PayPay Corporation (PAYP) Earnings Call Transcript & Summary

Good morning, and good evening, everyone, and welcome to PayPay's earnings call for the first quarter of fiscal 2026. I'm Kotaro Emae, Head of Investor Relations. Joining me on today's call are Nakayama-san, our President and CEO; Kagechika-san, our CFO; and Motoda-san, Head of Finance and Corporate Strategy. As a reminder, today's call is being broadcast live, and a replay will be available on our website at a later date. Before we begin, please note that today's discussion includes forward-looking statements, non-IFRS financial measures and unaudited financial data. Actual results may differ materially from our expectations. For more details, including risk factors and non-IFRS reconciliations of non-IFRS measures to the most directly comparable IFRS measures, please carefully review the disclaimer on Page 2 of our presentation. We ask for your understanding of these terms as we proceed. With that, I will now turn the call over to Nakayama-san.

Hello, everyone. This is Nakayama speaking. So before we begin the presentation, I would like to say a few words in Japanese. [Foreign Language] Before we begin today's presentation, I'd like to express my deepest sympathies to everyone affected by the recent earthquake in Kumamoto. We sincerely pray for your safety and a swift recovery and reconstruction of the affected areas. So let's start. Now let me turn to our financial results. Following a strong finish in Q4, we delivered another strong quarter in Q1. Total revenue increased 27% Y-o-Y, driven by continued growth in the Payment segment and even faster growth in the Financial Service segment. RLTC increased 26% Y-o-Y. The margin declined by 1% to 77%, mainly due to higher funding costs for bank deposits after policy rate increase. Adjusted EBITDA increased 59% Y-o-Y, and the margin expanded to 34% as both segments delivered operating leverage. Our Rule of X reached 61%, showing solid growth in both revenue and profitability. Today, we announced our capital and business alliance with Seven & i Holdings. I would now like to explain how these partnerships support our growth strategy. First of all, our vision remains clear. To build one of the largest digital financial platform in Japan. We focus on 2 areas. The first is products and customer touch points. We started with payments and expanded into credit cards, banking and securities. In June, we announced the planned acquisition of shares in T&D Financial Life Insurance. This will add life insurance to our platform and help us meet needs such as protection, wealth buildings and asset succession. Our partnership with Seven & i will expand our reach further by connecting with users in their daily shopping. The second area is data. The more data we gather, the better we understand our users. The blue circles show static data such as user profiles and financial assets. The left circle show real-time data, such as payments and shopping activity. By combining them, we can better understand who our users are and what they need at the moment. This allows us to offer the right financial service to the right users at the right time. This personalized approach is very different from the mass marketing often used by traditional financial institutions, institutions. We have consistently invested in products, customer touch points and data capabilities. Our direction has not changed and our execution remains strong. Let me now explain the T&D Financial Life Insurance acquisition in more detail. Life insurance sits between bank deposits and securities and will expand our financial services lineup. By combining it with PayPay's daily payment touch points, we plan to offer new digital life insurance products to our user base. We also aim to strengthen asset management, expand revenue opportunities and improve profit margins. By bringing the life insurance balance sheet into our group, we will build a stronger hybrid model that combines flow-based revenue from payments with stock-based revenue from financial services. This will help us benefit from rising interest rates and build a stronger foundation for sustainable growth even as the external environment changes. We will continue to prepare for the completion of the acquisition. Next, I would like to highlight our capital and business alliance with Seven & i Holdings we announced today. First, let me explain the strategic purpose of the partnership. Our goal is more than a payment link. We want to connect in-store and digital customer touch points and improve the everyday shopping experience. Seven-Eleven Japan has about 22,000 stores and around 20 million customers visit each day. PayPay has about 75 million users and handles around 30 million payments each day. By bringing together 2 industry leaders, we can make better use of the large amount of data generated every day. This is the core value of the partnership. Seven-Eleven Japan has a strong capability in product development, logistics, store operations, membership programs, promotions and apps. As Seven-Eleven transforms its business model, PayPay will lead the renewal of its digital customer touch points. We will connect memberships, IDs, data, point apps and promotion on the PayPay platform and add digital capabilities to its stores. This clear vision of roles will help us build stronger and broader customer connections. In the mid- to long term, we place the greatest value on our continuous real-time data. Everyday payments generate fresh data without asking users to enter extra information as the data grows. AI can keep learning and offer more personalized suggestions to each users. This is a key long-term strategy to increase lifetime value in the age of AI. Looking ahead, PayPay will explore opportunities to expand its payment service outside Japan, including in the United States. We have no specific plans at this stage. However, we believe that the success we achieve with this partnership in Japan would support PayPay's further global growth. At the same time, we will create near-term growth from the partnership. By combining services such as 7NOW and mobile ordering with PayPay's customer base and data, we can reach potential customers more effectively by improving customer experience, we will drive near-term growth and put this model into practice. These initiatives will help us build a one-stop digital financial platform that supports users at every stage of life. Financial needs change at each stage of life. Younger users mainly need payments and credit cards. As they get older, their needs become broader and more diversified. By combining payments, shopping and behavioral data, we can better understand these changes and offer services that fit each user's needs. This help us increase lifetime value while keeping customer acquisition costs low. We hope our investors will share our vision and excitement as we increase the cross-use of our services and grow revenue per user. One key measure of this progress in ARPU. Cross-use between payments and finance creates growth on both sides. It increases revenue in the Financial Service segment, while greater use of financial services also increased payment engagement, GMV and ARPU in the Payment segment. Our growth strategy has not changed. We expand customer touch points, gather more data and use that data to order the right financial service to each user. We will continue to invest for growth, increase cross-use and build greater corporate value over the medium to long term. This concludes my presentation. I will now hand over to our CFO, Kagechika-san. Thank you.

Thank you, Nakayama-san. I will now walk you through our earnings highlights. Let me first highlight our operational and financial performance for the first quarter. Fiscal 2026 is off to an excellent start. Building on this strong momentum, we are raising our full year financial guidance for fiscal 2026, which I will touch upon later. While the top line growth is quite healthy, I want to specifically highlight the quality of growth we are seeing across both our Payments and Financial Service segments. Looking at the Payment segment, the usage of PayPay Card is further accelerating and continue to be a key growth driver. Through the expanded use of PayPay Card, we will increase the monthly GMV per MTU and strengthen PayPay's position as our users' main wallet. Further, our unit economics consistently improved, supported by GMV growth of our higher-margin online GMV. In the Financial Service segment, we are working on establishing a foundation for future growth alongside the steady expansion of our user base. In the first quarter, Tanida-san, the former President of PayPay Card until last fiscal year, assumed the role of new President at PayPay Bank. Under his leadership, we are refining our growth strategy and accelerating its execution. At the same time, we are redesigning our technology architecture to fully leverage the opportunities created by AI. The number of PayPay Bank accounts has now exceeded 10 million, demonstrating steady growth in our customer base. Next page, please. This slide shows our consolidated total revenue. Sorry. Now I'd like to highlight some of our key business developments for the first quarter and our recent progress. As announced in February, we implemented a comprehensive revision to our rewards program in June. Of the various changes we introduced, the most significant financial impact came from restoring rewards point eligibility only to eKYC-verified users. To build a secure and reliable financial infrastructure, we've been actively promoting eKYC. Through these effort, the number of eKYC-verified users has exceeded 42.5 million. As an added benefit from a financial perspective, the initiative led to JPY 1 billion in cost savings in June alone. Next page, please. This slide shows our consolidated total revenue. Since Nakayama-san already covered this, I will skip the detail. Next slide, please. This shows our adjusted EBITDA. Similarly, I will skip the details here as well. As mentioned earlier, PayPay Credit and PayPay Cards, the primary engines of our GMV growth continue to perform strongly. Furthermore, our take rates continue to expand, primarily driven by favorable shift in our GMV mix. Please turn to the next page. MTUs increased 10% year-on-year to approximately 42 million, driven by the growth in our registered user base and a higher active user rate. GMV per MTU, which represents the monthly spending per active user, continued to increase, primarily driven by an increase in monthly transaction frequency. For PayPay Card, we will -- we continue to see strong new customer acquisition. In addition, new Gold Card acquisitions increased significantly, driven by the launch of new Pay-Toku 2 pricing plan for SoftBank mobile users. Furthermore, revolving and installment loan balances, including the Pay-in Installment Later launched in the second half of the previous fiscal year grew 25% year-on-year. Cash advance usage also continued to expand strongly, increasing 57% year-on-year. Please turn to the next slide. Moving on to the credit metric for PayPay Card. Starting this quarter, we are replacing the net charge-off rate disclosed in previous earnings presentation with a new metric, the delinquency transition rate. This metric measure the annualized ratio of receivables that migrated to Stage 3 during the quarter relative to the opening receivable balance. The annualized rate is calculated based on the cumulative transitions over the most recent 4 quarters. For this quarter, the rate was 2.7%. It has continued to trend downward, indicating that credit quality of our portfolio remains sound. Let me turn to the Financial Service segment. Customer acquisition through the PayPay app continue to be highly effective for both our banking and securities business, supporting double-digit growth in the number of accounts. The number of PayPay Bank accounts has exceeded 10 million. Furthermore, PayPay Securities, leveraging 0 customer acquisition costs achieved a 29% year-on-year growth in accounts, moving its ranking up from sixth to fifth among Japan's online brokerages. Despite intense competition for deposits across the banking sector, our deposit balance grew 17% year-on-year to reach JPY 2.3 trillion. Our loan balance reached JPY 1.3 trillion, up 37% year-on-year, bringing our loan-to-deposit ratio to 57%. The interest rate margin, the spread between the loan yield and the deposit costs narrowed slightly, reflecting an increase in corporate loans driven by the diversification of our borrower base to include large enterprises. This slide shows our balance sheet and the key metrics. Our ROE was 22.5% and continue to improve the number. Lastly, let's turn to our financial guidance. There are 3 main reasons why we confirmed and comfortably beat our Q1 guidance. First, GMV in our payment business performed better than expected. Second, our merchant business saw strong performance. And last, we benefited from favorable external environment, including a strong equity market. Regarding our full year guidance, reflecting the strong business momentum confirmed in Q1, we are raising our forecast. We expect total revenue to be between JPY 467 billion (sic) [ JPY 465 billion ] and JPY 473 billion, representing a 22% to 24% year-on-year growth and adjusted EBITDA to be between JPY 149 billion and JPY 155 billion. The adjusted EBITDA margin is expected to be around 32% at the midpoint. For our Q2 guidance, we project total revenue to be between JPY 114 billion and JPY 116 billion, up approximately 24% year-on-year growth. We forecast adjusted EBITDA to be between JPY 37.5 billion and JPY 39.5 billion with adjusted EBITDA margin of around 34%. You may notice a modest year-on-year growth in the total revenue compared to Q1. We consider this to be driven primarily by 2 factors: the absence of the onetime benefit related to favorable external environment in Q1; and the tough comp from the prior year period, which saw a last-minute demand ahead of the rule changes to Home Tax Donation, Japan's municipal donation program. But let me be clear, our underlying business momentum is as strong as ever, and we are fully confident in our ability to continue delivering robust growth. This concludes our presentation. We will now open the line for your questions. Thank you.

We will now move on to the Q&A session. [Operator Instructions] The first question is from Goldman Sachs, Mr.Makoto Kuroda.

This is Kuroda from Goldman Sachs. Congratulations on delivering a beat and raise. I have one question for Nakayama-san. Your strategy vision is very inspiring. And this quarter, we have also had investments in TNB Financial and Seven. My question is, in order to realize your vision of the future, where would you invest capital from here? Are there any missing pieces on your mind now?

This slide that we are sharing on the screen, this is the vision that I have. This is a world view that I would like to realize. Therefore, we will need -- we have various options to grow organically and inorganically to realize our business growth and to grow our profits. There are various plans that we have. But it's not that we will get this type of great opportunity like the one that we have right now all the time. So in accordance, when the opportunity arises based on our investment governance, we'll make appropriate decisions and carry them out.

We'd like to move on to the next question. From Morgan Stanley, we'd like to ask Mia Nagasaka to unmute and ask your question.

This is Nagasaka from Morgan Stanley MUFG. Can you hear me?

Yes.

I have 2 questions, if I may. The first point is regarding entering into the insurance business. So I understand that they will be closed next year. But over the medium term, when will the insurance business start to contribute to your overall profit? And by onboarding the life business, how would your balance sheet and P&L change? The reason why I'm asking this is because there are assets and liabilities that's unique to insurance companies as a structure. So over the medium term, what is your KPI and the target? Which KPIs are you going to prioritize? And you may be adopting a different KPI with the insurance business as part of your group. So please elaborate on that. And my second question is the alliance with Seven & i Holdings. I thought that this was a very good deal. And in promoting for the data utilization, how would you exert governance in managing the data? And also for reinforcing the governance, would that impact the speed of the data usage or the timing of monetizing the opportunities. So to the extent possible, if you could respond to the questions, that will be great.

Yes. First, regarding the insurance business, I will first take that question. The strength of PayPay is that we have the flow business, mainly focusing on the payment service. But recently, we are also entering the stock-based business using our balance sheet with the bank and the security business. Life business, I think, is a typical of the balance sheet-based business. So we want to pursue balance where we are not impacted by just the market. So we want to have both a strong flow-based business and the stock-based business. The data which we build with the flow business can be collected and personalized to lead to the stock business opportunity. So we see great synergies between the 2. And we believe that this is second to none, and this is a very unique business model that we can only deliver. So we would like to pursue a business model where we can accommodate to the changing external environment. And to that extent, when will the life business start to contribute to the earnings? Regarding the Life business, as we have already announced, we will be communicating with FSA to get the approval for the deal, and we will also have to accommodate to IFRS. So we are looking about 1.5 years to close the deal and bring the entity into the group.

So for ARPU, this may not be directly responding to your question, but including the insurance business, the current ARPU is JPY 900, and we would like to double that as our target. So not just with the insurance business, but in the last 8 years or so, we have built up this ARPU growth, and we would like to repeat that with the new opportunities. And for balance sheet and the P&L, we will manage that appropriately. And by including their balance sheet, the balance sheet will get larger, much larger, but we believe that it is manageable for us. Motada-san will make some additional comments.

Yes, Nagasaka-san, thank you for your question. I am Motada from the Finance division. Regarding the T&D Financial Life acquisition, I would like to make one additional comment. Until closing, the closing date is October 1 next year, as Nakayama-san mentioned. So there will be some time. And in order for us to discuss about the strategic initiatives, we are going to set up the integrated committee ourselves, TMB Financial Life and also IM will be joining this committee. So even before the integration, if we see initiatives where it will be beneficial mutually, then we would like to embark on those activities. So the integration impact will be after the closing of the deal. But we are going to make a thorough preparation so that we can start very strongly as we reach October 1 next year.

So that's the response to your insurance business question. And the other question around the data governance Seven & i. So of course, we have to get the concept first from the users in regards to how we can use the data. So we will first get the consent from the users. And under that scope, we will be using the data. So Seven & i has Seven ID and prior to integrating that to PayPay ID, we have always upheld that policy. So that will remain unchanged. So in terms of governance, we will have the appropriate governance to control.

Next question from Mizuho Securities, Dan Dolev.

Can you hear me?

Yes.

Congrats, Kagechika-san, it was an excellent quarter. I have 2 quick questions. On the June -- first one is on the June Point Reward revamp. Very nice to see boosting profitability by JPY 1 billion in the month and the contained impact on retention of GMV. Can you maybe give us some color on how things are trending in July and down the road? And then my second question is on the guidance. Very, very strong beat on EBITDA, but it looks like the second half is still very conservative. Just wanted to get a sense of what is embedded in your guidance in terms of reinvestment seasonality on the EBITDA side given such a strong Q1? Or are you simply being very conservative here, which is our assumption? Congrats again.

Thank you for asking me. Those are 2 questions. The first one regarding the June reward change that we made, reward points revisions. We have been quite cautious in planning this initiative, and we just carried it out as planned in June time. In July, we are seeing a similar trend as we saw in June. But July is a big campaign time for PayPay, the summer big campaign. So this cost side improvement is not the only benefit that we're getting. Actually, with this big campaign, we are going to see an uptick in the revenue in GMV as well. So there will be a nice balance. So it will come down later down the road that we can share with you. So I would like to keep this comment to this level at the moment. And the second point, regarding guidance, EBITDA outlook, we have made a revision to the guidance, and we are making an upward revision this time. And as Dan mentioned, we don't think our guidance is anything conservative. We are making revisions where it's appropriate, where it's needed. So I hope you see our guidance this way as well. And we hope, needless to say that we would like to, of course, continue to achieve the guidance level.

Congratulations again on a great quarter.

We will take the next question from Darling Peller from Wolfe Research.