Digital Garage Q1/FY2024 Earnings

Digital Garage was always of special interest to us, as the famous Joi Ito is one of the co-founders, and became even more so when activist investor Oasis Management threw down the gauntlet at the end of 2022, proposing “A better DG”.

To recap, Oasis was proposing that Digital Garage should:

1. Spin-off the Financial Technology and Marketing Technology segments to create DG Financial Technology, expanding the payment service provider business;
2. Operate the remaining business as DG Investments, expanding startup and venture capital investments; and
3. Divest its shares of Kakaku.com, Inc. (“Kakaku”).

Digital Garage Group, segments, and group companies

In response, Digital Garage continued with its strategy “DG FinTech Shift”, which combines the Digital Garage Group’s three largest assets in Japan: “Payment Platform,” “Media Business,” and “Overseas Investment Business” based on the purpose of “Designing ‘New Context’ for a sustainable society with technology.”

Instead of divesting Kakaku.com, like Oasis suggested, Digital Garage doubled down on the restaurant website, and aims to ride the foreign tourist boom for its growth.

To illustrate how this strategy has worked out to date, the graph from Yahoo! Finance above shows the performance of the Nikkei 225 and Digital Garage since December 1, 2022, with the former appreciating by 26% over this term, and the latter giving up 33%. Little surprise then that some call Digital Garage’s board “dysfunctional”. So when you read the earnings report, please keep this in the back of your mind.

I. Optimization of Business Portfolio

• Strengthening the PS Segment: Digital Garage has restructured its marketing business to prioritize the PS segment, aiming to drive substantial growth in this area.
• PS specializes in the payment/FinTech business and is focused on expanding its payment platforms and fortifying its foundational infrastructure.
• This move aligns with the broader industry shift towards data-driven marketing, fueled by the phasing out of third-party cookies (although this elimination of cookies has only recently been severely curtailed by Google).
• Impact of Reorganization on Financial Performance: The restructuring is expected to drive significant growth in the PS segment, with a projected increase of +20–25% in segment profit for FY25.3. This positive outlook is supported by factors like (I) rebound from a one-time loss: The PS segment faced a one-time loss in the previous fiscal year, from which it is now recovering, (II) strong business trends: The overall payment industry is experiencing robust growth, which benefits Digital Garage’s PS segment, and (III) stable business expansion and ongoing projects: Existing operations are expanding steadily, and new projects are expected to contribute to growth in the second half of the year.

II. Consolidated Financial Highlights

• Mixed Performance: While the consolidated pre-tax profit saw a 23% decrease, mainly attributed to foreign exchange effects, the basic business profit demonstrated a healthy 17% increase.
• Exceptional Items: Profit growth was limited to +2.4% due to exceptional items, but the company expects these effects to normalize in the second half of the year.
• Full-year Forecasts Remain Positive: Despite the first-quarter decline, Digital Garage remains confident in achieving its full-year forecasts across all business segments.

III. Segment Performance Highlights

PS Segment

PS Segment Performance

• Strong growth is anticipated in the second half of the year, reaffirming the full-year growth target of +20%.
• Payment transaction volume increased +21%, driven by growth in general retail, travel, restaurants, and financial accounts. Acquiring new merchants also contributed to this increase.
• The impact of a major client loss in the cross-border e-commerce space will continue to affect performance in the first half of the year but is expected to subside in the second half.
• Organizational restructuring is underway to further bolster collaboration with the payment business.

LTI Segment

LTI Segment Performance

• Profit from equity method investments saw a substantial +37% increase, primarily driven by the strong performance of Kakaku.com.
• Collaboration with Kakaku.com is being strengthened, leading to the joint launch of new services.
• Strategic sectors for collaboration include restaurant, travel, real estate, retail, and HR.
• The first joint initiative is a full-scale inbound online reservation service on “Tabelog”.
• Co-creation collaboration among DG, Kakaku.com, and KDDI is being actively pursued.
• Upfront investments in new businesses related to payments are ongoing, aiming for medium- and long-term growth.

GII Segment

• Recorded ¥2.5 billion in investment business income.
• Progress has been made in transferring investment securities to a joint fund with Resona Group, resulting in a decrease in the segment’s overall balance, excluding foreign exchange effects. This move aligns with the company’s policy to strategically reduce its balance sheet.
• New Generative AI initiatives are underway in San Francisco, focusing on the rapidly expanding Gen AI market.
• The company has launched a “Venture Studio” program to support entrepreneurs in this field.
• Hackathons have been successfully conducted at DG717 in San Francisco, attracting top-class entrepreneurs and engineers.

IV. Business Progress

Payment Business Outlook

• Digital Garage remains on track to achieve its full-year growth target of +20% for the payment business.
• Initiatives are underway to secure continued growth in the coming years, including strategic alliances with (I) Resona Group: strengthening capital and business collaboration, (II) KDDI Group: providing high-quality payment services for the au economic zone, and (III) other global companies: expanding reach and capabilities.

Restructured Marketing Business

The marketing business has been reorganized into two key functions:

• Business Collaboration: Focus on strengthening collaboration in payment and financial domains.
• Data Marketing: Supporting new business development by leveraging data-driven approaches.

Share Buyback

• A ¥4 billion share buyback was announced on June 20th, aiming to repurchase up to 4.6% of outstanding shares.

V. Key Performance Indicators (KPIs)

• Basic Business Profit: Showed a stable +17% growth, driven by robust “offline” performance fueled by general retail strength and increasing inbound consumption. “Online” payment also continued to grow at a double-digit rate.
• Transaction Volume: Increased by +21.2%, with “Offline” payment experiencing a significant surge of +44.1%.

VI. Shareholder Return

• Share Repurchase: The company is actively repurchasing shares, demonstrating its commitment to returning value to shareholders.
• Dividend Increase: Digital Garage has announced an increase in ordinary dividends and a special commemorative dividend, reflecting its strong financial performance and positive outlook.
• Shareholder Return Policy: The company maintains a progressive dividend policy, aiming for long-term stable dividends and dividend growth supported by new business launches.

VII. Financial Strategy for Investment Business

• Focus on Investment EXIT Income: Digital Garage is strategically promoting the sale of directly held shares to generate investment EXIT income.
• Strategic Investment Management: The company is carefully selecting new investments and exploring investment through funds for income generation. This approach aims to balance the investment portfolio and maximize returns.
• Growth and Returns: Investment EXIT income will be strategically allocated to fuel growth investments, including new business development, as well as to provide additional shareholder returns.

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