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
End of December
HP
Stock Information
Share Price Number of shares issued
(excluding treasury shares)
Total market cap ROE
(Actual)
Trading Unit
¥3,530 2,634,154 shares ¥9,298 million 14.6% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥0.00 - ¥0.00 - ¥425.47 8.3times
* The share price is the closing price on Aug 15, 2016. 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 (Actual) 6,890 108 135 153 58.24 30.00
December 2017 (Forecast) 7,650 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. Non-consolidated values have been used from the term ended Dec. 2017.
*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 introduces GMO Pepabo's fiscal year December 2016 earnings results and so on. ,
 
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 the 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 on the JASDAQ market. In April 2014, the company was renamed as GMO Pepabo, Inc.,

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 4 major segments: "hosting business," "EC support business," "handmade 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. Sales is derived mainly from the usage fee of 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.
 
 
<Handmade business>
At present, the company is committing most of its efforts towards developing the customer to customer handmade crafts market "minne," and as its quantitative importance has increased, from this period onwards, the company has decided to place it in a segment of the report separate and independent to the EC support business.
 
 
<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 June 2016, the number of registered artists is 252,000 and the number of products on display is 3.27 million. These numbers indicate that "" 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 the following three factors exist behind the growth of the C-to-C market:

(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.
 
<System of minne>
*Merits for artists and purchasers
 
*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 usage fee 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.
 
 
The net income for the term ended Dec. 2016 was first estimated to be 0 yen, but turned out to be 153 million yen. The company forecasts a net income of 0 yen for this term too, but as an operator of Internet businesses, its basic ROE is at a high level.
 
 
Fiscal Year December 2016 Earnings Results
 
 
Sales grew, moving operating income into the black.
Sales were 6,890 million yen, up 20.9% year on year. In the existing stock-type business, the number of subscriptions increased steadily. Gross profit and its rate increased 27.4% and 2.9%, respectively. Since the advertisement cost for minne was reduced about 30% from the previous term, the augmentation of SG&A expenses was as small as 3.0%. Accordingly, operating income and other incomes improved from the red in the previous term to the black.
 
 
 
① Hosting business
"Lollipop!" (a rental server service) enjoyed increased sales per customer and maintained a high rate of domain renewals, resulting in increased sales and profits. Some fluctuation due to seasonal factors and various campaigns was observed but altogether the developments were favorable.
The number of subscriptions to "Lollipop!" increased by 10,000 (2.7%) from the end of the previous term to 403,000, maintaining the strong pace of +10,000 members per year. Additionally, the number of registered domains at "Muu Muu Domain" (a domain acquisition agency service) grew by 135,000 (12.8%) from the end of the previous term to 1,194,000.
 
◎ Strategies for "Lollipop!"
The company's primary stock-type business "Lollipop!" regards the increase in the number of paid contracts and sales per customer as its basic strategy.
Currently, the most popular plan is the standard plan that offers all main functions while making rental servers available at a reasonable cost (from ¥500 per month, capacity: 120GB).
In comparison to the conventional plans, its contents are greatly enhanced. Moreover, although it uses shared servers, the excellent speed experienced is comparable to that of an own server plan. After the company's various efforts to improve user satisfaction, such as the introduction of telephone customer support, the proportion of standard plans amongst the new Lollipop! subscriptions has gone up from 9.3% in January 2014 to 42.2% in December 2016. This resulted in a 5.0% increase of sales per customer from the same month of the previous year.

The company considered that the practically unchanged design from the time of its launch in 2001 may be the cause of the low recognition of its "low price, high function and high performance" message amongst users, and consequently refreshed its image by overhauling the website design. With this brand development, it hopes to popularize the value of Lollipop! among new targets.
Furthermore, in collaboration with the "Pepabo Research Institute" (a research and development organization that focuses on the creation and accomplishment of new technology, established in July 2016), the company intends to create new services utilizing AI, IoT, machine learning etc., to appeal to users that its services are immensely superior in pricing, function and performance, and can to suit a myriad of needs.
 
② EC Support Business
Increased ARPU from "Color Me Shop" (an ASP service) and larger sales at "SUZURI" (a service for production/sales of original goods) resulted in increased sales and profits.
At "Color Me Shop", the continued effort in up-selling and cross-selling bore fruit with an increase in the number of subscriptions by 1,000 to 45,000 (+1.9%) and sales per customer also went up.
The number of types of items offered on "SUZURI" was increased from 4 at the time of launch to 14. May 2016 also witnessed the launch of its iOS app. The membership grew steadily as the collaboration projects with renowned creators and the sales promotion campaigns were spread widely via SNS and degree of recognition was enhanced; by December 2016, there were over 130,000 members and this was an increase of 142.6% over the end of the previous term. The regular addition of new items and a sales promotion campaign also helped SUZURI, which recorded an impressive 167.7% increase of sales over the last term.
 
◎ Strategies for "Color Me Shop"
"Color Me Shop" also regards an increase in both the number of paid subscriptions and sales per customer as its basic strategy.
To improve its recognition, in May 2016, it has run various projects including the Color Me Shop Grand Prize 2016, of which the aim was to discover and give awards to the online stores with creative construction and operation.
Meanwhile, its regular plan (one of the multiple plans available) performed particularly well. This plan offers high functionality to mid- to small-scale shops at "¥3,240 per month, with 10,000 free pages upper limit and up to 50 images per sale item." The ratio of the regular plan amongst the new Color Me Shop subscriptions has risen from 11.5% in January 2014 to 41.2% in December 2016, contributing to the improved sales per customer (+9.2% from the same month of the previous term).

The company has already introduced new functions such as a continuous SSL service, Amazon log-in & payment, a "new shopping cart" project, but it is planning to strengthen its structure and speed up the development of new functions, so that high value-added services can be offered to differentiate itself from the competitors.
 
③ Handmade goods business
Increased distribution amount, resulted in significantly increased sales and shrinkage of the margin of loss.
In addition to the aggressive Web marketing campaigns, in April 2016 a new project for "minne" - "minne handmade market" - was held at Tokyo Big Sight to boost its recognition. This was thus far the largest sales event. Consequently, as of December 2016, the number of registered artists and artworks was 307,000 (+76.1% from the previous term) and 4.63 million (+121.2% from the previous term) respectively.
Total number of app downloads grew, with 6.79 million downloads as of the end of December 2016 (+53.7% from the previous term).
The annual distribution amount in 2016 was 8.39 billion yen, up 83.3% from the previous term. Especially in 4Q, the special holiday season editions with the added free shipping campaigns brought positive results, including a record day-order amount of 56 million yen, and made this quarter's circulation the highest ever at 2.31 billion yen.
However, advertising cost was 1.07 billion yen, down 29.3% year on year.
 
④ Community business
Sales decreased and profits increased.
Business sell-offs and decreased advertisement income from "JUGEM" (a blog service) affected revenue, but efforts to control costs and secure profits paid off, resulting in increased profits.
 
 
Due to the increases in cash and deposits and trade receivables, current assets grew 710 million yen from the end of the previous term to 3,784 million yen. Noncurrent assets did not change so much, and total assets increased 707 million yen from the end of the previous term to 4,770 million yen.
Due to the increase in trade payables, etc., current liabilities augmented 494 million yen from the end of the previous term to 3,532 million yen, and total liabilities increased 535 million yen from the end of the previous term to 3,585 million yen.
Because of the increase in retained earnings reserve, net assets rose 172 million yen from the end of the previous term to 1,184 million yen.
As a result, equity ratio declined 0.7% from the end of the previous term to 23.5%.
 
 
Operating CF became positive, due to the increases in income before income taxes, other current assets, etc.
Investing CF became negative, because the income from the redemption of securities and the refunding of anonymous association investment, which had been posted in the previous term, was not posted this term. Free CF became positive.
The negative amount of Financing CF shrunk, as treasury shares were not acquired and the payment amount of dividends decreased.
The cash position improved.
 
(4) Topics
◎ Promotion of selection and concentration
The company proceeded with selection and concentration as follows, in order to improve productivity and secure resources.
 
 
GMO Pepabo OC, Inc. had been operating "tetote," which traded the third largest number of products in the Japanese C-to-C handmade goods market. However, as the business scale of "minne" became the largest in this field in Japan, the company decided to absorb it to streamline business administration through the mutual utilization of managerial resources, accelerate decision making process, and improve cooperation in marketing/business operation/product development, to strengthen its business.
 
 
Fiscal Year December 2017 Earnings Estimates
 
 
The active investment in "minne" to be continued this term.
Sales are estimated to be 7,650 million yen, up 760 million yen (11.0%) year on year.
The stock-type service business is forecasted to grow steadily, and the distribution amount of "minne" is expected to increase.
The company will keep controlling cost while investing in "minne" actively, to achieve a good balance of revenue and expenditure in operating income and other incomes.
The company does not plan to pay dividends this term too.
 
 
The distribution amount increased 90% from the previous term to 8.39 billion yen, but below the initial target value of 10 billion yen.
This happened mainly as a result of the company's failure to acquire new users because ad cost was curbed due to an emphasis on cost effectiveness.
 
② Future activities
As mentioned above, the company expects that the distribution amount at platforms where handmade goods can be traded is increasing as the C-to-C market in the Japanese hobby field is expanding and this market will keep growing.
The company plans to continue investment, and estimates that the distribution amount will reach 12.5 billion yen.
 
 
In detail, the company will implement its measures in the following three fields.
 
 
 
Conclusions
 
The "handmade goods business," which was added as a new business segment in the term ended Dec. 2016, is catching up with the EC support business, which is one of mainstays, as its sales composition ratio rose from 10.2% in the term ended Dec. 2015 to 17.1%.
The loss shrank 540 million yen, and ad cost declined 440 million yen. Therefore, it is indispensable to expand its scale further in order to evaluate practical profitability.
In the short term, the company aims to achieve the target distribution amount, which was not attained in the previous term. How the company estimates the break-even distribution amount and when it achieves them must be the points of interest to the investors, as the share price of GMO Pepabo remains low.
 
 
<Reference : Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
The company submitted the latest corporate governance report on Jun. 30, 2016.
As a JASDAQ-listed company, the company fully follows the basic principles of the corporate governance code.
 
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) 2017 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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