LY Corp

XMUN:YOJ

Earnings Call Transcript 2020-Q3

[Operator]

Thank you very much for participating in Z Holdings Corporation FY 2019 Q3 Business Results. The business results presentation material is on Z Holdings Corporation's homepage. The participants from Z Holdings Corporation are as follows: Mr. Ryosuke Sakaue, Managing Corporate Officer, CFO; Mr. Takao Ozawa, Director, Senior Managing Corporate Officer; Mr. Gen Miyazawa, Managing Corporate Officer; and also Chiaki Fujimon, Managing Corporate Officer, CTO.

Firstly, we will hear from Mr. Sakaue to give the presentation on Q3 results, and we will have Q&A afterward. And the total conference call is scheduled to go for about 90 minutes. We would like to start the telephone conference.

Mr. Sakaue, please. The floor is yours.

[Ryosuke Sakaue, executive]

Thank you very much. I am Sakaue of Z Holdings Corporation. I would like to give the business results of Q3 2019. First page shows the topic regarding the Q3. We can say that the 3 months trended very favorably. Commerce and Media businesses grew steadily; therefore, regarding our net income, it grew by 59% year-on-year. Full year operating income-wise, it is at the higher end of guidance, i.e., JPY 150 billion. This is the slide that shows the reasons why we are growing. Shopping-wise, we grew by 37% year-on-year. And also in the third quarter, we started PayPay Mall. And because of that, the take rate went up, and therefore, the advertisement revenue of shopping went up by 20% year-on-year.

And second contributing factor is the advertising revenue. From the first half, we made some improvement, and it grew 6% year-on-year. PayPay-wise, just looking at the January figure alone, number of PayPay payments were 100 million times and also accumulative registered users continued to grow steadily. And in the end of January, we went above 24 million.

Please turn to Page 4. This shows the Q3 income statement. Revenue went up by 13.6%. Operating income went up by 30.9%.

On Page 5, you see the factors contributing to the changes in the operating income year-on-year. There are 2 points, first is the consolidated impact of ZOZO. And second point, if you can kindly look at SG&A. There has been an increase of JPY 18.4 billion year-on-year. And ZOZO contributed JPY 17.7 billion, which means that other than ZOZO, the increase was only JPY 700 million. So we can say that we were able to control the cost. And because of all those factors, we were able to increase the operating income by 30%.

Please turn to Page 6. Without the impact of ZOZO, how did we trend? If we exclude ZOZO for Q3 revenue, we were able to increase by 19.3%. So regarding PPA amortization, in 2 months' time, it was JPY 2.2 billion. And full year-wise, it will be JPY 13.3 billion on a straight-line basis. So we can say that even without ZOZO, we trended favorably in Q3.

Please turn to Page 7. Regarding P/L, especially the KPIs for each business, we can say that as compared to the previous year, we are trending favorably again.

Page 8. This is the full year forecast regarding revenue. Because of the consolidation of ZOZO, we are at the high end of the guidance; operating income-wise we will be in the lower half of the guidance. And I would like to explain to you the reason. As mentioned before, PayPay users was at 24 million. And so at the beginning of the fiscal year, we had our forecast, but we were able to outperform our expectation. Having said that, we still believe that there is much leeway for the growth of cashless business, and we will put our effort to realize that. And so instead of sitting put and enjoying the PayPay contribution, we would like to be aggressive in conducting further investment in Q4.

And so regarding the revenue, it will be in the higher part of the guidance, whereas operating income-wise, it will be in the lower half of the guidance. And looking at EPS, we had different events. So maybe you might have forgotten about some of the events. But regarding the shareholders' return, we had a buyback of treasury, and therefore, EPS will be between 7% to 12% growth. That's about it for P/L.

So from here onward, I would like to talk about Commerce and Media individually. Page 11 is the situation of Commerce. The basis is e-commerce and payment, and these 2 are growing very favorably.

On Page 12, you see the breakdown of the transaction value. Reuse business was called YAHUOKU! in the past, but now since we have a PayPay Flea Market, we have changed the name to Reuse business. By starting PayPay Flea Market, we try to reallocate the sales promotional cost for YAHUOKU! to PayPay Flea Market. Therefore, the sales promotional cost for YAHUOKU! was very low. And therefore, the number for Reuse business was minus 5.8%.

The last line is for the credit card values. So this cashless and the synergy with PayPay have been -- have kind of been effective so that why and now it has been substantially grow by 61%.

Page 13 represents about the shopping transaction value without ZOZO and grown by 7.4%. So far, hasn't grown close to that double-digit growth by the end. And -- but in the first quarter, now we have this 7.4% due to that -- the negative impacts from the -- for example, as the consumption tax. But now in the Q3, so this is that -- this is the Q3 only for the temporary impact by the consumption tax rate. The 15 -- Page 14. So this is about the forecast of GMV for the Commerce. Well, we've done the consolidations of ZOZO. So now we will over that -- the target to 12 digit -- at double digits and 13% to 15% of the growth is now in the forecast for that e-commerce transaction value.

Page 15. The policy investors ask and ask about, that's the breakdown of -- that's the e-commerce of the consolidated -- the businesses. So that -- let me explain about. And after the consolidation of ZOZO. And the Q3 have -- up in income. Now the Yahoo! account for about half of that. And other than that for each of the group subsidiaries and provided the 50% of the operating income. So the Yahoo! ZOZO and Ikyu -- so the -- how we can maximize the synergy among all these group companies will be very important for us. So that's why -- and by maximizing the synergy, we'd like to go to further growth.

Page 16, to indicate -- so far, I've talked about each of these in the group company, but this is about the breakdown by each service. The 3 major shopping service types or the moat. So these are the value proposition of these different type of services of the Commerce. Yahoo! Shopping will cover all of the items and the merchandising so far. And the PayPay Mall, which have started from the Q3, it will be going in the one long upscaling. And it's easier to search. Or that's providing and more and really higher-quality products. So the campaigns for the LOHACO and ZOZO is providing about specific category. At the same time, and including that and the -- and high-quality delivery service, including that in-house delivery service will be provided by them. Consumers have diversified the needs so that's why we needed to deal with each of these different device for their needs by providing this, having different types of the e-commerce services, so they'd likely become the #1 in transaction values and the business.

Next, let me talk about the specific highlight topics for each of this and company. First of all, starting for the Yahoo!, we have 2 major topics. Page 18. First highlight is the PayPay Mall. So now the tenants have been steadily growing in the PayPay Mall. And so far, those who have not joined up the Yahoo! Shopping also -- and now participating in the PayPay Mall. So we get off to a very steady start when it comes to the PayPay Mall operation.

And Page 19 represents about the PayPay Flea Market. So the 2 million -- is go over the 2 million of the total and downloading and now become the #1 in shopping. Now after launching this Flea Market, now it is about the redundancy of the Yahoo! Auctions and Yahoo! Market have been very few. So that now we can have a very good synergy. And so the [indiscernible] for example, [indiscernible] kind of -- were based the businesses on, so that we'll have to do -- now we are implementing about the campaigns about the -- actually, 3% of the fees. That is the part of the campaign we're doing for the -- expanding that the transaction value for the PayPay Flea Market, want to do more after this.

Next, let me talk about ZOZO. On Page 21 -- represents that this is that -- and the initial -- the results of the ZOZOTOWN and the PayPay Mall. And now it was then subsidized and the -- December and in November. And now we have launched the ZOZO service on the December 17. So we have -- so far, we have a very good process and now also transaction value have been growing stably day by day. And the PayPay Mall and Yahoo! categories, the fashion category is now that ZOZO is now overwhelming #1 in the category. Again I mentioned earlier, after those were subsidized and because now as whole the subsidiary. And now we think that we have turning and transforming in through that as part of our end core of the business.

Now this is that the PayPay Mall is a consumer's breakdown and profiles. When we're launching this ZOZOTOWN and PayPay Mall, so there's cannibalization from the original and traditional ZOZOTOWN users. That was part of the concern. But now after implementing this and integrations, now we have acquired the new users from ZOZOTOWN from that basics -- from that the Yahoo! and [indiscernible] consumers. So that about 60% of these purchasers in PayPay Mall, the ZOZOTOWN PayPay Mall is all the new customers. But on the other hand, well, we have just started. So that's why -- and a lot of things that we have to do for the user experience and user interface. So we like to keep improving.

On Page 23, this is about how we can distinguish between the ZOZOTOWN, the main store ZOZOTOWN and the PayPay Mall store version of the ZOZOTOWN. How we can distinguish between the 2. And first of all, for the ZOZOTOWN main store. So that's the major -- the target would be that for those who are the favorite of -- and the fashion items. So that's why, first of all, we need to have more items and then more merchandising items, so that's why we'd like to expand it as -- and items so that by taking advantage of ZOZOMAT, we would like to expand it as the merchandising and the shoes. And also not only here in Japan, in order to expand into the customer base, we'd like to expand and break it into the Chinese market. So that's -- we like to just attract that -- ZOZO fans in China. This is our idea.

Another store, which is PayPay Mall Store. And I'll repeat myself regarding this topic, we would like to access a large segment of Yahoo!, so that we can create a store that will be in line with their needs. And we would like to improve UI and UX furthermore. PayPay is a brand that has the image of being affordable. So we will have strategic promotions so we can increase the shoppers as well as make the -- more that will be frequented by different shoppers. We want to have a variety of items, including fashion brands that are not handled by the ZOZOTOWN main store, so that PayPay Mall Store of itself can grow on its own. The target is different, and also the nature of these 2 sites are different. So these are the front and rear wheels that we would like to roll on to grow together.

So I explained about the synergy of PayPay Mall Store. Other than that, I believe that there are numerous potentials. 23 showcases is some of the potential. For example, PayPay is not introduced in ZOZOTOWN. And so by introducing PayPay, we believe that 24 million users of PayPay can enjoy shopping at ZOZOTOWN. And also we can reduce cost for payment commissions by utilizing all the group companies.

Another point is collaboration with SoftBank. Regarding Yahoo! Shopping, we had in-store promotions as well as reward program. And by doing so we were able to promote the users of SoftBank subscribers. And ZOZOTOWN has many young shoppers, so we would like to collaborate with the subscribers of Softbank as well. The SoftBank is the operator that has the strong fashion brand. And that is unique position. And so by leveraging on each other's potential, we would like to grow ZOZOTOWN. Now third point is media and advertising business in ZOZOTOWN and where there are many users. And so far, these have not been used as a platform for advertisement, so we can leverage on the know-how of Yahoo!, so

that we can have full-fledged growth of media and advertisement using these platforms. Talking about Reuse, ZOZOTOWN has the record of purchase. So you can enlist your items on YAHUOKU! as well as PayPay Flea Market. And based on the bid that you can receive from such sales, you will be able to use that as the source of capital to shop at ZOZOTOWN once again.

And ZOZOTOWN has a different recommendation engine, but then there is much leeway for growth, so we will collaborate in this domain as well. And also logistics-wise, Yahoo! Commerce, the merchants can work together to use ZOZO base. As you can see, there is a whole list of different potentials. Not only the members of Z Holdings, but SoftBank will be incorporated in this ecosystem so that we can go forward with PMI of ZOZO, so we can further grow ZOZO as one of the members of our group.

Now let's talk about ASKUL. Please turn to Page 26. In -- at the end of August last year, we have conducted numerous management meetings. Right now we have a very strong collaboration, and we are working to further improve our EV. So regarding our capital and business alliance, we will continue the relationship so that we can deepen the ties that we have.

And today, we had the Board of Directors' meeting, and 4 independent directors have been selected. We will be more transparent and have a group governance that will enable us to execute on our plan.

On the right, you see the results of ASKUL Group. Regarding 3Q operating income, it was JPY 1.5 billion. There has been a dramatic increase year-on-year. What is the reason? One is the reduction of the -- a deficit of LOHACO. Original [ PB ] items have been sold in magnitude, so that we were able to increase our operating income. And also we were able to strengthen collaboration with Yahoo! JAPAN. And so by May 2023, we would like to turn ASKUL to be profitable. I understand that some of you have concern against the relationship between us and ASKUL, but now we are working in collaboration so that EV can be further enhanced. I do hope that the shareholders will feel that the challenges have been resolved already.

Next about Media business. This is the platform of our media business. So time spent by logged-in users and number of monthly logged-in user ID group, especially through smartphone users. Next about advertising revenue. There has been an increase of 5.7%. The main point is YDN. Yahoo! advertisement, one platformization has been pursued and some of the products have been discontinued. And also we conducted anti-tracking. And because of these 2 factors, there had been a decrease. But in Q3, we implemented new products, which led us to grow by 1.5%. From Q2 of 2018, we were in the negative, but in Q3 of 2019, we were able to increase by 1.5%.

This is the full year phases of the projections. And when it comes to the -- to advertisement business, we expect that we can have more business and exceed into Q3 on a full time -- full year basis. So that we'll like to in a way -- and the catch up on a full year basis. And so that's -- and we would like to try to achieve that as a target. So see [indiscernible] range of the forecast is 3% to 6%. Why is it we have set up this forecast at the wider range? This is about some decrease of the advertising and from the advertisers from the -- this new coronavirus infection, the issues -- but currently is not that there's not any actual and impact have been observed, but now it seems like we -- and quite uncertain in future. That's why we have talked to the end of these risks. We did this in a wider range of forecast. So there's no any issues about it and impact, and we think that we can have a better [ learn ] on this without an -- a low to mid-single digits, in the middle single digits.

So next page, this is about the product that can visualize the advertising effects. So now -- so this is integrated marketing solution -- is that one of the slogan business this year so far. And to look at the news -- or that's the search, that's the information, and then we've linked it to the advertising. For the advertisers, so what will be that the convergence have been implemented with that advertise or not. And it was -- had been not clear. So that's why in order to visualize that kind of functions, now we have released that, the new products. So for example, PayPay Consumer Gifts or the Retail Gifts. So that that advertiser can check out and visualize the effects of the advertising on the offline basis.

So this is actually to visualize this system on Page 33. So just like this -- so this is the offline sales promotion products that can visualize the effect of the advertising and also in PayPay to reutilize that payment informations based on the PayPay operations that can -- unique only to our -- the Z Holdings. So this would be that the highlight is for the further growth potential. So this isn't about -- we think that this is the key for us, further growth and success in the Media business and advertising business. And so this product, including the PayPay-related products, can offered only by the Z Holding. And this is unique to -- for precious asset, unique only to the Z Holdings. So that's -- we hope that the advertisers all understand about that the competitive edge of Z Holdings.

Next page, please. And generally, we have -- and implemented and released a new product called the PayPay Retail Gifts. So let me explain it about this product. As we're part of the test marketing and Lawson and Kirin Beer Company (sic) [ Kirin Brewery Company ] have joined this -- the pilot study for this new product. So this is a quite -- in a simple flow, the first that advertisement is made on as our media, for example, that Kirin beer is sold at that the Lawson store, the user, using the lottery, Zubatoku, and now to bring that through that actual offline store and purchase the Kirin beer and products and the user can get a benefit. So that with only the process, we can visualize the effects of the -- its advertising. And what happens -- and the effects on an offline basis -- and also this -- the good -- [ the reference traces ] and the data can be stored. So this is the product, PayPay Retail Gift. So this is including the just PayPay Consumer Gift. We have very good inquiries from the other potential advertisers so that they would like to and pushed -- and to promote these products more after this.

Next, let me talk about strategic measures. And first of all, the PayPay. Page 37. This is about our PayPay strategy. And by taking advantage of -- that's a tailwind of the cashless promotions now we have been expanded steadily the business so that now we have exceeded 100 million on the monthly in January, and also 24 million is that -- now currently that's the users of PayPay service. So just like this. But all KPIs are favorable and PayPay is now ranked higher in a lot of the cashless ranking, for example, you're looking at the use ranking. So the PayPay ranked #2 for the use of the cashless -- the payment following the credit card. But although that the users have been expanded, but still, we needed to grow there the business and use of the PayPay. So that's why, starting from the February, we'd like to start the new campaign for that, getting to cashless more and closer and the pay. So that we'd like to implement campaign at the supermarkets.

I'm also the PayPay user, and I'm a premium member, so that's why I want to buy that, and about the cola on the vending machines and the JPY 120 of cola can be bought with JPY 60. So this is the big benefit. So that's why we wanted the consumer would keep using the PayPay payment services just like this. So get -- so that the payment by PayPay will become a routine of the payment practice. And also one of that effort in this year for the PayPay is that providing financial service. Z Holdings Group also implemented -- already have a variety of different financial services. So when it comes to financial services that are on the PayPay would be -- and -- be operated on a multipartner basis, so that's why by dealing with and selling that -- the financial products of the other financial institutions, we can expand into service. So this is the super applications so that [ I find ] the informations an online button on the PayPay can be connect about this offline activity with an online. So this is the nature of the super application of PayPay.

Now last of all, let me talk about the current status of integration of business with LINE. At December, it's the end of last year, 4 companies have a -- close to final agreements after that, but at the end of the -- generally, just like the schedule on the left-hand side, the LINE business was been transferred to that this is that for the Z Holdings that we have agreed about this switching stock exchange agreement. But we need to have the approval from the shareholders that -- so we're going to have an extraordinary general shareholders meeting on March 17, 2020, for having approval of this new structure. So that's why we all come to order shareholders and agree about this concept of this business integration. And in payroll, we need to go through the screening of this monopoly, policy screening and for this why, and we'd like to make -- that's the progress for this integration going through that the -- October of 2020 for the completion of the integration. That's all my presentation with the highlights of the business. Thank you very much. Thank you.

[Operator]

Mr. Sakaue, thank you very much for your presentation. We would like to open the floor for Q&A.

[Unknown Analyst]

I have 2 questions. Firstly, about the sponsored search. I understand that it grew. And I want to know what was the impact that provided a positive result. And I understand that you have been conducting this for some time. And do you think that this will keep its momentum for a year or so? Can you tell me about that?

[Ryosuke Sakaue, executive]

So this is Sakaue. And then afterward, Miyazawa-san will be talking about that. Firstly, why the Paid Search group and amongst the format of the advertisement of Paid Search, we made some improvement. And because of those enhancements, we were able to increase the Paid Search. And your question is whether the momentum will continue for a year or so. I believe that it might slow down to some extent. But then I believe that all in all, this is the initiative that will continue its momentum for about a year. Then Miyazawa-san, please?

[Gen Miyazawa, executive]

As mentioned by Mr. Sakaue, regarding the results of the Paid Search, improvement has been made. And also Paid Search advertisement option was added. And in Q2, some of the products were terminated. But in Q3, we added new products and the sales of the new products went up. And because of these factors, we were able to have a positive growth for Paid Search. There might be a slight slowdown. But I believe that for the full year, there will be growth of this product.

[Unknown Analyst]

Second question about shopping. I understand that because of the rebound of the consumption tax hike, Yahoo! GMV went down. But still, you were able to grow. But given the current situation, I want to know whether you will be able to rebound after the end of the negative impact of the consumption tax hike. If the factor is not only consumption tax hike, can you tell me what that might be?

[Ryosuke Sakaue, executive]

And then myself, Sakaue will answer first, and then Mr. Ozawa will do so. And so in January, as the transaction value went up by about 10%. So we understand that improvement is on our way. Then Mr. Ozawa, please.

[Takao Ozawa, executive]

In January and February, well, February just started, but as mentioned by Mr. Sakaue, we are seeing improvement in the negative impact of the consumption tax side is dulling down. And you want to know whether there are other factors that might be impacting our results. Regarding the marketing expense, and I guess we talked about this during YAHUOKU!, but we are controlling the marketing expense to some extent. So as compared to last year, we are reducing our marketing expense. So that is the impact that we have to bear in mind.

[Operator]

Next, Mr. Nagao from the Nomura Securities.

[Yoshitaka Nagao, analyst]

I'm Nagao from Nomura Securities. I have 2 questions. The first question is about the advertising business. Now we observed the recovery of the advertising business in the Q3, but when it comes to the -- about the display advertising premium -- but when it comes to growth to the premium advertising, a little bit weak than we expected. So that would you please be specific about the status of this premium advertising status in Q3 and also premium advertising. You advertised about this, the format is about major -- big major domestic and the national advertisers. So that one would be in the current status of the orders now.

[Ryosuke Sakaue, executive]

Okay. Mr. Miyazawa is going to explain.

[Gen Miyazawa, executive]

Miyazawa speaking. Okay. When it comes to premium advertising, usually it's in September and in March, we have a peak in March and September, and also ended in Q3. It's not that have been weakened dramatically, but -- and because we have a peak in the Q2. So in -- and the end of fiscal year, they were up, for example, our YDN or the Paid Search or the different format of advertising products have been emphasized so that the service also focus on, not only for that premium advertising, but also for the other formats. So that we have just a little bit a change in the strategy. That's all. Thank you.

[Unknown Executive]

Okay. So may I have additional question about this? Okay.

So when it comes to premium advertising, and it's also been -- had the impact of this consumption tax hike, you have also had the impact. And so that in the first half and premium advertising have a -- based on the new cashless payment advertising. That's why have some kind of reaction for, after that. But it's not that any -- an abrupt decline of that momentum. And -- maybe it would be just exactly the same we have in there. Okay?

[Yoshitaka Nagao, analyst]

Okay. My second question is that now you have Reuse business. You have changed the name of the segment. But when it comes to that Yahoo! Auction, YAHUOKU! is now at the positive growth and that the PayPay will be and -- put on top of that. So that's -- if it's going to cannibalize with each other, and it's a bit difficult to have a substantial growth of this Reuse business as a whole. So that's why when it comes to this reuse business, Ozawa-san mentioned about now promotion cost will decline and they reduce it. But in order to grow this Reuse business as a whole, what is needed for you? What kind of actions should be taken?

[Ryosuke Sakaue, executive]

Okay. Mr. Ozawa-san is going to -- Mr. Ozawa is going to talk about it, okay?

[Takao Ozawa, executive]

This is Ozawa speaking. As you have just mentioned, now Yahoo! Auction and growing, and at least 100% growth we'd like to have, and also the Flea Market will be put on top of that. This is the idea. Then what happens in Q3 was that -- and for the YAHUOKU!, now we have narrowed down or reduced marketing costs. And I am afraid that we did too much reduced the marketing cost for YAHUOKU!. And so now we just -- when it comes to -- on to the expenses would be and invested on the Flea Market, the Flea Market where we'll get off to a rather slower start because it was just beginning of the release. So that's why -- and just much to reduction of YAHUOKU! is one of the impact. So that way have -- and the spending and about to -- like the same level of marketing again on the YAHUOKU! in this quarter. So that's also a -- we think -- I think I felt that we spend there much too of the promotion cost that's about -- anyway, we would like to have 100% of that -- the minimum target of the growth. So this is about the target. But when it comes to the product, but still we have been struggling and the merchandising of this products. So that's why looking at both at the Flea Market and YAHUOKU!. And we would like to make that the Yafuoku! and more of the unique. For example, there's a corporate -- the merchants can be joined or that we have just reviewed that's about the whole of system, the Yafuoku!, revitalize it.

[Operator]

Citigroup Securities, Mr. Tsuruo please.

[Mitsunobu Tsuruo, analyst]

And first question. My question is on PayPay. Right now GDV and active-user ratio, what is the trend right now regarding these 2 parameters?

[Ryosuke Sakaue, executive]

Unfortunately, we are not disclosing those numbers, but you can deduce GDV. So on a monthly basis, 100 million times is the usage, you go to a convenience store as well as fast food. And also consumer electronics, and you can do the addition by yourself to get the GDV. And we do not disclose the active user number.

[Mitsunobu Tsuruo, analyst]

I see. So in terms of the average spend, it is higher than JPY 500?

[Ryosuke Sakaue, executive]

Yes, of course.

[Mitsunobu Tsuruo, analyst]

Okay. I just wanted to confirm. And second question, and this is a very granular question. Regarding the guidance, you made some upward revision and you, I hope, can explain to me in 3 parts. In terms of Z Holdings without ZOZO, what is the profit that you assumed? Second point is ZOZO for the full year. So 1.5 quarters, what is the contribution of the profit from ZOZO. Third one is PayPay, and there has been a loss of 25%. And I want to know how you have factored that in. So calculation-wise, as compared to the last operating profit, it was JPY 145.3 billion, and you did not increase it by more than JPY 500 million. And so in terms of ZOZO, I understand that ZOZO unto itself can contribute at least JPY 500 million. So I want to know whether ZOZO's business is declining. And so please clarify the situation of those 3 entities.

[Ryosuke Sakaue, executive]

Please give me some time. So I cannot give you a direct answer regarding ZOZO. In Q3, we have factored in 2 months, and we try to extend that to 3 months. And that figure has been already reflected in our number.

And in terms of operating income, including Yahoo!, I can say that in Q3, operating profit was JPY 47.8 billion. As compared to that, we have PayPay Mall and Flea Market. And in Q3, the promotional cost was low. And we are conducting different campaigns now. And in Q3, we started that in November. And only 2 months has been factored in for Q3. But in Q4, 3 months will be factored in. So regarding the sales promotional cost, it will be about a positive JPY 8 billion increase as compared to Q3.

And in terms of the third point, Yahoo! had a different system platform that had been mixed and matched as time passed by, and we are trying to modernize our platform. And we are trying to migrate to the new platform. So regarding the legacy system, we need to eliminate the legacy system, and also we have to focus and concentrate on different services. And those services that will be eliminated must be factored in. And it's not definitive yet, but then there will be about JPY 10 billion. But then that can be factored in as the future depreciation/amortization. So as compared to Q3 and Q4, there will be additional cost of about JPY 18 billion. So the guidance of the operating income is about JPY 150 billion.

And regarding the net income and talking about PayPay, in particular. So regarding the loss of PayPay that we factor in, we increased by about JPY 4 billion as compared to the beginning of the fiscal year. And during the fiscal year, we did not have the bridge finance for ZOZOTOWN, but we had to factor in about JPY 1 billion. And in total, there is about JPY 5 billion that we did not factor in at the beginning of the fiscal year. And so in terms of the net income, it is between JPY 70 billion to JPY 80 billion. If my explanation is not clear enough, please ask more.

[Mitsunobu Tsuruo, analyst]

I have a simple follow-up question. So PayPay -- so 9 months have passed. So what is the cost that you have already realized? And full year-wise, so what is the budget? So I want to know, what is the loss that you will be recognizing under the equity method?

[Ryosuke Sakaue, executive]

So from Q1 to Q3, about JPY 15 billion is the cumulative of 9 months. At the beginning, we assumed about JPY 19 billion negative for the full year. That was our initial assumption. But as mentioned before, it might be slightly shy of JPY 23 billion in terms of the deficit. And so the difference is JPY 4 billion increase as compared to the beginning of the fiscal year assumption.

[Operator]

Mitsubishi UFJ Morgan Stanley Securities, Mr. Araki.

[Masato Araki, analyst]

Okay. I have 2 questions. My first question is about the shopping. Now -- and when I look at your numbers you gave us, and the transaction value of shopping is in JPY 216 billion in Q2. But this time -- and the apple-to-apple comparison this time is that on the slide Page 12, exclude -- JPY 232 billion, excluding ZOZO. This is the apple-to-apple comparison we can make. And when it comes to PayPay Mall and will it be included in the JPY 232 billion. It's only one month, but what was the impact of the PayPal Mall launch and this transaction value number?

[Ryosuke Sakaue, executive]

On Page 17. So these are the new tenants and -- who participated in this -- the PayPay Mall, including all this -- they would like to know about the impacts of all this and -- on the transaction value. First of all, I'm sorry this is not [ Page 12, not 13 ], I'm sorry. And just know that the pagination was the -- was wrong and -- but anyway. And the JPY 232 billion was the apple-to-apple to Q2.

[Masato Araki, analyst]

Yes, you're right. But when it comes to -- but PayPay Mall is included.

[Ryosuke Sakaue, executive]

It's included. Yes.

[Masato Araki, analyst]

And now -- and when I look at this page 17, for example, that the 785 tenants and it's not the net new and the store. How many of them are in stores and the tenants are net new, not that they transferred from the Yahoo! Shopping mall?

[Ryosuke Sakaue, executive]

Ozawa-san, do you know that?

[Takao Ozawa, executive]

Sorry, we don't have any -- what is the accurate information, but we're going to get back to you later. But there are couple of tens of tenants, it's not hundreds, but a couple of tens. So out of this JPY 500 million to JPY 785 million, but many of these tenants have to transfer -- to migrate it from that the -- Yahoo! Shopping to the PayPay Mall.

[Masato Araki, analyst]

So you mean that the JPY 235 billion means that this is contribution by that this traditional and the tenants for the Yahoo! Shopping, right?

[Takao Ozawa, executive]

Yes. In terms of the sales.

[Masato Araki, analyst]

Okay. This is my first question. My second question is that -- about the advertising. On Page 28, it might -- the information, the documents, Page 28. And the premium advertising, YDN is using -- that's the brand panel, taking advantage of brand panel, but they have a study from their last February, but the brand panel has been steadily utilized. But why did you -- but now in any of the speed up of the pace of the usage? That's why you mentioned here, particularly?

[Ryosuke Sakaue, executive]

Yes. As I've just now mentioned, we have started the brand panel from the February last year, part of the YDN. So is there anything that -- Miyazawa-san, do you have any comments?

[Gen Miyazawa, executive]

So in this first half, and we're having some hard time. So that's why we try to sell the more expensive and higher-priced product. This is the part of the efforts of the sales so that's why -- for expanding the video format advertising. And we have set up some -- the ceiling of the sales of it. But now we try to expand that more so that we can sell more, and higher-unit priced products. So that the brand panel of the -- is -- and one of them. The other thing was that the product -- part of the products were closed, so that's why -- and that push was covered, by the way, at the end. So that's why it happened, just a little bit inflated the figure.

[Operator]

So we would like to hear from Mr. Davidson (sic) [ David Gibson ] from Astris.

[David Gibson, analyst]

It's David Gibson from Astris Advisory. On the PayPay Mall, ZOZO commented that the daily rates for them was hitting over JPY 100 million or hitting JPY 100 million GMV. Can you infer then from January as PayPay Mall exceeding JPY 3 billion of GMV in January?

[Ryosuke Sakaue, executive]

So now you mentioned the JPY 100 million. Is that this is -- that's the payments made by PayPay? is that what you mentioned, JPY 100 million?

[David Gibson, analyst]

For PayPay Mall GMV that ZOZO was seeing JPY 100 million per day run rate. And hence, if we extrapolate that is in January for you, PayPay Mall, is it seeing GMV of JPY 3 billion or more?

[Ryosuke Sakaue, executive]

Okay. Let me explain in more details. Properly this JPY 100 million per day is, this is a PayPay Mall store of ZOZO. So this is 100 million per day is that only for the ZOZO store and PayPay Mall. So the PayPay Mall as a whole, if we include everything on PayPay Mall, it will account for about 30% to 40% of all of the shopping business is coming up from the PayPay Mall, the transaction.

[David Gibson, analyst]

So do you mean that in January, that's the case?

[Ryosuke Sakaue, executive]

Yes. Yes, that's right. That's about it and generally, but so as I mentioned, at 30% or 40%, that means that the PayPay Mall as a whole, not only for the ZOZOTOWN and the PayPay Mall.

[David Gibson, analyst]

Okay. And then likewise, could you indicate how big PayPay Flea Market is relative to PayPay Mall, please?

[Ryosuke Sakaue, executive]

The use of the PayPay Flea Market compared to the PayPay Mall is only limited and very, very marginal compared to the PayPay Mall as a whole. When it comes to value basis, we don't disclose the value. But the -- compared to the PayPay Mall as a whole, and the PayPay Flea Market is very, very limited, very, very marginal still.

[David Gibson, analyst]

Okay. And also ZOZO commented that they had some suggestions to improve the PayPay Mall in the user interface and said that obviously PayPay Mall is doing that work. Could you elaborate when you think those suggestions might happen because they thought it would improve the GMV growth significantly?

[Ryosuke Sakaue, executive]

Okay. Now what we're doing is that, particularly for the fashion category of PayPay Mall, is we used to use interface for the fashion items on the PayPay Mall, just like this main store of ZOZO. So I'd like to -- we're doing work on a daily basis, so that there's no any deadline or any specific end of schedule. But anyway, we are working on a daily basis to improving the interfaces. So that's to note the fashion item. The PayPay Mall shops were getting closer to the ones like ZOZO, and in the next 3 or 6 months' time, we hope that this interface of this fashion item stores and the PayPay Mall will be improved and more favorable. And we expect that the sales also will catch up on it and would increase, too. This is what we expect.

[Operator]

Mr. Ishihara of Daiwa Securities, please?

[Taro Ishihara, analyst]

I'm Ishihara with Daiwa Securities. I have 2 questions. And my first question is about -- so when it comes to that market, what is the market trend of the advertising? And would you please explain about your perspective in October to December. And then after that January and January to March, and any difference in the market trend in the advertising in these 2 quarters. And the other -- the companies has mentioned that now that the market trend has been going up, and they expect that that is going to further improve in going towards the March. So that this is not a company that's coming. So the one to think about is, and when it comes to brand advertising performance, advertisement and/or -- and the enterprise and the SMEs, or what will be that mind psychology of these potential advertisers. What's your analysis on that?

[Ryosuke Sakaue, executive]

Okay, Mr. Miyazawa will reply to the question about the market trend.

[Gen Miyazawa, executive]

This is Miyazawa speaking. Well, this year, Japan will host the Olympic and Paralympic games. So that's why going towards that Olympic and Paralympic games. And major social momentum is that it has been more favorable, and we don't think it's -- that the market is not that bad. But -- so -- but there's not any -- but each year, some of the specific advertisers, the service anchor advertisers, were leading in overall the advertising market, but -- for example, in some time ago, with the gaming industries, social gaming or the cryptocurrencies. They are, and each year that we have some kind of anchor, but as a -- but this year, we couldn't find it. So that's -- although that's and all these advertisers are placing orders as usual. And in recent days that due to that coronavirus infections, the tourism industry is now worried about an uncertainty of the business. So this is the major -- the trend of the market now.

[Taro Ishihara, analyst]

Okay. Understood. And my second question is, so the -- I don't have your advice about your input about accounting perspective. So on the -- now the -- ZOZO is now a consolidated subsidiary, and there's also the list of the company and the share price of the ZOZO will have some impact on, for example, that in the case of the stock price or share price of the ZOZO in case of dramatically decline at the plant. And is any need for the Z Holdings to do some kind of accounting and dealing or you don't care about a debt, or from the accounting perspective, I'd like to know about your idea about.

[Ryosuke Sakaue, executive]

So ZOZO is a subsidiary. So that's why all the income will be consolidated and then you're talking about share price, but it is simply that the ZOZO, the share price had declined. There is not any specific immediate impact will be on our accounting. So for example, impaired in impairments is part of the accounting issues. But now, not only for the share price, but also basically that the core for the value of the ZOZO is -- the impairment will be recognized. And only for that -- not only for the share price, but also we need to -- we look at them all discover value. So -- but anyway, as mentioned earlier, we are trying to implement a lot of the good synergy together. So that's why we're going to make that to grow. There's not any need to for us to worry about that kind of any negative scenarios, anyway.

[Unknown Attendee]

[indiscernible] Jefferies Securities. I want Ms. Sato to pose a question.

[Hiroko Sato, analyst]

I am Sato of Jefferies Securities. Can you hear me?

[Ryosuke Sakaue, executive]

Yes, I can hear you.

[Hiroko Sato, analyst]

I have one major question. Whether you factor in ZOZO or not, I understand that you have the continued CapEx, at least that's the impression I have. In the past few years, you have been incrementally having the investment of about JPY 20 billion every year. And you will have to invest in the system, and you will have LINE as well. And so in terms of the operating profit, maybe there might be some limit to the future growth. And also you have YAHUOKU! marketing cost has been reduced, and you ended up having slow revenue growth. So from the next fiscal year, what will be the area that you can further reduce the cost?

On the other hand, what is the area that you have to continue investing in? And so if there is any area that you definitively want to continue to invest in, can you tell me what will be the net-net increase in the cost? PayPay inclusive, you will have a LINE pay as well, and there is a risk of further increase in the cost. So regarding marketing campaign, maybe next fiscal year, you plan to reduce the marketing cost. I know that you are the winner in terms of the PayPay area, so are you going to accelerate your endeavor so that you can completely beat the competitors?

[Ryosuke Sakaue, executive]

This is Sakaue speaking. So regarding LINE and business integration with LINE, it relates to the fair trade commission's review, so I would like to refrain from answering that question. But talking about ZOZOTOWN consolidation, regarding the profit in 2023, we want to have about that JPY 25 billion and we plan to increase the revenue in the future, and that plan has not changed at all.

So regarding the marginal profit, it is growing. Including Yahoo! Shopping and also advertisement, we are increasing our marginal profit. So we can continue this momentum.

And so how can we make up with the fixed cost? Out of the fixed cost, regarding the HR cost, I do not think that there will be any dramatic increase in the future.

And the second big component will be the CapEx. Regarding CapEx, in the next year or 2, I believe we have the continued CapEx we need to modernize our platform, and there will be a 5-year depreciation that will continue. So in the next 1 to 2 years, we will see increase of Capex.

Regarding sales promotion, we tried to limit that within our marginal profit. And so if top line increases, of course, the absolute value of promotional cost goes up. But then we try to bear in mind that the limit is the increase of marginal profit. And so in short, that we would like to continue increasing our profit in the future as well.

[Hiroko Sato, analyst]

Okay. So that means that in the next year or 2, you will continue Capex, and that will increase, and you have to integrate DB maybe because you are looking for one-ID login, so that you can actually analyze the purchase pattern. So the CapEx will be in the magnitude of about JPY 10 billion. Am I correct?

[Ryosuke Sakaue, executive]

So are you talking about LINE? Because I answered excluding LINE. I was thinking about ZOZO.

[Hiroko Sato, analyst]

Well, but in the future, you will have ZOZO and LINE under the same roof. And say a few years ago, you invested about JPY 20 billion, and you had 3 databases and you have consolidated 3 into 1. And I thought that that is the end of one cycle, but you are trying to expand your scale merits?

[Ryosuke Sakaue, executive]

So I feel that maybe in the future, I cannot expect much improvement in the profit because you have to have a very large amount of CapEx.

Well, in terms of the business integration with LINE, how we're going to do it, we haven't ironed out the details, so we don't know how much will be the CapEx that is necessary. So I will answer that later.

[Hiroko Sato, analyst]

So other than LINE, in terms of marketing cost for PayPay, what is the forecast for next fiscal year? Are you going to increase because you're going to have further campaign next fiscal year?

[Ryosuke Sakaue, executive]

Well, right now, we are discussing the budget with PayPay, and PayPay started only about 16 months ago. And so in the first 2 or 3 years, we have to acquire customers. And so we want them to use PayPay on a day-to-day basis. So next fiscal year-wise, as in the case of this fiscal year, we would like to follow suit regarding the cost that we will be investing in the marketing activities.

[Hiroko Sato, analyst]

I see, I see.

[Ryosuke Sakaue, executive]

So as mentioned before, regarding monetization, we need to plant the seeds for further growth. So 2020 will be the time in which we will be planting seeds for the future monetization.

[Operator]

Next, from JPMorgan Securities, Mori-san, please?

[Haruka Mori, analyst]

I have 2 questions. My first question is about for the PayPay Mall. And after the launch, now we implemented -- extended the JPY 10 billion campaign. Well, you extended the campaign. Why? I like to know about the fact on why did you extend the period of this campaign. You're talking about the interface improvement. But now, for example, are there any new challenges now you would like to overcome now of this PayPay Mall operations? And also when it comes to the user profile of PayPay Mall, and for how many the new users are acquired by the PayPay Mall, not from the migration from the traditional shopping mall?

[Ryosuke Sakaue, executive]

Ozawa-san is going to reply fast about the PayPay Mall.

[Takao Ozawa, executive]

When it comes to extension of this JPY 10 billion campaign, because -- so it's not that we have some unspent expenditures, but then we budgeted JPY 10 billion and we've implemented all that. And first of all -- and first, we set up that -- the seeding of the expenditure, the JPY 10 billion for the cost control. And also we set out that -- this specific period of the campaign. And once we implemented that campaign, for the GMV, it exceeded. Then we have projected and also so we have the sufficient budgets, and so that's why we extended till end of the March because we still had the budget to continue the campaign. But if someone used a ZOZO at the PayPay Mall, and for the user, it's not so easier to use the ZOZO and the PayPay Mall. But many consumers and users and -- appreciated as now interfaces compared to the Yahoo! Shopping mall.

But when it comes to the LOHACO, and the loyal users have some complaints about difficulty in the user interface. They try to find the same item in the PayPay Mall. So that's why we needed to continue and keep improving that user experience for the PayPay Mall and for -- it has a weakness in the logistics and the distribution service. So that's why we need to enhance that kind of logistics services. So there's not any specific plan for this, but these are some of the challenges are then getting clear for us.

[Haruka Mori, analyst]

Okay. And when it comes to, actually, the purchasers.

[Ryosuke Sakaue, executive]

New purchaser, right?

[Haruka Mori, analyst]

Yes.

[Ryosuke Sakaue, executive]

New buyers, right?

[Haruka Mori, analyst]

Yes.

[Ryosuke Sakaue, executive]

When it comes to new buyers, so we wanted advertising so that's why have acquired some new buyers. And also -- and we have some new buyers based on the ZOZO integrations. So -- but so far, everything else in the plan when it comes to acquisition of the new buyers, and -- but we -- 24 million users are the PayPay users. So that when they try to acquire the PayPay payment users for the -- more on the PayPay Mall, that would be our next direction of the strategy.

[Haruka Mori, analyst]

My next question is about the PayPay Consumer Gift and the Retail Gift. When it comes to the Retail Gift, it's still on the pilot testing. But when it comes to the Consumer Gift it was launched in Q3 and the country that now Retail Gift is also there implemented so that -- what do you think about the potential of this new sales and the promotion items and the products? So is there anything that you can be more specific about this?

[Gen Miyazawa, executive]

Okay. This is Miyazawa. I'm going to respond to your question, okay? And so far, we could not visualize about the consumers' activity and behavior. But now by taking advantage of these new products and we could successfully visualize that all the behavior of the consumers on the online and offline. So that's why we have a very good inquiries from the potential advertisers. And so that's why I also try to explore that the further possibilities of this usage and then other solutions. So then we're trying to explore the possibilities that we don't put so much emphasis on that the sales itself when it comes to these products. But they still -- we already have some kind of -- couple of challenges, for example, and some of the shoppers, potential shop of the users will drop into the process, entity in the process from the -- and do they -- they finally choose and buy. So that's why we need to put some additional promotion in the process -- in the middle of that process, so that all those challenges will be solved and will renew and a little bit products so that we are testing a lot of things now.

[Haruka Mori, analyst]

Okay. And then next year, we're going to be more aggressive selling these products the next year?

[Ryosuke Sakaue, executive]

Yes. Yes, from the next year -- next fiscal year, we would like to push the sales of this new product more. But in not so much of us, we don't expect that kind of the sales by the way with so much of impact for sales.

[Operator]

Next, from CLSA, Mr. Oliver Matthew, please.

[Oliver Matthew, analyst]

I have 2 questions. The first question is about PayPay Retail Gift. Seems this will drive lots of traffic to stores, is that right? And if so I imagine the LINE business customers would also be very happy with this product. Is that something they're thinking about longer term? That's the first question.

[Gen Miyazawa, executive]

Yes, this is Miyazawa speaking. You're right. I just mentioned that actually in -- these products can attract the users to that actual and offline store. So also -- we will also appeal to them to that -- this and the product can't just encourage the users to go to the shop front. So and the LINE also thinking about this similar idea. So that's why not only for the online, but also we'll try to add mostly to attract the users go to the offline store, too.

[Oliver Matthew, analyst]

Okay. Second question, could you explain in more detail the size and the type of the advertising opportunity at ZOZO? What kind of ad products can they sell and to who?

[Takao Ozawa, executive]

Yes, this is Ozawa speaking. First of all, at this moment of time, now, so we have not discussed so far with ZOZO about this advertising product they're selling. But when it comes to -- the part of the expected synergy of this integration is that for one thing that ZOZO is not so skillful. It's not so much skilled to take advantage of advertising like Yahoo! and before the integration. But on the other hand, ZOZO have a -- the younger culture or any -- a very sensitive young users and the consumers there that are sensitive to the culture and fashion. So this is a couple of millions of this customer base they have. This is missing from the Yahoo! JAPAN, for example. And this is a couple millions of these potential users are now owned by ZOZO.

So this is really a good assets, but ZOZO is not an advertising company. So that's why the Yahoo! is doing advertising for them. For example, advertising technologies or the -- and advertising space will be secured by and also offered. Find that Yahoo! JAPAN, Yahoo! too that the ZOZO and that we're going to have some kind of agreement of where do they share of that advertising. By the way I'm just started, and there's not any -- we're still in the middle of the discussions, but now at least we can say that it is a very -- a good potential of the further incremental and the income that we have, it is really promising.

[Operator]

From the Astris Advisory, Mr. David Gibson, please.

[David Gibson, analyst]

On PayPay Mall, can you talk at all about the categories within that? So is fashion, the largest at what half, 50% of the business? Also what other categories are also doing well within PayPay Mall?

[Ryosuke Sakaue, executive]

Regarding PayPay Mall, it is not that unique. But in terms of the consumer electronics sales volume, it is increasing. Mr. Ozawa, do you want to add something?

[Takao Ozawa, executive]

At PayPay Mall, other than fashion, home appliances is selling very well. And in terms of the major mass merchandisers of home appliances, they have their stores in PayPay Mall, and they are selling very well. And the amount of sales of fashion is less than that of home appliances, and so we want fashion to be the second major pillar of the categories that we sell at PayPay Mall.

[Operator]

So we would like to accept the last question. From CLSA, Mr. Oliver Matthew, please?

[Oliver Matthew, analyst]

Could you tell us more about your credit card business and monetization opportunity there? At what point do you start to see your operating margins improve for your credit card business?

[Ryosuke Sakaue, executive]

When it comes to Yahoo! JAPAN Card and from the middle of 2018, it has already been -- tend to be profitable already. So now we have an increasing number of users and also cardholders and also transaction values. So that's now -- and no way -- profit have been increasing since then 2018. So now we have been occasionally implementing that the credit card owners increasing campaigns better now. And we still have -- already have our Yahoo! card business have been turned out to be profitable already.

[Oliver Matthew, analyst]

Is there any sense on what the operating margin could reach? Do you think you can get close to your peers?

[Ryosuke Sakaue, executive]

Yes, we can, but Ozawa-san, do you have any comments?

[Takao Ozawa, executive]

Yes. So first of all, and do we assure -- I think that we are going to catch up with that op margin that lacked entirely is that one of the good comparison. And we don't have any accurate statistics, but -- and after the [indiscernible] card joined the Rakuten. And the period of time -- if you compare that the period of time that Yahoo! [indiscernible] card can and live up to the expectations as the Rakuten? And do you understand that how much fast now that Yahoo! card is increasing the business. And also and this is also we have the PayPay and we have the shopping malls. And so that's why. And also we limit that acquisition costs as much as possible.

And at the same time, we can offer about some revolving loan business or the -- many of the monetizations and patents we can offer are going to have with this credit card. So that's why. And I hope you understand this and how we can just catch up within all this credit companies when it comes to the operating income margin, too.

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