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Edited Transcript of 9449.T earnings conference call or presentation 9-May-19 9:30am GMT

Q1 2019 GMO Internet Inc Earnings Presentation

Tokyo May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of GMO Internet Inc earnings conference call or presentation Thursday, May 9, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Masashi Yasuda

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

* Masatoshi Kumagai

GMO Internet, Inc. - Founder, Chairman of the Board, Group CEO and President

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Presentation

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Masatoshi Kumagai, GMO Internet, Inc. - Founder, Chairman of the Board, Group CEO and President [1]

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Hello, everyone. This is Kumagai. Thank you for choosing to listen to our financial results out of the many financial announcements concentrated on this day. We have intentionally selected this method of live streaming for the convenience of the investors.

Allow me to go into the presentation. The agenda for today is as you can see, and I would like to first explain about the conclusion and highlight. The highlights of the January to March first quarter results.

Infrastructure business was an all-time high for 6 consecutive quarters with continuous high growth rates. The number of contracts has exceeded JPY 10 million. One of the factors of high-performance is due to the combination of our solid revenue basin group synergy. Financial business decreased profit due to temporary market fluctuations and fall in transaction. Cryptocurrency business incurred loss from decline in transaction. Mining business progressed with reestablishment. Deficit decline, however, is still in the red.

Next is the summary of the financial results. The figures are self-explanatory. The quarter ended with an increase in revenue, decrease in profit due to market factors, financial area faced difficult results. But Infrastructure business marked an all-time high, contributing to a reasonable start of the fiscal year.

Next would be the operating profit analysis. Profit decreased by JPY 260 million compared to same period of prior year, which was JPY 5.26 billion. The negative in financial business was supplemented by the Cryptocurrency business.

Next is the summary of each segment. Infrastructure business increased in both revenue and profit, all-time high for 6 consecutive quarters. Payment, EC provider showed continuous high growth, supported by the expansion of customer base.

Advertising & Media was decreased in both revenue and profit. There are 3 main reasons. The sales termination of former in-house products for small business. Next would be ad technology product advertising standard becoming more rigid, resulting to a decline in distribution and major business of point media was booked last year.

Financial business was decline in revenue and profit. On top of the foreign exchange, trade decreased. A temporary market fluctuation in the beginning of the year would be the reason.

Cryptocurrency business increased revenue and reduced deficit. Exchange business incurred loss. However, deficit decreased substantially due to loss booked in the prior year. Mining business remain a deficit. However, when compared to October to December period, deficit decreased with reestablishment.

Next, I would like to explain about the dividend. Our company does not disclose performance outlook. Therefore, dividend forecast is also not announced. Dividend announce is announced every quarter. Based on the net profit of the quarter, the first quarter dividend per share is JPY 6 with payout ratio at 34%.

The next slide and onwards will be explained by our Vice President, Mr. Yasuda.

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

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This is Yasuda. I will be explaining the overview to the net bank part. I would like to go into the first quarter financial overview. This shows the quarterly net sales by segment for the past 6 years. Revenue increased by 7.2% year-on-year, same period.

This would be the quarterly profit trend by segment. Financial segment declined significantly year-on-year. Infrastructure, growth. And Cryptocurrency segment, deficit declined, resulted in flat profit versus prior year, same period. On the other hand, financial segment declined quarter-on-quarter, however, landed with profit increase due to profit increase in Infrastructure and significant deficit decline in Mining business.

Next is the P&L summary. Due to the initiation of the GMO Aozora Net Bank, the equity method loss has increased from prior year. 0 appraisal of Mining business reestablishment booked JPY 760 million extraordinary profit through sales of asset. The other figures are self-explanatory.

Next would be the [B&S] summary. When compared against the end of December, interest-bearing liability has increased. This is due to the increase in working capital for the Financial business in the end of March.

Next slide, please. The group overview. The listed group companies market capitalization and equity share is as you can see.

This slide shows the 4 business segments. The sales compositions illustrate the size of the business. The number of contracts in Infrastructure and the number of accounts in foreign exchange, securities and Cryptocurrency form our solid revenue base, which totals to 11.78 million customers. Mentioned in our previous announcement, we expect to exceed 10 million just with our Infrastructure service.

Next slide shows the number of group partners. As of the end of March, the number of group partners was 5,758. We welcomed 139 new graduate partners in April, totaling the number of partners to roughly 6,000. 45.4% of this are engineers and creators, the people who have the technical capability to create. We plan to invest on talents towards the goal to exceed 50%.

Next would be the segment report. This shows the segment composition of our net Infrastructure business. The number of contracts of our Infrastructure business has exceeded 10 million as of end of March. Domain server, EC support, payment, security, all fall under our Infrastructure business, which are all inevitable services for Internet. As you can see, our group Infrastructure business is an aggregate of #1 service. Our robust growth is realized through this aggregate of #1 service.

This slide shows the quarterly trend of our Infrastructure business. Revenue increased by 17.5% year-on-year same period, showing continuous growth. It has grown by 2.5x during the 5 years from first quarter of 2014.

This would be the quarterly operating profit trend. In addition to payment and provider, the surplus of minne contributed to a significant profit growth by 39.7% to JPY 3.61 billion.

The Infrastructure business profit breakdown by payment and nonpayment by quarter is shown on this slide. Profit of nonpayment is the sum of provider, domain, service, EC support and security. We are asked whether our Infrastructure business, other than payment business, is growing by investors. However, as you can see, the business is growing in a well-balanced way.

The number of contracts in our Infrastructure business, as mentioned at the beginning of this presentation, was 10.36 million as of March, which is marking the highest in our record.

Next would be our short-term outlook and mid-, long-term strategy of our net Infrastructure business. Infrastructure business is inevitable for Internet business and is an aggregate of must-have services. On top of that, it is an aggregate of #1 service. A short-term strategy is to continue providing #1 service for continuous growth. Mid-, long-term strategy is to follow the policy of strengthening our strength. The business itself will be reinforced. The initiation of our bank business will accelerate our group synergy composed by the combination of Infrastructure and Financial business.

Next would be the Internet Advertising as well as Media business. This slide shows the quarterly net sales and the breakdown of our Advertising & Media segment. The result was 1.6% decline in revenue against prior year. For Advertising, it was flat. Movie and SNS advertising group. However, the rigid control in advertising technology and advertising standard impacted to a decline in Advertising distribution volume. On the other hand, media was negative. Sales termination of Internet product for small business and recoil reduction of a major point media business are the main reasons.

This shows the quarterly profit results. The recent trend was already explained earlier.

Next would be our Online Advertising & Media business short-term outlook and mid-, long-term strategy. Short-term outlook is the high-performing areas such as movie and SNS advertising will continue to grow. The recent negative factor of sales termination of internal products for our small business, we believe, is a one-off factor. On the other hand, we understand that advertising network -- advertising quality itself enhancement is an industrial challenge. We experienced a tentative dip due to the rigid standard. However, by embracing the challenges our customers face, we will obtain national clients. Mid-, long-term strategy is to follow the policy to develop #1 service and product in this area. We will develop in-house products and media to achieve growth in the segment.

Next is Internet and Financial business. The quarterly performance is as you can see. In addition to foreign exchange trade decrease, the market fluctuation is the factor of the slow start.

This slide shows the foreign exchange trading volume. We have achieved world #1 for 7 consecutive years, share increased by 1% year-on-year at 22.2%.

The online financial business short-term outlook and mid-, long-term strategy summary. Short-term outlook is to continue our efforts in improving profitability given the low foreign exchange trade due to low volatility. A new product share index binary option was released in April showing a promising start. Mid-, long-term strategy is to leverage AI and big data, which are existing measures, and initiate a full launch of B2B business, which are transaction with institutional investors. This will allow optimization of corporate costs and further enhance profitability. We would also like to further expand our product lineup in areas outside of foreign exchange.

Next is the global operations. We are now expanded to 66 locations in 22 countries, and our global partners reached 1,340 members.

Our global net sales are mainly carried out in Southeast Asia under the Z.com brand, comprising Infrastructure business, Finance business and Mining business. The growth is mainly driven by the Infrastructure business, and it achieved 26% higher results year-on-year.

The next is Cryptocurrency business. The GMO Internet Group's Cryptocurrency business is mainly comprising Mining and Exchange businesses.

This is the quarterly performance of the total Cryptocurrency business. Let me break it down to Mining and Exchange businesses, respectively.

First is the mining business. The sales dropped year-on-year, but the loss diminished. The top line sales decline is mainly due to the decline of hash rate, which indicates the productivity. On the other hand, as for the cost, the electricity, which is a variable cost, decreased. And also due to the booking of the impairment loss in the previous fiscal year, the depreciation, which is a fixed cost, became less of a burden.

Next is the hash rate and the mining volume. The blue line chart shows the hash rate, which indicates the productivity. Since we closed 1 of the 2 centers in Scandinavia last year-end, it was 500 petahash as of end of March. The bar chart shows the reference revenues, which is the month end rate times the mining volume.

This is the schedule for the activities for restructuring. The hash rate at the end of the year is expected to be 1,200 petahash. In addition to 700 petahash that is already at our hand, we are considering additional investment for 500 petahash in the second half of the year since the off-shelf products can be procured cheaply. Yet, with the relocation, the number of operating machines would decline temporarily, so our in-house hash rate is likely to decline temporarily with the second quarter as the bottom and the -- recover in the third quarter. Supposing that the macro environment, such as Bitcoin prices and global hash rates remain flat, the second quarter sales are likely to be lower than the first quarter. With the data center relocation, the running cost, which is mostly electricity cost, is going to be 60% lower, which is going to improve our profitability. This may take until the year -- end of the year. But [due to activity with] the productivity with the early realization.

The next is the Cryptocurrency Exchange business. We booked a loss due to the trading volume decline year-on-year because of a less volatility. However, the volatility has been improving since April with the bitcoin price hitting the record high level for this year, and the business environment has been turning for the better.

Here's the summary of the short-term outlook and the mid-, long-term strategy of the Cryptocurrency business. In the short run, the restructuring of the Mining business will take until the year-end, and the in-house hash rate is likely to decline temporarily in the second quarter. As for the Exchange business, the trading volume is increasing and showing a sign of recovery with the volatility improvement. And in the mid and long run, the Mining business will follow a low cost strategy. Exchange business' revenue structure is getting established, so we'd like to increase the domestic market share utilizing the FX know-how and the apps. As for the payment business, we will aim to issue stablecoin, which is linked to the Japanese yen.

Next, I do like to report on the activities at GMO Aozora Net Bank. The connected securities accounts with GMO Click Securities are growing well for both the number of accounts and the balance. Upon the disclosure of the API in January, we opened up the API developers' portal. GMO Aozora Net Bank will aim to be a technology-oriented bank close to engineers so as to offer information proactively and develop safe and easy-to-use environment. We aim to realize a platform bank.

As one of the API collaborations, we are going to provide cloud accounting software free now. The account balance transactions and the account information as well as the automatic journaling would become possible under the API collaborated stable environment. As for the read API to be provided from April and on, in addition to the account referencing, you can also do the payment.

As a second initiative, this is likely to be the first attempt in Japan, but we are going to disclose the API and SDK on May 21. SDK is a developmental kit to facilitate the process for the network providers to offer engineer-friendly development environment. The basic banking functions would, of course, be provided. But in addition to that, better convenience matching it up with various different services will also be offered.

Finally, from Mr. Kumagai, we'd once again like to explain about the -- today's press release, which is about the reaching 10 million customers in the Infrastructure services.

So as we had made a press release today, the number of customers using our Infrastructure service, which is including domain, cloud, hosting, e-commerce and network payment, the customers that are using have exceeded 10 million. And this is not on a cumulative basis. This is the actual active number of customers and accounts who are using the service.

Ever since we started to provide the Infrastructure service for Internet in 1995, we are now celebrating the 24th year. The domain and the server business and service have reached the outstanding #1 market share position in Japan. I do like to once again thank the customers, the shareholders and all the business partners and stakeholders that has been supporting us throughout this period. And also, if I may, I would also like to thank the business partners, who have been working very hard to improve the service on daily basis.

Now commemorating the exceeding of 10 million customers, we started Bitcoin present campaign to give away JPY 10 million worth of Bitcoin. If you would fill in the account -- if you would follow our Twitter account and apply with retweeting in a certain tweeting function, in just with 2 clicks, you can apply, so please check the website.

And during the briefing meetings, we have been giving the reports on the quarterly results. But let me give you some summary until we reached this 10 million customers. This is showing the number of contracts or customers who have been using our Infrastructure service actively.

Since we were founded as the provider of Internet service in 1995, we did -- started the cloud hosting and domain Internet service from 1997. But in those days, the Internet was still at the very early phase. And in order to sustain a host homepage or website, you had to contract a server contract, which cost you JPY 100,000 or more. And the e-mail addresses were not your own original domain but mainly using the provider address. But now it's available at much cheaper price by us at around JPY 10,000 per month. And from around 2000, especially in 2004, we began the payment service; in 2005, EC service; and from 2006, we started the SSL business so as to support the service Infrastructure, including online shops and online payment services. It became a new growth foundation, and it became a central service for the Internet business. And with the greater synergy effect, it has been growing on an exponential basis.

Now in almost all of the Infrastructure segment service, we have been enjoying #1 market share. And in the domain, you might be using Google, but if you check Google Japan, 90% of that is our market share. And in the cloud hosting, more than 50% is our market share, which means out of 2 customers we meet every day, one of them would be our group service users. This Infrastructure business growth may seem as if it's just a payment service for some of you, but it's not true.

So today, actually, I do like to talk about 2 business segments and their growth, which are not often mentioned.

The Internet Provider business, which has been continuing since the foundation of company. It's achieving great growth recently. You might think this Internet Provider business is already an obsolete business. And in fact, there are some other companies that have already discontinued this business. But we -- even though we had to face some difficult price competitions in the past and we had dropped the market share, now in 2018, we had -- did a reviewing of the market strategy and brand-new strategy, and the annual sales were JPY 26.2 billion, which was 43% higher. So it's one of the highest achieving, growth achieving products.

And the main products are those 2: Mobile Wi-Fi and FTTH. In Mobile Wi-Fi, we've been providing the lowest priced plan in the industry. And in the FTTH, we are providing the outstanding speed and quality with IPv6. So a lot of customers are choosing our service.

On this page, we're showing the FTTH net additions. The blue shows our company's net additions, and the red indicates our market share compared against the FTTH net adds data of Ministry of Information Communications. In fact, in fiscal 2018, our market share grew into 55%.

Next is the e-commerce solutions business. In this business, we had mainly talked about cart services such as Color me shop! and MakeShop. But the cart business is a stock business where we receive SPVs.

And also, as for minne, which is an online handmade market offered since 2012, this is distribution billing style or the transaction model. And also, the gray part shown here is the O2O business, which is to support the online and off-line shops and vendors. When the shops and vendors increase their revenues, it would lead to higher transactions in payment. So those are providing us great synergy with one another within the group, and it's leading to our strength.

And also, not just collaborating among the Infrastructure services, we've also liked to collaborate with the Finance service so as to optimize the operational efficiency of the customers, to provide the lending service for the store shops' working capital needs and also, the Freenance, which is the early payment service for the freelance workers. As such, there is diversification of the revenue model, and we are also -- we'd also like to do the multiplication of Infrastructure and Finance proactively. Please look forward to our further services.

And finally, we have been doing the Infrastructure business for 23 years, and I truly believe that we were doing the right thing. In fact, when I started this Internet business, there is a certain business model that I studied or referenced. So I do like to talk about it as a closing.

Historically, the Japanese economy and the core industries were driven by the zaibatsu or conglomerate. The zaibatsu group were constructing the roads and railways to build cities, or they also dig up -- dug up the mines or did the maritime trade operations, and they became indispensable social infrastructure. And also, finance has always been an indispensable service. Finance industry is also a service industry, which is indispensable. So by combining those 2 services, it has been supporting the Japanese economy over 100 years.

So likewise, we, as a corporate group, to provide infrastructure and financing in the Internet industry, we had created new values and helped people to enrich their lives. Now we are about to enter another growth period. This year is the 30th anniversary since the World Wide Web came into this world. Considering that the industrial revolution lasted 55 years in average and considering that it's a 24-hour clock now might be the lunchtime.

The Internet Infrastructure service requires high level of technology to cater to the diversifying demands swiftly, and it is becoming an area where our know-how and expertise will be used very much. We do like to utilize this knowledge and know-how in the Financial services so as to realize an outstanding inspirations and speed, which was not realized by the existing financial services.

GMO Internet Group is aiming to become a 100-year or longer corporate group, and we'd like to contribute to the customer's smile and emotions.

Thank you very much for your attention. Internet for everyone.

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