BRIDGE REPORT
(3633)

JASDAQ

GMO Pepabo, Inc. (3633)
President Kentaro Sato
President
Kentaro Sato
Corporate Profile
Company
GMO Pepabo, Inc.
Code No.
3633
Exchange
JASDAQ
Business category
Information and communications
President
Kentaro Sato
Address
Cerulean Tower, 26-1 Sakuragaoka-cho, Shibuya-ku, Tokyo
Year-end
Last day of December
HP
Stock Information
Share Price Number of shares issued
(excluding treasury shares)
Total market cap ROE
(Actual)
Trading Unit
¥3,490 2,634,154 shares ¥9,193 million -51.6% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥0.00 - ¥0.00 - ¥384.32 9.1times
* The share price is the closing price on Feb. 16. The number of shares issued, ROE, and BPS were taken from the latest brief financial report.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating
 Income
Ordinary
 Income
Net Income EPS DPS   
December 2010 (Actual) 3,100 622 597 350 132.21 130.00
December 2011 (Actual) 3,418 653 709 411 155.09 130.00
December 2012 (Actual) 3,809 686 699 396 149.52 135.00
December 2013 (Actual) 4,165 725 743 408 153.52 135.00
December 2014 (Actual) 4,533 724 742 410 151.73 135.00
December 2015 (Actual) 5,697 -621 -597 -797 -299.93 0.00
December 2016 (Forecast) 6,850 0 0 0 0.00 0.00
* The forecasted values are from the Company. Consolidated values have been used from the term ended Dec. 2012.
* From the term ending Dec. 2016, net income means the profit attributable to owners of the parent. The same applies to the rest of this report.

This report describes the corporate profile of GMO Pepabo, future growth strategies, the interview with President Sato, etc.
 
Key Points
 
 
 
Company Overview
 
GMO Pepabo provides individual users who want to express themselves through the Internet with several services, including rental servers, domains, and online shop development ASP. Its characteristics and strengths include the diversity of services based on internal production and unique corporate culture. In addition to the stable revenue from existing stock-type business (business with moderate yet stable income), the company aims to grow further based on "minne," an online C-to-C market launched in 2012 for handmade products.
 
Corporate history & profile of the president
In January 2003, the founder Kazuma Ieiri established the limited company "paperboy & co." for the purpose of operating personal hosting business.
Around that time, the Internet environment had already advanced from the early period to the spread period, but it was still necessary to install your own server in order to distribute information through your website. Most services were targeted at corporations, and too expensive for individuals to use.

In that circumstance, the company launched a hosting service while setting a monthly charge at several hundred yen, with the aim of offering Internet infrastructure for "individuals who want to express themselves" at affordable prices. One year later, it started the service of obtaining a domain on behalf of each customer. The company grew its business steadily, by grasping the multifaceted needs of individual users who want to distribute information and express themselves through the Internet.
The company's far-sightedness both in recognizing the commercial potential of blogs, which had already been showing a sign of spread in the U.S., and in developing the environment for using blogs in Japanese, was a significant growth driver.
In March 2004, the company conducted the allocation of new shares to a third party, which was GMO Internet Inc. (named Global Media Online Co., Ltd. at that time), and became a member of the GMO group.
Around that time, several leading Internet firms had strong interests in paperboy & co., and requested capital participation. Among these firms, the GMO group, which operated services with a main focus on corporations, was judged as the most appropriate collaborator for exerting synergetic effects, creating new services, etc.
After that, the company launched a succession of new services, including online shop development ASP and rental servers for creators, achieving steady business expansion. In December 2008, it was listed in the JASDAQ market. In April 2014, the company was renamed GMO Pepabo, Inc., the current name.

President Kentaro Sato was born in January 1981. He created websites, etc. on his own, and was invited by Mr. Ieiri to offer help to the predecessor of the company while he was still a student. In January 2003, he participated in the establishment of the company. After serving as Executive Secretary, and Representative Director, Vice President, and Head of the Management Planning Section, he was appointed as Representative Director and President in March 2009. He also serves as Director of GMO Internet.
 
Corporate ethos, etc.
Under the following corporate ethos and missions, GMO Pepabo aims to offer an Internet environment that is attractive and easy to use for individual users.
 
 
Business contents
Under the above corporate ethos and mission, the company provides individual users who want to "initiate something through the Internet" with a wide array of Internet services at affordable prices, and supports individual expression activities with the Internet.
Its business is composed of the 3 major segments: "hosting business," "EC support business," and "community business." (In January 2016, the C-to-C handmade product market "minne," which had belonged to the EC support business segment, was redefined as an independent segment called "handmade business.")
 
 
<Hosting business>
GMO Pepabo offers servers, functions, domains, etc. for establishing websites. Its sales are mainly from the charges for such services.
 
 
<EC support business>
GMO Pepabo offers the services for developing online shops, operating online shopping malls, and establishing the websites of stores for supporting e-commerce (EC) at low rates. The sales of this business are mainly from charges for use and commissions.
 
 
◎ "minne," a C-to-C online market product service for handmade products
Among the services described above, GMO Pepabo puts the greatest energy into the development of "minne," a C-to-C handmade product market.
 
 
<Overview>
Launched in 2012, Minne is a C-to-C online market for connecting artists, who want to exhibit and sell their handmade products, and consumers, who want to purchase one-of-a-kind items or characteristic works.
As of the end of December 2015, the number of registered artists is 174,000 and the number of products on display is 2.09 million. These numbers indicates that minne is the largest C-to-C handmade product market in Japan. Pepabo aims to further accelerate its growth and make it overwhelming No.1.
The development of this service was started because it turned out to be consistent with the corporate policy of "supporting those who want to express themselves" when the company discussed various plans for increasing its growth rate further.
 
<Market scale and background of growth>
The "C-to-C" business, which means the trade of products and services among consumers through the Internet, is growing rapidly.
Products and services sold on the Internet are diverse, which include auctions, flea markets, ticket sale, and accommodation in private houses. The company estimates the market scale and trend of Japanese handmade products that are handled by minne as tabulated below:
 
 
Although its scale is still small, the market is growing rapidly. Against this backdrop, "minne" is expanding the volume of trade at a rate higher than that of the market scale growth.
 
Background of the growth of the C-to-C market
It is suggested that behind the growth of the C-to-C market exist the following three factors:

(1) Spread of smartphones
When an artist puts his/her artwork on display by using a PC, he/she needs to take pictures, import images into a PC, input and upload the description of his/her work. At present, however, anyone can put his/her products on display just by taking pictures of the products with a smartphone and inputting necessary text in a form. Namely, the hurdle for presenting artworks to the market has been significantly lowered.

(2) Change in awareness from ownership to sharing
As the age of mass production and consumption ended and the way of thinking for valuing materials, including the environment and sustainability, has spread, "sharing economy," in which items you own but do not use are shared with others, is growing. Auctions, flea markets, etc. are typical of this trend.

(3) Place where individuals can exert their abilities
Many cases substantiate the fact that since the Internet can connect you with people around the world, you can flourish by yourself as long as you are competent, like celebrities, leading companies, etc., even if you are not famous. Stimulated by this trend, an increasing number of individuals aim to express themselves and flourish in the C-to-C market. The artists who exhibit their artworks in "minne" are the very examples of such individuals.
 
*Overseas handmade product market
The outline of Etsy, Inc. (listed in NASADQ, ETSY), the world's largest handmade product market operator, would be helpful for forecasting the future of minne.
 
 
From its establishment in 2005, the trade volume of Etsy, the handmade product market operated by Etsy, Inc., expanded to 10.5 billion yen (1 US dollar = 120 yen) in the 3rd year, 2008, and 231.8 billion yen in 2014. Its annual growth rate in the 6 years is as high as 67%.
On the other hand, the trade volume of minne, which was started in 2012, reached 4.46 billion yen in the term ended December 2015, or the first half of the 4th year. In the term ending December 2016, or the 5th year, the company aims to achieve a trade volume of 10 billion yen. The trend of the trade volume of minne so far is very similar to that of Etsy.
The simple comparison with Etsy, which is targeted at the global market, is difficult, but it can be said that there is potential for dramatic growth of the trade volume of minne in parallel with the growth of the C-to-C market.
 
<System of minne>
 
*Minne's business model and payment settlement method
When a product is sold, the company pays the amount calculated by subtracting 10% from the selling price to the seller (artist).
As for the transfer of proceeds from sale, the company adopted the escrow service for satisfying the needs of both buyers: "I want to pay the price after receiving the product" and sellers: "I want to ship the product after receiving the price."
 
<Progress of minne>
In October 2015, the company started disclosing the number of app downloads and the volume of trade on a monthly basis.
The trade volume in January 2016 dropped due to decreased orders during year-end and new-year holidays, but it increased by 286.9% year on year.
 
 
<Community business>
The company offers services based on communication through the Internet, such as blogs. The sales of this business are mainly from ad fees for charge-free services, and charges for use and commissions for paid services.
 
 
Characteristics and strengths
1. Provision of a variety of services based on internal production
As mentioned in the section "Business contents," the company offers a wide array of services, differentiating it considerably from competitors.
According to President Sato, such diversity of services can be achieved only because the company possesses a system capable of not only development, but also the ability to design and market services by itself. This leads to excellent speed and quality, and is essential for making the Internet business successful.
 
2. Unique corporate culture
The mission of the company is to root for "individuals who want to express themselves." To do so, the company itself needs to express itself, and the active outputting through the Internet is now its established homegrown corporate culture.
(For details, see "Interview with President Sato.")
 
 
The company incurred operating, ordinary and net losses, due to the active investment in mainly the advertisement of "minne" in the term ended Dec. 2015. The company remains in the investment phase this term, and so net income is estimated to be 0 yen, but the basic ROE is at a high level, as the company operates Internet businesses.
 
 
Fiscal Year December 2015 Earnings Results
 
 
Sales grew, but there was an operating loss due to the active investment in "minne."
Sales were 5,697 million yen, up 25.7% year on year. In the existing stock-type business, the number of transactions increased steadily.
Gross margin grew 27.2% year on year and gross profit rate rose, but SG&A expenses augmented 118.7% year on year due to the investment in "minne" with advertisement, etc. Accordingly, operating income dropped from 724 million yen in the previous term to minus 621 million yen.
Ad cost was 1,795 million yen, up 537.4% year on year. Of these, the ad cost for "minne" was 1,525 million yen. Since the company strived to maximize the number of app downloads, the cost exceeded the initial estimate.
 
 
(1) Hosting business
Sales and profit increased.
The company strived to increase new customers by enriching plans and continuing various campaigns with rental server-related services. In addition, the number of contracts for rental servers as of the end of the term was 423,000, up 13,000 from the end of the previous term, because of the improvement of the server environment, the increase in the speed of website operation, the enhancement of security, etc.
Since the number of contracts for mainly rental servers increased steadily, the performance of the domain service, too, was healthy, and the number of registered domains grew by 108,000 to 1,058,000.
Average customer spend bottomed out at the time of the consumption tax hike in Apr. 2014, and has since been increasing.
 
(2) EC support business
Sales grew, while profit declined.
For the online shop development ASP service "Color Me Shop," the company strived to increase new customers with active advertisements, campaigns, etc. mainly in the first half, and make direct approaches, including telephone support for supporting and describing online shop operation and EC seminars throughout Japan. As a result, the number of transactions for "Color Me Shop" as of the end of the term increased by 1,800 to 44,200.
For "minne," the company proactively carried out strategic investment as mentioned above, intensified sales promotion, expanded and enriched smartphone apps.
As for advertisement, the company utilized a variety of media, including TV, websites, and out-of-home advertisement. As average spend per app installation skyrocketed, ad volume was adjusted.
Besides advertisement, the company published minne-related books, established the atelier of minne, held selling events, and hosted the handmade product market of minne at the 40th Japan Hobby Show 2016, which was held at Tokyo Big Sight in April.
In addition, the company developed an original box in cooperation with Yamato Transport, so that fragile products can be shipped safely.
The goal for 2015 was "to achieve 200,000 artists, 2 million products, and 5 million app downloads," but the results were 174,000 artists, 2.09 million products, and 4.41 million downloads. The number of products attained the goal, but the others did not reach the target values.
However, the number of downloads reached 4.5 million on January 7, 2016, and is increasing steadily.
The annual trade volume in 2015 was 4.4 billion yen, 4.2 times larger than the volume in the previous year, and the volume of trade via the app increased 11.2 times as rapidly as that of the previous year.
 
(3) Community business
Sales and profit increased.
For the charge-free blog service "JUGEM," the company improved the convenience for smartphone users, etc. As a result, the number of charge-free service users increased steadily. The company also strived to maximize profit by trying to increase the sales from advertisements and streamline business operation.
 
 
Due to the decrease in cash and deposits, etc., current assets declined by 427 million yen from the end of the previous term to 3,073 million yen. Due to the increase in property, plant, and equipment (tools, appliances, and fixtures), etc., noncurrent assets grew 74 million yen to 988 million yen, and total assets dropped 352 million yen to 4,062 million yen.
Because of the augmentation of other accounts payables, etc., current liabilities increased 746 million yen to 3,038 million yen, and total liabilities rose 743 million yen to 3,050 million yen.
As legal retained earnings decreased, net assets shrank 1,095 million yen to 1,012 million yen.
Consequently, equity ratio dropped 23.6% from the end of the previous term to 24.2%.
 
 
Because of a net loss before taxes and other adjustments, etc., operating cash flow became negative.
Due to the income from the redemption of securities, which did not exist in the previous term, and the refund of investments in silent partnership, investing cash flow became positive but free cash flow became negative.
Since there was no income from the issuance of shares through the exercise of share acquisition rights, financing cash flow decreased further.
The cash position dropped 551 million yen.
 
 
Fiscal Year December 2016 Earnings Estimates
 
 
Active investment in "minne" to be continued this term.
Sales are estimated to be 6,850 million yen, up 20.2% year on year. The trade volumes of the existing stock business and "minne" are estimated to increase.
The company will actively invest in "minne" this term, too, and so operating and other income are estimated to be zero.
There will be no dividends this term, either.
In response to the rapid growth of minne, the company will introduce the new segment "Handmade" this term.
 
(2) Future measures
From this term, the company will concentrate on mainly the two themes "Increase of paid contracts × increase in average customer spend" and "Active investment in minne."
 
① Increase of paid contracts × increase in average customer spend
In the existing stock-type business, the company will focus on "Increase of paid contracts × increase in average customer spend" by improving customer satisfaction level, and aim to expand sales and profit steadily.

*Hosting business
As for the next-generation hosting aimed at increasing the speed of website operation, the company will improve competitiveness by further technology development.
In addition, the company will offer more conscientious support for users by expanding telephone support, etc.; and improve customer follow-ups, events, and seminars for existing large-lot users.

*EC support business
The company will enhance public-relations activities by holding events for the Color Me Shop Award, etc.
In addition, in order to improve user retention rate, the company will support shops by holding seminars and events, and improve conversion rate* for upgrading shopping carts.
*Conversion rate: This is an indicator that indicates the ratio of good results, such as the purchase of products, to total accesses to the website or unique users.
 
② Active investment in minne
The company aims to achieve a trade volume of 10 billion yen this term, by expanding the trade volume of minne through the promotion, functional development, etc. for both artists and purchasers under the theme of "maximizing the experience of shopping" as well as the expansion of the domestic C-to-C market for handmade products.
*Market expansion
As mentioned above, the scale of the Japanese hobby market was 103.7 billion yen in 2015. The trade volume of handmade products is estimated to be 7.8 billion yen, over two folds of that in the previous year. It is estimated to grow rapidly from this term as well.
Against this backdrop, the company will optimize the existing categories of handmade products and add new ones.
As a new category, the company is thinking of long-life processed food products, such as bread, baked confectionery, jam, coffee, and tea. It is to be added in the first half of 2016.
The company aims to increase categories further.

*Maximization of shopping experience
The company aims at creating selling and buying experiences, which can be realized by nothing but minne, by strengthening back-end systems through the promotion targeted at both purchasers and artists and the development of new technologies.
For purchasers, data analysis will be conducted based on user action logs, purchase information, etc., and the personalizing and recommending functions will enable purchasers to experience the pleasure in shopping, that is, "you can encounter and find what you want at nowhere else but minne."
For artists, on the other hand, the company will improve the system functions, hold atelier study sessions, and offer the opportunity to experience the pleasure in selling. Especially, atelier study sessions can be held by nothing else but minne, and this is expected to considerably differentiate the company from competitors.

*Future outlook
After achieving a trade volume of 10 billion yen this term, the company aims to "develop a gigantic economic sphere based on Japanese craftsmanship" in the mid to long terms.
 
 
Interview with President Sato
 
We asked President Sato about the features of each business, the corporate culture, and his message to investors.
 
Business Features
The Hosting business is our core revenue-driver, constituting approximately 60 percent of our total sales. Though a number of businesses providing consumer web hosting services are struggling to survive, we are enjoying first-mover advantage, and have every expectation that this cash cow will continue to maintain steady growth into the future. We are also planning a move into the corporate market, targeting primarily small to medium-size businesses.
Just as with the Hosting business, the E-commerce Support business is stock-based, and we are expecting ongoing stable growth here as well. The number of paid users for our Shopping Cart ASP Service is the largest in Japan. However, we have seen some consumers, who used our service at the time of opening their stores, move onto shopping malls as their size increased, so we will need to further enhance the system's functionality and establish methods for conscientious follow-ups as we are to secure long-term users.
Based on this stable revenue base, we would like to achieve further growth through our "minne" business. Although we are already the largest handmade product marketplace within Japan, we want to stretch this lead even further to achieve the overwhelming No. 1 position through continued proactive investment.
 
Our Corporate Culture
We believe the following three points sum up the core values for working:
The first is harmony. As an internet service provider, we have few opportunities to meet face-to-face with our customers, but, even so, we want to develop and provide the best service we possibly can. For this, we need to get along with those we work with, and, whether through our communications online, or at the many events we host, we are constantly working to maintain a friendly work environment.
The second is to increase our fans. We want not only our customers and partners but every single person who crosses our path to become our fan, and we hope our humility and friendly reception will help win them over.
The last is output. Our mission is to help support self-expression, but we can't do this unless we value self-expression amongst ourselves. We, as a company, encourage our employees to actively express themselves online and this is firmly established as part of our corporate culture. Our staff base of around 300 people are all connected in some way online and contribute their views to various topics and themes, whether in a work, or private capacity.
Our company is relatively youthful with the average age at 32 years. We are non-hierarchical and there's a real sense of comradeship.
Our corporate culture will continue to develop and strengthen under our management philosophy, "We can make things more enjoyable", and our mission to "connect and expand possibilities through the Internet".
 
Message to Investors
The Hosting and EC Support businesses have provided our company with a degree of stability, and our focus over the past few years has been to realize growth. By developing our next pillar of growth, the "minne" business, we can look forward to further high growth.
We will widen the lead in Japan in the C-to-C handmade product market with "minne," and this in turn will allow us to expand and improve our corporate scale and value, with the aim of ascending to the First Section of the Tokyo Stock Exchange by 2019.
I hope our stockholders and investors will continue to support us as we continue to challenge ourselves.
 
 
 
 
Conclusions
 
"minne," which is recognized by the company as a new revenue source, is growing steadily.
Its sales equal to 10% of the volume of trade. Accordingly, if its business progresses as planned, sales will be 1 billion yen this term, and minne is highly likely to be the third source of revenue in the handmade product segment.
As for profit, it is difficult to gain significant profit soon, because the company plans to continue active investment until it develops an overwhelming No.1 handmade product market for the foreseeable future. We need to be fully aware of such intentions and strategies on the part of the company.
On the other hand, the company discloses the number of downloads and the volume of trade of minne every month. This attitude for IR should be highly evaluated.
We would like to pay attention to its short-term progress as well as medium and long-term growth strategies.
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
Copyright(C) 2016 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
PAGE TOP