Rakuten, Inc. (OTCPK:RKUNY) Q2 2020 Earnings Conference Call August 11, 2020 2:00 AM ET

Company Participants

Hiroshi Mikitani – Representative Director, Chairman, President and CEO

Kenji Hirose – Group Executive Vice President, CFO

Conference Call Participants

Unidentified Company Representative

Good afternoon. Thank you for joining and Welcome to Rakuten Second Quarter Financial Results meeting. I’d like to first hear from Mr. Mikitani talking about the impact of COVID-19 to Q2 results followed by Mr. Hirose, the Q&A session would follow.

Now let me introduce the members of the executive team of Rakuten. Hiroshi Mikitani, Kenji Hirose, Masayuki Hosaka, Yoshihisa Yamada, Tareq Amin, Kentaro Hyakuno, Yasufumi Hirai, Makoto Arima, Kazunori Takeda, Hiroshi Takasawa, Koichi Nakamura, Noriaki Komori. These 12 executives will be present and available for question, at the end of the presentation. Please show the presentation slide.

Now over to you, Mr. Mikitani

Hiroshi Mikitani

Good afternoon. Thank you for attending fiscal year 2020 Second Quarter Consolidated Financial Results meeting. As has been explained by the Secretariat, unfortunately, due to COVID-19 we can’t meet face to face, but rather using Zoom as a webinar. Now without further ado, I’d like to begin the presentation.

Due to COVID-19, various enterprises are faced with impacts in different forms. But fortunately, I would say, thanks to the diversified portfolio in the case of Rakuten, and due to the – our core business that is online business, in Q2, we saw consolidated revenue up 13.4% year-on-year. As to global GTV that was up 12.6%.

In domestic e-commerce, JMS growth, especially shopping, and I have to say that the Travel among others was heavily impacted but when it is excluded, in the case of Rakuten Ichiba and others. And then I would say the shopping e-commerce GMS growth was up 48.1% year-on-year. I’d like to touch on that later on. After the end of the first wave of COVID-19, after the state of Emergency declaration was removed and yet we continue to grow.

And as to the GAAP operating income, there due to the sale of OverDrive, it was ¥3.3 billion and non-GAAP operating income was impacted due to the mobile business and logistics investment, that was minus ¥32.6 billion. As I said earlier, we have established a unique ecosystem, especially in FinTech. Their revenue growth was 19.5% up year-on-year, non-GAAP operating income again and was up 24.2% year-on-year.

As I said earlier, the travel business was hit hard, but in our case in our Group, we are engaged in different kinds of businesses and therefore, we successfully reallocated the people and also restructure the business model and therefore we are already seeing the positive revenue. The revenue was up and also as local travel is promoted, we are seeing recovery here as well.

And as to Rakuten Mobile, thanks to UN-LIMIT program, we have achieved 1 million applications. The Rakuten Mini was so popular and we were out of inventory. It takes about one or two to fill that shortage. And in the beginning, there we also received applications from Ichiba and when they’re translated into extra contracts, there was a time lag of about one to two months. Yet, I would say that the mobile business has been growing quite successfully.

And in a nutshell, in Rakuten Group, our Ecosystem despite various hardships, especially under COVID-19 has managed to achieve a robust growth. Number two, internet shopping is seeing increasing demand. Some might think it is a one-off type of surge, but as far as we’re concerned, we are seeing the permanent change among consumer behaviors and we are now seeing the increased number of positive cases.

About a month ago, when the situation has settled down somewhat, yet there no slowdown in e-commerce growth and the unified shipping service is participated by about 80% of merchants. And that is where we see a very strong growth. If you purchase more than ¥ 3980 then the shipping fee it would be free.

So therefore, we expected that this package would help us continue sustainable growth and the – we are seeing the steady mobile customer acquisitions. And also, we are seeing the Rakuten Communication Platform strategy has been developed quite successfully, thus demonstrating the strength of Rakuten Ecosystem.

Now, turning to the next page. In short, core business growth phase businesses and investment phase businesses, that’s how we typically classify our businesses into. Except for Rakuten Travel, the core businesses enjoyed the revenue, an increase by 15.1% and operating income 19.8%. And even when Travel is included, revenue was up 9.4% and operating income up 1.2%.

And for growth phase businesses, revenue is up 27.2% and those investment phase businesses, the revenue is up 64.7%.

Now, the – as for the impact of COVID-19, let’s take a closer look. In Q2, we saw the e-commerce in Rakuten Ichiba increase 48.1% and that level of growth is still maintained since the beginning of the month of August. And Rakuten Securities in Online Banking Cashless Pay, the Rakuten Securities is the one that we are seeing the increase in their customers, their joint revenue up 29.3% and operating income up 62.1%, thanks to the synergy of other businesses.

And as to Rakuten Card, when other card companies are suffering a setback in offline shopping, in the case of Rakuten Card, it has continued to achieve a steady growth. Especially in the field of digital entertainment or digital content, Rakuten TV in Europe is growing explosively. Now active users were added with 3.9 million. In Rakuten VIKI, in this quarter alone, we have added 3.7 million users. Rakuten Kobo, that is online education. Rakuten Kobo is enjoying growth in revenue, it turns into [black].

And for this quarter alone, the registered users increased by 1.9 million as to Rakuten Mobile due to the requirement for work from home and because more and more people are staying more time at home, including young population. As I said earlier, we have received more than 1 million applications for the quarter and Rakuten Viber, the Unique IDs was at 16.5 million.

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If I’m may repeat, despite COVID-19 impact, and maybe because of that, the e-commerce GMS in Japan was up 48.1% year-on-year.

And if you took a look at the details, then the new purchasers increased by 63.1%, and there are those people who once came to Rakuten and then didn’t come back, but they came back again and the returning purchasers was up 80.9%.

And Rakuten Card Shopping GTV share compared to other card companies like ANB, generally speaking, well ANB, these are the card companies for which are affiliated with reach out businesses. And I would say they are doing fairly good, yet there are some card companies that are suffering negative growth and despite that, Rakuten Card, as you see here continues to achieve a steady growth.

Now FinTech, the Rakuten Card holders now topped 20 million. And when I mentioned about the card holders, whenever the numbers is closed, we were wondering whether our business model could be copied by others but actually we topped 20 million. In the Rakuten Bank accounts, it exceeded 9 million. Back some time ago, it was about 4 million. It has more than doubled and soon reach 10 million, especially in the case of Rakuten Securities accounts, it already reached 4.4 million. And in the industry, I would say this is the fastest growing business.

And as I said earlier, in cashless transaction, Rakuten has a strong position not only Rakuten Card but also Rakuten Edy, Rakuten Bank, Rakuten Pay, the debit card are also available. In the cashless transaction, we enjoy a rather sizable market share.

Now about e-commerce, what kind of initiatives are there. As I said earlier, despite COVID-19 we are seeing increasing demand for e-commerce. And this is not a one-off type of event. In fact, thanks to improved service in Rakuten Ichiba among others, we are seeing such a sustainable growth.

In fact, internet shopping is a part of daily life of consumers and therefore, the logistics is a key there. And there are two points. One is about the unified shipping this – or uniform shipping, this leads to for worry-free shopping experience. And also, we have our own logistics network, which allows us to introduce various initiatives. Right now, about 70% of households are covered by our own logistics network, we want to further increase it.

And with that, in various ways this contributes to improvement of efficiency of operation of merchants. We’re also expanding logistic centers as you’ll see here and will soon start the new center, on June 15, this year in Chiba Narashino, the new center was open. And in first half of next year, there will be another one in Chuorinkan in Kanagawa. This is an automated warehouse.

And why logistics is a key? First of all for merchants, it is efficient and therefore less costly. For those merchants that use Rakuten Super Logistics they enjoyed nearly 40% or 40 points increase in growth compared to non-users – non-using merchants. And first, that we have next day delivery or Asuraku and high-quality packaging and lower logistics cost. And for merchants, they can reduce labor costs because they’re freed up – they are able to free up their labor using Rakuten applications, notification for estimated delivery time could be made.

Ordering Rakuten Super Sale and Shopping Marathon, there could be cases where a consumer might be buying from tens of the merchants if not hundreds. And in such a case, then all those items could be put into one package. What is called the 39 shops or 39, that is the merchants with the uniform shipping compared to those compared to those with uniform shipping with those without. They’re achieving nearly 40% of growth and therefore, for merchants as well and consumers, they prefer to buy from those stores with uniform shipping. And as a result NPS improvement for both heavy and light users, we outperformed competitors. And there may be some users that have – that were not satisfied with shipping. But now their satisfaction level has improved greatly.

So now I’d like to move on to the Mobile business, first, the customer acquisition. The customer acquisition for the Rakuten Group is exemplified by the 20 million, exceeding 20 million for the Rakuten Card and what we are trying to realize is for the Rakuten Mobile is to democratize this mobile phone business. So even from a global perspective, the Japanese mobile fees are very expensive. So based on our very unique and strong technology, we can deploy this kind of very cheap or good kind of service.

Now this is a new television commercial for Rakuten Mobile. And we’d like to introduce you to that. [Video Presentation]

So, the strategy for the Rakuten Mobile is called UN-LIMIT, will be about half the price of our competitors. And the reason can be explained from the following three points. We have this technology, the backbone. Rakuten Group is the only group in the world which has the radio access that has been made software, that has been created through the software and we’re also building base stations and another point is the Rakuten Group’s Ecosystem. So these three points make it possible for us to reduce the mobile prices.

Now speaking about the base stations, originally, the plan was to aim for 90% coverage of population by 2028. But the deployment has been accelerated. At this point in time, at the end of June, it was 5739 and more than 10,000 base stations have completed their build up, and we’re waiting for the connections at the moment. And by March 2021, we’re aiming or we will be able to realize our target of 70% coverage of population and by next summer, what we were saying that we will achieve in 2028, all the base stations will be deployed, that will happen next summer. So it has been brought forward by seven years. Originally, I think many of you were worried about the base stations building, that was delayed, but actually it’s been accelerated.

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Now next is the user survey. The overall satisfaction is 80%. Of course, it has to be 100% but it’s very easy to understand. Our pricing plan is very simple. We just have one single, UN-LIMIT plan, which is being received very well by our users and the cost performance is good and the flat rate data plan, in other words, the speed – the communication speed is also receiving tremendous satisfaction.

Now speaking about 5G launch. So, the question was, who are we going to partner with? As far as 5G roll out is concerned, we have decided to partner with a Japanese company NEC, which is very skilled in its technology, and we will be developing the 5G Core together, jointly.

So it will be stand alone, the 5G fast advantage, that kind of network will be developed together with NEC. Rakuten Group is the only company which has been able to create the software. So we’re the only ones who can do this. METI as well as NEDO have been evaluating this program very highly. And they will be providing us with a research and development subsidy.

Now Rakuten Mobile chapter one or maybe it’s like an introduction – preliminary introduction. And now we are going to go into the second phase, the U.S. government and the European governments and the Middle East governments are very interested in this strategy. And even those companies are starting up in this area are showing interest in our strategy, so we are going to be building the Rakuten Communications Platform. The first step was virtualization. The second phase is the Rakuten Communications Platform or RCP. Starting this fall, here in Japan, we will be conducting tests.

And so in that sense, this is a full of virtualization, that will be promoted. It’s very difficult to explain this in words, verbally. So, in order for you to understand what it would – this is going to be like the, the de facto or the present platform, Ericsson or Samsung, they had to be they had to come up – come in to build the platform, but what we trying to deploy globally is the RCP, a container based platform, the communications platform. How easily can you build a network, is going to be shown, in the following video. Please watch that demonstration.

[Video Presentation]

Thank you. So I don’t know if this is a good way to describe this. Well if I am to compare, well, very simply we have been able to build the network because we developed that technology by ourselves. So it’s really a revolution, a dramatic revolution that is going to happen in the network industry. So we’ve been hearing a lot about open RAN, and also fully virtualized, Rakuten Mobile is driving this move. So there’s a lot of artificial intelligence involved here. And container, which is a new technology for virtualization, that will improve scalability. Automatically that scalability can be achieved. And not because it’s cheap as a software but well, it’s not a very good comparison, but it’s like the Automobile a car by Tesla, that’s very fast. So this container-based power that is open platform is revolutionary. And it will dramatically change the definition of the platform.

How big is the market for this? It’s about ¥30 trillion, ¥40 trillion per year. And that’s what we are targeting. So, if we introduce RCP, how much will it cost us? At least we will achieve 30% cost reduction by introducing this Rakuten Communication Platform. The competition might be becoming very severe in some countries, so for future growth, I think there is tremendous potential.

Now, the strength of the Rakuten Ecosystem, thanks to everyone, recognition has become very global. It’s at 8.7% in Taiwan, 62.2% in U.S., France, 79.7% and Spain 74.1% and the membership is also increasing. So, the concept, the strategy that we are conceptualizing is to really become number one. So rather than in a limited area, this mobile industry we’ll be looking at the entire mobile market, be it in payment or other types of marketing using data, and the transaction, the finance, all of that has very high value added-ness. So this is going to be our strategy of Rakuten everywhere.

The Rakuten Card, I said has reached 20 million membership. So we believe that Rakuten Mobile will exceed that number. Those people who are paying ¥7000 a month, if that can be reduced to ¥3000, that’s like ¥50,000 a year, and if they have five people in the family, that would be ¥200,000 and so forth. That’s the calculation. So the economic advantage, the economic benefit of the Rakuten Card will be exceeded by what Rakuten Mobile will provide. So there is tremendous potential for the future.

Finally, speaking about COVID-19, I need to give you some additional information at the moment, the Rakuten Group, majority of the employees are working from home. Well, if it’s the logistics, the warehouse, they have to go there. But other than that, most of the employees work from home. And we have various systems to support work from home. So, globally speaking, our COVID-19 initiative I think is quite good.

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Now as for the partners, so we’re providing them support in Rakuten Travel. We want to provide safe, reassuring guidelines and also, if there has to be some kind of contact like nail salons or beauty salons, we try to provide countermeasures against COVID-19. And as for Rakuten Realtime Takeout, I would like you to use this. Until October, the free of charge takeout, is going to be implemented. And also, the – this work from home sometimes will become very stressful. So we can provide our hotel rooms as offices or the vacation – staycation and etc., can be provided.

Now as for our charity funds or the donation to one’s hometown etc., that is going to also be implemented. Now, so sustainability is another commitment. Over here you see this, indices against racial discrimination that was promoted in the U.S. as well as other types of environmental commitments that are being promoted. So, the ESG indices, we have been selected as – to be a constituent in the ESG index or indices, S&P/JPX. Well, the ESG Select Leaders Index, we have been evaluated highly as well as in empowering women. Hirose will give you the consolidated results, but could you please refer to page 67 of the Appendix.

Page 67 of the Appendix. So a cashless era is really going to arrive, I may be repeating but the strength of the Rakuten Group is as indicated here. There is a uniform or common ID. So you can use that one ID for credit cards, debit cards, e-money, QR code, barcodes, point cards, and the Rakuten Pay is also introduced there.

And the core is the Rakuten Point, which is number one in Japan in terms of satisfaction, we are number one in terms of the points, etc. Approximately 5 million merchants have been participating and also for Suica Linkage. Well, I’m trying to stay home and not move around too much but if I have to ride the trains or take the bullet trains, I will use the Rakuten Pay, the Suica platform. So for the cashless strategy, we have a very good program.

And then if you can turn to page 72 or 73 rather. So what is – does the future hold for us? Rakuten Mobile will – well we are trying to achieve 20 million. And we will be making investments which will bring tremendous impact. If you look at Q2, this is the domestic e-commerce operating income breakdown. That was ¥12.1 billion in Q2 2019, and that has increased to ¥20 billion.

The Rakuten Travel and GORA, of course suffered a negative impact from COVID-19, so and then there is a logistics related investments which can be recovered, which is minus ¥3.3 billion. So this ¥12.1 billion exceed ¥20 billion and the minus ¥5.9 billion that will be recovered and the logistics related investments, that will be recovered and will contribute to our revenue and to our sales.

So the catalog shopping, is going to change its contents and the revenue is almost ¥3 trillion but we are aiming at ¥7 trillion or ¥8 trillion. So this kind of approach will be necessary. So I hope the investors will take a look at this kind of approach.

And thank you very much, that’s all from my side.

Kenji Hirose

So, I’d like to continue with the consolidated results. So this is the results summary. For this quarter, we achieved ¥347.3 billion which was up 13.4% year-on-year. And in the mobile logistics, we have done some upfront investments, so it was ¥31.3 billion but including the sale of OverDrive holdings IFRS operating income was ¥3.3 billion. If we exclude mobile, logistics and investment business, it was ¥31.3 billion.

On Page 9 of the handouts, we will see the last three months summary. So it was minus ¥4.5 billion before tax but because of the system of consolidated calculation, we were able to register ¥7.5 billion for this quarter. And this is the core business as well as non-recurring investments as well as future growth investments of revenue and operating income. The COVID-19 did impact some of the business but overall, the result has been very good and the Rakuten Securities did very well. But on the other hand, we registered some negative numbers in the investments, the future growth investments. And do we will continue to make investments for future growth investments to be able to register positive figures for the revenue and operating income.

Now, this is the non-GAAP operating income breakdown. So it was ¥3.2 billion for others but for operating income it was ¥7.6 billion and that domestic EC was ¥8.1 billion and then a minus

¥5.9 billion which was about a one-time slowing of growth by COVID-19. So the base revenue ¥7.5 billion last year has increased to ¥10.7 billion this quarter. And then the deficit of minus ¥38.4 billion from Mobile, has indicated that. And so the Q2 operating income is minus ¥32.6 billion.

So the Rakuten Ecosystem membership value is explained in this page. In Q2, our membership value was ¥7.3 trillion. The MNO business is not included in this membership value. Now, this is the membership value trend, active users growing steadily and also, we are seeing increase in accounts for Rakuten Securities, new customers as well as returning customers can be seen. Cross-use is also growing, so Rakuten Ichiba, Rakuten Securities, contributed to the increase in revenue and OI which was ¥7.3 trillion for Q2 2020.

That concludes my presentation on the consolidated result. This concludes the presentation on the consolidated result.

Question-and-Answer Session

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