PayPay 2027 Q2 Earnings Call

Morning and good evening, everyone. Welcome to this investor briefing for second quarter of fiscal 2026. I am Keita Oishi, Head of Investor Relations. Joining me on this call are Kagechika-san, our CFO, and Motoda-san, Head of Finance Group. As a reminder, this call is being broadcast live, and replay will be available on our website at a later date. Before we begin, please note today's discussion includes forward-looking statements, non-IFRS financial measures, and unaudited financial data. Actual results may differ materially from our expectations. For more details, including risk factors and non-IFRS reconciliations of non-IFRS measures to the most directly comparable IFRS measures, please carefully review the disclaimer on page two of our presentation. We ask for your understanding of these terms as we proceed. With that, I will now turn the call over to Kagechika-san.

Thank you for joining us today. I am Wataru Kagechika, CFO of PayPay. In today's session, I will explain our Q2 results and the key drivers behind them. Before we begin, I would like to share an update on our investor relations activities. Since October 26, we have established a New York-based team to accelerate our investor relations activities in the States. We aim to have more regular and open dialogue about our growth strategy, earnings potential, and long-term shareholder value. With that, let me turn to our Q2 results. Please open the next page. There are three key points I would like to highlight today about our Q2 results. First, we continue to deliver robust growth. As shown in the upper left corner, total revenue grew by 28% year-on-year, and our EBITDA margin reached 36%. Please look at the middle.

In the payment segment, revenue grew by 27% year-on-year. This outpaced GMV growth again. This was driven by three factors: the expansion of a higher-margin online GMV mix, steady growth in credit card financing balance, and the change to our rewards program in June. In the blue box on the left, the financial service segment also continued to grow with revenue up 38%, driven by growth in deposit and loans, as well as higher interest rates. Second, irregular weather slightly affected our performance. GMV growth slowed down to 20% year-on-year in the second quarter from 23% in the first quarter. Offline payments were affected by the prolonged rain, particularly in September. We also saw a pullback following temporary surge in demand in the prior fiscal year ahead of the revision of hometown tax donation system. Eliminating these factors, the GMV growth trend remains unchanged.

Third, disciplined cost management has strengthened operating leverage effect. In addition to our effort to manage reward expenses, we remain committed to controlling costs, including outsourcing and advertising expenses. This discipline, combined with top-line growth, drove stronger-than-expected operating leverage effect, with consolidated adjusted EBITDA increasing by 55% year-on-year and its margin expanding to 36%. Based on these strong first-half results, we are broadly revising our full-year guidance again. I will come back to this point later. Turn to the next slide, please. Now let me explain the results in more detail. Please turn to the next slide. From the top, our total revenue grew 27.7% to JPY 118.1 billion, which exceeded the upper end of our Q2 guidance range shown in the top right.

Total transaction cost, which includes costs associated with our revenue, increased by 35.3% to JPY 28.1 billion, mainly due to higher interest expenses following policy rate hikes. As a result, these costs grew faster than revenue. Adjusted EBITDA grew by 54.8% to JPY 42.1 billion. This also significantly exceeds our Q2 guidance, reflecting our cost management efforts. Profit for the period, or net income, was JPY 18.4 billion, down year-on-year. This was due to the absence of our one-time tax benefit related to net operating losses in the same quarter last year. Excluding this factor, our profit for the period increased year-on-year. Please turn to the next slide. This chart shows the drivers of year-on-year growth in total revenue for the three-month period compared with the same period last year. Consolidated total revenue reached JPY 118.1 billion.

Revenue grew by 26.8% year-on-year in payments and by 37.7% year-on-year in financial service segments, with both segments continuing to deliver strong growth. In the payment segment, approximately 70% of the revenue increase came from the transaction and service income represented by the second bar from the left. The remaining 30% came from higher interest income driven by growth in credit-related financing balances, as APRs are capped by the regulation. In the financial service segment, interest income shown by the blue bar chart grew by 70%, supported by growth in loan balance and higher policy interest rates. This accounts for nearly 80% of this segment's total revenue growth. Please move on to the next slide. This chart compares total transaction costs as a percentage of total revenue this quarter with those in the same quarter last fiscal year. The ratio increased from 22.5% to 23.8% year-on-year.

In the payment segment, changes to how third-party credit cards are used in PayPay shifted our funding mix towards lower-cost sources, reducing the settlement-related cost rate shown by the second bar chart from the left. At PayPay Card, since December 2025, we have expanded credit availability to a broader range of users within defined limits based on our risk-return assessments. Through this initiative, we have grown our revenue base even though the credit costs have increased to some extent. What I emphasize here is this was an intentional approach. We believe that the credit costs remain well controlled. In the financial service segment, the interest expense ratio shown in the third bar from the left increased largely as deposit rates increased. This was mainly due to cumulative 50 basis points increase in the policy rates implemented in December 2025 and June 2026. Please turn to the next slide.

Our operating profit margin rose by 5.9 percentage points from 22.2% in the same period last year to 28.1%. While total revenue grew 28% year-on-year, the increase in operating expenses was limited to 18%. As I mentioned earlier, in addition to the benefits of changes to our rewards program shown by the third red bar from the left, we continued our group-wide cost-saving efforts. These efforts contributed to reducing other expenses as a percentage of revenue in both segments by 2.3 percentage points in payments and 1.4 percentage points in financial services respectively. Turn to the next slide, please. As you can see, adjusted EBITDA shown by the bars and its margin shown by the line have continued to rise. The items added back to profit for the period along with other adjustments are shown on the right. Please turn to the next slide.

From here, I would like to explain the payment segment's business performance. As shown in the black box at the top, GMV grew by 20% year-on-year to JPY 5.56 trillion despite the headwinds I mentioned earlier. Again, we confirmed internally that the underlying GMV growth trends remain unchanged. Please turn to the next slide. This slide breaks down GMV growth into two main drivers, namely MTU and the monthly usage per MTU. The year-on-year growth rate for each component was 1 to 2 percentage points lower than that in the fourth quarter. Please turn to the next slide. As shown by the red line on the left, our net take rate, which includes payment-related revenue, increased by 0.10 percentage points year-on-year from 1.64% to 1.74%. The gray line shows our gross take rate, which also rose to 2.32%.

For a breakdown of this increase, please refer to the bars on the right. There are three main drivers. First, the payment fee rates increased, mainly due to a shift in GMV mix. The online GMV share rose by 3 percentage points to 19% year-on-year. Second, as shown in more detail on the next slides, balances from credit card financing, including revolving credit, installment payments, and cash advances, grew 26%, which is faster than GMV. Third, revenue from merchant services, including services for municipalities, also increased. This third revenue cannot be expected as this is closely tied with the government's budget for Q3 and Q4. Please turn to the next slide. On the left, the number of active PayPay Cards issued increased by 23% year-on-year to 18.7 million. Our customer base continued to expand, particularly among younger customers.

This was supported in part by higher approval rates enabled by our proprietary credit model, which leverages PayPay payment data. New card issuance has also been strong following the changes to the benefits offered under SoftBank's new mobile plan, which took effect in June. Turning to the card financing balances, credit-related card balances reached JPY 600 billion, up 26% year-on-year. Revolving and installment balances continue to grow solidly at 25% year-on-year. Paying installment later, "ato kara bunkatsu" in Japanese, which we launched last October, has been well received by our users. Another growth driver is the cash advance. Growth in cash advance balance accelerated further to 62% year-on-year, supported by our effort to promote uptake. Please turn to the next. At PayPay Card, we have been managing credit risk using a proprietary credit risk model.

Based on this model, we are approving credit card applications that we would previously have declined and increasing credit limits. Although our allowance for credit losses increased this quarter, we have confirmed that these measures remain profitable even after taking that increase into account. Our delinquency transition rate on the left remains controlled at 2.7%, and the ratio of stage 3 against the total balance, or NPL ratio, was 5.6%. We will continue to expand our credit offerings while further strengthening our credit management practices with a focus on ensuring profitability after credit costs. Let me move on to the next topic. Moving to our financial service segments, PayPay Bank accounts increased by 11% year-on-year to 10.4 million, while PayPay Securities account increased by 28% year-on-year to 1.88 million.

PayPay Securities, in particular, has been rapid growth in its account base, supported by its seamless integration with the PayPay ARPU. In financial services, building on our strength in engaging with customers through frequent payment interactions in their daily lives, we will promote cross-selling of our banking and brokerage services while encouraging greater use of deposits, lending, and asset management services. Please move on to the next slide. At PayPay Bank, deposits increased by 16% year-on-year to JPY 2.43 trillion, while loans grew by 37% year-on-year to JPY 1.4 trillion. Mortgage loans reached JPY 1.02 trillion. Relatively higher-yielding consumer and business loans also expanded steady. As shown in the right chart, deposit funding costs increased as the policy rate rose.

However, our loan yield increased to 2.32%, and the loan deposit spread shown by the thick blue line improved quarter-on-quarter, particularly due to a better loan mix. Going forward, as we grow our asset base, we will place greater emphasis on profitability. We are taking a disciplined approach to residential mortgages while expanding our loan portfolio by shifting the mix towards the higher yielding products. We will also seek to improve the overall yield on our assets and further enhance the profitability of our banking businesses. Please turn to the next slide, where I will explain our balance sheet management. This slide shows our consolidated balance sheet. Total assets increased from JPY 5.2 trillion at the end of the previous fiscal year to JPY 5.7 trillion as of the end of second quarter.