Monex Group Inc

TSE:8698

Earnings Call Transcript 2018-Q4

[Operator]

Good day, everyone, and welcome to the Monex Group announcement of financial results for fiscal year ending March 31, 2018 conference call. Just a reminder, today's conference is being recorded. At this time, for opening remarks, I would like to turn the conference over to your moderator for today, Representative Executive Officer, President and CEO, Mr. Oki Matsumoto. Please go ahead, sir.

[Oki Matsumoto, executive]

Okay, thank you. Good day, everybody. This is Oki Matsumoto, CEO of Monex Group. Thank you all for joining the call today. The -- I am with our CFO, Satoshi Hasuo as well as the U.S. Operation President, John Bartleman. And at this time, for the March '18 fiscal year, for the regular businesses, the market environment turned to be better, and also we have done many initiatives, like including -- we have moved -- we moved into the new internally developed system, backbone system in Japan, about a year ago to reduce the fixed cost. And also we did lots of new initiatives, refreshing brand and then changing the fee structure, wherever the many things in the States to enhance the customer base and also the interest rate in the States started going up. All those things together we had a quite good results in the regular businesses both in Japan and the States. The -- especially in the States, we had very remarkable result for this fiscal year, which John is going to talk about a little bit later. So for those regular businesses, we did very good. In addition to that, after the fiscal year-end, it is actually just 10 days ago from today, the -- we acquired Coincheck, the -- our 100% subsidiary, which is the -- one of the largest cryptocurrency exchanges in Japan, which is going to give us a very strong profit pillar to the groups. So the regular businesses we did great, and also we now have a very good prospect going forward. So we feel very excited about. If you go to Page 4, this illustrates the value proposition of Monex Group. We used to have 3 segments, Japan, U.S. and Asia Pacific. Now we have a new pillar, new segment, Crypto-Asset Business. Among those 4 -- and by the way, Crypto-Asset Business, is not inside this fiscal year results. It's going to be in this current running fiscal year. But among those 3 segments, Japan, U.S. and the Asia Pacific, we had very good result in the U.S. segment. The EBITDA for this fiscal year was JPY 2.9 billion, roughly speaking like $27 million. And also if you take the EBITDA for the fourth quarter, fourth Japanese quarter for the U.S. segment, and multiply by 4, you have EBITDA of the JPY 4.8 billion or like $45 million. So it used to be when you think about -- when people talk about the valuation for the Monex Group, someone tried to evaluate taking the value for the Monex Securities in Japan and then just did plus and minus something. But now we do have a very strong meaningful business in the States with EBITDA of the current run rate of JPY 4.8 billion, so that we believe that we can change the market perception to evaluate the Monex Group value by using the -- some of the past approach to unlock the added value for the group. Now before I talk about other segment, let me turn to John Bartleman to talk about how -- what we did and how we did in the U.S. segment for this year. John?

[John Bartleman, executive]

All right, thank you. Good morning, everyone. So yes, as Oki said, the macro environment here in the U.S. has really shifted in our favor finally. After the year of record low volatility, we now see volatility returning into this fourth quarter along with the rising interest rates, so that should really help our bottom line coming into this year. We continue to see momentum in our account growth from our rebranding in new pricing and marketing initiatives that we've rolled out over the last 12 months. So we continue to see and build on that momentum. And it's resulted now in top line revenue of $7 million quarter-over-quarter, the 20% year-over-year growth, which is pretty healthy. This is helped primarily by an increase in brokerage commissions driven by account growth and the higher volatility as well as the interest income driven by the higher interest rates. And on the spending side, in the core business, we were able to keep this pretty minimal increases. We did have a $6.6 million quarter-over-quarter increase but this was driven primarily from the onetime $5.8 million charge for the doubtful receivables from customer losses during the high volatility events earlier in the quarter, but the core spending side really stayed pretty flat. So we ended the quarter with a pretax profit of $700,000, $2.5 million for the year. So this is now our sixth consecutive profitable quarter, and it's the first profitable year for us since 2010. So this has really turned the business around, and we're now starting to really see the difference in what we've been putting in place here on the U.S. side. We start increasing $34,000, that's 33% quarter-over-quarter. It's driven primarily by the 7.2% increase in VIX this quarter. We have client assets continue to grow. We crossed the $5.2 billion mark this quarter. That's almost a 20% increase year-over-year. And on the account side, we were really focused, we had a record account growth this quarter of 7,720 growth accounts, that's a 27% increase quarter-over-quarter. And 25,000 accounts for the year, that's a 60% growth year-over-year. And our average accounts grew to 72,400, that was a 16% improvement year-over-year. So this is really highlights of the success of our branding, the marketing and the pricing initiatives that we launched over the past year. Now we expect to see the continued benefits of these changes going into now a full fiscal year. And on the attrition side, this has been another focus of ours is really trying to drop our attrition rate. We were able to hit an all-time low of 17.3% this quarter. So this is down 1.3 points quarter-over-quarter, and we continue -- we'd expect this to continue to drop slightly going into this next year. And this is driven primarily by the new pricing plans that we launched as we no longer charge our customers, some of these more nagging market data fees and software fees and inactivity fees that were, sort of, pushing them out the doors so we're starting to realize the benefits of that -- those changes as well. Over the past quarter, we launched several major initiatives that are helping with our strategy to drive account growth. First, we launched our new account opening profits here in the U.S. and our new funding -- automated funding process. So this now takes our -- what was a very manual and painful process for customers to onboard into a streamlined and fully automated process. So we're starting to see significant increases in throughput for customers that are coming through our online process. We continue to push more into our -- marketing of our new brands. We had a very successful experiential marketing event in the Oculus PATH station in New York in the month of March. It was a week-long exercise particularly highlighting our new brand and our new look. There was a lot of new people to see this new brand and really created some great PR for us. On a global side, we launched the TradeStation global initiative. This is a partnership with interactive brokers. This was initially launched in December, but our marketing really started this quarter, and we're starting to see the account lift in that side as we continue to push this for trying to land international clients that are trading multiple assets, FX, CFDs, U.S. markets as well as the local markets. And we'll continue to see that growth as we get into this year. We also launched a new offering with a company called ClickIPO. ClickIPO is a mobile-based app that provides retail investors with access to the IPO markets here in the U.S. So that was launched this quarter, and we expect that to provide some interest in driving account growth on our side. And finally, as we continue to get more involved in the cryptocurrency space, in addition to supporting the bitcoin features on CME and CBOE, this quarter we launched connectivity with the coin-based GDAX crypto exchange for market data. So this provides our customers with the ability to analyze the crypto markets with the TradeStation analytics tools. That's been a very interesting launch for us, and we continue to sponsor -- we launched a sponsorship of a new show, a cryptocurrency show with our media partner, Cheddar, this past quarter that covers news and analytics on the crypto market. It's a 30-minute show once a week on Thursday morning, so that's driving some additional interest in this crypto space here in the U.S. And obviously, we're excited to work with Monex and Coincheck as we get into this year and hopefully launching the ability for our customers here in the U.S. to be trading crypto markets. So with that, we think this will help drive a lot more interest in TradeStation and help our overall strategy to really drive growth and redefine TradeStation here in the U.S. so it's a exciting, exciting year. Oki, I'll turn it back over to you.

[Oki Matsumoto, executive]

Thank you, John. And the one thing I may want to add to what John said is that with the short-term rates rising as well as the asset in custody in TradeStation growing, we had about JPY 1 billion better financial income for this year for the TradeStation, and we expect that the Fed would raise rates maybe twice in this running fiscal year. With that, we expect that our financial income would probably grow at least another like $10 million again for this running fiscal year. So that is going to -- that is acting as a kind of good tailwind for us as well. Now if you go back to Page 4 again, so the U.S. is doing great. And if you look at the left side, it's Japan, the EBITDA for the Japan segment for this fiscal year was JPY 14.4 billion. The -- inside of that is Monex Securities' net operating income of JPY 5.4 billion, and the Monex Ventures' net operating income was JPY 2.7 billion. So total of like JPY 8 billion something for those 2 businesses. And since we finished developing the backbone system about a year ago, so there is a big depreciation for that. So with that back, the EBITDA is JPY 14.4 billion. Asia Pacific, it's a business for the Hong Kong, Australia and Southeast Asia as well as the China. It's the very prospective high-growth area, and we do have very interesting fees in those area, including Monex Australia. But as of now, the business is almost breakeven. But as I said, it's a very high-growth area and that we have -- we are -- and we have and we are -- we have planted and we are planting a lot of the seeds right now. Now as regard to the Coincheck at the right-hand side, the -- currently, Coincheck is not fully licensed by Japan FSA. So currently, the Monex Group is providing a lot of resource and 100% forecasting on Coincheck to get the full license from FSA. We are targeting like 2 months, within 2 months. As regard to the Coincheck results, which by the way, the Coincheck became the member of Monex Group just 10 days ago, so their result is not consolidated to us. But because of the current Monex share price movement and trading value and the volume, we believe that we should disclose some information about Coincheck, so which I will explain a little bit later. But anyway, as you see at the bottom of this page, now we have a very strong business in Japan, in the States and in the Crypto-Asset Business. So that if you add value of those businesses, to the some of the past approach, we believe that we do have -- that's more value in the group, which we'd like to unlock and explain to the market and the investors. And also with U.S. become this strong, I think -- as John said, we do have a lot more collaboration opportunities among Japan, U.S. and Asia Pacific in brokerage businesses. And also the -- again, also as John said, the Coincheck can try to do the business outside of Japan, like taking advantage of the TradeStation and then begin the business in the States and so forth, so that through the -- it's a group collaboration, we can make the -- we can globalize the Coincheck Crypto-Asset Business to the global customers. And also the cryptocurrency business is -- by nature, it's a global business. And Japan and U.S. and Asia Pacific customers, they do have interest in trading and knowing about cryptocurrencies so that we can do the lots of collaboration between Coincheck and TradeStation and Monex and Asia Pacific subsidiaries. And also in addition to that, with having a Coincheck, which is in a sense like a crypto-asset bank, we can create the fairly futuristic -- the global financial conglomerate, I believe. For example, in Japan, if it's a Mizuho or Mitsubishi, they create a financial conglomerate, having a Fiat bank and a domestic broker and a credit card company. But now with Coincheck and our -- the global subsidiaries, we have the crypto-asset bank and we have online brokers in the globe, which have got the access to the various financial markets in the world. And also using Coincheck's blockchain technologies, we can create the new payment type of services, and all those things -- 3 things together we can create, as I said, futuristic global financial service company. So through those new initiatives as well as the collaboration, we believe we can increase the -- our corporate value in a big way in addition to the -- some of the past approach for the entire -- the value production. So we feel quite constructive to ourselves. If you come page -- to the Page 6, this is the Coincheck kind of financial results. Again, we -- they became our group member just 10 days ago. And also their book is not closed yet, so this is just a forecast and a kind of rough number. But as you see for the fiscal year ending March 2018, their netting sales was JPY 62.6 billion, and SGA was JPY 8.8 billion to make the operating income JPY 53.7 billion. But extraordinary loss was JPY 47.3 billion because of the heft of the coin called NEM. To-date, the profit before tax to be JPY 6.3 billion. The incident happened on January 26. So we looked at the number for the February and March only. For those period, basically all services got once suspended and then it gradually resumed. A part of the pie is very limited, a part of services. But for those 2-month period, whereby pretty much most of the business was suspended, still sales was JPY 2 billion, and SGA was JPY 1.5 billion, and operating income was JPY 500 million. So even for those period, February and March, the Coincheck was in black ink. So as I said, we are now focusing on trying to get the full license for Coincheck on the cryptocurrency exchange Binance in Japan from FSA. But after we get that, we do believe that we can put their business back into right track and then grow the business in a big way, which is quite exciting. On Page 7, this is going to be the last page I'm going to explain about. 3 months ago, in January, we changed the -- our TSR policy from 75% average for the multiple years into 100% for each year. Because of the big depreciation and so because of that, at that time, 3 months ago, the stated P&L and cash flow have had that big, big gap so that in order to kind of explain or the -- somehow compensate that gap, we decided to pay 100% -- we decided to return 100% of the profit per year to shareholders. But given the -- Coincheck just joined the group and we do need to make lots of investment in cybersecurity as well as enhancing personnel, and those as I said, we do have opportunity to do -- to create new global financial service company such and such. We decided to put the TSR policy back to where we were 3 months ago, which is 75% average for the multiple year. But inside this 75%, we don't set any kind of a guideline between the dividend and share buyback. But because of this -- kind of some of the parts approach, if we believe that our value should be more than the -- our current market cap, the -- to the share buyback all of our dividend would make more sense. So that we didn't put any limitation between the dividend versus share buyback inside this 75% TSR policy. But anyway, let me stop here. So we did very good in the regular businesses particularly in the States and which we feel great about. And our prospect for the U.S. is even better because of this market environment and also the account growth. Japan regular business is doing quite good as well. And also, we now have this Crypto-Assets Business, which can generate lots of profit and also we can do the lots of collaboration between U.S., Japan, Asia Pacific and this crypto business, and also we can create a new value, new -- a global financial service utilizing this global presence of the online brokers of Monex Group as well as Coincheck. So we feel very good about. We -- as you know, the last like 2 or 3 weeks, our share price being advanced a lot and also lots of trading volume and trading value, which we feel great about as well as we feel a lot of responsibility. But we feel kind of confident that we can provide the -- even better value to our shareholders. So let me stop here, and then I'd like to open up for our Q&As.

[Operator]

[Operator Instructions] Our first question comes from Michael Herzig of Gardenia Global.

[Michael Herzig, analyst]

Just you had been talking increasingly about your interest in crypto the last few quarters. I'm not sure how much you can talk at this stage, but perhaps you can walk us through the decision to move from the idea of building a business to buying a business and how can you get it so quickly? And perhaps if you can share with us any specifics, that would be helpful in understanding Coincheck customer base.

[Oki Matsumoto, executive]

Okay. Thank you, Mike. The -- so it was 6 month ago, half year ago, in October, the investor call, we announced the Monex new beginning and whereby we said the blockchain is now really coming and the blockchain can change and can improve many financial services such as making the bonds or pounds into various small lots, for example. So we came to believe that we really need to embrace blockchain technologies. As of that time, the crypto exchange business is really the only kind of one or biggest application of blockchain technologies, so the many blockchain engineers avow with the cryptocurrency exchanges. And also the cryptocurrency is a interesting trading item and also it's becoming important asset class. Now the market cap of cryptocurrency is about 5% of the gold on the globe, so it's becoming a lot -- very interesting, important asset -- new asset class. And also I thought one could say that when you think about the cryptocurrency market movement last year, whose market cap grew from JPY 20 billion -- $20 billion to $600 billion in a year, so one might be able to say that the most speculative money went to crypto market so that the regular capital market may have enjoyed the kind of, how do you say, paste -- it didn't shake up too much. So even one didn't like the cryptocurrency as a trading item or asset class, one probably need to know what's going on in the crypto market to know better about the capital market environment. So that we created cryptocurrency -- Monex cryptocurrency laws in January. And then we are preparing to create this -- exchange -- cryptocurrency exchange business by ourselves, as you said. In the meanwhile, Coincheck was -- in that area blockchain and crypto, Coincheck was far advanced company than Monex, but the -- some unfortunate incident happened at the end of January. And then -- I knew them, so I offered help right after that, said anything we could help you but nothing happened. In the middle of -- I think, middle of March, they called us, wanted to discuss with us, and basically they asked for help. And then the discussion developed just in 3 weeks from day 1 to the closing, it took only 3 weeks. The -- so this is -- from my point of view, this is not really acquisition. The Monex draw the new -- kind of a new vision trying to utilize blockchain and the cryptocurrency exchange or whatever half year ago. And then by instantly, the Coincheck faced the special situation and then we discussed each other, and then we agreed, okay, let's work together because they were doing what we may be going to do anyway, and they needed some help in the internal control or the credibility of those places, so we decided to do it together. So that's how happened. And for me, it's kind of lucky that instead of spending a lot of -- high amount of energy to create our own business, we now are working together with Coincheck. We've got good brand and may not be good today but we've got a big brand and a huge recognition and very big customer base and lots of technologies. And that -- again, for the area they are lacking, like a cybersecurity or internal controls, we are providing also things to them. As regard to their customer base, the 1.7 million of application, cryptocurrency trading application being downloaded. As you know the Monex Securities has got 1.7 million end-user customers and Coincheck has got 1.7 million application downloaded, so pretty much the same customer size. But of course, there is kind of, how do you say, big kind of -- how do you say? How do you say in English? The big kind of skew in the demography. The Coincheck customer base tend to be young people and the Monex Securities customers, 40s and 50 and above. So we do see the very interesting synergy opportunity here. Probably more in encouraging or explaining to Coincheck customers to think about the more regular asset management. Because as of today, in Japan, even you make money in the cryptocurrency trading, you have to pay the general income tax, it can be like 50%. But if it's ETF for the financial products, we're talking about a 20% withholding tax. It's got a much better tax treatment as well as you can diversify your portfolio. So we will try to approach Coincheck customers, tell them you might want to think about the other real financial assets, creating portfolio and diversifying the risk and such and such, which we believe is a lot of opportunity here. And also, of course, yes, there are many, many, many Monex Securities customers who are interested in cryptocurrency, although the tax treatment is heavy but still they're interested in trading cryptocurrency, but they've been kind of holding their action because they didn't know which exchange they should trade. But now Coincheck is Monex' sister company. It's Monex Group, it's one company, so that they would feel very comfortable trading crypto on the Coincheck. So we have a quite interesting synergy effect going forward. But anyway, answering your second question short, the 1.7 million kind of rough customer base and skewed to the younger people.

[Operator]

It appears there are no further questions at this time. [Operator Instructions] It appears there are no further questions at this time. I would now hand the call over to Mr. Matsumoto for any additional or closing remarks.

[Oki Matsumoto, executive]

Okay. We are very excited, and I think there are reasons that we should be excited. And we meaning not only the colleagues in Japan but also colleagues in the States, the Asia and also colleagues in Coincheck because we can do many things together. And also, I am very excited -- when you think -- when we think -- when I think about the value of the company, it's quite strong pillars now we have. U.S. is making profit and also Coincheck is now the family member. And so that I think there are reason for you to be excited too. And I believe you may have further questions so please reach us if it's in Japan or in the States and we are more than happy to answer any of your questions. And thank you very much for joining call today.

[Operator]

This concludes today's conference. Thank you everyone for your participation.