LY Corporation

This is Idezawa from LY Corporation. Thank you very much for taking the time out of your business schedules to join us in the business results briefing for Q2 of FY23, ending in March 2024. I will present the overview. This is the first results meeting as a company, and I would like to start with the Q2 business results. I would like to start with the FY2023 Q2 business results topics, revenue and adjusted EBITDA. both reached record highs for the second quarter. Media business increased both revenue and income through a gradual recovery of advertising business and the line of digital accounts growth of over 20% enabled partly by rate revision. Commerce business increased both revenue and income with shopping business continuing to show signs of improvement and travel business recording double digit growth. Strategic business achieved a positive quarterly adjusted EBITDA For the first time, thanks to the selective focus on key businesses, we have promoted since the beginning of the previous year. With the addition of Line and the Yahoo Japan account linkage already started in October and the LYP premium starting in November, we will continue to promote cross-use between services. We will aim for further growth through new initiatives such as the renewable lineup. From here, I will present the items on the agenda one by one. First is consolidated business results for the entire group. Both revenue and adjusted EBITDA grew by double digits year-on-year. Revenue growth was attributable mainly to consolidation by pay-pay and the increase of media business revenue. Adjusted EBITDA increased by more than 25% thanks to cost optimization and select focus on key business areas, especially strategic business. Adjusted EBITDA margin improved to 23.4%. The following slide shows variance analysis of adjusted EBITDA. Growth profit improved year-on-year, mainly driven by line media business as well as travel business. Adjusted EBITDA increased year-on-year as a result of selective focus on key business areas and a fixed cost reduction beyond what was expected. Business variance analysis in operating income. Operating income grew 14% year-on-year due to growth in adjusted EBITDA. In the previous year, We had aligned music conversion into a consolidated subsidiary. Therefore, others and adjustments is done year on year. This is variance analysis in adjusted net income. Equity in losses of associates and joint ventures continued to improve in Q2 due to business growth and cost optimization. As a one-time factor, the recognition of a tax benefit from the merger due to significant decrease in corporate income tax payment resulting in an increase in adjusted net income of approximately 6.1 times year-on-year. Here is the consolidated full-year guidance for FY23. The progress as of the end of Q2 is 55% vis-à-vis the adjusted EBITDA target for the entire group. The results remained around the guidance level due to the continued uncertainty in the market and the continued focus on measures to promote the cross-use including account linkage during the second half of the year. Due to the merger, LY Corporation is applying a revised cost allocation rules starting in Q3, allocating corporate admin and HR expenses and the system expenses previously booked in others and adjustments to respective business segment. Next page, please. Let me explain the results and topics by segment. First is media business. In Q2, recovery of advertising sales, mainly from growth in account advertising and the consolidation of live music, supported an year-on-year growth in revenue. As for adjusted EBITDA, an improvement in gross profit due to higher sales and a tight control over SG&A expenses through cost optimization measures, resulted in revenue growth of 11.3%. As a result, adjusted EBITDA margin was 40%. Next page is total advertising revenue for the group. Despite the slowdown of such advertising, the negative growth rate of display and advertising was reduced. In addition, due to cost of optimization of the commerce business, shopping related ads gradually improved after continuous decline. for some time. As a result, the overall growth rate, including shopping ads, also turned positive year on year. Next is breakdown of search advertising revenue. About 80% to 85% of our search and revenue Search ad revenue is from search ads of LOI Corporation services, which is shown as LOI Corporation's websites, while the revenue from search ads distributed to partner sites is shown as partners' websites. Revenue from partner websites is declining, while revenue from LOI Corporation's websites has grown year on year. Next page shows account advertising. The number of paid accounts has increased steadily. Functional enhancements are being implemented on an ongoing basis. To enhance monetization, we are offering a membership function that allows users to create a paid membership plan on their official LINE account. In addition, using generative AI to automatically generate a response to user inquiries, we are planning to launch a new function in FY2023 We have already completed the preparation. We will continue to enhance functionality and improve operational efficiency to steadily grow LINE official account. Next page shows commerce business performance. Revenue grew year-on-year due to improvements in e-commerce transaction value. Adjusted EBITDA grew 16.9% year-on-year as we continue to reduce sales promotion expenses in Yahoo! Japan Shopping and Line e-commerce. Next page shows e-commerce transaction value. Growth in domestic merchandise was down 0.7% year-on-year due to continued reduction of sales promotion expenses, but it is on an improving trend. The total growth rate has turned positive at 0.4%. Next page shows domestic e-commerce transaction value. Domestic shopping transaction value was down 5.5% year on year, while the QOQ growth rate continued to improve and remained in line with expectations. Domestic service transaction value was impacted by the fading effect of reopening while travel remained strong with double digit growth. We have been asked about the synergies between Dozo and ASCO. So let me explain it once again. L.Y. Corporation's user base and technical capabilities contributed to the growth of Dozo and ASCO. Dozo opened a store in Pepe Mall in December 2019 and accessed L.Y. Japan's broad customer base, which helped expanding its merchandise transaction value. ASCO's B2C business returned to profitability FY 2023, partly helped by the migration of Lohaco main store system to Yahoo Japan system infrastructure. Both companies also contributed to the LOI corporations ecosystem. For example, the average number of orders from Yahoo Japan is about three times higher for those who are the Zozotown Yahoo Japan store and about four times higher for those who use the Lohaco or Yahoo Japan store compared to general users. Next, performance of strategic business for Q2 adjusted EBITDA turned positive for the first time as a result of selectively focusing on key business areas. Revenue growth strategically at YOY mainly due to the growth of PayPal and PayPal cards. Adjusted EBITDA is improving steadily, partly due to improved profitability of PayPal. Going forward, in addition to PayPal growth, we will continue to optimize cost and reduce revenue, review loss-making businesses in order to improve profitability and revenue growth. Here is the overview of PayPay business. Consolidated GMV was flat on Q1Q and up more than 20% year-on-year. Consolidated EBITDA was positive again in the second quarter. In addition to the increase in the number of registered users, the number of payments is also increasing steadily, supporting continued growth. There are PayPay cards' major KPIs. Synergies with PayPay continued to drive double-digit growth in the number of active cardholders. Transaction volume was up 31.8% year on year. Revolving balance also continued to expand, growing strongly by 56.4% year on year. Next page shows PayPay Bank's major KPIs. PayPay Bank also had synergy with PayPay. Each KPI is steadily expanding. The number of accounts has maintained double-digit growth due to the acquisition of accounts through PayPay mini-apps. Loan balance grew 30.5% year-on-year thanks to the sales promotions of housing loans and business loans. Next page. I'd like to talk about initiatives in the future. In April, we presented our management policy for FY2023. We made steady progress since then in streamlining our business, which is reflected in income numbers. as we spoke earlier. So what I would like to present today is the future initiatives for the regrowth of business further in FY 2024 and beyond. The slide illustrates the overall strategy of LY Corporation Group. we will leverage the group assets, promote cross-use among services, and reinforce our businesses with a focus on highly profitable search and media businesses. Today, I would like to explain some of our key initiatives with a particular focus on cross-use, search, commerce, and finance. Next page. First is cross-use. Next page.

Now about cross-use, needless to say, we will further reinforce linkages among LINE, Yahoo, the Japan PayPay, and while promoting cross-use today as an important concrete measure, we will explain about account linkage, RIP premium, and LINE renewal. So these are the three that we are going to explain today. First, about the first point, account linkage. From October, we start linking LINE and Yahoo Japan accounts. As of yesterday, November 6th, the actual number of links was 19,480,000, which is progressing smoothly and exceeding expectations. By linking accounts, we can expect to expand cost use of services and increase ad revenue. Please note that line and PayPay account linkage is scheduled for fiscal 2024. We will promote the use of PayPay by inline users. Next is the second measure, LIP premium. LIP premium is The premium membership plan by the new integrated company is scheduled for release on November 29th. The monthly fee is 580 yen, the same as the current Yahoo premium. And in addition to the existing Yahoo premium benefits, new line benefits will be added. We aim to acquire new members by adding new benefits. and expand the use of LI Cooperation Group services. The next point is the third measure, line renewal. Today, these are some examples. We are still considering these, so there is a possibility of this to be changed. Now this is a major renewal and with this renewal we are preparing to further encourage users to visit various sites for them to use search and commerce more. There are three major changes. At the extreme left, you see the Home tab. This has been redesigned into a portal where news and content are gathered. In order to attract more line users to search, this is going to be a very convenient place. On the second from the right, this is a Shopping tab, and this is to be newly established for commerce and shopping. This will be an easy-to-use UI that anyone can use. We will provide a purchasing experience beginning with a messenger app. On the extreme right, we have the place tab. The local information and mapping information are to be gathered here. the up-to-date information about the information that customers are looking for will be provided. And so this will allow users to use maps and reservations seamlessly. So through this major renewal, we will aim at improving the convenience of line and strengthening, attracting users to important services within the group. Next is search. Next page, please. Search is the gateway to the internet, and the growth of search leads to growth in all domains. Now I'd like to explain two important points to strengthen in order to grow search in the period ahead. The first is to strengthen search traffic. Approximately 80% of Yahoo search users go through Yahoo's top page. So we are taking measures about the Yahoo top page through which the search comes in. Specifically, to make users want to use the Yahoo app on a daily basis, we enriched weather and sports information. And as a result, on the Yahoo app grew by 5.6% year-on-year in the second quarter. Next is the second enhancement point. The key query domains for search are commas, local, and knowledge. These three domains account for over 50% of search queries and over 70% of search revenue from these three domains. We will improve the satisfaction level of the search experience in these three domains. We believe this is very important. Next page, please. So specifically on the left-hand side, these are the measures that we took in the first half. Now, Yahoo Search is available from within lineup, contributing to an increase in the number of searches. In the middle, in the local domain, we have improved the UI UX of restaurant search to improve convenience. And in the knowledge domain, we are enriching celebrity profiles. We are working to improve the search experience for our users. In the second half, we will strengthen our commerce domain by providing shopping search ads. So on the right hand side, we're going to provide for the first time. When commerce search is made, the ability to display products at the top of the commerce search module has a high appeal effect. So in the second five, we are scheduled to start provision of this. And in the gray on the right, there is a product information site that started in April 2023. Again, the external advertisers product information, the we actually started in April 2003 by offering a cost per acquisition type product. So this way, We would like to increase the number of searches and also in key query domains, we would like to strengthen the, enhance the search. Next page. And now the search and AI, very important combination. First, to use a generative AI for search, we started testing the search experience using chat type UI in October. On the right hand side, on Yahoo Chebukuro, both humans and generative AI answer questions. This is a new place to share knowledge. This is to start to be provided in November 2023. Next page. Next is commerce. For commerce, in addition to the diverse services provided by the LOI Corporation Group, we are now, of course, providing diverse services. In addition to these diverse services, as I have been explaining, with newly launched LOIP Premiums Integrated Commerce Search, and with the renewal of Lion Shopping Tab, we will provide a convenient commerce experience at great value. Lastly, I'd like to talk about FinTech. Next page, please. In the financial business, in order to consolidate overlapping businesses, we have been reorganizing since last year. In the credit card business, by making PayPayCard a subsidiary of PayPay, we are accelerating generational synergy by integrating QR code payments and credit card payments. Banking, securities, insurance, and consumer loans businesses overlapped within the group, so we aim to achieve further growth by unifying in each business and increasing efficiency. As a result of this, a selective focus on key business areas adjusted EBITDA improved by 7.8 billion yen in the first half, significantly improving the profitability of the financial business. Next page, please. Next is a linkage between PayPay and other financial services and line. First, on the left-hand side, we have a PayPay card. It has changed its company name and started offering credit. So after the linkage transaction volume, it continues to grow by more than 20%. As for PayPay Bank, with its trade name change and by providing services from the PayPay Mini apps, the number of bank accounts opened via PayPay is steadily increasing. on the right-hand side with respect to linkages with LINE, which are planned to allow for seamless PayPay payments on the LINE app. And the PayPay transfer to LINE friends, which are more convenient features for users for further growth of PayPay. Next page, please. The Line and Yahoo! Japan prepare the growth cycle of financial services. With the influx of users from Line and Yahoo! Japan, PayPay's user base will expand, sending customers to PayPay's financial mini-apps, and furthermore, will promote cross-use between financial services. And in addition, by improving convenience of points, we will create a positive cycle of increasing user engagement, expanding the customer base for financial services as a whole. Finally, I will explain action to implement management that is conscious of cost of capital and stock price. Please take a look at the next page. An issue we need to address for our capital policy is due to the increase in the number of shares and net assets from the business integration in 2021, we need to recover from the deterioration in EPS. On the other hand, considering that interest bearing debt is at an appropriate level, we have adopted cost of equity. as the cost of capital we estimate the cost of equity for the last year to be around 6.5 to 7.5 percent toward achieving a positive equity spread first we will recover adjusted eps to 18.7 yen the pre-integration level next page please we will work to recover adjusted eps by improving profitability and optimizing equity with a clear capital allocation policy Capital allocation involves allocating operating cash flows, excluding those from the financial business to base investments and shareholder returns. Using this surplus and the increase in cash due to the merger defect, we will flexibly allocate it to additional investments that contribute to medium and long-term business growth and additional shareholder returns such as share buybacks. In addition, adjusted EPS has been adopted as evaluation criteria for executive remuneration. As a result, executives are now in the same boat with our shareholders. we will work on profit improvement, which is the numerator of the adjusted EPS, and that optimizing capital, which is the denominator. In the first half, we were able to make a significant recovery in adjusted EPS, mainly through defensive initiatives, such as selective focus on key business areas and cost reductions. We aim to recover adjusted EPS to pre-integration level within adjusted around three to four years. Next page, please. So thank you so much for listening.

We would like to start the Q&A session. First, UBS Securities, Fukuyama-san. Please unmute yourself. Yes. Thank you very much for the opportunity to ask a question. My name is Fukuyama from UBS. I have two questions about advertising. The first is about the second half, domestic ad market outlook. When you look at your performance, display art in Q2 has stopped going down. But for the second half, can you accelerate your growth? if you can, what are the drivers for the growth in the second half? This is my first question. Could you ask the first and second questions together? Yes, thank you. For the second question, this is about Yahoo News. What is the procurement price for news? You have already announced the new pricing. But what is the size of the adversarial revenue related to news? If you raise the price, and then what will be the positive impact on the profits of medium business? Do you have any simulated calculation results? Yes, thank you very much for the question. For the first question about the second half ad outlook, Ikehata, who's in charge of advertising, is going to respond. And for the Yahoo news, CFO Sakaue would like to respond to your question. Yes, this is Ikehata speaking. Thank you very much for your question. For the first question about the ad market outlook for the second half, I would like to respond. In this presentation, we have already indicated that L.Y. Corporation ad business negative profit has been reduced. Therefore, we think that the market conditions have already bottomed out. And for the second half, gradually, we will see a recovery of the market conditions. It may be a moderate recovery, but we are expecting a recovery anyways. And this trend is something that we like to take advantage of as a group for the display art and other arts. We would like to expand our distribution, other distribution mechanisms so that we can capture the opportunity. So that's my answer for the first question. The second question was about Yahoo News. This is Sakawa speaking. I'd like to respond. Regarding news, sales, revenue, or other information, we are not disclosing any details. We are afraid that we can't make any comments on Yahoo News. In terms of the impact on earnings, well, the review of the rates have not been decided yet. With the information providers, we already have discussions, and we would like to explain about our logic for the information distribution and some of the simulation with the numbers. And so that means that we have just started the conversation with them. So we have to proceed with the conversation. Otherwise, the impact on the earnings cannot be determined yet. So at this moment, we are not sure how much impact we will have. So when we have progress on this front, we would like to communicate more information with the investors. Thank you very much.