GMO internet group, Inc. (9449) Earnings Call Transcript & Summary

Good afternoon. Thank you very much for joining us in the financial results briefing of GMO Internet Group for the full year of 2022 despite of your busy schedule. Let us first of all introduce the presenter today. Chairman and Group CEO, Masatoshi Kumagai; Executive Vice President and Group CFO, Masashi Yasuda. The presentation will be followed by a Q&A session. Before the presentation, we would like to explain the change in the account recording rules. The accounting standard for revenue recognition has been applied from this fiscal year. The rules for recording sales have been changed. In this presentation, figures before the rule change are indicated as old standard, and those after the application and indicated as new standard. The concept of net sales and operating income is as described here. Now regarding the comparison with the same period of the previous year, for the affected sectors, that is to say consolidation, infrastructure and advertising and media, we use the old standard to use the same yardstick so to accurately report the actual status of the business. Please refer to the appendix for a comparison of old standard and new standard. In addition, we have also made comparative calculations of old standard and new standard for the division that are not affected by the new standard. Now Kumagai, Chairman and Group CEO, will now give a presentation.

Good afternoon. I am Kumagai, Chairman and CEO of GMO Internet Group. Thank you all very much for watching the presentation. Now I would like to explain our FY 2022 earnings result. The agenda for today is shown. First, the financial summary. The numbers are, as you can see, both the old and new standards recorded the highest financial results, with sales and profits increasing for 14 consecutive fiscal years. This 14 consecutive fiscal year of increased sales and profit is a record that ranks in the single digits among the nearly 4,000 listed companies. All of us partners, as we call our employees partners, are very proud and redeemed at this result. And we really wanted to convey our pride. On the other hand, final profit decreased due to extraordinary losses on GMO Aozora Net Bank shares and other factors. Now following is a summary of each segment. Please note that the qualitative description is that a personal assessment of Kumagai's together with previous year's results. Infrastructure is double circle or excellent. We have achieved our highest performance for 7 consecutive fiscal years. This business embodies the group's strength, a collection of overwhelming #1 services and a bedrock stock profit business model. Advertisement and media was double circle or excellent. This is the first time in 9 fiscal years that we have achieved a record high. Our efforts to strengthen our organizations and shift to in-house products and media started to reflect in our numbers. We can proudly say that we have achieved a V-shaped recovery. Financial was single circle or good. Both sales and profits increased. FX was triangle or neutral, although trading volume expanded due to the one-way depreciation of the yen, profitability had been an issue. The measures taken in the fourth quarter have had the effect of improving profitability. CFDs were rated single circle or good and have grown to become the second mainstay product of the FX. Overseas is cross or no good. In the securities business in Thailand, we recorded an allowance for doubtful accounts of JPY 3.5 billion due to the occurrence of transactions that were suspected to be unfair. We will strengthen our risk management system and do our utmost to collect receivables by all means possible. Crypto asset is triangle or neutral. Sales declined and losses were recorded from the previous year, which was a brisk year. In the exchange business, developed by GMO Coin, the number of accounts and transactions share remained steady. On the other hand, the market environment was difficult and trading was down across the industry. The mining business also experienced weak utilization rates. Although conditions remain harsh, we have not changed the view that the crypto asset market is an area with potential. We will continue to build the system in an unobtrusive manner so that we can generate profits when the time is right. Incubation was double circle or excellent. The GMO Global Payments Fund is a fund specializing in the payments area in Southeast Asia as the first of its investment projects. We sold a portion of the shares of Coda Payments, which we worked with, and the company achieved its highest performance. Here are our full year results. Sales and profits increased for the 14th consecutive fiscal year, as I had explained earlier. This is an analysis of changes in sales and profit by segment. Sales are on the left and operating income is on the right. The effects of the change in standards are also included. First, sales were positive in infrastructure, finance, advertising and media and incubation. Revenues were up on a consolidated basis with a reactionary drop in crypto assets. Also, revenue increased under the new standards, although there was a negative JPY 30.7 billion due to the impact of the change in standards. Next, with regard to operating income, the infrastructure, advertising and media and incubation saw profit due to increased revenues. On the other hand, finance and crypto assets posted negative earnings on a consolidated basis, respectively, due to the posting of provisions overseas and the reactionary decline in crypto assets. In addition, the new standard shows almost the same level of profit. Next, I would like to discuss shareholders' return. Our basic policy is achieve a total return ratio of 50%. That remains to be unchanged. Of this amount, at least 33% will be used for dividends and the remaining 17% will be used for share repurchases and cancellation. The chart shows the trend of dividend per share. Since we will not disclose earnings forecast for this fiscal year as well, we will announce dividends on a quarterly basis. Since we posted a net loss in the fourth quarter, following the third quarter, and the annual dividend payout ratio is 38.6%. So we regret to inform you that we will not be paying a dividend for the fourth quarter as well. Now the shares repurchase and cancellation of treasury stock. We would like to reiterate our notice of shareholders' return policy, including the setting of long-term share repurchase targets disclosed in July 2015 and report on the progress of this policy. When we withdrew from the loan credit business in 2006 to 2007, we apologized to our shareholders for causing trouble by issuing new shares to increase our capital. We believe that repurchasing and canceling the 38.35 million shares we issued at the time is an appropriate way to return profits to our shareholders. As the top management, we believe so, and we pledge so. And we have set a target to achieve this goal. Now the number of shares of treasury stock that have been repurchased and canceled is shown in the table below. When we set the target, we assumed that it will be a multi-decade initiative. But thanks to your support, it has been achieved well in advance. So the total return of 50%. And so far as the cash allows, we would like to move up the schedule so that we will be able to share the joy together with the shareholders. We will continue to disclose this information. The chart shows the number of shares repurchased. So the overall chart shows the number of shares repurchased. In pale blue, nonretired; dark blue, retired shares. Dotted line shows the shares scheduled to be canceled this year. We will continue to cancel the shares repurchased over time. This year, too, the profit will be appropriated to the cancellation of the blue portion as being committed. Now finally, I would like to discuss the new establishment of a share repurchase limit. As for the final profit of FY '22, since 38.6%, of the total return ratio of 50%, which is our basic policy, has already been paid as dividend in Q1 and Q2, the remaining 11.4% or JPY 1.51 billion will be used to fund the repurchase. We will continue to steadily return profits to shareholders while maintaining a balance with shareholders' equity. Now before I go into the details of our business performance, I would like to explain again our group's strength. There are 2 major strengths. The first of our strength: Our commitment to in-house development and operation. We believe that, in order to survive in the fast-changing market of the Internet world and to provide the #1 service, we must be a manufacturing company that creates and operates its own products and services. The key is to have engineers, creators, directors and other people who are involved in the manufacturing process. As a matter of fact, this idea sometimes lead to questions from both internal and external as to my overlooking nonmanufacturing functions. This is a wrong understanding. By having great talent in such areas, sales activities, defense activities as well as administration works becomes all the more easy. At Internet company, having manufacturing capabilities allow us to put smiles on everyone faces. This is our belief. As of the end of 2022, we had more than 7,300 partners, of which 49.6% accounts for makers or creators. So it was in 2011 that we first set this target of 50% of the total number of people being makers or manufacturers. When we first presented this target to investors in February 2014, the percentage at the time was 37.1%. So we are now in sight of achieving our target of 50% after 10 years, so we are raising our target to 60% now. The Internet age is the age of sensitivity. We need to increase the number of great creators and become known as the GMO of UI and UX and creativity. While we place a lot of importance on engineers in the past, but we will place emphasis on creators as well from here down the road so that we will be known as GMO of UI, UX and creatives. We will continue to grow as a manufacturing company. Now strength number two. What we create and manufacture allow us to enjoy recurring type of business. Nowadays, this is known as a subscription, or sabusuku, nowadays, which only indicates a type of billing which is different from GMO's business model, which we described to be bedrock stock earnings. It is a revenue model which is unique to GMO that never goes away or be lost, subscription type of business. So that never goes away or be lost subscription type of business. This is described as bedrock stock business earnings from the time of the founding. So this 14 years of consecutive increase in both revenue and as profit was possible thanks to this bedrock stock earnings. Now as you can see, on a consolidated basis, you can see the trend of the sales as well as profit, and we have achieved sustainable growth since our establishment. So we manufacture, create the product ourselves, and we dedicate the products that we create and produce to bedrock stock earnings. And we remain to be such a company, and we intend not to change this business model. Now by the way, as you can see, this bedrock stock earnings. This is last year, 48.6%, as a matter of fact. So that accounted for nearly 50% of the total, that's the blue -- dark blue part. This dark blue part, if we were to analyze it into different KPIs, this is how it looks. So JPY 10,000 of a unit price, so that's about JPY 800 per month or so, and there is an annual contract, whereas there's a monthly contract. And if you were to multiply that by 12 months, it would be somewhere around JPY 10,000 per annum. And the active accounts of 13 million times 10,000, and that means JPY 134 billion. So the number of contracts has been increasing gradually over time. So moving on to the next page. The unit price is increasing. So are the, number of contracts over the past 5 years. As you can see, 850,000, on a continued basis, the number of contracts has been increasing every year. You may not believe this or you may not be able to believe this. But even today, at least 10,000 contracts per day, even over the weekend. And in some cases, more than 20,000 new contracts are concluded, or the customers make an application to new products. So payment, easy card and the main service and so on and so forth. 10,000 contracts or more than 10,000 contracts per day. So it could be a year contract or 2 years contract. So it's not a net increase. So JPY 10,000 times 365 days. And of course, there are some people who may of course churn as well. So this is why it ends up allowing us to enjoy 850,000 contracts. And as you can see, it has been increasing over time. So JPY 8.5 billion worth of sales or stock increases every year, in other words. Moving on to the next page. Now it's time for me to hand over to Yasuda, the Group Vice President and CFO.

So from this part, Yasuda, CFO of GMO Internet Group is going to take over. Now first of all, the diagram below is a bird's eye view of our business areas. The size of the areas indicate the sales composition ratio. On a year-over-year basis, the infrastructure data increase 580,000. In addition to that, the financial client base had increased by 150,000 per annum. That allowed us to enjoy a number of contracts for infrastructure. It's the bedrock revenue base and the number of accounts for FX securities and crypto assets together for a customer base of 15.7 billion (sic) [ 15.7 million ]. This is the total market cap of the 10 listed group companies annual equity equivalent. The total market cap of the group is approximately JPY 1.4 trillion. And our equity in the group company is close to JPY 500 billion, as being shown on the chart. Here are the quarterly sales trends by segment. As Kumagai mentioned earlier, we continue to see a growth trend centered on the bottom, dark blue, infrastructure. Next is the quarterly operating income by segment. In the fourth quarter, the financial business reported a decrease in profit versus the prior year, mainly due to a JPY 3.5 billion provision in the Thai securities business. In the short term, despite volatility, a view of sustainable growth based on bedrock stock earnings has not changed at all. And the next is the infrastructure segment. So this shows the infrastructure business, domain, cloud hosting, e-commerce platforms, SSL service certificates, digital sales, cybersecurity, payments and access are all our collection of #1 services that will not go away or lost to the Internet society. Now here is a 6-year history of infrastructure business full year results. On the strength of our bedrock stock earnings revenue model, we have achieved our highest performance for 7 consecutive years. Here is a breakdown of the quarterly sales growth and its breakdown based on the old standard. The overall segment revenue growth rate has accelerated, again, to over 18%. The payment business, shown in pale blue, continued to perform well. The business environment is favorable with the cashless ratio and the e-commerce ratio still growing. And the security business in green color is contributing to the acceleration of the top line. The impact of the change in SSL security expiration date has run its course, and we are back to high growth again. GMO Cybersecurity by Ierae, which became a group joiner in the second quarter, also saw revenue growth asset utilization rate increased. Yellow color, EC support, also performed well due to the active EC season at the end of the year. The bottom line, gray, access, which accounts for a large percentage of sales, also turned positive in the same period of the previous year. In addition to a steady increase in fixed line sales, mobile line sales, which have been weak due to the rise of low-price plans from major carriers, benefited from the effects of product revisions. Now the quarterly operating income. Profits are on an expansionary trend in line with the accumulation of bedrock stock earnings. In the current fourth quarter, there is a burden of amortization of goodwill due to the start of consolidation of Ierae. Profits have increased -- or profits, I'm sorry, have decreased due to strategic investment based on the first half savings in each division. Now I would like to report once again on our business progress in the GMO Sign encrypted security, which we are developing group-wide as a strategic business. As I announced at the last briefing, we are #1 not only in the number of subscribing companies but also in the number of transmissions. First of all, let me give you an update on the number of subscribing companies since the group-wide Farewell, See You campaign in June 2020, the customer base has continued to expand due to the so-called network effect and group synergies. So as of the end of 2022, the number of customers exceeded 1 million. As you can see, the introduction of our services to major companies is also progressing steadily. Next is the number of transmissions. We consider the number of transmissions to be the most important KPI, indicating the high level activity of our customers. As you can see, we were #1 in Japan in this category as well, achieving a double crown together with a number of subscribing companies. GMO Sign is also strengthening its efforts in digital government. We have already introduced the services to 30 public organizations in order to become #1 in local government adoption. We are aiming to achieve the triple crown with a number of subscribers and a number of transmissions which would lead to further growth. Now this chart shows the distribution value of the EC support business as a whole. This business consists of EC platforms, such as Color Me Shop and Make Shop and services such as minne, SUZURI and Freenance. In the EC product sales business, there was a reactionary decline in cocooning consumption in the industry as a whole. However, the EC platform, especially for high price makeup -- Make Shop products remain strong due to the boom period. And as to the build to the e-commerce, GMV size remains to be higher by 1 notch after COVID pandemic. Although there may be some reactionary decline for the time being, but we can continue to expect growth going forward. And also, out of the GMV, the 40% of the total amount is handled by GMO Payment Gateway. So EC platform combined with payment, so the number indicates the strong synergy between the 2. Last of all, I'd like to talk about introduction of the service maintenance adjustment fee and its impact. GMO Internet Group has a model to provide #1 services in all specifications and prices. However, due to the recent surge in electricity price, depreciation of Japanese yen and shortage of semiconductors globally, we cannot absorb the increase in cost just by our efforts. As such, we decided to introduce service maintenance fee as per the description. It is not a permanent hike, but more like a surcharge. We plan to review the pricing in line with the market trends. We made an announcement about this at the end of last year. There were some rush demand, but the ensuing retention rate and new applications were not impacted as of now. Next is Internet advertisement and media. This is full year performance for 6 years. We achieved significant increase in both sales and profit for 2 consecutive years and renewed our record high for the first time in 9 years. Market recovery is surely a tailwind, but not only that, internal initiatives, such as bolstering the organization, shift towards our own products and media, are finally being reflected on numbers. We can now proudly say that this is a V-shaped recovery. This is a ratio of sales of our own product out of the total sales of listed companies in online advertising and media. On top of the expansion of sales of our own media, affiliate services based on our own plan in advertising is performing well. As such, we are accelerating the shift to our own products. This is quarterly net sales and its breakdown based on former accounting standard. Online advertisement captured recovering advertisement demand. Number of new projects also expanded, continuing the favorable trend. Number of PVs over all media continue to be strong in media segment as well. This is quarterly operating profit. V-shaped recovery trend is continuing with 2020 as the bottom. We are seeing a continuous trend of expansion in sales of our own products which is high margins, such as our own media, research platform and so on. In this Q4, JPY 600 million-plus cumulative strategic investments have been made by the group companies in this area. Next is Internet finance. This is full year performance for 6 years. FX struggled due to one-way depreciation of Japanese yen. But thanks to increased volatility of commodity indices, CFD performed strongly. Furthermore, with Gaika ex by GMO joining our group, sales achieved record high. On the other hand, operating profit decreased since allowance for doubtful accounts were provisioned for securities business in Thailand. This is historical performance by quarter. We have operating loss in Q4 due to JPY 3.5 billion of provisioning of allowance for securities business in Thailand. This is net sales by product. FX, in dark blue, improved Q-on-Q; and CFD, in pale blue, continues to perform well. This graph shows FX sales and trading volume. As you can see, trading volume surged in 2022 in line with depreciation of the Japanese yen. But on the contrary, sales fell. From Q4, we focused on securing profitability and took various measures. As a result, trading volume declined, but sales improved Q-on-Q. Last of all, this is FX trading volume and domestic market share. One of the measures we have taken is to put a ceiling on the trading volume in a single day for some of the accounts. As a result, trading volume decreased and our share also dropped. Going forward, at the same time, securing our profits, we aim to recover our market share. We are also going to enhance our services to improve convenience for our accounts. Next is crypto assets. We have the 3 businesses of mining, exchange and payment. This is full year performance for 6 years. In 2021, crypto asset market was booming. But in 2022, the environment became severe and a loss was recorded. This is quarterly sales and its breakdown. Gains and losses on currency hedging transactions have been included in sales conventionally in the exchange business. However, since it does not represent the actual state of the business correctly, it has been reclassified into nonoperating profit and loss since October 2022. This implies currency hedge gain or loss have been pushing down sales until Q3. As JPY 870 million of increase in sales by reclassifications were all posted lump sum in Q4, Q4 sales increased to JPY 1.6 billion. This is quarterly operating profit. As I just explained, approximately JPY 870 million of incremental sales due to reclassification had similar positive impact on profit in Q4. So excluding this, exchange and mining businesses are continuing to post losses. In GMO Coin and exchange business, number of accounts are increasing steadily, but transaction volume is continuing to decrease, making it difficult to generate profits. Against such backdrop, we are controlling our market investments. We believe the market will continue to be tough, and we will steadily continue to take initiatives internally to build a structure so that we will be able to generate profits once the market booms again. That is all for the update of each business. The last part of the presentation topics will be explained again by CEO, Kumagai.

Now allow me to explain the topics. Rather than topics, I would like to share with you how GMO Internet Group will compete in the market, where we will focus on to contribute to the world. According to the news, EY survey found that CRO, Chief Risk Officers, view cybersecurity as the top risk in 2023. As you can see, cyber attack was identified as the biggest business risk. More than credit risks, environmental risks or geopolitical risks, CROs believe they need to focus cyber risks at companies. Even without this data, you can see news on Nikkei newspaper or a variety of other news on a daily basis about cyber attacks everywhere causing damage. For example, last year, a major car manufacturer was intruded through one of its suppliers causing suspension of production at all plants. I'm sure this news is still fresh in your minds. And last autumn, a hospital in West Japan suffered a cyberattack and could no longer accept new patients. It damaged the business of the hospital substantially and also caused significant inconvenience to its patients. This means all kinds of systems are exposed to such risks. You probably do not have such a strong impression of security business of GMO Internet Group. Many people probably think that GMO Internet Group is doing some financial business, probably because of the impact of TV commercial or provider business. But don't be surprised. I will explain, from now, we are very serious about security also and are adopted by many clients. I'd like you to recognize this today. The slogan we hold for security business this fiscal year is Safe and Secure Internet for Everyone. We have 3 main security business from before. The first is cryptosecurity. This is SSL and others utilizing authentication technology. The second is cybersecurity. This will be offered by Japan's largest white hacker group. We will be protecting against cyber attacks or will identify the causes to prevent recurrence. And the third is brand security offered by professionals to protect domains and trademarks and others. Internet is a world of imitation. We are offering consultancy services and others to protect the authentic. First, I'd like to talk about cryptosecurity. We have logos of our clients who have adopted our cryptosecurity. How does it look? Johnson & Johnson, Ford, Microsoft, Airbnb, AT&T, Netflix, Virgin Atlantic, Motorola. And from Japan, Shiseido, Kosei, Cisco, are companies that everyone knows, but they are just a very small portion of clients we have. We have the logos of clients who have agreed to show their logos. We are the one and only certification authority in Japan under GMO GlobalSign brand and the only one that is global from Japan. SECOM also has a global certification authority, but they are not doing global business. In terms of global business, we are the one and only Japanese certification authority. Nowadays, thinking about geopolitical risks, there's a lot of discussion about which country's certification authority should be used. The government is also discussing about this. For Japanese companies and Japanese citizens, I believe it would give everyone peace of mind to use the certification authority located in Japan. In that sense, we operate certification authority in Japan that is responsible. Please look forward to the expansion of our business going forward. This is the second security business: Cybersecurity. Totally the opposite of hackers are white hackers. We have GMO Cybersecurity Ierae's clients listed here. As you can see, venture funds here in Shibuya, CyberAgent, Sammy, Access and recently Note that has recently IPO-ed. Sansan, Morinaga, Macnica, Will Group, Forval, NEC are also using it. Sompo Cyber Security, Drecom is also using it. We are trusted by venture colleagues, and they are requesting us to do the intrusion test so that they will not be hacked by hackers. We made sure that there are no holes that hackers can enter from and prevent their intrusion. Vulnerability diagnosis by white hackers, who can see things from hackers perspective, is being adopted not only by Japanese companies alone, but broad range of companies from overseas as well. The strength of our GMO Cybersecurity Ierae is the advanced technical capabilities, sophisticated technical capabilities, as they are a group of white hackers. There are no statistical data about hackers, so this is an estimate, but we believe 30% to 40% of hackers in Japan are working at our group. Here, we have clients for GMO brand security: Toray, Suntory, Bridgestone, Isuzu, Family Mart, Ricoh, Wacoal, ABC Mart. As you can see, so-called large enterprises in Japan are giving us orders so that we can prevent usage of fraudulent trademarks and act of piracy. GMO brand Security will detect and propose protection methods quickly. As a group of professionals of trademark rights and domain names, we offer solutions to all types of brand damages. Please visit the GMO brand Security website for more information. I talked about GMO Cybersecurity Ierae, a group of white hackers. They are providing technical support to the Self Defense Forces and National Police Agency. In a sense, we are the one giving trainings and educating cyber defense team at Self Defense Forces. It is the same for National Police Agency. And in return for our technical support, we receive a certificate of appreciation recently. Now this is what we are thinking of. This year, we want to combine our 3 security businesses with our existing infrastructure products or finance products that have a solid revenue base. By combining businesses, we will create synergy, and to contribute to a safer and securer Internet society. We will provide more differentiated products compared to competitors and achieve overwhelming position, as infrastructure provider and Internet provider, to continue to grow. From this spring, we will be offering GMO cyberattack Internet diagnosis. This product is currently undergoing tests and will be released soon. It is very simple. If you enter your domain, it automatically checks whether there are holes in the site, and the scores will come out automatically. It will inform the user whether there were holes or not, whether there are vulnerabilities, and recommendations will be made. This is a SaaS type product. The fee remains blank here. We are still considering this. We are currently considering charging a few hundreds of yen per month recurring business model. Regular check will be conducted to inform the client whether there are intrusion holes or not. After this checking is done, we will issue a website sticker for those who have cleared the test. Site sticker on the website is shown here. The red circle has been zoomed. If you look at the right bottom of the slide, you see a sicker of GlobalSign on the left. I'm sure many of you have seen this or our competitors' stickers. And next to this figure, you can post this website sticker, meaning countermeasures against cyber attacks are taken. It is of course not a must. But if a company wants to, they are welcome to do so. Recently, there are increasing number of companies, checking whether the counterparty has taken measures against cyberattacks before starting or deciding to continue transaction. Just the other day, there was an article about Shiseido on Nikkei newspaper. Shiseido has -- well, first, make sure that the counterparty does not have holes that would invite cyber attacks to do trade. This kind of service and trading criteria is gradually expanding overseas. We expect Japan will follow this trend. As a criteria for trading, that you have your health checkup done, holes are closed to prevent hacker attacks can be demonstrated with the sticker we have created. This is the service we will be offering with GMO cyberattack Internet diagnosis. We currently hold 30 million-plus solid revenue base customers, plus we are receiving 10,000 to 20,000 new contracts every day. For all those customers, we are going to provide cyberattack Internet diagnosis initially free of charge, all at once. Our intention is to penetrate this throughout Japan, all at once. Please look forward to the release of this service this spring. Naturally, we will start to charge from some point in time. We want to contribute to the world by providing safe and secure Internet with innovative services. As a result, incremental growth over solid revenue base will follow. Please look forward to this factor of growth. We are going to develop further to be the one and only listed company group that solves security issues, one stop top. Last of all, this is the summary. This is the outlook for this fiscal year. This is my subjective view. Infrastructure is expected to be double circle based on this explanation written. Online advertising and media, also double circle. Internet finance, a circle. For crypto assets, I put triangle conservatively. We will do our utmost to live up to your expectations in 2023 again. That is all for me. Internet for Everyone.