LY Corporation

We will now begin LI Corporation's financial results briefing for the first quarter of FY2024. Thank you very much for joining us today. This briefing will use the financial results presentation materials posted on the company's website.

Let us introduce attendees from the company.

President and the representative director, CEO. Takeshi Idezawa, Executive Corporate Officer, CFO, Ryosuke Sakaue, Executive Corporate Officer, Marketing Solution Company, CEO, Ryuki Ikehata, Executive Corporate Officer, Commerce Company, CEO, Hide Makoto. In the beginning, Mr. Sakaue will take you through 2024 Q1 results, and after that, We will have a Q&A session. The overall session should end in 60 minutes. Live streaming of this session will be available on a later day. If there is any technical problem, either with audio or video, an instruction will be appearing on the bottom of the screen to guide the audience to an alternative server. Now let's begin. This is Sakaue from LY Corporation. Thank you very much for taking your time to attend the financial results briefing for the first quarter of FY24. I will now give you an overview of the first quarter results. These are the topics. There are four. First is security measures. Progress was reported to the Personal Information Protection Commission on June the 28th. and to the Ministry of Internal Affairs and Communications on July 1, our efforts have been well received. We have brought forward some of the schedule for security measures against unauthorized access that occurred last year and are making steady progress. Second is prime listing. In order to maintain listing on the prime market and return profits to shareholders, We will acquire 150 billion yen of share buyback from August 5th. The third is Q1 performance. Performance for the first quarter is going strong. Company-wide revenue grew 7.6% year-on-year, and the consolidated adjusted EBITDA grew 21.7% year-on-year. Our growth driver, account advertising, and pay-per-consolidation continue to grow steadily. Lastly, product enhancements for top-line growth. We strengthen our products to achieve top-line growth. We have renewed the Yahoo Japan app and strengthened our media capabilities. Security measures are progressing smoothly, and we have also carried out share buyback. We have announced a share buyback to maintain our position on the prime market. Going forward, we will shift gears to promote our business for the mid to long term. Here's the agenda. First is the consolidated business results. These are the details of the share buyback. The acquisition method will be tender offer, 388 yen per share. The cancellation of treasury shares will involve the existing treasury shares held at the company and the shares to be purchased, totaling 6.4% of the outstanding shares. This will be canceled. And this share buyback will increase the free floating share to maintain our listing on the prime market and improve EPS and ROE. We believe that our stock price is undervalued. so we will continue to consider share buybacks as appropriate within the scope of capital allocation. The first quarter results, we saw an year-on-year growth both in revenue and profit. Progress on each target is generally above 25%, except for revenue being below 25%. However, this is within expectations as we expect higher sales in the second half of the year, seasonally. So, so far, we are in line with the expectations. Revenue for the company, each product grew, so revenue grew by 7.6% year-on-year. Adjust to the EBDA grew by 21.7% year-on-year. Thanks to the structural reforms that we have been implementing since the second half of FY22, including efficiency improvement, sales promotions, review of outsourcing costs, and selective focus on key business areas, revenue and adjusted EBITDA reached a record high for the first quarter, and adjusted EBITDA margin increased to 26.3% due to improved profitability. This is EBITDA YOY. Due to product enhancement, promotion expenses increased in Yahoo Shopping and PayPay consolidation compared with the last year. However, increase in SG&A was more than offset by increase in revenue in respective segments, resulting in higher adjusted EBITDA year-on-year. In Q1, security-related measure costs of approximately 3 billion yen were recorded, and another factor is that for one-time gain, totaling 43 billion yen was included in operating income, while only 4.2 billion yen was included in adjusted EBITDA because there are some cash transactions. So these are included in adjusted EBITDA. Gain and loss of control of subsidiaries was recorded at IPX, which promotes character business such as Line Friends, Line Next, which plans and develops an NFT platform, and Value Commerce. Those are the three companies recorded it. Again, after one time gain, $6.9 billion comes from value commerce, and out of 6.9 billion, 4.2 billion is included in adjusted EBITDA. Excluding one time factor of 4.2 billion, adjusted EBITDA grew 17.5% year on year.

Next, please.

Next is EPS. Adjusted EPS for the first quarter excluding the impact of gain on change in equity for Webtoon recorded in the first quarter of last year, and the impact of the valuation loss on options for equity method affiliates recorded this year improved by 2.8 yen, YOY, year on year, with a growth rate of 104.8%, mainly due to the growth in operating profit. Due to the planned implementation of share buybacks, adjusted EPS for FY24 is expected to improve by 0.4 yen. Next is performance by segment, starting with media business. Revenue grew by 4.4% year-on-year, driven mainly by account advertisement. Adjusted BTA growth was 14.2% year-on-year due to revenue growth as well as cost control, which was flat year-on-year, with an improved margin of 39.2%.

Next is the breakdown of sales in media.

Account advertisement grew by 21.4% year-on-year. In search advertising, sales declined on the partner side, while the Line Yahoo side maintained positive growth of 6.5% year-on-year. just like last year. Display advertising grew by 0.9% year-on-year due to a strong growth of line ads, talk list, home tab, and wallet tab. Other grew by 4.4% year-on-year due to strong sales of line stamps.

This is EVTA of the media segment. Why? The gross margin is high in the account ad and that grew. Therefore, sales mix improved. As a result, the sales cost was flat. We continue to control the promotional and advertising expenses which contributed to the increase of the profit. One of the drivers of our growth is account add. In June of last year, pricing revision was implemented, and after that, The number of account, paid account is growing steadily. The sales revenue is growing at more than 20% and we will continuously strengthen the product. We do expect stronger growth going forward. LYP premium membership, the number has declined Q2. That is because last year in fourth quarter, we implemented measures of three-month free period. However, we did not implement a similar measure in this fiscal year. Therefore, the new member growth has slowed. And the new members that joined in the fourth quarter were converted to paid member. in a significant scale, so the total of SoftBank member, Y-Mobile member, and paid member grew on Q-on-Q basis. In order to strengthen the attractiveness of LYP premium going forward, we will continue to strengthen the product provided exclusively to the members in order to improve the a conversion to paid members and also retention rate. Next, this is the revamp of YepFu Japan app. We have conducted this from June to July period. We have revamped the tab structure in line with the user needs. This has been started just recently, but the performance so far is good. per person session count compared to the previous, but new tabs largely increased compared to non-users. And we will promote multiple domain usage. Also, we do expect that the number of search from the app to increase in the future. This is on commerce business. The revenue contribution was made from Zozo, ASCO, and Yahoo Shopping, and the growth was 5.8% Y-on-Y. Adjusted EBITDA includes a one-time gain that I will talk in more detail later. This is the GNV for the commerce business. Zozo and Yahoo Shopping and domestic shopping grew 6.1% year-on-year. Domestic service e-commerce, thanks to the strong performance of Yahoo Travel and Ikkyu, the transaction value grew by 10.5% year-on-year. This is YOY Commerce EVDA. SG&A, we strengthened the sales promotion of Yahoo Shopping mostly, so it increased. But the increase of the revenue absorbed the increase of SG&A, so the income profit increased. A one-time factor, the value commerce gain on loss of control of a subsidiary of 4.2 billion is included, but the core performance basis, the profit grew by 3.9% year-on-year thanks to the sales promotional measures to promote wine. LYP premium memberships. The new memberships increased by 14% year on year. And also, average monthly e-commerce spend per member grew by 8%. And also, next month, the retention rate of new members is also growing. Thanks to that, Yahoo Shopping's transaction value increased 8.3% year-on-year. Next, this is the strategic business performance of PayPay, and the contribution was made by PayPay consolidation, which grew 20.9% year-on-year, and also fintech revenue grew and profitability improved, and the adjusted EBITDA was 6 billion. Next page. In addition to the PayPay consolidation, PayPay card revolving balance grew more than 20% year-on-year, and PayPay consolidated revenue grew 18.8% year-on-year. PayPay Bank, thanks to mortgage and bank card loan growth, the revenue grew by 13.8% year-on-year. For other fintech line pay overseas businesses, especially in Taiwan, the transaction value grew by more than 20% year-on-year in line pay. revenue expanded. Line credit, the loan balance expanded on line pocket money and revenue increased. This is on SG&A. Although this increased, the revenue increased absorbed. And this For other SG&A, the factors of variances include the line pay domestic service exit related expenses and payment related fees were consolidated and provision of allowance for doubtful accounts increased and this is The registered user which grew by double digit and GMB and revenue also grew nearly by 20% year on year and operating profit for the PayPay recorded profitability for the first time. This is the summary. Four initiatives are implemented and shifting gears to achieve medium to long-term business growth. The equity market is volatile today, but LY intends to change its share price momentum. This concludes my presentation.

Thank you.

Now we would like to start a Q&A session. If you have any question, please use the Zoom function raise hand button. If the MC calls your name, please start your question. Let me repeat again. If you have any question, please use the raise hand button on Zoom. When your turn comes and your name is called, please start asking a question. For the questions, we would like to limit the number of questions per person to two, so please ask two questions at a time. Now, we would like to begin the Q&A session.

First, SMBC.

Maeda-san, please unmute yourself and start your question. Thank you. Maeda from SMBC Nikko Securities. Disclosure of materials have improved. It's much easier to understand. My question is, this time there was a gain on loss of control. Last year, Webtoon equity profit, there was some valuation gain. So it seems that quite there is some impact from these items. Going forward, maybe we should take those into consideration for the short term and the long term, non-operating items or items that can significantly swing OP with regards to the subsidiaries' movements. Are there anything more to come? Or have you already gone through the major items? Could you talk about this? That's the first point. The second point is, earlier you talked about line pay closure. Reduction in expenses is expected going forward. For next year onward, how would it contribute to earnings? Do you have any outlook? That's the two questions. Sakaiwa would like to answer both of the questions. Regarding impact on OP, runtime factors, For Q2, Q3, Q4 this year, we are not expecting any major items anymore. If there is any, like we did today, we would like to give you a sufficient explanation. For the items below OP, like options, Well, there are some valuation with the accounting auditors. So towards the end of the fiscal year, we may have some items. But we would like to make sure that we will disclose the information in advance and explain sufficiently. Below OP, if there are any major items, so far we do not anticipate any. For line pay, You are right. When we close down the services after April 2025, when services closed, for this fiscal year, any gain on profit we are not expecting because the timing is sometime after this year. For FY25 onward, as you know, domestic portion of line pay, there are some deficit, negative profit, therefore gradually This is going to have less and less impact. I'm sorry, we cannot disclose a specific amount. Thank you. Thank you very much.

Thank you very much. Next is Mori-san of JP Morgan. Please unmute and raise your question. Thank you. I have two questions. First question. On first quarter, the start of this fiscal year is quite smooth. The control of the expenses, can we expect that such a control will continue into the second quarter and beyond? The revenue is heavier or higher in the second half. When we look at last year, the profit is larger in the second half. If we multiply the first quarter by four, then it shows an outperformance. But if you have a visibility on the expense side from the second quarter onward, please explain. That is my first question. Second question is the advertising sales momentum. When is... the timing that you believe the momentum will be there. In the first quarter, display ads, the momentum slowed. And you talked about the revamp of Yahoo and Line in the pipeline. So when can we expect the impact to be felt of the initiatives and we can start to feel the momentum? The first question will be answered by Sakawa-san, and second question, Ikehata will reply. The cost control for Q2 and beyond for subcontracting cost, the Q1 level will be maintained into the second quarter. Towards the year end, there are sales promotions, and we are still in a planning stage, but compared to Q1, the SG&A will likely to increase, but that will be linked to the increase of the revenue. Rather than sacrificing the profit, we will be conscious of the ROI in investing in sales promotion. Mostly that will be e-commerce and pay-pay, and in terms of the seasonality, the sales promotion expense will increase. Ikihata-san to reply on the second question. Thank you for the question. The second question, let me comment. As you pointed out, lying Yahoo display ads, the overall market is in a moderate improvement trend. But compared to that, our situation is not sufficient. That is our recognition. When will our measures be reflected in our revenue? The measures that we are taking are mostly medium-term measures. So please understand that time frame. There are two perspectives. One is media and service. Another is product improvement. on media service measures. As was mentioned in the presentation, Yahoo top renewal. And also in the future, line renewal revamp is scheduled. So to the users, we shall generate new transactions and convert that to advertising revenue. This will be a medium term measure. It takes some time. In product improvement measures, Line Yahoo has first-party data, and we are to expand the area of utilization of such data. user account linkage, the volume will have an impact, and also the efficiency of the advertising distribution in order to improve that line Yahoo ad platform integration will be an important initiative. So these measures are medium term, one to two year measures. We are implementing measures in parallel to catch up with the market trend. That was the reply. Thank you very much. Yahoo and Line revamp, renewal, are they part of the medium-term initiative? The guidance is conservative in the advertising business. In the second half, rather than expecting the impact in the second half, the revenue impact will be from next fiscal year and beyond. Yes, that is the correct understanding. Thank you very much.

Next is from Citigroup Securities. Tsuro-san, could you unmute yourself and start your question? Yes, I'm unmuted. Can you hear me? Yes, we can hear you. Good. First question. This is about securities, measures, costs, your outlook on the investment. Q1 is 3 billion. For the full year, based on the government report, 15 billion. Is that right? So the investment peak, when is it going to be? And based on that, that consolidation of line and the pay-pay, when do you think you can realize that? The second question. is about 150 billion yen share buyback. I didn't go through all of the details because of the lack of time. So sorry for the primitive question. But today's ending share price, compared with that, is 10% premium. With A holdings and ordinary shareholders, what would be the relative weight between them? And within A holdings, with neighbor, and SoftBank, a joint enterprise. What will be the weight going to change? Sorry, this is about the group companies, but if possible, please give us guidance. Thank you. For the first question, I'd like to take up the question, and it is ours as well. And the second will be by Sakao. Security measure cost $15 billion. Well, we are also assuming $15 billion for the year as well. And after Q2, it's not going to fluctuate so much. Maybe $3 billion will be executed in Q3, Q4 as well. Blind paper ID will be addressed by in terms of the timing. On July the 1st and the end of June, Measures were reported to authorities, and they appreciated the content. So we were to implement those measures securely for the rest of this year. As we make progress on that, ID consolidation is something that we were to promote as well. But the first priority is to prevent recurrence of the issues. The situation has not changed from the last time when we spoke to the investors. So when we have more details, we would like to update you on the details. Second point was about the share buyback. Today's share price is down significantly. After consultation or internal review, the one-month review, one-month average ending yesterday, was 388, so we decided to adopt this 388 yen. Especially in the latter half, there were some fluctuation in stock prices, so we decided to take the one month average stock price. For this, for ordinary shareholders, it's possible to apply. On the other hand, A holdings, more allocation, By design, that is something we are thinking about allocating more for A holdings. So the A holdings portion, by having more, we would like to increase the floating share ratio. For A holdings per part, we have the application contract concluded, so they have already committed to applying for the tender offer by contract. Within A Holdings, in terms of the share, even after the share buyback, the structure of A Holdings shareholder proposition is staying at 50 to 50, so the both parties' relative portion would not change. That's what we are hearing. We are a passive So please ask SB or neighbor for more details. That's all. Thank you. Thank you very much. That's all my question. Thank you very much.

Next, Mizuho Securities, Kishimoto-san. Please unmute and raise your question. I'm Kishimoto of Mizuho Securities.

I have one question.

In the advertising business, media business, first quarter, account ad was strong and started in a good way. As of now, what is your perception of the advertising market trend? The third party regulation will likely to start to impact towards the end of the fiscal year, but right now, I believe there is no negative factor. The full year assumption, what is the likelihood of outperforming to the plan? The search ad line Yahoo side is performing well. So the search business, if you have confidence in the strong performance to start the year, Ikehata will reply and Sakaue will follow up if necessary. Thank you for the question. I'm Ikehata. First, the advertising market perception, market trend, each company is publishing their forecast The overall market is in a moderate recovery phase. So on YOY basis, the upper single digit would be the overall market growth forecast. And our perception is also the same. As was commented, our account ad itself is unique. In the medium term, the trend will be continuous growth. The search ad at partner sites, as the result is being communicated. But LINE, Yahoo! property, which is essentially important, we continue to see robust strength. This may overlap with your question. As the company, we need to strengthen the focus on the display ad domain. The growth of display ad itself is supported by SNS media and also video media. The advertising business generated from these media is supporting the overall growth. So our company's action Let me repeat, our Yahoo app and Line app, such apps and media experience shall be improved in order to monetize the advertising business. So in a nutshell, in the medium term, we need to catch up with the display ad business, and we do expect that it's going to take some time. Please understand. Third-party cookie topic. In the short term, we consider this as a positive factor. The distribution using cookie it was considered that there will be an impact. We do not expect impact in this fiscal year, but once this is halted, we may be impacted from next fiscal year onward. But in the short term, this will not happen. In the medium term, the personal information protection and consumer orientation That trend will not change. Our first party data will be leveraged and we will continue to pursue targeting. That will lead to our strength in the display ad as well. Let me repeat, display ad itself, there are positive side and areas of improvement. in various areas, but we will tackle this solidly in the medium term. So that was my reply. In the previous briefing session on the topic of Kuki, display ad revenue, the single digit or nearly 1%, that part may be impacted by Kuki. And as Ikehata mentioned, in the short term, it is postponed. So that is our understanding. In the search area, Yahoo surface, UI improvement from June, we were able to implement. And that, for now, is... impacting the revenue in a good way. So UI click rate improvement will not continue for long term, but search ad, we do have such a positive factor. Thank you for the explanation.

Thank you. Next, Okasan Securities, Okumura-san, could you unmute yourself and start your question?

Thank you.

Okumura from Okasan Securities. From myself, I have two questions. First, regarding confirmation on the first quarter performance, by segment, EBDA breakdown compared with your plan, excluding one-time factors, you said all of the segments outperformed the guidance. If that's the case, among them, Which one was particularly strong and which one was not? And how about the outlook? In the expense discussion earlier, media business margin account which has high GP ratio, as long as it is strong, can you expect more? Or after Q1, is it likely to go down? So that's my first question. Second question. is about share buyback. In your explanation, capital allocation will be implemented, and you will continue to think about implementation of share buyback going forward. If you do additional share buyback, what will be the decision-making criteria for the company? Primarily, EPS 20 yen or more, Is that the first primary reason or stock price or ROE? Is there any bar in terms of ROE? What is your thinking for the method of additional buyback? Are you buying from any particular party or from the market? Thank you, Okamura-san. For Q1, EBITDA One-time factors are only value commerce that we described earlier. The outperformance was in media business and strategic segments. For Q1, there was outperformance vis-à-vis the guidance compared with the internal targets. Regarding the media business margin, 39% is too good to continue for a long time, especially LYP premium. We did not take such a major promotion. So the upper 39% margin, there may be some fluctuation, but we like to maintain at that level overall going forward. So that is the response to the first question. Second question is about the future plan of share buyback. Our decision-making criteria is we showed you capital allocation plan last time. Growth investment, like M&A, if there is any opportunity, we would like to inject capital in those areas. So options that we have will be compared and considered, and then we make a final decision. Therefore, for share buyback, for the method of additional buyback, we have nothing we have already decided in concrete terms. If there is any decision, we will disclose them going forward. That's all. Thank you very much for the detailed answer.

Thank you.

Next is from CLSA Securities. Mr. Oliver Matthew, please unmute and raise your question.

Hello, thank you. Could I ask about PayPay and the profit? Sounds like it's higher than you expected. Could you explain why and what do you expect going forward? And are there any new initiatives at PayPay you'd like to talk about? Thank you.

Sakaue, we'll reply to your question.

Q1, we made a good start. We were controlling cost and at the same time, nearly a 20% transaction value growth was achieved. That was thanks to product improvement to improve the usability. And already there are quite a large volume of people using PayPay, so the frequency of use per person was raised, and that was thanks to the accumulation of product improvement. Going forward, in order to further improve the revenue, the measures would be the same. Per person usage frequency should be raised. GMB needs to be enhanced overall, and pay-pay credit is a function similar to credit card, and by promoting more use of pay-pay credit, the revolving payment can be converted to this product. we can generate the interest income through this and increase the revolving credit balance. So those are the potential areas of further growth. Thank you.

So just to confirm, so this level of profitability can be maintained?

Yes, it's not going to fall to the red ink, but we will be able to maintain a certain level of profitability.

Thank you.

Next is Masuno-sama from Nomura Securities. This is Masuno from Nomura Securities.

I have two. One is LYP premium members. What is the current situation? Could you talk about it? What is the current picture and what is going to be the initiatives you are taking in the future? Second is about PayPay. For the PayPay stand-alone earnings, what is their position today? The scale has become so big. Most of the marketing is split between the partner and your company in terms of the cost burden. So automatically, promotion cost per GMV or promotion cost per sales are likely to go down continuously going forward. So what is your view? First is about LIP premium, and second is about PayPay. Both will be answered. by myself for LYP premium. First, for Q4 acquisition, because of the campaign and so forth, new acquisition was quite high performance. In terms of the conversion to paid members, compared with the internal expectation, it is a little bit weaker. But we were able to attain a certain level of retention. and promotions expense to acquire customers. Rather than continuing with this forever, we would like to use line pre and product benefits. Certain product benefits will be available only for LYP members. Rather than promotion, we would like to increase the retention and the number of members by those benefits rather than promotions. To a certain extent, as LIP premium benefits, if they are attractive enough, we wouldn't have to spend too much on promotion, or even if we do, retention should go higher and promotion efficiency will get higher. So for Q2 and Q3, we would like to offer more product benefits and increase the LYP premium membership attraction. That's what we are would like to do with the NYP premium. For the second, pay-based and earnings are not disclosed, but you are right to a certain extent with the stores, merchants, and the local governments last year, the year before, we worked together with them for the campaign. So for that part, with the local governments and business partners. We will continue to use them so that the promotion expense ratio per revenue, or GMV, will be lowered. So in the meantime, for customers, because we have to send customers to stores and the merchants, that will be the attraction for the merchants. Therefore, sending customers to merchants using point program and so forth, we would like to think about that too. That's all. Thank you. Additional question. You said you are not disclosing, but in terms of timing for the pay-based standard loan, when will they say a positive OP? This year or next year? Rather than the number, could you talk about the timeline for the positive OP? Yes, it's like that. Like for credit card business and ,, we are making some adjustments between those two. Therefore, even if I tell you the earnings information for the standard law, it would not be so meaningful. So for Q1, on a consolidated basis, the OP, positive OP, was achieved. And for this year, three-digit and OP is something we want to achieve, or a two-digit billion yen is something we can achieve, we believe. So for the full year, we want to exceed two-digit billion OP profit this year. I see. Thank you very much. If that's the case, could you also disclose operating profit going forward? Yes, we would like to think about the possibility.

Thank you.

Thank you very much. We are accepting questions. If you have a question, please press raise hand button on Zoom. If you have a question, please press raise hand button on Zoom. Since there is no further question, we would like to close the Q&A session. Lastly, Mr. Sakaue will give his closing remarks. I explained in my presentation and covered mostly. We are changing the gear, and with this briefing of the financial results, we would like to change the momentum of our company's share prices as well. Thank you very much. With this, we would like to close the financial briefing session for Lain Yacoub for the first quarter of the fiscal year 2024.