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Edited Transcript of 3938.T earnings conference call or presentation 30-Oct-19 8:30am GMT

Q3 2019 Line Corp Earnings Call

SHINJUKU-KU Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Line Corp earnings conference call or presentation Wednesday, October 30, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* In-Joon Hwang

LINE Corporation - CFO & Director

* Satoshi Yano

LINE Corporation - Head of Marketing Communication Department

* Takeshi Idezawa

LINE Corporation - President, CEO & Representative Director

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Conference Call Participants

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* Seungjoo Ro

CLSA Limited, Research Division - Research Analyst

* Taewon Kim

UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming

* Yoshitaka Nagao

Nomura Securities Co. Ltd., Research Division - Analyst

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Presentation

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Satoshi Yano, LINE Corporation - Head of Marketing Communication Department [1]

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Thank you for joining LINE Corporation's Fiscal Year 2019 Third Quarter Earnings Announcement. This is Satoshi Yano from LINE IR. Today, we have CEO Idezawa; CFO Hwang; and CSMO, Masuda joining the announcement. The presentation material is available on LINE Corporation's IR homepage. We have scheduled 1 hour for the earnings announcement.

Our CEO will present the fiscal year 2019 third quarter results and business updates, followed by the CFO who will explain the financials.

Please note that the presentation will be conducted in simultaneous translation and the Q&A session in consecutive translation. We will be accepting questions for the Q&A session via e-mail. If you have a question, please e-mail it to irqa@linecorp.com. We will accept your questions any time during this announcement. However, we would like to limit questions to 2 per person. The questions will be read in the order received. We will also read your questions as written. Finally, this announcement will be recorded and made available on the IR website later.

I would now like to hand over to CEO Idezawa for his presentation.

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Takeshi Idezawa, LINE Corporation - President, CEO & Representative Director [2]

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This is the CEO, Idezawa. Thank you for joining LINE Corporation's Fiscal Year 2019 Third Quarter Earnings Announcement Call.

I would like to start with an overview of our third quarter results and explain our future business strategies. MAU for the LINE App this quarter was JPY 164 million in our 4 key markets. In Japan, MAU was 82 million, an increase of 4 million in 1 year. Furthermore, the DAU to MAU ratio that measures engagement continues to maintain a high level of 86%. In our core business, revenue from display ads increased by 42% year-on-year, thanks to the consistent growth of ads on LINE News and the Smart Channel. The number of new accounts for account ads have also been steadily increasing.

In our strategic business of LINE Pay, we have shifted our focus on increasing the user base to increasing user activity and are now placing emphasis on sustainable and efficient marketing rather than giveaway campaign. Despite the absence of major campaigns, we were able to confirm the effectiveness of our high-retention rates and network effects and the resulting growth in organic users.

Regarding the Visa LINE Pay Card, we opened up applications in August. We are on track to start sending out cards from early 2020. For our other financial services this quarter, we launched LINE Securities, the LINE Pocket Money service for personal loans, and the BITMAX cryptocurrency exchange for the Japanese market.

At the end of June this year, we also launched our new scoring service, LINE Score, [with] over 2 million people registered in just 2 months since launch. Also, we successfully obtained an Internet-only banking permit in Taiwan and are moving forward with preparations to start business early next year.

Next is our consolidated revenue. Our consolidated revenue for this quarter was JPY 55.9 billion, an increase of 7.9% year-on-year. Ad revenue accounted for 55% of overall revenue with 73% of this coming from Japan.

Next, I will explain our revenue and operating income by segment. The Q3 revenue for the core business was JPY 48.5 billion, a year-on-year increase of 8.7%, thanks to the solid growth of our ads business. On the other hand, despite this growth, we recorded an operating income margin of 16.7% due to increased marketing costs involved in our newly released game.

Our revenue for the strategic business was JPY 7.4 billion, a year-on-year increase of 3.2%. Operating loss decreased from the last quarter to JPY 13.9 billion as a result of reduced marketing costs for LINE Pay.

In the previous quarter, we provided guidance that expected losses for our strategic business would be on par with the Q1 level but have since been able to further control costs. Regarding Q4 operating losses, while we predict further marketing expenses and increased depreciation costs from systems used in our new financial services, losses are projected to be around the same as Q1.

Next, I'll speak about our core business. First, our communication and content services. The release of our new game, LINE Chef, has gotten off to a great start in Japan and Taiwan and have contributed to increased content revenue. Other content services, particularly LINE Manga and LINE Music, are also on a consistent growth track. Recently, the Manga app market has been enjoying a high-market evaluation with the domestic Manga app market also exhibiting continued growth. Against this background, LINE Manga has become the undisputed #1 comic book app in Japan. Furthermore, the subscription market continues to grow in Japan's music market, the second largest market in the world. LINE Music has also steadily increased user numbers, leading the service to record a 46% increase year-on-year in payments. As a result, content revenue reached JPY 9.9 billion.

Communication revenue was the same level as last year's Q3 at JPY 6.9 billion. All in all, communication, content and other revenue totaled JPY 18 billion, a year-on-year increase of 1.3%.

Next, I will explain about the ads business. Overall revenue from the ad business increased 13.5% year-on-year to JPY 30.6 billion. Starting with account ads, LINE Official Account and LINE App merged to become a single unified accounts called LINE Official Account as part of the redesign project. Assuming the same breakdown by Official Account and LINE app, the Official Account business grew by 171 accounts this quarter. The number of accounts continues to grow, and 564 new LINE Official Accounts have opened in Japan since the redesign project completed last December. Compared to before the consolidation, the total number of accounts has grown more than 2.6x. Although sales from account ads decreased quarter-on-quarter due to redesigning sponsor stickers and temporarily suspending sales of certain sales promotion products, sales are expected to recover in Q4, judging from the steady orders for our latest product, cost per download, or CPD.

We also launched a new ad product called LINE Flyer yesterday, October 29. LINE Flyer informs users about great deals being offered nearby based on their geolocation information. LINE Flyer has been in high demand since day 1, demonstrated by the fact that close to 10,000 retailers had already signed up for the service at launch. Boasting top-class coverage since the beginning, LINE Flyer is expected to contribute significantly to our sales promotion business. As a result of these efforts, account ad sales were JPY 15.1 billion, an 8.2% growth year-on-year.

For display ads, overall impressions increased 17% quarter-on-quarter and 90% year-on-year because of continued impression growth from LINE NEWS and Smart Channel.

Smart Channel impressions are especially growing and accounted for approximately 20% of total impressions this quarter. The Smart Channel video ad called Talk Head View has been very popular since its release, and many advertisers are placing ads in the space. Furthermore, the brand lift rate is exceeding our expectations. As a result of these efforts, we expect our display ad business to continue to achieve significant growth as a result of increased inventory in conjunction with business growth, the release of self-serve ads, video format improvements and report enhancements and that the growth rate will further increase in Q4. Subsequently, display ad sales grew 42.1% year-on-year to JPY 12.6 billion, a significant increase.

Next, I will talk about our strategic business. First, in the O2O commerce domain. In the shopping domain, the surge of last-minute demand before the consumption hike, tax hike, supported a steady growth of our GMV, where GMV increased 83.4% year-on-year. LINE Shopping has shifted its marketing target from merchants to products, which led to improved conversion rates. SHOPPING GO continues to maintain a high growth rate through initiatives to meet last-minute demand before the tax increase, such as our renewed website from campaigns targeting first-time users.

In the gourmet domain, GMV increased 55.5% year-on-year. LINE Delima recorded an increase in GMV and the proportion of payments via LINE Pay, thanks to the successful half-price sale conducted in August. Our food takeout service, LINE Pokeo, saw an impressive 2.5-fold surge in GMV in just 2 weeks after the tax hike due to rising demand for takeout foods with a reduced tax rate.

GMV for our travel domain increased slightly from the previous quarter. In Q3, we mainly focused on improving functionalities such as adding search and review features.

Next, I would like to discuss the progress of the LINE Pay business. In Q2, we launched a JPY 30 billion giveaway campaign following deregulation of e-KYC services in Japan, which now enable users to send funds with a simplified identity verification process. With this timing, the campaign aimed to expand LINE Pay's user base, drive P2P money transfers and verify the network effect of leveraging the LINE platform. As a result, we significantly increased user numbers.

In this quarter, despite focusing on sustainable and efficient marketing over major campaigns, the number of global LINE Pay users still exceeded 50 million with global GMV also increasing to JPY 286.6 billion, a 9.9% year-on-year increase. LINE Pay users increased 670,000 quarter-on-quarter, resulting in a total of 36.9 million. Among these, over 5 million users have completed the KYC process. In line with our expectations, global MAU decreased slightly quarter-on-quarter in reaction to the JPY 30 billion giveaway campaign. Nevertheless, overall global MAU increased 52.1% year-on-year to 5.54 million.

On the next slide, I will explain further about our domestic KPIs following the JPY 30 billion campaign. So far, LINE Pay has run many incentive-based campaigns, including the JPY 30 billion giveaway and the Pay-Toku campaign with 20% reward aimed at raising LINE Pay's profile in acquiring users. Through these efforts, we have steadily increased LINE Pay's users. At the same time, the heating up of points back incentives being offered by cashless service provider since 2018 has meant that Japan's cashless market remains a war of attrition. In this quarter, we changed course to pursue a strategy that would set us apart from other cashless solution focusing on LINE strengths and more substantial and efficient marketing to drive LINE Pay's efficient growth.

By foregoing large-scale incentive campaigns, LINE Pay's domestic marketing costs were down by 80% to JPY 800 million from Q1. At the same time, the number of payments made with LINE Pay cards and QR codes demonstrated an ongoing high retention rate of over 75%. In this quarter as well, we increased a number of new organic users by leveraging LINE's network effect and increased domestic MAU to 1.7x that of Q1.

Regarding fund transfers, the number of transactions more than doubled from Q1, and we work to enhance the service's functionality, including releasing a fund transfer service in July that enables businesses to send money to individuals. From this KPI, we can affirm that using LINE Pay has become the norm for core users.

All in all, these results' evidence that LINE Pay services have become a mainstay for its users. Moving forward, we will leverage LINE's phenomenal engagement levels, financial services and LINE Pay's other features and assets to pursue continued growth. Visa LINE Pay Card will also launch early next year, offering improved convenience to LINE Pay users.

This concludes my summary of the third quarter. Now CFO, Hwang, will explain the details of third quarter financials.

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In-Joon Hwang, LINE Corporation - CFO & Director [3]

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Hello. This is CFO, In-Joon Hwang. Let me highlight some of the financials for the third quarter earnings.

Our consolidated revenues and other operating income for the third quarter of fiscal year 2019 was JPY 57.4 billion with operating loss of JPY 5.7 billion. As for revenues, we reported JPY 55.9 billion. This is an increase of 7.9% year-on-year and 0.9% quarter-on-quarter. On the other operating income, we recorded a dilution gain of approximately JPY 950 million due to (inaudible) made by Snow Corporation that changes our interim interest.

Our third quarter revenue for the core business was JPY 48.5 billion, 8.7% increase year-on-year and 0.2% increase quarter-on-quarter. Operating income for core business was JPY 8.1 billion with operating margin of 16.7%, quarter-on-quarter decrease of 1.1%. The operating margin decrease was due to an increase in marketing spending in the content business, particularly the gaming business.

We continue to surface the annual KPI for the core business margin set at 15% due to strict cost control effort. However, during the year-end season, we anticipate an increase in onetime marketing spending during the fourth quarter, which could result in a lower margin than the current level.

Next, our revenue for the strategic business was JPY 7.4 billion, with operating loss of JPY 13.9 billion. We've commented that the third quarter spending would be at a similar level to the first quarter during the last earnings call. And we have no large-scale promotion campaign for LINE Pay. And taken cost control at the same time, we saw a significant decrease in costs from the last quarter, resulting in an even smaller loss amount compared to the first quarter.

We will continue to employ disciplined investment strategies during the fourth quarter and anticipate the operating loss to be at a similar level to that of the first quarter.

Next, I will discuss operating expenses. The third quarter saw operating expenses was JPY 63.1 billion, 13.7% increase year-on-year and 10.6% decrease quarter-on-quarter. Since personnel costs and marketing expenses will be covered in detail on a later page, I will discuss the breakdown of the other expenses.

Sales commissions decreased to JPY 3.6 billion, 18.2% decrease quarter-on-quarter, mainly due to a decline in sales for LINE Part Time Jobs. Outsourcing expenses were JPY 10.5 billion, 4.7% decrease quarter-on-quarter due to a decrease in outsourcing fees associated with KYC registration processing following LINE Pay JPY 30 billion campaign.

Depreciation expenses were JPY 5.8 billion, 6.8% increase quarter-on-quarter, mainly due to the start of depreciation of LINE Securities systems after a service launch. Other operating expenses were JPY 8.6 billion, 6.9% decrease quarter-on-quarter.

Employee compensation was JPY 17.8 billion, 7.3% increase quarter-on-quarter. This is mainly due to headcount growth and an increase in cost relating to the ESOP stock-based compensation to reflect a stock price for the third quarter. Marketing expense decreased significantly continue to JPY 4.9 billion, 62.2% decrease quarter-on-quarter due to a drastic decline in the marketing expense for LINE Pay in Japan by enhancing marketing efficiency. Our operating loss for the third quarter was JPY 5.7 billion, with net loss of JPY 8.8 billion.

This concludes my presentation. We would now like to take your questions.

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Questions and Answers

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Operator [1]

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[Interpreted] We will now start the Q&A session, which will be conducted in consecutive translation. We will be accepting questions via e-mail. If you have a question, please e-mail irqa@linecorp.com. We will accept your questions any time during this announcement. However, we would like to limit to 2 questions per person, and the questions will be ready in order received. We will also read your questions as written.

The first question is from Mr. Taewon Kim from UBS.

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Taewon Kim, UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming [2]

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[Interpreted] What is management strategy in building out the LINE Pay and LINE Points ecosystem now that we are seeing healthy MAU growth and marketing expense trend in the third results? For instance, with forging partnership with direct payment competitors, be one of your strategic [constellations], do you still need for such actions? Or are you confident that you can continue to grow your KYC and roll out fintech services given the latest operating merge metrics on LINE Pay platform?

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Unidentified Company Representative, [3]

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[Interpreted] Thank you for your questions. I understand your question is regarding the core relation or the relationship between LINE Point and LINE Pay, also regarding the partnership for LINE Pay services. Actually -- or currently, we have made a very big change. This is integration between the LINE Pay and LINE Point. So so far, we are trying to make it our [core] -- or the circumstance where the user can use their Line Point as the -- or the LINE Pay services or the user can use the LINE Point for the other LINE services.

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Unidentified Company Representative, [4]

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[Interpreted] And I would like to add one point. This integration is just integration, but we would like to carry out various initiatives such as -- further the relationship, which caused stronger relationship or correlation between Point and Pay or cross-sell with the other services. Also, we're trying to create an environment where the user can use LINE Points or Pay for their various LINE services.

Regarding LINE Point, actually, we are not focusing on this with the partnership with the external parties. Rather than that, we would try to let users use LINE Point for the other LINE services.

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Unidentified Company Representative, [5]

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[Interpreted] From the broader perspective, yes, we are actually working with the various payment services. For example, for the sake of the developing the merchants, we established a partner, called the MoPA, mobile payments partnership, with the various payment service partners. And as I mentioned earlier, so we will be the -- releasing -- launching the LINE Pay Visa cards in a partnership with Visa as well for the payment we are personalizing with JCB. Therefore, we have taken already the various initiatives, and we will keep continuing to -- forging such partnerships.

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Operator [6]

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[Interpreted] The next question is from Mr. Seungjoo Ro from CLSA.

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Seungjoo Ro, CLSA Limited, Research Division - Research Analyst [7]

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[Interpreted] In regards to LINE Pay, we have seen rather expected decline in user metrics in the third over -- in the third quarter over the second quarter. However, could you share us the few indicators in October after the tax hike such as MAU, e-KYC users and transaction volumes?

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Unidentified Company Representative, [8]

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[Interpreted] Thank you very much for your question. As we announced, we have maintained extremely high-retention rate even after conducting the expensive campaign in the second quarter. So compared to the first quarter, we have achieved attrition growth. We do not disclose monthly figures. However, after the tax hike in October, we are happy to report a steady growth in this area.

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Operator [9]

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[Interpreted] The following question is also from Mr. Seungjoo Ro from CLSA.

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Seungjoo Ro, CLSA Limited, Research Division - Research Analyst [10]

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[Interpreted] Even with the changes in the definition of the inflation in the third quarter, display ad inflation did increase 90% year-on-year. Looking at the decline in the branded pricing, we can estimate that the lower priced ads are driving the growth in this trend going to continue to going forward heading into the fourth quarter. Or do you have a strategy to ramp higher priced as through [retail] and better targeting?

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Unidentified Company Representative, [11]

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[Interpreted] Thank you very much for your question. As we see the blended numbers in terms of CPM, the CPM in general does appear to be on a decline trend. However, in terms of ad location, as we have previously announced, we have shifted to a new ad system. This has made it easier for us to make improvements, and therefore, CPM is on a rising trend.

Yes, and going forward, we are focusing our efforts in 3 key areas. First is the introduction of self-serve ads that we expect to launch in November. With this, we expect to see increase in ad demand. Number two is enhancement in video ad format. With this, we see that the percentage of video ads is increasing. And also with Talk Head View, which is a display within the Smart Channel is increasing steadily as well. Talk Head View also achieved a very high CPM at this moment, and we are receiving many inquiries and orders from our advertisers. So enhancing our video ad format is definitely an area we are focusing on. And number three is targeting. With our new ad system, we have included new features such as targeting and raising the precision of it, which will contribute to the rise of CDM overall.

And just to add, in terms of inventory, we are focusing on the following 4 areas. And number one is our News Tab. Ad location in our new tab is extremely successful, and we are seeing continued growth. Number two is Smart Channel. We are operating Smart Channel with a lot of room to grow, and we see greater potential going forward. Number three is a full-fledge commitment into our overseas market. We will be launching our ads inventory for our overseas market. And number four is leveraging external ad distributors, which will also increase in terms of inventory.

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Operator [12]

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[Interpreted] Our next question is from Yoshitaka Nagao of Nomura Securities.

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Yoshitaka Nagao, Nomura Securities Co. Ltd., Research Division - Analyst [13]

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[Interpreted] Previously, you said the LINE Pay should become profitable within 3 years. But I can see that there are some potential of the loss on a quarter basis. So shall I assuming that the amount of loss will be shrinking in 2020 or 2021 on a fiscal year basis? Could you give us some more color regarding the road map how to make profitable?

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In-Joon Hwang, LINE Corporation - CFO & Director [14]

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For the LINE Pay, it is hard to say in detail at this moment for 2020 because we are on the process of setting up the minimum plan for next year. But we can say that we are on track. And as the scale is getting larger, the profitability will be expected to be improved in 2020 and 2021.

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Yoshitaka Nagao, Nomura Securities Co. Ltd., Research Division - Analyst [15]

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[Interpreted] The following is the second question. As you've mentioned that (inaudible) ads the growth will be beyond Q3 and Q4, but what kind of other project -- product would be the growth driver? It could be the self-serve ads or Smart Channel in overseas markets?

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Unidentified Company Representative, [16]

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[Interpreted] I think I will reiterate what I said. There would be the 4 major drivers. One is that you're starting the self-serve and the increasing amount of the video ad and refinement or enhance the precision of targeting, hence, the increasing number of the inventory. So when it comes to the [ecosystem] for the Q4, yes, we've already seen a great increase in the News. They also -- among the Smart Channel products, the Talk Head View, which is the video display ad, and this ad is very, very popular among our advertisers. So they are the key growth drivers.

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Operator [17]

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[Interpreted] The next question is from an investor.

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Unidentified Participant, [18]

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[Interpreted] Can you discuss the CPM of Smart Channel in the third quarter of 2019? Also, what are the Smart Channel CPM trends in the fourth quarter of 2019 and 2020?

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Unidentified Company Representative, [19]

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[Interpreted] Yes. Thank you for your questions. CPM for Smart Channel is growing at a very impressive rate. Talk Head View, which is a video ad format on Smart Channel, the sales for Talk Head View is also increasing at a very good rate. So overall, CPM for Smart Channel, we expect it to grow for 4Q and for 2020. Talk Head View have been offered for 6 months, and we are continuing our optimization or refining this ad location. As the rate show of video ad increase, and we continue our fine-tuning efforts, on top of the 4 key focus areas that I've mentioned in the previous question, these are ways for us to fine-tune this ad location in order to increase CPM.

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Operator [20]

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[Interpreted] Our next question is from an investor.

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Unidentified Participant, [21]

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[Interpreted] Can you please discuss the asset improvement on self-serve and better targeting in detail, including time frames for improvements?

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Unidentified Company Representative, [22]

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[Interpreted] Regarding the self-serve, we are going to launch in November. So we are under progress. So when it comes to better target change, actually, this is not matter of the timing because normally, from this year, but even for the start of these services, we have the effort to refine or change that target rate proceeding. But of course, we're introducing the new platform system. So impacting exactly from this summer, we have such greater efforts to do that. But of course, for that purpose, any one action could [achieve that goal]. Therefore, we have been putting tireless efforts to achieve that. For the purpose, we have [a large] human resources and then carry a device testing. So again, this is not a matter of time of frame, but this is kind of an ongoing effort and project for us. So probably in the fiscal year 2020, we'll be able to see the results of our ongoing and tireless efforts.

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Operator [23]

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[Interpreted] As we have no further questions, we would like to close the Q&A session.

This concludes LINE Corporation's Fiscal Year 2019 Third Quarter Earnings Announcement. Thank you for joining now today.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]