LY Corp

XMUN:YOJ

Earnings Call Analysis

Record Q1 Revenue and EBITDA; PayPay Profitable

Z Holdings reported record Q1 results with double-digit growth in both revenue and adjusted EBITDA, partly attributed to PayPay's consolidation and the success in their Media Business. PayPay, starting services 4.5 years ago, achieved profitability for the first time. Media Business ad revenues saw double-digit growth, with a 5.2% increase in search ad revenue. Operating income rose 19.3% year-on-year, thanks to PayPay and lower fixed costs, while the Commerce Business's adjusted EBITDA margin surpassed 20% due to cost optimizations. The company expects low single-digit ad revenue growth and mid to high single-digit Commerce revenue growth. PayPay's integration, subsidiaries expansion, and operational cost reductions have contributed to a 34.8% increase in adjusted net income.

PayPay's Positive Turnaround and Revenue Growth

A key highlight from this quarter was the financial turnaround of PayPay, with its adjusted EBITDA turning positive for the first time. This was primarily driven by a marked revenue growth due to the increasing popularity and adoption of PayPay and PayPay Card services, which saw the number of active card members and transaction volume both rising steadily. There was a particular emphasis on the integrated management with PayPay Cards to provide a seamless payment experience, which is central to business expansion and user diversification strategies.

Enhanced Strategic Business Performance

The company reported significant year-on-year improvement in its strategic business performance, with a 40% revenue increase, mainly fueled by the growth of PayPay. Adjusted EBITDA improved both year-on-year and quarter-over-quarter due to the growing profitability of PayPay following the implementation of selection and concentration initiatives, which included the reorganization of finance businesses. The PayPay Bank also showed steady growth in accounts and deposit balance, aiding overall financial health.

Focus on Cost Optimization and Business Efficiency

The company has placed a strong emphasis on optimizing costs, reviewing unprofitable businesses, and improving business efficiency. These efforts are paying off, manifesting in fixed cost reductions and beneficial effects of focusing on core businesses. An effective strategy of selection and concentration is helping improve earnings, with PayPay making a notable contribution to positive EBITDA. The management has an ongoing commitment to balance necessary promotion costs with profitability attention, aiming to maintain a sustainable positive growth trajectory.

Financial Strategy and Equity Investment

The company reported that it is on track to meet its target of a JPY 30 billion cost reduction and possibly exceed it. Management also mentioned that the current pace of SG&A reduction, which has been faster than initially expected, may continue into future quarters. On equity investment loss, executives believe there is room for further improvement and expect that by FY2025, current equity investment losses could turn into gains as loss-generating overseas financial businesses are currently diminishing the red numbers. The firm adheres to an internal benchmark of 2 to 3 times net leverage ratio and is vigilant about managing balance sheets and cash flow within this range.

Outlook on Membership Services and Future Investments

In terms of membership services, LYP Premium is being positioned to attract new users, particularly through leveraging SoftBank collaboration to offer premium memberships with higher point yields. The company is not contemplating providing premium memberships free of charge but rather emphasizes their value to encourage member growth. As for the advertising and commerce services, particularly Yahoo Shopping, there is an expectation that controlling costs and maximizing utility from assets in the second half will facilitate business regrowth and GMV increase.

ID Linkage, Database Consolidation Costs, and Future Promotions

For the planned ID linkage initiative starting in October, the company has clarified that there won't be substantial additional expenses in Q2, as existing assets will be utilized for this project. Promotional costs may be considered in the future to support the ID linkage campaign, which is part of a broader strategy to enhance media use and advertising targeting effectiveness. In addition, the company reaffirmed its dedication to growing the top line while generating profit and highlighted that profit generation alongside top-line growth remains a top priority.

Earnings Call Transcript 2024-Q1

[Operator]

Now we would like to start the Z Holdings Corporation's Fiscal 2023 Q1 Business Results Briefing. Thank you very much for joining us today. We are going to use the material, which is available on our website Today, from Z Holdings Corporation, we have Mr. Takeshi Idezawa, CEO and Representative President; and Mr. Ryosuke Sakaue, Z CFO and Senior Managing Corporate Officer. From LINE, we have Mr. Yuki Ikehata, Senior Executive Officer, Advertising and Corporate Business Management; and from Yahoo, we have Mr. Hiroshi Kataoka, Executive Vice President and Managing Corporate Officer; and Mr. Makoto Hide also from Yahoo, Managing Corporate Officer. First, Mr. Sakaue will present the Q1 business results and we take questions. We plan to end the session in about 1 hour. This session is live streamed. If you have some difficulties in getting the audio or video, if you go to the bottom of the screen, you'll be able to move to another server.

Now I'd like to ask Mr. Sakaue to start the presentation.

[Ryosuke Sakaue, executive]

Thank you very much for joining us. My name is Sakaue of Z Holding Corporation. Thank you very much for taking the time out of your busy schedule to join us. Let me now present the overview of Q1 business results. Next page, please. First of all, let me start with Q1 business results topics. Both revenue and adjusted EBITDA renewed the highest record for Q1. PayPay started services 4.5 years ago and turned profitable in adjusted EBITDA for the first time. In Media Business, account ads revenue grew in double digit and the search ad revenue also grew by 5.2% year-on-year. Commerce Business adjusted EBITDA margin exceeded 20% with subsidiaries growth as well as profitability improvement through cost optimization. And through the selective focus on key businesses, we'll be reorganizing domestic financial business. This is the agenda that I'd like to follow.

Let me start with consolidated business results of the whole group. This shows the group-wide performance. Revenue and adjusted EBITDA both showed double-digit growth. Revenue growth is mainly due to the PayPay consolidation and Media Business revenue increase. Adjusted EBITDA increased with lower fixed cost and also PayPay consolidation and turning into the profitable business in strategy business and the selective focus on key businesses. Adjusted EBITDA margin improved to 23.2%. This shows the factors of change in adjusted EBITDA. We have been reducing business commissions and increasing efficiency in sales promotion cost. Last fiscal year we started the selective focus on the key businesses and we are steadily decreasing the fixed cost. Excluding the listed subsidiaries and PayPay consolidation, our Z Holdings adjusted EBITDA greatly improved.

In addition to the growth of ZOZO and ASKUL, the profitability of the PayPay consolidation improved and adjusted EBITDA increased as a result. This shows the factors of change in operating income. Although depreciation and PPA amortization increased, with the growth of the adjusted EBITDA, the operating income grew 19.3% year-on-year. In April 2023, the AI company business of LINE was inherited to Works Mobile Japan through absorption type demerger or split and we booked transfer profit through the business separation, which is included under the others. This shows the factors of change in adjusted net income. Equity in losses of associates and joint venture improved with business growth and cost optimization. As our equity ratio in WEBTOON changed, we booked gain on change in equity interest. Adjusted net income grew by 34.8% year-on-year. Until now we did not give you the details below the adjusted EBITDA, but now we are giving more details.

As a background of that, improvement of the capital efficiency we believe is one of the important management issues and we understand that it is important to streamline the capital. But realizing the continuous profit growth is the most important thing in our mind so we continue to expand the profit. Next is selective focus on key businesses. As we start LINE Yahoo!, we will promote selective focus on the key businesses, mainly overlapping businesses. Domestic financial businesses, we have Z Financial and LINE Financial, 2 companies. And through this reorganization, we have consolidated the functions to Z Financial. So below Z Financial, there is LINE Securities and LINE Credit Corporation. As for generative AI, I would like to talk about the 2 perspectives including applications and services and increasing work efficiency.

First of all, the applications in services. As for Flea Market: using the chat GPT, we will start to provide a feature to assist composition of text to explain items and we are also considering the introduction to YAHUOKU! As for LINE, we started the service to auto generate visual images using generative AI. In terms of work efficiency improvement in order to improve the productivity of the engineers, we have introduced GitHub Copilot. We concluded an agreement to use all APIs provided by OpenAI. Older employees of the older divisions will be using generative AI to pursue operational productivity and service quality improvement as well as new service creation. Let me now talk about the new structure after the merger in October. As we announced the business results, we also disclosed the new structure. We will streamline the Board of Directors in order to speed up the decision making.

We will promote the delegation of the authorities so the company CEO will have authority and responsibility for the management of business domains and we also promote the product-based businesses. As for the organizational structure, we will have 3 categories, the 7 companies and cross-sectional technologies and corporate administration. As MC announced at the beginning, today I am joined by Mr. Hide, Mr. Kataoka, Mr. Ikehata. They will become the company CEOs of Commerce Company, Media Company and Marketing Solution Companies from October. So under this new structure, we will pursue product innovation and profitability improvement. This shows the consolidated full year guidance. In addition to adjusted EBITDA, we have disclosed the revenue guidance of Media Business and Commerce Business. I'll touch upon this later, but we are seeing the signs of ad market bottoming out in Media Business.

So excluding Commerce ad of FY '23, we expect a low single-digit growth of the ad revenue. In Commerce Business, we plan to start the LYP Premium from November this year and we expect the user base to expand. As our subsidiaries are growing, the FY '23 Commerce revenue is expected to be in mid to high single digit. Now let me move on to each segment business results and topics by segment. First, the Media Business performance trend. In Q1 despite the impact of market conditions on display ads, revenue increased due to recovery in ads on media sections and the consolidation of LINE Music. Adjusted EBITDA is down despite a higher increase since the second half of last year due to new graduates hiring and increased corporate expense allocation to the Media Business. Next, please. This is group-wide total advertising revenue. Total revenues growth rate, excluding shopping-related ads, is up 1.2% Y-o-Y indicating signs of bottoming out.

Next, please. This is factors of changes in display ads. Revenue of shopping-related ads is down due to the impact of strategic efforts to improve the efficiency of sales promotion expenses in the Commerce Business. Revenue of reservation ads is down due to the ongoing shift to programmatic advertising. In the short term we will implement initiatives such as ID linkage and sales team integration to generate synergies. Integration of the LINE and Yahoo! sales teams is expected to generate upside through analytics across both platforms and the proposal of integrated solutions. In the long term, we intend to increase sales through the integration of advertising platforms and capture the video advertising market. LINE official accounts, the number of paid accounts increased 35.6% year-on-year. To further enhance functionalities and strengthen linkage with Z Holding services, we have implemented a revised fee plan on June 1.

Even after the fee revision, the number of paid accounts continued to increase and the churn rate did not deteriorate. So a positive contribution to the revenue is expected in the mid to long term. Next page, please. Commerce Business performance trend. Reduced promotion expenses at Yahoo! Shopping and LINE AC led to a significant improvement in profitability with adjusted EBITDA growing 24.2% year-on-year and adjusted EBITDA margin exceeding 20% as a result. Next, please, e-commerce transaction value. This is the overall situation. Domestic merchandise transaction value is down 1.9% year-on-year, however, there is a sign of bottoming out. Next please, domestic e-commerce transaction value categorized into each area. Domestic shopping transaction value is down 8% year-on-year, however, this represents an improvement from the previous quarter and is in line with our expectations.

Domestic reuse business continued to grow steadily driven mainly by PayPay Flea Market, which is expanding its user base. In the domestic service business, the positive impact of the reopening has run its course, but the travel business still continued to do well. Next, please. This is profitability improvement and other initiatives in the Commerce Business especially Yahoo! Shopping. We are making a steady progress in terms of user retention, product enhancement and profitability with continued improvement in Yahoo! Shopping gross margin of 22 points from Q1 last year. We are also enhancing the service offering essentially resulting in higher ratios of new users repeating in the following month as well as blue ribbon delivery. As a second half initiative, we are launching LYP Premium Membership in November this year, which is expected to increase our commerce service usage by LINE and PayPay users.

The improvement in retention rate and profitability prior to the launch of LYP Premium Membership should provide a solid base for the growth in the second half. Next please. Strategic business performance trend. The highlight of Q1 is that adjusted EBITDA of consolidated PayPay turned positive. Revenue grew significantly year-on-year driven mainly by the growth of PayPay and PayPay Card. Adjusted EBITDA improved year-on-year and Q-on-Q due to the improved profitability of PayPay and impact of selection and concentration initiative, including finance business reorganization. Going forward, we will improve profitability by optimizing costs and reducing and reviewing loss-making businesses in addition to the growth of PayPay. This slide shows PayPay business overview. Consolidated revenue continued to grow by more than 40% year-on-year allowing consolidated EBITDA to turn positive for the first time.

Consolidated GMV continued to grow significantly driven by increases in the number of users as well as in the number of payment transactions. Going forward, we will continue to promote integrated management with PayPay Cards offering seamless payment experience centering on smartphone apps to further expand and diversify our business. These are PayPay Card's major KPIs. The number of active card members is growing steadily partly thanks to the synergy with PayPay. Also with an increase in unit price per transaction, transaction volume grew significantly by 28.2% year-on-year. Next is PayPay Bank's major KPIs. This is the last slide. PayPay Bank is also improving its KPIs steadily thanks to synergies with PayPay. The number of accounts is maintained double-digit growth due to acquisitions through PayPay mini apps. Deposit balance is growing steadily along with the increasing number of accounts.

Lastly, business efficiency improvement. One of the management policies this year is progressing well on both fixed cost reduction and selection and concentration contributing to the improvement of Q1 earnings with PayPay resulting in positive EBITDA. The other policy of the group of building a foundation for renewed growth from FY '24 onward will be addressed with ID linkage starting in October and LYP Premium Membership starting in November and preparation is going on smoothly so far. We are off to a good start in FY '23 in line with our plan so with a sign of bottoming out in the advertising market.

This concludes my presentation. Thank you.

[Operator]

[Operator Instructions] First from JPMorgan Securities, we have Mori-san.

[Haruka Mori, analyst]

My name is Mori of JPMorgan. I have 2 questions, if I may. First question is about the Q1 adjusted EBITDA results. In comparison to your expectation, how was it? I think that the progress has been pretty good so if it exceeded your expectations, where did it come from? Could you talk about different segments or item of cost reduction? If you can give us some more details. For the SG&A, JPY 10 billion reduction is what we see so the JPY 30 billion reduction of the fixed cost is what you mentioned at the beginning of the fiscal year and LINE Securities and Bank have been excluded and the effect of that have been big. So vis-a-vis your target of the cost reduction, probably you'll be exceeding that JPY 30 billion. So if you can talk about the details in Q1.

My second question is about advertising. You mentioned that the signs of bottoming out are being seen so these signs. As a background of the sign, the market factor and also your initiatives, could you talk about those 2 to let us know what have been happening? And in Q2 and onwards, the market could recover further, is that something that we can expect? And as for the initiatives, LINE account the fee revision, we will start to see some effect of that. So in comparison to Q1, probably the market and your initiatives will go to the next level. Is that something that we can expect? Sorry to be long, but a neighbor engine, the integrated commerce engine is being introduced. So could you give us some update on that? And including advertising, if you decide to do so, what will be the potential? What are the expectations in the medium term?

[Ryosuke Sakaue, executive]

Mori-san, thank you very much for your questions. The first question is about the Q1 EBITDA factors and where they came from. And the second is about advertising market and our initiatives in the background of the bottoming out and what will be happening in Q2 and onwards. And the third is about the Commerce search. So Ikehata-san will talk about the market in response to your second question. Let me answer to your questions. In Q1 adjusted EBITDA compared to our expectations, it was better because of the SG&A reduction through the efforts of the employees have gone well. By segment, Commerce and Strategic segment, those 2 are the areas that we are seeing the bigger improvements. Relatively speaking, this is something that we are working as a corporate-wide.

So business commissions and sales promotions, those 2 factors, we have been trying to improve the efficiency and that's something that we have been doing at the company-wide level and we made good progress. If I may add about the LINE Securities in terms of EBITDA, this is deconsolidated from April so we are currently transferring this. So in Q1 LINE Securities deficit is already booked -- is not booked in the EBITDA so that condition continues to be the same in Q2 and onwards. As for LINE Bank, in the previous quarter we made a provision to some extent so Q1 was within the level of provision. So in Q2 and onwards whether there will be some add-ons, that is not going to be the case. In Q2 and onwards, the forecast guidance is that for the fixed cost reduction, we are making good progress. At the same time in the second half, LYP Premium and ID linkage, those are planned.

So product quality will be very important and we need to go in further to build such foundation, but we want to make sure that we manage this well. And as for the EBITDA guidance for the full year, we want to make sure that we achieve that target and that's going to be unchanged. Second part about the advertising, the initiatives in search LINE official account and display, we have various measures and initiatives that we have been adding. So we are building the foundation for growth. In Q2 and onwards, as for the forecast, the low single digit is what we mentioned in terms of range. So in Q2 and onwards, the low single-digit growth is what we expect for the full year. And the market conditions are still uncertain so that is what we can say. Now as for the Commerce Search, we are testing various things so we are still evaluating them and we will continue to do so. We are still in the testing phase. So Ikehata-san will answer to second part of your question.

[Yuki Ikehata, executive]

Ikehata is going to answer to your second question. The market bottoming out, we see some signs as we said. And as a background, if I may add, the advertising market as a whole if I may talk about that. The companies and partners and agencies, through the conversations with them, the ad budget of 1 company going back to the level is not something that we are seeing. We are still seeing a plateau or a flat situation. But I think that the companies are now obliged to more efficiently utilize their budget and they are more aware of such budget management.

So more specifically for example, digital marketing and digital advertising, allocating budget for those is something that we are seeing. So in the second half, gradually the recovery trend is something that we expect. And as you commented about the official account and fee revision and that's something that might contribute in the second half. So in response to that, yes, that is the case. And as we presented the fee plan revision and the cancellation, we did not see the negative impact. So this plan change, this gives us the continuous revenue to us so we are working so that we can see the gradual improvements.

[Ryosuke Sakaue, executive]

I'd like to clarify something about the Commerce Search. In relation to NAVER, we have not yet introduced that. So about the e-commerce query, we are considering many things right now. So that is our answer to your comment.

[Haruka Mori, analyst]

Just 1 thing, Sakaue-san, 1 follow-up question. This term I think that the Q1 result was better than expectation. But the guidance numbers, maintaining those numbers and also if you have a buffer in the second half, you want to invest that for the future or for the medium to long-term growth?

[Ryosuke Sakaue, executive]

We would like to invest, but we also need to think about the fiscal discipline and the investment efficiency. So we are not going to make the wasteful investment in order to achieve our targets. So that means that if the investment efficiency is not so good, it is possible that we have a short-term profit, but that could damage the medium to long term so it's difficult to say. But we would like to consider all of those factors.

[Operator]

Next question is from SMBC Nikko Securities, Maeda-san.

[Eiji Maeda, analyst]

Maeda from Nikko. For PayPay business and the Commerce Business especially regarding Commerce Shopping, I have questions. For PayPay consolidated EBITDA was JPY 1.7 billion, quarter in the previous year was JPY 2.4 billion. So what was the factors behind the improvement? And also previous year JPY 2.4 billion, is it -- with the PayPay Card as well, is it included because this year JPY 1.7 billion other than PayPay Card's contribution, do we have sufficient profits there within JPY 1.7 billion? What is the breakdown, payments and promotion services and other finance services? Do you include all of these? So there was a positive profit of JPY 1.7 billion, what is the breakdown? And also this positive profit, is it sustainable going forward or sometime in the future are you going to record expenses and this might fall into negative profit once again? So if you could give us those details, that would be great.

Regarding Shopping, this year you are prioritizing cost control and efficiency improvement. But if you look at your competitors because of the tough business situation, it seems that they are rather investing. So probably the company can invest rather than protect given the current situation. So at this point in time even if you spend promotion costs, the structure of Shopping itself going forward for the yield of users, you cannot secure that probably in the future. Therefore, is your priority still cost reduction or is it time for you to turn more offensive on your Shopping business at this point in time? What is your stance?

[Ryosuke Sakaue, executive]

For the first question about PayPay improvement breakdown, Sakaue would like to answer. The second question will be answered by Mr. Hide, who is in-charge of Commerce. The reason for the improvement in PayPay, revenue, including GMV, there was a huge growth in sales and revenue that pushed up the gross margin. The fixed cost has gone up a little bit. However, we have compensated for that with the increase in revenue. And there was some acquisition cost, but even after that, we were able to earn enough gross profit. That's why we had a positive profit. In terms of breakdown, the payment business is still the main business there for PayPay. So the payment business is the driver actually of the positive profitability. For the positive profit, whether this is sustainable or not, what's the question. Rather than that, we are focusing on the growth of the cashless market. Therefore, we would like to continue to spend necessary promotion costs, sales promotion costs while paying attention to the profitability.

[Makoto Hide, executive]

Hide is going to respond to your second question. Yes, I would like to address the second question. Once again, whether we are activating the commerce investment or not was the question. As you alluded in your question, at the moment, the cost or investment efficiency improvement is our priority. So that's the first and foremost priority. But after this phase, once again, we would like to promote the regrowth. And once again, we want to promote the growth of the size of the business. In terms of the cost reduction rather than investing by compromising investment, the service quality, product quality, we are focusing on that. And this is a new company. So we want to have a good asset level for this company for the investment. The first milestone is LYP Premium in November and ID linkage with that. So mainly from the second half, we are promoting the regrowth of Yahoo Shopping. So for that, we would like to actively utilize the assets of the new company. That was my response.

[Ryosuke Sakaue, executive]

Sorry, there was one missing part. Regarding the first consolidated PayPay EVA, this slide shows the PayPay cards included as well. So this slide shows Page 22 includes PayPay cards.

[Operator]

Next from Goldman Sachs Securities, Munakata-san.

[Minami Munakata, analyst]

Munakata speaking from Goldman Sachs. I have 2 questions, please. First is about strategic business. Another is ID linkage related question. First question is about strategies. So the selective focus on the core businesses have been going on. So PayPay has turned profitable in Q1. Now PayPay turning profitable, the position of the LINE Pay, could you explain that. What do you think would be the optimum business structure in the future?

The second question; in terms of the management of the private information, you mentioned the media reported that there are some challenges in relation to that. So could you talk about the current status? And in October, you plan to have ID linkage. Do you expect some issues or the delay in ID Linkage?

[Ryosuke Sakaue, executive]

About the strategic segment, I'd like to respond, Sakaue. And as for the private information related, Idezawa will answer to your question. About the strategic segment, your question is about LINE Pay. LINE Pay currently, the digital content online still use LINE Pay. So discontinuing the service or integrating the entities is not something that we are planning to do. At the same time, we have been selecting and concentrating on the different key businesses, and we'll continue that. And there are a lot of possibilities that we'd like to pursue. So that's my answer to your first question.

[Takeshi Idezawa, executive]

Yes. About the ID linkage, as we planned from the beginning of October, we will start the ID linkage, and we're preparing for that. And so we would like to explain to the users in detail and would like to proceed smoothly.

[Operator]

Next is from Citigroup Global Markets, Tsuruo-san.

[Mitsunobu Tsuruo, analyst]

First question, this is about strategic focus. ChatGPT and Generative AI, in your current situation, what pros and cons of that. In the chart, you said that you started to use Generative AI. On the other hand, in the search ads, Microsoft for the overseas markets, I think, including Japan, that's where they are taking market share. That's what they are saying. So a very wild argument, probably this is. But for the search engine, LINK plus ChatGPT plus maybe theoretically it's possible to switch to that. So the pros and cons of these possibilities, please.

My second question is about cost reduction. For the last quarter, there was JPY 10 billion SG&A reduction. But for the selling expenses, what is the progress so far in cost reduction at the moment compared with the expectation at the beginning of the year. At the moment, how much progress did you make and eventually how much is possible by the end of this fiscal year. Those are the 2 questions.

[Ryosuke Sakaue, executive]

Yes. First question was about Generative AI. The second question was about the progress and the outlook on cost reduction. I would like to take-up both of the questions. For Generative AI, there are pros and cons. In the presentation today, we showed you positive aspects such as efficiency improvement of our work. This is a very effective technology for that. And in terms of the business, in the industry where we are playing, Generative AI can be the driver of various innovations and changes. Therefore, in different services, today, we are prioritizing a discussion of the use of Generative AI.

With that, we would like to come up with new services and user experiences. If we do that, we can promote more use of Internet, that will be all positive for our company. And also for search engine part, there was a question you asked. There are various search experiences, including overseas examples, there are many. So we are investigating into those use cases. In that sense, for the Generative AI, does that lead to the UI improvement and also search engine improvement. We are trying to figure out what will be the benefits. What kind of engine and technological base should we use, including that question, we are discussing all these aspects within our company. So when the time is right, we would like to give you more details and respond to your questions in more detail.

Regarding the second question, cost reduction. The progress is favorable, and it is actually faster than what we had planned originally. In the beginning of the year, we said JPY 30 billion reduction. Regarding this JPY 30 billion, we think we can hit this target expectation. And furthermore, how much more can we go for Q3 and Q3, we would like to wait and see and we'd like to update you on the progress when the time comes. Anyways, outsourcing expenses and other fixed expenses during Q1, we were able to reduce it to a certain extent. That was a great achievement we think. So that's my answer.

[Mitsunobu Tsuruo, analyst]

There is a follow-up question regarding cost reduction. JPY 30 billion, you said that you have a good progress towards this. So what is the run rate? So that means for against the annual reduction target, how much did you do so far? Could you give us a quantified answer.

[Ryosuke Sakaue, executive]

Sorry, this is undisclosed information, but the plan internally is JPY 30 billion. We are on trend as well as some extra at the moment.

[Mitsunobu Tsuruo, analyst]

Second question regarding search engine. Using Generative AI, UI accuracy, you are trying to improve. You are looking at these possibilities. Is it just about AI or are you looking at ChatGPT as well because they are the latest, right? And most advanced, you have Hyper Clover, but it's still lagging behind, according to Mr. Miyata of SoftBank. So for ChatGPT, are you including it as one of the candidates for your search engine, are you considering that possibility as well?

[Ryosuke Sakaue, executive]

Well, regarding a specific product, we would like to refrain from mentioning specific products, but we are evaluating various different products in trying to figure out the possibilities. At this point in time, we cannot tell you our judgment on which product is good and bad. So on this point as well, we would like to give you an update in the future.

[Operator]

Next from UBS Securities, we have Fukuyama-san.

[Kenji Fukuyama, analyst]

This is Fukuyama of UBS. I have 2 questions. First is about ID linkage. Second is about Yahoo login user number. So about ID linkage and LYP premium and the advertising and commerce rippling effect, the impact on the top line. So in the second half, do you think that you can expect some impact? Could you give us the update in terms of time line? The ID linkage, you mentioned that several years might be necessary. So what will be the time-frame before we see the effect or impact. So as much as possible, please give us some explanation. That's my first question.

The login user number, I think that the slight decrease observed in the past 2 quarters. So what are the reasons in order to increase the number of users, the portal itself needs to be more attractive. So UI and UX can be renewed to attract more young users. Maybe you need to innovate the product. So as of now, what are the things that you're considering? Could you give us some update?

[Ryosuke Sakaue, executive]

Yes. To your first question about the effect of the ID linkage and second is ID login user, which is slightly declining and the reasons behind that and what are we doing to counter that? So I'd like to answer to that. And to the second question, Kataoka-san will talk about Yahoo login and also media in the wider range. So ID linkage until now, as I answered, we do not expect everyone to give us consent. So gradually, we would make progress in ID linkage. And the number of combined or linked IDs, the media and content targeting can be done. And as a result, targeting well progress. So ID linkage, as we make progress gradually, the media use or at heart, we will see the positive impact. So that's what we expect. No specific numbers and so forth are not disclosed.

Second question about the number of login users. Sorry, I cannot give you the answer right away, but looking down to some extent, but there has been some seasonal factors. So Kataoka-san can explain further including the future trend.

[Hiroshi Kataoka, executive]

Yes, this is Kataoka speaking. So about login, yes, younger users and attracting them, we believe is necessary. And in that sense, together with the LINE, the ID linkage, starting in October and the linking the functions and features and services, Yahoo login user, we plan to increase the number. And also high login ratio is in comparison to PC and smartphone, the apps have a higher login ratio. So we want to make sure that we can work with apps so that the indispensable functions for the users can be added so that we can increase the login ratio. So when we have the higher login ratio, as Sakaue said, the revenue per login will be higher than those users who do not login. So that would lead to the top line growth.

[Ryosuke Sakaue, executive]

About the commerce, yes, Hide can answer to your question.

[Makoto Hide, executive]

Yes, this is Hide. LYP Premium impact. How do we expect that on commerce? LYP Premium, by providing it, the biggest thing is that the LINE user becoming premium members. I think that's the biggest thing. So LINE will be added to the Yahoo Premium and they will become the new LYP premium member. So those people who have not used Yahoo shopping can become the members. And then just like the Yahoo Premium, a commerce point can be provided in the preferential way. So that can be used as a hook. So that's the structure that we expect. So as for the impact, the size of it, it will be linked to the number of members. So usually, first of all, the new user acquisition will increase rather than the overall GMV. So from the second half to the next year, we want to make sure that we'll take route and so that we can eventually increase the GMV. So that's what I expect.

[Operator]

Next is from Nomura Securities, Masuno-san.

[Daisaku Masuno, analyst]

I have 2 questions. One is about PayPay. The other is about base cash flow. Regarding PayPay, in PayPay cards in the quarter, JPY 3 billion or JPY 4 billion positive profit is there. So probably you can go a little bit more. So is that the situation today for NPA, it is a little bit weak. But can you bring it up? I think that there are many measures that you can possibly take in order to improve it. And also regarding the card, is the gold selling very well. What is the basis for sustainability of the card business?

Second, no financial business. Second question, we talked about the non-financial, but the business cash flow is also important because EBITDA ratio is 2 times. So if it's an Internet company 3 times, 4 times leverage would not be a problem at all. So in terms of BS and cash flow, what is your basic stance about those BSN cash flow? That's the 2 questions.

[Ryosuke Sakaue, executive]

The first question was about PayPay. And second is about BS and cash flow. So I would like to take up all of these questions. Regarding the unconsolidated PayPay profit level, sorry, this is not disclosed from the company. So that's the answer. Rather than PayPay card, PayPay growth was a driver of the consolidated positive profitability. Regarding NPA, the P2P and friends to friends, money transfer, that is one area, and there are others as well, like merchants and promotions, you can continue to use the same margins. So that's how we would like to increase the MTU. For the net increase of cards, a major driver is PayPay Atobarai and that's what we are guiding users towards and recommending users. So when they use PayPay Atobarai, the PayPay cards and the new registration or sign-up for the PayPay cards is likely. So on top of that, from [indiscernible] can be used from April, it became available. So for Atobarai, there are many usage that we are providing. Therefore, there is some contribution to PayPay cards from that as well.

For the BSN cash flow, what you said is correct. The base expenses, acceptable finance business, as you can see in the appendix, for the net leverage ratio, it is from 2 times, 3 times. That's the internal benchmark we are looking at as a guideline. So within that range, we would like to control for the net business and managing the BS as a net Internet company. For the finance business, well, for bank business and payment business is different. But for the bank business, there is a capital adequacy that we have to watch. And also for the card business, will payments come before. That's the business model. So the liquidation and securitization of the credits is something we are looking at so that we can minimize the cost for securing capital.

For the unconsolidated PayPay, the charged balance payment is still majority. Therefore, basically, cash conversion is negative because the money is accumulating in the first place. Therefore, in terms of the funds for the PayPay Inc unconsolidated, there is no issue with that. Sorry, those were the comments that I can make. Regarding leverage of 3 times, maybe another JPY 300 billion is something you can make in terms of the leverage. So you can spend JPY 300 billion or something else. So please consider this possibility.

[Operator]

Next, Okumura-san of Okasan Securities.

[Yusuke Okumura, analyst]

Okumura speaking of Okasan. Two questions, please. First, a point of clarification, LYP premium. So ID linkage is done, and this is something that is provided to the users who linked ID free of charge. And if that is the case, ID linkage might be able to accelerate. So just like the Yahoo premium, the monthly billing, is that something that you will continue. So that's something that I'd like to clarify. This is my first point.

Second point is that the equity investment loss in Q1. Excluding PayPay, I think that we are improving this. And as a breakdown, the content and commerce payment business environment, how did it improve? And what would be the future direction? Do you think that the current speed of improvement will continue. Those are the 2 questions.

[Ryosuke Sakaue, executive]

So first question, LYP premium member. When you link the ID, providing this free of charge is not something that we are considering. Attractive point provision is something that the people can use so that we would emphasize the premium member attractiveness to gain the number of the bankers. So in terms of collaboration with the SoftBank, so SoftBank users can continue to use the premium membership with a higher point provision.

As for the second question, the equity investment losses. I think there is still room for further improvement. And this time in the appendix, as you can see, the negative number in others is more than half of it. So those are unspecified companies, so overseas financial business mostly. And the business expansion is happening, and the red number is being reduced. So the [indiscernible] as they disclosed, they are trying to become profitable in FY '25. So equity investment, we believe can turn to profit with that. As we said previously, from 2023 to 2025, internally, 2024 and 2025 in FY, we want to make those business profitable. And if the businesses are not profitable in FY '25, is it meaningful to continue or not, we might make a judgment. So that's a kind of a guideline that we have. So the equity investment number from the red number to the profitable number, we would, of course, want to move to the equity investment gains rather than losses. So the profitability improvement would continue.

[Operator]

We would like to take one more question from Kumazawa-san, Daiwa Securities.

[クマザワ, analyst]

One question. In October, there will be ID linkage, and you are consolidating the database which is incurring some costs, I assume. Has it been already accounted for? What is the pace of recognition, so if it will be largest in the September quarter?

[Ryosuke Sakaue, executive]

Regarding the cost for ID linkage, in Q2, if there is any additional major expenses or not, the answer is no. We already have the assets. We are using them. So for the ID linkage, there's any specific additional cost expenses for that. So you don't have to worry about that part. Of course, for the ID linkage, in order to promote this, there may be some promotional cost and expenses in the future, which we would like to consider, but that it is limited to that.

[Operator]

With this, we would like to conclude the Q&A session. Finally, Mr. Sakaue would like to say a few words. Mr. Sakaue, please.

[Ryosuke Sakaue, executive]

Yes, Sakaue speaking. So we are now limiting the time to 60 minutes, and we had a variety of questions and many questions. So if you need some additional explanation, please ask questions to IR team. So as first quarter, I think that we made a good start. So we want to make sure that we grow top line and also generate profit. That is most important thing. So we'd like to make sure that we do this at the same time. So thank you very much for your participation today.

[Operator]

This concludes the business briefing session, announcement of Q1 business results of the Z Holdings Corporation. Thank you very much indeed for joining today.

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