LY Corporation (1H8.SI) Q3 FY2026 Earnings Call Transcript & Summary

We'll now begin the LY Corporation Fiscal '25 Third Quarter Financial Results Briefing. Thank you very much for joining us today. In this briefing, we will use the financial results briefing presentation materials available on the LY Corporation website. Today's briefing is attended by the following members of LY Corporation: Representative Director, President and CEO, Takeshi Idezawa; Senior Executive Officer and CFO, Ryosuke Sakaue; Senior Executive Officer, Media and Search Domain, Domain Lead, Hiroshi Kataoka; Senior Executive Officer, Commerce Domain, Domain Lead, Makoto Hide; Senior Executive Officer, Corporate Business Domain, Domain Lead, Yuki Ikehata. First, Sakaue will provide an overview of the fiscal '25 third quarter financial results. After that, we will have a question-and-answer session. The entire briefing is scheduled to last about 1 hour. This briefing is being live streamed. If you experience any audio or video issues during viewing, please use the link displayed at the bottom of the screen and move to another server. Now let us begin.

This is Sakaue from LY Corporation. Thank you very much for taking time to join our fiscal '25 third quarter financial results briefing today. I will give you the overview of our third quarter financial results. So this is the overview. At our subsidiary, there was a system outage due to a ransomware attack. So to show the underlying business performance in an easy-to-understand manner, we will present figures, excluding ASKUL for both the previous and current fiscal years. First, excluding ASKUL, third quarter performance showed steady business growth. And as you can see, we had double-digit year-on-year increases in both revenue and profit. I will present following the agenda. First, the consolidated financial results. So third quarter results. Consolidated revenue declined 0.7% year-on-year. But as I said, excluding ASKUL, it was 15.7% year-on-year increase. Adjusted EBITDA was down 2.3% year-on-year, but excluding ASKUL, it was up 11.2% year-on-year. So this is the third quarter. So for the fiscal '25, we show our outlook, and we show also the outlook for next fiscal year. For fiscal '25, reflecting the impact of ASKUL's system outage, revenue is projected at about JPY 2 trillion. Adjusted EBITDA is expected to be around JPY 500 billion even after factoring the system outage impact. Revenue growth in Strategic segment and company-wide cost reductions are supporting the overall performance. The Media segment has been on an improving trend since bottoming out in the first quarter. Adjusted EPS is also expected to land within the initial guidance range. For fiscal '26, we aim to achieve for adjusted EBITDA, 10% to 15% increase compared with the fiscal '25 outlook of approximately JPY 500 billion, driven by business growth and cost reductions. So on a consolidated LY basis, we're targeting JPY 550 billion to JPY 575 billion. So as I explained, the underlying business has remained solid. Next. So, EBITDA year-on-year analysis in the middle, this shows excluding ASKUL last and this fiscal year. Revenue increased driven by expansion in the Commerce and Strategic businesses. Although SG&A increased due to PayPay consolidated and Commerce, they were absorbed by revenue growth. We had 11.2% increased profit. So this is ad-related revenue. Commerce, advertising grew 20.1%, supported by the expansion of transaction value and company-wide ad revenue grew 3%. Next, about the e-commerce transaction value. Reuse, due to growth of Yahoo! Flea Market and consolidation of BEENOS achieved double-digit growth. For shopping. So in Q2, there was a spike in hometown tax payments. So there was a shift from Q3 to Q2. And last year, there was a high level of tax payment in Q3. So reflecting that, it was a 2% year-on-year growth. Even including ASKUL, consolidated e-commerce transaction value was up 2.5% year-on-year. Next, performance by segment. For Media, revenue achieved a slight positive growth year-on-year. Adjusted EBITDA declined 2.8% year-on-year, but the growth rate bottomed out in the first quarter and has continued to improve. Margins increased due to changes in the revenue mix. Next. So this is the Media revenue and EBITDA year-on-year comparison. Revenue saw search advertising declined 9.5% year-on-year. Account ads rose 13.8% and display ads also posted positive growth. Total advertising revenue grew 0.4%. Adjusted EBITDA was down 2.8% year-on-year as decreases in costs such as outsourcing expenses were offset by increases in sales promotion and Gen AI-related expenses. As we have shared in the previous earnings results, this is a mid- to long-term business development plan leveraging on OA, OA: LINE Official Account. The first point is capitalizing on OA's expanding customer base. And then we will build up services and layer structure from MINI Apps to SaaS to be offered from the first half of FY '26. So from #1 to #3, I will give you the progress to date. So regarding the account advertisement, both Pay-As-You-Go Billing Accounts and Plan Revenue accounts increased. On the back of that, on the right-hand side, you can see that the sales grew by 13.8%. So this is regarding the second point, the MINI Apps. The number of MINI Apps grew by 57.8% year-on-year. And the MAUs, it continue to grow at a high rate of 63.8% Y-o-Y. The promotions, growth in development partners and improved convenience of MINI Apps led to increase in usage. So this is the third point regarding SaaS. For SaaS, we are starting with the SMB sector and the beauty category. For solutions targeting restaurants, we are acquiring Toreta to build a reservation capability, which was a missing piece for us. And this was recently announced. This acquisition, it covers the functionality required for store operations, i.e., the reservation functions. Toreta services, as you can see on the right-hand side, have a proven track record. And it's a reservation log or strong in table management, and it is used mainly by casual restaurants. In the future, together with official accounts and reservations log, they will be linked to provide a one-stop solution from customer attraction to customer management and CRM. Through these efforts, we aim to enhance the ARPU. Next page, please. This is regarding the Commerce business. Consolidated revenue and profits were down. Excluding ASKUL, impact of new consolidation and strong reuse business contributed. And as presented on Slide 4, excluding ASKUL, revenue grew by 31% year-over-year and adjusted EBITDA grew by 15.5%. So this is again the Commerce business. On the left-hand side and the right-hand side, both excludes the numbers from ASKUL. For revenue for LINE Yahoo! Commerce, it increased by 64.4% Y-o-Y due to the consolidation of LINE MAN and BEENOS. A higher promotion expenses for Yahoo! JAPAN Shopping and Yahoo! JAPAN Flea Market was absorbed by revenue growth, as you can see on the left-hand side. So the impact of the consolidation is JPY 1.1 billion as shown on the right-hand side. But excluding that, the EBITDA grew by 11.9% Y-o-Y, and we were able to achieve organic growth. This is a Strategic Business. Revenue rose sharply by 30% year-on-year. We are achieving high growth. Adjusted EBITDA also expanded significantly. Steady growth continues with more margin expansion to 22.2%. Next, this is the year-on-year comparison for the Strategic Business. PayPay consolidated revenue growth by 24%, and it is driving the segment growth. In Other Fintech subsegment, LINE Bank Taiwan, which was consolidated in the current fiscal year contributed. Higher SG&A expenses was offset by revenue growth, and we achieved growth in adjusted EBITDA. This is focusing on the PayPay consolidated business. In addition to continued growth in QR code payments, interest income increased at banks on the back of loan book growth, leading to growth in both Payments and Financial Services. As a result, both consolidated GMV and revenue grew at a high rate of more than 20% year-on-year. Consolidated EBITDA grew 59.1% year-on-year to over JPY 30 billion for the quarter. So, this will be my last slide. And that concludes my presentation on the Q3 earnings results. To wrap up, in Q3, despite the impact on earnings stemming from ASKUL system outage, the fundamentals were solid with double-digit growth in both revenue and profit. Our focus areas such as Official Accounts and MINI Apps are also growing steadily, and we aim to maintain this growth trend and increase profit by 10% to 15% next fiscal year for FY '26. Thank you very much for your attention.

Now we would like to move on to the Q&A session. [Operator Instructions] So now without further ado, we'd like to begin the Q&A session. The first question, please. From Goldman Sachs Securities, Munakata-san.

Munakata from Goldman Sachs Securities. So, I'd like to ask two questions. Should I state the two questions together?

Yes, please.

So, with the Media business, so it seems to be bottoming. But ad demand, how has it trended past 3 months? Was it in line with expectations? In what areas was it not? And also SG&A, what's the ratio of the AI in SG&A? So that's the first question. Second question, maybe getting ahead to ourselves, but next fiscal year -- this fiscal year, ad business was in a tough situation, but you did renewable LINE apps and you introduced AI agents. So I think you are quite aggressive on those fronts. So next fiscal year, 10% to 15% adjusted EBITDA increase is what you're expecting. But -- so things -- measures you've taken this year, how is that going to contribute next year? What is going to drive the growth next fiscal year?

Let me respond to the first question, and Ikehata will follow up. So, for the search ads improved quite a bit compared with Q2. So search ad product has been improved. We have improved it. And so the negative number has shrunk somewhat. Display ads, Q2, there was a special demand from hometown tax. And so it was just the same as Q1, but display ads is strong. It's moving into the higher revenue direction. For account ads, it seems that globally, account ads using points not so active, not so vibrant. So Y-o-Y, a little less than Q1, Q2. But account ads using points, not so profitable, not high margin. So in terms of profit impact to the segment, not so big impact. And for SG&A, AI for Media segment, it's about JPY 1 billion plus alpha. Ikehata, please.

This is Ikehata. So throughout the fiscal year, ad business, so you asked, was it in line with expectations? So let me give you our impressions. So Sakaue has explained, and so I may be repeating some parts, but the three major things about the account business. And well, there's account and display and the search ads. So for account ads was in line with expectations. So for next fiscal year, as was mentioned in the presentation, we are taking various measures for next fiscal year. So we are prepared for expansion, and we're able to maintain growth rate. For display ads, this fiscal year, it was negative, but now it's becoming flat. And then single-digit growth is what we would like to realize. We've been saying that for some time. And looking back in terms of numbers, so from flat to single-digit growth, we are able to show for display ads. And so the ad platform construction that we've been working on and data sharing to increase ad performance, we are starting to see results. And so, we've finally been able to come flat and entering the single-digit growth. So it's based on our plan, it's going. So next fiscal year, is it going to dramatically increase the growth rate? Maybe not. So let's be conservative. We will aim for flat or higher. That's what we will aim for. And one thing that may be out of line with expectations and something that we have to take measures is search ads. So in terms of numbers, you can see and Sakaue also mentioned -- commented about this as well. So for next fiscal year, certainly, the existing search ads and the new shopping search ads and AI initiatives, those new challenges going to be pursued to improve the search ad business itself. That's how we look at this. So that's my supplemental explanation.

So for the next question about our image for next fiscal year, for Media, so I think we have become leaner, and we are improving productivity and raising margin. And so next fiscal year, we would like to solidly make profit increases. That's one thing. For Commerce, so this fiscal year, we have taken various measures for Flea Market and Others. So reuse part, I showed you the number, including BEENOS. And the reuse part is getting on a growth trajectory. So next fiscal year in terms of profit, we are expecting it to boom. So Media Commerce, JPY 10 billion each profit increases is what we'd like to achieve. For ASKUL, some uncertainties. So, we would like to get plus alpha with a rebound. And for Strategic segment, it's still growing around PayPay. So about JPY 20 billion increase in profit we'd like to achieve, mainly around PayPay. And Others, well, JPY 15 billion reduction in fixed cost is what we explained last time. And so that's outside of the three segments and JPY 15 billion reduction in fixed costs. So if you add that, that would be JPY 50 billion plus. And then ASKUL, we're going to provide strong support if sales recovers. Well, if it can contribute more to profit, I think we can create strong numbers.

For the first one about the Media business, if I may follow up a bit, SG&A increased, so the ratio of AI, not so big was the impression I got. But the AI search usage rate, any changes in such numbers in the third quarter?

Comparing Q2 and Q3 in search, the ratio of AI ads hasn't changed so much, 10-plus -- a little less than 20%, 10-plus percentage, we're controlling at that level.

Next question is from Maeda-san from SMBC Nikko.

I have two questions. The first question is regarding the AI search that you just explained. So you said that you're managing that in 10-plus percent range. But going forward, by using the AI search, would you try to improve the impact of the ad, so that it can eventually lead to revenue per ad. Google has been quite successful in that space. So to grow your search ad business, would AI be a driver for that growth? And do you have any good feeling for that right now? So are you managing that at 10%? Or do you just manage to have it used at 10% or so? So if you could just give us some nuance to that. And also for next fiscal year on Page 13, you talked about the rollout of OA and MINI Apps. So, you talked about the market outlook. But for your revenue and profit, what are going to be the impact on your numbers? And also the timeline and addressable market and the scale, can you elaborate on those points as well for those strategies?

Yes. So I will respond to both of the questions. So Kataoka-san and Ikehata-san will follow up. For AI search, as a major direction, the AI search proportion will be increasing in the search result. So we are now doing some tests and trying to incorporate the ad for the AI results as well. So, on top of the genuine search advertisement, we will have the AI portion, which will be an uplift on the revenue. And Kataoka-san, please?

Yes, I will follow up. So, first on the search ad, we have the existing search ad, shopping search ad. And what we're testing right now is the AI ad. So, we have the mix of the three, so that we can improve the decline we're seeing with the search ad business. So right now, AI results account for roughly 10-plus percent, and we are now planning to add new initiatives. So within the ad search, the AI results -- AI usage will be increasing. And we are now testing the AI ads so that we can monetize on that opportunity. So we will be growing the AI ads. And on top of that, with the existing search ad business, the shopping ad business, we are now rolling out measures to improve. So all-in-all, we aim for growth. So we are intentionally managing that to just 10%, I mean the AI ad. And this is because we're still pushing up the functions for AI ads to be as competitive as the other ads. So as we push up the functionalities, we will be able to raise the proportion from 10-plus percent. And on your second question, as we have shared in the previous earnings results for FY '28, we are now trying to double the revenue from the current JPY 140 billion to JPY 280 billion. And in terms of the mix, in the first layer, which is the official account, we are expecting 10% to 15% stable growth. And then what's short to the doubling of the revenue, maybe JPY 100 billion, that would be covered by the second layer, the MINI App and also the third layer SaaS business. And in terms of the margin, for the first layer for the official account, the margin will be the highest. And then SaaS and for the MINI App, we have to think about the mix between the ad and the payment. But if the payment is larger, then the margin may not be that high. So, Ikehata-san, do you have any follow-up?

Yes, this is Ikehata. Thank you for the question. So maybe let me put this into the context of the timeline. For FY '28 that target remains unchanged. And for next fiscal year, for FY '26 and also beyond '27, '28, first, looking at FY '26. For the existing official account, the first layer on this diagram, we aim to achieve further growth. And that is going to drive the revenue growth. And on top of that, simultaneously from this fiscal year to next fiscal year, we are going to be working on the monetization of the second layer MINI App and also doing the marketing for SaaS. So for monetizing FY '27, FY '28 will be the timing for incremental revenue for the MINI App and the SaaS business. At the same time, for Toreta coordination is something that we have in the plan. So then the SaaS product launch may be happening earlier than expected. So for the FY '27, '28 timeline and the impact on profit, as we get more clarity, we will be sharing our outlook. But at this point, this is the timeline that we are expecting for the monetization opportunities.

Next, from Okasan Securities, Okumura-san.

This is Okumura from Okasan. Two questions. First, clarification of the previous question. Next fiscal year, JPY 10 billion profit growth for Media is what you're aiming for. And MINI Apps and SaaS as of Q3, you don't have revenue yet. So in increasing JPY 10 billion profit, MINI Apps and SaaS, what's the contribution expectation for next fiscal year? Should we not expect much in the next fiscal year? Second question, several years ago, there was a security incident and talking about the response to that. So end of next month, those measures are to be completed. Is that the understanding correct? And from April onwards, any restrictions to be removed? So PayPay implemented in LINE app or the kind of more collaboration within the group, is that going to be strengthened? Are you going to enter that phase? So what are the measures you have in mind with the ending of the measures against the incident?

So I'd like to respond to both questions. So Media numbers for next fiscal year. So as Ikehata mentioned, in Q3, we had no revenue. And for next fiscal year, MINI Apps and SaaS, so will be single-digit billion. So JPY 1 billion to JPY 1.5 billion. It's very small, and it should be tens of billions in '27, '28. So we're preparing to achieve those numbers in terms of sales for '27, '28. So it will be mainly around official account and we're going to increase margin to achieve profit growth. As for the security incident, so end of March, we are planning to end the measures. So going forward after that, PayPay and LINE, Yahoo!, ID Link, some parts that have not been completed, those areas we would like to work on and prepare for those measures. That's all.

Nagao-san from BofA Securities.

This is Nagao from BofA. I have one question. At the outset, you talked about the next year's outlook and aiming for 10% to 15% growth. So thank you for sharing that. So that would mean the profit growth will be JPY 50 billion to JPY 75 billion profit growth. And I would like to confirm, as for Media plus JPY 10 billion, Commerce with the existing business, plus JPY 10 billion. And for the remaining, how do you aim to grow by 10% to 15%? You have the cost reduction and also recovery of ASKUL. Did you say that together will be JPY 30 billion? Can you clarify those numbers once again, please?

Yes. As I'll be repeating my answer. So Media, Commerce were JPY 10 billion plus each. Commerce does not include ASKUL. Strategic businesses, plus JPY 20 billion is my image. And Media, Commerce and Strategic segment, outside of that cost reduction, it will be roughly JPY 15 billion cost savings across the organization.

So, sorry for repeating my question. But -- and these numbers does not incorporate ASKUL's performance recovery?

That is correct.

I see. That's clear.

From Nomura Securities, Harahata-san.

Harahata from Nomura. Two questions. So Media business, the business environment change next fiscal year on ChatGPT. That's going to be a trial and Gemini also. So that may expand to Japan. So how do you see the change in the competitive environment? And second, there was a reporting in Nikkei in January. So the system foundation integration between Yahoo! and LINE. So Nikkei said several tens of billions yens of savings with the integration. So when are you going to see the impact of the cost reductions based on that? Thank you.

To answer your first question, the Media competitive environment change may be including ads, so Kataoka will answer that one.

This is Kataoka. Let me respond. So GPT and Gemini, number of users are increasing in the market. So there is the user need. And so there's going to be further usage. In addition to that, we are also doing testing. So with the increased number of users, there will be ad space and the testing has started to add ads to those spaces. So ad market, we think will grow gradually. That's our expectation. So there will be more users and ads will grow for them. But from existing search ads, is it going to simply switch from there to that? Well, the market itself is growing now. So the overall pie is growing. And so in terms of the weight, there's going to be this search ad. So in terms of how we understand the market, Well, there's going to be various solutions. So we consider that a positive thing. That's all.

The second question. Next fiscal year, I talked about the three segments. And outside of that, there will be JPY 15 billion cost reduction. And one part of that is the LINE and Yahoo! technology foundation integration, lowering the infrastructure cost. So that is included in that JPY 15 billion. So that's going to bring about the impact over several years. So next fiscal year, yes, we would like to achieve impact so that there will be several tens of billion as of yen total. So I don't have the numbers at hand about what's the specific number for next fiscal year, but that's my response.

[Operator Instructions] Next from Jefferies Securities, Sato-san, please.

This is Sato from Jefferies. Can you hear me?

Yes, we can.

I have one question. In Q3, vis-a-vis the internal plan, how did you do? For Media for the internal target, was your result in line with the internal target? How about e-commerce, excluding ASKUL? And also for Strategic businesses, I think you outperformed the original plan or maybe in line with your internal projections. Also briefly, compared to the internal target, how did you do with the Q3 results?

Yes. For Commerce, it was pretty much on par with the plan. For Media, it's difficult to say which point. But about a year ago, from that base point, compared to the internal original target, we were slightly short, but that was offset by strategic segment and others.

So if that's the case for Q3, compared to the internal target, Media was slightly weaker than your projection. Is that correct?

Yes, just very slightly.

From Daiwa Securities, Kumazawa-san, please.

For the EC service, so foreigners, maybe Chinese people may not be able to come to Japan. And EQ and hotel reservation, what's the expectation for January, March quarter and onwards? What's your current outlook?

Hide will respond.

This is Hide. EQ and Yahoo! Travel, so the current users are mostly domestic users. So Chinese people not come to Japan, leading to lower reservation, that's not going to happen because it's our main user base is Japanese users. Where there will be impact is inventory of hotels. So until recently, there were many inbound customers and so there was competition, strong demand. And so unit price have gone up. But in some areas, the unit price is coming down. So there is some impact there. Overall, not such a big impact. But in some areas like Toreta in Okinawa, we see a slight decline in unit price of hotels.

[Operator Instructions] It seems that there are no further questions. So we will complete the Q&A session. So lastly, we would like to have Mr. Sakaue give a closing remark.

Yes. So I have explained the presentation. So I will hand over to Idezawa-san for the closing remarks.

Yes, this is Idezawa, and thank you very much for your time today. As we reported, we had the ASKUL impact. But setting that aside, the businesses fundamentally have been making steady progress. For next fiscal year, we are aiming for 10% to 15% growth, and we are now putting together the plan for next fiscal year. And important thing is going to grow with the product. So we are now working on AI agent and also working on all the other services. So focusing on that and also with the ad business we will try to revive that for -- to achieve growth. So we would like to achieve multifaceted growth, and we hope to continue to enjoy your general support. Thank you very much for participating today.

So with that, we would like to complete LY Corporation's Q3 earnings results for FY '25. Thank you very much for joining us today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]