Rakuten's (RKNUF) CEO Hiroshi Mikitani on Q2 2014 Results - Earnings Call Transcript

| About: Rakuten Inc. (RKUNF)

Rakuten Inc. (OTCPK:RKUNF) Q2 2014 Earnings Conference Call August 4, 2014 2:30 AM ET


Hiroshi Mikitani - Chairman and Chief Executive Officer

Unidentified Company Representative

Good Afternoon Thank you for attending Rakuten’s second quarter financial results meeting for investors and analysts. Just a few announcements to make before the meeting begins. This meeting is only for investors and analysts. The briefing for media has already finished. If any media is still present and please notify our staffs who will assist you.

Today’s meeting will be in English and in Japanese. There will be simultaneous translation with Japanese on Channel one and English on Channel two. We will collect the ear pieces and receivers after announcing our results. So leave these items on the table at the end.

For security reasons, we request that you always wear your security pass in the building. We will collect the security pass at the exit on the first floor. If you need to use the wash room, you may exit this room and it is on the right just outside the room. Also please note there is no smoking anywhere in the building. So in front of you are today’s materials.

You should find three materials, one, PowerPoint presentation. Two Kessan Tanshin Financial Results and three Rakuten’s business results by segment. If one of these documents is not in front of you, please raise your hand and one of our staffs will assist you.

And if you need any of these documents in English we have them at the back of the room and again, you may raise your hand to help, a staff will help you. Rakuten Securities and Rakuten Bank Kessan Tanshin are also available at the back and also please remember to turn your mobile phones to silent mode. Thank you.

Finally, our CEO Hiroshi Mikitani is in the U.S. right now. But he will be joining us by video link to make an initial presentation from there. So, please wait a moment until we begin the results meeting. Thank you.

So, good afternoon ladies and gentlemen once again and thank you for waiting and welcome to Rakuten's 2014 second quarter financial results meeting for analysts and investors. First I would like to introduce our main presenter today who is joining us by video link from the US is Hiroshi Mikitani our Chairman and CEO.

So, we can now hear you, Miki.

Hiroshi Mikitani

Okay. Thank you.

Unidentified Company Representative

Okay, and I’ll just introduce the other executives before we move on to your presentation. So, in the conference room today, from your left, is Yoshihisa Yamada, Executive Vice President and CFO; Masayuki Hosaka, Executive Vice President; Masato Takahashi Managing Executive Officer; Kazunori Takeda, Managing Executive Officer; and Yuji Kusunoki, Managing Executive Officer.

So, these six people will present and available for questions at the end of the presentation. So with that, Mr. Mikitani, please begin.

Hiroshi Mikitani

Okay, good afternoon everybody. Forgive me for joining this press or our earnings meet through the video conference. I am in Silicon Valley right now. And let’s start using our PowerPoint presentation.

So, before talking about our earnings highlights, let me just view one of the slides which kind of demonstrates what we can use with the data we have.

This is, as you know, Rakuten has been using our personal big data not only for our user experience optimization or advertising optimization, but we have used our data to enhance our personal finance business. So, in a sense, we are very, very unique. But recently, our lab, Rakuten Institute of Technology came up with the predicting the economic condition of Japan using our purchased data and credit data.

So, I asked them to come out with the best estimate of the composite index of which is released by Japanese government, three months - two months prior to the government announcement. And the blue dot is what we predicted and red dot is the actual announcement of the government.

So, you can see, our prediction error was 0.4% and this tells you two things, one, we can pretty much predict the future economic condition of Japan. And secondly, as far as we can research, we can tell what kind of products represent as a sample of government composite index announcement, which was a little bit strange in my very, very straight opinion.

But I think Rakuten Ichiba has a gigantic market share in Japan and we have the ability to utilize our data in many different ways and that is a biggest differentiator for us from our competitor. So this was a kind of interesting and so I just wanted to share with the - our – the most honorable analysts.

And today, I want to talk about two things. Strategically speaking, one is strategic action for growth and the second is our operations. And so let’s talk about the - our – the growth especially for Viber.

As you know, we acquired Viber in February. Since then, it has been keep accelerating its growth. In – at the end of July, our - the registration of Viber reached 608 million. This is a little bit different from what we have been using, but I assume some of our sort of the initiating apps companies is using very similar number.

So, just to maybe convenient for you guys to compare apples-to-apples, we thought it may be worthwhile to present the pure registration numbers. But, this is the true unique IDs of Viber.

But you can see, it has reached 400 million – as of July 31. So, the growth is just accelerating especially in countries like India, Russia, and the Latin American countries, in Southeast Asian countries, the membership growth is exploding and Viber is reaching its monetization target as well.

Now, we have already created our data service which is going to integrate Viber ID and Rakuten ID. So this is going to enable us to use our super points very, very effectively to expand our user base for our core e-commerce service and digital content service using Viber as a funnel to reach out to the customer.

So, I think this is a very, very unique experiment and this can completely change the growth pattern of Rakuten business. As for the sort of operations, as you know we have been conducting Project V4 which is our cost-cutting initiative and we have already reached over JPY 1 billion and I think, we have we have already achieved over JPY1.1 billion, which is above our target per month in cost reduction.

What we have done is basically two things. We did the operation improvement of existing business by just simply reducing the costs, Viber’s costs and at the same time, we have given effect to our Kobo with business and we did business model changes for our training business Wuaki and our Chinese travel business which were a little bit over investing.

And at the same time, we made a sort of a very strategic movement to reduce cost as well as for further acquisition of the growth, which is to integrate our global e-commerce platform. As you know, we have acquired several e-commerce marketplaces out of the other world. They have been using different platforms and it made us very difficult to create the largest synergy we can and transfer our expertise and know how.

So we have decided to integrate the e-commerce platform, which is going to give us huge operational efficiency, as well as the very, - had a very strong strategic expectation to share the expertise.

As you can see here, the internet service loss – the loss from other internet services has reduced from minus 13.3 billion to minus 8.5. But we didn’t take out the one-time items. It has decreased from minus JPY11.1 billion to minus JPY8.5 billion and this is just to represent we are not just expanding, but we are a very, very reasonable company in terms of managing bottom-line as well.

So, for Kobo, what we have done is, basically we brought a new management now Allison who is a basically senior and build our telecom business and other businesses in Japan moved to Kobo. He now resides in Toronto. And making an extremely good sort of realignment of the strategy as well as optimization of the operation and organization.

We have also – we completed Sony eReader business migration for North America, Europe, and Australia and we are enhancing our new initiative, which is going to bring us more margin than the existing e-commerce legacy e-commerce business – e-reader and e-book business. The first one is, basically seventh publishing platform, which we have much higher profit margin and we are also focusing on the education business and enhancing to introduce the different languages.

As for e-commerce, as I mentioned, we have already announced that we are going to close down the old Play.com business and migrate our service to Rakuten Merchant Server, which we call as RMS and as you can see, our – now we have three different types of platforms.

One RMS Japan, which I think is the best – the platform for B2B2C type e-marketplace and second is RMS Global. This is the system we developed for our international businesses, the Malaysia, Thailand, Indonesia, and Spain operates on RMS system.

But, the chart type is the oldest e-commerce platform of the companies we acquired which is we have eight different platforms and we definitely need to integrate those on the same platform. As you can see, the outlet goal is to integrate the entire e-commerce business under the same platform including RMS or the Japanese operation. But first step is to integrate global – the services on to the platform.

And this will enable us definitely to optimize our cost. Some of our smaller marketplaces, the IT cost is too high and that is making us difficult to expand. And at the same time, we will be able to share the expertise more and we will be able to let our merchants cross-list their products on to many different international marketplaces simultaneously and I think that is going to be a huge advantage for us.

We have seen stronger growth for the marketplaces which use RMS Global platform. And the growth in the US, France and Asia-Pacific is very, very good. As you can see, our overseas marketplaces is growing at 47.4%, Forex adjusted plus 32.5%. But this number excludes Play.com because, as I explained, we have announced the closure of the existing Play.com’s marketplace and turned it to our RMS Global platform.

The marketplaces which use RMSg, which is our international platform now is showing almost plus 700 – plus 600 – over 600% growth and with the Forex adjustment, it’s plus 700%. So, we can see it’s showing explosive growth.

So this is to show you – this is the growth of our overseas marketplace on our RMSg platform and this is the growth of our overall marketplace business, which is not bad but you can see this is what we can do with our own platform, but definitely, price mix there, the Rakuten.com which is – the Buy.com business, size-wise it’s larger than others but overall, we made 47.4% y-o-y for the marketplace which is good.

By what we are doing is really enhancing our globalization of our e-commerce business. And as you can see, we are doing the super sales out of other world, Malaysia, US, Germany, France, US. We are conducting the same kind of marketing initiative and it has been a great success.

And also we are doing our conference Rakuten Expo all over the world and has increased our platform.

So let’s move on to the financials. Basically, we – despite the consumption increase, as of April 1, our global – I am sorry, the domestic gross transaction volume grew 21.3% y-o-y and our domestic e-commerce grew plus 8.1% and total of the half year, grow plus 19.5%.

The credit card profit growth was plus 64.5%. The other internet services loss is shrinking. So these are the highlights. As you can see, unfortunately, we had a very sluggish and stock market. So Rakuten Security RMS basically shrunk half, but despite that, I think we managed to make revenues plus 8.3% growth and you can see at the bottom of the chart, you can see the operating income excluding Rakuten Security was plus 6.2% and dividend growth was 12.7%.

As we can see, a more breakdown of this. Now let’s go to EBITDA, you can see that Rakuten Ichiba and Rakuten Travel, revenue-wise it grew 6.9% and excluding the accounting error adjustment, we made bottom-line EBITDA grew 6.9% as well.

And unfortunately as we can see in the third row, the Internet Finance segment, although dividend grew 9.8%, EBITDA was minus 10.6% purely because of the slowdown of the stock market which had a huge impact over to the bottom-line of Rakuten Securities.

This is the breakdown of the growth of domestic gross transaction volume. As you cans see, Edy and Credit Card grew 31.8% and Travel grew 10.3% and domestic e-commerce grew 8.1%.

From this earnings release, we slightly changed the definition of gross merchandize sales from domestic e-commerce to after-tax basis. Prior, some numbers were inclusive, some numbers were not. So it was not very consistent. And so we made it very clear like other companies, everything is now after-tax after the consumption tax.

With regard to the ecosystem and synergy, as you can see, we are continuing to improve the cross-use ratio and now it’s 58.1% and which is a 5.3% improvement from June of 2013.

Let’s move on to the Internet Finance segment. As you can see, the bank and credit card are making Rakuten Credit – Rakuten card are making huge growth despite again of the consumption tax increase. Rakuten’s bank’s operating income grew 23.9% and Rakuten Cards operating income grew 54.5% in Q2.

And this is the breakdown of the Rakuten Card and as you can see the operating income margin has stabled at 17.6%. The shopping transaction volumes and the volume balance made over 30% growth. So we are making huge growth despite the slowdown of the general consumption of Japan.

The short-term slowdown of consumption, because of the consumption tax increase. So this is the Rakuten Bank, as you can see, we are continuously making progress and revenue grew 19.12% and operating income grew 23.9%. Our super loan has reached the balance of JPY265.7 billion and I think you may be aware we are one of the top players in this segment.

The bank deposits has reached over JPY1trillion and the only sole business for our Internet Finance business, Rakuten Securities and operating income decreased by 46.6% and revenues on the y-o-y basis decreased by 30.1%.

So this the only sort of the negative growth company as the business of us, but I think it is purely dependent on the decision of the stock markets in Japan. And it’s extremely high profitable business. But it’s very, very related to decision of the stock exchange.

However, we are trying to make as stable as possible by increasing some of our asset business of Rakuten Securities. As we can see, now our balance of investment track has almost reached JPY400 billion. Our initial mid-term target is to grow this to JPY1 trillion, which is going to give us close to JPY10 billion of stable income for us.

The Rakuten Securities stock, the trading value decreased 49%.

The Rakuten Life is keeping its momentum. Our number of policies grew 15.7% and annualized insurance premium grew plus 20.8% and it’s already profitable business for us.

Let’s move on to Internet Services. As you can see, Rakuten Internet results, operating income growth was 5.8% and you can see dividend growth was 7.1%.

Domestic e-commerce, as I mentioned grew 8.1%, but you can think about the levering up the consumption tax increase, our growth was 19.5% and which is second from the last half year of the last year which we had a huge gigantic revenue GNS growth from the championship sales of the Rakuten e-books.

And this is the disclosure of the breakdown of the product categories y-o-y. As you can see Package Media, plus 33%, the medical goods, including pharmaceutical not pharmaceutical but the OTC drugs grew 17%. The sweets grew 16%. TVs, Audio, Cameras grew 10%.

But if you go to the lower group, cars and the auto goods, the very luxurious watches, cosmetics, luxury brands are still at single-digit negative growth, which is a lagging factor of what, but I am sure these will come down – come back in the third quarter. So, other than very durable goods, very luxurious goods, I think the consumption is getting back to normal is what I want to say and all these products will probably come back in the third quarter.

Rakuten Ichiba Unique Buyers grew 8.6% and the number of transaction grew also plus 6.3%. The Ichiba Mobile and Tablet growth grew 34.4% and this is one of the things I wanted to show you because some of our competitors kind of trying to discount the fee but which has almost zero impact to us and our – very different from our competitors.

Our GMS core Ichiba merchant is making a huge growth and for the first half year, it grew 17.5% to JPY23.1 million. So I think we are getting more customer satisfaction from our merchants.

The number of merchants, the number was flat, but I think we are very, very selective to make sure that we have the most secure and most attractive marketplace and we don’t want to have disturbance by introducing the sort of non-performing merchants and trying to create the premium more is our strategy. This is the distribution of merchant plans.

Let’s move on to Rakuten Capital. As you can see, our revenue was 5.9% and adjusted operating income was plus 15.8%. So, okay. And one of the things is, we had another adjustment from our previous earnings releases. But I think our governance is under control and I hope this will never happen again in a larger scale.

Let’s move on to our content strategy which is becoming one of our globally important business segments. The Viki monthly active users reached 31.9 million people, which is 60% y-o-y growth. Kobo registered user grow to 20.9 million, which is almost plus 40% y-o-y and as you can see content revenue of Kobo is growing very nicely.

And let’s move on to the other sectors. Telecom on the first highlight. As you can see Fusion is doing great. Baseball is growing very, very nicely despite of the fact that our team performance is not that good and very solid, hitting our best and hoping they will come back, but I think the business-wise, the CDM is field with fans and we are very, very happy to see that.

Let’s – but the only thing I want to add regarding is, if we go to the last – next year topic, we are going – as you know, Rakuten has adopted IFRS and right now we are expensing our customer acquisition marketing and advertisement cost of our some of our business like credit cards as our expense, as it happens it takes place.

But under the new IFRS 16, we will be able to capitalize it. So, the annual basis we are going to improve our profit of JPY4 billion per year.

And at the same time, following next year, we will have the office – we are moving into start with our new office that’s going to give us the one-time cost increase of JPY4 billion and I think for year-to-year operating continuous basis, we are going to reduce costs.

However, because of the moving cost is definitely there, and the renovation of the interior design of the new offices is going to cost us by about JPY4 billion. So that’s going to be one-time and a sort of cost for moving to our new headquarters, which is very, very nice, but very, very economical as well.

So these are the things but - what we wanted to say is, from 2015, our revenue will and OP basically will improve by JPY4 billion because of the accounting policies change of IFRS.

That’s it for me and if other participants have any further comments, please jump in or otherwise, I would like to move on to the Q&A. Thank you very much.

Question-and-Answer Session

[No Q&A Session for this event]

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