Masahiro Inoue – President and CEO
Hidetsugu Tonomura – SVP, Business Service Unit
Manabu Miyasaka – SVP, Smart Consumer Unit
Keiichi Yoneshima – Barclays Securities
Takayoshi Koike – Goldman Sachs
Yoshitaka Nagao – Nomura Securities
Masato Araki – Morgan Stanley
Yahoo Japan Corporation (YAHOF.PK) F3Q 2011 Earnings Call January 25, 2012 2:30 AM ET
Thank you very much for waiting. Now we would like to start the presentation of the Business Results for the Third Quarter of FY2011. In front of you, I think, you have at the time sheet the summary of the consolidated business results and the profit and loss trend list, and also the survey questionnaire. We would welcome your feedback. Now we would like to use the presentation document and Mr. Inoue will present for about 20 minutes and then take questions. Thank you.
Thank you very much, good afternoon. First of all, the highlights of the financial data. Revenues ¥75 billion – ¥76.5 billion sorry operating income is ¥41.8 billion, ordinary income ¥42.3 billion, quarterly net income ¥25.3 billion. So year-over-year change, as you can see, is 2%, 1.6%, 2.4% and 2.7% increases. As a summary, the advertising and game-related services were strong and the revenue operating income both increased year-on-year and quarter-on-quarter.
Now let’s look at each segment, starting with the media business. The page search advertising or sponsored search has declined year-on-year. This was unfortunate, but as you can see on this page, there have been growing industries, there are flash marketing, there is Internet information services advertising. This industry has decreased at advertising year-on-year and that was one of the major reasons behind the decline.
As for the display advertising, this has grown steadily. Cosmetics, toiletry, real estate and transportation and leisure, those industries are increased substantially. And as for the flash marketing or automobile-related industry has been weaker and discount situation continues, but other strong growing areas have offset the declines of those. As for the topic, the smartphone version of the Brand Panel advertising was started. Now the revenue was ¥28 billion, so slightly down from the year before.
As for the Business Service business, or BS business, the flash marketing companies were the major ones, and it was the advertising agency and distinct advertising in the BS business was not affected, therefore steadily increased. And of course, we have made our efforts to increase our businesses in this segment.
As for the data center-related revenue, IDC Frontier Inc., together with Yahoo!, have been providing cloud computing services and we have been focused on the sale of this service, and this has increased in terms of the revenues.
Information listing revenues, temporarily we saw some decline and has not yet recovered to the past peak level, but gradually recovering, the Rikunabi Real Estate – Rikunabi’s recruitment services and both of them grew. So revenue was 20.3% ¥20.3 billion that is 5.9% year-on-year growth.
Now turning to consumer business, starting with the e-Commerce-related revenues. Mobage and gaming services have been very strong – Mobage and Sengoku IXA. And as for the topic, with the SQUARE ENIX we started MONSTER DRAGON. And we had the holiday season in the third quarter, and the auction has also grown. And especially in the e-Commerce, the smartphone transaction value substantially increased. As for the membership services, the Premium membership IDs total 7.82 million, revenue was ¥28 billion, 1.9% growth over the previous year.
Now, compared with our forecast of three months ago, what were the results? Overall, the revenue down to the net income, we were within the expected range. And as I mentioned in the summary, or highlight, I think that similar explanations are shown here. As for the listing sales or revenue, as I said, the flash marketing sector was weak, so the growth was very limited and that was unfortunate.
And in November, as you know, the system for the paid search advertising distribution was changed from Overture to Google system. And we have completed the transfer successfully to the Google system. But thus in terms of cost, because of this change, there has been some temporary cost increase and also toward the end of the year, we spent more for the sales promotion, including the Yahoo! Points expenses, so this affected our numbers.
Now looking at the fourth quarter and business outlook, the paid search advertising and digital content, we will target the sales growth. And also, as for the expenses, we would try to reduce the sales promotion cost increase and our C&A expenses increases. So, together with all those factors, the revenue range forecast is ¥77.6 billion to ¥82.4 billion; operating income expected range is ¥42.1 billion to ¥45.4 billion; ordinary income, ¥42.6 billion to ¥45.9 billion; net income ¥24.2 billion to ¥26.2 billion, that is our forecast for the fourth quarter.
So based on that fourth quarter business outlook, this shows the business outlook for the full year, in terms of the full year forecast in FY 2011. Revenue-wise, it will be between ¥299.7 billion to ¥304.5 billion. Operating income, ¥163.3 billion to ¥166.6 billion, ordinary income between ¥165.2 billion to ¥168.5 billion, net income within the range of ¥97.1 billion to ¥99.1 billion.
There are some special notes this fiscal term-wise, so we have business tie-up with Credit Saison Company Ltd. using the local information related site, we would like to reinforce O2O. So there will be linkage between the real and the virtual, so that the information in the virtual world can be linked to the real world sales.
Credit Saison has largest card member base in Japan and also it has a very popular program called Permanently Usable Points. Yes, we will like to increase the linkage with our e-Commerce services and personalized local information.
In terms of O2O we had a partnership with four companies all together. So this is a reviewed slide. We would like to further impose the partnership that we have with those entities. Let’s look at the breakdown of the numbers. I already mentioned about the revenue which is about ¥76.5 billion and the cost of sales of ¥7.1 billion and SG&A at ¥27.5 billion and operating income ¥41.8 billion. So this shows the graph of the revenue.
In terms of the revenue, we have the record high number, the profit slide shows the trend. In terms of the operating margin it is 55%. We want to be more aggressive so that we would be able to invest further more for the future growth and so we have to start with a good balance between the future oriented investment and the operating margin. And you see the details of the breakdown each business has the operating margin of about 50%.
We would like to accelerate the growth of each business section. This is the slide showing the breakdown of SG&A. There is no item with any major changes. But in terms of the business commissions we focused on the Point program and also we also have boosted up the sales promotion. So we see some increase in the expenses here. We were aggressive in expanding our user base.
Firstly, we focus on the U.S.’s Yahoo! Media but we will like to increase our coverage and services and also we actually acquired IDC Frontier and we tried to reduce the cost as much as possible. And therefore, as compared to the previous year, we were able to decrease the communication charges by about 26%. In terms of the facilities and the number of the servers we are increasing our equipments. But nonetheless, we were able to still reduce the communication charges and this is the reflection of the success we had in the acquisition of IDC.
This shows the balance sheet details. In terms of the major changes you see the descriptions on the right, but there is nothing to actually note here. Let’s take a look at the cash flow. In terms of the operating activities, cash flow was ¥6.9 billion and we had to pay the tax and that is the event in the third quarter and in terms of investing activities it was minus ¥1.7 billion. We actually conducted CapEx, i.e., the purchasing of service. As our net change in cash flows, it is positive ¥5.1 billion.
This shows the number of employees we’ve 5076 all together and so we have little bit more than 5,000 people all together. This completes my presentation and I would like to open the floor for Q&A.
Do you have any questions? Person sitting in the second row from the front?
Keiichi Yoneshima – Barclays Securities
I’m Yoneshima, Barclays Securities; I have a few questions. First of all, I want to confirm the numbers. In terms of the display advertisement and listing advertisement, you’ve mentioned that the flash marketing actually had the negative impact on the listing advertisement. So year-on-year how did display advertisement grow? And also in terms of listing advertisement, how limited was the growth? Especially in terms of listing, I want to know the breakdown between the media and IBS section. I will really appreciate if you can tell me the breakdown.
And also in terms of the consumer-related business, I do understand that it is growing but in terms of the segment breakdown, there is a decrease. You said that a point program was a costly proposition but other than that in terms of the consumer business are they are any other factors contributing to the current number?
Moving on to the second question, you have migrated to the new system and in November you shifted to Google’s engine and you stated that the system is up learning. And so is there any impact because of that situation? Or is business as usual and there is no problem? And in terms of the click rate and information distribution rate wise, is it the same as before, or is it deteriorating, or is it improving?
In terms of smartphone, Brand Panel, I don’t know when you started this service, so please tell me about the timing. And also what do you expect the impact of that new service to be?
My last question, the U.S. Yahoo!, Mr. Jerry Yang actually retired from your directorship as well; and so in terms of the relationship that you with Yahoo! USA, what will be that relationship? How will Yahoo! US handle Yahoo! Japan stocks? And in terms of the relationship between Yahoo! US and Yahoo! Inc. What kind of change do you expect and what kind of change do you think will be favorable for you?
Okay. Let’s confirm the number first. Let’s see. Well, before going into the details in terms of the listing, my answer relates to your second question; in the third quarter, we actually migrated from Yahoo!’s engine to Google’s engine. So explained in the previous presentation as well as during the one-on-one interview, we come up with the budget and we come with the forecast, and we assume that there will be any major change. And what did actually happen? And Mr. Inoue will talk about that technical aspect.
And I think time is not right to give you the detailed numbers. But nonetheless, in terms of business activities, as compared to the search business we have to had the involvement of the advertisers. And so we put our emphasis on dealing with the advertisers.
In terms of acquiring new customers, we did not be very aggressive. So for about a month, we just concentrated on the existing account so that they will be able to migrate successfully to the new engine. And so our full fledged effort was put in that area instead of trying to develop new clients. And so that actually contributed to the weak growth of new clients.
And as far as assets is concerned, in terms of flash marketing that had a major impact two years ago in the third quarter – actually it is last fiscal year third quarter and the sales amount about ¥1 billion in terms of scale and that continues until the fourth and the first quarter of the next fiscal year and then you see a drop. So GAAP-wise it is almost zero.
And so in terms of ¥100 million, we will be able to make up with but then more than that, we will have difficulty trying to make up for that loss. And so unfortunately, that had a negative impact on the growth and the growth became stagnant or sluggish because of that reason.
Also as related to the mobile, before migrating to the new engine. So smartphone was counted as PC while actually that’s not relevant. Well, going back to mobile, in terms of the feature phone sales, it went down dramatically because the flipside of the coin is that there was a very speedy shift to the smartphone.
And fortunately, by moving onto the smartphone, the search rate and different usages of the services increased dramatically. So net net, as feature phone decrease by smartphone actually we increased. So actually smartphone did more than offsetting the decline feature and because the growth of the smartphone is partially consumed by the drop of the feature phone, we cannot completely 100% depend on the growth only.
In terms of the paid search advertisement, depending on the nature of the sponsors, there might be a click, but then the conversion goes down. So it all boils down to the question of quality. So we have to have a very good control of the graphics and the traffic rather. But there are sponsors with very good advertisement sales, but there are cases in which in the third quarter, we see some drop.
In terms of Yahoo!, we complete a task, but then the partners are continuing with the past program and so, of course, the partners are happy if they can increase the sales. And so the focus on the sales rather than the quality of the traffic and so the traffic control is proceeding slowly. And in terms of the sponsor side, we try to complete the control of the traffic and because of that control, the sales go down by ¥400 million to ¥500 million and that also contributed negatively to the growth. And also, in terms of the major partners, I guess it was last year, we concluded the contract already i.e. the contract expired. And so in terms of the major sponsors’ expiration, it impacts the growth. But then at the same time, we were able to have new contract as well.
However, I don’t know, in terms of the third quarter SS and listing advertisement and the growth of the advertisement, we usually had two digits growth. But it actually declined from the ordinary level of growth.
And so it dropped to 2% level. But I’m sure that we’re going to recover. We can talk about that later. And I think this is just a temporary phenomenon. Now in terms of display advertisement, we saw some growth in the second quarter and we were able to see the continuation of that momentum. So year-on-year and past the first quarter was minus and the second quarter was positive and the third quarter was – we were able to have a single-digit positive figure. But because of the flood in Thailand, a major automobile company’s advertising was scheduled, but it was cancelled and that had a negative impact. But nonetheless, we are able to see a growth in the display advertisement, and so we are in the mid-level of the single-digit growth year-on-year.
Now regarding media and BS, Mr. Inoue already mentioned about it, but in terms of listing advertisement, they used the sales channel, i.e. the agencies, so it is included in the media. But in terms of small and medium enterprises, their sales are counted under BS. And so online system is used for the – a voluntary registration of the advertisement. And so there are some industries and the sponsors that reduced their advertisements. And so media, service wise, there was some decline. So this is the – the company has the expiration of the advertisement.
Also about the consumer, I think I explained this previously, when you look at the segments, the media, BS and consumer and also there is a companywide and the offsetting or depreciation, and using the search engine, say that we use to spend ¥100 and paid search, we only have Yahoo! and Google and we distribute them, Yahoo! portion will be higher. And so that it would be returning back to us or refunded back to us. So it looked as expenses, but when you look at the companywide and the elimination, this is actually covered by the R&D team.
So it appears, so that it is the expense, but it’s actually offset. So this is because of the accounting. So roughly speaking, the consumer portion, of course, that we spend a lot for the points. And the third quarter, of course, it’s very important because it’s a holiday season, so we did not hesitate to have campaigns. So the point, of course, was high. And part of it, there was additional costs, so year-on-year, some of the numbers were lower. As for the BS, the recruitment, real estate, rebounding or recovering. So in terms of the numbers, it seems that the profitability is lower, but it’s actually flat.
So well, as for the transfer to the Google system for the beta search, I think it’s a little premature to talk about the transfer as a whole. But I think, I can say that it is going as we anticipated. So as for the details, for example, the click rate or coverage or other indices, there are those indices and they are showing various trends. As you know, when one index goes up, another would go down.
So we have not looked at all of the indices in detail, but as a whole, I think we can say that the performance has been at the level of what we expected. And this third quarter or towards the end of fourth quarter, as I said that we are still in the learning process, so we like to take advantage of what we learn and look at the daily search level and how much click rate it will be. So when we see the daily reflection of that, that will be the final step and we are preparing for that. And so after that, I think we will start to see the growth in a full-fledged manner and that is what we expect. So I think that’s my answer.
Keiichi Yoneshima – Barclays Securities
And as for the brand panel, the smartphone version, when did we start that?
That was started in December.
Keiichi Yoneshima – Barclays Securities
In the middle of December?
The second week of December. Nobody seems to remember the date. It was Monday. So in the middle of December and it was Monday.
Keiichi Yoneshima – Barclays Securities
So I think that was the question, what is the impact – expected impact or reputation, so far? So smartphone version, Brand Panel, what has been the reaction?
Mostly from the Media business. Yes, there has been a good feedback. Click-through rate has been very high. The users of the smartphone, I think, well, unlike PC, we do not have the advertising on other pages, but we will continue to sell it out. Then performance has been very good and advertiser’s feedback has been very positive as well.
As for the retirement of Jerry Yang, over the past 17 years, I think we worked together, so it’s unfortunate, but that’s a fact. So vis-à-vis, the increase, I think there was a message and the growth of Yahoo! Japan, I think he made a major contribution for that, especially, it was like a time machine management that we talked about in the past. Japanese internet was like two years behind thereof US. So we were always following. So that success invader in the United States could be used as assumption for our future.
So what they learned was something that we could utilize in Japan. So I think, he made that out of contribution in that sense. But at the same time, after more than 15 years, U.S., Japan, the business involvement surrounding internet and also the competitive environment surrounding Yahoo! Japan have changed and has become different from the environment surrounding Yahoo! Inc. in the United States.
So as for the future, I do not expect any major impact from this event. But at the same time, as for the relationship with Yahoo! Inc., right now, I think as you know, there has been nothing in particular to report to you. So Yahoo! Inc. and Yahoo! Japan, the relationship between the two, the board member of Yahoo! Inc. can nominate one board member and SOFTBANK will approve that. And it’s a joint venture agreement that exists between SOFTBANK and Yahoo! Inc.
So Yahoo! Inc. – it is possible that Yahoo! Inc. will nominate a director. But so far, we have not heard from them about the nomination of the director. So as for the license agreement, both the retirement of the – Jerry Yang and the Yahoo! Japan shares and also, the relationship based upon our contract, all of those are totally unrelated. So the license agreement, right now, is a perpetual contract. So it is an ongoing contract. So there has been no change to it. So the relationship will continue and there will be no changes to the relationship from the contract aspect.
Any other question? Person sitting beside the gentleman.
Takayoshi Koike – Goldman Sachs
I am Koike, Goldman Sachs. I have three question altogether. First question is related to mobile page view. According to your presentation material, after March, it is about ¥10 billion and this is at constant level. Feature phone is declining, but then the smartphone is increasing. And looking at the number, it seems that all in all, the number is not increasing. And can you explain about the backlog about which this is happening?
Moving on to the second question, in terms of the advertisement, what is the percentage of the mobile? In particular, I want to know about the smartphone. I know that display is not included or maybe e-search in terms of categorization, it might be included in PC still, but what is monetization of advertisement in smartphone? And can you tell me what is the prospect?
Third question wise, I want to know about Yahoo! Inc.’s equities that they hold. And we don’t know what will happen to those stocks. But maybe you can buy back your own stocks and that’s one of the options than you have been mentioning about that before. You have much cash and equivalent and you do have cash flow. And so what is the rational level in which you will be able to spend in repurchasing your stock from Yahoo! Inc.? Can you tell me about those three points?
In terms of more buyers of page view, in terms of the announced number, it is on the same level. We have the feature phones page view, which is declining dramatically. On the other hand, smartphones page view is dramatically increasing. And in terms of the number of phones, to begin with, how frequently the search is conducted and how frequently the net is being accessed, of course, smartphone is very high.
But all in all, there are more feature phones than smartphones. And so in terms of the – our feature phone is declining by two-digit figure and actually, the increase of smartphone offsets the decrease of the feature phone. But I’m sure that this trend will continue only for some time more, and in the near future, we will see increase that is contributed by the smartphone increase.
Now in terms of the advertisement ratio, this is in line with the PV. It is about 80% or more. And last quarter, it was about 80% as well. And as I’ve mentioned, in the previous presentation, the feature phone is decreasing, but actually the growth of smartphone is larger than the decline of the feature phone and net, net, we cannot 100% capture on the growth of the smartphone. So in terms of the overall advertisers, PC is increasing as well. So it is about 8% and that is the level that we are seeing right now, but I’m sure that this number of 8% will change in the near future.
Say, in terms of smartphone, there is nothing in particular, just to mention regarding smartphone, but we have a large category of the internet and we have the internet function. And as one of the tools to leverage on in the internet, we have PC and smartphones and feature phones. So those are the access devices. And having said that, of course, there might be some special business model pertaining only to the smartphones, but all in all, we have PC and smartphone and we will be monetizing under the same scenario.
We have the advertisement and we have e-Commerce, so in the past 15 years, we were able to establish the monetization business model using PC. And on top of that, we will add the digital content in the domain of PC and I believe that the same will be true in the smartphone area as well. And so these three are the monetization potential in the future.
No matter which scenario we opt for in terms of monetization, we need to capture large mass of consumers and that will be the fundamentals of our business model. Therefore, as Yahoo!, as in the case of PC, we want multiple users of smartphone to enjoy our services, so that we can try different venues for monetization using smartphones. So it’s the same as PC.
Now regarding the feature phones, the operators are pretty dominant and they have closed the data transmission services. So Yahoo! and SOFTBANK Mobile were the pioneers in opening new horizon. On the other hand, smartphone is open and it is connected to the internet, so I believe that that this the major difference between feature phone and smartphones. So smartphone that does not link directly to the internet cannot be categorized as smartphone. And so if we apply this definition of smartphone, this smartphone will be on par with PCs.
So the third question, I think one thing I forgot to mention, which is important about the page view, in the case of smartphone there is access from application which is many. So that cannot be counted right now. So what we disclosed that is in mobile, in the smartphone page view, application is not included, so that’s something that we are not yet counting. So we are trying to make it possible to count that access from application. So when it becomes possible, we’d like to include that and would probably make the total picture look different. The last question was about Yahoo! Japan’s share held by Yahoo! Inc. And as Mr. Inoue said, we are continuously having the discussion and negotiation, but basically, there’s nothing more for me to say at this point.
As for the second question, the cash flow, we have cash and equivalents and what would be the definition with a reasonable level of that. I think there are different views. As Yahoo! Japan, one-third of the shares – if we can control one-third of the shares or rather we are taking – we will be taking measures, so that we can control one-third of the shares. For example, we have a shortage of the cash or capital or when we need the cash for the future, there are various scenarios that we can think of.
Takayoshi Koike – Goldman Sachs
Is it just a part of it or all of it or to what extent?
So the reasonable level will be quite different depending on the scenarios about the buyback and compared with a year ago, the market is down and the share price is down, so we have to recalculate the total amount. So we have to look at all of those factors, so that we’ll be able to take the measures which are reasonable. So we have not yet set a certain fixed level as to how much we would like to buy back.
As for the page view of the mobile application, the access on the application is not included at all because we cannot count this right now. For some, we can, and for others, we cannot. So we don’t want to mix those two. So currently, we are preparing for that. So currently, it’s not included. That’s correct.
Any other questions?
Yoshitaka Nagao – Nomura Securities
I am Nagao of Nomura Securities. I had three questions. In terms of your presentation, you have the forecast for Q4. And in terms of the advertisement, what is your assumption? Do you think it’s going to be robust or do you factor in any negative points? And what is your forecast for the advertisement revenue? Please tell us your view.
And secondly, you’ve mentioned about O2O and personal local services. And what is the situation of personal local services? And in order to make it more prevalent, what kind of services do you plan to launch with your partners and how do you plan to design different services? In Q1 presentation, you gave us some explanation, but some time has passed, so can you tell me if there are any changes and confirm your business plan?
Thirdly and in terms of smartphone, it is increasing even though feature is decreasing in terms of the advertisement. On Page 26, you have the comments related to smartphone and in terms of the feature phone, I do understand that not many people will buy items via the feature phones, but in terms of the smartphone, maybe you might be able to add on to the e-Commerce revenue. And is my understanding correct? And by using smartphone, what kind of products are being purchased? And maybe it might be a repeater purchase. Can you tell us what is the purchase behavior if there is any changes? Three questions all together.
In terms of advertisement for Q4, we believe that the market is pretty robust. Let’s talk about display first. In Q2, we saw some recovery and in the third quarter, we are seeing the continuation of a strong momentum. In terms of Q4, we have the uncertainties in Europe. And there are other external factors, but then all those news are not new. Of course, the flood in Thailand was a surprise. But unless any major event surprises us in Q4, we believe that the companies, i.e. the advertisers, will not stop their business.
And in terms of promotional expenses, as well as advertisement, these are must. And so unless some irregular event happens, I believe that we will see the continuation of the momentum of Q3 and Q4. As is margins, the end of the fiscal year, we don’t know how much advertisement will be launched. But we are quite optimistic in terms of the paid search, as mentioned in the third quarter explanation, we were in a tough situation and we were impacted by the migration to Google’s engine and we will be very aggressive and try to cater to the needs of the clients. And in terms of orders and in terms of the SMEs, I’m sure that they will be more active come March.
And in terms of the national clients, as in the case of display advertisement, we believe that our listing advertisement will see some improvement. And in terms of the performance, in terms of the system learning curve, I am not sure whether we will be able to completely convert Google system to meet our needs. We need more time more than this Q4, but I believe that we will continue learning.
And so in terms of paid search advertisement, I believe that the market will be pretty robust. We have a very wide range of revenue forecast. And in terms of paid search advertisement, if everything goes well, we believe that we will be able to capture high numbers. But if we encounter some hiccups, then maybe, range wise, we will be in the mid to the low end.
In terms of O2O, what is the status quo was the question. Well, we are trying to improve the service that will be more user-friendly. And we need the registration of the merchants and also in terms of the customers, we want to increase the numbers as much as possible and we will put our continuous effort to meet this end.
And so Tonomura-san is in-charge of this section. And Miyasaka-san will be talking about the third question.
I am Tonomura of Business Service business and I am in charge of the Personal Local Services. So the basic concept hasn’t changed. And so we have the online information as much as possible and we would like to expose that to the users, so we try to solicit the clients to go to the brick-and-mortar stores. And in terms of the linking page, we have to come up with more information related to the sites (inaudible) and we have a local place registration so that the stores can register their information. So Saison and JCB are very good partners, so that we will be able to get their support in the sales activities and get information about their merchants. And in O2O, we would like to further strengthen our partnerships, so that the users and the store owners will be more satisfied. So we are still in the midst of this process.
Yoshitaka Nagao – Nomura Securities
So the question about the smartphone?
Yes, I’m in charge of the Smart Consumer business. As for the smartphone, what would happen to the e-Commerce as a whole? Regionally, the feature phones were used for the e-Commerce. And those e-Commerce users have – now using the smartphones instead of feature phones. So those items that the users purchased only via the PC are now purchased by the smartphones. So the mobile percentage that is the smartphone plus feature phone is increasing.
Takayoshi Koike – Goldman Sachs
What other items are purchased?
Actually there had been no major change. With the increase of the smartphones, the new trend would be that, for example, on the train, the smartphone is used to check on the information. And at home, people would make the purchase using the PC. So smartphone is now integrated into the purchasing behavior of the users. So how people are making the purchases, we really need to make the adjustment. So for example, using the application, for example, we can push some products, this is something that we could not do with the PC. So by using smartphone and PC, people can truly enjoy the shopping. So that’s something that we are studying right now.
I’m sorry. The speaker is not using the microphone.
So how much information do we disclose, or it seems that it’s not the information that we disclosed, but I can talk about the feeding. The advertising, I said, 8% or so. As for the commerce, the percentage will be higher, double-digit. So recently, in the third quarter, there was a reversal. Originally, it was the feature phone, especially auction, for example.
The percentage was high, but it’s more than 20% in commerce. So in commerce, it’s 25% to 26%. So I think you can understand this. Smartphone is now higher, so the speed is actually very fast. Initially, even before the smartphone, it was higher than 20%, so it’s being reversed. Smartphone is now higher than the feature phones. Any other questions?
I have three questions from Merrill Lynch. About the listing advertising, the change of the search engine is mentioned and it seems that, without this change, what would have happened? I think probably you might have had the positive number for the October-December period. So I’m sure that was the assumption. And right now, the impact of this, what other – what had been the negative impact? And in the future, it would be converted to the positive impact, I’m sure. So what are your views on that?
And you mentioned that the system is currently learning. Google Japan, of course, has had a lot of experiences, and I’m sure that they have went through the learning process, but what are the things that you or your system need to learn? And it seems that, from the agency, we heard that there were some confusion because of this transfer or change. So could you talk about that, and could you talk about how you can change this to the positive factor?
The second question is that in your plan, the advertising, I think your assumption has been very strong. But the advertising revenue, I think double-digit growth year-on-year and, of course, last year, there was an earthquake, but 5%, 6% and so other in third quarter. So Mr. Kajikawa, I think that even if there has been the growth of more than 10%, you did not say, did not use the term, the strong or positive. So what do you mean by the assumption is very positive or strong? And also about the flash marketing, which is going down and do you explain that you’re trying to offset that? So flash marketing, I think that there is – continuing to struggle in the fourth quarter. So how – what is overall impact of that?
And also the smartphone surface strategy; overall internet usage, I’m sure that the smartphone will be positive. But the environment of the smartphone is different in terms, for example, if you look at the Android, in order to fully utilize the smartphone, I think that you have to really come up with the unique services that only smartphone can offer. So in order to win utilizing the smartphone, what are the things that you need to do, and what would be your strategy?
In terms of Google’s search engine, your question about the learning phase, we just have to try and you never know the result until you try, so I’m talking on the expectation level. There is a segment of people using Google search engine, and there is another segment of users leveraging on Yahoo! search engine. Of course, there are some commonalities, but then there are differences as well.
In terms of the current Google’s paid search engine, which logic should we leverage on? Google’s advertisers and Google users pairing must be thought in coming up with the right logics to be used. In terms of the users, there is a segment difference between Yahoo! and Google, and also in terms of the advertiser’s type and number, and also the types of the advertisers and the kind of advertisement.
Of course there are some commonalities, but then at the same time, there are differences between Google search engine users and Yahoo! search engine users. And so, if the matching between the users and the engine is the right, then you can have a successful advertisement. And so the number of clicks really determines – what is the revenue? And so, in order to maximize the revenue, we have to come up with the advertisement price and the click rate.
If we emphasize the users, then we have to come out with the advertisement which can capture high click rate. But in terms of Google’s high click rate advertisement that does not necessarily mean that the same advertisement will capture high click rate on Yahoo! Engine. And the reverse is true as well. Therefore, in terms of Yahoo! Japan’s advertisement and the users, we have to think about, what is the best combination of the two and we need some time to learn the best match and pairing of those two segments.
In terms of the paid search advertisement of Yahoo!, we learn – and the best match on Google, and we only learned a handful of information yet. And so, based on the limited information we have on Google and the one we have on Yahoo!, we still have the hybrid situation. So we have not completed migration into the Yahoo! type of search engine. And so, we have expectations toward the end of fiscal year.
And in terms of Yahoo!’s advertisers and Yahoo!’s users, if we decide on the priority of the listing of the advertisement in terms of the migration to the engine and if everything goes smoothly, then we believe that we can have the real Yahoo! version of the paid search engine. And once we complete the migration, then we will be able to quickly leverage on the new environment and increase that click rate. Of course we will continue our learning, but once we reach a certain stage of learning curve, then we will be able to leverage on that understanding and see improvements in each and every segments of our business.
You mentioned that we opted for Google engine because Google engine is the best engine, and it is indeed true that we did not only think about the status quo, but we thought about the future as well. In terms of the net Panama, the new development was conducted about a year ago, and during that time, Google continued making efforts to make – do improvements. So if this pattern continues for the next three years, we are talking about IT industry, if the engine is not improved, and then it will be obsolete. Therefore, we decided to go for the engine that will go through the ongoing improvement.
And so, in terms of the current performance, maybe Overture might be better than that of Google, but even then, if there is no improvement made on Overture’s engine, we have to change to Google’s engine, which is making continuous improvement.
Yes, about the second question, of course I did not use the term that we are very positive. We have never, maybe I have never used that term, but before the earthquake, 2010 second quarter, from that timeframe, I think that advertising had been growing at the double-digit year-on-year. But unfortunately, after the earthquake, especially the national client declined. And from that point, the recovery started in the second quarter this year and we had expectation for the third quarter and recovery of the national account had been very strong.
And so in the third quarter, the paid search, if we did not have any special reasons, the third quarter 2010 level, that is a strong growth, would have been repeated. But because of the reasons I mentioned, that was not the case. But fourth quarter, as for the prospect for the fourth quarter, basically the national clients have a stronger appetite. Now, so if that is the case, of course, that listing advertising national client account for 55% to 60%, so quite high percentage.
So when we see the recovery, the growth of the listing will be the equivalent of the third quarter, fourth quarter last year. So if that is the case, I think I can say that we are quite positive, or we have had a major earthquake and there was an effect of that tsunami, but we can go back and recover to the level of the third quarter, fourth quarter of last year.
So about the flash marketing, I think about the same level, the fourth quarter will be better. So I as I mentioned, it’s for the estimate for the third quarter, the new accounts will be obtained so that we can offset. So the growth has slowed a little bit, but we have offset that, and we have seen the increase year-on-year. So in that sense, we believe that we will see the strong recovery in the fourth quarter.
But the smartphones, yes, as you mentioned, the usage environment, competition environment, are different from the PC’s, but probably I touched upon this earlier, but basically the users are the same, I think. So right now, the users of the smartphone is still growing, and the people who don’t use the PC to access Internet – there are some people. And at the same time, there are some people who would use the Internet only with the smartphone, not with PC.
And in the future, PC might be replaced by the smart pads, but there are some people who would attach the keyboard to the smart pads, so I don’t think it is necessary to separate them. So the level of usage, even when you are commuting or moving, you will be able to use a device, and that will be the higher ease of use. But the needs for the Internet, I think, remains the same. But whether you can use it as you move around or on the go will be the major difference. So the same service, we need to change the usability depending on the devices.
So for example, this service is only for the smartphone, but it’s not for the PC, or this service is only for the PC, not used by smartphones. There are some services like these, but not so many. So the paid search or search needs to be offered for the PC users as well as smartphone users. And the stock price information also needs to offer it, both for PC and smartphone use, also should be offered with the PC and smartphone.
Basically, I think there are not major differences between the two types of devices, but as we said about e-commerce, the two devices, as Miyasaka said, I think that the people are using both of those devices, and probably we will see more and more of this. Especially the local services, when you are using the PC or when you are using the smartphone, the environment of usage is different. So, for example, in the case of smartphone, based on where you are at that moment, you want to have the local information; but in the case of PC, it’s usually fixed. So the way of showing the information should be different so that it will be more convenient for the users. So in order to offer more convenient information, convenient services, I think we should also think about the differences like those.
Any other question? So person sitting over there in the next row.
Masato Araki – Morgan Stanley
My name is Araki. I have two questions. In the third quarter, in terms of display, Y-on-Y and Q-on-Q, you have a plus. But in terms of Brand Panel, you have positive on year-on-year, but not on Q-on-Q. So, how should I interpret this situation? A year ago, you increased the price and you mentioned that, in this quarter, the impact will not be felt any more. So year-on-year, I understand that there hasn’t been an increase in sales; but in terms of quarter-on-quarter, there has been a decline. So did the advertisement go to other products instead of Brand Panel?
In terms of mobile’s Brand Panel, I don’t know where it exists, so can you tell me about that? And concept-wise it is non-target brand, and that’s the concept of Brand Panel. In terms of smartphone, the screen is very small and it’s very difficult to locate where it exists. And so I want to know what is the difference, or similarity, of the concept of Brand Panel on mobile.
Moving on to the third question, we have marketplace and we have ad exchange, and we have the third party distribution, and I do understand that you do not go for it. So can you tell me why you don’t positively support it? Can you elaborate on the reason?
So let’s tackle the first question. In terms of Brand Panel’s quarter-on-quarter number, did it decrease or did it increase? Let’s see. Q-on-Q wise, it increased. So it did not decrease or did you find any number?
Masato Araki – Morgan Stanley
In Tanshin, you only had the number as compared to the previous year. And so we just didn’t see the number quarter-on-quarter. So I just assume that it decline.
No. The fundamentals of Tanshin is year-on-year. Maybe there might be cases, and you have the numbers comparing quarter-to-quarter, but we did increase the Brand Panel advertisement sales quarter-on-quarter. In terms of smartphone’s Brand Panel, it is on the top. But maybe there is a limited display.
So the number of Brand Panel being exposed on the smartphone is very limited. And I guess the frequency parameter is said to be pretty low. And so we are in a way “start the lead” conducting in the exposure of Brand Panel. So the more you use a smartphone you will be able to be lucky to see the mobile Brand Panel. And it’s on the top page, yes. So it’s shown on the window that has the search window. Well, you have the search window. The speaker is not using the microphone. So we will try and once we get a Brand Panel on the mobile we will show you.
In terms of advertisement, I think there are two types of markets. One is exchange, in the U.S. exchange is used, that’s one segment. And in terms of Ad network, that’s another item and these two are completely different.
In terms of Ad network, we do have our own network. So it’s not that we are reluctant, but we want to maintain a certain level of quality and when we give explanations to the advertisers, we say that this is a certain level of site quality that we will expose the advertisement. Therefore, in terms of the advertisement site, it is quite limited, but that does not mean that we are not aggressive in pursuing new avenues.
And in terms of exchange, we are monitoring the situation and we are going through the experimental stage. As you know, Yahoo! Inc. acquired Right Media which is the advertisement exchange company. So in Japan, we use it and Yahoo! has some stock that we cannot sell to the branding-oriented advertisers, so that’s a new niche segment that we will address. We have our own exchange. So in terms of having advertisement stocks to sites other than Yahoo!, we are not aggressive.
Masato Araki – Morgan Stanley
So can you tell me the reason why you are not very aggressive in going into other sites via your site?
Well, it all boils down to the quality of the advertisement. Yahoo! has our own advertisement screening criteria and we only handle the advertisement that meets this criteria. But in terms of external network there is no criteria or the criteria is very flexible, so to speak. So in terms of the quality of the advertisement, you cannot guarantee, that is why we are not very aggressive in pursuing other avenues. Any other questions?
Masato Araki – Morgan Stanley
I have two questions. About O2O, the actual revenue model, the merchants or card companies has some merchants and there is advertising from them. In addition to that, by sending the customers to the card users, would there be a kind of revenue sharing with the card companies? If that is the case, please tell us.
And another question is that the end of October from the consumption ministry, there was a guidance about the net advertising and it’s not about you but indirectly your clients, have there been any activities after this guidance from the ministry, if it’s possible for you to comment on that?
About O2O. The specific contract with the card companies, I really don’t know the details myself. Probably it’s included in the future discussion but there is no revenue sharing planned right now with the card companies. What we are trying to do with the local is that merchant or those other merchants who register to the Yahoo! Service, so that those stores can use the paid services and we have been doing that for some time. So card companies merchants bringing them to Yahoo! and that is something that we can have some help from the card companies.
As for the guidance from the consumption ministry, is there anything that we can say? Already, the 18-Karat gold we’ve already taken the measures and so as for the guidance from the ministry there have been no new additions of the measures that we have made. So in Japan, I think that we have the most stringent, I believe, guideline at Yahoo! Japan. So I think we’re okay.
Masato Araki – Morgan Stanley
Any other questions? I think we’re running out of time, so if there is one last question, we can entertain it. Thank you very much. Then this is the end of this session. Thank you.
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