Face change while focusing
on the future even when
times are tough, and be a
compass that leads the way
Executive Vice President & CFO
Review of medium-term targets
Progress of medium-term targets ended in FY2022
In August 2020, we announced our medium-term target to reach ¥1 trillion in operating income in FY2022. Subsequently, we faced major internal and external changes in the environment, including mobile service price reductions by carriers and lifestyle changes stemming from the spread of COVID-19. In particular, with regard to the mobile service price reductions, we had internally anticipated a cumulative impact of over ¥150 billion in lost revenue over the two-year period from FY2021 to FY2022. As a result, the hurdle for achieving our targets became much higher than when we announced our medium-term targets. However, it was precisely because of this situation that we keenly felt that achieving the ¥1 trillion target carries an even greater significance as a promise to our shareholders and investors, and we have been insistent on achieving this target. To achieve our target, we worked on growing our user base in our mainstay Consumer segment, with a particular focus on acquiring users from other carriers by using the mobile number portability (MNP) program. This is because our “Beyond Carrier” growth strategy is based on our core telecommunications business, and building a solid smartphone customer base is the foundation of our business design and the source of future returns. We faced a challenging environment, but rather than shrinking in fear, we took an aggressive stance and were able to expand our customer base. Furthermore, in working to achieve our goal, we believe that the Enterprise segment, which has an expanded range of business solutions and other services to capture enterprise digitalization demand, as well as growth in businesses other than mobile communications services, including “Yahoo! JAPAN” and “LINE”, have been substantial. In addition to the profit gained from this business growth, we recorded a remeasurement gain from making PayPay a consolidated subsidiary, which has been performing well since its launch. As a result, we were able to achieve our goal, with operating income coming in at ¥1,060.2 billion in FY2022. Once we announced the “¥1 trillion” target to the public, the entire management team considered it a “commitment,” and we are very proud to have achieved this target. However, our commitment is not limited to the FY2022 target. We were able to achieve all of the revenue, operating income, and net income targets that we set for each year leading up to the medium-term management targets, as we all worked together and persevered in our efforts to achieve these goals.
As I mentioned last year, we are not just trying to patch up our performance by recording accounting profits from the remeasurement gain on PayPay, but we are also focused on generating a higher level of adjusted free cash flow than the previous year to truly boost our corporate value, and we generated ¥618.6 billion in adjusted free cash flow in FY2022. As a result, we were able to maintain a dividend per share of ¥86. We have set a target of a total shareholder return ratio of about 85%*1 for the three-year period from FY2020 to FY2022, and with the share repurchases announced in May 2023, we are on track to achieve this goal. I believe we were able to meet the expectations of our shareholders by balancing growth and returns.
- *1Total amount of dividends paid and treasury stock retired during the three years from FY2020 to FY2022 / total amount of net income attributable to owners of the Company during the same three years
- *2Net income: Net income attributable to owners of the Company
Medium-term management plan
Rebuilding our business infrastructure
We announced our medium-term management plan ending in FY2025. The plan's theme is to rebuild our business infrastructure and to recover from the impact of the mobile service price reductions that took place in the spring of 2021.
In formulating the plan, we determined that net income attributable to owners of the Company (“net income”) is the most important indicator, and set a target of achieving recordhigh net income of ¥535 billion in FY2025. The reason for changing the most important indicator from operating income in the previous medium-term targets to net income this time is that the subsidiaries that make up our Group are not only wholly owned subsidiaries, but also include subsidiaries with minority shareholders such as Yahoo Japan, LINE, and PayPay, and we believe that net income is the most appropriate indicator for measuring our performance.
In addition, we set our operating income target at ¥970 billion for the final year of this medium-term management plan. This is because we firmly incorporated milestones for continued growth beyond the period of the medium-term management plan. We calculated this target by working backward from the record-high ¥535 billion net income target, and it is by no means an easy target to achieve. However, we believe that returning operating income to the level before mobile service price reductions is the least we can do to meet the expectations of our shareholders and investors, and we are determined to achieve our operating income target.
Consumer segment outlook
Mobile service revenue in the Consumer segment was greatly affected by the mobile service price reductions, but we are aiming for a turnaround after hitting bottom in FY2023. In terms of segment income, we are aiming for a turnaround after hitting bottom in FY2022, one year earlier than mobile service revenue. The rationale for this is that, although the impact of the mobile service price reductions and higher electricity costs will continue, we expect to be able to offset this through cost reductions, while the decline in ARPU is beginning to narrow, and the factors negatively affecting profits are already factored into the picture. On the other hand, the number of smartphone subscribers is increasing steadily driven by “Y!mobile” as ongoing efforts to acquire users from other companies materialize, and we can expect higher revenue and profits from this. We have three brands, “SoftBank”, “Y!mobile”, and “LINEMO”, and we would like our customers to experience the added value we offer by starting with “Y!mobile”, which offers lower monthly charges for low to medium data usage. Subsequently, we would like to increase ARPU by strengthening our efforts to encourage customers to migrate to the “SoftBank” brand, where they can receive that added value in the form of unlimited data plans.
We will also continue to focus on expanding our customer base. Competition for customer acquisitions in the telecommunications industry is intensifying today, and both new acquisitions and churn are high. Competition will only intensify, and we expect conditions to remain challenging. In FY2022, we spent a lot of money on customer acquisition, but the cost-effectiveness of this investment is verified by setting a lifetime value (LTV) for each brand. Furthermore, the smartphone customer base is very important as a foundation for creating Group synergies through smartphone-related services provided by the Group, such as “PayPay” and “LINE”, to acquire subscriptions and promote continued use. Through these efforts, we will surpass our 30 million total smartphone subscription target in FY2023 and aim to continue adding 1 million smartphone subscriptions each year.
Tackling the Enterprise segment
In this medium-term management plan, we expect significant growth from the Enterprise segment, particularly from business solution and others. We are targeting double-digit growth (measured as compound annual growth rate) in both Enterprise segment income and revenue from business solution and others. In order to achieve our targets, we plan to boost transaction value per customer by cross-selling to our major clients, large and medium-sized companies, by encouraging them to continue using the solution services they are already using, as well as by combining a wide range of digital products and services to help them solve their management issues. We are also developing our clientele of SMEs, which account for 99.8% of all Japanese companies. As a leader in digitalization, we hope to help SMEs go digital by providing solutions tailored to their size, while collaborating with customer companies, organizations, and Group companies that have SMEs as customers or members. In addition to this, we will be working on building a data integration platform (xIPF) as a new business. This is a platform for linking and making available various types of data (private data, national data, sensor data) that are currently disconnected and stored separately. It is still in the research and development stage, but once we are able to implement it, we will be able to further promote digitalization in various fields such as healthcare, retail, and real estate. We hope to grow our Enterprise segment by providing advanced necessary services tailored to the size of each company, such as more advanced services for large companies and services that serve as a gateway to digitalization for SMEs, as well as solutions that contribute to the digital transformation of society at large.
Renewed growth in the Media & EC segment
For the Media & EC segment, we are aiming for renewed growth in media, search, and commerce, while also streamlining operations. To consolidate the group's inherent strengths and accelerate synergy creation, we have reorganized the group in October 2023 and changed the company name from Z Holdings to LY Corporation. Taking advantage of this reorganization, we will make decisions more quickly and reduce fixed costs by streamlining overlapping businesses along with other measures. Furthermore, we are preparing to provide services that will delight our customers by integrating the IDs of “LINE” and “Yahoo! JAPAN” and revamping our premium membership program. In addition, we believe we can push for renewed growth in the Media & EC segment by making full use of “LINE” and “PayPay” to improve profitability in the media and search domain and by integrating IDs with “PayPay”, which we plan to do during FY2024.
Turning the Financial segment profitable
For the Financial segment, we have set a target of generating operating income by FY2025. PayPay boasts diverse revenue sources, including financial services, value-added services for merchants, and payment services, and its gross merchandise value (GMV) has reached ¥10 trillion*3 in four and a half years since launching the service. With the integration of PayPay Card, payment methods such as code payment, “Credit” (formerly “Atobarai” ), and credit card payment became seamless, and PayPay's user base, value per transaction, and number of transactions grew, thereby boosting GMV significantly. We are already well within range of turning a profit in the regular payment business. Going forward, I believe it is important to add depth to each of these services and accelerate growth in terms of business scale. In addition, we are aiming to enhance in-house solutions to boost transaction value per merchant at SB Payment Service Corp. by leveraging Group assets to grow the merchant base.
In this way, we aim to achieve strong growth with diversified revenue sources, and are mapping the way to turn the Financial segment profitable by FY2025 by expanding the GMV of PayPay and SB Payment Service Corp.
- *3GMV of PayPay Card Corporation is combined with GMV of PayPay Corporation retroactively to FY2021, and internal transactions between PayPay Corporation and PayPay Card Corporation have been eliminated.
Cost reduction outlook
Given changes in social conditions, such as rising electricity prices and inflation, we expect to see a variety of factors driving up costs during the medium-term management plan period. However, we believe that we will be able to handle this cost increase as our depreciation and amortization will start declining. This is because the depreciation on the major ¥700 billion per year capital expenditures made since FY2012, when we secured the platinum band, is coming to an end. Furthermore, we expect to see lower network operating costs as we gradually phase out services such as PHS, 3G, and ADSL. For these, we aim to accelerate the effects of cost reductions by early removal of equipment. In this way, we will continue to tightly control costs.
Maintain high level of shareholder returns
Since our IPO, we have maintained a policy of pursuing both growth and a high level of shareholder returns. Our approach remains the same and we plan to continue maintaining a high level of returns. For FY2023, we plan to pay a dividend per share of ¥86, the same as in the previous fiscal year. We have not yet decided on dividends for FY2024 and beyond, but will make a decision after taking into account investor expectations. Looking back at our track record, we have paid high dividends while simultaneously making a variety of investments for future growth. We have invested a large amount of money thus far to incorporate Yahoo Japan, LINE, PayPay, and others into the Group and diversify our business portfolio. At the same time, we have been executing major capital expenditures for rolling out 5G. Going forward, there will be more opportunities for various growth investments, such as those related to generative AI, and we intend to maintain a balance between growth investments and shareholder returns.
We tend to be evaluated solely on the basis of dividend yield, but we believe that total shareholder return (TSR), which includes share price as well as dividends, is more important in demonstrating the balance between growth and shareholder returns resulting from our management efforts. Therefore, a portion of our officer remuneration incorporates medium-term performance-based remuneration, and we use TSR as the performance indicator.
Approach to adjusted free cash flow
We believe that appropriate capital allocation is extremely important to achieve both growth and high shareholder returns. We use adjusted free cash flow (FCF), which is operating cash flow minus capital expenditures and growth investments, as the starting point for all financial targets in our planning. With regard to our capital expenditure plan, the intensive investment for accelerating 5G rollout implemented in FY2022 has run its course, and we intend to control expenditures by focusing on investments that are necessary, such as expanding spot capacity in response to traffic levels. As a result, we expect capital expenditures to come to ¥330 billion per year from FY2023 onward, a substantial drop from the FY2022 amount of ¥407.5 billion. On the other hand, with regard to the use of adjusted FCF, we will examine what is best for the Company, paying out shareholder returns as well as improving our financial position.
Status of balance sheet
- *4Net leverage ratio = net interest-bearing debt / adjusted
EBITDA (last 12 months for the relevant quarter)
- *5“Excluding Z Holdings and PayPay, etc.,
and securitization of installment sales receivables”
refers to exclusion of net interest-bearing debt
and adjusted EBITDA of A Holdings Corporation,
Z Holdings Corporation and its subsidiaries,
B Holdings Corporation, PayPay Corporation,
and PayPay Card Corporation, interest-bearing
debt of securitization of installment sales receivables,
and cash reserve for securitization of sales receivables
- *4Net leverage ratio = net interest-bearing debt / adjusted
We currently have long-term issuer ratings of A+ and AA- with Rating and Investment Information, Inc. (R&I) and Japan Credit Rating Agency, Ltd. (JCR), respectively. We will continue to maintain this high rating while preserving both our earnings capacity and financial soundness In monitoring financial soundness, we emphasize net leverage ratio (NLR) as an important indicator. This is the ratio of net interest-bearing debt to adjusted EBITDA. Financial discipline is critical to maintaining our ratings, and we aim to maintain or reduce NLR in the mid-2x range while growing EBITDA over the medium term. However, if we come across a project with high return potential, we will take into account the profitability and certainty of the project and may decide to take on the challenge in the interests of medium- to long-term growth, even if our NLR temporarily rises.
On a related note, we have taken whatever means of funding we deemed best at any given time. Prior to going public, we had to rely heavily on indirect financing such as bank loans. However, after going public, we were able to diversify our financing methods to include corporate bonds, and by increasing the ratio of direct financing, we have been able to stabilize our financial base and reduce our financing costs. At the same time, we would like to improve our equity ratio as well, even if only gradually, and as a new financing measure, we have amended our Articles of Incorporation to issue a so-called Bond-type class shares, which has no voting rights and can not be converted to common shares. This method allows us to expand shareholders' equity without diluting our common stock, and we believe it is an effective method of financing going forward.
Approach to cost of equity and growth investments
As a basic policy, when we execute investments, we use the internal rate of return (IRR) as the hurdle rate. Since we make full use of debt, our weighted average cost of capital (WACC) is at about 5%. When making actual investment decisions, we look for investment returns commensurate with business risks far in excess of our WACC. In calculating the IRR, the Corporate Planning Division, which I head, carefully examines the business plan from the business unit, takes into consideration multiple risk scenarios, and calculates the IRR based on approximately five years of cash flow and terminal value. After the investment is executed, we dispatch Board Directors and Audit & Supervisory Board Members when necessary and monitor the business quarterly to check the progress against the approved business plan and take necessary measures.
The CFO's role
A compass that navigates the company onto a growth trajectory
I believe that the primary role of the CFO is to measure what comes in and control what goes out. In other words, you must reliably anticipate revenues and keep costs in line with your budgets. I believe that the basic principle of any business is to first generate proper cash flow through solid operations. There is a widely known saying, “accounting profit is an opinion, but cash is a fact,” and I agree with this saying. I believe that having cash support is a very important factor no matter what you do, including for shareholder returns and growth investments. Even when remaining focused on cash, when a great opportunity presents itself, you must seize it, even if it means taking on debt. Accordingly, I believe that the CFO's most important role as a compass is to navigate the company onto a growth trajectory by carefully setting cash flow and other financial targets and controlling the cash by knowing when to speed things up or slow things down.
Furthermore, I personally believe it is crucial to face change in a future-oriented manner. Thinking about this from the standpoint of the Finance Division, I think there are three key points: Analyze change as the accumulation of differences, shorten the clock cycle by revising forecasts frequently, and looking further ahead when in doubt. Going forward, if we make good use of generative AI, we will be able to quickly analyze changes, significantly reduce the time required for financial analysis, and shorten the clock cycle by making monthly forecast revisions into weekly or daily revisions. However, even with these changes, it is still important to look far ahead when in doubt. I intend to serve as a compass, keeping my eyes firmly fixed on the distant future, while becoming more sensitive to change and making revisions more frequently than ever, so that we can safely sail toward our vision for 2030 and beyond.