Rakuten (4755) Q2 FY17 – A Decent Quarter but the Risk of Profit Volatility is High
Rakuten reported better-than-consensus-estimate Q2 FY17 results: net income was ¥15.3bil (+2.4% YoY) on IFRS OP of ¥28.2bil (+8.6% YoY) and non-GAAP OP was ¥31.9bil (+0.3% YoY) on revenue of ¥228.0bil (+20.9% YoY). Ongoing implementation of new initiatives to stimulate and create new growth opportunities are encouraging. However, we perceive the risk of profit volatility as high and the possibility of recording large impairment losses is not small, if history can be of any reference.
Key Points
- Driving top-line growth was the Internet Services segment, where sales expanded 22.5% YoY to account for 71.6% of total sales.
- Both the Domestic E-commerce and the Communication & Sports divisions experienced double-digit revenue growth rates. However, while the former’s OP grew 4.8% YoY, the latter was still in the red, with an operating loss of ¥0.3bil. There are encouraging numbers for Rakuten Mobile and Viber.
- Ebates GMS continues to post strong expansion (+46.8% YoY), partly thanks to contributions from digital shopping platforms Cartera and ShopStyle, which were acquired in H1 FY17, although margins were slightly lower.
- We are hopeful that Rakuten Data Marketing (51% Rakuten, 49% Dentsu (4324)), which will start operations on October 1st, 2017, will contribute to Rakuten’s Vision 2020 targets. However, we think the plans are rather ambitious.
- The FinTech segment continue to expand steadily
- Valuations (FY17 EV/OPe 20x) remain rich
Rakuten is mainly engaged in the Internet-related business. Along with its affiliates, Co. operates in two business segments. The Internet Services segment is engaged in the operation of electronic commerce sites, including an Internet shopping mall "Rakuten Ichiba," an online cash back site, a travel booking site, portal sites and digital contents sites; the sale of advertising on Co.'s sites; the provision of messaging and communication services; and the management of a professional baseball team "Tohoku Rakuten Golden Eagles." FinTech segment is engaged in the provision of Internet banking services and online securities trading services, and the credit card and life insurance businesses.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
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