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Executives

Manabu Miyasaka - CEO and Operating Officer

Osamu Aranami - Marketing Solutions

Analysts

Taro Ishihara - Daiwa Securities

Yoshitaka Nagao - Nomura Securities

Yosuke Tomimatsu - Merrill Lynch

Yahoo Japan Corporation (OTCPK:YAHOF) Q1 2014 Earnings Conference Call July 31, 2014 4:00 AM ET

Operator

Thank you very much for coming today. From now on, I'd like to start the 2014 First Quarter Business Results Guidance Meeting, and this guidance meeting will be live broadcast on Internet, and then also we're going to broadcast on an on-demand basis on the web. Thank you very much.

From now on, I would like to introduce that the attendance from Yahoo Japan, and from the right hand side from your side is CEO and Operating Officer Mr. Manabu Miyasaka; and CFO and Operating Officer Mr. Toshiki Oya. And first of all, Mr. Miyasaka is going to make a presentation, and after that we are going to have a question-and-answer session. We are going to close the sessions at 6:30. Okay, so let’s start the presentation.

Manabu Miyasaka

Hello everyone, so let me talk about FY2014 Q1 business results. First of all, this is the overall business performance and the first quarter, this slide here. We have record high revenues in the quarter. There are three major points for this business performance, for the revenue and operating income, and now we have the record high revenues. When it comes to operating income, we have studied eCommerce revolution efforts. We have some decrease in profit, but this is planned and scheduled and in a sense that it is decline in operating income. And now when it comes to result of the eCommerce revolution efforts, we have some last minute spike up demand immediately before that consumption tax hike, but after that we overcame that reaction fall of demand, and now the business performance has been steady. One of the milestones of the business this year is access from the smartphone has started to exceed the access from the PC. And for a second now, the advertising revenues -- more than 30% of the revenue is coming up from the smartphone, and also about a 30% of the transaction volumes in eCommerce is now based on smartphones. So it doesn’t make any sense, it is just only 30%, 50%, but I think that this seems like that. Now we have been working on the smartphone, shifting to the smartphone, but it seems like that our business is gradually and steadily shifted on to the smartphone-base business platform now.

And this is that quarterly revenue trend. And after the fall last year, this is the historical growth, since last fall, and we now have e-commerce. Once we dropped it to zero, and when we started e-commerce revolutions, but now we have success with delivering goods like this now.

And when I look at the revenue breakdown, we have about 2.8% positive growth year-on-year, and that means ¥2.6 billion, and we have 8.4% growth on the marketing, and due to, let’s say our e-commerce revolutions, now the consumer business will have the negative impact on the 10.6%.

Let me focus on the advertising business that ended the quarter. Now, we have 8.8% growth year-on-year, and when I look at the break down, 19.7% growth is from the display advertising and the sponsor as such grew only by 3.4%.

When I look at advertising, the revenues on smartphone have steadily grown like this. And as I mentioned earlier at the beginning of my presentation, on the year-on-year basis and now we are about close to about (inaudible) of the smartphone advertising, and got more than double -- closer to double just like this to the 31.5%, and this is growth of both gross and the actual revenues. And when I look at this, the growth of the sponsored search -- and before the last guidance, and we have announced middle and low single digits was our focus, but now when you look at actual growth, I am going to explain details later, but clearly we see a gradual decline, and on the other hand, that’s the access from the smartphone that is increasing, so that we think that we need to be conservative to have a forecast. So, I think that the low-single-digit growth will be maintained for the time being as far as the sponsored search growth is concerned.

This is related to e-commerce and transaction value, and this is just red and light, light red colors, this is the shopping and the e-commerce auctions and 3.5% growth in the shopping and 9.3% in auctions, so this is the growth. So, as I just mentioned here in this slide about the -- over 30% of e-commerce is based on the smartphone platform, and this is the trend of the quarterly operating income.

And when it comes to growth of the operating income, we have just the negative impact of the e-commerce, the revolution had run its course, so that we still keep making investments for e-commerce, so this is minus 0.5% growth will still continue. And I’d like to make the revision on the business outlook for the first half of FY2014, and our original focus was ¥211.9 billion, but now we’d like to make downward revision to ¥201 billion, and the focus on the operating income will be same.

The reason why we made this downward revision is, as I mentioned earlier, and now we have just changed it and making the focus on advertising business a little more conservative. And when it comes to the business outlook for the first half of the FY 2014, this is just shown here on this slide. This is the forecast on a year-on-year basis.

Let me talk about each service. Now first of all, I would like to tell you that now the Yahoo Japan service is being actually utilized in the smartphone age, and just like this, and now the utilization of Yahoo Japan services have been growing steadily like this, and also for downloading applications. Now, we have about more than double of the number of applications that are downloads like this, and so the application of Yahoo Japan has been also is steadily utilized.

Just like this, in the past three months -- the biggest event in the last three months was the FIFA World Cup in 2014, and we have some specific featured pages and news services, and we've been very successful at this. And the other thing that we've done is that is about Yahoo Real Estate, and we try to make listing properties more than triple, and now we would like to have, that’s the largest number of listing properties available on the Yahoo Real Estate. The other effort is what we call, Content Discovery. We have not yet started this service yet, but now.

And this is that and (inaudible) delivered through contents partners, so we would like to just provide the technology and also including all these partner sites. And so, through this inside link, it should it be then activated. This is basic concept of Yahoo Content Discovery.

And then also, we have started the Pass Market, and Pass Market mean for example, this is an e-commerce service like events and concerts, and there is certain fee and commissions for this. Just like this, we're making at the most to activate and encourage the users of our services, and let me talk about how we are monetizing our business services.

First of all, let me talk about marketing solution business. Now first of all, I’d like to talk about as a whole, and first of all general information that when I look at the declining trend as such by a PC, it still -- value like this, for example, you look at this as just, quite flat in the bottom of the graphics, and all are just a little bit declining and this is (inaudible), this is the query via the PC. So just like this, for all the people that use smartphone and tablets, use them such from their tablet and smartphones just like this for all these users, don't use less as such by a PC. We think that this is a very, very structural reason, and this now is only for the Japan Panel, this is just a trend in the market as a whole.

On the other hand in terms of the search from smartphone, the volume is dramatically increasing as we can see here. Therefore, all-in-all, in terms of queries at Yahoo Japan, we are seeing a growth. But when it comes down to the efficiency of query monetization, as you know, in terms of the advertisement, the unit price, it is higher on PC side as compared to smartphone.

Therefore, in terms of a query, it is generated from PC to smartphone, and we are seeing this dramatic transition into smartphone therefore. In terms of sponsor search, since smartphone in terms of the volume is registering the majority, the sponsor search revenue will be in single digit.

Another point to note about search. We have a search deal with Google, and what is the status quo? Basically, we are discussing to continue that relationship, but we haven’t signed the bottom line yet. Therefore, in terms of the terms and conditions, we have to refine them furthermore, but all in all, the relationship between the two parties will be extended.

Other than search or query, what is the status of the access? The vertical access shows a million unique browsers, and in terms of the access from smartphone in the last few years, you are seeing a dramatic growth.

So, in terms of daily unique browser number, this is same as the search/query. We have YDN which is the non-query type, and in terms of smartphone YDN, the unit price is on par with PC in terms of the revenue per impression, and so with more accesses from smartphone, that will be the tailwind for YDN.

In the future, we will see more and more people using different devices, so access will be made, and in such a situation, Yahoo Japan is trying to personalize the advertisement and not only that but we are working on personalization of content. And so, e-commerce product will be personalized for recommendation. Therefore, we are accumulating different data from the customers, so we can provide personalized information.

We handle big data and whether it'd be search, news, query, settlement, we have multiple big data accumulated. Therefore, from the multifaceted angle, we will be able to understand the customer and provide the recommendation for the product as well as provide advertisement and that will be in line with the needs of the customers. And so, we believe as we have more big data, we can improve the accuracy of personalization. So, I believe that YDN will grow in the future as well.

Having said that, products have life cycle unto itself, so upon the time of incipiency, we have the maturity and it will go to the decline. So there is peak and trough cycle. Therefore, we have to think about new revenue source, and last fall we started a premium DSP which is the video advertisement.

And this is not only an announcement, but we have actually released premium DSP. And looking at the numbers, since we just started the service, we don't have any large numbers to boast about, but when you think about the early stage incipiency of premium DSP, I believe that we are on the path of success, and we believe that premium DSP can be yet another major pillar of revenue in the future. In terms of advertisement business, it registers about 20% of our revenue. And as you can see on this chart, we went through different evolutions and changed the driving force of advertisement by transiting to smartphone. I believe that YDN will be the major pillar of growth, and on top of that we will add video as well as DSP.

Now let’s talk about consumer business, firstly let’s look at shopping. I’ve explained about this chart before, and in terms of shopping we would like to increase the number of sellers. So, we will make it free of charge for the sellers, and we started this initiative as of October last year, and how many do we have in terms of the sellers, and this is based on the number of ID stores, and we have about 134,000 requests already being made to get the shopping store ID. So as we have intended, we are seeing growth in terms of store IDs. Even though we have more and more store IDs, if they don’t open the store or even if they did if they do not have wide variety of assortment, it doesn’t make any sense, so how about the number of products as compared to a year ago, there has been an increase of 60%, so we have more than 100 million.

In terms of Yahoo Shopping, we have shoppers, but then there was insufficiency of merchandise, but now the situation is different. But of course we have to have more line up, but as compared to a year ago, we are seeing much improvement in the number of assortments that can be provided. For the buyers, we will have a campaign and come up with new initiatives because since we have such a wide assortment, we want to have more buyers come in.

This is a trend on the transaction value. And in terms of March, there was a pre-consumption tax hike shopping trend. And then afterward in April, we were impacted, but we are seeing improvement as of May. So as compared to a year ago, we are seeing the robust trend of recovery.

Let's talk about YAHUOKU! Regarding YAHUOKU! in terms of Shopping we try to focus on increasing the number of sellers, and in terms of YAHUOKU!, we focus more on the buyers. What did we do to increase the number of buyers? We had TV commercial even after the consumption tax hike, we had campaign tried to solicit buyers to come into YAHUOKU! and we are seeing increased bidders and buyers in this last quarter. The more bid we have, there will be an increase of unit price for winning bids, and we believe that we were able to come up with this win-win cycle.

In terms of the transaction value growth trend, as you can see in this quarter, we were able to grow dramatically as well. If we can sell this much, then the corporate sellers want to do their business in YAHUOKU! So corporate sellers, as you can see here, we have about more than 18,000 corporate sellers having their store IDs.

Now let's talk about sellers. In terms of the number of listings, we are seeing increase of about 20% year-on-year, half of the number of sellers including the individual. First time in two years, we are seeing an increase year-over-year. In terms of the newcomers, we do not see much growth, but by coming up with different initiatives such as lowering the cost to be borne by the sellers, we are seeing increase of sellers.

Let's talk about premium membership. The major change is the birth of a new company called Personal Services Company. So far, in terms of the premium member, it was actually incorporated within YAHUOKU!, and it was a part o YAHUOKU!, but we actually did away with that scheme, and we should not just depend totally on YAHUOKU!. As a standalone, we can have the premium membership and make it a viable business, and that is the reason why we came up with Personal Services Company.

So far, YAHUOKU! leveraged on premium membership, but premium membership again enjoyed benefits even in offline situation as well, and that is just a Personal Services Company. In terms of the number of premium members, unfortunately the number went down and there are several reasons. In terms of acquiring premium members, we have Yahoo! online channel and also SoftBank offline channel. And in terms of SoftBank offline channel in the end of February to March, [MNV] of mobile phones competition became very tough, and I am sure that there were different switches from one operator to another, and when a switch occurred, then the premium members have been canceled, and therefore we are seeing the decline in premium member ID.

Not only auction, but we try to come up with different benefits to be enjoyed by premium members. And starting tomorrow, we will have Y!mobile, and we want our premium membership to be one of the benefits to be enjoyed by Y!mobile.

Let me recap on the relationship between Yahoo! and Y!mobile. The Y!Mobile is -- we like to make the Y!mobile suited for Internet use, so for example 30 gigabytes of the Yahoo! Box is available, and that is kind of thing , but also and so far traditional carriers -- but offering the less and less the traffic packets that is used, but also there are some times that the users will have to suffer from some kind of a slow traffic and the communication a bit low, and we like to make it the different so that at least and as far as that more that user use Yahoo! Services, they are going to have the more data traffic packets and exchange for that. This is the concept of the new service called Packet Mileage, to start the service.

And initially, we don’t have any (inaudible) how many users will use this, the Packet Mileage, but they like to be very carefully. They are watching the situations, but like expanding the new service. So, that’s the more the Yahoo! service the user uses, they can have more data for that packet. And also, I would like to offer the enjoy pack with offers to the premium membership.

The other segment is about the settlement and finance and the companies. And this is the major news this time. This is that the credit card operators and the KC, and we’d like to make it our subsidiary and start our credit card business. And effective January 5, 2015, we are going to acquire about 65% of the stake of KC.

And the idea is very simple. Now we have a growing business of e-commerce, after the e-commerce revolution, so we also like to incorporate the settlement business inside our group company, and this is a very simple idea.

Now we're going to start, and we have announced that at previous quarters, but now for the bank and credit cards and also settlement payments, we like to look at both banking and also credit card businesses.

And just like this, we like to add the target, and ¥330 billion of operating income by FY21, and also we like to become a number one transaction value into e-commerce market by FY2016. That's all. Thank you very much.

Question-and-Answer Session

Operator

Now we would like to open the floor for questions. (Operator Instructions). Yes, gentlemen sitting at the center, second row from the front.

Microphone is not on. Excuse me, can you turn on the microphone?

Unidentified Analyst

Thank you very much. I am (inaudible) of Barclays Securities. I have several questions. Firstly, I would like to know more about the advertisement along with the guidance. Can you talk more about the advertisement in terms of search? I understand that you are forecasting low growth, so maybe initially it was a single-digit middle to high-end but then you said it will be under low end that means that there will be decrease of about 5%. In terms of search advertisement, in terms of first half, it was about 7 billion, but now it will go down by 3.5 billion. But now in guidance, you actually reduced it by 10 billion. That means that it’s not only the sponsor search, but it seems that there are some other factors contributing to the decrease. And so in terms of the decrease of 10 billion, is there any other factors other than in the sponsor search that contributed to this downward revision?

Manabu Miyasaka

In April, I mentioned that the growth is single-digit middle to high-end, but now we revised it to the lower single-digit growth. We made downward revision because of the following reasons. The major reason is the PC related situation, IE the mobility has been detected and also XP will no longer be supported. Therefore IE users actually switch to Chrome. And I believe that this is one of the major events that impacted us. And there were some users who came back from Chrome or others use Yahoo! as the start page using Chrome. And we are coming out with different initiatives to solicit that action. So I do not think that there will be any further decline. But in terms of PC SS decline I think IE and end of XP support were the major factors.

Now regarding the Outlook of SS, I believe that we shouldn't be that optimistic. Therefore, we believe we will be in the low single-digit i.e. 1% to 2%. And I think that will be the most viable outlook. Regarding other factors I cannot give you the details but all-in-all in terms of the advertisement, we are being pretty conservative in providing with the forecast. The overall advertisement will grow by a single-digit. So we will try to come out with different initiatives and increase the outlook. But for now we are making it conservative, and so we reduce it about 10 billion yen. Thank you.

Keiichi Yoneshima - Barclays Capital Japan Limited

Thank you. Another question related to the revenue or the profit outlook and you haven't changed. You said that you are being conservative about in terms of second quarter operating income, I guess as compared to the Q1 it will go down by 4 billion but do you plan to conduct any promotion with say Y!mobile so that they will not be any further decline as compared to Q1?

Unidentified Company Representative

In terms of Q1 regarding the income, I would like to provide you with some technical factor. We assetized the software and across the board we reinforced infrastructure. So we dedicated many engineers and made the infrastructure more robust. So we have resources for that project and that actually led to major scale development. And that impacted the capitalization as a portion of about 2 billion.

And in terms of the reduction of income, it was not very high, but in terms of 4% to 5% due to the capitalization or assetization of software it did not impact much. And as compared to Q1 and Q2 I do not think that there will be a major difference as in the case of revenue, we are being conservative in coming up with the operating income as well.

Keiichi Yoneshima - Barclays Capital Japan Limited

In terms of ¥2 billion that has been capitalize or assetized, what is the depreciation image that you have?

Unidentified Company Representative

Usually, we use about five years for depreciation. And so depreciation doesn't happen all of a sudden so it does not negatively impact operating income.

Keiichi Yoneshima - Barclays Capital Japan Limited

Now third question about question about cash, and how do you plan to use this cash. In terms of Y!mobile and eAccess acquisition you decided not to go for it so I think you have ample cash at hand and you will be purchasing the stocks of KC. And as compared to 400 billion cash you are not spending much for the acquisition of shares of KC and so I was wondering what is your plan to use this abundant cash?

Unidentified Company Representative

Well my answer would be the same as before, we have advertisement and EC and we will be investing in those areas for further growth. As the management we are trying to find out what will be the next pillar or the engine for growth. We will not acquire E-Mobile, but in terms of the subscriber of the Internet we will try to focus on them as a business model to be pursued and of course we need the settlement mechanism and also we need a different financial services for the buyers and sellers. And so the settlement as well as financing services will be the next pillar that we will be focusing on.

Keiichi Yoneshima - Barclays Capital Japan Limited

Lastly this is a question related to Yahoo! premium. I understand that it went down and you will be partnering with Y!mobile and you plan to increase the number of premium, but don’t you think that you will just follow the same track, you have increase in Y!mobile but after one cycle you will encounter another decline. And in terms of Y!mobile it will be sold is a packaged solution so in terms of ARPU, Y!mobile maybe might decline. Don’t you think there is such a risk?

Unidentified Company Representative

In the first stage we have Y!mobile device and we have Wi-Fi device. And so premium will be incorporated into those devices. So our premium membership services can be provided. We have the collaboration with Softbank and we try to increase the number of membership, but in terms of attrition, sine the channel is quite different I think we will see a different landscape in terms of the attrition rate. Thank you.

Operator

Any other questions? Okay. The one sitting in the second row in the middle side. Please.

Taro Ishihara - Daiwa Securities

I'm Ishihara from Daiwa Securities. Thank you very much for the presentation. I have three questions and let me make one by one. My first question is about the contract with Google and the contract renewal with Google. What kind of increase of cost was expected or you don't expect any cost increase about the renewal of the contract with Google?

Unidentified Company Representative

Okay. But this is before the natural closing the deal. And also we have not disclosed agreements, we cannot disclose any details about our current negotiations with Google. But now current gross is just about lower single-digit gross and current the sponsored search, the profit from sponsored search can be maintained. And there will be just landing point for us in this negotiation with Google. This is what we can say today.

Taro Ishihara - Daiwa Securities

Okay. Thank you very much. And my second question is now at this time, we will go into and acquire a stake of KC credit card operator and what you aim at and about the scale of e-commerce and I think that’s the number of the credit card members and the users and KC is rather smaller in scale. So what does this mean of acquiring KC? For example, you can acquire that credit card operating system and this is the most important asset for you, for the [inaudible] for example. And after that you’re going to grow the members of credit card by yourself or and this is first big step for break into the credit card. Then also you think about another M&A for growing the business in the future. What’s your strategy?

Unidentified Company Representative

Now when comes that the objective of this acquisition of KC Card is that just you have just mentioned now when it comes to that, for all this the credit card users, we think that we can grow this user base by ourselves after this onward. So, what’s most difficult to start up this the credit card system is that computer system and then also the skilled resources, the human resources to acquire and these human resources and system take a bit long time if we need to build up from scratch. So that’s why it would be the most effective for us to have all this management and the business basis by acquisitions. And when it comes to that the acquisition of that users and we’ll have to do our utmost after this and by ourselves and we can do that.

So, I think that KC don’t -- we don’t have to acquire any companies; but we already have a very, very larger user base.

Taro Ishihara - Daiwa Securities

Okay. Thank you very much. And my last question is -- my question about premium DSP. For example that in the revenue forecast and the revenues in the new quarter in the next quarter or what kind of clients do you expect. And I expect that about you mentioned about 80 companies, whether this 80 clients and customers, what’s the break down, the profile of these clients and where are you going to introduce and deploying these systems. Would you be more specific about that?

Unidentified Company Representative

Yes. First of all on forecast, I’m going to explain forecast and your latter part of question will be explained by Mr. Aranami. Premium DSP has started six months ago and also in the Q1 we have about the revenues of couple of hundred millions. And still that revenue and SKU is limited so that's why it looks like that growth rate itself seems a bit conspicuous but the revenue size is still limited. And it mean that we are outsourced - that the operation from the clients. So that's why we can expect a very good repeat rate and the stock base business let’s say, so that in Q2 and it will be still limited to that couple of hundred millions but it will steadily grow in the future we would like to have that revenue of 10 billion Japanese yen.

Next nature of operations will be explained.

Osamu Aranami

I am Aranami from Marketing Solutions and when it comes to -- we cannot disclose the name of the clients, we’re sorry, but basically that some -- all the big clients called the national clients for example the travel and real estate or the recruitment, so we have diversified customer and client bases.

Taro Ishihara - Daiwa Securities

That's all. Thank you very much.

Osamu Aranami

Okay. Thank you.

Unidentified Company Representative

Any other question? Person sitting at the center in the front.

Yoshitaka Nagao - Nomura Securities

I am Nagao of Nomura Securities. I have three questions. Firstly, about paid search, you said that PC query is declining and that is the trend. In total with mobile, what is the overall query trend? And you said that the number of queries from mobile is increasing. And maybe one day the PC decline will be compensated by mobile and you will come to the timing re-growth phase. And when do you think, you will encounter the re-growth phase. And in terms of paid search, maybe not three months down the road, but maybe two or three years down the road, what is the number you think you will attain in sponsored search business?

Unidentified Company Representative

In terms of overall query, of course needless to say smartphone based query is growing dramatically, so overall query is growing of course.

And from here onward I should talk on a device-by-device basis. Query from smartphone is the focus of the company so we are trying to further boost its growth. The market itself is growing but we would like to outdo the growth of Google that’s our objective. And we are on trend as scheduled and so we are growing above that of Google or the market.

And so in terms of the smartphone based search/query, we are very confident that’s the status quo.

Talking about PC, long-term structure wise for some time we will be seeing a decline. However, it is unthinkable to see the extinguishing of PC. So we will bottom out sooner or later. So when is the turning point, I don’t know. At one point in time we will bottom out in terms of PC. Regarding smartphone, I believe that it can compensate for the decline of PC. In terms of RPS i.e. monetization, right now, we try to focus on the users and try to solicit them to use the devices. And so now we are focusing more or less on the user friendliness. We want to increase monetization. There are many measures; we can just increase the number of advertisements. But we want to expand the user base, so there will be more users. So in terms of RPS or monetization regarding the smartphone, I believe that there is much leeway for upside surprise. And so in terms of the device, we are on a plateau at this point of time, but I'm sure that we can enjoy regrowth in the future. Thank you.

Unidentified Company Representative

In terms of the smartphone query I'm sure that it will grow without any doubt. And we are focusing on [answer] [ph] Japan, which is focused on mobile and PC. So the result of the query will be the actual response that the user wants. And so in terms of the result of the query, we will actually show the answer or the response.

And in terms of query PC is declining but the decline is very small. So, in total we are seeing good growth in terms of the query business and I believe that we will enjoy further growth in the future.

But when you look at the breakdown say, if you are watching TV and if you want a query, then you can query immediately using smartphone. And in terms of the monetization however it is not very efficient. But at the same time, there are some schemes of monetization that can be realized only on smartphone, you can show the telephone number so you can immediately call that entity.

And I cannot give you the details, but we have more than a million accounts and we have about 4 million operational sites. So in terms of the smartphone maybe the small account can have the paid search and if that becomes viable business model for them. Then we can actually have better business. So in terms of long tail we have entities that are residing on the left hand side of the long tail, but if we can shift more to the right side we believe we can come up with more advertisement on the smartphone. And so three or four years down the road we would like to focus on the local regions.

Yoshitaka Nagao - Nomura Securities

Now second question is about Yahoo! Shopping, in the end of June you said you have about 130,000 store IDs so you have a large scale and you can actually have more visitors into your site. Maybe the time is not right yet to mention about monetization in detail but if you have any initiatives that you can share with us, can you tell me about that and especially focuses on the situation of Yahoo! Shopping?

Manabu Miyasaka

We are in the midst of the cycle. And so we would like to increase the sellers and buyers so that transaction value can be increased in the end of the day. Regarding commerce advertising we have a project and we started development. In terms of [inaudible] launch the time is not ripe yet and we have to focus more on increasing transaction value. By having new advertisement we would like to increase the revenue but that equation will be viable only a year or more down the road.

Yoshitaka Nagao - Nomura Securities

Thank you very much. Last question, in terms of the share of JNB you’re increasing and you are acquiring KC stocks as well and you actually embraced FX as well, and you have [inaudible] securities and insurance companies within your group. And in terms of the Internet holistic financial services are you going to further strengthen this domain. Then President Miyasaka would you please share your mind with us?

Manabu Miyasaka

In terms of the mountain we want to increase the operating income by double fold and if our goal is not that high we can just sit relaxed but that is not a case. We have abundant segments that we can actually cater to. And so we will focus on the current business but at the same time we have to create the second and third pillars.

There are many Yahoo users. And what do they usually do? They actually have ISPs and use their service providers so those operators are the target and Y!mobile is the entity that we are cooperating with. Of course we did not acquire them but we have partnership and also another domain is settlement because everybody will conduct e-commerce.

And in terms of Yahoo! Japan of course people do not only shop on Yahoo! but they might use other e-commerce sites. But one way or the other our users need the settlement and financing services. So in terms of the transaction volume it is very hard and we’re conducting different businesses in this area. And I believe that settlement and financing services should be a very good match with us.

Unidentified Company Representative

Do you have any other question? Okay, sitting in that back side of the row, please?

Sumito Takeda - UBS Securities Japan Co., Ltd.

Thank you very much for presentations, I’m Takeda, I have three questions. And the first is about the advertising and smartphone advertising. And other than that search and YDN for example and the premium smartphone advertising, how are you going to grow that area of the business. And I think that you're going to renew all that the top page for smartphone but where will be that your specific strategy. This is my first question and second question is about the settlement and finance.

Manabu Miyasaka

Just wait for a minute. So would please make the question one-by-one please, okay. So now your question about the smartphone advertising and the search and YDN. This is also the core part and also and the renew with top page and I’d like to just place advertising in the timeline and this is the specific strategy. Okay. Thank you very much. Do you have any other thing to add?

Unidentified Company Representative

Yes. And that sure that currently the premium advertising cannot be so much smoothly monetized on the smartphone. And so this is one reason we have been struggling in premium advertising.

but in order to deal with this situation for example on the smart, on device so we're going to provide some test delivering the rich content advertising and also the Mr. Miyasaka have now just mentioned the timeline type of advertising will also be placed and we’re getting ready for that. And the other thing is that now we also are thinking about an application advertising. So this mean for example this is the next new advertising and for that's the video and also would like to just like the application type advertising, it’s a new effort.

Sumito Takeda - UBS Securities Japan Co., Ltd.

Okay, thank you very much. And my second question about the settlement and finance business. And my question is about the credit card business. So what is your target user base, target number of users or target number of credit cards? If you have any specific target I would like know that? And also you explained about the synergy with the EC and that’s for sure that and also essentially as you think about the synergy with eCommerce, but would you be more specific about the strategy, about the synergy for example Softbank is going to have a 30% of stake of KC so is there cooperation with them?

Unidentified Company Representative

Okay, first of all our targets and also acquisition of the credit card users. We have set up a very aggressive target already internally. And now we are working together with the KC and studying about the feasibility of this target, so we cannot disclose the specific internal target, we are sorry. And when it comes to specific services based on this credit card operation and we are working together with KC also as well as Softbank so we cannot disclose about the details of current discussion with them.

But I would like to -- at least I would like to show our enthusiasm of the business.

Unidentified Company Representative

Okay. I am [Tanya] [ph] I am responsible for this settlement and finance business. And now we would like to become the Japan number one credit card operator. But I think that’s the credit card and it should be used by the Yahoo! services and also not only for eCommerce but Yahoo! Japan is providing travel and other - there are a lot of premium or there a lot of different services which have very good synergy and affinity with the credit card operation. So, I think I would like to take advantage for all this and our service portfolios, and also the [key] [ph] points that [tenants] [ph] or the Bookoff or this and also there’s real channels we can also take advantage of and make use of for acquiring the users. That's all. Thank you very much.

The third fact is, it can be repetitive that there is 3.6 million class trucks on the road that dwarfs any natural gas markets that's out there and every year there is another 180,000 to 200,000 diesel trucks that become two years old and become eligible for dual fuel. So it’s a perpetual source of conversion opportunities that we have out there.

Even though fill stations are number one issue, they continue to grow and the class-8 stations are being built every month, the government reports as of June that there is an additional 238 stations that have either been permitted or under-construction or waiting to open. Most of those now are class-8 accessible so that's almost doubling the number of stations we have available to us in the next 12 months.

And then finally, like Weyerhaeuser and Home Depot and Lowes and Proctor & Gamble we are seeing more corporations are requiring their logistics suppliers use cleaner burning fuel to meet the sustainability objectives and so combine economics with gaining market share with the larger customers that's an important trend that we see. We have realized that it’s going to take all these pieces of the puzzle to eventually reach volume adoption rates, but we see the signals are continuing to get stronger not weaker and we project APG will be a major player in this natural gas evolution.

I am going to wrap up my statements this morning with a recently I read an insightful Warren Buffet quote that discussed the “importance of what the focus on when accessing the business opportunity?” and he said with the wonderful business, you can figure out what will happen, however, you can’t always figure out when it will happen. And he goes on to say we don’t know, you don’t want to focus on the when you want to focus on the what and then he concludes if you are right about the what, you don’t have to worry about the when and for me any way we are clearly focused right now on the what and working that very hard and very confident that our business model is solid and is going to continue to gain popularity and we believe it’s only a matter of time before we can better predict the when.

So with that I will turn it back over and we will start our Q&A session.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Keith Markey of Griffin Securities.

Keith Markey - Griffin Securities

Good morning, and thank you for taking the question. I have two actually. I was wondering, is there any chance of doing those, the turnkey type installations ever again? It sounds like that was a one-off that had rather, very nicely boosted your performance last year, but we may never see that again.

Lyle Jensen

On the oil and gas side, I think the catalytic converters are, that was actually a timing issue. We get very little mark up. It’s got like 12% gross profit on the market and we did it again, it has been for financial reason for revenue reporting, it was actually done to help the customer who was so larger a customer, that they felt that we could actually process and get the paperwork done and get to the field quicker. So I guess I will this answer this way, there is always opportunities and we will never see no to it. It’s really not a common practice to have those involved in. It’s almost not our core business but adding catalytic converters are added to handle additional emission requirements of all the engines. But I will say yes and we will take it when they come but it won’t be our main stream revenue.

Keith Markey - Griffin Securities

Okay. And then it sounds like you have a fairly large number of new opportunities to pursue in the coming year. Can you give us a sense as to what the kind of capacity expansion you might need to have in place in order to serve those new opportunities?

Lyle Jensen

It’s a great question. And that's one that again we – this is kind of have been taking care of our oil and gas side, it really driven crews and so you get the – our one dealer is already up to two crews and the other one is about ready to go to two crews so that's really not a—and you can do six, seven, eight conversions per month per group. On the vehicular side where it could get large quick, this was the importance, the strategic importance of our WheelTime certified installer agreement that we entered in early 2013 where you have these 18 individual WheelTime members that have a 181 locations across North America, not all of those have been upgraded to do duel fuel or to do natural gas or service an install work. But it’s really not, it’s a task that we really to continue to train new certified techs and we see – really not only next year but for the years to come we actually don’t see any way that we will tap out the capacity of the WheelTime network. It can handle anything we can throw at it which give us great, I sleep at nights because of our WheelTime installation capability that's being developed.

Chuck Coppa

That's one of the other things we are talking to the bank about, one of the reasons for them looking at increasing and kind of restructuring the credit facility is to be able to gain access to additional capital that we feel we’d need to continue to grow this. The turns are very quick on the inventory piece, but with the ramp up that we are looking at, having access through the working capital line to buy more inventory will be important for us on that piece too.

Keith Markey - Griffin Securities

Thank you very much.

Operator

Thank you (Operator Instructions). And we will go now Dick Feldman of Axiom Capital.

Dick Feldman - Axiom Capital

You forecast $7 million to $8 million revenue for the year, sort of at the midpoint that would imply about $2.7 million revenues for the final fiscal quarter. Do you think that would be sufficient to get you to breakeven or modest profitability?

Chuck Coppa

That won’t get us to profitability on an annualized basis, Dick because of...

Dick Feldman - Axiom Capital

No just for the quarter?

Lyle Jensen

Dick, we get close. As I watch month to month to month, we have always talked about 8.5 million annualized being our EBITDA break-even and we have achieved that a third of the time. It’s a matter of putting multiple months together. So, 2.7 now we are talking 10, well over 10 million. Chuck has talked about, with all the amortization and everything I think we are still in that 12 million range for fully reported profitability when you take all the inventory soft costs and depreciation and amortized development expense. So, I feel very good that it is positive EBITIDA and sure going to be getting close to towards the break-even way.

Dick Feldman - Axiom Capital

Okay. So from a cash point of view, it would be positive EBITDA and...

Lyle Jensen

And that's what I managed, I mean again obviously I want fully reporting profitability but I really watch our expenses to the extent we can and I really watch that EBITDA breakeven because that plus a reason as Chuck said that plus a reasonable working capital line of credit they can support receivable and inventory growth that's a combination they can supporting a growing business.

Dick Feldman - Axiom Capital

It also sounds as if you will have a good start to the new fiscal year given that 160-odd units that you mentioned that will carry over, you will have that, right.

Lyle Jensen

Yes, I think it’s timing of purchasing of profile but yes so that 565 as I said is scheduled, right now we can see visibility that all of that delivers from the first two quarters of the December quarter and the March quarter and that's just those five customers. As we continue to pull people out of the early adaptor phase and follow on that should get stronger every quarter as we go forward that's our goal and our objective.

Dick Feldman - Axiom Capital

On the oil and gas side, you're dealing with a somewhat finite market, not as open-ended as the vehicular market. Do you think you can still grow that, or are you getting to a point where the penetration is such that it's going to be difficult to grow?

Lyle Jensen

Again great question. Internally, we talk about market saturation and so forth but we think 3, 4, or 5 more years and it’s really based upon again the number of the units in the field. When they pull them out of the field for over-haul that's a great time to convert them and then when we go to conferences now the oil and gas guys are talking about that eventually within five years or by 2020 they believe that, 50% to 60% of the eligible electronic generators will be running on some form of natural gas and so I don’t see anything slowing us down at least for the next two years if not may be the three to four years. So I think there is good opportunities to grow.

Dick Feldman - Axiom Capital

So you think you can continue to grow that segment of the business?

Lyle Jensen

Yes.

Dick Feldman - Axiom Capital

Well, if it all comes to pass, it would be nice, so good luck, and thanks for taking the question.

Lyle Jensen

Thank you.

Operator

(Operator Instructions) and we will go next to JinMing Liu of Ardour Capital.

JinMing Liu - Ardour Capital Investments

Good morning thanks for taking my question. First of all, just a quick clarification, if my number is correct, it looks like for your vehicular sales for the quarter, you had lower ASP comparing to what you delivered before. Can you comment on that?

Lyle Jensen

If you will take a look at the total revenue you are seeing the increased international vehicular revenue which has a lower ASP price because it doesn’t – those customers don’t require any type of Euro standard or EPA requirement, so yes there is a simpler lower ASP for international versus North America, Australia and Europe.

JinMing Liu - Ardour Capital Investments

It just looks like they are much lower compared to what the price you have in the States?

Lyle Jensen

They are. The cost of the EPA compliance is huge as we all know.

JinMing Liu - Ardour Capital Investments

Okay. I see. And on that subject, if you are expanding to the foreign countries, like Mexico, Canada, Peru, what are the regulation hurdles you have to get over, or what you have with the EPA will help you?

Lyle Jensen

Having EPA approval is a huge right of passage. Most countries in South America, they do not have any formal emission guidelines and they pretty much accept and recognize our EPA approvals as being able to enter their markets. So from that standpoint, you do have some parts acceptability requirements that we go through but those usually take 90 to 120 days by country to get our parts approved but overall it’s countries with formal emission requirements or at least acknowledge what we have accomplished already in the United States allows us to start to grow in their markets.

JinMing Liu - Ardour Capital Investments

Okay. How about Mexico, is there anything specific for that country?

Lyle Jensen

No specific emission requirements. But again they ask for all of the EPA approvals and they want to see which engine family has been approved in the United States which again most of the Mexico does drive fleets that are 2009 and older so our current 453 approvals have helped a lot in the fleets that we have talked to in Mexico.

JinMing Liu - Ardour Capital Investments

Okay. Moving to your IUL certification, Congressional now I think they first what. Is there any way that you can quantify the size of the area of IUL compared to OUL?

Lyle Jensen

The way they probably do it is to, if we take a look at 2010 through 2013 and those become the ones that are two years older, during that time period I think 10 and 11 were slow years so it is like 150,000 trucks per year were purchased and now we are up to 180 to 100 so it’s probably those four years like and in previous press releases we talked about that if you take a look at the Volvo Mac, Detroit diesel and Cumins in total for the IUL market it’s about 1.5 million trucks on the road today. So it will take 175 times four or five years and that’s kind of a market that will open up to us with this IUL approval. I can’t really tell you how many of that have million is in (inaudible) natural gas at this point in time. So that's our task with our dealer network and with our sales teams as we get these approvals now we can actually go legally market and sell them, we will go back out to the fleet that they have these newer engines and to determine which companies are interested in natural gas.

JinMing Liu - Ardour Capital Investments

Okay. Lastly on the financing side, is there any specific covenants from your current bank facility that you have to satisfy to to increase the borrowing?

Chuck Coppa

That would be to pre-determined JinMing as far them increasing beyond the 2.5 million max they have got out there. I mean we have currently traditional covenants working capital ratios and things like that. But that will be part of our discussion as we look to extend the maturity and increase the availability will be addressing any additional covenants that they will need to satisfy our request.

JinMing Liu - Ardour Capital Investments

Okay, got that thanks a lot.

Operator

Thank you. At this time, I would like to turn the conference back over for any additional or closing remarks.

Lyle Jensen

We appreciate the time and the focus on what we are working and we believe again that hopefully have continue to good positive result to report as we go forward and we thank you for attending the call.

Operator

That does conclude today’s conference. Thank you for your participation.

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