LY Corporation (YAHOF) Q1 FY2025 Earnings Call Transcript

LY Corporation reported Q1 FY2025 results tracking full-year guidance, achieving record Q1 revenue and adjusted EBITDA, primarily driven by strong account advertising and robust growth from its PayPay consolidated segment, which saw revenue increase 22.1% YoY and EBITDA surpass JPY20 billion. Despite a notable 7.4% YoY decrease in media segment adjusted EBITDA due to increased SG&A and a decline in search advertising revenue attributed to specific advertiser demand shifts rather than AI search, the company is actively executing a phased LINE platform revamp, expanding MINI app functionality, and rolling out generative AI features across services. LY Corp also emphasized shareholder returns through significant share repurchases and confirmed its intent to maintain PayPay as a consolidated subsidiary post-IPO, signaling continued investment in key growth areas.

Analysis

LY Corporation's Q1 FY2025 results present a bifurcated performance, with record consolidated Q1 revenue and adjusted EBITDA masking underlying segment weakness. The primary growth driver was the Strategic Business, where the consolidation of PayPay fueled a 22.1% year-over-year revenue increase and pushed segment EBITDA past JPY 20 billion for the first time on a 21.7% margin. In stark contrast, the core Media Business faced significant headwinds; while account advertising grew a robust 18.3% YoY, a sharper-than-expected decline in search advertising revenue, attributed to specific client spending changes rather than AI search penetration, caused the segment's adjusted EBITDA to fall 7.4% YoY. Management expressed caution that this search ad weakness may persist. The Commerce segment's profitability was largely flat year-over-year when excluding prior-year one-time gains, as revenue growth was offset by higher SG&A. Strategically, the company is advancing a multi-pronged growth plan centered on the phased revamp of the LINE platform, which introduces new shopping and wallet tabs, and the expansion of LINE MINI apps, where app numbers grew 55% YoY. The company's commitment to shareholder returns is underscored by a significant share repurchase program, and management clarified that PayPay will remain a consolidated subsidiary post-IPO, securing its contribution to future growth.

Key Decisions for Investors

• Investors should weigh the robust growth and profitability of the PayPay-driven Strategic Business against the significant and persistent weakness in the core Search Advertising segment, which management expects to continue.
• Closely monitor the execution and user adoption of the LINE platform revamp, as the success of the new Shopping tab and the monetization of MINI apps are critical catalysts for offsetting the decline in the legacy media business.
• Factor in the supportive effect of the substantial share repurchase program and the clarity on maintaining PayPay as a consolidated subsidiary post-IPO, which provides a degree of valuation support and de-risks a key part of the growth narrative.