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

Hello, everyone. Thank you very much for taking time out of your busy schedules to join the GMO Internet Group's FY 2025 Q1 Earnings Presentation. Let me first introduce today's speakers. Mr. Masashi Yasuda, Executive Vice President and Group CFO; Ms. Noriko Inagaki, Group Executive Officer and General Manager of the Group Financial Department. Today, we will begin with an overview of our financial results followed by a Q&A session. All related presentation materials are available on our corporate website. After the session, a survey link will appear on your screen. We would greatly appreciate your feedback. Thank you very much for your cooperation. Before diving into the presentation, we would like to share one important point. Yesterday, on May 14, we announced a notice regarding the secondary offering of shares of a consolidated subsidiary. In order to avoid any interpretation as solicitation, we will refrain from commenting on this topic during today's presentation or Q&A. Thank you for your understanding. Now I'd like to hand it over to Mr. Yasuda, Group Vice President.

Hello, everyone. I'm Masashi Yasuda, Executive Vice President, CFO. Thank you very much once again for joining the GMO Internet Group's FY 2025 Q1 Earnings Presentation today. Let me walk you through today's agenda. Up to the section on the Internet Security for Everyone project, I will present, and then Ms. Inagaki will take over to explain the remainder. Let me begin with today's key takeaways. There are 3 major highlights. First, as a foundational step toward realizing our vision of becoming a 100-year corporate group, in January 2025, we transitioned to a structure close to a pure holding company. At the same time, a new entity, GMO Internet, inheriting our ancestral infrastructure business was launched. We will continue evolving our group structure going forward. Second, in Q1, despite forward-looking investments for future growth, we achieved record high quarterly operating profit, excluding gains and losses from VC investments. This strong start to FY 2025 was led by solid recurring revenue from our infrastructure business, which continues to grow steadily even amid macroeconomic uncertainties such as tariff risks under the Trump administration. Third, as cybersecurity becomes an increasingly urgent social issue, we have formally designated our security business as a core strategic focus area. Previously included in Internet infrastructure, it is now independently disclosed as the Internet security business. We will continue to position this business as a mid- to long-term growth driver and continue strengthening the business. From February 2025, we launched the Internet Security for Everyone project, uniting the technical strength of our security group companies under the slogan, a Safer Internet Future for Everyone. We are currently implementing the third phase of this initiative. Details will follow shortly. Now let's move to the financial highlights. We posted both revenue and profit growth in Q1, led by the Infrastructure segment, which reached a record high, we achieved all-time high quarterly sales and operating profit, excluding VC investment sales. Next, here is the performance summary by segment. On the right, you can see our qualitative assessment compared to the previous year. Infrastructure is marked double check. It achieved record high quarterly performance despite a high base from last year and upfront investment in GPU cloud and group restructuring costs. This demonstrates the strength of our solid recurring revenue stream generated by our suite of indispensable and essential #1 services. The new segment, security is marked double checks. Revenue increased, profit decreased. Cybersecurity grew strongly, thanks to seasonal demand at fiscal year-end and increased awareness from the Internet Security for Everyone project. The consolidation of GMO Flatt Security also contributed. The decline in profit was due to strategic investments in engineers and amortization of goodwill, all aimed at future growth. Advertising and media is marked with a single check. There was mixed performance across products. Flow-based products like ad agency and affiliate advertising remained soft. Meanwhile, our high-margin stock-based in-house products performed well. Despite the favorable gross margin mix, restructuring costs weighed on profit. We will continue focusing on stock-type products. Finance is marked with a single check. Both revenue and profit declined. FX is marked with a single check. We enjoyed strong volume and revenue performance. CFD, revenue declined due to enhanced customer rebates or spread reductions as part of our strategy to expand our client base. We are adjusting spreads to stay competitive amid increasing entrants. Crypto assets is marked with a single check. Also revenue and profit declined year-on-year due to a temporary gain from the crypto payment business in the previous year, transaction volume and revenue in the exchange business remained strong amid a bullish market. Here is the breakdown of year-on-year changes in revenue and operating profit by segment. You can see sales on the left and operating profit on the right-hand side. As explained earlier, infrastructure was main driver. Despite temporary costs related to group restructuring and absence of VC and incubation contributions this year, we ended the quarter with solid year-on-year growth. Here, we present the top contributors to revenue growth among our non-listed group companies in Q1. Top ranked was GMO TownWifi, which was integrated into a listed company as of April 1. Others span a diverse range of businesses, reflecting broad-based group contributions. At GMO, we value growth through synergies after joining the company. This ranking embodies the success of our GMO style group management. Next is our quarterly trend of operating profit, excluding VC and incubation businesses. As shown, we achieved record high quarterly operating profit on this basis. This illustrates the stable growing profit-generating capacity of our group, underpinned by a solid recurring revenue model. Here is a summary of the changes to our segment structure. From this fiscal year, we are independently disclosing the Internet Security business, which had previously been part of Internet Infrastructure. Now let me explain one of our core growth strategies, the Internet Security for Everyone project. This initiative also supports our decision to define security as a stand-alone segment. Why now? Let me explain the essential significance of carving out security as an independent business. Our mission has always been Internet for everyone. As the Internet evolves into indispensable social infrastructure, cyber threats are escalating. Security is now as vital a foundation as infrastructure and finance. That is why we have placed security at the heart of our group's mid- to long-term strategy. We are focusing on 3 main pillars: encryption security, preventing eavesdropping, tampering and spoofing through authentication technology, cybersecurity, countering attacks with the world's top white hat hackers and brand security, detecting and removing spoofed domains with domain and trademark experts. Together, these 3 pillars drive us toward our goal, a Safer Internet Future for Everyone. To this end, we will further strengthen our security business. This slide outlines the company's services and strength under each security domain. First, in the area of encryption security, we offer a wide range of products centered on digital certificates and electronic seals built on the technological and operational expertise we have developed as a certificate authority. In cybersecurity, our greatest strength lies in the technical capabilities of our team of world-class white hat hackers. In addition to providing vulnerability assessments and penetration testing services, we have also begun offering SaaS-based products that leverage the insights gained from these operations. Meanwhile, in brand security, we provide a variety of services and products that capitalize on our intellectual property expertise in domain and trademark management. We believe our competitive advantage lies in the way these 3 domains, each with its own distinct area of expertise come together to form a comprehensive and integrated security framework. This graph shows full year revenue across the 3 segments within security. While encryption security remains the base, cybersecurity's growth has accelerated since our entry in 2022. As of FY 2024, our Total Security segment revenue approached JPY 20 billion. Revisiting the slide from our previous earnings call, I want to explain the drivers behind our growth. As you see at the top of the page, the social environment is changing rapidly. And now security is becoming a prerequisite for these transformations from cloud vulnerabilities due to the expansion of use of cloud environments and DX-related integration risks to the risks of data tampering and impersonation in the use of AI and advanced KYC in a cashless society. None of these advances are possible without robust security. Through initiatives like the Internet Security for Everyone project, we continue to offer #1 services to address these evolving challenges. This is supported by the GMO-ism that underpins our group structure based on independent management, in-house development and operations and a recurring revenue model. This slide maps the full scope of our infrastructure and security services, the core of our group's business. From foundational services such as connectivity domains and hosting to high-value areas like payments and e-commerce support, we deliver indispensable essential value. All our #1 services working in synergy, enabling us to achieve sustained growth. We now see security as a mid- to long-term growth engine that expands this value proposition of indispensable essential value further. Now let me report on the progress of our Internet Security for Everyone project, which launched in February 2025 under the slogan, a Safer Internet Future for Everyone. Phase 1 introduced GMO Security 24, a comprehensive Internet security checkup service that identifies password leaks, web vulnerabilities and more available 24/7 free of charge. We are proud to say this is the world's first diagnostic service that integrates encryption, cyber and brand security. Phase 2 took place on March 6 with the GMO Cybersecurity Conference and Award Ceremony 2025. The event featured surprise appearances and diverse speakers, including government officials, leading security experts, corporate executives and educators who discussed the latest trends in cybersecurity and the challenges of developing human resources. The event drew 1,200 participants and became one of the largest cybersecurity events in Japan, serving as a day to reflect on the future of the nation's cybersecurity. Next, I would like to introduce the GMO Security Visualization site sticker. This is a product especially developed to make your security measures stand out. Think of it as a sticker you would put on your front door with a brand name of home security companies such as SECOM or ALSOK to make it easier to you to get an idea. Investment in security traditionally has been seen as a cost, but now it is an investment for building trust. What we are working on is to make it very apparent that your security level is great by displaying your protections in 3 security domains, namely crypto, cyber and brand to assure customers with a peace of mind. By displaying your protections, you will be able to help depend your brand and give your users one more reason to choose you. This is a new era, and we are already in it. Next, I'd like to introduce corporate logo e-mail and corporate logo ownership certificate, which were launched in this April. These services give you credibility of your e-mail at a glance, helps improve your brand value while helping you to prevent spoofing and phishing attacks all at once. To be more specific, your company logo will be shown in the inbox, providing the authenticity of the e-mail. Users can determine if it's safe or not simply by looking for a logo, businesses will also benefit by gaining more trust or by improving click rate while preventing a compromise. We will first roll them out to our group companies entirely by summer of 2025, followed by full-fledged rollout to customers outside. Please look forward to it. Finally, I'd like to introduce GMO.company name filing and operation support service. This is the third iteration of the NetSecurity GMO project and was just launched in May. E-mail domains are just like mailing addresses in the Internet. Owning domains, typical domains like dotcom, .co.jp, it's similar to renting a space in a very big building. For example, in our case, we are renting a room called GMO.co.jp in a huge building called co.jp as an example. This new service is quite different because it will let you rent the entire building all by yourself under your company name. In a sense, this will be -- enable you to occupy a premium space in the Internet only by your company such as group.GMO. It makes it even more striking because the filing will start in the spring of 2026 for the first time in 14 years. Timing for the next round has not been decided. So this could be an opportunity that comes around only once in the decade. This can be a huge benefit for businesses because this not only works as a powerful tool to prevent spoofing or phishing scams, but also helps improve brand values and perpetual IPs in the long run. We have an experience during the last round in 2012, where we help 83% of filings in Japan, a track record. We can be your one-stop shop covering end-to-end from consultation before filing all the way to assisting the operation. We will also develop it as a new pillar to support our recurring income stream. Now I'd like to hand it over to my colleague, Inagaki, who is the Group Corporate Officer responsible for finance. Thank you very much.

My name is Inagaki from Group Finance team. Thank you. I will cover performances by segment and shareholder return. First topic is the group overview. This slide is showing a portfolio of our main products and services. We have separated security as an independent segment as presented at the top left. Everything on the slide is developed and operated by us internally. Out of those products and services, combined customer base for infrastructure, security, finance and crypto amount to be 17.12 million customers. This shows the quarterly breakdown of sales trends by segment. Majority of the Internet infrastructure in dark blue and the security, just above that in green are rock solid recurring businesses, which are very sustainable and predictable. And the revenues are steadily growing in tandem with growth in our customer base. We believe they will be important pillars that will give us the consistent growth as both data volume and transaction volume are expected to grow in the Internet. This slide shows quarterly trends in operating profit by segment. As you can see, we are continuing to leverage rock-solid recurring incomes from infrastructure and security as the foundation while combining that with highly profitable businesses such as finance and crypto assets. We are also bringing this model to Ad and Media segment by increasing the percentages of its recurring income over the last few years. Next section will show your overview by business unit. First, here is the quarterly net sales trend and breakdown for the Internet Infrastructure business. As Yasuda mentioned, we are now disclosing the security business as an independent segment from this quarter. Furthermore, TownWifi has now moved under Ad and Media segment. This chart shows you the adjusted revenues after reflecting those changes retrospectively from 2020. Quarterly performance for the infrastructure business once again has broken the record from this perspective. We have monthly and yearly steady income streams at its foundation where payment businesses on top, which brings us both recurring and transaction income flows, and the model is giving a steady growth in revenue. This is the trend of quarterly operating profit. We are able to break the record for profit as well. The profit, by the way, during the same period last year improved by about 40%, which means we were up against the baseline that was very high. Being able to outperform that in this quarter, I believe, deserves a positive credit. We had a big onetime cost during this period, such as advanced investment to GPU Cloud or group restructuring, but we offset them by growing highly profitable payment businesses and others to secure double-digit profit growth. Next, I will discuss about the progress we have made on GMO GPU Cloud, which is a status product of the renewed GMO Internet. GPU cloud was developed with a lot of ingenuities in driving its performances. We are indeed getting great feedback on this technical superiority and customers from many verticals have decided to implement. This is just a small examples of customers who have implemented. AI Robot Association or AIRoA is using it as their computation platform in developing their next-gen robotics. Turing is using it to develop their autonomous driving AI product. NEC is using it for multiple projects and the list of these customers is steadily getting bigger. Next one is the Internet security. Here is the quarterly sales trend and its breakdown. Overall, net sales was 14% better year-on-year. Cybersecurity businesses launched in 2022 saw a significant growth at more than 30%, driven by strong demand at the end of fiscal year or by net security GMO project, which helped to build awareness and with a new addition of GMO Flatt Security in our consolidation accounting. The dark green at the very bottom is encryption security. It's a key product called digital stamp GMO Sign performed very well by bringing new customers in and driving transaction volume, while sales performance of SSL in Europe and the U.S. was soft due to previous addition of big accounts, which offset growth and [indiscernible] only in the single digit. This is a trend of quarterly operating profit. As you can see, has decreased from the previous year. This was mainly caused by strategic investment we have made for the future growth such as an IT investment for certification authority or recruitment of engineering talent. Another factor was amortization of goodwill after new consultation. But all of them investments are essential pieces to for our vision to bring safe future for all, and we will continue to focus on them. This shows trend in quarterly sales for Ad Media and its breakdown. Net sales increased slightly year-on-year. At the very bottom of the chart is media business in dark blue and our in-house products, in particular, high-margin in-house recurring products are performing very well. Online advertisement, on the other hand, is not performing strong due to slowdown in affiliate ads and other nonrecurring businesses. This is operating profit by quarter. Gross margin increased year-on-year, driven by growth in highly profitable recurring products, but the operating profit was down due to a big spending for restructuring. Next one is finance. This shows quarterly performances. Both top and bottom lines decreased, as you can see, but both of them performed better than the last quarter as the impact from provisioning for Thai Security has gotten smaller. This is the trend in net sales by product. FX went up, but CFD was down. CFD was down because we gave the benefits of the spread back to our customers as an investment to grow our customer base. It performed like you see here because the impact has to be posted under the net sales due to a specific accounting rule. This chart is showing you the relationship between net sales and trading volume in the FX business. The correlation was drawing an inverse curve until fiscal 2022, where net sales was down while transaction volume was going up. This had happened because at the time, a large volume transactions were predominantly made by some large accounts, which in turn caused negative impact to the margin. We wanted to improve the situation by running different regions such as putting a limit on the daily transaction volumes for some customers. These programs have started to pay off. The proportion of transaction from smaller accounts have been growing gradually, and we are seeing improvements in both the top and bottom lines. As a matter of fact, our volume and margin remained very high, while market was experiencing big volatilities. The last segment is crypto asset by quarter. As you see, revenues and profits were down year-on-year and versus last quarter, but they were mostly due to big onetime income in crypto asset payment for year-on-year and in exchange business for the last quarter. Exchange business actually is performing very well in both transaction volume and income level, supported by tailwind in crypto market. We will continue to work on expanding our customer base while ensuring running of steady operation. The last section is about shareholders' return. Our basic stance regarding shareholder return has always been a total return ratio at 50%. Of that, 33% of consolidated net income goes to dividends, while the remaining 17% goes to buyback and retirement of our own share. And we want to give it back as quickly as possible. That's why we issue dividends every quarter. And this quarter's dividend is JPY 17.6 per share. Finally, I want to share where we are at for share buyback program. As you can see, we are well on track on a path to buying back JPY 10 billion in total. This concludes today's announcement. Thank you very much for watching Internet for Everyone.