 0 if the quarter resulted in a loss. However, we have a rule to pay out dividend at 33% or more and execute sales buyback to appropriate for the rest of 17% or more based on the profit for the full year. In the case whereby we could not complete our buyback program, it will be carried over to the next fiscal period.

Now the next slide shows the trend of dividend per share. Since we will continue to not disclose earnings forecast for this fiscal year as well, dividends will also be announced on a quarterly basis. We regret to inform you that we will not be paying a dividend for the third quarter of the current fiscal year due to the net loss for the quarter. However, since the cumulative total for the period from January to September exceeded that of the previous year, we will continue our efforts in the fourth quarter to increase the dividend for the full year.

Now before we get into the details of the quarterly results, once again, I would like to take this opportunity to explain the strength of our group. There are 2 major strengths. The first strengths, our persistence and commitment to in-house development and operations. To survive in the fast-changing market of Internet and to provide the #1 services, we believe that we must be a manufacturing company that creates and operate its own products. For this purpose, creators with technical skills, namely engineers and creators are absolutely important. We call our employees and staff partners. And at the end of September, we had 7,208 partners. Of these, 49.9% are creators and engineers.

It was in 2011, that Group President, Kumagai, first set the goal of a 50% ratio for creators and engineers. When we first presented this ratio to investors in February of 2014, the ratio was at 37.1%. After 10 years, we are now very close to our target of 50%.

We will continue to grow as a manufacturing company. Now the second strengths, it is the earnings model called rock solid recurring earnings model that we have explained at the time of the briefing session last time. That slide shows the trend of consolidated net sales. As you can see, we have achieved sustainable growth since our founding. At the end of the previous year, the company had increased revenues for 13 consecutive fiscal years. Why have we've been able to achieve sustainable growth? We believe this is because we have been building up a solid, rock, recurring earnings since our inception.

The solid rock recurring earnings is a unique GMO term. So what is the difference between a mere recurring type earnings model or subscriptions as the password has come to be known. That is -- it is a recurring earnings that is indispensable and that it will not disappear as long as the Internet continues to exist, and that comes from continuously charged merchandises. It is also the business structure that Kumagai has been striving for since the founding. Now many investors may think of GMO as an infrastructure company. That is certainly true. So why are we, GMO Internet Group, is in the infrastructure businesses?

It is because we started our business by posing ourselves a question of what are the continuous building merchandise that is indispensable and that will not go away. The answer to that question is the array of infrastructure products and the earnings that comes from the solid, rock recurring earnings.

Now this slide shows the breakdown of sales into solid rock recurring revenue and other revenues. The red line represents solid rock recurring revenues as a percentage of net sales. Solid rock recurring revenues include both recurring billable revenues in the Infrastructure business and transactional revenues that have a solid rock revenue base similar to recurring billing revenues. As you can see, solid rock recurring earnings are what supports our sustained growth.

The slide shows a breakdown of solid rock revenues into unit price and number of contracts. Both The unit price and the number of contracts are on an increasing trend. And as you can see, the current solid rock recurring earnings of JPY 117.4 billion is generated from the annual unit price of about JPY 10,000 that is multiplied by the number of contracts of about 12 million. And as for the number of contracts, we are receiving 10,000 new applications every day at present. The net growth will be a bit smaller because of some trends, but the volume of information and transactions on the Internet expense, we can expect this trend to continue into the future.

The slide shows the number of contracts for Internet infrastructure. It can be rephrased as a foundation that supports the solid rock recurring earnings. At the end of September, there were 12.93 million contracts. The number of contracts has been increasing at about 1 million per year as shown in the past fiscal year-end figures. Multiplying this by the unit price of JPY 10,000, mentioned earlier, it is calculated that the sales of JPY 10 billion per year could be accumulated every year.

Now the slide shows some responses to the disclosure of solid rock recurring earnings on social media. As you can see, so if you could read it at your leisure time, it'd be very grateful.

Now next, we will explain the group overview. The presenter will be Inagaki, Group Executive Officer and General Manager of the Group Financial Department.

[Noriko Inagaki, executive]

I am Inagaki Group Executive Officer and General Manager of Financial Department of GMO Internet Group. Thank you for this opportunity.

Now this diagram shows bird's eye view of our business segments. The size of the area indicates the sales percentage breakdown of the segment, the number of infrastructure contracts as a solid rock revenue base and a number of FX securities and Cryptoasset accounts together make up a customer base of 15.38 million. The slide shows the market cap of the 10 listed companies in the group and the company's equity share. The total market cap of the group is about JPY 1.4 trillion, and our equity share is approaching JPY 500 billion.

The slide shows the trend of the quarterly sales by segment. As Yasuda mentioned earlier, we continue to see a growth trend, led by the Internet infrastructure colored in dark blue. This is the quarterly operating profit by segment. Although there is a reactionary decline in Cryptoassets over the short term, we have not changed our view of sustainable growth based on solid recurring revenue coming from infrastructure.

Next is Internet Infrastructure business. These are the services of the infrastructure business. Domain, hosting and cloud, e-commerce platform, security, e-signature, cybersecurity, payment and internet service provider, it is a collection of #1 services. These are all essential services that will never disappear and indispensable in the Internet society. This is the quarterly sales and its breakdown based on the former accounting standard.

Sales growth for the segment as a whole is accelerating again to 16%. The payment business shown in light blue continues to be strong, a cashless ratio and EC ratio still have room to grow and the business environment continues to be favorable.

The security business shown in green is contributing to the acceleration of the top line. The impact of the change in the expiration date of SSL security has run its course, and we are back to high growth again. GMO cybersecurity by Ierae, which joined the group last quarter, also expanded its earnings as its utilization rate rose.

In addition, provider business, which is shown in gray at the bottom and accounts for a large portion of sales turned positive year-on-year. There are 2 reasons. One is because fixed lines are steadily increasing due to telework and remote classes becoming a commonplace. The other reason is the result of revision on low-priced plans at major telecom carriers. Because of this, mobile lines had been weak until now. Please look forward to the accumulation of revenue from solid recurring revenue. This is the trend of quarterly operating profits. Each of the business has entered into the monetization phase, including businesses and investment and growth stage, realizing double-digit growth despite amortization of goodwill, with sort of consolidation of Ierae and strategic investments for GMO Sign.

The third quarter is the fiscal year closing at GMO Payment Gateway performance-linked bonus was posted, and the profit declined quarter-on-quarter compared to Q2. In accumulation, profits were strong. We are thus planning to make some investments in the fourth quarter. I would like to report about the progress of our strategic crypto security business, GMO Sign in which we are making group-wide efforts. We had been #1 in terms of number of accounts. But this time, we became #1 in terms of number of contracts sent as well. This is the number of e-contract accounts. Thanks to the so-called network effect, even after the group-wide Sayonara Seal campaign launched in June 2020 during COVID-19, the number of accounts are continuing to grow. As of the end of September, it increased 2.7 fold year-on-year to 910,000.

Introduction by large enterprises are increasing also. This is a number of e-contracts sent. This is the most important KPI since it indicates the level of customer activities. We became #1 in Japan, along with the number of accounts achieving dual crown. GMO Sign is strengthening initiatives for promoting digital government. In November, Fukuoka City has decided to introduce it. We will continue to actively promote introduction at local governments to lead to further growth. Last of all, this shows the transaction value of e-commerce solutions business in total.

It consists e-commerce platforms, such as Color Me Shop! and MakeShop and services such as minne, SUZURI and Freenance. Despite the reactionary decline in nesting demand for e-commerce, which was triggered by COVID-19, our group performed strongly, centering around high price range MakeShop. GMO Payment Gateway payment service is used in roughly 40% of these transactions, majority of the transaction amount via payment agency services. For example, credit cards are using our group services, demonstrating strong synergy between e-commerce platform and payment business.

Next is Online Advertising & Media. This is quarterly sales and its breakdown based on the former accounting standard. January to March is usually the busy period. but we achieved record high sales this quarter again. Due to the resumption of economic activities, advertisement as well as affiliate business is performing well. In the Internet media as well, the number of page views of our own media continue to grow steadily. This is the quarterly operating profit trend.

Recovery is continuing after bottoming out 2 years ago. We are seeing a continuous trend of expansion of high-margin in-house products such as own media and research platforms. We are performing strongly exceeding the initial plan as is demonstrated by listed group companies making upward revisions. We will continue to make investments to enhance in-house products and own media in the fourth quarter.

Next is Internet Finance. This is the quarterly performance trend. Sales increased due to consolidation of Gaika ex byGMO and strong performance of CFD. However, operating profit increased just slightly due to FX margin decline. This is a trend of sales by product. FX transaction volumes shown in dark blue increased but profitability declined on the back of cost increase related to cover trade. Sales were weaker quarter-on-quarter -- year-on-year. On the other hand, continuing from the first half, CFD performed strongly, thanks to booming commodity market and stock indices.

This is the FX trading volume and domestic share. Trading volume reached its record high as the market boomed with increased volatility. On the other hand, transaction share has decreased. As many of our customers reach their trading limits we imposed from risk management perspective due to the booming market.

We will continue to pay attention to the trends of the FX market to enhance our initiatives aiming for better margin. Allow me to talk about GMO Aozora Net Bank. Let me expand about the extraordinary loss first. GMO Aozora Net Bank has been aiming to turn profitable on a full year basis in the fiscal year ending March 2023. However, there are gaps with the business plan. Therefore, we made a decision to increase capital and to revise the plan during the period. Our group currently hold 14.9% of GMO Aozora Net Bank shares, but plan to increase this up to 50%.

We decided to reduce the valuation of the shares we will acquire in the future by about half with the capital increase. As a result, we will be posting the gap of the reduced valuation as extraordinary loss. Although we are behind in terms of performance, our KPIs are steadily improving. As a result of focusing on corporate accounts, the number of corporate accounts have been expanding steadily. We are hoping to see the next mega venture created by our account. Our built-in type financial service is of service offering bank functions at parts, targeting accounts aiming to grow in the digital area. We are continuing to take action to penetrate this more.

We are getting good response from the market along with heightened awareness. People are able to associate built-in type financial service bank API with GMO Aozora Net Bank nowadays. Our KPIs are steadily improving, and there are no changes to the 3 pillars of #1 bank for small and start-up companies, #1 built-in type finance, #1 tech first bank in the revised business plan. In the banking business as well, our group will collectively focus on solid recurring revenue model to grow our business deal stand.

Next is Cryptoassets We have 3 businesses of mining, exchange and payment under Cryptoassets business. This is the quarterly sales and its breakdown. Since the boom in the first half of last fiscal year, trading volume of the exchange business market overall decreased sharply, pushing down sales. Mining business was also weak due to lower utilization rate of the data center and the impact of Cryptoassets prices and global hash rate.

This is the quarterly operating profit. But the exchange and mining businesses posted losses. Although the number of accounts for GMO Coin in exchange business are growing steadily, there is a very big impact of decrease in transaction volume. Also, as foreign affiliate companies entered the market, our share of trading has gone down slightly. Taking into consideration such an environment, we are continuing to control marketing investments. That is all for the business update last of all topics.

From here on, CFO, Yasuda will explain about the latest topics.

[Masashi Yasuda, executive]

Hello. This is Yasuda, again. This is the topics that I would like to explain . I would like to talk about GMO cybersecurity by Ierae, the strongest white hat hacker organization in Japan, which joined the group in January .

A new service called site seal has been launched.

This is an image of the service using our website as an example. On the left, this logo, you see the SSL certification sealed by global -- GMO GlobalSign, which you are already familiar with. This SSL certification seal shows that the site can be trusted by exhibiting the security certificate to the site visitors. This is already adopted by 10,000 sites or more. The new service this time is a cyber defense version of the site seal. Ierae white hackers will be diagnosing, and if they were able to judge that the security is a certain level, then the seal will be displayed.

Personally, there are news about cyber attacks. Not only are they about information leakage but also there are increasing number of cases, which would put business continuity at risk. We have come to a stage where cyber defense is becoming more and more important. Reflecting such a situation, there are new services being launched to assess the cyber defense capabilities of companies. We are aiming to make this service a new de facto standard as a symbol of cyber defense, giving security to our clients and their partners.

Currently, this seal is posted only on the sites where white hackers diagnoses the security level directly. But going forward, we will be pushing ahead with Japan's cyber and defense by creating a safe and secure environment by posting this to websites that introduced our SaaS products that is being developed now.

Last of all, I would like to summarize about the site seal. At the beginning today, I explained about the strength of our group. There are 2 strengths I talked about. First is that we are focusing on in-house development and operation, utilizing our technical capabilities. And second is our solid recurring revenue model. The site seal, we have launched is not just a seal, but it's a product that embodies our strength. We are able to offer incomparable product that no one else can imitate as this is a product realized by combining our technical strength of Global Certification Authority and the technical skills of our talented white hackers.

Just like the other infrastructure products. We believe, this new product will become a part of solid revenue -- recurring revenue. So please look forward to the business synergies with Ierae.

This concludes the financial results presentation. Thank you for your attention. Internet for everyone.