GMO Internet Inc

TSE:9449

Earnings Call Transcript 2019-Q4

[Masatoshi Kumagai, executive]

Thank you very much for gathering. We would like to start the Annual Earnings Report for FY '19. Our group CFO, Yasuda will be explaining.

[Masashi Yasuda, executive]

Hello, this is Yasuda. Now I would like to explain. Today's agenda is as shown on the slide. I will start with the overview. This is the summary of 2019 annual earnings report. The figures are as shown on the slide. We have achieved an all-time high for net sales, operating profit and ordinary profit.

Next slide is the financial results. Let me explain each business. Infrastructure business achieved an all-time high with continuously robust performance led by provider and payment. The infrastructure fused with finance business has also kicked off.

Next, Advertising & Media was an X, unsuccessful. 0 growth, decrease in profit due to both internal and external factors. The V-shaped recovery set out at the beginning of the year was far away from where we have landed.

Finance business was a circle. The business unfortunately was not in a very good environment, and we have ended with decrease in both revenue and profit. However, each of the initiatives are progressing as planned, and we believe we are on track in achieving our mid-term business target.

Cryptocurrency was triangle. The business refers to surplus through the effect of cost reduction by business reestablishment. The delay in relocating the new office was an X, unsuccessful. However, we have secured electricity and property with great deal, therefore, is a circle, a success. Machine operation is planned to start soon. Overall performance will be a triangle since the cryptocurrency transaction business model has been established.

Incubation business outperformed 2 consecutive terms, including the IPO of ChatWork.

This slide shows the past 6 years' annual performance. Revenue and operating profit achieved an all-time high for 12 consecutive terms. Infrastructure and online data volume and transaction continued to increase and in line with this trend. Revenue and profit continue to show strong growth. Finance business cannot avoid the environmental changes of the market, however, the capability to respond to impact is enhancing year after year.

This slide shows the year-on-year comparison by segment. The top shows the revenue, and profit is shown on the bottom. There may have some overlap with what I have mentioned before in the overview, but allow me to explain from the left, which is our infrastructure business.

Infrastructure business increased significantly in both revenue and profit. Finance business decreased in revenue and profit. Advertising & Media business was flat in revenue and declined in profit. This business was impacted by the contraction in Media business, which is a relatively high profitability.

Cryptocurrency decreased in revenue and profit. The revenue declined due to mining volume decrease in our mining business, however, increased profit through efforts of cost control. VC incubation increased in revenue and profit. Finance business decreased in profit due to market environment. However, since the infrastructure business is a robust foundation of our business, we have established a structure that can generate both revenue and profit. All in all, on a consolidated basis, revenue increased at JPY 10.9 billion, and profit increased at JPY 3.49 billion. Next, I would like to explain about our shareholder return policy. Our basic policy is total shareholder return ratio of 50%, of which dividend payout ratio is 33% or more. The remaining will be share buyback. This basic policy remains to be the same from 2015. When this is applied to this term results, total shareholder return is JPY 4.16 billion, which is half of net profit of JPY 8.32 billion. Out of this JPY 2.75 billion will be total dividend and $1.4 billion is share buyback. The amount per share is Q4 dividend JPY 5 and full year dividend per share is JPY 24.2. Next, regarding share buyback, it is not JPY 1.4 billion, it will be JPY 15 billion. The reason why we will buy back this amount, it is because, as a requisite, we have confidence in future profit growth. Our profit foundation led by infrastructure and finance will further develop to online bank deployment, which will be explained afterwards. 5G deployment will further expand our profit opportunity, which will be explained afterwards.

On the other hand, our recent stock price, we believe, is not reflecting our business growth. Therefore, to enhance a shareholder value even more through EPS and DPS improvement, we will buyback share earlier than initially planned. We have judged this to be the optimal decision. This share buyback is a buyback of profit that we'll generate in the future. If we assume that the profit growth each term will be 15%, the JPY 15 billion will be equivalent to buyback of 6 years. The treasury stock we will acquire will be canceled in the following year and the amount will be 17% of the net profit of each year. This policy will remain to be the same. Next is the financial results. This chart shows the 6-year trend of each segment by quarter. The size of the business is around JPY 50 billion, and you can see from the chart that we have continued to grow steadily.

This slide shows the quarterly operating profit by segment. On a quarterly basis, we can see ups and downs. However, from a long-term perspective, continued profit growth is realized through the contribution of infrastructure and finance segment.

This slide shows the fourth quarter results comparison by segment. Infrastructure increased in revenue and decreased in profit. The cause of this will be explained in the infrastructure section. However, there are no changes to the business momentum. Finance business decreased in revenue and profit. The main reason is due to the foreign exchange transaction volume decline. Advertising & Media business decreased in revenue and profit.

This will overlap with the end of fiscal year explanation, but the decline is due to Media business stagnation. Cryptocurrency decreased in revenue and increased in profit. The revenue decline due to mining volume decrease in our mining business, while on the other hand, efforts to control cost progressed, and VC and incubation increased in revenue and profit. On a consolidated basis, revenue increased by JPY 1.1 billion, and profit increased by JPY 870 million year-on-year.

Next is the P&L summary. The figures are self-explanatory.

Next slide shows the balance sheet summary. Liquid assets and liabilities increased due to the expansion of customer foundation in the finance segment.

Next slide shows the summary of our cash flow. Cash and equivalents have increased by JPY 16 billion at JPY 159.7 billion. Next, I would like to explain the group overview. This chart shows the market capitalization and equity shares of the listed companies of our group. This chart shows the overview of the 4 business segments. The size illustrates the revenue mix of each segment. The number of infrastructure contracts, foreign exchange, securities and cryptocurrency accounts have now totaled to 12.83 million. All of them are part of our revenue and customer foundation. Next slide shows the number of partners. As of end of December, the number of partners was 5,995. Out of this, 46.4% are engineers and creators. These are partners who have the technological capability to create. We have set 50% as a target for creators, and we'll continue to invest on talent.

Next, I would like to explain about our new group entity. Last November, GMO TownWiFi K.K. joined our GMO Internet Group to deploy public wireless network automatic connection application. The number of app downloads is 6.5 million. Monthly users is 3.2 million and 350,000 locations. All are #1 service. When you download this app, you can automatically connect to the Wi-Fi in stations, domestic and overseas airports and cafes to seamlessly enjoy Wi-Fi environment.

Currently, we provide free gathering spot on the second floor of our second headquarter office, GMO Digital Hachiko. Please take a look at this video that introduces our TownWiFi.

[Presentation]

[Masashi Yasuda, executive]

The existing business model was centered around advertisement to users. However, in addition to this, GMO Toku Toku BB, a mutual customer gathering function with connection service; coupon distribution using Wi-Fi GPS information such as O2O customer traffic support; new service development utilizing ad technology, all will generate synergies from our group. We will make efforts to enhance awareness, including inbound and aim to further increase share. Next, I would like to explain about our working-from-home initiative, given the coronavirus infection. The BCP measures we have taken: One is protecting employees; two is service continuity; three is aid to affected areas. This is the order of priority, and this is the principle of our BCP for decision-making accordingly to natural disaster and social landscape. In line with infection and expansion of the coronavirus, we have instructed partners to work from home in areas with high risk. Tokyo, Osaka and Fukuoka region has started to work from home from January 26. Out of 4,500 partners in Japan, 400 have been subject to working from home, and they have been working from home for 2 weeks. As of now, after 2 weeks, we have set internal standards to shift to a system that can operate in case the situation were to be deferred. To be specific, we have partners continuing to work from home. However, for partners where they are required to come to the office, we take safety measures and provide exception for part of our partners.

This is a graph that shows the daily state of infected people by country, provided by the Health, Labour and Welfare Ministry. We have set up a task force since an affected person was confirmed in Japan and have aroused precautions and enforced work-from-home measures.

As a company that supports Internet infrastructure, service continuity and safe operation in case of emergency is a top priority. The first incident occurred in 2003 with the SARS outbreak. Our BCP was further established during the East Japan great earthquake in 2011. For over 10 years, we have trained our partners to work from home every year and continue to have this training on a regular basis.

Finally, the impact to business is 0 by having people work from home at the moment. For the sales forces who interact with the customers directly, work through Zoom or web conferences and may cause some impact temporarily. On the other hand, the majority of our products use online pool for traffic generation. There has been no impact to this. Support is provided to our customers at each site or telephone and is operating as usual.

In the finance sector, increase in CFD transactions, such as currency exchange and golds, have increased due to the instability. Allow me to summarize the measures that have been taken so far. We have prioritized our partners' life and safety has been secured. With that as a big requisite through homework, a new way of working reform has progressed. Even from the results of our internal survey, 80% or more answered positively to the work-from-home measure. We have received many improvement opportunities, and they will be reflected going forward. Regarding this information, all of the information will be provided on the company website for your reference. Please visit our website, if you are interested. And this initiative will link to future office cost reduction in the mid- to long term. We will utilize this for business efficiency to further strengthen our organization. Next slide is the Internet infrastructure. This is the segment composition of the Infrastructure business. The number of contracts have achieved 10 million as of the end of March last year and is continuing to expand. Provider business achieved 55% share in annual optical network. The number of network is not provided on the slide. It has increased by 30% at 1.8 million, and the membership is growing. This infrastructure business is an inevitable service and is also a service that will never diminish, plus both businesses are in aggregate of #1 service.

This slide shows the 6-year trend of our full year Infrastructure business. In addition to the expansion of our customer foundation, the diversification of the profit model has realized a robust revenue and profit increase trend. Our profit model has further enriched with the so-called robust foundation, such as stock type and foundation type and has been added with transaction type and financial functions.

The next slide shows the net sales by subsegment. This is the profit foundation of stock and transaction types and have exceeded JPY 10 billion per month in the recent quarter. This substantial growth is realized through the aggregate of our #1 service. The next slide is the operating profit by quarter. The recent quarter experienced a decline by 1.9% at JPY 3.09 billion. There hasn't been much change in the business momentum, but the subsequent slides will be used to explain the details.

This is the breakdown of operating profit of Infrastructure business into Payment business, others and the cost distribution. The Payment business results are the same as the Payment Gateway, and the OP was about the same as the last fiscal year. This is mainly because the previous term was strong. And for this term, sizable deals were skewed towards the second half. We are currently in off-peak period. We are progressing as per the PG's plans. On a full year basis, I expect to see profit growth of 25%, as is disclosed in the guidance.

Also, activities for the group brand improvements are increasing, and the overall cost burden is increasing. The number of infrastructure contracts are 11.26 million, which is an increase by 1.31 million year-on-year. It is a net increase of 100,000 contracts per month. Since this is the full year results presentation, I would like to summarize the future of the Infrastructure business. Infrastructure business is necessary for the Internet business and is a collection of services that are essential. Furthermore, it is a collection of businesses that have #1 services. This fiscal year, we would like to enhance our #1 products and pursue synergies between all products to realize continuous growth. As mid- to long-term strategies, with the launch of the banking business, we, GMO Internet Group, have infrastructure and finance enabling us to transform into a different company group compared to competition. We will continue to accelerate growth through the combination of the solid revenue base and finance.

Now Online Advertising & Media business. The bar chart shows the full year results for the past 6 years. As you can see, it has been on a downward trend. Each of the companies in this segment took initiatives to realize V-shaped recovery. However, this could not be achieved. There are different factors, but major reasons are: Although the online advertising market itself is expanding, the competition is becoming more intense. This is mainly because the major ad agencies are expanding their Internet advertising. There is also a trend of increase in direct transactions with mega platformers. In Media business, we have a structure where we could not offset the decline in existing media with the growth of the new media.

This shows the quarterly sales in Advertising & Media business with its breakdown. There is a year-on-year decline by 1.7%. Advertising was flattish at JPY 8.2 billion. In-house ad technology products are gradually recovering with an increase in ad distribution and performance, thanks to the optimization of ad placement standards.

On the other hand, ad agency services softened with less affiliate advertisements. Media business declined by 5.8% to JPY 2.6 billion. EC media was strong, but media was -- for teenage girls were weak, and existing products had completed sales in Q1 for SMEs, which caused that decline. This is the quarterly OP trend. As you can see, downward trend has been persisting for some time. We have confidence that our efforts to enhance in-house product to media are the right approach, but we are far from the V-shaped recovery that we aimed for at the beginning of the year. This slide is a summary of Advertising & Media businesses feature. First, in the Advertising business, we will enhance our cooperation within the group and focus on development and sales of our group products and try to maximize the growth and earnings efficiency. We will restructure the group and make GMO come upon a subsidiary through acquisition by GMO Media. With this, we will be providing a competitive O2O services. With -- we will also be making strategic investments into advertisement of the new Media, kireipass.

With this investment, we expect the profit to decline for this segment as a whole. There will be a temporary weakness in the profit, but we plan to make a leap next fiscal year onwards. Now looking at the mid- to long-term strategies, there are no changes in our stance to enhance our in-house products. We will establish a revenue base, which will not be impacted by others. Now the Internet finance business. This is the full year results for the past 6 years. Although FX, our main products, trading volume was weak. Big data analytics, et cetera, are contributing to improvements in profitability and non-FX, especially CFD, is growing to be able to generate high level of revenue and profit. This is -- and now this is the quarterly trend. In the last quarter, there was a decline, both year-on-year and quarter-on-quarter, mainly due to a decline in trading volume. This slide shows the trend of the FX trading volume. There was an improvement in volatility this quarter temporarily, but overall, its trading volume was weak, down by 18.3% year-on-year. Our most recent share stands at 20.9%. This is a slide on net finance business. To make a strong business even stronger, we will propel for profitability improvement for FX and steadily take action. As for CFD, we will steadily continue to grow this business. As our new initiative overseas, in Thailand, we have the Internet Securities business. We have been able to achieve profits on a single-month basis already, and for full year, we expect the business to be profitable. As for the mid- to long-term strategies, we have already started a long-term project to make major improvements in FX profitability, in addition to the conventional cover orders via the Internet. Interbank market, we will roll out new risk-hedging method through the open market. We would also like to continue with further expansion of non-FX products. Before talking about cryptocurrency business, I would like to talk about our initiatives in finance, payments and cryptocurrency. But first, I would like to start with our cryptocurrency. This is the quarterly trend of the Cryptocurrency business. Revenue and profits were down Q-on-Q for the segment as a whole. I would like to explain mining business in cryptocurrency exchange, respectively, from here on. First, let me start with the cryptocurrency mining business Q-on-Q was down, causing the business to post deficit. The business situation is similar to the previous quarter. We are in the transition phase of mining center relocation and the hash rate remained flattish. On the other hand, with the deterioration of the macro environment, unit price of mining declined, causing revenue to go down, and we could not cover the fixed cost and fell into the deficit. As for the relocation plan, we completed securing power supply and the land and are progressing with the building of the new facility. This is a slide on cryptocurrency exchange business. Both revenue and profit were down Q-on-Q. On top of the trading volume decline in the cryptocurrency market, we reduced the leverage by 4x based on the voluntary restraint imposed by the Japan Virtual Currency Exchange Association from the end of September. On the other hand, customer base, such as number of accounts and deposits are steadily increasing.

This is a summary of future plans for Cryptocurrency business. Reflecting the impairment loss, the Mining business fixed costs have become lighter, but the business fell into the deficit again. We would like to prioritize the building of new facility by utilizing the competitive, inexpensive electric power. We would like to overcome the half-life period. Increase in hash rate is expected to be March onwards. In the Exchange business, we will grow our share by reducing the spread. We will continue to expand the customer base to address the stricter leverage regulation.

Over the mid- to long term, we are not in the aggressive mode to make investments for the Mining business, but aim for profit contribution with low-cost strategy. In the Exchange business, as I mentioned just now, we will expand our domestic share first. For the Payment business, we started the blockchain testing. We are continuing with the development of GYEN to be able to launch this stable coin in the first half of fiscal 2020. Next, GMO Aozora Net Bank. 1.5 years has passed since the business started in July 2018. We are feeling the high expectations of our customers with increasing individuals, business owners and the corporate customers increasing, especially our initiatives, bank API, bank transfer account, which provides convenience for corporate customers are appreciated. We have, therefore, reviewed the business strategy we envisioned at the start of this business and reallocated the resources to enhance our services to corporate customers. As you can see, bank API connections have increased by 8 companies. GMO Aozora Net Bank's proprietary private connection increased to 14 companies, increasing the total number of connections to 18 companies. This is a case of a customer, [ Carrier ], a company which has connected API. Before the API connection, about 30 clerical staffs were manually transferring salary to about 5,000 temporary staffs. However, with the introduction of GMO Aozora Net Bank API, everything until the money transfer became automated. With this, overwhelming improvements in operational efficiency has been achieved. In addition to such a case, we are planning to host regular seminars and networking sessions on bank API at Shibuya Fukuras, putting Shibuya and finance as keywords. Please look forward to our initiatives going forward.

Next is global operations. We are now operating in 22 countries with 69 locations. Number of global partners reached 1,482. Global operation sales consists of Infra business, Finance business, Mining and Global Research business. Infrastructure business is comprised of Z.com business, which we have vertically rolled out to Southeast Asia, SSL security business, which is globally rolled out and eshop -- .shop. Infra and Finance business grew, but due to that decline in sales of Mining business, global operations grew 2.8% year-on-year to JPY 4.4 billion, and the overseas sales ratio remained to be 9.0%. As we are far from achieving the overseas sales ratio of 50%, which is our long-term target, the rating of the business would be triangle. Last of all, I would like to talk about the -- our initiatives on next-generation mobile communication technology, 5G. The advancements of mobile telecommunications until 4G was a series of improvements in speed and high capacity data volume per decade per generation. Faster and easier access to the Internet was enabled with improvements in the environment. And as a result, our Infra service business grew, together with the Internet. But 5G, whose service is about to be commercialized, is not an extension of this. It is the focus of attention as it will accelerate penetration and development of IoT, which enables all things to be connected to the Internet. 5G has 4 major features: namely ultra-high speed, high capacity, ultra-low latency, many simultaneous connections. Ultra-high speed and high capacity are extension of the conventional evolution. But with ultra-low latency and many simultaneous connections realize, data sharing and usage is enabled by connecting devices and equipments from various industries. This 5G technology has a role to play in digital transformation and ongoing change in all industries through usage of Internet technology. In the past industrial revolution, seem locomotive's power was used to automate previous manual work, leading to productivity improvement 5G, which will be full-fledged use from 2020, which is the starting year of the latter part of the Internet revolution, will be a very big opportunity for our group. Not only is telecom technology needed to connect everything to the Internet, domains and security will also be essential parts. I would like to share our 2 specific initiatives. First, we will be applying to the Ministry of Internal Affairs and Communications to receive 5G license, where radio waves will be allocated to the corporations and municipalities for 5G use in specific limited geographies and areas. First, we will build an environment internally for local 5G demonstration site and plan to release this space free of charge to internal and external engineers. There are 2 objectives to this: to accelerate development of new services from within our group, to integrate with 5G. We would like to -- like many engineers, to make use of this environment. We would like to provide support in co-creating cutting-edge technology and contribute to creating new value. As a second tangible initiatives, we are planning to provide IoT-dedicated domain with SSL.gmo.

Out of 1,930 new domain applications from all over the world in 2012, we are providing domains such as .shop and .tokyo. But we also own a .gmo domain. We are planning to release this domain for IoT use with SSL. We are planning to provide DNS service, which automates management of domain names allocated to massive devices and things. We are also planning to provide the API free of charge. GMO domain registry will be distributor for .gmo.

We are planning to have onamae.com, the largest domain registration service provider, provide DNS service. We will contribute to development of IoT, penetrating .gmo as a default domain for IoT.

And last of all, I have mentioned a number of times already that Internet is an industrial revolution. And thinking about the cycle of industrial revolution of 50- to 6-year cycle, this Internet revolution, which started from the 1990s, it's already been around 30 years, and now we are going into the latter half of the revolution. GMO Internet Group celebrates its 25th anniversary this year, and we have been providing support in building Internet for the information and Internet service infrastructure. This is a very solid business infrastructure. And also, this is an inevitable service, and this will continue to grow with the development of internet in the latter part of the internet revolution. In order to promote Internet for all industries, infra services and necessary parts will be provided, and we will continue to provide support and development of IoT. And we believe we have confidence that we were right in selecting internet infrastructure as our core business. And going forward, we would like to continue to create services with our own technology and also taken the challenges to bring in innovation to make people's lives richer, listening to the people's voices and by utilizing cutting-edge technology. And we promise that it will continue to grow in 2020 as well. And thank you very much for your attention, and internet for everyone.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]