LY Corporation (4689) Earnings Call Transcript & Summary

We will now begin the LY Corporation FY 2026 First Quarter Financial Results Briefing. Thank you very much for joining us today. For this briefing, we will be using the presentation materials available on the LY Corporation website. Attending today's briefing is LY Corporation, President and Representative Director, CEO, Takeshi Idezawa; Director and Chief Financial Officer, Ryosuke Sakaue; Executive Corporate Officer, Media Search Domain Lead, Hiroshi Kataoka; Executive Corporate Officer; Commerce Domain Lead, Makoto Hide; Executive Corporate Officer, Corporate Business Domain League, Yuki Ikehata are in attendance. First, Sakaue will present the financial results for the first quarter of fiscal year 2026. This will be followed by a Q&A session. The briefing is expected to last approximately 1 hour. Please take note that this briefing is also being live streamed. We will now start the briefing.

This is Sakaue of Corporation. Thank you very much for taking the time out of your busy schedule to join us at FY 2026 financial results briefing. Let me explain the summary of the financial results. There are 3 topics. First of all, it is about consolidated business results. The LY Corporation's gross profit grew with performance exceeding the internal projections. More specifically, the consolidated revenue was JPY 53.9 billion, up 13.1% year-on-year; adjusted EBITDA, JPY 154.8 billion, up 23.1% year-on-year. Strong growth were achieved. The second point is that the agent eyes domain agents expanded to 25 domains. DAU expanded to 12 million. So we are seeing the good progress in terms of the shift to AI agent. The third is tender offer for Kakaku.com, Inc. We aim to create synergies by combining user touch points, product data and payment platform of 2 companies. Please go to the next slide. This is the agenda that I did follow First of all, about the Q1 consolidated results. Both revenue and profit made steady progress toward achieving the full-year guidance. In Media and Strategic revenue, the progress was below the 25% of the guidance. This is due to the seasonality, basically. And we assume that the revenue will concentrate in the second half. So we believe that the final results are in line with our expectations. And once again, this is the trend of the overall results. Revenue grew 13.1% year-on-year. The speed of the growth has accelerated. Adjusted EBITDA grew by 23.1% year-on-year, significant growth. Margin improved to 28%, the major improvement. So the level of profitability is increasing. PayPay consolidation expanded the profit, and the -- this has been the case in the past. But in addition, the higher gross profit of LY Corporation contributed to overall profit growth. So this was the major characteristic of Q1 results. Looking at the individual businesses. The Media, Commerce and Strategic gross profit grew in all segments. In addition, in Media segment, the cost management was successful and that led to the EBITDA increase of JPY 14.8 billion. On the right-hand side, there were newly consolidated subsidiaries in the last fiscal year that offset the negative impact coming from ASKUL, such as EBITDA grew as much as 23.1% year-on-year. Next page, what we are focused upon is the shift to agent eye, user navigation enhancement between LINE and Yahoo! JAPAN and also additional feature of the long-term memory of the user preference. Those are driving greater everyday usage. And also, the agent eye agent has expanded to 25, and we are improving the usability. Through those initiatives, the agent eye user grew to the 12 million DAU. Next page. This is about the collaboration with 7-Eleven. Last week, we made announcement. And once again, an Yahoo! has over 100 million digital customers, 711 has about 20 million per day physical customer. And as you can see in the middle, we have LIP premium and official account and mini app, we would like to align them. For the LIP premium members, we provide a higher rewards rate and also the coupons that can be utilized in the 711 stores. we plan to enhance the membership value as well as referrals. As for the official account and mini app, through the expansion of the digital touch points, such as digital membership and mobile order, we'd like to improve the convenient and rewarding shopping experience. Next is by segment. Looking at the media business, the shift in the revenue mix progressed, and the revenue grew steadily by 2.6% year-on-year. Adjusted EBITDA was 14.2% year-on-year and achieving the double-digit growth. The margin increased to 4.2 points and expanded to 41.8%. Now, we have a new level of the margin. This is the analysis of the media business. The portfolio transformation of this segment is progressing. And the search and display ads were down year-on-year. However, the account ads continue to show the high growth. Also, LIP premium, the user number increased. So user subscription, including the LYP premium, this is a new perspective has also grew and contributed to the revenue. adjusted EBITDA with the higher revenue of the account add and LYP premium, the gross profit improved by using AI, the productivity improved and SG&A expenses was reduced and the adjusted EBITDA grew by 14%. And next, the number of the paid accounts has been growing. Total is right now 500,000, and we exceeded that level. As for the revenue, it's expanding in line with our plan. Next, as for the mini apps, in Q1, the number has reached 35,000 MAU, 22.18 million, higher than 50% growth continued. So it's growing very rapidly. DX transformation solutions and stores -- 4 stores and CRM is another initiative. In June, we began offering restaurant options, a digital transformation service for restaurants and started to monetize. The service is off to a strong start. We also plan to launch this service for hair and beauty salons during the second quarter. Additionally, the CRM options, which enables more advanced management of LINE official accounts was launched in June for a multi fee of JPY 5,000. It supports centralized management of customer information and communication optimized for each user. Through these monetization enhancements, we aim to achieve sustainable revenue growth of account advertising. Please turn to the next page. This is on LYP premium. The number of direct members, excluding free users through mobile phone career benefits, has steadily increased to 6.82 million, up 36.8% year-on-year. Going forward, we aim to reach 10 million subscribers, including new plan users. As part of our new plan offerings, we launched the lower priced LINE plan enjoy pack in July and plan to introduce the LINE Music new plan in the fall or later. Going forward, we talked about the benefits with 7-Eleven off-line benefits, and we intend to further strengthen the benefits and establish the media business as a key driver of earnings. Next page, please. This is commerce business. Revenue increased by 12.5% year-on-year, achieving double-digit growth. Adjusted EBITDA also rose 10.2% year-on-year, achieving double-digit growth. After ASKUL's pressure, we now were able to come back to the profitable level. The adjusted EBITDA margin improved significantly to 17.3%, a level close to the previous fiscal year. Next page, this is on commerce business performance. LINE Yahoo!'s revenue 11.2% year-over-year, excluding the consolidation effects of Binan lineman driven by strong performance in Shopping and reuse. Adjusted EBITDA posted double-digit growth, driven by revenue growth at LINE Yahoo! and the contribution from the consolidation of subsidiaries despite the impact of ASKUL. This is on transaction value. Starting this fiscal year, the disclosure classification for commerce transaction value has been revised to align with that of the P&L. As a result, transaction value no longer includes media or equity method affiliates, providing a clearer view of each services growth. For details, please see Page 24 of the supplementary materials. Shopping transaction value. This is mostly Yahoo! Shopping, grew 9.1% year-on-year, continuing its growth trend. Reuse transaction value also performed strongly, up 18.4% year-on-year. Service transaction value also maintained double-digit growth. Please see next page. This is on Shopping and Reuse business. Yahoo! Shop Bank posted strong performance with a transaction value, up 8.6% year-on-year, driven by the time limited PayPay points promotions, the strengthening of product categories such as gourmet food and the enhancement of AI-powered features. In the reuse business, the entertainment market expanded and measures such as shipping fee, refunds and coupon distributions proved successful, driving double-digit percentage growth in transaction value. Please see next page. This is on strategic businesses. Revenue grew 34.9% year-on-year, maintaining strong growth. Adjusted EBITDA also reached JPY 35 billion, an increase of nearly JPY 14 billion year-on-year. Along with the revenue increase, the margin expanded to 26.9%, continuing strong top line growth and improved profitability. Please see next page. Revenue maintained strong with the revenue of PayPay consolidated, up 28.4% year-on-year. Other fintech saw significant growth of 81.7% while year-on-year, driven by the impact of the new consolidation of LINE Taiwan and the growth of LINE Fintech. Adjusted EBITDA rose significantly by 64.4% year-on-year as the substantial increase in revenue offset higher at S&G expenses and other costs. Please see next page. This is on PayPay consolidated business overview. The number of registered users expanded to over 74 million, and GMV maintained strong growth, up 23% year-on-year. driven by increases in online payment GMV and interest income. Revenue grew by 27.4% year-over-year, exceeding the growth rate of GMV, while EBITDA also saw strong growth of 59.1% year-over-year thanks to high take rate. Furthermore, the acquisition of D&D Financial Life Insurance announced in June will accelerate the offering of comprehensive financial services. Lastly, we will explain the schedule tender offer for Kakaku.com. Overview is shown here. The tender offer price will be determined based on whether Kakaku.com acquired treasury shares from KDDI or not. The total acquisition cost is expected to be approximately JPY 690 billion in either case. This is a joint proposal with Bain Capital, and we aim to enhance Kakaku.com's long-term corporate value by combining the strength of both companies. The economic ownership ratio is expected to be 50.1% for Bain Capital and 49.9% for LY Corporation. Please see next page. When this transaction is completed, we will leverage LINE's Yahoo! extensive user touch point, data and payment infrastructure to drive synergies. There are 4 specific points shown here. We will drive user traffic to Kakaku.com's media platform and integrate Kakaku.com with Agent I and payment experiences, and we aim to deepen and expand DX solutions for the restaurants in HR domain. This deal is yet to be closed. So I will not go into the details. However, when this transaction is finalized, further details will be provided separately. Please see next page. This concludes the summary of our first quarter financial results. Thank you very much. Now, I would like to take questions.

[Operator Instructions] First, Okasan Shogan Okumura-san.

Okumura speaking, can you hear me? Yes. I have 2 questions, please. First, about Kakaku.com, TOB, scheduled TOB. Based upon the current conditions, the -- basically, it's 4% to 5% yield. So for you, the IRR 10%, I think, is the standard for you. So the difference or the gap, how do you plan to fill that? What is the strongest conviction for this offer? You mentioned the synergy in Page 25. But I'm sure that there are things which are not yet final. So what are your expectations? And what would be the impact that you expect from this? If you can elaborate on that?

Thank you very much, Okumura-san, for your questions. Let me answer first, and then, it is might make some additional comments. IRR, 10%, the criteria? Yes, that's correct. And for us, the biggest synergy that we have in our expectation is Tabelog. Using Tabelog official account area, we want to develop such area. That is the area that we would like to work on the most. This is something that we must do. This is like most important domain. So we have the highest expectation from that. In addition, the next priority is Kakaku.com's services. And they have various, for example, product data and word-of-mouth data, and those can be utilized for our Agent i so that the Agent i can provide a better navigation for the shoppers, the Agent i become smarter. So that's how we plan to utilize this. Yes. That's the question -- sorry, the answer to your first question.

One follow-up question, if I may. So the impact on the dividend, and also, would there be a impact in terms of the buyback?

As of now, the dividend, we announced the increase of the dividend payment that we do not expect any impact on those. The capital allocation for 3 years, basically, will not be changed based on the current assumptions.

My second question is about the media business and the results and the forecast. So search ad, I think you mentioned that the downward trend might stop. And on Page 6, you mentioned the differences, the fluctuations, and the gross profit, JPY 5.4 billion up and the gross profit increase is higher than the profit increase. So because -- this is because of the fact that the search is down, the profitability per product, would there be -- are there any positive impact from it? What is the current status as well as the outlook, if you can comment?

Yes. Sakaue would like to answer to that question. First of all, about the stopping of the decline of the search, yes, it is that is starting to happen, and that's what we see internally. So Search Ads, when we look at the efficiency and power of monetization, I think we are seeing the improvements. So through that, the decline of the revenue is something that we are seeing. And as for the gross profit improvement, on Page 11, if you refer to that, as you pointed out correctly, the low profit margin is declined and high profit product increase. So due to the improvement of the mix that led to the higher number. So that is the biggest part was the search advertising, as you correctly mentioned.

Yes. So it's product mix and the productivity -- sorry, the profitability of each product hasn't changed.

Yes, we have 4 now. So for each product, the productivity of each product remains the same.

We would like to take questions from Sato-san of Jefferies Securities.

This is Sato of Jefferies. Can you hear my voice?

Yes, we can.

I have 2 questions as well. My question is similar to the previous question. I'm also asking about Kakaku.com. Why this is important to you? I think you explained on that topic. So I was listening and nodding to the explanation. But frankly speaking, Tabelog from LY Corporation's perspective is the most attractive asset. Kakaku.com business, I think that you can also do that through using AI. But why this is most important to you? If the deal with the Kakaku.com is unsuccessful, what are you going to do? That is my first question.

Thank you for the question. Why this is important to us? The strategic significance is that when we look at AI era, the broad touch point with users and AI, 3 services that Kakaku.com has highly specialized data and customer platforms. So combining them would be very important in the era of AI rather than click type conversion and reservation has to be made before we can receive payment from the users and monetize. So I said Tabelog is high priority and also Kakaku.com. The purchase action can be completed using AI. So from that perspective, it is a very important asset and recruiting box, the job posting box. Once conversion is achieved, then the surface can be monetized simple posting of the job ads that will no longer be a valuable service in the era of AI. So these 3 assets, although I talked about our priority, we believe all 3 are important. There were a raising of prices as I have said 10% of IRR is our financial discipline. And it's possible that there may be further development, but we will continue to look into that.

The second question, what happens if this deal fails, especially restaurant-related areas and purchase AI agent or procurement agent?

This is a must-have domain for us. the changes through AI happens and expands in a very speedy manner in the next several months. In order to expand our market share in this domain, we can change the partners or using the synergy of SP Group like we did for PayPay, we shall make investment in large amount to start up in an organic manner. So that is the backup plan we have. This is a domain where business environment rapidly changes several years later. Do we try to acquire Kakaku.com? Again, at that time, it will be too late. We believe this is -- this time around will be the last opportunity. If we miss this opportunity, we will change our strategy, including organic development, back up plan concept of IRR 10% remains the same. So that is they must achieve requirement. Anything?

This is Idezawa speaking. First, in terms of the importance and priority Kakaku.com has 3 businesses, and it also does incubation. The characteristic is that they all have high-quality conversion points, and they were network in the era of AI. AI Agent will connect various services. AI is highly capable, but across Japan, the reservation of restaurants or product information or human talent registration, that is a very difficult area for AI to achieve. But if there is a concentration of such data somewhere and network, that will become very important. And this company that we are targeting has a very attractive services. So that is why we are proposing what happens if we cannot buy the speed is very important at this juncture. So that is the reason why we are proposing that we collaborate and work together. If this fails, we need to consider the backup plan on a speedy manner. We already have a backup plan, and we will look into that -- my point is that their services, the monetization and charging and settlement services, how can you attach those so that end-to-end service can be provided the -- whether that opportunity is remaining, strength in that area and convert the mini app and develop as LY Corporation service.

Right. If you cannot also acquire the backup plan, then you have other things in mind, right? My second point, overall, the first quarter financial results were fairly good. Margin improved more than I thought. And adjusted EBITDA is growing in each segment. this momentum, do you think it's going to continue in Q2 and beyond? Or you'd have a tendency to be slow in spending costs the beginning of the year. So cost cutting, cost saving worked quite well in the first quarter. So is that the reason for the higher margin? What about the sustainability of -- what about maintaining this momentum from second quarter and onward?

As indicated in the topics, this performance surpassed internal plans. So it was better, the profit was better than our expectation. In terms of the gross margin, Q2 and onward, in terms of the growth rate, we don't see major risks. As you say, SG&A, we were slow starter in spending, and that is actually true. For Q1, in commerce business, we plan to do promotion, but we were able to achieve GMV without spending for promotion. So that happened in commerce. In the second quarter, the hometown tax scheme due to that, the change in that and seasonality, there may be some change in the second quarter. Media, the mix of the revenue direction-wise will remain the same, and display ad will continue to be tough, but account add, and we have a recurring business, so we expect to add on gradually. And SG&A will start to normalize from the second quarter. So the profit growth will -- may not be as high as the first quarter. But full year total, the guidance, we have the confidence to surpass the full year guidance.

I do understand that the high hurdle was there, thanks to the hometown tax payment scheme, but as much as you can comment, was campaigns or major launch, festival or any major event that you are planning in the second quarter that you did not do last year.

So far, no, no plan of anything new in major.

Next, from Goldman Sachs, Munakata-san.

This is Munakata of Goldman Sachs. I hope you can hear me.

Yes.

On the search ads, I have 1 question on that. And also another question on commerce. About the search ads, in the supplementary information, I was looking at it, and the number of the search is down and the demand is slowing down and that was offset by the improvement of the part of the products I understand. So right now, the slowing down of the ad business and the number of search are being reduced. I think that one of the points that in the stock market drawing a lot of question. So is this within your expectation? I want to check on that. And about the product improvement, I think that the unit price is coming up, so what are the items who contributed or which are the initiatives which contributed specifically? That's my first question.

Yes. Let me answer. About the number of search Yes. since last year with AI, the quick response can be given. So we query is not likely to occur. So the total number of the search, I think naturally will continue to face some difficulties. And this is something that we expected. We ourselves, the response of the AI, the percentage is being increased. So the number of the search is not likely to increase and that's going to continue. As for the unit price, higher unit price and offsetting the lower search number. Yes, we -- what we have as a data, we would use it to the search, and then, by doing so, that led to the higher unit price per click. So we are trying to offset the lower number of the searches like that.

I see. So as Q1, I think, basically, it's in line when you look at the search ads alone.