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

This is Yasuda, CFO of GMO Internet Group. Thank you very much for joining us today for the GMO Internet Group's Fiscal Year 2025 Second Quarter Earnings Presentation. As our fiscal year ends in December, I will provide an explanation of the results for the April to June period. I appreciate your attention. The agenda for today is as shown here. I will cover the Internet Security for Everyone project. And after that, our Group Executive Officer and General Manager of the Group Financial Department, Inagaki, will provide further details. Now I will present the summary and conclusion. There are 3 key points I will discuss today. The first is about our long-term vision. Our management aimed at becoming a corporate group that continues for 100 years is progressing steadily. In January of this year, we transitioned closer to a pure holding company structure. At the same time, the newly reorganized GMO Internet, Inc., inheriting our ancestral infrastructure business has started its new system. Furthermore, GMO Research & AI and GMO TownWiFi, both listed on the growth market, have also merged and started their new structures. We will continue to evolve our group structure towards sustainable growth. Next, let's look at the second quarter performance. Like the first quarter, excluding the gains and losses from VC investments and sales, we were able to achieve record high quarterly profits. This reflects the positive impact of proactive investments for future growth, and we are progressing smoothly through the first half of the year. Additionally, we believe that accumulating stock-based revenue is crucial for sustainable growth. Not only in the infrastructure business, but across the entire group, we are advancing the development of solid recurring revenue. New growth opportunities are also emerging as we move towards long-term sustainable growth. The third point is the Internet Security business that we have established as an independent segment starting this fiscal year. Given the increasing social demand for cybersecurity, both [ Ierae ] and Flatt have grown significantly. The Internet Security for Everyone project, which aims to create a safer future for all, has now reached its seventh phase. I will explain in more detail later about our efforts to establish GMO as a top-of-mind awareness brand in the field. Next, let's review the earnings summary. As you can see, we had an increase in both sales and profit. In particular, both infrastructure and financial services recorded their highest ever operating profits. Excluding the profits from VC investment sales, this was our highest ever result. Here is the cumulative data for the first half of the year from January to June. Sales have reached an all-time high, and operating profit is approaching JPY 30 billion. Next, here is a summary of the segment performances. On the right, you can see the management's qualitative evaluation, which has been added alongside the previous quarter's results. First, infrastructure is marked double checks. Continuing from the first quarter, we have again achieved record high performance for the quarter. By making proactive investments in GPU cloud services, we were able to achieve double-digit profit growth. I believe we've demonstrated the stability of our solid recurring revenue, which comes from our indispensable irreplaceable #1 services. Next, security, a new segment this year has marked double checks. Sales increased, but profits decreased. As cyber threats grow, the Internet Security for Everyone project has helped improve brand recognition, leading to strong performance in cybersecurity, continuing from the first quarter. However, the decline in profits is due to the large contribution of a major brand security deal last year and necessary investments made in cybersecurity this year. We are making necessary steps for future growth. So we rate this as double checks. Next, Advertising & Media was poor. Sales and profits decreased. Our own products, especially high-margin stock-type products have performed well. On the other hand, flow type products like advertising agency services and affiliate ads have remained weak. Particularly in advertising agencies, changes in the online advertising market's external environment have had a significant impact. Next, finance is marked double checks. Sales increased and turned into a profit, marking a record high for the quarter. The main product, FX, saw steady growth in its key KPI, unique transaction numbers. Additionally, the provision for reserves related to the Thai Securities business from the previous year has been resolved, leading to significant profit growth. Cryptocurrency is marked with a single check. Sales decreased, but profits increased. Despite market fluctuations, the trading volume and profits from our exchange business have remained at a high level. Here is a breakdown of the factors affecting the year-on-year changes in sales and operating profit by segment. On the left side, you see sales and on the right side, operating profit. As I mentioned earlier, the expansion of FX in infrastructure and finance contributed to increased revenue and profit. Also, the reversal of the provisions for Thai Securities from last year resulted in a positive impact, leading to increased revenue and profit. Now as I mentioned at the beginning, new growth opportunities are emerging as we move towards long-term sustainable growth. Here is a ranking of the sales growth rates for our group companies. GMO Flatt Security ranked first and GMO Cybersecurity by Ierae ranked fifth, have continued to grow rapidly after joining the group, driven by the increasing demand for cybersecurity. GMO Beauty ranked second and GMO OMAKASE ranked third, also performed well with stock-based products. The ability to accumulate stock-based revenue is crucial for sustainable growth. And you can see that such efforts are progressing steadily across the entire group. Here is the quarterly trend of operating profit, excluding VC investments and Incubation businesses. Continuing from the first quarter, we achieved the highest ever profit on this basis. You can see that the ability to generate profits based on our solid recurring revenue foundation is steadily growing. Next, let me explain the progress of our growth strategy, which centers on the security business and the Internet Security for Everyone project. First, let me explain why we established the cybersecurity business as an independent segment. At GMO Internet Group, our corporate catch phrase has always been Internet for Everyone. And since our founding, we have been working to expand and develop the Internet. As the Internet increasingly plays the role of social infrastructure, the threat of cyberattacks is also becoming more serious. Ensuring safety has become an urgent issue and security is now considered one of the foundations that support society alongside infrastructure and finance. In this context, we have made cybersecurity our most prioritized area and have positioned it as a key component of our medium- and long-term strategy. Our focus is on 3 areas: cryptographic security, which prevents a eavesdropping, tampering and impersonation using certification technology. Cybersecurity using the world's strongest white hat hacker group to prevent cyberattacks. Brand security, which helps prevent impersonation through domain and trademark monitoring and deletion. We are working to further strengthen and develop the security business in these 3 areas. This chart shows the main companies, services and products in each of the 3 areas that make up our security business. In cryptographic security, we offer products such as digital certificates and electronic signatures based on our experience as a certificate authority. The greatest strength in cybersecurity is the technical skills of our world-class White Hat Hacker group. Recently, they won first place at the world's largest cybersecurity conference, DEFCON Cloud Village CTF, and they became the champion for the 3 years in a row. And they have been developing vulnerability diagnostics and penetration testing. We are also diversifying our revenue model through SaaS-based products. In brand security, we leverage our expertise in intellectual property management for domains and trademarks to offer a range of services and products. This chart shows the total sales of the security business by segment. As you can see, the growth of the cybersecurity segment, which we entered in 2022 has accelerated. As a result, total security sales reached nearly JPY 20 billion in fiscal 2024. Now let me update you on the progress of the Internet Security for Everyone project, which started in February 2025 with the catch phrase, a safe future for everyone. This project aims to establish our brand as the top of mind in the security field. The top section of the chart shows our ongoing efforts through continuous products and service offerings. The bottom section highlights our efforts through large-scale events, including conferences. We are steadily increasing brand recognition through both product offerings and events, and I will explain each initiative in detail shortly. First, I'd like to reintroduce the application and operation of brand TLDs dot Brand that we announced as the third initiative during the last earnings presentation. As for domain names, as many of you already know, typical ones include .com and .jp. We have long used the domain gmo.jp for our web URLs and e-mail addresses. And we are now gradually transitioning from gmo.jp to group.gmo, .gmo is our company domain, and we are making the shift. In the age of advanced AI generated impersonation and phishing, we believe that the dot brand domain is crucial for proving trust to both AI and people, and it will enhance brand value. Notably, the next application period for dot Brand domain will occur in spring 2026. After 14 years, this will be the second time and the next opportunity is undecided. This means it's a once-in-a-decade opportunity. Since we started offering this service in May, we've received a significant increase in inquiries compared to the last registration period. We will continue to focus on this initiative, which is expected to provide high-value, high-continuity and a new pillar for stock-based revenue. I will explain about GMO opensource developer support program, which is the fourth initiative started in July. Much of the opensource software that supports the Internet known as OSS is developed by volunteer engineers, and that's the funding and human resources necessary for security measures. Therefore, we are offering opensource developers free of charge access to Takumi by GMO, a security diagnostics AI agent developed by GMO Flatt Security. We will contribute to improving Internet security and enhancing our brand value in the security field. In July, we launched the sixth service cyber physical penetration test developed jointly with ALSOK. It sounds like a spy movie, but European financial institutions have actually experienced cyberattacks in which criminals infiltrated offices and connected devices to internal networks. The financial services agency guidelines also require penetration test that includes physical intrusion. Against such a backdrop, we have partnered with ALSOK, a pioneer in physical security, to develop an industry-first comprehensive security assessment service that provides end-to-end visibility of unauthorized intrusion risks from physical spaces to cyberspace. This innovative service will further enhance our group's presence in the security field. As the seventh initiative, we will host GMO AI & Robotics Conference and Awards 2025 at ballroom in basement 2 of Shibuya, Cerulean Tower, where our first headquarter is located on September 25. Major speakers are as shown. We will have a message from NVIDIA CEO, Mr. Jensen Huang, Professor Matsuo of University of Tokyo, Dr. Furuta, General Manager of Future Robotics Technology Center of Shibaura Institute of Technology and others who are the top runners of AI robotics industry will gather at one of the biggest conferences in Japan. We will also be presenting awards at GMO AI & Robotics Awards 2025. Finally, this is an overview of our service offerings centered on our core infrastructure security business. We have been offering a wide range of services from infrastructure domains such as Internet connections, domains and cloud rental servers to value-added domains such as payment and online store support. Each one of them are a #1 service and by creating synergies with each other, we are achieving sustainable growth. And now what is accelerating this growth is security domain. By achieving overwhelming differentiation in the security domain and strengthening the integration of security with each service, we will expand the provision of value of indispensable products that will not disappear and further solidify our sustainable growth. Please keep an eye out. From here on, Ms. Inagaki will explain.

I am Inagaki in charge of Group Financial Department. I will explain the segment status and shareholder returns. This is the group overview, it shows the lineup of major products of the group. We are showing Internet Security, which became an independent segment starting this quarter at the left top. These are all in-house developed, in-house operated, in-house proprietary products. These products and services have a combined customer base of over 17 million in the areas of infrastructure, security and finance, cryptocurrency. This is quarterly sales by subsegment. For infrastructure shown in dark blue and security shown in green, recurring revenue, which has high sustainability and predictability account for a large portion. They are growing along with the expansion of customer base. We believe that the volume of information and transactions on the Internet will continue to expand in the future, and this will be a pillar supporting the sustainable growth of our group. This is quarterly operating profit. Our approach remains unchanged. We aim to achieve sustainable growth overall by combining rock-solid recurring revenue in infrastructure and security with high-margin flow-type businesses such as finance and crypto assets. Next is segment performance. Starting with Internet Infrastructure, quarterly sales by subsegment. Although Internet Infrastructure renewed its record high this quarter again, it remained slightly weak. However, this is due to a change in strategy by GMO Financial Gate, which operates in the face-to-face payment field, and we believe that the business is essentially progressing smoothly. Specifically, in the face-to-face payment area, sales from payment terminals are recorded as spot sales. We strengthened our terminal-less marketing, which utilizes customers' smartphones rather than dedicated payment terminals targeting mainly SMEs, small- and medium-sized merchants. As a result, terminal sales decreased. On the other hand, rock solid recurring revenue associated with the number of IDs, payment processing transactions and payment processing amount is steadily increasing. This is quarterly operating profit. Following the last quarter, we renewed our record high profit again. During the current term, we achieved double-digit profit growth by executing planned upfront investments in GPU cloud and others, thanks to expansion of high-margin solid recurring revenue. Let me explain the progress of GMO GPU Cloud, which is a strategic product of our new GMO Internet, which is the core of the Infrastructure segment. We plan to start offering NVIDIA B300 equipped with NVIDIA's latest generation Blackwell Ultra GPU, the fastest within Japan by the end of this year. With the rapid evolution of AI in the industrial sector, demand for large-scale computing resources is increasing even further. We will strengthen our response to the computing performance and scalability required for future AI development and deploy a more advanced infrastructure platform. So please keep an eye out for -- eye out. Next is Internet Security. This is net sales by segment. Please take a look at cybersecurity in the middle in emerald green. The 2 companies of Flatt Security and Ierae as introduced by Mr. Yasuda earlier, saw a 42% increase in revenue and grew sharply. Orders for high-price penetration tests are booming and awareness of the Internet Security for Everyone project proved effective. On the other hand, segment as a whole remained at a single-digit increase as brand security saw a large-scale project recorded in the previous year, while cryptosecurity performed well with strong sales of the key product, GMO Sign e-contract service, but SSL saw a decline in sales to large customers. This is quarterly operating profit. As you can see, profit decreased Y-o-Y. There is an overlap with the previous explanation, but the main factors are that there was a large-scale contribution in brand security last fiscal year. Cybersecurity marked strong sales and gross profit. But at the same time, we made strategic investments for future growth such as hiring engineers. We believe such an investment is necessary to realize safe future for everyone. We will steadily take initiatives to expand revenue over the mid- to long term. This is Online Advertising & Media's net sales by segment. Sales declined Y-o-Y. In online advertising, shown in light blue, advertising agencies, affiliate advertising and other flow-type products continue to show weakness. In particular, in advertising agencies, the impact of structural changes in the market as a whole, such as the in-house production and operations by advertisers and direct transactions with mega platformers are becoming apparent. On the other hand, our in-house products, especially high-margin stock-type products performed well and the Advertising Media segment as a whole is shifting from flow-type products to stock-type products. This is quarterly operating profit. Although high-margin stock-type products grew, a significant decline in flow-type products led to a decrease in profits. This is Internet Finance. This slide shows historical performance by quarter. Due to the provision recorded in the Thai Securities business in the previous year, it returned to profitability with increased revenue and posted its record high quarterly profit. This slide shows sales by product. While FX revenue expanded, CFD saw a slight decline. This is because we intentionally reduced spread as a means of giving return to customers. And although it is recorded as a decrease in revenue in the accounts, it is a strategic initiative aimed at strengthening competitiveness and improving customer satisfaction. This is Internet Finance, FX net sales and trading volume. Until fiscal 2022, there was an inverse correlation of an increase in transaction volume and a decrease in net sales. This was due to the fact that we emphasized share of transaction volume and a large proportion of transactions were from large customers, which had a negative impact on profitability. Under these circumstances, from Q4 of 2022, we shifted our policy from pursuing share of transaction volume to focus on increasing our customer base and deposits. As a result, sales and profitability have gradually improved and the strategy of increasing transaction volumes with small customers is proving successful. This is cryptoassets business. Quarterly performance are shown here. Y-o-Y, sales decreased, profit increased. Despite the impact of fluctuations in the cryptocurrency market, transaction volume and revenue from the exchange business remained at high levels. Cost control also contributed to increasing profits. In addition, in this segment, we are working to stabilize revenues through stock-type products such as staking and loaning of cryptoassets. We will continue to steadily operate our business while expanding our customer base and implementing various measures. Next, I will explain GMO Aozora Net Bank, which is an important initiative in our group growth strategy. GMO Aozora Net Bank is an equity method affiliate and 50% of its results are included in the consolidated income statement. This is the quarterly earnings of GMO Aozora Net Bank. Revenue increased, and we were able to become profitable last year. The main factors were an increase in the transaction revenue such as transfer fees due to an increase in the number of corporate accounts. In addition, an increase in deposit balances contributed to the stabilization of revenue. We have established a growth trajectory as an online bank. These are important KPIs. The number of corporate accounts and the number of BaaS by GMO Aozora contracts. The pace of expansion has accelerated with more than 50,000 accounts added every quarter, surpassing 200,000 accounts. This is due to the convenience and superiority of our in-house developed products. We are currently being selected by many newly established companies. Another important KPI, the number of BaaS by GMO Aozora contracts is also growing steadily. Banking functions such as payment and deposit notifications are provided to external businesses as a cloud service via API. Businesses highly value the fact that they can incorporate banking functions without disrupting the world view of their own services. Last of all, this is deposit balance. We achieved a major milestone of topping JPY 1 trillion. 7 years after opening in 2018, we have reached a milestone of JPY 1 trillion in deposit balance, including the 200,000 corporate accounts mentioned earlier. We believe that this is the result of our corporate focused strategy and the high evaluation we have received from our customers who are mainly small and medium-sized enterprises and start-ups. The business will continue to serve as an important growth engine for the group as a next-generation tech bank. Please keep an eye out. Last of all, I will talk about shareholder returns. The basic policy for shareholder returns has been set at a total return ratio of 50%. Dividends will be paid out as 33% consolidated net income with the remaining 17% allocated to the buyback and cancellation of treasury shares. Furthermore, we have introduced a quarterly dividend system in order to return profits to shareholders as quickly as possible. The dividend for the current quarter is JPY 17.6. Finally, I will report on the progress of share buyback. As you can see, we are making steady progress towards our planned total buyback of JPY 10 billion. This concludes the earnings call. Thank you for your attention. Internet for everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]