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 GMO Internet Group's Fiscal 2025 Third Quarter Earnings Call. As our fiscal year ends in December, I will provide explanation for the results of July to September period. The agenda for today is as shown here. I will cover strategic highlights and summary and our security, AI and robotics initiatives as key topics, followed by our Group Executive Officer and General Manager of the Group Financial Department, Inagaki, to provide further details. Now I will present the strategic highlights and summary. There are 3 key points I will discuss today. The first is about our long-term vision. We are aiming to become a corporate group that will continue to thrive over the next century by thoroughly implementing a long-term management. In January this year, we transitioned to a position that is like a holdings company. At the same time, newly reorganized GMO Internet Inc., inheriting our original infrastructure business, has started with a new structure. In September, GMO Commerce became listed in the Growth Market anew. And in October, GMO Product Platform and GMO TECH Holdings started with a new structure. The second topic is our performance. In Q3, both net sales and OP increased, with OP reaching JPY 14.7 billion. Infrastructure drove growth, renewing its record highs for 3 consecutive quarters. OP exceeded JPY 10 billion. Out of this segment, the GPU Cloud business turned profitable on a monthly basis and has entered into a phase to recover investments. For sustainable growth, we believe accumulation of solid recurring revenue is important. From that perspective, we are advancing ahead with recurring revenue, not only in infrastructure segment, but across all segments. The third point is the growth of security and AI and robotics, our top priority area. Driven by increasing social demands, high growth of Ierae and Flatt in cybersecurity are continuing. The Internet Security for Everyone project, advancing under the slogan, "A Safe Future for Everyone," held the AI & Robotics Conference Autumn 2025 in September. It presented a road map for industry, government, academia collaboration centered on humanoids, aiming for the social implementation of cutting-edge technologies. From next year onwards, we will hold the event twice a year in the spring with a focus on cybersecurity and in the fall, with a focus on AI and robotics. Next is about earnings summary. As you can see from the results, we achieved increase in both sales and profits. In particular, OP reached a high level as the infrastructure segment posted record high results for the third consecutive quarter. These are cumulative results from January to September. We renewed our record highs for both sales and OP. This is the summary by segment. At the right end, we have the management's qualitative evaluation of Q3 along with the previous quarter. Infrastructure was double checks. Sales and profits increased, achieving record highs for 3 straight quarters, with OP exceeding JPY 10 billion for the first time. GMO Payment Gateway and GMO Internet drove overall performance. GMO Internet entered into the investment recovery phase with its GPU Cloud achieving monthly profitability following prior investments. In addition to steady performance in its existing domain, server and internet connection businesses, we believe we demonstrated the rock-solid stability of our recurring revenue, derived from the collective strength of overwhelmingly #1 services made up of indispensable products that will not disappear. Next, security was double checks, achieving increase in sales and profits. Amid growing cyberattack threats, awareness raising initiatives under the Internet Security for Everyone project contributed to continuing strong performance in the cybersecurity business. Additionally, our overseas SSL sales, which temporarily declined last year, recovered. Although the size of profit is still small, we are taking action for future growth, therefore, the double checks. Next, online ad & media was poor. Sales and profits declined. We are continuing to see variance in earnings depending on the company and the products. Our own products, especially stock-type products, with high margin maintained steady performance. On the other hand, flow-type products such as advertising agency services and affiliate advertising are experiencing a decline. And because of that, we are promoting a shift from flow-type to stock-type products. Next, internet finance was a single check. Both sales and profits decreased. This is mainly because our main product, FX, remained soft due to market conditions. But on the other hand, we are continuing with growth of the key KPIs, unique transaction numbers and margin balance. Next, cryptoassets was double checks, with the increase in sales and profits. Despite the impact of fluctuation in cryptoassets market, exchange business remained at a high level. Evaluation was double checked since the stock-type products are growing rather than because of short-term earnings results. Here is a breakdown of factors affecting Y-o-Y changes in sales and OP by segment. On the left, we have sales. On the right is OP. As I mentioned earlier, expansion of infrastructure, security, cryptoassets and incubation contributed to increased sales and profits. On the other hand, in the financial segment, although the impact of provisions recorded in the previous year related to Thai Securities lessened, there was a downward pressure from the market factors. In total, consolidated sales and profits increased. This is revenue growth ranking within the group. For many of the investors, you might think mainly of infrastructure and security segments when you think of recurring revenue. However, rock-solid recurring revenue is growing not only in infrastructure but throughout the group. For example, GMO Beauty ranked first, provides DX support for aesthetic medicine and achieved its top position through growth driven by both stock- and flow-based revenue models. GMO Coin ranked second, operates a typical flow-based revenue model of cryptoassets, but has spent several years cultivating, staking as a stock-based product. We believe that accumulating assets is critical for sustainable growth, and we hope you can see that these efforts are steadily progressing across the entire group. This is quarterly OP trends, excluding VC investments and incubation business. You can see that our group's earnings power based on our solid recurring revenue is growing steadily. Next, I will talk about the key topics of progress in security and AI and robotics area. I will start with security. I mentioned about this in the last earnings call as well, but I'd like to explain why we established the security business as an independent segment. GMO Internet Group has been working on the penetration and evolution of the Internet under our corporate slogan, "Internet for Everyone". And Internet now plays a very important role as a social infrastructure. But at the same time, threats of cyberattacks are becoming more serious day by day. Ensuring safety has become an urgent issue, and security is now considered one of the foundations that supports the society that is indispensable. In this context, we have made cybersecurity our most prioritized area and have positioned it as a key component of our medium- to long-term strategy to realize "A Safe Future for Everyone." Cryptographic security, which provides protection against eavesdropping, tampering and impersonation, cybersecurity, which is countermeasures against cyberattacks. Brand security, which offers monitoring and takedown support for impersonation. Our focus is on these 3. We are working to further strengthen and develop the security business. These are the 3 key areas of Internet security business. We have the main operating companies, their respective services and products and key strength. Let me start with cryptographic security. We offer stock-type products such as digital certificates and electronic signatures based on our strength of technology and operation know-how as a certificate authority. Next is cybersecurity. The biggest strength we have is the technical skills of the world's strongest group of white hackers. They have won the #1 position in cybersecurity conferences inside and outside of Japan. Vulnerability diagnosis and penetration tests are performed by white hackers, with technical skills. On top of that, services have been developed utilizing their expertise, which is leading to expansion in stock-based products. In brand security, leveraging the strength of IP management know-how of domain and trademarks, services and products as shown are being offered. This shows full year revenue of Internet security business by segment. As you can see, with cryptographic security as the basis, growth of cryptosecurity -- cybersecurity, which we newly entered into in 2022, is accelerating. As a result, full year sales of Internet security business was nearly JPY 20 billion in fiscal 2024. Now I will explain the progress of Internet Security for Everyone project, which we started in February 2025 with a catch phrase of "A Safe Security for Everyone" (sic) [ "A Safe Future for Everyone" ]. This project aims to establish our brand as top-of-mind brand in the security field. The upper part of the page shows our ongoing efforts through continuous products and service offerings. The lower part highlights our efforts through events, including large-scale conferences. We are steadily increasing brand recognition through both product offerings and events. Today, I will introduce a number of cases, starting with dot-brand. In recent years, the emergence of generative AI has led to increasingly sophisticated and elaborate impersonation and phishing scams. We firmly believe that providing peace of mind through anti-phishing measures is essential for enhancing brand value. Domains that are typical are .com and .jp. We have been using the domain name of gmo.jp for web URLs and email addresses for a long time. We are now shifting from gmo.jp domain to .gmo domain, named group.gmo. For end users who receive emails, they will be able to understand at a glance that the emails sent from .gmo are from authentic email address, enabling us to reduce communication costs significantly. This implies that dot-brand is an ultimate countermeasure against phishing. And what is notable is that the application will be accepted for the first time in 14 years. And the next acceptance period is TBD. This means that this is a once-in-a-decade opportunity. The company names shown at the bottom are the ones who have obtained those domains at the last application opportunity 14 years ago. Since we started this offering in May, we have received so many inquiries. The interest is clearly much higher compared to the last application period. Toward the application period, in spring next year, we will steadily cultivate this as a new pillar of recurring revenue with high unit price and high retention rates. Next is about GMO AI Robotics Conference Autumn 2025, one of the largest conferences in Japan. First, I'd like to show a 1-minute video. [Presentation]

As you have seen, this conference brought together top industry leaders, including a video message from NVIDIA CEO, Jensen Huang; Professor Matsuo from the University of Tokyo; and Director Furuta from the Future Robotics Technology Research Center at Chiba Institute of Technology. In our CEO, Kumagai's presentation, he stated that next year, 2026, will likely be called the year 1 of humanoids, and he emphasized that Japan should lead this greatest technological revolution in human history through collaboration between industry, government and academia. At the venue, we presented a road map for industry, government, academia collaboration towards social implementation and exhibited operational humanoid robots, allowing attendees to experience cutting-edge technology firsthand. I'd like to talk about GMO AI & Robotics Corporation, GMO AIR in short, which we established last year. GMO AIR is positioned as a trading company of robots, and robot offering service was launched in April this year. The company is not bound by any particular manufacturer. We are able to compare multiple robots and is able to make the optimal proposal for customers, which is our strength as a trading firm. Conventionally, a few tens of millions of yen were necessary as initial investment to introduce robots as well as securing of professionals. You cannot just buy robots, you need technical skills in order to actually use them. Our service is Japan's first business model that customizes programs according to customers' requests and dispatches them. Furthermore, we will also make use of our group security know-how to support safe social implementation. We are currently receiving many inquiries from diverse sectors such as events and factories. We are steadily accumulating track record. Finally, I would like to explain how we plan to develop the GMO conference going forward. Starting next year, we intend to hold it twice annually. In spring, the theme will be cybersecurity and in full, AI, robotics. As one of the largest conferences of its kind in Japan, we will continue sharing the latest developments in the cutting-edge technology. By doing so, we aim to accelerate the social implementation of advanced technologies and create business opportunities. Next, as one of our initiatives in the AI robotics domain, I would like to introduce our generative AI service, Tenbin AI. Tenbin AI is a service that allows users to submit the same questions simultaneously to up to 6 different gen AI engines and compare the responses. Each gen AI engine has its strength and weaknesses, and a single engine may not always provide a complete answer. By comparing responses from multiple engines, users can gain more reliable and accurate insights. To meet corporate needs for operational efficiency, we have launched the service under a monthly subscription model, and we will develop it as a new pillar of recurring revenue. Lastly, this is an overview of our service offerings centered on our core infrastructure and security business. We have provided a wide range of services from foundational areas such as Internet connectivity, domains, cloud and rental service, to value-added areas such as payment services and online store support. Each of these services is a market leader, and the synergy among them have enabled sustainable growth. Now security is becoming the key driver that will further accelerate this growth. By achieving strong differentiation in the security domain and strengthening integration between security and all of our services, we will expand indispensable enduring value and reinforce sustainable growth. And please look forward to it. From here, Group Executive Officer and Head of Finance, Ms. Inagaki, will continue the presentation. Thank you very much.

I am Inagaki in charge of Group Finance. Thank you for joining us. Now I will explain the performance by segment and our shareholders' returns. First, an overview of the group. Here's the lineup of our main products. All of them are developed and operated in-house. In addition to Tenbin AI, we are also advancing new services for the AI industry. The combined customer base for infrastructure, security, finance and cryptoassets exceeds 18 million. Here's the quarterly trend in the net sales by segment. Dark blue infrastructure segment overlaid with the green security segment derives a large portion of its revenue from a highly predictable and sustainable recurring income. Both continue to grow along with our expanding customer base. As mentioned earlier, recurring rock-solid service models are also increasing outside infrastructure and security. The volume of information and transactions on the Internet is expected to continue increasing. By further reinforcing our recurring revenue foundation, we will secure even more sustainable growth. Here is the quarterly trend in operating profit by segment. As you can see, we continue to pursue overall sustainable growth by combining rock-solid recurring revenue in infrastructure and security with high profit flow-type businesses such as finance and cryptoassets. This approach remains unchanged. Next, the status of each business segment. First, the quarterly net sales of the Internet Infrastructure business and its breakdown. Infrastructure sales reached a record high, driven by the accumulation of stable recurring revenue. The payment business offered through GMO Payment Gateway, shown in light blue, continues to expand steadily. The cloud and rental server businesses, shown in dark blue, such as GPU Cloud at GMO Internet and CloudCREW at GMO Global Sign Holdings also performed strongly, supported by enterprise demand. Here's the quarterly trend in operating profit. We achieved a record operating profit for the third consecutive quarter, surpassing JPY 10 billion for the first time. In addition to steady growth in the payment services, contributions from GMO Internet increased. Existing business such as domain, cloud and rental servers and Internet connectivity performed steadily, while GPU Cloud previously in an investment-first phase achieved monthly profitability and entered the investment recovery phase. These were the primary drivers. Next, an update on GPU Cloud, a strategic product of GMO Internet. The service launched last November and after an investment-first phase, achieved monthly profitability as utilization increased. The sales progress towards full operation in the fourth quarter is going smoothly. As previously announced, we plan to offer servers equipped with the B300 within this year. Here are some examples of companies that have adopted GPU Cloud. Today, we announced that Sakana AI, one of the Japan's fastest-growing unicorns, gaining international attention, has adopted GPU Cloud as its next-generation AI development platform. GPU Cloud was built with a strong focus on performance, thanks to its technical advantages, is being adopted across a wide range of fields. Lastly, an infrastructure-related topic. Let me introduce GMO Commerce, newly listed on the Growth Market in September. It belongs to the e-commerce support segment. GMO Commerce provides a digital marketing platform for chain-type brick-and-mortar stores, with a mission to become the marketing platform for everyone. Through the services shown here, it helps maximize customer acquisition efficiency and enhance customer experience. Its strength lie in the know-hows and data accumulated since the early days of social media. About 70% of its revenue comes from recurring revenue, along with the transaction revenue based on the ad delivery volume and usage, enabling stable recurring growth. Going forward, it aims to drive further growth through AI-powered personalized ad delivery, tailored to end user preferences. Please look forward to it. Next, the network security business. Here is the quarterly trend in the net sales and its breakdown. Please focus on the area in emerald green, which represents cybersecurity. Flatt Security and Cybersecurity by Ierae continues to deliver strong growth. While the number of projects is increasing, strong demand for high-value penetration testing has been a key driver. In cryptosecurity, strategic products such as GMO Sign performed well and overseas SSL sales recovered, compared with the same period last year. Here is the quarterly trend in operating profit. As you can see, the profit increased year-on-year, returned to profitability. As noted earlier, the primary factor was a recovery in cryptosecurity. Meanwhile, cybersecurity continues to show strong revenue and growth profit while we also pursue strategic investments for future growth, including hiring engineers and strengthening SaaS products. We view these as essential investments to achieve "A Safe Future for All" (sic) [ "A Safe Future for Everyone" ] and to support sustainable growth. Here is the quarterly trend in the revenue for the advertising and the media segment and its breakdown. Revenue declined year-on-year. In the light blue area, Internet advertising, particularly flow-type products such as agency services and affiliate advertising remains soft. In agency services, especially, we are seeing the effect of structural changes in the market, such as advertiser internalizing operations and engaging directly with the major platforms. However, we have seen some modest recovery since the second quarter. Meanwhile, our in-house products, especially high-margin recurring products, continue to perform steadily. Here's the quarterly trend in operating profit. Although high-margin recurring products grew, the decline in flow-type businesses led to a lower profit. Next, the finance segment. As shown, the quarterly result declined in both revenue and profit. The size of the decline reflects allowances -- allowance expenses recorded in the Thai Security business last year. Here is the trend in revenue by product. Both FX and CFD revenues decreased. This was driven by the market factors rather than the company-specific issues, mainly low volatility and reduced trading activity. This chart shows the relationship between FX revenue and FX trading volume. FX performed well through the second quarter, but volatility, especially in the U.S. dollars and Japanese yen, decreased, and trading volume declined. While revenue remains in line with the trading volume, we are being affected by the significant decline in OTC FX trading volume across the market. Meanwhile, the customer base continues to grow steadily. At GMO Financial Holdings, we are currently focusing on the margin deposit balance and the number of active users as key KPIs. As shown in the bar chart on the left, the margin deposit balance reached a record high for the second consecutive quarter. The line graph on the right shows the number of FX traders, active users has risen steadily since our policy shift at the end of 2022, accounting for around 15%. Both indicators shows that the number of customers is increasing, placing us in a strong position to capture revenue once trading activity recovers. Next, the cryptoassets segment. Here are the quarterly results. Revenue and net profit increased year-on-year. Despite market volatility affecting cryptoasset conditions, trading volume and revenue in the exchange business remained at a high level. Within this segment, we are also strengthening recurring revenue products such as staking and in crypto lending. We began offering staking in 2021. Quarterly revenue remained modest at around JPY 100 million, but it has doubled from the same period last year and continues to grow steadily. We aim to continue expanding by increasing customer deposits. Next, I would like to explain GMO Aozora Net Bank, a key initiative in our group growth strategy. GMO Aozora Net Bank is an equity-method affiliate, and 50% of its profit is reflected in our consolidated results. Here are the quarterly performance trends. The bank achieved higher revenue and then return to profitability compared with the previous year. It contributed to improvements in consolidated ordinary income. The primary factors were growth in transaction revenue such as transfer fees, supported by steady increases in the corporate account openings as well as rising deposit balances contributed to revenues steadily. Here are 2 important KPIs: the number of business accounts and then contracts for BaaS by GMO Aozora. According to Tokyo Shoko Research, the bank ranked #1 for main bank growth rate for the second consecutive year, demonstrating strong expansion of its customer base. Since its launch in 2018, the bank has continuously enhanced convenience, expanded functionality, strengthening its competitive fee structure to provide #1 products. In addition to in-house development and operation by engineers, who account for about 40% of the partners, has continued -- contributed significantly to higher customer satisfaction. The number of BaaS by GMO Aozora contracts, another important KPI, is also growing steadily. Through APIs that provide banking functions such as payment and deposit notifications as a cloud services, we offer solution that will allow businesses to integrate banking into their own service experiences without disruption and aspect highly valued by customers. Finally, here's the status of our deposit balances. We have achieved a major milestone of surpassing JPY 1 trillion. 7 years after launch in 2018, together with 200,000 business accounts, we have now reached an important milestone of JPY 1 trillion in deposit. This is a result of our corporate focused strategy and the strong support we have received from SMEs and start-up customers. Going forward, as a next-generation tech bank, we will continue to serve as an important growth engine for the group. Please look forward to it. Finally, shareholder returns. Our basic shareholder returns policy has long been a total shareholder returns ratio of 50%. The dividends accounts for 33% of consolidated net income, while the remaining 70% (sic) [ 67% ] is allocated to shareholder -- share buybacks and cancellations. To return results to shareholders promptly, we have introduced a quarterly dividend system. The dividend per share for this quarter is JPY 9.5. Finally, an update on the progress of our share repurchase program. The planned total of JPY 10 billion has now been fully completed. This concludes today's presentation. Thank you very much for watching. "Internet for Everyone". [Statements in English on this transcript were spoken by an interpreter present on the live call.]