Rakuten Group, Inc. (4755) Earnings Call Transcript & Summary

[Interpreted] Thank you very much for joining us at Rakuten Group's FY 2026 second quarter consolidated financial results. So already the flash report of the summary of the financial report has been disclosed half past 3 this afternoon. Please refer to the content from the Investors information page on the corporate website. [Operator Instructions] So I'd like to invite Mr. Mikitani for the presentation.

[Interpreted] Hello, everyone. So first of all, the effect of the 2026, those families and individuals that has been affected, we would like to offer a heartfelt support. And 2 weeks before the earthquake, in fact, I was in Kumamoto, I visited AEON Mall as well, who had been severely struck by the earthquake. And those people who have difficulties and deceased, at Rakuten Group, we would like to do everything that we can. So we'd like to offer heartfelt support and also [indiscernible] to that. So in terms of the topic today, this will be the summary. So number one, in summary and FinTech business reorganization and segment result. And in finance, CFO, Kaga-san, will be presenting. AI Chief AI Officer, Data Officer, Ting Cai, will be presenting this section. So without further ado, the summary, Rakuten Group this second quarter. In terms of the net income, we were able to achieve positive by amount of JPY 27.3 billion. Mobile business is a big challenge that we have executed, and that is a growth driver for us. In between the meantime, since Q2 of 2020, we have been able to enjoy the positive result. So reflective of that, so in 8 years -- 6 years, it says, but this is not only a one-off, but this needs to be a perpetuating result that we would like to achieve on the coming years. In the consolidated revenue, the record high of JPY 665.5 billion. With the size of our business year-on-year, 11.6% growth. So we have been able to grow our business quite steadily. Each segment, all of them are on a growth trajectory. And also in term of consolidated EBITDA is a record high for second quarter, JPY 115.3 billion. Year-on-year, it's a growth by 11.7% in terms of the growth rate. And non-GAAP operating income is, again, AML service, this is a record high, JPY 42 billion. So again, year-on-year, it's 109.6%, roughly 110% increase over this year. And with that being said, this is regarding the FinTech business. So Rakuten's FinTech business, bank securities and card and although this was not included this time, insurance and Rakuten Point Card or Rakuten Payment, we do have these entities. And respectively, they are top leaders within each industry, we believe. So regarding card, shopping GTV, JPY 27.7 trillion, that's second quarter result, so amazing result. And for digital bank, Rakuten Bank, the number of accounts, 18.46 million accounts. So very soon, we will be achieving 20 million mark. And for Rakuten Securities, general accounts, 14.39 million accounts. We're #1 in the industry. So this has industry-leading growth and overwhelming customer base. So these 3 companies basically will be under the umbrella of Rakuten Bank. So for the details, we would like to talk about this later, but we do believe there are 2 major synergies, straightforward financial synergies. That's one. And from a marketing perspective, maximizing individual customer base. So cross use of customers or acquire new customers. So we do believe that there will be significant synergies that could be generated. So the total impact 2029 -- 2028. So actually, in October, we will integrate, which means that full year will be fiscal year ending March '28. So that's JPY 25 billion approximately in financial impact and JPY 8 billion in terms of the marketing impact. And furthermore, with this growth for March 2030, JPY 85 billion of synergy effect presumably can be gained. So going forward, Rakuten Bank, the synergy with Rakuten Securities, we will be able to leverage their capabilities. And like I said, the number of accounts, Rakuten Bank, 18.46 million. And for Rakuten Card, overwhelmingly, the number of cards is extremely high. So we will be able to refer customers and Rakuten Card and Rakuten Securities with NISA, it is leading the young customer base. So there, once again, will be synergy. So what kind of synergies, Rakuten Card, non-transfer of bank and those people with bank transfer at Rakuten Bank, the direct debit, the deposit amount is 4.3x. And with and without Money Bridge, that's 4.4x difference. So as we move into the world with interest rate, how can we go about opening more accounts and have our customers deposit their balance in those accounts. So these will challenge us. So we believe that there will be a lot of benefits that we can gain from consolidating integration. So card bank securities will be integrated. We want to increase the deposit and also diversify the portfolio. And not just these 3 entities, but synergy with Rakuten Group can be generated. So through Rakuten Payment, this fintech ecosystem and Rakuten Group e-commerce. So we will be connecting the two ecosystems. And moving on to by segment results. So the Internet Service segment, in terms of the business results for the second quarter, revenue is JPY 338.1 billion and year-on-year is plus by 4.2%. And with AI utilization and other levers, non-GAAP operating income year-on-year is 68.6% increase, so JPY 23.1 billion. So looking into the breakdown in content, the domestic EC GMS, it's year-on-year, it 5.3% increase there by JPY 1.5 trillion. Rakuten Travel, GTV is 17.2% increase. The investment, again, plus by 17.6% for realizing IRR. And International is also a very robust business growth. Especially, it could be highlighted to the sense that advertising revenue year-on-year is JPY 65.6 billion. So data and AI, Rakuten Mobile, DPI Data inclusive, we are able to enjoy a great amount of momentum in growth. And if I may reiterate, GMS is, as you can see, is increasing. And at the same time, the revenue is plus by 5.3%. So non-GAAP operating profit is 30.8% positive. So the AI, how this could be well leveraged and utilized. Without AI, we will not be able to grow our business. So with that being said, AI, we are putting a lot of emphasis on AI. But one of the examples I'd like to share with you is that we are promoting and developing AI shop manager, allow me to introduce the shop manager. So with Rakuten and Amazon, the biggest difference is that Rakuten is based on brick-and-mortar stores and the store is the basis. So in other words, the human touch shopping experience that we'll be able to offer. At the same time, in terms of hospitality, we like to offer the sense of Omotenashi and hospitality from Japan. The true real store managers, 24/7 or serving a few tens of thousands of customers at the same time is not feasible. So the shop manager, the personality or the store characteristics or the product characteristics, having deep understanding of that, AI shop manager will be able to provide service 24/7. So I think you're running a video of this AI shop manager. [Presentation]

[Interpreted] So within this year, we're going to launch the service, and we're now extending our effort for the further development. Next, I would like to highlight about the Rakuten Travel business. So again, it's a robust growth that we are enjoying. In terms of year-on-year, it's 17.2% in terms of GTV. So the domestic is 10% growth year-on-year. So again, a very robust growth. And on top of that, global related, we have 78.5% year-on-year. Especially in terms of Rakuten Travel Exchange, we have been holding the wholesaler distribution in terms of the room accommodation inventory, the various countries. The effective, of course, travel services, we're going to connect them all. So we have 1,295 companies, the service companies, connected to Rakuten Travel Exchange. And the sales of that is increasing and the transaction value is increasing. So that is the reason for the growth of the gross transaction value. And outside of that, the investments that are being made, we are working hard in order to improve the profitability of the business. Last year, the second quarter compared to that is a growth by JPY 3.3 billion, the improvement of the losses. And the international department, well, Rakuten France marketplace, they have worked hard, but they have not been able to achieve the ambitious goal. So we are unfortunately closing down this operation, and that is something that we decided. So the growth is the 3.9% growth, non-GAAP operating increase, a slight decline, but it's showing a very robust foundation of growth. Viber, Viki, Rakuten Kobo and also U.S. Rakuten [indiscernible]. These are increasing their profitability steadily. And already mentioned earlier, the ad business, this is in fact, very -- showing a very healthy strong growth. And this quarter, [indiscernible] is 15.6% positive year-on-year. So JPY 65.6 billion basis, we will now be able to seek JPY 300 billion, excuse me. And AI utilization, for instance, in terms of content creative, the creation of that. So in terms of banner static image and video ad, we are going to offer that. At the same time, massive amount of, of course, transactions and inspection, performance and bidding, everything is going to be leveraging AI capability. At the same time, based on Rakuten's customer database, we are going to effectively use the targeting ad. Moving on to the FinTech segment. Revenue and income, revenue, JPY 295.4 billion. So very robust, year-on-year 25% increase. Non-GAAP operating income, JPY 69.2 billion, year-on-year, 60.1% increase. So Rakuten Card GTV, plus 9.4%, so that's JPY 7.1 trillion. Rakuten Bank account, 18.46 million and bank deposits, JPY 13.3 trillion. So deposit, of course, it's very competitive to gain deposits, but it grew by 13.9% year-on-year and securities general account, 14.39 million, 14.5% growth. So especially young people are opening accounts, NISA accounts. In July, we surpassed 8 million, growing by more than 20% year-on-year and assets under custody, a plus 48.3% year-on-year basis, so a total of JPY 58.7 trillion. So for Rakuten Card, the number of cards are growing nicely. So shopping GTV and financial expense is going up. But with a reorganization of our financial businesses, we will be able to minimize the downside expense. And operating income since we're controlling. So non-GAAP operating income is plus 16.2%. So 17.4% was the result for Q2. For Rakuten Bank, we made financial result announcements already. Interest rate is going up. And given this backdrop, we are growing nicely. ordinary revenue, JPY 78.4 billion; ordinary profit, JPY 30.2 billion, 26.1% year-on-year and capital adequacy ratio, 11.4%; ROE, 22%; accounts, 18.4 million. Main accounts, the ratio. Well, the main accounts increased by 7.7%. It's now JPY 6 million. So main account ratio is improving and deposits grew by 13.9% and expense ratio coming down. So our activities are materializing. And for Rakuten Securities, especially with new NISA, we are gaining new accounts. It is growing, the number of accounts, it is growing and surpassing 15 million. And operating revenue as well as operating income, very robust, especially operating income under Japanese GAAP, it grew by 2.4x or more. And what's more is assets under custody. It has exceeded JPY 60 trillion. A very steady, very stable performance is being achieved. Stock flow revenue, you can see the ratio here. The stock ratio is going up over the past quarters. And now insurance business is not included in this reorg, but very steady. We are honestly saying, revamping this business. So revenue and income, revenue is JPY 20.7 billion and operating income, JPY 1.5 billion. So we are generating profits. And going forward, we believe that we will be able to generate more profit. And for Rakuten Payment, JPY 29.1 billion of revenue, plus 12.2% year-on-year and non-GAAP operating income, JPY 3.2 billion and year-on-year, it is close to 80% plus. So we have been working with different partners. As you know, the other day, we announced with FamilyMart, we've started SPU eligible services. If you spend more than JPY 3,000 or more per month, then you can earn points, plus 0.5% times. And now with mobile segment. In terms of revenue, is JPY 121.4 billion. So year-on-year is positive by 8.3%. Non-GAAP operating income is an improvement by JPY 4.1 billion. But EBITDA, well, year-on-year is minus 28.4%. But in segment, for one thing, is the [indiscernible], the energy crisis, the Rakuten Electricity, the energy price has gone up. That is the main reason for that. And also pre-marketing cash flow. In other words, the new acquisition, what would happen without the new acquisition is a scenario. Already JPY 28 billion profit is being generated. So yes, this is positive by 11.8%. So mobile, of course, accounts, it is going to achieve 10.8 million. And of course, the churn rate is going down. ARPU is also gradually going up steadily. Rakuten Symphony, so the number of customers and the number of partners are also on the growth trajectory. And Mobile, in the business, specifically, if I can allude on that, so 11.9% revenue, non-GAAP operating income is an improvement by JPY 6.7 billion. So it's in [indiscernible] with JPY 32.3 billion. But as I said, the pre-marketing cash flow, it is JPY 27.1 billion. So in terms of the number of outlets is increasing, the marketing is quite active. So with that, including all that, there is a major contribution in terms of the profitability of our business. And also in terms of March and April, the peak competitive season after that, gradually, we are still on a rise and on an increase. So -- and churn rate, again, the hopping, the targeting, the point accumulation, those customers, we have been able to contain that. So therefore, the churn rate compared -- it was 1.38% for the second quarter. So we have seen improvement in this area. So data usage has been growing nicely as well, ARPU as well. So going forward, the options, is an area that we also want to grow. Data usage, like I said, is growing. So 20 gigabyte plus users ratio share expanded plus 3.6 points -- percentage points. So network needs to be put in place. So as we initially planned, we will make investment of JPY 200 billion. And 5G construction has been more or less completed in this area. And also for Tokyo Metro, we only had 5 megahertz, but we'll be growing to 20 megahertz bandwidth expansion. And as you may know, with Ministry of Internal Affairs and Communications, creating Japan Low Earth Orbit Satellite Communication. So as indirect subsidy operator, we have been selected. So our investment is JPY 248 billion. We will be receiving -- we would like to contribute toward resilience that maintains domestic communications infrastructure. Now regarding the e-finance, last week, there was a comment from KDDI. So I would like to comment regarding roaming. First and foremost, Rakuten Mobile business, we have had roaming contract with KDDI. And we started the whole business with that and the main goal was NTT's dominance. We wanted to shift from that situation so that we can democratize telecommunication. And KDDI had supported our goal, and we were very grateful for that. So based on the contract with KDDI, we have come thus far. And first of all, we have the coverage based on the contract, we will continue on from October and onwards. Where Rakuten does not have a coverage, the roaming will be reduced gradually. So that will be the approach we will be taking. I will stop here. Thank you.

[Interpreted] Thank you for your kind participation. So I would like to report on the finance. So first of all, in terms of the summary of the second quarter non-GAAP operating income was JPY 42 billion. IFRS operating income was JPY 20 billion after recording one-off item, including impairment losses on fixed assets in the logistics business. This represents more than double the figure of the same period last year. Since the one-off items are noncash accounting item, we believe the group's underlying capacity to generate cash is steadily increasing. In addition to that, income before tax was positive mentioned by Mr. Mikitani, the fourth consecutive quarter since the third quarter of last year, we have been able to achieve positive. And furthermore, I would like to explain later, but the reversal of tax expenses arose in connection with the sales of shares we held. And as a result, quarterly net income attributable to owners of the parent returned to profit for the first time in 6 years since the second quarter of 2020. Regarding the one-off item I just mentioned, in the second quarter, we recorded JPY 17 billion of impairment losses on fixed assets and related items in the logistics business. The impairment resulted from the decision following discussion with the counterparty of our warehouse leasing service to terminate that service and convert the warehouse to our own use. Together with impairment recorded in fiscal 2025 on warehouse, in the online supermarket logistics business, we have now impaired the entire book value of our own warehouses, which means that from a financial perspective, the associated balance sheet risk has been eliminated going forward. On the other hand, this is an accounting treatment, reflecting the past asset and shift to more efficient management structure. At the same time, we intend to improve supply chain management in order to maximize the potential of our logistics facility, reduce operating costs and create competitive advantage in e-commerce. And in terms of the second quarter, accounting treatment across -- in tax expense in connection with the sales of share we held, especially as a result of the sales of fair value OCI shares held by a group company, the gain on sales was not recognized through P&L, but transferred directly to retained earnings. On the other hand, an unrecognized tax effect recorded on OCI in relation to this transaction were transferred, thereby recorded on the tax benefit. That is a negative tax expense on the P&L. The actual negative tax expense reflecting the fact that substantially no tax payment rises. So that is the cost. And in addition to that, this accounting treatment suggests that as a result of a strategic investment, to date, we have more than JPY 1 trillion of net operating loss. So this would offset a certain portion of a future tax expense. And as earnings improve further, that effect will materialize and contribute to maximizing our cash flow. Next, I'd like to explain once again the significance of the reorganization of our FinTech business scheduled to take effect on October 1, including the financial perspective. The purpose of this reorganization is to operate one financial business in a more integrated manner, thereby accelerating growth and improving operational efficiencies. As Mikitani explained earlier, we expect to generate more than JPY 85 billion in synergies by the fiscal year ending March 2030. So this reorganization is not intended as a means of fundraising for the company. Also May 20, we disclosed that while the transaction does require a certain capital contribution, in order to carry out the reorganization, I would like to reiterate that we currently have no intention of selling shares of the bank. We recognize that the market assessment of our financial position continues to improve. The chart on the left shows the spread calculated from the yields on our corporate bond and the yields on the JGB, government bond of corresponding maturity. The blue line shows the credit spread 1 year ago and the red line shows the most recent level. So across the maturities, spreads are steadily tightening on the trend. On the chart on the right, CDS spread also show a relative improvement compared to the market index. To further enhance the market assessment of the company, we would continue working to strengthen our financial soundness. Lastly, our financial policy remain unchanged, self-funding, meeting the funding needs of the mobile business without relying on external financing. As I mentioned earlier, in the second quarter, we raised approximately JPY 200 billion through the sales of share that we have held. Going forward, we would continue to use such asset finance while securing the funds we need through the cash flow of each business and improvement in the cash conversion cycle. And also, the bond redemptions are also proceeding smoothly in line with our policy. In addition to redeeming our perpetual subordinated bonds in full, the first call date on April and in June, we redeemed JPY 20 billion of senior bond entirely with cash on hand without issuing refinancing bond. And also in terms of the December, we will be able to redeem in full with the cash on hand as well. So in 2027 onward, the bond redemption, we would like to take a proactive approach in this range and the business cash flow maximizing them and the gross debt will be contained, of course, but refinance if it's been required in terms of the closely monitoring the market trends such as foreign exchange and interest rate, we would like to select optimal means for our company. That's all for the finance section. I'd like to invite about initiative of AI. Chief AI and Data Officer, Ting will be taking this part.

Thank you, Hello, everyone. I will share an update on the Rakuten AI vision and our execution momentum in Q2 2026. As we discussed last quarter, the strength of the Rakuten ecosystem lies in the synergy among its services. Now AI presents a unique opportunity to amplify that synergy by attracting new users at lower cost increasing cross-use and bring more value to our users and businesses. We are doing that in 3 ways: engage, expand and differentiate. Engage means making every touch point more relevant and useful; expand means increasing the usage scenario and surface area where we can be helpful to our customers, guiding them from vague idea to concrete actions; and differentiate means guiding a customer all the way to task completion from online discovery to off-line delivery an end-to-end experience that general purpose agent cannot match. Together, these 3 areas add up to a durable competitive advantage built not only just on data, but also accumulate intelligence within the Rakuten ecosystem. And today, we will share examples in each of the 3 areas. First, engage. the application of large language models goes beyond chat and language models can understand the user intent, identify patterns, match and translate better than any previous technology. And this is why we use large language models to enrich our [indiscernible] data, improve our ranking signal and in this case, improve our understanding of user queries. Through ALM, we can better understand whether users have made up their mind or not. Take 2 customers on Ichiba as an example. One customer search for specific model number. And in this case, he knows exactly what he wants, and we only return product that matches that exact model number. With a set of limited choices, we accelerate his decision to check out. Another customer search for gift for summer holidays, and she does not have any specific product in mind. And in this case, we guide users through explorations, present a broader set of suggestions, expanded option and increasing the bucket size. The impact is evident as indicated by our recent A/B experiment. The test shows that attributed orders grew by 0.52% and attributed GMS grew by 0.87%. At Ichiba's scale, this is quite remarkable. On an annualized basis, this is equivalent to JPY 12.8 billion GMS uplift. The second area is expand, how Rakuten AI can expand, where, when and how we serve our customer needs. This includes engage them earlier in the purchase funnel and also recommend relevant products and services across businesses to dramatically increase cross use. Specifically, we are embedding Rakuten AI into almost every business applications, not only increasing their capability, but also connect them with the rest of ecosystem. In addition, we are expanding our touch point through Rakuten AI apps across the vast surface area, whether it's mobile apps on the web or on the desktop. As web traffic shifts from search to agent, we are very well positioned to take advantage of this agentic shift to attract new users and increase usage of existing users. Finally, we are also expanding our distribution by bringing Rakuten AI to our partners. As announced in July, Rakuten AI for desktop is now pre-bundled on Rakuten on our HP PCs, and this will help millions of users easily access the Rakuten ecosystem, leverage the computing power on their AI PC to reduce token cost and also understand the local context to provide more relevant results. As of today, 17 of all of our services are live with an AI agent and 7 more are in the near-term deployment and more than 50 are underway. Each agent strengthened its own business and connect with the Rakuten ecosystem, expanding the potential of cross-use across Rakuten. And lastly, the last area is differentiate. As Rakuten AI deeply embeds into each business applications, it can accomplish what other external agent cannot from first chat to a complete transaction all the way to delivery in the real world, even providing customer service after purchase. For example, on Ichiba, AI can [ now ] help customers to make decisions faster and the time to purchase is reduced by 41% and average order amount up 17%. Customer can understand the decision they have to make faster and buy with greater confidence. Similarly, on Rakuten Travel takes customers from discovery to booking in one flow, and this is growing rapidly. Rakuten AI for Travel launched at the end of April. Now average order is 13% higher for AI-assisted booking versus those are not going through AI. And family and group trip booking are also up 29%. Such family and group tracking is often very complex in nature, and this is exactly where AI can help ease the decision-making. Just last week, we announced Rakuten AI Super Agent at Rakuten AI Optimism Conference. This means 3 things. First, we doubled down on cross-use. Rakuten AI Super Agent is about connecting the customer experience across all of our products and services, so agent in one part of the ecosystem can hand off to another agent and complete another transaction. Second, we are expanding what agent can do, handling complex tasks, achieving goals, guiding users on the full journey from discover to purchase across many services. And third, we are connecting Super Agent to third-party services like maps, calendar, e-mail, messengers, so it's easier for customers to communicate and plan using their favorite tools and improve the product. And lastly, the Super Agent will interact with other external agents on the Internet, which is critical to attract more agent traffic for our merchants, hotel and business partners in the Rakuten ecosystem. And I'd like to show you what the Super Agent can do. Please play the video. [Presentation]

To close -- is that the last slide? Okay. To close, together, a preview of the Super Agent, you can download Rakuten AI today. It is available on the web, iOS, Android and Windows. And very soon, it will come to Mac as well. And I'd like to close by saying this in Japanese, [Foreign Language].

[Interpreted] Let's create new values, expand possibilities with AI and together build a better future. Thank you very much. That concludes the report. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]