Rakuten, Inc. (OTCPK:RKUNY) Q1 2020 Earnings Conference Call May 13, 2020 2:15 AM ET

Company Participants

Hiroshi Mikitani – Founder, Chairman, President and Chief Executive Officer

Kenji Hirose – Chief Financial Officer

Conference Call Participants

Unidentified Company Representative

Good afternoon, and thank you for waiting, and welcome to Rakuten’s first quarter financial results meeting. Due to COVID-19, pandemic, we decided to have this meeting for both media investors and analysts as a countermeasure against the COVID-19. Hope that you would kindly understand the situation. At 15:00, the latest – the short financial results were disclosed. You can check the file with presentation documents from our corporate sites page for investors.

Now let me introduce the speakers first. Hiroshi Mikitani.

Hiroshi Mikitani

Good afternoon.

Unidentified Company Representative

Kenji Hirose, Masayuki Hosaka, Yoshihisa Yamada, Tareq Amin, Hyakuno Kentaro, Yasufumi Hirai, Makoto Arima, Kazunori Takeda, Hiroshi Takasawa, Koichi Nakamura, Noriaki Komori. These 12 executives will be present for the presentation. So please first take a look at the video clip.

[Video presentation] Now first, I’d like to invite Mr. Mikitani to give us the consolidated results. Mr. Mikitani, please turn on the microphone.

Hiroshi Mikitani

I hope you can hear me. Now under coronavirus pandemic, we decided to hold the meeting in such a way. Therefore, I’m speaking to you from my home. I’ve just seen the video clip. That’s how we are working in the company. We have been quite proactive in promoting social distancing and work from home. And in fact, that has advanced a great extent to achieve about 97% work from home. We are seeing progress in financial department as well.

Now I’d like to move on to Q1 highlights. Consolidated revenue was up 18.2% year-on-year. Global GTV was up 23.7% year-on-year. Especially, I’d like to highlight the domestic e-commerce GMS growth. Compared to Q4 of 2019, we have seen accelerated growth, 9.8% up. Well, for April, there will be explanation later on, but shopping e-commerce GMS growth was up 57.5% year-on-year.

On the other hand, mobile business and logistics businesses are the areas that we made investment actively. And as a result, the non-GAAP operating income/loss, actually that was operating loss recorded ¥18.1 billion. In Q1, first, we realized that we – our strength has to do with the diversified ecosystem. For instance, the – we saw the FinTech revenue growth of 22.9% and non-GAAP operating income up 14.7%. And core business revenue growth was 13.8% year-on-year Except for travel, the sector that is hugely impacted by COVID-19.

For such area, we are reallocating people to other growing sectors. And for mild patients as well as asymptomatic patients, we are offering accommodations using resources available from travel sector, thereby continued to support society in such a way. For Mobile business, we finally launched service on April 8. We have seen the acceleration of base station build-out. This is going to be elaborated later on.

Now moving on to the next page. As I explained earlier, in the case of the group, it consists of three components for medium to long-term business growth. First comes core business, that centers around Rakuten Ichiba and others that is solely founded for such a business. The revenue was up 13.8% year-on-year, operating income up 3.1%. And there are some areas like Rakuma and Rakuten Netsuper that is in the growth phase, the revenue was up 21.8% year-on-year. And then the Mobile and Logistics, they are considered as investment phase businesses, the revenue is growing quite successfully although we are making huge investment in those areas still.

More specifically, when we consider impact of COVID-19, Rakuten Ichiba, Rakuten24, Rakuten Books, Rakuten Seiyu Netsuper, for those sectors, we are seeing strong growth despite pandemic. And then for digital content, like Kobo, Rakuten TV Europe, for example, they’ve seen growth both in revenue as well as number of users. Rakuten Securities, ForEx transactions are noteworthy for their growth. And Rakuten Mobile, the service has launched and we are seeing the growth in service as well as operation, together with increasing number of subscribers.

Rakuten Energy, this again is the area where revenue is growing, thanks to growth in household. On the other hand, Rakuten Travel, unfortunately, I have to say that inbound travelers as well as domestic travelers, these are the areas we see major setback. And the sports like Rakuten Eagles and the Vissel Kobe football, their games are yet to be started. We hope that the official game will start in June. But because of that, they are suffering major setback. And Rakuten Lyft, that is part of the major portfolio, that’s where the business is suffering.

However, recently, Lyft made announcement about restructuring their business and placing focus on their core business. And therefore, we expect that the revenue structure would improve. And as to Rakuten Card, we are seeing increasing number of subscribers although the offline transaction volume is declining. But unlike other card companies, the Internet-based transaction plays an important role. And therefore, that is why they managed to maintain it as flat.

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As I said earlier, domestic EC including Rakuten Ichiba is, of course, influenced by COVID-19. But we have some differences compared to others. We are seeing growth in various categories including health care, sanitary products, daily goods among others. But growth is seen in other areas as well. Therefore, overall, we have achieved 57.5% growth compared to previous year.

Among them, the – what is called the 39 shops, that is the uniform shipping as introduced among more than 80% of merchants. And therefore, for them, we have seen the growth of 28.7 percentage points compared to those merchants without that system. And in fact, users like the system. Some say that they decided to use Rakuten Ichiba rather than others. And now they don’t have to worry about shipping fee. And also they are planning to spend more than ¥3,980. We received such positive comments, and therefore, we are giving explanation continuously to other merchants as well so that uniform shipping would be introduced across the board among other merchants.

On the other hand, as I said earlier, about digital content business, that includes Rakuten Kobo in Europe, in Canada, Japan as well, it is growing. In Q1 alone, we had the increase of 2.2 million users, volume 1 audio book of Harry Potter is distributed free of charge. And thanks to the publisher and author, and therefore, it is enjoying the good growth. And hardware is something that worried us, but now that plant in China has resumed their operation, we expect digital books as well would grow further.

As to Rakuten TV, mainly in Europe, we saw increase of monthly active users, more than 500,000. In Rakuten Viki, in Q1, registered users were added with another 2.1 million, and Rakuten Viber, we have seen growth, including Eastern Europe.

Now we are faced with the new normal and we have to adapt ourselves to what is called the new normal. 89% consider that the work from home is taken as something positive, only 2.3% considered it something negative. We saw an increase in productivity, while 56.3% of employees think that way, 36.8% think no change.

Personally, I also consider that the amount of work that I am currently handling is three times more than before. You might wonder what I was doing before, but probably due to the fact that I don’t have to commute, that I can spend more time for work, efficiency improvement as well as taking a look at the office layout and so on. And those exercises would further lead to improvement in efficiency. And also, we anticipate the Tokyo Olympic Games so that we have been preparing for work from home, even before this pandemic spreading. And therefore, that worked quite advantageously for us.

And still logistics, we are working on this. And we are seeing increasing number of logistic facilities that have accomplished automation and hope that – with the advent of this pandemic hope that this initiative would further spread for automation.

Next slide, please. What kind of contribution we are trying to make? As a contribution to the society with Rakuten TV, free content distribution is one, and ABCmouse as an education tool is offered. And as to Rakuten Mobile, Rakuten UN-LIMIT 2.0 now includes increase of the partner area free usage from 2 to 5 gig. And instead of 128 kilobit per second, now even when you go beyond that limit, you can still enjoy the speed of 1 meg.

For partners, for Rakuten Travel, we are trying to achieve faster payment cycle. And also in a time-limited fashion, a fee waiver in Europe. And restaurant in Japan and in Europe, real-time take out service started. Donation as well, the charity activities that’s being promoted. And on the part of Rakuten Travel for mildly ill patients as well as asymptomatic patients, we offer rooms. More than 100,000 rooms are ready for them to stay.

Now more specifically – can I have Page 13? I’d like to touch on Mobile business. With Mobile business, we are now considered as the number four player in Mobile business as MNO. We have fully virtualized technology, first in kind in the world, together with construction of radio stations and with fast constant acquisition and efficient investment is something that I’d like to mention. There used to be a concern whether we could start this business with the originally planned investment level.

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First of all, technology. We learned after launch that increasing bandwidth capacity, because we are totally independent from hardware, thanks to full virtualization – by increasing virtual machine, we can increase capacity of network as much as we want, IP version six virtualization technology, a first in kind in the world is quite significant. That would be good enough to stand against the explosive growth of the data consumption.

And Rakuten Ichiba, Rakuten membership are there as a basis for acquiring customers and online, even when we can not use the physical shops, together with the construction of fully virtualized base stations and investment, that is well within what was originally planned budget. And actually, the base station construction is advancing more than expected. And therefore, the timing of spending is faster than we expected. And this is going to be explained later on from a virtual machine of what was considered. Now we have the first technology that is container-based technology, very flexible and fully scalable platform is something that we are going to evolve into.

Another major characteristics is that if you press green button then RCS could be initiated. That is IP-based, software-based communication capability. So even when you’re flying an airplane, you will not suffer disruption of short message. You can use it as short messages or for SNS as well. That’s the kind of service that we are offering. And from summer and onward, UCC, that’s the another stage that we are going to evolve into. And with that, the communication platform would evolve into a new platform. And therefore, as we are talking to major carriers in the world, in first two years, as we realized full virtualization technology, that really took the world by surprise.

And that results in the major differentiation, competitive advantage as we have been stating from some time ago. Rakuten Mobile would achieve success in Japan and then evolve into a platform globally. And from now on, 5G is something that we are seriously working on. The hardware as well, we have developed hardware together with our partners. And the cost there is far smaller than originally – or conventionally considered.

And when service started, many new subscribers are first-comers when it comes to Rakuten Group ecosystem services. And therefore, once they become users of the ecosystem, then the value could be expanded even further. And as I said earlier, UN-LIMIT 2.0, that is the price that we would charge is less than half of existing MNOs. And for the first year, that will be free.

And the network scaling up. That is, if you take a look at the daily data communication, for instance, Rakuten Mobile Network, the communication has grown by three times. And they’re twice as much as what is usually used by the conventional hardware for the green communication button that is RCS-based communication. And as I said earlier, of course, we want to further increase subscribers. And because we started as an Internet-based company, and even when offline physical stores are closed, we are less damaged by that because we can continue to receive subscription via Internet.

And eKYC is going to be introduced. And as a result, there will be more smooth sign-up online. As to base station construction. Originally, we plan to achieve 3,432 radio stations. But now we have 4,738 that are already on air. And those radio stations with contracts signed, we will soon achieve 10,000 radio stations. And in view of that, the challenges that we are faced with is about construction of base stations in big cities. But so far, the enhancement progressing quite successfully. Therefore, by March 2021, we hope to cover 70% of population with our network.

Now moving on to Logistics. Next slide, please. So based on the merchants, we would like to provide a fast and quality service to our users, and this is the reason why we incorporated One Delivery service. At the moment, as for Rakuten EXPRESS, the population coverage has reached 62%. For example, the Matomete Haiso, deliver items at one-time across RSL merchants or Oki-hai drop-off service have been enhanced. And then as for the logistics locations facilities, we will be introducing Ichikawa, Nagareyama in Chiba and Sagamihara in Kanagawa from 2020.

Next, please. As for payment from going beyond this period, we don’t want to use or touch cash. So cashless, I think, is going to accelerate. So if you look at the Rakuten Group, I think we are the only group which has credit card, debit card, e-money as well as QR code, barcode and point cards. We are very strong on all these platforms, payment methods. So we are able to provide diverse payment methods. And this is going to be unified under one application so that convenience will grow.

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In particular – unfortunately, well, restaurants and small boutiques, I think they are having a hard time. However, having said that, well, Rakuten Pay has been affected. But Edy is being launched in supermarkets in the suburbs, implementation of Edy function has been going very well. And we are increasing the number of Edy users. So the – within the Rakuten Pay, Edy has been introduced, which means that the number of new Rakuten Edy users are also increasing.

Next, please. As it says here, the year-on-year growth was plus 42.1%. So this is the summary. The group membership is 1.4 billion. Annual points issued was 320 billion points. And there are over 70-plus services. And the Rakuten service, I think, have both the plus and the minus. But regardless of what the situation is, we can see strong and stable growth. We have life insurance and non-life insurance. We are increasing business online. As for Rakuten Bank, sign up is more than 5,000 a day. When we bought e-bank, this was a number that we could not imagine and that can be said for the other businesses. We have tremendous agility.

The biggest issue, well, is sports. Unfortunately, we have been affected significantly because sports have been canceled. As for overseas, first of all, in Taiwan, we have bought the brand in Taiwan, and the brand recognition is going up in an unprecedented manner. People in Taiwan know the Rakuten brand, it’s 77.5% in Taiwan. In U.S., it’s 62%. And in Spain and France, it’s – the brand recognition is going up and also in Canada. So this brand awareness is very good, and we would like to reflect that in business. The France and Germany e-commerce are doing very well.

In particular, in France, the major – I think they are looking at Amazon and are moving away from Amazon to sign up with Rakuten. Many of the merchants in France are switching from Amazon to Rakuten. So that concludes the presentation from my side. I’m sorry that it was rather lengthy. Thank you for your patience. Next, Mr. Hirose, CFO, will make a presentation.

Kenji Hirose

Good afternoon. I am the CFO, Hirose. So I’d like to give you the summary of the consolidated results. Mikitani already gave you the numbers. Revenue was, for Q1 2020, ¥331.4 billion, up 18.2% year-on-year. Non-GAAP operating income was minus ¥18.1 billion, I’m sorry. If you look under that, the mobile logistics and other investment business, if you look at the non-GAAP operating income, against ¥16.1 billion in Q1 2019, it was ¥24.3 billion in Q1 2020. So the profitability for our core business is doing well. IFRS operating income was minus ¥24.1 billion. And the difference from the non-GAAP operating income, it has to do with the stock option as well as amortization, which was about ¥600 million. Next page, please.

This is the core business, revenue operating income for core business, non-recurring and future growth investments. Core business is doing well. And the investments has gone down significantly against the previous year, but that is the reflection of our Lyft business. Future growth investments, we will continue to invest in these businesses. This is the operating income breakdown. Last year, in Q1, it was – if you start from ¥5.3 billion, you can see that the operating income has been very good. It was ¥5.3 billion in Q1 2019 operating income, which was ¥8.4 billion – and Mobile business and other investments excluded, it was ¥8.4 billion year-on-year.

Now the investments for the future, because of rebranding last year, it has turned to a positive. And for Mobile, it was minus ¥25.1 billion. And as a result, the Q1 2020 operating income excluding loss from investment business was minus ¥14.7 billion. Now the membership business. In Q1, it was ¥6.2 trillion, up 32.7% year-on-year. This is the membership value up until March. So starting in April, more contribution is expected. This is the membership value trend for Q1. Rakuten Securities, Rakuten Card, Rakuten Ichiba are seeing increase in users and the revenue has also gone up as well as the LTV. That – those have contributed, and it has increased from ¥4.7 trillion to ¥6.2 trillion. Now cross use is also expanding.

In Q1, it was up 72.3%. In addition to the increase in active users, we are seeing an expansion of the cross use ratio. So quite briefly, this was my presentation on the financial results. Thank you.

Question-and-Answer Session

Q –