Yahoo Japan Corp's CEO Discusses F1Q 2011 Results - Earnings Call Transcript

Jul.25.11 | About: Yahoo Japan (YAHOF)

Yahoo Japan Corp (OTCPK:YAHOF) F1Q 2011 Earnings Conference Call July 22, 2011 3:30 AM ET

Executives

Masahiro Inoue – President and Chief Executive Officer

Analysts

Yoneshima – Barclays Securities

Takeda – UBS Securities

Koike – Goldman Sachs

Tomimatsu – Merrill Lynch

Ishii – Tachibana Securities

Operator

Thank you for waiting. I’d now start the meeting reporting the business results of the First Quarter FY 2011. We have then seen the brief summary and the presentation material, and profit and loss statement as well as survey or questionnaire. We welcome your feedback. Mr. Inoue will first make the presentation about the business results for the first quarter in first 30 minutes and then we have Q&A.

Masahiro Inoue – President and Chief Executive Officer

Thank you very much. First of all, let me start with the highlights of the financial data. So still there are some impacts from the earthquake. And as a whole, the impact is becoming less and less and as for the first quarter listing advertising revenue was strong, compared with the previous year, both the revenue and profit increased.

The revenue, sales ¥71.8 billion, 1.9% increase year-on-year. As you can see on this slide, the research business was transferred to MACROMILL and that accounted for ¥1.2 billion decrease in quarterly revenue. So, because of that the growth looks smaller. As per the operating income and ordinary income ¥38.8 billion and ¥39.2 billion respectively, 3.3% and 4.6% increase year-on-year. Quarterly net income of ¥23.3 billion, that is an increase of 7.6% year-on-year.

Now, looking at the breakdown, first of all, starting with the media business, the listing advertising through advertising agencies, there are both paid-search advertising, sponsored-search and interest match. There is some impact from the earthquake, so the financial sector revenue declined, but at the same time the fashion, accessory, internet information service companies’ sales increased. And the growth rate has slowed down somewhat, but still the revenue rose.

As for the display advertising, the conclusion, first of all, is that the revenues were almost flat. And internet-related information companies as well as cosmetic and other sectors were strong. However, there was a biggest impact from the earthquake, for example, the automobile-related business. Their production has not yet recovered to the full-fledged level. And also the entertainment software, they are still suffering from the impact from the earthquake, they are restraining their activities. So that was seen in the display advertising.

As I touched upon earlier, the research business is now in the media business and ¥1.1 billion decline was observed. So, the revenue was ¥25.1 billion that is minus 1.9% year-on-year. The revenue was strong, but – sorry, the impact of the revenue was seen, but the impact in terms of the profit was very small. So, operating income was ¥13.7 billion that is an increase of 5.2% year-on-year.

Turning to BS, Business-Services business, the listing advertising through online order, revenue increased steadily and also the profit increased, especially the internet information related sales revenue increased. So, the data center-related revenues, this was strong. The cloud business was strong. After the earthquake or until the earthquake that many companies maintained the servers internally and they recognized that they need to transfer or move that to the outside data centers. So there has been more active interest in this business, and also there were companies, who had data center in the Kanto area, but from the BCP aspect, especially those companies, who are concerned about the shortage of the electricity have started to shift to the Kansai area, so that they can locate the data center in non-typical territories. So that also led to the increase of the demand, so because of that data center related revenue was strong.

Yahoo! Local started, so the information listing revenue started to increase and as I explained previously as a first step, we had the various information listing revenues for different industries and now we have consolidated this to the Yahoo! Local. So, we have not yet seen the major change from this, but if you look at the real estate in Rikunabi, they have been very strong.

Especially Rikunabi, the recruitment information, for example part time information and also the recruitment information of other companies actually started to be more active after the collapse of the Lehman Brothers. The companies started to be more active in recruiting and providing information in relation to the recruitment. So, we are seeing the growth of that. So, the revenue of the BS business was ¥19.8 billion, 7.6% increase year-on-year. Operating income was ¥9.9 billion, 12.2% year-on-year increase.

Now, turning to Consumer Business. First of all the e-commerce related revenue, the paid digital content, especially online gaming was very strong. Mobage and Sengoku IXA both of them grew favorably in terms of the revenue. As for Shopping, in the previous year I touched upon this briefly. After the earthquake, the goods, which are selling well, have changed. So, there are some products, which are selling well and some others, which have become weaker, but as a whole Shopping was strong, especially because of the full conversion to the digital terrestrial TV broadcasting, there has been a rush to buy TVs and also the products, which will save energy; people are more conscious about saving energy. So, home appliances, which can contribute to the power saving have sold well.

As for Auctions, the unit price have been declining, but that decline had finally halted or stopped, especially home appliances and the auto sector were strong for the Yahoo! Auctions. Now Auctions and Shopping for both of them, the transaction via smartphone was relatively strong and transaction value rose substantially. The new smartphone is a new tool and this has activated the e-commerce and we have done the promotions to promote the increase of the transaction via smartphone.

As for the SG&A, the sales promotion activities were conducted relatively actively and the operating income or the profit was flat or declined slightly. As for the membership services revenue, the membership IDs have continued to grow and revenue as a result increased and also Partner and Matchmaking; those services performed well.

So, as a result revenue was ¥26.8 billion, 2% increase year-on-year. And as I said at the sales promotion, was spent more and operating income was ¥17.5 billion that is down by 0.8% year-on-year. And so having said that vis-à-vis three months ago forecast what has been the actual figures? In terms of the revenue, it was between ¥70.4 billion to ¥73.9 billion and the actual figure was ¥71.8 billion. So, we were able to set all in the midpoint of the forecast. In terms of the operating income or net income and quarterly net income, we had a forecast as written over here and but we were able to – instead of a bigger slightly above the midpoint of the range as though the numbers are self-explanatory.

Now, as to the second quarter business outlook, in terms of the overall take, we believe that the trend of Q1 will continue in Q2 as well. So, we have the advertisement, e-commerce, shopping, and digital content and these will be the major pillars to further boost to our revenue. And in terms of the research business transfer impact, we will still see the remains of the impact in the figures for Q2 as well. And in terms of sales promotion expenses, we plan to budget sufficient amount in order to conduct promotion activities. In terms of the revenue, we believe it was that of between ¥71.4 billion to ¥74.9 billion, operating income ¥38 billion to ¥40.2 billion, ordinary income ¥38.4 billion to ¥40.6 billion, and quarterly net income was ¥22.7 billion to ¥24 billion. And these are the forecasted numbers that we have on mind right now.

Let’s try to drill down into the numbers of the first quarter. Revenue-wise ¥71.8 billion, a 1.9% increase and our COGS ¥6.7 billion, minus 11% and gross profit ¥65 billion, 3.5% up and SG&A ¥26.2 billion, 3.9% up and operating income, ¥38.8 billion, an increase by 3.3%. So, these are the overall breakdown of the statements of income.

This shows the graph of the revenue and this is self-explanatory. And once again this is the graph of the quarterly profit trend. This shows the breakdown by business. In terms of each number, I have already explained to you is that in terms of the revenue as well as the operating margin and ordinary margin, you can see the numbers over here. And this shows the SG&A breakdown. This is as usual. Once again this is self-explanatory, but in terms of sales promotional cost and also in terms of advertisement cost we are increasing the number, but in terms of the overall reach of those expenses, we are on par with other past quarters. In terms of communication charges, we have our own data center. Therefore, we were able to decrease the cost in collaboration with IDC, as though this depicts the fact that we are streamlining operations.

Let’s take a look at the balance sheet. Again, this is quite self-explanatory. In terms of the corporate tax, as mentioned before, there has been some changes, but in terms of other items, we do not see much change. This shows the cash flow, this quarter wise. And since we completed our first quarter, we had to pay for the corporate tax and that impacted our cash flow and then we were able to increase our profit. And so in terms of operating activities, there was an increase of ¥8 billion and we paid out our dividends as though in terms of financing activities, there has been a minus ¥18.4 billion, and so net cash change is minus ¥13.4 billion.

This shows the number of people working in our company. We have already mentioned to you in terms of near hires, we are focusing on the new graduates, and so we see much increase in the first quarter. And by December, we see some decrease, but that is the trend that we see year-to-year as though you see the overall figure of the number of people working in our company.

Now, I would like to end my presentation and answer some questions. Any questions?

Question-and-Answer Session

Masahiro Inoue

The person in the second row?

Yoneshima – Barclays Securities

Yoneshima from Barclays Securities. Thank you very much. Media business, the advertising items, I’d like to know the breakdown, listing and others. What is the breakdown of others too? And looking at Advertising business the Search has been strong, Banner-related was flat, you mention. So, compared with the previous year or compared with the first quarter last year what was the growth. Could you give us the rough numbers? That's my first question.

And also the BS business data center-related business demand was very strong and the fourth building in Kyushu and Fukushima also. So, what would be the impact of the CapEx? When you build the data center, temporarily we believe that the settlement number might be affected, but rather demand is very strong, so would you say that the data center-related business continues to grow? So, what would be the impact on the profit and loss and also the CapEx-related impact?

Lastly, the third question is the Consumer business. Mr. Inoue mentioned that, if you look at each division, Auction stopped declining, Shopping is growing and Digital or Gaming has been growing. And if you look at the revenue 2% growth was realized compared with the first quarter last year. So, Games I think is growing more and Shopping is also growing a lot more. So, compared with a year ago revenue did not grow so much and what were the reasons behind this low revenue growth?

Masahiro Inoue

As for advertising this time, I’d like to talk about the trend. Display was not too bad, but top five or top 10 industries especially auto-related, transportation, airlines and railways, and beverages. Those industries are usually top 10 the major advertisers. But those industries were much weaker compared with the previous year. So, three sectors or industry were down by ¥700 million to ¥800 million. So, usually the first quarter is not usually low quarter, especially beverage industry usually shows a stronger growth. So, that was one of the weaknesses, but we offset that weakness with other industries. For example, cosmetics and toiletries were strong, and as a result the display compared with the previous year was flat.

As for listing, there are media business as well as BS, sales channel, and other OLS. In the BS business, OLS, the search has been very strong. So, double-digit or higher growth was observed in the media business. Major companies are usually advertisers and the same trend as display was seen. It was positive, but compared to OLS, it was a single-digit or middle of the single-digit growth. So, listing in terms of year-on-year, was the growth was less than 10%. So that in terms of the percentage ratio, 70% is listing and the remaining is display, the 30% or so is display.

As for the data center CapEx, you don’t have to be too concerned about this. The impact on our business result, of course, there are some, but very minor impact. Low cost data center is something that we would like to build. According to some newspaper, a company invested, for example, ¥10 billion or so, but, in our case, it’s just billions – less than ¥10 billion, so smaller investment. And under the SG&A, I also talked about this. Data center efficiency is something that we are trying to improve. So, we are trying to reduce cost. So, building the new data center, of course, the cost increases with that, and we would try to contain the increased cost by improving efficiency.

As for the consumer business, the growth rate digital content or games is the major one and partner after the earthquake, there has been a move a boom for marriage so people are getting married more so that has been strong, but in terms of growth rate, the game is the strongest. At the end of the first quarter, about ¥600 million is the total for the games and the year-on-year growth were used to be zero. So, there has been several times higher, so, also about 50% growth or so for the games. And Shopping has been strong as well, revenue or sales or transaction, the sales did not grow as much as transaction, but as a whole 15% to 20% growth was observed. So, weaker area was Auction, but still Auction was flat. So, it was not so bad.

YBB ISP, the continuous incentive that was not very good. So probably, that was a kind of a negative factor, which impacted as a whole.

Yoneshima – Barclays Securities

I’d like to ask one additional question, the forecast for April – sorry, the July-September, you mentioned that the trend is going to continue for the second quarter. So, auto and transportation which was weaker, do you see that those industry to recover?

Masahiro Inoue

Well, auto-related production facilities were damaged. So according to the newspaper, they are trying to rebuild the production facilities and they have been accelerating that. But unless the production recovers, they have – they do not have products to sell. So in our forecast, in the auto-related, it will be much better than the first quarter, but it’s not going to be a very quick recovery, we shouldn’t expect that. So in terms of advertising, display advertising, from the second quarter last year, it has strengthened, so we have to compare to that. So, it’s not going to be a major growth. It’s not going to be the negative growth, but probably flat. So, the same trend is likely to continue. So, listing advertising, we will be happy to see more acceleration so that we are trying to work so that we can see more growth from the listing advertising. Thank you.

Any other question?

Takeda – UBS Securities

I’m Takeda of UBS Securities. Thank you very much. I have a question related to Yahoo! Local. The service has started about two months ago, and I want to know, whether users are leveraging on the service. And is the ramp up as expected? And Mr. Inoue, you mentioned about the current Local, and you have just consolidated different services, and you will be going into the second phase and what is the roadmap? When do you think you’ll automatically change the Local service?

And in terms of monetization of Local, I believe that social will be very important factor, so the more social more easier for you to monetize. So, can you tell me, what is your view regarding social? Do you have any plan to collaborate with Twitter? And in terms of days, maybe it’s not right to say that you are not going to work with days, but it seems that you are going to review that concept and so including smartphone, what is your view regarding social factors?

Masahiro Inoue

Well, in terms of Local, unfortunately, we see some bugs, so to speak. Therefore right now, we are trying to fix the bugs and that is the majority effort that we are putting in.

Takeda – UBS Securities

And actually, I don’t use Local that much, but are we seeing any growth in Yahoo! Local?

Masahiro Inoue

Well, it seems that in a way, it is starting to grow. We do not plan to dramatically change the service, but rather we would like to build robust Yahoo! Local service as expected. And then we will gradually add a new different features and services. And that will be our continual effort for some time being. And within that, social functions will most probably be incorporated. As in terms of the timeline, we do not have any specific roadmap, but rather it will be a very continuous effort in which we will add additional functions and services.

Regarding your question about our take of social factors, we had different social oriented services, and what can we do? Of course we will ponder upon that, and we will be incorporating Twitter and search services. And along the same line, we will try to collaborate with other social services. So, there will be some linkages with the existing social services to Yahoo! Services.

What should be the shape of Yahoo! Social Services? We have not yet clearly defined our direction because as you know, the environment is changing very rapidly. But having said that, we can say that we will be leveraging on non-Yahoo! Social Services by linking them with Yahoo! Services. And also, there is a good business model of monetization, which is the game. So, instead of thinking about what kind of social platform there should be, we will try to put effort in further developing our game services. So, that will be our overall stance. Any other questions?

Koike – Goldman Sachs

Koike from Goldman Sachs, I have two questions. If you can probably comment on this, this is the question I always ask. Yahoo! Inc., your shareholder, I think every time we have this type of meeting we talk about them. So, if you can comment on any progress in relation to Yahoo! Inc. Second point is the mobile trend in advertising, if you can talk about trends including some numbers.

Masahiro Inoue

Yahoo! Inc. two days ago, that would be day before yesterday, Yahoo! Inc. had their Analyst Day. And so if I may trace that we continue to have a discussion. There are several different ideas. There are some ideas which disappear and other ideas which are being studied. So, no additional comments I need to make. In the past six month or so, there have been no major change. As for mobile, it’s doing well in one word. So, listing especially or regardless of the earthquake, we have been engaged in the sales, so it’s okay. But as for display, based upon the request from the carriers, we have been restraining the advertising via mobile in the first quarter up until the Golden Week of May. We restrained that. So, it’s not apple-to-apple comparison. So, at the end of the quarter, we started the display advertising, but basically it has been firm, strong. I hope that answers your questions.

Koike – Goldman Sachs

Any percentage or ratio?

Masahiro Inoue

In terms of the whole advertising revenue, 8% is the percentage of the mobile.

Koike – Goldman Sachs

Thank you.

Masahiro Inoue

Any other question?

Unidentified Analyst

I’m (indiscernible) of JPMorgan, I have two questions. Firstly, it’s about sales promotional fee within SG&A. And in terms of the ratio, you mentioned it’s about 10%. And year-on-year, there has been an increase of more than 65%. And I want to know how long this trend will continue; this will be for our temporarily measures, but I want to know how long this will continue, i.e., your investment in the marketing activities? Now let’s move on to the second question; it’s related to consumer business. And so in terms of smartphone-related auction shopping it has increased and can you tell me the comparative figure? On page 23, you see very busy chart which is very difficult to understand. And so if you have any numbers that you can share, what is the transaction value and what is the increased percentage? Can you try to make it simple so that we can understand what has been the increase?

Masahiro Inoue

Well, in terms of the SG&A, especially in terms of sales promotion fee ever since the end of last year, we are recovering from the Lehman shock. And also top line wise, we have been enjoying an increase. So, in terms of SG&A, including the sales proportional expense, we are increasing the unique user and other means that we are budgeting for the sales promotion activities. But after March 11, we are restraining that and that is a fact. But if there is a deterioration of the top line and say if we register a negative figure, of course, we will stop sales promotion activities, but that is not the case. So, we believe that we will continue investing in sales promotion activities.

In terms of the first half, we had a very conservative outlook especially in terms of the sponsors. But in the latter half, we will see some improvement. And we do not have the intention to reduce the sales promotion activity expenses and SG&A, but of course, we’re going to cap in.

And in terms of the shopping commercial, we do not have that in the first half. But in Q1, we did not do that because of the earthquake. So, we see some fluctuations in terms of the numbers, but strategically speaking, we plan to increase it. But then having said that, we do not have any percentage that we have defined amongst ourselves to determine what is the appropriate level of expenses. And so, in the second quarter business performance presentation, I do not think that you will see a dramatic increase in the sales promotion activity expenses as well as SG&A.

Now in terms of shopping transaction value, do we disclose the number? I do not think so. We do not want to disclose it for now. But if you visit the Yahoo! site, you will see Yahoo! Shopping and number, and also what is the increase in the point that you can accumulate. And you can have additional 10 points if you shop via the smartphone. And so we’re coming up with different promotional activities to foster the increase of shopping via the smartphone. So from that, you can understand a big increase.

Unidentified Analyst

Is it a two-digit increase or is it a three-digit increase, what is the ballpark figure?

Masahiro Inoue

Well, in terms of mobile as a whole, it is two-digit increase.

Unidentified Analyst

How about smartphone?

Masahiro Inoue

Well, we see more increase. Well, year-on-year wise, in terms of smartphone, it has been used very massively, quite recently. So, we see an increase of three digits. Maybe on page 23, if you look at this graph, you can see that the transaction and value by smartphone increased by six-fold. So, that is the increase that you are seeing. Any other questions?

Tomimatsu – Merrill Lynch

Tomimatsu from Merrill Lynch, three questions. Advertising is the first question that I would like to ask. You made various comments on the current situation. At the beginning Mr. Inoue said that we are seeing the recovery since the earthquake. So, first quarter the Display was weak and the Advertising via the agency was weak. So, what is the most recent status? You did mention that it was recovering. And how did you incorporate that into this coming forecast for the Q2? The second point or topics, if you look at the Tanshin, the strategic collaboration or alliance with Twitter, it seems that it sounds very important, but the strategic alliance with Twitter what is it? And in the case of Google, Twitter real-time search is not available from June. In your case it is possible, but it is not as good as what Google had before. So, a strategic alliance, how and what would change? And as a service how do you differentiate this and if you can explain that?

Google could not reach an agreement with Twitter based on the conditions. Does that mean that you had better condition so that you can provide the information or the other companies are competing with the Google. So based upon that, how – what will be the benefit in terms of differentiating your search service?

The monetization of the smartphone, I’d like to ask a question about the advertising, the smartphone or it would take time before a smartphone becomes more important, but via the advertising agencies, I think the timing of having 10 million user would be very important. At that timing, there would be a big major breakthrough. So when the smartphone user increasing 10 million, how would you be able to monetize it, I believe that will be very important. So in that sense or exceeding 10 million probably would happen only after few, several month. So, your preparation and formation in terms of preparing for the monetization of the smartphone how much progress have you made?

Masahiro Inoue

Advertising, this time it was very difficult to explain, but the industries that I touched upon earlier did reflect the impact of the earthquake in their spending, but other sectors or industries were not so conspicuous. And major growth for example was the net internet-related information, the Groupon (indiscernible) or mobile games, so those are recovering quite a bit. Toiletry also grew.

So, in the first quarter, auto transportation suffered. There were negative numbers, but how much that would continue in the second quarter, if it becomes a flat trend, then it will be much stronger. But the last year second quarter was a very strong growth second quarter and third quarter. So, we have a high hurdle. We have a year-on-year comparison. So, current auto industry, if you look at the different manufacturers, they are not likely to recover as quickly as they did in the last year. So, probably their budget for advertising will not grow so much. As for beverage industry, alcoholic beverage, it was right after the earthquake. So from April toward the summer, usually they spend a lot of money for the beer. But they have refrained from that.

Starting from June, not all the companies, but from a few companies, we are starting to see the recovery. So, it would rely upon whether the summer will be very hot or not. If the summer is very hot, the beverage-related advertisers and sponsors might run a lot of commercials and advertising. So, that is what we expect. So, we are starting to see the recovery. For example, in the auto, gradually, we are starting to see the recovery. But the size of the industry is so high, so it would take time. And there are some industries or sectors which were not affected. So, there is a mixture. So, display is flat because of that, and that’s how we forecast. So, it is true when we say it is recovering, but when we talk about numbers, those industries which were affected very much will not be recovering in the second quarter. So, that has been included in our forecast.

As for Twitter, I am not sure whether I understand the intention of your question. When you say strategic alliance, what do you mean? Did it say it was strategic?

Tomimatsu – Merrill Lynch

Yes, in Tanshin, the summary of the consolidated business results, there is a second bullet point, which says the strategic alliance with Twitter. It sounds very important; that's why I asked that question. Maybe this is my misunderstanding maybe it’s not so important.

Masahiro Inoue

Of course, it’s not very important. But it is important strategic alliance. Well, Google, I don’t know what kind of conditions that they had for Twitter and whether our conditions were better or not, we don’t know. But that’s Yahoo! the search service is what we provide. So, it’s not just a Twitter, but real-time information. It is better to be able to search the real-time information. So, with Twitter we’d like to have appropriate alliance and that’s what we did.

And Yahoo! Search, you mentioned that the search is not as good as that of Google, but I think it’s a good enough search. So, whether to go provide a same level of the search as Google or whether to go with our search is, how we design the services. And it’s really up to the users and how they use it, maybe there are some differences in terms of the needs of the users. But the click rate the result of the search looking at the click rate, we would be adjusting the results of the search that we show. For example key words, sometimes we can increase or reduce. We have to do that appropriately. If we’d provide too much that would be too much results and so we will be making some adjustment as to the results of the search.

The full Yahoo! Search, if it is the strategic decision, Twitter and other real-time information needs to be included in the search results and that is very strategic decision, I believe. So, it’s just not Twitter, if there are some information flow such as Twitter, we would like to incorporate that into the results of the search. So for that, we will continue to have strategic alliances with those companies.

And also in terms of monetization of smartphone and I think you’re particularly talking about advertisement 10 million users. Say, based on our past record in terms of the display advertisement, I think it is important to bear that in mind i.e. that is the critical mass in order to cater to the mass. But that is just the beginning of the ramp up. So, in terms of 10 million users, it does not mean that instantaneously the market will increase by 10-fold or 100-fold as if it were in a big bang situation. I do not think that is the case.

On the other hand, in terms of display advertisement that we have to have 10 million users and that is in a way a starting point in which we can gradually increase the market and that is expectation that we have and I hope that you do understand our position.

Regarding smartphone, especially in terms of the display advertisement, how are we going to show the advertisement? What will be the optimal view? The advertisers and users and media, we haven’t reached any consensus amongst these three parties. So, we will try to go through a different trial and error, so that we can increase the satisfaction level of the advertisers and at the same time and the users will not be a negative looking at advertisement on the phone.

Tomimatsu – Merrill Lynch

I would like to ask one more question in terms of search, you changed to Google’s engine, but there are areas that you do not partner, say you have Android and Google has a very good channel to lead the users to smartphone buyer Android. And looking at R&D organization, it seems that you pale out vis-à-vis Google. And so if you have to compete with Google what is the strength that you have vis-à-vis Google or in terms of the overall competitive landscape that is not an important domain for you, can explain your stance?

Masahiro Inoue

Well, in terms of the search service that we compete with Google, we shifted from Yahoo! Inc’s engine to Google’s engine. In terms of the weapon that we had, we paled out vis-à-vis Google in the past, but now we are on par with Google engine-wise. And so I guess that decision was a very positive decision. And by using the engine of Google, we understand firsthand how great their technology is and Yahoo Japan adds our own flavor so to speak and that will be another competitive factor that we can leverage on. In the past the basic engine-wise we did not have the same horsepower as that of Google and we tried to come up with different peripheral gadgets in order to compete with Google. But now, we have the same engine, so we do not have to exert our energy in trying to come up with horsepower using the peripheral factors. And we will put our effort to improve our search as compared to Google. Yahoo! has diverse contents and we will incorporate that in the search results and that will be the major differentiation factor. And regarding that aspect, we will put our very best effort.

And also in terms of smartphone, you mentioned about Google having Android and I know that they have the upper hand so to speak in that area. Yahoo! if we had the weapon to begin with it would have been a different story, but now we have Microsoft and we have Google equipped with different channels to lead to the smartphone. But since nothing is new in terms of the competitive landscape for us, we will continue putting our effort so that we will be able to compete with them. Thank you.

Any other questions?

Unidentified Analyst

Higuchi is my name. I have two points of clarification in balance sheet. The first, in terms of amount, it’s small, but page 10 of Tanshin, the variation loss of the securities, if you can talk about the major examples? The second point was on page 35, the risks and also the relationship with the partners, Chinese company, there are of course risks and returns, so how do you plan to manage those?

Masahiro Inoue

Well, we are checking on the balance sheet, so let’s look at the investment risk. For China you mentioned that is not our risk, but the SoftBank’s risk. And as a business domain, we are limited to Japan. So, for the foreseeable future on the investment to the Japanese company is the risk that we take.

Basically, by making investment there are various benefits for our business. We’re not an investing company. We are an operating company. So, that’s a difference from SoftBank. What kind of benefits do we see will be the criteria that we use before making investments. So, it’s not just for the capital gains, not for the capital gain.

Before making investments, of course, we try to review the benefits and once we make investments sometimes we find out that the investment is not working very well. So, that is reflected under this page. The procedures that we need to take, is something that we take so that we can minimize the risks. But we try to pursue the benefits for our businesses and in some cases the investment does not work.

Unidentified Analyst

Thank you.

Masahiro Inoue

So, as for the loss in relation to the securities there are about 10 companies. There are not many positive ones, more negative ones. For example Vector, we invested in Vector and their valuation was down, their mark-to-market. Also the internet is something that we invest and that has been reflected here. All of them are included. So, as accumulation this comes to several hundreds of millions of the yen. Any other questions?

Ishii – Tachibana Securities

I’m Ishii of Tachibana Securities. I have two questions. Firstly, in the first quarter you mention about the cosmetics and toiletry advertisement being very strong, but then it doesn't really sit well. Can you tell me in more concrete terms, say, the name of the products or the name of the companies?

Okay, let's move onto the second question related to the growth. In terms of the fourth quarter of last year, I see that your business has been relatively good. But in terms of the profit I guess it's very difficult to expect two-digit growth as compared to the last quarter. But do you have any scenario, which you can overcome the current situation and enjoy dramatic growth?

Masahiro Inoue

Now, in terms of the first question we should not mention any company name. Well, because of the sales department relationship with company we should not give you any proper nouns.

Ishii – Tachibana Securities

Will it be cosmetics, so it's more or less foreign cosmetic companies that increased the advertisement?

Masahiro Inoue

Well, our major advertisement sponsor decided to have internet advertisement in a large scale from tactical or strategic point of view and that impacted us. We have domestic cosmetic companies, but they were pretty restraining from having major advertisement, but the foreign cosmetic companies strategically invested in advertisement and we have enjoyed that fruit of success.

In terms of the automobile industry, it is quite weak, but in terms of major domestic car manufacturers, they are not increasing their advertisement budget, but foreign automobile companies are increasing their advertisement. I think there were two or three major foreign cosmetic companies that contributed to the increase in advertisements. I cannot tell you any specific name though.

Ishii – Tachibana Securities

So in terms of your second question, are you talking about surprise scenario or are you talking about mid-to-long term perspective?

Masahiro Inoue

Well, it can be either. This quarter wise as compared to the fourth quarter in terms of the growth rate of the income/profit, I know that it was difficult. Well, last-year top line wise we increased by 5% to 6% and our profit was increased by 10%. And so in terms of the revenue, it is the top portion of the range and in terms of the income, it went above the range. That was the past record.

And we mentioned and that in terms of the operating margin, it increased and we believe that 50% is the normal. We reached to the level of 55%. And we mentioned then that the increase of operating margin is not the major goal that we are working at. And in terms of the short and mid to long-term, we would like to invest and also have enough budget for SG&A

And right after the earthquake in April, we mentioned that the earthquake impact will not last for one or two years. It will be relatively short. So, we do not have any strategic plan to decrease SG&A that was what we had mentioned then. And so in terms of the recovery of the top line, I think we will see similar scenario evolving in the second quarter as well. We have our strategic top line and also SG&A inline with expected top line.

Ishii – Tachibana Securities

And in terms of the increase of the top line, if it is stronger and especially the income/profit, may increase furthermore, then what?

Unidentified Speaker

Say, in terms of the three month period in the latter half, the top line grows very dramatically, but then we might try to find out some areas to further conduct sales promotion activities, but still we cannot really increase SG&A all of a sudden. And after 2009, especially in 2010 we saw some imbalances between and the increase our top-line and the bottom-line and SG&A. And there might be some surprise in the future yet to come, but we’re not having any bet on one way or the other.

So, major advertisements sponsors, they can if recover to the normal level very quickly then maybe we might be able to return back to the previous scenario. But in terms of mid to long-term I guess, Mr. Inoue might be able to elaborate on that, but short-term wise I have already mentioned.

Masahiro Inoue

Well, we are not satisfied with only one-digit percent increase. We want to grow by two-digits. So, we are putting our full-fledged effort to realize that and of course that has not being anything new, but rather we have being conducting that effort for some time. But unfortunately, we have been bombarded with one event after the other.

So, in terms of advertisement and e-commerce and also digital content businesswise and also our personal billing service area as well, each domain we are trying to grow each area and we will not cease our effort. If the market becomes more stable then we can realize two-digit growth. But we went through the Lehman shock and we went through the impact of the earthquake and there are external factors that impact us. And we cannot overcome and nullify the negative impacts that we’re getting from those external factors.

In terms of the usage of the internet and the usage of internet for businesses, the basic strength of internet will become stronger in the future that will continue. So, having said that, what kind of service are we going to roll out? How are we going to create new services that are appealing to the consumers at large? How can we monetize these services? These are the questions that we have to answer. We should leverage on our wisdom and also try to solicit the generation of new ideas and we are just at the incipient stage, so we can expect in the future. Any other questions.

Unidentified Analyst

I have three questions. About the collaboration with Taobao and GyaO have you seen any changes, any good signs? Also Mr. Son of SoftBank has been active in smart grid and energy. So, in the future for Yahoo! what would be the impact of that I’d like to review that so if you can talk about that?

Masahiro Inoue

About Taobao e-commerce development resource, we have shifted them to more important one. Well, we have stopped the improvement at this moment. As for GyaO, the advertising business and the paid content business, so they are two businesses. So, the paid content business, especially after the earthquake there has been some restraint in term of the advertising so we are more focused on the paid services and which is growing. And for the full year, we generated profit. So, from now on we will be investing more for the future growth.

As for the energy business, so far we have no plans to do anything at Yahoo! but recently one of the buzzword is IoT. Internet or smart meter, via the smart meter, the home appliances will be connected to the internet. So, when that happens, what kind of services can we provide? That’s something that we are very much interested in. So, we would like to do something in that area. But we have not yet come up with specific plans. We will not be generating power that’s for sure. Thank you. Any others? Thank you very much.

Masahiro Inoue – President and Chief Executive Officer

Thank you very much.

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