GMO Internet Inc

TSE:9449

Earnings Call Transcript 2021-Q4

[Masatoshi Kumagai, executive]

I am Masatoshi Kumagai, representing GMO Internet. Group, very nice to meet you. Our finance show closure is at the end of December. So here we are today to talk about third quarter 2021 covering July to September. Here is our agenda today.

This is a summary slide for third quarter 2021 covering July to September. We have delivered better performances for top and bottom line year-on-year. In China, the infrastructure was steady and strong online ads and media so improvements, and crypto asset grew big to become the third pillar for our businesses, just to cover the basis.

So this is year-to-date, covering January to September. You see from net sales, although we [ down ] to net profit, we have made records in all performances. Operating profit, ordinary profit and net profit saw at the end of third quarter, it's already performing better than the last year full year. This is covering July to September in different segments in a summarized format. All the way at the right-hand side is my subjective scores of different segments, just as usual, using circle, triangle and x.

For your information, we have made the second quarter scores right next to it. All the way to the right, is my subjective assessment at third quarter. Infrastructure remains to be double circle. DX also now on the low transformation have made advancement. People are spending more at home, more consumption at on Mine, this rock bed business have become even stronger.

Access, which is main business of us, had saw some change in sales mix, and we have made the strategic investment for GMO Sign. Therefore, the growth might be nuanced, but business as a whole is very steady. Advertising and media remains to be double circles. Media services saw some decline due to less spending at home than the peak for some customers and because we now have stricter rules for ad standards, but this segment's business conditions generally are trending very well.

And showing this V-shape recovery, and I believe this V-shape recovery will continue. For finance, I gave, in the second quarter, single circle, but I decided to give double circles for this quarter. Business is rather stable on the same time last year when the FX spread was lowered, but the earnings have improved. And CFD was quite high for its volume of transaction and earnings.

Now Gaika ex byGMO, formally known as YJFX, joined the group officially and that process completed. But they will be part of the consolidation starting from the fourth quarter. Gaika ex byGMO team and us will create synergy to make this finance business with a very positive progress in growth, and that's my expectation.

Lastly, but not least is crypto asset. So I give double circles just as I did in second quarter. The business is stable. We are making aggressive but steady marketing activities, has become the third pillar of our business only next to infrastructure and finance.

Now here is my view in a comprehensive way in a way of how the business is trending. So first, within group, we have more than 100 subsidiaries, but -- and 10 listed companies. Looking at the motivation of those different group companies, different mechanisms that we have put in place, performances, I see very good performances that is tangible. We now have more confidence in growth trajectory for next 5, 10, 30 years to come. That will be my summary for third quarter. Please go to the next slide.

This is showing you segment by segment changes over top line or bottom line for a year. On the left-hand side is net sales. Right-hand side, the operating profit. For the net sales, we have improved by JPY 5.6 billion. For operating profit, we have improved by JPY 1.91 billion. Crypto asset 3rd pillar of the business and our finance growth, which has made the improvement in earnings, were the main drivers.

Next, I'd like to talk about our return policy to shareholders. As you can see at the very top, our basic policy for return to shareholder in total is 50% of -- and out of that 50%, we will allocate 33% for dividends, the remaining 17% will go to share buyback. In the middle of the slide, you see the dividend amount per share in quarter. For the third quarter, we will give -- we will have JPY 3.4 higher dividend compared to the same time last year, which makes its JPY 10.8 per share for third quarter.

At the very bottom is our update on share buyback. We have a plan to buy back as much as JPY 5.63 billion share buyback. We have no updates in progress as yet, but we will implement before the terms come, which is at the end of February next year.

Now we have overview of our performances. I'd like to introduce Yasuda-san, who is the Group CFO. Thank you.

[Masashi Yasuda, executive]

Well, this is Yasuda speaking. I'd like to walk through our business performance, the overview. So first off, this is segment by segment. Net sales performance is by quarter, at the very bottom, is dark blue, which is our net solid basis. This is growing steadily. The contribution from green, which is group asset is becoming bigger.

Now I do show you segment by segment, quarter-by-quarter net operating profit performance. The transaction of crypto asset has saw some reduction from the first half, but earnings, generally speaking, are performing quite well. Now this is a summary for our group companies. We have 10 listed companies within the group. Here, we have shown market caps and our ownership. At the every year end, the total market cap of the group companies count about JPY 1.8 trillion. Our equity ownership counts higher now than JPY 600 billion.

This is a summary of our 4 business segments. Size of the areas show the size of the revenue. Numbers of contracts for internet infrastructure and a number of accounts at the FX, securities and crypto assets are shown. Solid customer base grew to be JPY 13.97 million in total.

Next one is our partners. We call our employees, partners, and that's our update on that. At the end of September, we have 6,767 partners. We are especially show some growth in partners because of acquisitions of Gaika ex by GMO. Amount of engineers and creators count at 46.7%. Our target is -- have 50% or more of our partners to become engineers. This is essential for us to create better things with higher quality. We'd like to invite more engineers and creators to be our group.

Next one is infrastructure business. This is Internet infrastructure business summaries. We have domain business, cloud hosting, digital stamp, EC platform, SL service affiliation payment access, all of which are #1 with its own territories. All of them are essential, all of them are not gone in the age of the Internet.

Next, I'd like to talk about Internet infrastructure quarter-by-quarter revenue performances. Online spending and at-home spending, we're performing well from last year. We are just a group of #1 businesses. Therefore, we are very healthy and steadily growing payment by the GFO financial gauge, especially is going very positively from the next-generation platform called stera. And that will give us more revenue sources for transactions.

Access, which is one of our biggest business, saw some sales mix change. We have some differences in trend from historically. But if you take access and access-related numbers, here's how the performance looks like. As you can see, if you take that numbers out, you can see we are steadily and healthily growing in a very steady manner. But one of the access business, I'd like to spend some time talking about how access business is trending. These are the critical KPIs for access. One is top line revenue and the other one is a number of the lines.

You see number of lines all keep growing, but the net sales is seeing some decline, and that could give you why the change in the revenue and in terms of the trend. This is divided with the optical line, mobile line and other lines. The red line is optical line. Because of remote work and because of the remote businesses, this is performing very well. This is mainly stock revenue. Blue on the other hand, which is mobile, ever since the second quarter, we had some line quality, also aggressive pricing by many bigger carriers have shown some impact.

Mobile is initial and stock, which means higher upfront payment. This mobile is struggling, and that is the reason why access itself is performing weak. We believe this weak performance will continue until the first half of next year. But the stock lines for the optical will keep growing, which means that impact will generally be canceled. So please also pay attention to the numbers of -- the growth in the numbers of lines. And we are promoting DOCOMO Hikari or other carriers' Hikari businesses. But our brand, GMO Hikari access is another area that we will be promoting selling more lines to our customers.

Next, this is how operating profit is trending quarter-by-quarter. Operating profit is generally speaking, growing, but we have made a big investment for GMO sign, and we have started depreciation for goodwill. Therefore, the growth for now has -- remains to be small. And this is numbers of contracts, numbers of customer counts at 12.11 million customers or accounts. The strong growth was driven by digital stamp, also known as GMO Sign. We have farewell, good -- farewell sign campaign last year, but our customer base has been growing even after the campaign. We are -- now have 6.9 bigger customer base.

We have in total 334,000 accounts. As you can see, a lot of the big accounts have signed up for this program. We are #1 in Japan. And this is numbers of the contract transaction. This is an amount of transaction being sent to the counterparts. This is showing how active our customers are using our services, very important KPI. We are targeting to become #1 in Japan for this particular KPI.

Now GMO Sign is -- give you more productivity for the work and can reduce papers and we validated that. We have proof-of-concept project with the [ PSD Yokosuka ]. Time, cost and amount of paper can drastically be reduced, and we validated that under this program.

We are also pleased to announce that the digital agency, the Ministry of Justice and the Ministry of Finance have confirmed the legality of GMO Sign as a valid electronic signature in place of a name step. Going forward, we will continue to expand the functionality and provide support to companies and organizations that have adopted GMO Sign in order to make it a more secure and convenient service for both the public and private sectors.

Next chart shows the transaction value trend for the e-commerce solutions business in addition to the EC platforms developed by Color me Shop! and MakeShop, this business consists of new types of EC, such as Mine and Suzuri. The quarterly transaction value is now close to JPY 120 billion. Compared to the previous year, when the transaction value surged due to the impact of COVID-19, the trend has been steady, especially for high-priced plans.

About 40% of the total transaction value was settled by GMO Payment Gateway. Excluding bank transfers and other payments, most of the amount distributed through credit card and other payment services make use of the group's services, and we believe this shows the strong synergy between the e-commerce solutions business and the payment business.

Next is the advertising and media business. The page shows the trend and the breakdown of the quarterly net sales. Net sales was up 5.9% year-on-year. In online advertising, although affiliate advertising was strong. Sales were below year-over-year due to a reactionary decline from stay-at-home demand among some customers in the advertising agency business and the impact of stricter screening standards for the ad network advertising. On the other hand, media sales grew significantly with unit advertising prices on a recovery track, a complete turnaround from the negative impact of the pandemic in the previous year.

Next page shows the trend of quarterly operating profit. As you can see, since hitting the bottom in the third quarter of last year, the recovery trend is continuing. The results of internal initiatives such as replacement of products, renewal sales methods and cost reduction are continuing. And despite the temporary factors I mentioned earlier for the third quarter, business conditions are favorable for the segment as a whole. In the fourth quarter, as planned from the beginning of the fiscal year, we plan to strengthen investments mainly on the media side.

Now next is the financial business. Quarterly performance trend is shown on this page. In the same period of the previous year, profitability of FX worsened due to intensified competition in lowering the spreads. But since the beginning of this year, there has been no such competition, and profitability has improved. CFDs also performed well, resulting in increased sales and profits.

This chart shows the FX trading volume and our domestic market share. The trading volume has remained at a high level, although it has slowed down compared to last year when the market was booming due to the pandemic. We continue to enjoy the #1 share of the FX market in Japan. And with the consolidation of YJFX, now Gaika ex byGMO, which joined the group in the second quarter, we expect our domestic share to reach 30%. We will continue to strengthen our synergy to become the overwhelming #1 in Japan.

Next is the crypto assets business. The crypto assets business consists of the 3 businesses shown on this page. These are mining business; the exchange business, mainly operated by GMO Coin; and the payment business, which issued stable coins. The chart here shows the trend and the breakdown of the net sales of crypto assets business. The pale blue colored exchange business at the bottom of the chart shows a decrease in both transaction volume and revenue compared to the first half of the year when the business was brisk. On the other hand, the blue colored mining business enjoys stability despite fluctuations in the external environment of crypto asset prices and global hash rate.

The page shows the quarterly operating profit trend. As compared to the same period last year, profits increased by JPY 1.09 billion, contributing to the performance as the third pillar of the business. Against this backdrop, GMO Coin is strengthening its marketing investment. In the second quarter, we ran TV commercials, mainly in the Kanto Region and received an extremely positive response, confirming the effectiveness of our efforts to raise brand recognition and awareness. In the fourth quarter, we have started the second phase of TV commercials by expanding the scope of the broadcast. We hope to further raise awareness and lead to account openings. As for the mining business, we will continue to develop our business in a calm and steady manner.

Next, I would like to talk about GYEN, a stable coin in the crypto assets payment business. GYEN, which has been distributed through overseas exchanges since [indiscernible], will now be listed on Coinbase, one of the world's largest crypto asset exchanges. GYEN is the world's first stable coin that is linked to the Japanese yen and compiled with the regulations of the U.S. financial authorities. We expect to further stimulate trading through the listing of GYEN on Coinbase.

Finally, let me share with you some of the highlights of the recent topics. First, let's talk about the NFT Marketplace are done by GMO. As I told you last time, we started offering the beta version on August 31. And we are planning to release the official version in December. We are working on expanding the product lineup, developing systems such as the listing management screen so that a wide range of people can list their items and supporting multiple languages in order to become the most user-friendly NFT marketplace by far. Please keep your eyes on the business.

Now next, let's talk about GMO Aozora Net Bank. As an Internet bank that is always at the side of small and start-up companies, we will provide high-quality, low-cost services that meet the needs of our customers' growth phases. With a corporate account that is easy for small and start-up companies to open as a gateway, we will offer services aligned to the growth phase of our customers, such as bank API connection, loans and links to incorporated financial services, respond to the growth of numbers of transfers as well as issuance of a dedicated credit card when a company grows to be the size of a unicorn.

By continuing to promote the series of initiatives, now named GMO Aozora Net Bank, entrepreneur and challenger support project. We aim to grow together with small and start-up companies. Low-cost services are essential to activate the use of the accounts. As you can see, our bank transfer fees are the lowest in the industry. The change in fees was triggered by a reduction in interbank fees by the Zengin network and the decision to lower the fees was made in immediate response to the announcement by other banks on September 30, the day before the change on October 1.

Normally, it takes at least a month for other banks to reduce their fees as they need to place orders with vendors. Our swift and immediate response were made possible, thanks to our in-house development capabilities. The number of corporate accounts, that functions as a gateway has been steadily growing as shown on the chart. The bar chart shows the number of companies that have signed up for the API connection.

The bank API is a mechanism and specification for calling bank functions such as balance inquiries and transfers from the outside. We provide the banking API itself free of charge, but we consider it as an important KPI that will lead to future transfers. We will contribute to the acceleration of DX by having business companies incorporate the banking functions. We will continue to blast forward as the API top runner. Please keep your eyes on this business as well.

Lastly, I would like to talk about our initiatives in the area of next-generation air mobility. As you know, the key was like next-generation air mobility flying cars and drones have been making the headlines recently. Honda has announced its policy to work on an electric vertical takeoff and landing eVTOL aircraft and Marubeni Corporation has also announced that it will purchase 200 units of eVTOLs.

Now why is GMO Internet Group entering the next-generation air mobility market? The reason is that the Sky is a market with the potential to become the last business frontier. In particular, flying car market is expected to reach JPY 160 trillion in size by 2040. It won't be long before flying cars like those seen in back to the future become a reality.

I would also like to add that Kumagai, the group CEO, who has licensed for both helicopter and airplane, is the IT company CEO, who knows the best about the sky. In the areas of next-generation air mobility, which is expected to grow in the future, we are promoting these 3 initiatives: The first is our investment in a drone and air mobility fund Drone Fund. This fund aims to realize a drone-based society and air mobility society, and we began our investment back in 2019.

The second is technological assistance through GMO GlobalSign in the field of drone security for communication and control with Prodrone and SkyDrive companies in which the Drone Fund has been investing. In addition, since May of this year, we have been participating in the Public Private Council for Air Transportation Revolution organized by the Ministry of Economy Trade and Industry and the Ministry of Plan Infrastructure Transport and Tourism. We are also participating in the study group for the implementation of flying cars at the Osaka Kansai World Expo.

Technology licensing in the security field will be as shown on the page. In the operation of drones and flying cars, countermeasures against security risks, such as hijacking of airframe and operation systems and falsification and tapping of communication data have been an issue. We will contribute in the field of security by access encryption and airframe certification using GlobalSign SSL. In IoT, where everything is connected to the Internet, the use of SSL will further advance. Please look forward to the future developments.

Well, that is all for now. Thank you very much for watching. Internet for everyone.