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Edited Transcript of 9449.T earnings conference call or presentation 12-May-20 7:00am GMT

Q1 2020 GMO Internet Inc Earnings Presentation

Tokyo May 13, 2020 (Thomson StreetEvents) -- Edited Transcript of GMO Internet Inc earnings conference call or presentation Tuesday, May 12, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Masashi Yasuda

GMO Internet, Inc. - Executive VP, Deputy to Group CEO, Group CFO, Head of Group Management Division & Director

* Masatoshi Kumagai

GMO Internet, Inc. - Founder, Group CEO & Director

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Presentation

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Masatoshi Kumagai, GMO Internet, Inc. - Founder, Group CEO & Director [1]

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Good afternoon, ladies and gentlemen. This is Masatoshi Kumagai from GMO Internet. I would like to first start by talking about COVID-19. I would like to send my condolences to the people who passed away and express my gratitude for those impacted by COVID-19. I also extend my respect to the medical professionals for their hard work.

Our group was the first company to shift to telework from January 27, and it has been 4 months since then. Internet infrastructure, financial service that we provide are inevitable services like water and gas to support all of your lives. We were aware of the importance of protecting our partners' employees' lives while continuously operating our business, which is why we have spent 10 years in preparing a telework system and have gone through disaster trainings every year. The outcome of such efforts, I believe, is reflected in the fact that even after 4 months of telework, there are absolutely no impact to our performance and organization.

Allow me to explain the impact from COVID-19. The conclusion is that although there are pluses and minuses, in total, the business achieved a significant growth with an all-time high. The cost changes due to COVID-19 or cost cuts did not generate a negative profit, but a positive profit generally from each services, applications, highest number of transactions. We understand that the quality of the profit is high.

When we look at the results by segment, as you can see, Infrastructure is positive. Advertisement & Media is neutral. Finance is positive. Crypto assets is neutral. There are differences by segment. However, as your lifestyle and work become more online based or digitalized, you end up using our group's services in various ways.

I have been advocating that in the latter phase of the Internet revolution comes a time for companies to become Internet themselves. I was right in this sense. However, I was wrong by saying this will happen with 5G. COVID-19 triggered this to happen, and the change that was to take 3 years happened in 3 months. As a result, we encountered an industrial revolution of Internet. And our 25 years of execution of our belief is now in need by many people.

From the next page and onwards, our CFO, Yasuda, will take you through the highlights of our earnings.

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Masashi Yasuda, GMO Internet, Inc. - Executive VP, Deputy to Group CEO, Group CFO, Head of Group Management Division & Director [2]

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Good afternoon. This is Yasuda. Thank you for listening to our earnings report. The agenda is as you can see on the slide. Allow me to explain the overview.

This slide shows the financial results of the first quarter FY '20. As you can see, we achieved increase in both revenue and profit. We have marked an all-time high quarterly net sales.

This slide shows the segment summary. The right side shows the overall rating of each segment. Infrastructure was positive. Provider and Payment was favorable, marking an all-time high.

This earnings report reminded us how robust our business is with the foundation being recurring business. Advertising & Media business was neutral. Advertising captured end of fiscal year demand and performed favorably. While on the other hand, media experienced a decline in advertising unit price and showed weakness. Finance business was positive. The volatility rise of the market increased the number of transactions, marking a record high. In addition to the conventional foreign exchange, our second pillar, CFD, contributed to our performance. We see this as a positive factor.

Next is Cryptoassets business. We have changed the segment name, given the revision of the action settlement of funds from Cryptocurrency to Cryptoassets. The business itself has not changed. The Cryptoasset business was neutral. The exchange business increased transaction and performed favorably. On the other hand, Mining was sluggish due to the business going through a transition phase to reestablish the business.

This slide is the executive summary by segment. The top is net sales, and the bottom is operating profit. Infrastructure business increased in both sales and profit and continues to expand the business. Finance increased in both sales and profit as well. It achieved significant increase due to last year being sluggish. Advertisement and media increased in sales but decreased in profit. Cryptoassets increased in both sales and profit. Mining business decreased in sales due to a decline in mining volume. While on the other hand, exchange business performed favorably. On a consolidated base, sales increased by JPY 6.8 billion, and profit by JPY 3.28 billion.

Next slide shows our shareholder return policy. As you can see on the top, the basic shareholder return policy is 50% total shareholder return ratio. Out of this, 33% or more will be dividend payout ratio, and the remaining 17% is share buyback. In the middle of the slide, we show the dividend per share. We will not be disclosing the business and dividend forecast this term as well. The figures will be announced each quarter. The first quarter dividend per share is JPY 6.6. On the top of the slide, we show the status of our share buyback. This term's total is planned to be JPY 15 billion. And as of end of April, we have completed 24.8%.

Next is financial results. This slide shows the net sales by segment. The darkest blue on the bottom is showing continuous growth centered around Infrastructure business.

This slide shows the operating profit by segment. When you look at the chart on a quarterly basis, there are ups and downs. However, from a long-term perspective, dark blue Infrastructure business and light blue Finance business is driving the growth trend.

Next is the segment report. The equity share and market capitalization of the 9 listed group companies are -- you can see. The bottom shows the group total. It has exceeded JPY 1 trillion.

Next slide shows the composition of our 4 business segments. The size of the diagram represents the sales contribution. The number of Infrastructure contracts, foreign exchange, securities and Cryptoassets accounts are the foundation of our profit, and our customer base now totals to 1,304 (sic) [13.04 million].

Next slide shows the state of our employees whom we call partners. The number of partners as of end of March, is 6,012. We have welcomed 167 new graduates in April. 45.5% of our partners are engineers or creators who have the skill to create. We have a set of target of exceeding 50% of creators and will continue to recruit talent.

Next is Infrastructure business. This slide shows the content of our Infrastructure business, domain hosting and cloud, e-commerce, SSL security, Payment, Provider, all are in aggregate of #1 services. And plus, each of the businesses are inevitable services with no end.

This slide shows the quarterly net sales by subsegment of our Infrastructure business. As you can see, we are upgrading our highest record. The revenue model of recurring and transactional businesses are combined with our expanding customer base. Our revenue foundation is definitely a solid revenue base. We believe this solid growth is realized because we are in aggregate of #1 services.

This is the trend of the quarterly operating income. We have been able to renew a record high level, and we are in a continuous growth trend. In the previous quarter because of the one-off increase of costs related to investment, the profit has declined. But right now we are back on the increasing trend.

This is the profit for the Infrastructure business divided in settlement business, nonsettlement business and the total cost. You can see that each of the business is growing in a well-balanced manner. In the nonsettlement business, it is negative year-over-year, but this is because we have increased investment for new businesses. And we have strategically investing to improve the group brand. So the total company cost is increasing in line with the profit growth.

The number of contracts for infrastructure is 11,430,000. It has been a 1.08 million increase year-over-year. The net increase per month is about 100,000.

Next is the Online Advertising & Media business. This is the quarterly sales trend and its breakdown. It's a 2.1% increase year-over-year. The light blue portion of the bar graph, advertisement, has increased by 2.9% to JPY 8.5 billion. In terms of the advertising agency business, there has been some decline of orders from some clients, but we have been able to tap into the term and demand for advertisement. So business has been robust.

For our own AD Tech products, because of the increase of the contact time with the Internet, the distribution volume has increased, and this business has been strong. For the darker blue media business, it has declined by 3.2% to JPY 2.8 billion. With the increase of the contact time with the Internet, the number of PVs to our own site has increased. But on the other hand, there has been a decline of the unit price for the advertisement, and that led to this decline of sales.

Next is the trend of the quarterly operating income. It has been a decline of 28.4% year-over-year. This is due to the drop of the media business, which is profitable.

Next is the Finance business. The trend of the quarterly performance is as seen here, the OTC derivative transactions, such as FX and CFD has been strong with the increased volatility in the market and has led to a record high level performance.

This is the FX situation, transaction volume and the domestic share. In terms of the transaction volume on the single month of March, it has been at a record high level, and has been strong. However, in terms of share, it has gone down slightly, and we have become #2 domestically. And this is a challenge for the segment. We are very focused to provide a #1 service, so share is a very important indicator for us. To recover our share from April onwards, this will be a top priority initiative for us.

Before we go into the Cryptoasset business status, this is the initiatives that we are conducting on the finance settlement and Cryptoasset business domains. I would like to explain about the Cryptoasset business situation. For the quarterly performance trend for the Cryptoasset business, overall, is shown on this slide. For the segment overall, whether it be year-over-year or quarter-over-quarter, we have seen an increase on both sales and profit. I would like to explain separately for the mining business and the exchange business.

First, this is the mining business. It has been flat quarter-over-quarter. For the status of the business, it is unchanged from the previous quarter. We are in the transition of relocating the mining center, and our hash rate has been flat. In terms of the plan of the relocation of the site, we have been able to secure the electricity and land, and the construction has been ongoing. But due to the lockdown to continue the spread of COVID-19, there has been some delay on the work. In terms of the start of the operation, we are planning to do this in mid-May.

Next is the exchange business under GMO Coin. Quarter-over-quarter, we have seen an increase in both sales and profit. The volatility for the Cryptoasset has increased, and that led to the increase of transaction volume. And we have been able to see the results from our initiatives to improve cover transactions.

Next is GMO Aozora Net Bank. It has been 1.5 years since we started this business in July 2018. More than ever, we have keenly felt the expectations coming from the increased number of individuals, self-owned businesses and business entities. This is the status of the API integration. The contract number of bank API as you can see here compared to the previous quarter has increased by 17 companies. And currently, the total is 35. Our strength is the API lineup and the easy access. We are steadily going forward to become #1 in terms of the number of contracts with the bank API. In March -- excuse me, March 23, we have been able to get the Excellence Award under the finance category in the Japan Financial Innovation Award 2020. This highlights our initiatives.

In April, this is a first for Japanese bank, we have opened up for free a testing environment for API, which is always connected called sunabar. Whether it be engineers or individuals, anybody can utilize this. Sunabar is a play on words, meaning sandbox. And this is exactly a sandbox. This is an environment that actually you can expand on the programs. And this is a community for developers as well. This makes it possible to realize in a speedy manner, led by engineers to make the operation efficient and discuss about the service level improvement. And to lessen your aspect of engineers and bank API, we want to accelerate the provision of new types of bank services. Please stay tuned to our activities.

Lastly, Mr. Kumagai will give you a summary.

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Masatoshi Kumagai, GMO Internet, Inc. - Founder, Group CEO & Director [3]

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Lastly, I would like to explain about the outlook by segment. Based on the change that is undergoing in the society due to COVID-19, we think that the trend for Finance and Infrastructure is going to continue. On top of that, on this autumn, in Infrastructure business, we are going to offer the world first dedicated domain for IoT devices called .gmo.

For the Finance business, we're expecting growth in the bank API business, and we offer new services such as sunabar. In the Online Advertising & Media business, we are at the bottom, it cannot get worse. We'll only get better.

For the Cryptoasset business, the new cycle mining is going to start this month. By the end of next month, we are going to fully withdraw from the former sites in Scandinavia. Through these 2 actions, we have -- are able to reduce the cost substantially such as electricity cost. And we have been preparing for stable coin GYEN, and it is going to be launched this month. As a result, coming July onwards, we can expect contribution coming from these segments to our earnings.

That has been the outline of the first quarter business results. We have been to recognize, again, the social role that we play, providing indispensable services to the society through this pandemic. All the 114 group companies and 6,000 of our employees are determined to provide the fight towards overcoming this coronavirus, which is going to be a long fight utilizing the power of Internet so that we can come out in a better post-corona world. GMO Internet group will advance further. Thank you very much for your attention. Internet for everyone.