Rakuten Group Inc

TSE:4755

Earnings Call Transcript 2018-Q4

[Unknown Executive]

[Foreign Language] Good afternoon, ladies and gentlemen. I'd like to begin the report on fourth quarter and full year consolidated financial results.

First, let me introduce who are here on the stage starting from left on the front: Mr. Hiroshi Mikitani, Mr. Masayuki Hosaka, Kenji Hosaka (sic) [ Kenji Hirose ], Yoshihisa Yamada, Tareq Amin. Now in the back, we have with us Kentaro Hyakuno, Yasufumi Hirai, Makoto Arima, Kazunori Takeda, Naho Kono, Takasawa Hiroshi. Now on the third row, Yuzo Hashiya, Noriaki Komori, Koichi Nakamura. We have those 14 members.

I would like to begin our presentation without further ado.

[Hiroshi Mikitani, executive]

Good afternoon. I'd like to be brief in explaining about highlights of 2018, the business results as well as the strategy, including Mobile business. But first, the first message that I'd like to emphasize is that we are still growing. The revenue grew by 16.6% even with the size of business. And operating income are now -- operating income with that. And revenue is JPY 1.1 trillion and operating income is JPY 170.4 billion. Consolidated revenue, the 16.6% growth year-on-year. Global GTV, 18.4% growth with JPY 15.4 trillion; Domestic E-commerce GMS, the -- usually we have about 11%, 12% growth but in Q4, we have achieved JPY 12.9% growth with JPY 3.4 trillion as GMS. Rakuten Card GTV, JPY 7.5 trillion, plus 23% year-on-year.

And as we are now the definite #1. And with SPU -- [ SPE ], therefore, the financial business, we are seeing a remarkable growth in the bank accounts for Rakuten Bank, Rakuten Bank and Securities, both of them, their joined SPUs. And now, Rakuten Bank, every day 4,000 additional accounts are added. Last year, we had new 800,000 accounts or -- and daily about 4,000 accounts. And the -- in the case of Rakuten Securities, they -- with additional 560,000 accounts, we reached 3 million. And in fact, the number of newly acquired accounts is more than twice compared to competitors. Thanks to ecosystem, that is quite effective. And of course, that comes with some costs.

And then, how shall we interpret value in Rakuten? Actually, it is your job to do. But last year, the membership value was JPY 4.1 trillion after 12 months. Now it reached JPY 4.6 trillion; that is 10.5% growth. Thanks to cross-use and -- now those -- the dormant users become active again. And therefore, the membership value has increased.

Now turning to future growth strategy. In principle, wherever you are on the planet -- well, this is a business -- and that is the membership based where the brand dater. Those are 3 main access in offering different kinds of services and benefits to users. That is a basic principle. Recent times, we offer service out of our own resources; sometimes, we work with partners. And partners would offer services. So depending on countries and markets, the different types of offering. But in principle, we operate a business around those 4 access: Commerce, FinTech, Advertisement and Mobile.

I will be brief in discussing Mobile business because this is going to be elaborated later on. This is completely new, disruptive, the different type of the network. We successfully concluded the field test for the virtual network. And I would say that about 90% of problems have been already resolved with that. In addition to that, stability, scalability, low cost, low investment, agility plus 5G ready from day 1. This is going to be explained by Mr. Amit (sic) [ Amin ] later on.

And in principle, this is the model that we embrace. This is -- the cost of acquiring new customer is low with high cross-use and low-cost operation, resulting in higher LTV. That is why our membership value is now reaching nearly JPY 5 trillion. There are businesses that are successful and they feel sluggish while some businesses that would require prior investment. And depending on the competitive landscape, there could be some differences. But in principle, I would say that this model is still effective and valid. And in the case of Rakuten Mobile, the radio station design is quite simplified. I'd like to show you the -- a prototype later on, and the hardware is standardized. In other words, proprietary hardware is not used other than at the radio station.

The open source and the full cloud-based architecture. And here is a movie that shows the -- a basic concept behind mobile business.

[Presentation]

[Tareq Amin, executive]

So let me just take 1 minute to introduce myself. My name is Tareq Amin. I am the CTO for Rakuten New Mobile Network Operation business.

So before coming to Japan, I also had the opportunity to build another large greenfield operator, which is Reliance Jio. But there's something very, very special about what we're doing in Japan. So Jio was about scale. I would argue, not about technology. In Rakuten, our approach in 2018 is to build the world first end-to-end, cloud-native network. This idea was dreamt about for many years, talked about for many years, never been realized. And I always -- and even in my video, what I talk about is what enabled us to achieve this. I believe it is our -- about the DNA of the culture, the leadership, the organization and people. So of course, when we talk about that in 2018, the first thing that people said, "It cannot happen, not possible. Radio access cannot be virtualized." And I will tell you, the smallest OEMs to the largest OEMs has said, "No way this could happen." Well, why not? Today, we host many workloads on Amazon, on Google Cloud and many other players, but nobody argues that cloud computing does actually work. Why it has never happened in telecommunication? I would argue the #1 reason is about organization of people.

So here's what we've done in -- since 2018. So the first approach that we've taken is virtualize this radio access. We're going to show you the -- a model of what we have done. And that's really, to me, how the innovation started. So I want to just walk you through what is different about this idea from what you would see, not just in Japan, by the way, anywhere across the world. So if you go on top of buildings, on top of towers and ask, "How does InnoDs are built and constructed?" So this part is an antenna. There's nothing special about this part. It exists anywhere. So you could see it in Japan as you're driving around. But what you would not see in Japan is this idea that this active component, which is called a remote radio head and antenna, are tightly integrated, meaning there is no jumpers, there is no cables, there is no connectors. It means better RF coverage, up to 30% better coverage out of this antenna. So nobody have thought about the simplicity of this antenna. So what would happen if the InnoD is the site and construction is about just this antenna? There is no equipment. And there's nothing else at the site other than this antenna. And of course, we have batteries for backup. But all the other complexities have been removed.

So when we talk about virtualization, why it's such a big deal? So let's just think about it from this construct. What is the cost -- total cost of ownership, not just OpEx, CapEx? Radio access always contributes about 70% to 80% of CapEx spend inside an operator. What happens if that disappears in a way that is meaningful to the total cost of ownership if fiber is the only thing you need to bring to the site and everything else resides on our edge data center as far as workloads? People said this cannot happen. Guess what? This antenna did not exist in August of last year. We built it with credible partners, delivered it, certified it against Japanese standards. We got TELEC certification, which was actually very interesting. Even our TELEC certification process required us to also educate a lot of people in the government about virtual RAN. And this has become the world first end-to-end virtualized cloud-RAN architecture.

In second phase, we also want to push the envelope. So first phase is about removals of jumpers and connectors. Second phase is even pushing the envelope further. Why it's important? Because we are focused on how do we reduce the costs not just from electronics, but the civil, the construction costs. What happens if this part disappears? And now, the part gets integrated. So there's nothing now you need to do. So the remote radio head, this part, is integrated inside the antenna. That's our phase 2 antenna. This is what we're currently deploying. And that's what we say virtualized.

Now the interesting thing I want to explain to you, this has been the dream of the industry when they talk about open radio access network, open RAN. So many forms got established to be able to push this idea. Open, no vendor lock, completely segregated radio access network. Again, this was always talked about, never been realized. But in fact of the matter, this remote radio head comes from Nokia. But Nokia does not provide new software. Nokia was actually a very good partner. They opened and they said, "Look, we'll open up the interfaces." The software for this comes from a company called Altiostar. So this is something not a proof of concept. This is something in production. So this is extremely, extremely exciting for us.

The second thing that we did is we deployed the world first telecommunication horizontal cloud platform, which is Rakuten cloud platform for telco software stack. And that's a very important point that for many of you, I want to emphasize the difference between our approach and many others. The virtualization journey in a typical operator starts from, I call it, the easy part. Go, look at the core. Maybe I'll virtualize packet core. Maybe I'll start virtualizing IMS core. But they never look at it horizontal, end to end. They look at it as I'll go and start and experimenting a little bit with the core. For us, it was an end to end. And our deployment revolves around 2 large data centers and many, many distributed edge compute centers. Now the edge compute is extremely important. Because even with 5G, if you really don't have mobile edge compute enabled, 5G will never enable the ultra-low latency requirement because the content itself is not hosted closer to the user. No matter how big the pipe is, you've got to get the content closer to the user. And today, to my knowledge, only Rakuten is implementing this in a massive scale in Japan.

So this another big, big advantage for us is our private cloud architecture. The second thing is thinking about 5G. So for those of you of -- if you wonder, what will it take for an existing operator to go from 3G to 4G to 5G? If I take you and walk you around of what happens in the field, first of all, this proprietary hardware, meaning this hardware and this antenna, is locked to a single vendor. They have a baseband that sits in top of their rooftop. They have to add, in some instances, additional hardware. And most of the time, they have to replace completely the site. So what -- I call it as an unnatural upgrade process. It's complex. It's difficult. It's not easy. And it means more equipment in top of the site, more costs. And that's -- when we talk about our costs, nobody believed that we could do it within the cost targets. But that's the advantage of cloud. Really, the advantage of pushing the envelope and say, we will make this happen is enabling us enter to this disruption.

So 5G for us is a -- for the core. We are ready today for 5G core. Why? Because our core is nothing but a virtual machine. To go from 4G to 5G is a simple software upgrade. So the only thing that we have to worry about is what is called new radio. New radio is the new antenna. For -- in Japan, it could be in 28 gigahertz, 3.7 or 4.5. These are the only thing we have to do. We don't have any upgrades that we have to do at the site. So of course, we are ready. My upgrades happen in the edge. And the edge is just nothing but software. So I think that's a huge advantage thinking about 5G. And the one other thing I will really tell you about 5G, we believe we're deploying what we consider true 5G in our core. So in the industry, you will hear something called standalone and non-standalone 5G core architecture. Rakuten Mobile network 5G core architecture will be a standalone architecture from day 1. That's a very, very important thing. That is how you deliver the disruption that 5G has been intended to do.

The other thing that's also important from backhaul point of view, we have a massive backhaul capability, massive. So we don't have constraint around transport, around backhaul. And we've been enabled all of the IPv6. Now the IP language is the language of the internet. To really be able to access billions of devices, what is called the protocol IPv4 has a limited finite addresses. We also ensured that this network, to my knowledge also, in Japan, is the only end-to-end IPv6-capable network in every element.

And then #7 is a very important one. And I'll give you the analogy in my previous job. If you go to my previous job, we had hundreds and hundreds of different hardware types. And when you have hundreds of different variation of hardware types, some proprietary, some not, now I would argue that becomes very complex to manage, very complex to address. There is no elasticity. In Rakuten's world, we have very standard hardware SKU. Actually, I would argue, one day, hopefully, you guys could see, on the 20th of February, we will open our new next-generation software-defined labs.

My first impression when people walk into this lab, I think they're going to say, "Where is your hardware?" I'm going to tell them, "These are servers. And they are IT servers, and they're running their workload in this network. There is nothing special." And in fact, by the way, we build this hardware. This hardware, we did not buy from HP or Dell or anybody. This is hardware that we build with Intel and a few of our partners in Taiwan.

And then, the 2 last one is -- around 8 and 9 is the concept of automation. So we took it culturally to say, everything you do, you must automate. Because we're going to achieve a level of resiliency in this network and level of service automation. Let me talk about resiliency because this is very important. A lot of the outages, by the way, that get experienced in the network, unfortunately, has to do with human beings. Human beings touching networks, human being configuring networks, we want to embed that in business logic into our automation tool. So we believe that our resiliency will be better because of the service automation. And then, also our digital stack that we do in our billing system, that we do on our customer-facing system, I think those are really, really important aspects. So these are to me, if I walk away, I tell you what are the key highlights, all of this happened in 8 months. Just think about it, 8 months. It took us 6.5 years to build Reliance Jio. So in 8 months, we built all of this. Now it has happened largely because this is what happens when you deal with software centricity in network as a primary driver. Our team today understand very, very well when you talk to a network engineer and say you're deploying your software as micro services. They know what micro services mean. They know what containers mean. They know what virtualization mean. These are terminologies that unfortunately many other telecom companies have to educate their engineers about. Things that we don't have to worry about because we have the luxury of being part of a very innovative IT organization that understood this well before we entered telecom.

So I won't speak a lot on this, but just -- if I tell you on one highlight, what is Rakuten Mobile network, number one, it's content rich. Focused on customer -- I mean, actually focused on customer and be -- has to have software centricity in its heart. So we are selling not connectivity, we are selling experiences. And that's the value and the ecosystem that Rakuten will bring when we launch this network.

So just briefly, I've already talked about this but I'll highlight to you quick things. So a customer in mobile -- in Rakuten Mobile is not a handset. A customer in the mobile part is a subscriber, a member that will benefit from the larger ecosystem of our Rakuten. The radio is not dedicated to radio, meaning it's not vendor-locked. Our radio is completely virtualized. No different by the way from 4G to 5G, we will follow the same architecture.

And then on infrastructure. There is nothing legacy about our infrastructure. Our infrastructure is completely virtualized and completely cloud-native architecture distributed across multiple data centers with resiliency built into the software. And then another interesting one. Let me talk about quality. This is a very, very misunderstood aspect about cloud. If you have experienced any services -- I use Netflix a lot. And I'll be honest with you, I have not experienced a single outage in Netflix. Netflix does a thousand software updates during the day. I would challenge you, ask any telecom operator if they ever dare to do this. And I say dare. They will never be able to do it because they are dealing with a legacy software architecture. It will never work. Rakuten software architecture is completely different. It is based on the premises of cloud-native architecture. It's micro services-driven. And any vendor that comes to talk to Rakuten, if they don't talk this language, they will never work with us. So we are -- our aim and approach is about ensuring that the software resiliency is not dependent on hardware. Just to give you an idea, imagine hundreds of servers go off air in our data center. It actually means nothing, because the software is not dependent on a specific piece of hardware. The same software is residing on hundreds of servers. So if one server goes off the air, it does not mean that we have discontinuity of service. And then operations on -- to go from NOC to SOC.

Lastly, I think on February 3, we proved that all of this came together. And that was a very, very big accomplishment for us. So all network elements coming live, not in lab. Actually, around RCH now, we have a very good number of sites transmitting. And the results are just incredible. I mean, we're very, very encouraged with it. We talked about these sites and antennas. This is now actually in top of the cinema site. It's live site. But there is a large number of sites around this area. And also pushing the envelope on the possibility on technology for the radio access.

So the last thing I'll leave you with is, we took also a very strategic view on how to protect this ecosystem. So Rakuten have taken an investment -- a strategic investment position on a U.S.-based company called Altiostar. Altiostar has been building radio access software, not hardware, for about 8 years, since 2011, actually. And we believe based on what we have seen that Altiostar is one of the only companies in terms of software that truly has a commercial-ready end-to-end virtualized radio access network that meets and met our objectives. So it was important for us to recognize that this is very critical for our disruption, very critical for our future. So we wanted to really ensure that we link up with Altiostar on a strategic level to continue to bring the disruption that we need for 4G and 5G. So we have -- taking an investment position into Altiostar. And just last but not least, not a long time to build this network. So hopefully, this would give you glimpses about what we've done, many things to come. But we're really, really excited. And I think Miki talked about it, our focus about the coverage, quality, ensuring that we deliver the speed and reliability that customers expect in Japan. Thank you very much.

[Hiroshi Mikitani, executive]

[Foreign Language] So it's a very innovative service that we are going to be launching. And everyone is asking, "Is this architecture going to really be -- is it going to work?" I know there are a lot of doubts, but it is possible. And there's amazing performance. That's why we asked you to give us some time. And we conducted the field test on February 3, and it was successful.

Now 5G, investment to 5G. The investment is only about 1/5 or 1/6 of other competitors' investment.

Next, I want to move on to the Rakuten Payment. So we established a new company that is called Rakuten Payment, Inc. So we are going to integrate Rakuten Pay, Edy and Point. It's going to be released on March 18. So all payments by Rakuten or Rakuten Point, Rakuten Card, various functions will be linked, and the 2D, 3D, QR, barcode payment -- of course, QR has to be read. And the FeliCa-based Rakuten Edy is going to be possible and Rakuten Point Card barcode are all going to be embedded into one platform -- will be integrated into one platform.

When we began, of course, the individual services, applications will continue to be able to be used. But eventually, they will be completely integrated. And we are thinking of various attempts. This is the Rakuten Smart -- Rakuten Seimei Park Miyagi and the Noevir Stadium Kobe. Both of these stadiums are going to become completely cashless in terms of their payment systems.

Now when you think about this -- well, other competitors are always saying that they can do the settlement elsewhere. But for Rakuten, the number of touch points is approximately 3 million. Of course, if you add credit cards, it's more, the number of touch points. So this is a new type of payment network.

As for logistics. Centered around Rakuten Ichiba, the Domestic E-Commerce GMS is doing very well. And the next stage of growth, such as the supply chain management [Foreign Language] and also including delivery, we are going to expand activities.

And for super logistics, we have -- on large-sized logistic centers. And in addition to that, they -- we have partners with some investment made and equity participation to be Rakuten super logistics centers because that will take a time if we are to build everything by ourselves. And that is why we decided to work with partners. So the very first center would be the one that we are going to work with Kantsu in Kansai, western part of Japan. And there is the -- we're already the unique -- the delivery service already started centering around Amagasaki. And for the -- such -- the coverage by service, it has now expanded from 2% to 19% in terms of population coverage with our delivery service within this year. We want to further improve it to 40% to 50%. We originally stated 70% population coverage, and we want to achieve that as soon as we can. And at present, in our warehouses, those that were sold directly by Rakuten Direct as well as Rakuten super logistics-based merchants' goods. And then in -- and show that from other warehouses, those that are going to be picked up, they started to be already covered.

Therefore, within this year, we want to realize the most important challenge for Rakuten. That is about one tariff on deliveries for all merchants. We have not yet decided or we can't state explicitly as to the -- what would be the minimum level of the purchase. But anyway, the -- with the one tariff and the standardized shipment fee, that's going to be applied. And with that, expect that in terms of GMS, we expect the additional 10% increase.

Thus, I'd like to share with you the One Delivery. That is a concept that has been under development. This is a new video that describes One Delivery. [Presentation]

[Hiroshi Mikitani, executive]

There. We are going to start collecting the parcels -- goods and the products for the first time. That will be the key. [Presentation]

[Hiroshi Mikitani, executive]

[Foreign Language] We introduced Rakuten Mobile and Rakuten Payment and logistics. And those are 3 major challenges that we are working on.

Now I'd like to turn to Mr. Hirose to explain about highlights of the results.

[Kenji Hirose, executive]

Because time is running short, I will be brief. Our consolidated results. JPY 1.1 trillion or more. With JPY 170 billion as operating income, the revenue being JPY 1.1 trillion, the record high. And for Q4, the revenue that is, again, the record high, although there is a decline in operating income. But due to the sales subsidiary, in terms of IFRS-based operating income, that was quite good. And I hope that you would take a look at the chart when you have a time because I wanted to secure time for Q&A. And this is about the operating income department.

[Foreign Language] So you may think that the profits have gone down, but for Domestic E-Commerce, last year, from the JPY 19 billion, we are making profits. Rakuma and other types of investment phase businesses are places where we conduct strategic investments. As for overseas business, the major businesses are showing profitability. However, we are trying to rebuild the business or trying to expand the business where costs are being spent and the brand change from the former Price Minister in France is costing. This is Rakuten France.

Now the investment business is doing very well. And this is the historical performance of the investment business and evaluation gains from investment business and the exit amount. The exit amount, if you look for fiscal year 2018, we were able to monetize JPY 15.5 billion. And the evaluation gains from investment business was also record high.

Now as for the Global GTV, we grew by over 20% year-on-year. And the same with GMS, it was over 13%. Now the structural change for further growth. The payment -- the Rakuten Payment is now a new entity. And we will be integrating the various businesses and then we have the Rakuten Mobile business. So in order to accelerate the speed of the different businesses, we are trying to restructure the company to make use of the synergy.

As for ads. In 2018, it was JPY 96.3 billion ad revenue. And Rakuten Data Marketing, our joint venture with Rakuten, the growth rate of order amount was 37.5% year-on-year. This shows the internal clients, so the Ichiba merchants, which was 13.2% year-on-year. That's the revenue. And then we have the national brands, the external advertisers. That was 16.5% year-on-year. So by year 2021, we are aiming at JPY 200 billion in revenue for the ad business.