GMO Internet Inc

TSE:9449

Earnings Call Transcript 2020-Q4

[Masatoshi Kumagai, executive]

I am Kumagai Masatoshi, the representative of GMO Internet. We end our business here on December. So this will be the full year results earnings for 2020. Today's agenda is as seen here.

First of all, this is the summary of this year's earnings. From last year, in January 26, as the first-ever as a Japanese company, we have started teleworking. Within our group, we call the employees, partners. We focus on the life and the health of our partners. But at the same time, as a company that supports the infrastructure of the Internet, we strive to stably support and provide services.

In terms of the environment, around New Year last year, I thought that maybe 5G might be the trigger. But actually, through the pressure of COVID-19, the Internet has accelerated. And we have grown with it. As management, overcoming this national emergency called COVID-19 and supporting the world with the Internet under the strong determination as a group for all, we overcame the situation.

What we have been continuing to do for 25 years has been asked for from a lot of people, I strongly felt that way for 2020. As a result, performance-wise, sales, operating income, ordinary income has record high level. In terms of the net income, it has increased substantially.

This is the summary of each of the segments. On the right-hand side, I am showing a subjective evaluation from my point of view as excellent, good, fair and poor. Infrastructure is double circle meaning excellent. They have been able to achieve a record high level of sales through and profit.

From second quarter onwards through stay-at-home consumption and online consumption stayed at a high level, specifically in EC segment access has contributed greatly to our performance. Rather than being a one-off effect, these seem to be a new trend.

For Advertising & Media, my evaluation is fair/poor. Sales has increased slightly. Profit has gone down. In terms of the advertisement, the COVID-19 -- under COVID-19, it has been stable. So it is fair. Our own products that we are focusing on, ad tech has been robust. But media, because of investment, the profit has gone down. This segment overall is only the slightly negative side. I hope they will perform better from next year onwards.

In terms of finance, it is excellent. Because of COVID, in the first half, there was a high volatility and specifically, performance was good. And we have seen an increase of both sales and profit. For Forex, we have seen a substantial increase in transaction volume and have been able to retake the #1 share in the world.

In CFT, we have seen an increase of our customer base. And as a second pillar following FX, it is contributing to our performance. As a result, my evaluation is excellent.

Going to crypto asset. This is good. The exchange business under GMO coin, on top of the expansion of the transaction volume, the new business, the Altcoin transaction has increased, and this has pushed up the performance.

In the mining business, the new site has started operation and it has turned profitable in the fourth quarter. And Stablecoin GYEN, we have been able to get a permit from a U.S. financial authority and we are targeting next month to issue this outside of Japan. In this segment, we have overcome various difficulties and I think we have been able to get at the starting line to recover the investment. So from this year onwards, I hope that they will do well so that -- and I'm very sure that it will become #3 pillar. So this is the valuation of being good.

Going to the next slide. This is a trend of the full year performance. You can see that we have been able to see increase in both sales and profit for 12 years in a row. So this is a by segment sales and profit increase and decrease compared to the previous year. On the top is sales. On the bottom is operating income.

Although there has been negative impact from VC from the previous year, the core business, that is infrastructure and finance, has been strong. We have seen a JPY 14.3 billion increase of sales, JPY 2.61 billion increase of profit.

Next is shareholder return. As I have been saying from before, a basic policy is the 50% of total return ratio out of which 33% or more will be coming from dividends and the remaining 17% will be coming through share buybacks.

Next is the dividend per share. This year, we, again, will not disclose our forecast. In terms of the dividends, we have been announcing it on a quarterly basis. For this quarter, the dividend will be JPY 10.6. The full year dividend will be increasing by JPY 6.6 to JPY 30.8.

This is the total shareholder return amount. This is a total of the dividend payment amount and the share buyback amount. In terms of the share buybacks, the blue portion is the portion that we already have canceled. The gray portion is where we are planning to cancel. Since we changed our shareholder return policy, in June 2015, overall, we have bought back JPY 15.8 billion worth of our own shares.

Last year, as we have disclosed previously, for the portion that we're using the resources -- the net incoming resources for 2019 and 2020, we have decided that we're going to cancel as of this -- today. Last year, at the full year results meeting, we have promised that we will buy back JPY 15 billion of our shares, but we are not being able to do that fully within the period. This year, for the remaining JPY 5.6 billion, we will use this as a resource to further buy back our shares. We will steadily go forward in our commitment.

From the next slide onwards, I would like to ask Mr. Yasuda, Group CFO, to make a presentation. On this slide, Yasuda will explain.

[Masashi Yasuda, executive]

This is the outline of our performance. This is the by segment quarterly sales trend. As a trend, at the very lower part of the bar, the dark blue infrastructure business. At the center, you can see that we are continuing growth. Going to the by segment quarterly operating income trend. The dark blue infrastructure, the light blue finance, both segments at the center is showing a growth trend.

In terms of the finance, there is a volatility on a quarterly basis. But overall, if you look at the full year basis, you can see that it is achieving a double-digit growth. Going to the overview of the group. Out of the listed 10 group companies, this is the market cap and our equity portion. On the lower of the slide, the total amount of the market cap is about JPY 1.9 trillion and our equity portion is over JPY 670 billion.

This is the overview of our 4 business domains. The size of the domains shows the sales composition. The number of contracts for the infrastructure, FX securities and crypto assets, number of assets. Our number of accounts here, the solid earnings basis as the customer basis. And you see that account number, 13.29 million. So going to the number of partners, we call our staff, employee's partners. So this is a situation at the end of December, the number of partners was 6,180, out of which creators, such as engineers, creators that has high technology, the ratio is 45.6%. Bringing the creators ratio to more than 50% is our target. We will continue to invest in human resources.

Next is the infrastructure business. As you can see, this is the content of our Infrastructure business domain, cloud hosting, ASP cart, SSL security. Settlement access. In each case, we have aggregation of #1 services. At the end of December, in this #1 service group, a new service called ECL GMO Sign has been added. These are all services that is indispensable. And the type of service that will not go away for the Internet end of society. This is a 6-year trend of the infrastructure business in terms of the full year results. As I have been saying every year, the continuous growth of the infrastructure business is the earnings model of the stock type and transaction type and the combination of the expanding customer base and we call this a rock-solid earnings base.

This strong growth can be achieved because we are aggregation of #1 service. Going to the quarterly sales trend and content. In the -- following the second and third quarter, we had the stay-at-home consumption and telework demand, access, EC support and settlement has been strong.

In the third quarter, the overseas subsidiaries engaged in settlement has been deconsolidated. So quarter-on-quarter, there has been a decline in sales temporarily. But as I have said previously, on a quarter-on-quarter basis, it has returned to increased sales trend.

Going to the quarterly operating income trend, the most recent quarter, year-over-year it has increased; and quarter-over-quarter, it has gone down. In terms of the details, I would like to use the next slide to explain. This is the profit of the infrastructure business and it divides between settlement and nonsettlement business and the total cost.

The settlement business under GMO PG has increased substantially. But the nonsettlement business, whether it be year-over-year and quarter-over-quarter, the profit has declined. The major reason behind this is that we have been proactive in marketing investment starting in GMO capable. Basically, we have shifted the marketing investment that was planned in the first half into the second half. And we have also shortened the expiration date of the SSL to improve the security, and there has been a unit price decline, and this has been a one-off impact. This is not related to the actual demand and this impact will be normalized from August 2021 onwards.

In terms of the overall cost, there has been some one-off factors such as performance linked bonuses. As you can see from the quarterly sales trend, you can see that the business momentum is quite strong. So the settlement and nonsettlement business, we think we'll be able to maintain a well-balanced growth.

Next is the contract numbers of infrastructure is 11.58 million. The registration of the domain has increased on a quarter-on-quarter basis. The strong growth we are seeing, specifically is in ECL GMO Sign business. On the end of June, we have focused on the campaign called Goodbye Seal campaign as a whole group. Even after that, through the network effect, we have been able to see expansion of a customer base. At the end of December, the number of accounts has increased 37x year-over-year, reaching 140,000. We have become #1 in Japan.

In terms of ECL GMO Sign, Mr. Kumagai will talk about it in more detail afterwards. This is the EC support business overall, our transaction volume situation. Color Me Shop, MakeShop, we have this EC platform businesses, and we have this new type of EC, such as minne and SUZURI.

In terms of the quarterly transaction volume, it is over JPY 120 billion. Year-over-year, it has grown by 46%. So we can see that the growth has started to reaccelerate. Out of the transaction volume, about 40% is through the GMO payment gateway settlement.

Next is the Advertising & Media business. This is the 6-year full year result trend of the Advertising & Media business. This year, advertisement despite the COVID-19, has been stable, but have invested in new media, so the profit has declined. Going to the quarterly sales trend of the advertisement and media business, on a quarterly basis, both advertisement and media sales has increased year-over-year, it has increased by 4.7%.

This slide shows the quarterly operating profit trend. GMO Research performed strongly by capturing the demand at the year-end in Q4. Next is Internet Finance segment. This is the performance trend for the past 6 years. Although it was not the record high, profit increased 24.7% year-on-year.

In order to maintain and expand the #1 share in FX trading, which is our main product, we narrowed the spread, leading to a decline year-on-year, but the training value and profit expanded backed by strong CFD market, which we have been focusing on from before, while maintaining the #1 FX trading volume, we generated profit exceeding JPY 10 billion and furthermore, enriched our product lineup, which we take as positive for us.

This is a quarterly trend. While CFD was strong, sales and profit declined due to the impact of reduced spread to expand our #1 FX market share in Japan. This is the trend of FX trading volume and our domestic share, trading volume continued to maintain high level, and we were able to recover our #1 global share globally in annual training volume.

Next is crypto assets segment. We have 3 businesses under crypto assets. They are mining, exchange and payment. Crypto assets will remove the border line of money from the world. We have been engaged in development of this business, believing the potential of changing the currency, financial businesses as a result the world. I would like to give an update on each one of them.

This is the yearly performance for the 4 years. I feel that we have finally come to a stage for harvesting where we are able to recover our investment for crypto asset segment, as Mr. Kumagai mentioned in the beginning. On the other hand, the crypto assets market situation has changed significantly from last year. But looking at this fiscal year, I get the impression this change has not been incorporated yet.

Both sales and profit increase in exchange and mining businesses, but because of development investments for GYEN, our Stablecoin profit declined. For your information, we have received approval for the launch of GYEN from the U.S. Authority last December.

This is the quarterly trend of crypto asset segment as a whole. Because of the Stablecoin development investments I have just talked about, this segment had increase in sales and decrease in profits from Q3. As the sales are on an increasing trend, we feel the investment recovery period is coming close. I would like to explain mining, business and exchange business separately, respectively.

First, the mining business. Q-on-Q, there is an increase in sales and it turned profitable. We closed the center at the end of June, and we were operating in the new center only since July. Although there was a one-off trouble at the time of the launch in Q3, we are enjoying stable operations since Q4. With the increase in crypto assets prices, mining profitability has increased and mining business has come to a harvesting period.

This is our hash rate and the mined bitcoin amount. The blue line is the hash rate at the end of the month. The yellow line is the monthly average. The bar graph shows the reference profit multiplying hash rate at the end of the month and the mining amount. Our hash rate now is close to 550 petahash. Mining amount is expanding due to increase in average hash rate and crypto assets prices.

This is the exchange business. We enjoyed increase in both sales and profit Q-on-Q as well as Y-on-Y. This is a substantial increase in sales with the tailwind of active market and trading increase in Altcoin. This is all from me. Domestic share, foundation, both are expanding. This is all from me. Now I would like to pass the microphone to Mr. Kumagai again.

[Masatoshi Kumagai, executive]

From here on, I would like to give you an update on our vision, on our focused business, Electronic Seal Service GMO Sign. Starting today, we will change the name, GMO Electronics Seal Agree to Electronic Seal GMO Sign.

I would like to share the KPIs. First, this is the number of accounts, which is nearly equal to number of users who signed up for the service. As of the end of December, it exceeded 140,000 overtaking CloudSign, our competitor, and we became the #1 in terms of the number of companies adopting electronic contract service in Japan. We made this release. The number of accounts exceeded 160,000 now. We received around 19,000 applications during the 3 months of October to December and really feel the full-fledged digitalization of companies.

Next is the changes in number of contracts transmitted. This refers to the number of electronic contracts sent to the counterparty. How many seals are used. As you can see, it grew 2.6 folds year-on-year. It will catch up with the number of accounts shown in the previous page. We have not been able to catch up to cloud sign yet, but we believe that it will grow in line with the number of accounts.

Now this is the biggest message that I have for you today. How would the future of seals be? As you can see, seals will be like this. I am pretty sure about this, which means the future of seals will be in the smartphones. There will be apps. The future of electronic seals, we aim to realize is a world where you do not need to physically carry various seals and tokens yourselves, but you will be able to use seals anywhere using smartphones anytime.

We are coming close to the middle of the 21st century. We can say goodbye to the previous century's troubles such as you need to go to the office, just to put seals on documents or you need to run to a dollar shop to buy a seal because it was necessary for a certain procedure or you have to search everywhere to find your officially registered seal, and maybe you need to register. You can say goodbye to such troubles. GMO Internet group will make our utmost efforts to embed GMO Sign inside your smartphones.

I just received a real estate-related contract from London. I signed this contract using this smartphone. It's very, very convenient. I just sent it back to London. There's no time lag with London. Instantly, you can put a seal. It's very, very convenient. There's no reason why it would not penetrate smartphones in Japan can be or linked to my number, which is social security and electronic certification can be linked, issued, and it can be used for private sector, public sector contracts as well. This function is GMO Global Signs. My number linked to official registered seal, and this can be embedded in the app. GMO Sign can be linked with my number, and it can be used as casual stamp, casual seal or officially registered seal, we want to provide this very convenient tool, and this is the future of electronic seal that we are envisioning. By having all seals replaced by GMO Signs -- seals, a future will soon be realized where electronic seal and contract for everyone's use will be realized.

Was it just the contract papers that you put seals on? I don't think so. Quotations, bills, receipts, medical certificates, diplomas and others, there are just so many documents. Probably hundreds of billions of documents and printing them, putting seal and closing them in the envelope, sending them, and maybe you have to put a stamp on it, you had to buy -- go to the post office and buy a stamp. And also, sort out these documents, sort them out, store them as well.

It's a lot of work at GMO Internet Group. These massive documents of putting seals. Instead of that, we have a solution. We have electronic seal solution DSS, has been developed. We already have started providing this service, electronic seal solution DSS and user companies systems can be linked, and important documents will have time stamp and electronic seal, and they can be sent.

GMO Sign is already offering merge documents and bulk transmission function, and regardless of the volume, bills received, standard contracts need to be sent. And therefore, you need to go to the office just to put a seal on. And you don't need to do that anymore. You can just use our service. We aim to realize this kind of a world under this vision. And we would like to make a statement about GMO Sign for everyone. We want everyone to be able to use this service. GMO Sign, this electronic seal, it supports electronic contracts and the biggest differentiating factor compared to the competitors, I would like to talk about this.

Our group's GMO Global Sign Holdings has been operating electronic certification business for many years, where there's just a few in the world. We are using our technology to operate this business.

Needless to say, we have #1 share in Japan for our main service of SSL server certification market. GlobalSign's public key is used in almost 100% of the web browsers, including Google Chrome, Microsoft Edge and Apple Safari, servers and browsers. The technology to communicate with them is SLL -- SSL. So even you have certification authority, unless there is a key in the browser you use it's useless. We have been building both of them taking many years up until now.

And iPhones, Android smartphones you have, in all the smartphones our SSL Seal is installed. And with this track record of global operation, it is used by global providers such as DocuSign and Adobe Sign and GMO GlobalSign's certificates are being used in each of the services. With the advancement of DX, digital transformation, global demand is increasing every day and the number of monthly signatures increased to 2 million times last year.

It is almost impossible to start a trusted certification authority like GMO GlobalSign from now and this is a very valuable strength for GMO Internet Group by having such a certification authority ourselves. This is GMO GlobalSign Certificates and services that are used. And some examples of them are GMO Sign. And looking at the industry overall, our GMO GlobalSign certificate is being used by one sign e-mails, DocuSign, Adobe Sign, SigniFlow, major electronic seal, electronic signature vendors are adopting them, and it supports electronic seals in Japan and globally. And now from here on, our GMO Sign, would this become a de facto in electronic Seal in Japan? Why could that be? I would like to talk about this. The conclusion is that our GMO Internet Group's collective power is the reason why this becomes de facto. GMO Sign electronic seal overtook CloudSign, and we have become #1 in terms of number of users.

And that is because we have 130 million contracts that we have. We have a very strong, solid consumer customer base, and that is why. And our infrastructure or our financial services, daily new applications, are at least 10,000, sometimes 20,000 applications are sent to us. So every day, we get more than 10,000 contracts, and GMO Sign can be used as a cross-sell base. And we can expect to increase -- see an increase in number of customers by 1 million per year. So please look forward to this.

Leveraging the collective power of GMO Internet Group, for example, regular payment, as is described on contract, can be done online, which other companies have not been able to start. We have been able to do this by cooperating with GMO payment gateway to realize this agreed payment and also linking my number card, which is tantamount to officially registered stamps, and we have been able to realize this by cooperating with GMO GlobalSign, we will be adding new services with speed, unique services going forward. So please look forward to it.

And now as a closing, I would like to talk about the outlook for fiscal 2021 for each of the segment. On the very right side, there are circles and triangles. These are subjective views of mine. Infrastructure segment continues to be double circle. It's a collection of overwhelming #1 businesses, we expect to see double-digit growth this fiscal year as well.

In this segment, GMO Electronic seal GMO Sign would be made the overwhelming #1 service, advertising and media segment, last year was triangle and X, but this year, it's triangle. We can remove the X this year. Advertising products will remain to be stable and strong, and our own products, our own media, will be enhanced and next fiscal year onwards, so rather than this fiscal year next year, this will become a growth driver.

Internet finance. Its double circle FX and sophistication and position management using AI and big data and through sophistication of B2B transactions, we would like to continue to make efforts to expand profit by pressing with increase in profitability. In CFD, we would like to be proactive in advertisement to raise awareness and expand the customer base by enhancing transaction tool, and we would like to cross-sell and grow. Crypto assets, we believe it will grow to be double circle and it will become the third pillar following infrastructure and finance. That's how we feel.

And during the 25 years, we have been focusing on Internet infrastructure business and Internet finance business. We believe that our decisions and our actions were right. And we believe we will be able to achieve results and show them to the investors. And thank you very much for your attention. Internet for everyone.