GMO Internet Inc

TSE:9449

Earnings Call Transcript 2018-Q4

[Masatoshi Kumagai, executive]

I would like to thank all of you for your participation despite your busy schedule. Allow me to go into the presentation starting with the highlights of the full year. In 2018, we exceeded 20% of both revenue and operating profit and broke the highest record. Both the Infrastructure and Financial business exceeded JPY 10 billion in operating profit, marking the highest record.

Our solid revenue base is formed from our infrastructure and Financial service business. The number of contracts in these 2 businesses exceeded 10 million. As of the end of this January, just with the Infrastructure business, we will grow to exceed 10 million.

The mining business incurred extraordinary loss from reestablishment. However, the downside risk was removed. The sell-off of our subsidiary has actually strengthened our financial foundation. I would like to explain this in further detail afterwards.

Shareholder return is plus JPY 6.5 versus last year; JPY 29.5 yen annually. As announced earlier, within 2019, we plan to exercise a share buyback of up to JPY 3.11 billion.

Please take a look at the next page. The full year summary. Net sales went up by 20% at JPY 185.1 billion. Operating profit increased by 23.5% at JPY 21.7 billion. Ordinary profit increased by 10.5% at JPY 19.1 billion. Net profit was JPY 20.7 billion including the extraordinary loss from reestablishment in the mining business. We have achieved a record high from net sales all the way to ordinary profit.

For your reference, please take a look at the next slide. This slide shows the results of the existing business excluding the impairment of the mining business. When excluding the mining business, both operating profit and ordinary profit achieved over 30% growth as you can see from this slide.

Next page, Page 6. This slide would be the analysis of the operating profit from January to December. We have increased operating profit by JPY 4.14 billion against last year's figure of JPY 17.64 billion. The breakdown is record high result in Infrastructure business, showing an increase of JPY 2.96 billion; likewise, with the Financial business achieving record high, we enjoyed an increase of JPY 2.77 million. Incubation business went up by JPY 550 million with sales of shares. On the other hand, Advertising & Media business was impacted by the ad fraud issue resulting in deteriorated profitability of minus JPY 210 million. Cryptocurrency business grew year-on-year in exchange business, however, was unable to offset the impairment from the mining business resulting to a negative of JPY 1.56 billion.

Next page. This slide shows the fourth quarter October to December operating profit analysis. Compared to prior year same period of JPY 5.65 billion it has decreased by JPY 1.19 billion. Infrastructure business grew by JPY 650 million and financial business grew by JPY 200 million. VC business booked profit last year with stock shares. However, for this fourth quarter, we had no sales and resulted to a negative of JPY 590 million. Cryptocurrency business has reversed from surplus of last year. The main cause of the deficit comes from the deterioration of profitability in the mining business.

Next would be the summary of each segment. Infrastructure increased in both revenue and profit, breaking the highest record. Operating profit exceeded JPY 10 billion for the first time. We will continue to drive the business in payment, EC, SSL, and provider to achieve high growth in each of the subsegments.

Advertising & Media business increased in revenue but decreased in profit. Top line was strong with the favorable advertising agency business, however, faced difficulty in profitability due to inability of reacting to the market changes. Specific reasons are ad fraud, terms review with major customers and profit deterioration of media companies.

Financial business increased in both profit and revenue, marking record high. Initiatives on improving the foreign exchange profitability continue to fruit, and new products and services such as the CFD showed sound growth.

Cryptocurrency business increased in revenue but decreased in profit. The GMO Coin exchange business was unable to establish revenue base. The result was surplus, however, was unable to absorb the impairment from the, mining business. The total segment of the virtual currency closed with a loss of JPY 1.36 billion.

Please take a look at the next page. This shows the past 6-year trend of our business performance. Trends such as IT service shifting to cloud or high focus on security service, payment and cashless has contributed to strong growth in revenue and profit for our Infrastructure business. Financial segment faced challenges on liquidity in 2017. In 2018, we set strong efforts on big data analysis to realize efficiency and cover deals to further enhance our profitability. In 2018, we urgently built our Cryptocurrency business. At the end of the year, decisions were made to reestablish the business marking the highest record driven by our existing business.

Now our total payout ratio. Our total payout ratio of 50% remains to be the same. Dividend of 33% or more of net profit and the remaining roughly 17% is set to be our source of share buyback. Our group does not disclose performance outlook, therefore, dividend forecast is also not disclosed. Dividend amount is announced every quarter.

Now please take a look at the next page. We impaired JPY 35.3 billion of extraordinary loss this term from the Mining business reestablishment. Our consolidated net profit is, as explained earlier, a negative of JPY 20.7 billion. Based on our group's dividend policy, the dividend amount will be JPY 0. However, even if profit is not booked on the consolidated P&L, we have managed to work out dividend payment from our balance sheet using our earned surplus from selling shares. Shareholder return will be as stipulated on this chart.

Please take a look at the next page. The quarterly dividend will be as follows. Dividend per share has increased to JPY 11.8. Total dividend per share for this term is JPY 29.5. Total dividend amount is JPY 3.395 billion.

This is the next page. Share buyback will be exercised as stipulated on the slide. JPY 10.273 billion will be the source for shareholder return. 50% of this deducted by the JPY 3.395 billion of total dividend calculates to JPY 1.75 billion and this will be the source of share buyback. Furthermore, the share buyback planned using JPY 1.36 billion from the net profit of fiscal 2017 was not exercised within 2018 and will be carried forward to this term. As a result, JPY 3.11 billion get of share buyback with a maximum cap of 2.5 million shares will be exercised.

Next, I would like to explain the financial results. This slide shows the 6-year trend of net sales by quarter by segment. Revenue increased by 14.7% year-on-year.

Next page. Operating profit by segment decreased by 20.9% versus prior year same quarter. Fourth quarter impaired loss in the mining business with the exit in the VC business prior year and became the main cause of the downswing.

Next page shows the full year P&L. Nonoperating losses deteriorating, however, this is a one-off foreign exchange impact of minus JPY 1.58 billion coming from the mining business. JPY 820 million loss in earnings from affiliates is due to the opening of GMO Aozora bank. Other information is shown on the slide.

Next Page is the balance sheet summary. As you can see, shareholder's equity on the bottom right as well as cash and deposits on the top left has increased significantly. While on the other hand, interest-bearing debt is decreasing illustrating how robust our financial foundation is.

Next, Page 19 is shown for your reference, which shows the net cash and D/E ratio. We have added the 6-year trend.

Next slide shows the summary of our cash flow. There were many movements in our cash flow in 2018. Operating cash flow went up by JPY 13.12 billion. Investing cash flow, including the JPY 20.5 billion investment in mining business, decreased by JPY 29.89 billion. Financing cash flow includes JPY 54.9 billion of subsidiary sell-off, JPY 17.5 billion of payment gateways CB issuance; adds up to JPY 72.5 billion increase in equity related activity. Repayment of loans was minus JPY 22.3 billion. All of these totals to plus JPY 43.96 billion. If we add the JPY 25.83 billion of cash and equivalents of this term end the balance of cash and equivalents is JPY 143.65 billion. That would be all for me. Our CMO -- CFO (sic) [ Deputy CEO ], excuse me, Yasuda, will take you through the group overview and onwards.

[Masashi Yasuda, executive]

I would like to explain the next part and the remaining agenda. First, the market capitalization of each listed group company and equity share is as shown on the slide. As Kumagai mentioned earlier, in 2018, there was a secondary offering of GMO Financial Holdings and a part of GMO-PG shares. Through this, we raised JPY 55 billion in total from the market. Through this offering, our equity has changed.

Next slide. This slide shows the 4 business segments. The sales compositions illustrate the size of the business. The number of contracts in Infrastructure and the number of accounts in Foreign Exchange, Securities, and Cryptocurrency form our solid revenue base which totals to 11.31 million customers. We will soon exceed 10 million just with our infrastructure business.

Next slide shows the number of group partners. As of the end of December, the number of group partners was 5,767, and 45.8% of this is engineers and creators, the people who have the technical capability to create. We plan to invest on talents towards the goal to exceed 50%.

Next, I would like to explain about our Infrastructure business. This slide shows the segment composition of the Internet Infrastructure business. As you can see, our Infrastructure business is an aggregate of #1 service. Our robust growth is realized because of this #1 service aggregate.

Next slide. This slide shows the 6 full-year performance of the infrastructure business. In 2018, we have hit the JPY 100 billion mark of net sales and JPY 10 billion mark of operating profit. Through our activities of expanding the customer base, recurring revenue and solid revenue, as well as diversification of transaction type and revenue model, is generating a robust increase in both revenue and profit.

Next slide. This slide shows the net sales on a quarterly basis with the breakdown. The most recent term from October to December achieved revenue increase by 16%. It may look as if growth has softened, however, this is due to a specific factor from previous year. 6-month revenue of an overseas subsidiary was booked during this quarter. Therefore, with this into consideration, we believe 20% is the organic growth standard.

Next slide. So this is the trend of quarterly operating profit. The trend remains consistent. High margin products such as Payment and SSL are performing well. The contracts of the Internet Infrastructure amounted to a JPY 9.95 million achieving the all-time high. As I said, we expect that the number of contracts just on Internet Infrastructure will exceed 10 million at the end of January.

Next is Online Advertising & Media. This is the transition of the Online Advertising & Media business for 6 years. The sales increased while profit decreased from the previous year. We see the trend of a decrease in profit for several years. There are various factors. The major factors in the last fiscal year are as follows: in Media business, growth of our e-commerce media has been stagnant and also we were impacted by the market situation of the ad fraud issue. In this fiscal year, we aim to realize the V-shaped recovery of this segment. The companies in the segment has already started taking actions.

Next is on the trend of our quarterly sales and the breakdown. Versus the same period of last year, media sales decreased but advertising captured the high demand season and the group closed to 20%. The total segment achieved sales increase by 11%.

This is the transition of our quarterly operating profit. We continue to face a tough situation given the changes in Internet Advertising market. In going forward, we will take measures in 2019 with the group's segment companies with a sense of urgency.

Next is Internet Finance. This is the transition of fiscal year results for 6 years. In 2017 onward in FX market, the trading volume has been relatively stable, but we improved the mechanism of cover transaction and with a high technical capability, the operating profit marked all-time high, exceeding JPY 10 billion in 2018.

This is the trend of quarterly results. Our net sales were virtually flat while the trading volume decreased towards the end of the year. We were able to absorb the increase of advertising expense and book the profit increase. GMO Click Securities backed by the improved FX profitability using AI and big data analytics. We will offer products like CFD that meet needs of customers and that build the business foundation that is less affected by the market environment.

So this is the FX trading volume. We recorded the highest trading volume globally for 7 consecutive years.

Next is on overseas situation. As the group, we have footprints in 22 countries in 65 locations. Our overseas partners amount to 1,329 people.

Moving on to next page. Current global sales ratio is about 9%. We will increase our ratio further through the Z.com branded infrastructure and the finance business and also with the restructured mining business.

Moving on to the next segment. Let me explain the areas of Finance, Payment and Cryptocurrency. The page illustrates the performance of the Cryptocurrency business. It is comprised of mining and exchange. The Cryptocurrency exchange in the fourth quarter, due to the worsened profitability of the mining business, the loss has expanded. Upon posting of the extraordinary loss announced on the December 25 last year, we will undertake a restructuring of mining business. About that, I will come back to this point later.

Moving on to next slide. The Cryptocurrency's business. There are 3 businesses in this business segment. We are changing the policy of mining business. We are conducting a major policy change on our Cryptocurrency mining business while the payment will stay on the current course with a plan to issue the stablecoin by payment and the exchange offered by GMO Coin.

The situation of mining business in the fourth quarter. From July through September last year, we executed the plan of an incremental installation of machines in our in-house mining facility. As a result, the in-house hash rate increased and the delivered sales increased. On the other hand, in the external environment, the global hash rate exceeded 50,000 petahash and also Bitcoin price trended rather weak. And as an internal factor, machines purchased during the period of peak price on the mining machines, depreciation burden increased and the profit decreased. For this mining business upon posting the extraordinary loss announced on December 25 last year, we will undertake a restructuring of mining business.

Let me explain about the content. We launched the in-house mining business in December 2017. Due to the an expected rise of the global hash rate, fall of the Bitcoin price and the characteristics of machine price -- mining machine price that surges depending on the market demand. So that's the specific characteristics. And the high depreciation burden of the machines purchased at the peak price has been pressuring our profitability of our mining business. And also in-house development and the manufacturing of the mining machine has been facing the market environment of a declining price of mining machines and also the lower demand and a delay of our commercialization due to machine parts shortage.

Given the business environment like these, we set forth a policy of business restructuring. First, in-house mining will be restructured in order to wipe out the evaluation risks in going forward on our risk assets. So we record write downs on all machines amounting to JPY 11.6 billion. And the major costs of the mining business are depreciation costs of machines and electricity so we will relocate the mining center to an area of lower utility expense and restructure the business. Substantial machine depreciation will be eliminated for now, so with the removed risk, we will consistently undertake the business.

As for development, manufacturing, and sale of mining business -- mining machines, JPY 23.6 billion, all related cost is impaired and we will withdraw from this business.

This is the Cryptocurrency Exchange business. In the fourth quarter, Cryptocurrency price was at the low level and there has been the challenge of a liquidity, but we are performing with profit. We will continue to add more variety of trading currencies and offer opportunities of trading.

Next is on our efforts on GMO Aozora Net Bank. GMO Aozora Net Bank. Our ownership ratio in the company's common stock is 14.9% but we operate with the spirit of equal partnership with Aozora Bank. Upon approval of our financial services agency, we will increase our ownership ratio to 50%. We launched banking business in July last year. The company is currently consolidated to Aozora Bank's financial statement, therefore, we cannot disclose information that is not disclosed by Aozora Bank. So there are some limitations in terms of the information we can provide. The balance of the security connected accounts linking GMO Click Securities and the bank accounts are growing steadily. In November, GMO Coin will start the integration services of the instant deposit and we are making progress of our integration of the services inside the group.

GMO Aozora Net Bank. On January 15, we started open API. With open API, we integrate the various third-party services like household account applications and accounting softwares for us to be the platform bank. Read API offers the services with which you can refer to account information like a deposit balance and account activity. Write API, planned in April or after, it enables transfer and payment in addition to account information reference. We provide an environment for engineers to fully engage in development to offer functionalities for banking services and also advanced convenience combining various services and banking services.

This is the road map of services. We are making steady progress in launching the services and then linking them inside and outside the group. Please continue to look forward to our future strategies. This concludes my presentation. Thank you for your undivided attention. Internet for Everyone.