【IR】GMO Internet Group Strategy

(IR) Masatoshi Kumagai talks about GMO Internet Group Strategy in 2017 Overview of the group’s current position and outline of strategy going forward.

Quarterly Overview
Q1 2017 business results (latest quarter)
Older business results (here)

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Contents
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About GMO Internet
– Internet Infrastructure
– Internet Finance
– Online Advertising & Media
– Mobile Entertainment
– Focus in 2017 (investment strategy, .shop, Internet Finance, global growth)
Business Performance, Outlook & Return to Shareholders
In Closing
Disclaimer

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About the GMO Internet Group
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Our technology and marketing power is supported by a formidable organizational strength. We are a group of 5,100 Internet professionals.

– The GMO Internet Group consists of 107 consolidated subsidiaries (including 9 listed companies) and 5,100 staff. The business group is listed on the first section of the Tokyo Stock Exchange.(as of March 2017)

– Internet for Everyone has been our corporate slogan for 21 years, ever since we launched Internet business operations in 1995.
– If you were to summarize in one sentence our business activities over the past 21 years you could say that we are the company who has most increased the number of websites in Japan, or the volume of information available over the Internet in Japan.

– The following diagram illustrates our four business segments.

(as of March 2017)

– Internet Infrastructure functions as a one-stop provider of everything required to communicate over the Internet for both businesses and individuals.
– Online Advertising & Media segment provides online marketing related services.
– The Internet Finance*1 segment operates low-priced online securities and forex trading services. Virtual currency business falls under this segment.
*1 Segment name changed from Internet Securities to Internet Finance in Q1 FY2017.
– The Mobile Entertainment segment was formed in 2011 as the Social & Smartphone segment(As of 2014 the segment is renamed Mobile Entertainment). Cash flow, technology and marketing expertise from the group’s existing business segments are reinvested into cultivating this segment as the fourth pillar of the Group.

– We have four major strengths.

(1)The technology that allow us to build almost all of our services from scratch.
(2)The sales and marketing power right throughout the group to sell the products and services we develop.
(3)A level of customer support recognized as an industry benchmark.
(4)The research strength that allows us to identify trends early phase.

– An analyst once said we were an organization made of steel. I would say that our greatest asset is the formidable organization that supports all of the above.

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Internet Infrastructure
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All five major products number one in Japan!
Overwhelmingly, the market leader.

– The entity that has most increased the volume of websites on the Internet is Internet Infrastructure segment shown at the bottom of the figure below.

(as of March 2017)

– In this segment, six different businesses have captured leading shares of their respective markets in Japan.

(as of March 2017)

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(1) Domain Registration
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The entry point to the Internet for businesses

– .com and .co.jp are examples of domains. Your domain name is your “address” on the Internet. We are the leading domain registrar in Japan.

– There are two types of domain business. One is domain registry business that wholesales domains. The other is domain registrar business that retails domains.

– Our cumulative market share in Japan is around 90.0% (*2)

– We are overwhelmingly No.1 in Japan, and in the top 10 .com/.net registrars worldwide.

– Some of our Services and Service Providers:
GMO Registry, Inc. http://www.gmoregistry.com/en/
GMO Brights Consulting, Inc. http://brightsconsulting.com/en/
Onamae.com http://www.onamae.com/
MuuMuu Domain https://muumuu-domain.com/
VALUE-DOMAIN https://www.value-domain.com/
Z.com Domain  https://domain.z.com/jp/en/

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(2) Hosting & Cloud
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Half of all servers in Japan are operated by GMO Internet Group

– Our web hosting business remains focused on responding to growing sophistication and diversification of client needs, through shared, dedicated and increasingly cloud based hosting solutions. We are the leading hosting provider in Japan.

– Our cumulative market share in Japan is around 55.7% (*2)
In this field we are also overwhelmingly number No.1.

Some of our Services:
GMO AppsCloud http://cloud.gmo.jp/en/
Onamae.com Shared Server SD  http://www.onamae.com/service/shared/sd/
Onamae.com VPS  http://www.onamae.com/server/vps/
Z.com Web Hosting https://hosting.z.com/jp/en/
Z.com for WordPress https://wp.z.com/jp/en/
Z.com Cloud https://cloud.z.com/
ConoHa byGMO https://www.conoha.jp/
Marugoto Server  http://www.marugoto-server.jp/
GMO Cloud (Rental Server)  https://shared.gmocloud.com/
GMO Cloud VPS  https://vps.gmocloud.com/
GMO Cloud Altus  http://www.gmocloud.com/
GMO Cloud Private  https://private-c.gmocloud.com/
ServerQueen http://www.serverqueen.jp/
Lolipop! Rental Server  https://www.lolipop.jp/
heteml  https://heteml.jp/
CORESERVER.JP  https://www.coreserver.jp/
VALUE SERVER https://www.value-server.com

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(3) Ecommerce Solutions
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Most widely used ecommerce solution in Japan

– We provide simple ecommerce site building tools. Unlike online shopping malls Yahoo! and Rakuten, we provide operational solutions for online stores.

– Our solutions are convenient and cost-effective, and with 75,000 paid stores, we have the most widely used ecommerce service offering in Japan.

Some of our services are:
Color Me Shop: http://shop-pro.jp/
MakeShop: http://www.makeshop.jp/

A New type of ecommerce

-Let me explain about the C2C market.

-We provide ecommerce platforms.
Even if customers don’t have much knowledge about the web, they can easily begin using our services, because our system responds to customer’s various eccomerce needs

-Some of our services are:
minne https://minne.com/
tetote https://tetote-market.jp/
SUZURI https://suzuri.jp/

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(4) Internet Security
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No.1 in Japan

– The Secure Sockets Layer (SSL) is the most widely deployed security protocol today. It is essentially a protocol that provides a secure channel between two machines operating over the Internet or an internal network. In today’s Internet-focused world, we typically see SSL in use when a web browser needs to securely connect to a web server over the insecure Internet and therefore SSL is essential in ecommerce businesses.

– This is the domain of GMO Cloud K.K.(English) (Tokyo Stock Exchange, First Section: 3788) subsidiary, GlobalSign (English)
– Growth in customer base particularly in overseas has led to growth in certificate issues. In addition to operating our own Certificate Authority, we have a highly sophisticated that enables certificate management in a secure environment. This is one of the reasons we are able to grow so quickly.
Google recently announced in Google Webmaster Central Blog that it recommended people to change their websites from HTTP to HTTPS for more secure website browsing (https://webmasters.googleblog.com/2015/12/indexing-https-pages-by-default.html), and that it would preferentially index HTTPS sites (https://webmasters.googleblog.com/2014/08/https-as-ranking-signal.html).

Google moved to use HTTPS as a ranking signal in search ranking algorithms, and to crawl HTTPS sites. Hence, we can expect SSL demand will further increase. This is a current trend worldwide.

– GlobalSign offers the only site seal for government elections in Japan. The GlobalSign site seal can be seen on the website of Japanese Prime Minister Shinzo Abe, and other members of parliament.
– GMO GlobalSign and ARM, the world’s leading semiconductor IP company, have partnered for enhanced security of Internet of Things (IoT) devices with GlobalSign joining the ARM mbed IoT Device Platform Partnership. GMO GlobalSign is putting effort into offering new service that enables automatic digital certificates installation in IC chips embedded in IoT devices.
Please see the link below for more information on the ARM mbed IoT Device Platform Partnership.
https://www.globalsign.com/en/company/news-events/news-archive/globalsign-joins-arm-mbed-iot-device-platform-partnership/

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(5) Payment
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Annual transaction volume approximately 2.4 trillion yen

– We provide payment processing services for the sale of products via the Internet. When users provide their credit card numbers to our customers we check the credit limit and process the payment.

– This is a Payment Gateway Inc. (Tokyo Stock Exchange, First Section: 3769) service.

– 85,000 merchants use our services in this segment. Transaction volume in the most recent quarter totaled 620 billion yen and approximately 261 million transactions* were processed. We also have the leading market share in this sub-segment as well. (January-March, 2017).
– As one of the leading payment companies in Japan, we aim to continue driving innovation and growing ecommerce participation in Japan.

– Going forward we will continue to identify new markets for credit card payment processing services, while expanding existing solutions as a leading innovator in ecommerce payment gateway services.

Some of our Services:
GMO Payment Gateway http://www.gmo-pg.com/global/
GMO Epsilon http://www.epsilon.jp/
GMO Payment Service http://www.gmo-ps.com/
GMO PAYMENT GATEWAY PTE. LTD. http://www.gmo-pg.com.sg/
SMBC GMO PAYMENT https://www.smbc-gp.co.jp/
GMO FINANCIAL GATE https://gmo-fg.com/
Global Card System https://www.globalcard.co.jp/

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(6) Web Site Brokerage
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Our web site brokerage service is also a market leader, helping expand business opportunities for our customers.

Site M&A: http://www.sitema.jp

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(7) Features and Strengths of the Internet Infrastructure Segment
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Advanced technology, broad-based sales and ongoing demand

Advanced technology, broad-based sales and ongoing demand
– Overall the Internet Infrastructure segment is overwhelmingly No.1 in its field. Despite being in competition with major carrier businesses, our domain registration and web hosting businesses boast leading market share, customer satisfaction, revenue and profit.
– Each of the Internet Infrastructure businesses has large customer bases. Building an economy of scale grows our operating profit margins.
– The Internet Infrastructure segment has five exceptional features.

(1) A steadfast income model
Once a customer signs a contract we have a continuing source of income creating a stable income business.

(2) An industry that will exist indefinitely
The Internet industry will continue to exist indefinitely. Take the example of the automobile industry. People get a new car about once every four years. However, even when cars change, the need for roads, traffic lights, parking lots, toll booths and other infrastructure remains. Imagine websites as the cars, ISP services as the roads, domains as the traffic signals, rental servers as the parking lots and payment processing as the toll booths. If the Internet continues to exist so will our business.

(3) People rarely change web service providers
Migrating to new web or mail servers is time-consuming and tedious.

(4) Customers don’t stop using our services
Customer URLs and e-mail addresses are printed on the business cards they hand out every day. These are services that they don’t stop using.

(5) Natural Cross Sell
The structure of this segment promotes a natural cross-sell among products and services. A customer who purchases a domain name cannot do anything with it unless they have a server.
Those that are using web hosting services for ecommerce will need payment processing, security (SSL) and shopping cart services as well.

– The infrastructure business is (1) stable (2) permanent and (3) a high margin business with a large market share. It is a price leader that continues to grow.
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Internet Finance*1
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*1 Segment name changed from Internet Securities to Internet Finance in Q1 FY2017.

Market leading strategy a mark of group DNA.

The Internet Finance segment complements our existing Web Infrastructure & Ecommerce and Internet Media businesses and helps to further generate synergy throughout the group. We aim to build a group that will succeed for hundreds of years and this is part of the reason why we brought this business into the group.

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(1) Internet Securities Segment – Objectives
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Pioneer in next generation online financial trading services

– With the growth of the Internet and the expansion of broadband usage during the late 1990s, as well as the 1999 relaxation of regulations on trading fees in Japan, online securities services became an essential tool for retails investors.
– Providing new technologies, added value, and innovative concepts through solutions that are universally user-friendly is core to the group’s fundamental mission.
– Our ultimate aim in this segment is to provide an easy to use online securities trading service to all of our customers.

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(2) Users & Market Share
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Market leader in FX

– Our Internet securities business has grown rapidly to become one of the major players, driving growth in the industry.
– For the past five consecutive years we achieved the highest transaction volume in the domestic FX market, and in comparison with global companies we have the highest transaction volumes in the world.(*3)

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(3) Internet Securities Segment Strengths
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Innovative technology and speed

– All of our backend systems are developed, operated and serviced in-house. Most other securities companies outsource technology functions. A large percentage of GMO CLICK Securities partners are engineers, and the company boasts industry-leading technology.
– This enables us to provide an agile service with highly cost effective operation and management. In other words, technology gives us our competitive edge.
– On April 1, 2015, GMO CLICK Holdings was listed on the Tokyo Stock Exchange JASDAQ market. It will change the company name, on October 1, 2017, to GMO Financial Holdings, Inc., a holding company that will head the Group’s Internet Finance segment, for the launch of the new Internet banking in the Spring of 2018 and for entering virtual currency business, and will develop and offer next generation financial services. As a finance group with an edge in technology, we aim to accelerate growth further by expanding into global markets.

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Online Advertising & Media
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– We advanced into a second business area directly after being listed on JASDAQ on August 27, 1999.

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(1) Why We are in this Industry
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To build synergy and to succeed.

– There are two reasons why we are in the Internet media business.

(1) Synergy with Internet Infrastructure
Customers who start up ecommerce businesses need advertising in order to increase sales. By providing search ranking services, SEO, SEM, SNS and other tools we achieve better customer satisfaction, capture more customers (cross sell) and achieve a higher profit ratio.

(2) Our Long term Plan (55-Year Plan)
We have a long term plan we call the 55-year plan. We plan to create an Internet group that by 2051 consists of 207 companies that are valuable to society and its people. In the Internet industry, companies that succeed are companies that can attract customers. Having our own media that attracts customers gives us an advantage over our competitors in virtually any market we enter.

(as of March 2017)

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(2) Companies and Services
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– The Online Advertising & Media segment can be roughly divided into two businesses; the business of “creating” media and the business of “selling” media.

– These companies “create” media:
GMO Media Inc.  (TSE:6180)
GMO Insight Inc.
GMO ADMARKETING Inc
GMO TECH, Inc. (TSE:6026)
GMO KUMAPON, Inc.

– These companies “sell” media:
GMO AD Partners Inc.(JASDAQ Growth: 4784)
GMO NIKKO,Inc.
GMO Solution Partner,Inc.

GMO Research, Inc. (TSE:3695)
The business of Internet Research is operated by GMO Research,Inc.

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(3) Online Advertising & Media Segment – Strengths
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Advanced development and operational capability

– We have the advanced technology to develop services used by millions of people, the marketing force to attract large numbers of Internet users and the stable operational capability to give tens of millions of users an enjoyable Internet experience. These are our three strengths.

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Mobile Entertainment
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The fourth pillar of group earnings

– In 2010, we entered the mobile game market with the objective of building a history-making smartphone game platform. We will use the expertise, cultivated through in-house development of titles, to get costs under control, aiming to produce a hit.

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Important Themes in 2017
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(1)Summary of our investment plans for this year.
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●Invest in continual growth overall

●GMO Pepabo will continue to invest in promotions for “minne.”
●.shop: This term, we will continue to bolster relations with registrars abroad to grow the number of registrations.
●Z.com:We have been building the base of business for the “Z.com” brand since last year in non-English-speaking countries throughout Asia.
We will continue business operations and promotions this year with an investment of several hundred million yen.
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●Strengthening Finance and Payment services

We are currently focusing on expanding our financial business.

From this term (Q1 2017), we have changed the name of the “Online Securities” segment to “Internet Finance.”

We will launch the virtual currency conversion and transaction business “Z.com Coin by GMO” on May 31, 2017.

【Virtual currency conversion and transaction business】

For the Internet bank, we plan to launch next March.

Our new Internet Securities business in Thailand is subject to getting a license, but we are planning to launch services this autumn.

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(2) The situation of .shop
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Cannot be copied – the only one, global strategy product .shop.

●No.1 potential
There are more than 300 million “domains” (or Internet addresses) worldwide. Approximately 6 million domain names are registered every month worldwide as the Internet continues to expand.

For this reason, it is hard to acquire short and memorable character strings these days. Hence, new domains are liberated to substitute conventional domains, “.com,” “net” and so on. Approximately 2,000 domains have since been applied for, and “.shop” is the most well-reputed domain in terms of potential.

●Acquiring operational rights
Group company and wholesale registry operator, GMO Registry started preparations to acquire “.shop” in 2009, and after 9 years of hard work, on January 28, 2016, GMO Registry finally won an auction at a record $41.5 million USD and acquired the rights to operate .shop.
(Consolidated Subsidiary Acquires Rights to Operate New Domain, .shop)
●Strengths
The strengths of “.shop” are as shown. It cannot be copied. Additionally, it will be an ongoing source of earnings in Internet Infrastructure.

●Good start
Things are off to a good start, as the domain just passed the 140,000 domain mark since it launched 4 months ago in September 2016. Registrations for the domain in China began on January 11th, which you’ll also notice on the graph shown.

●Ratio of overseas shares 88%
This is the number of registrations by country as of the end of January. We’ve had registrations placed from 167 countries, and most registrations are not from Japan, but from Europe, Germany, China and the Netherlands, while Japan comes in after that.

88% of the domain’s shares are held by overseas customers. I’m sure it will become a major driver for revenue overseas.

【.shop -registration report】

(Source: Fiscal Year 2016 4th Quarter Results Presentation)

●Strategy
We’ll begin getting a full return on profit from next year due to the current allocation of books.

With aggressive pricing, we hope to maximize new registrations and renewal rates and continue to build up recurring revenue.

We will continue to bolster relations with registrars aboard to grow the number of registrations.
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(3) Finance and Payment – Alliance Strategy
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We will launch the virtual currency exchange and trading business in the Fintech area.

In line with our motto of “strengthening strengths,” our group actively pursued an alliance strategy with major financial institutions in Fintech,
In Net Banking, we officially announced a capital and business alliance with Aozora Bank and set up the “Internet Bank Project Launch Office” for the next-generation net bank. We are aiming to begin business by March 2018. Aozora Trust Bank will be the base of new net bank. Although our current share ratio is 14.9% as of May 31, 2017, we will acquire more of Aozora Trust’s share to raise it to 50% and take on responsibility as an equal partner in the future.

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(4) Global Strategy
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Becoming a global Internet company.

Outside of Japan, GMO Internet Group has 1,152 global staff in 55 locations throughout 18 countries. Global sales still only account for around 6% of the Group’s total Net Sales. However, we will step up global expansion in both the Infrastructure and Securities segments, and unify global marketing efforts under the Z.com brand.

Overseas, we are expanding our two main globally strategic wholesale products – “.shop” and GlobalSign SSL.

GMO Internet Group is providing revolutionary global number 1 services under the world’s most memorable domain with the Z.com brand further driving global sales ratio  and making direct sales.

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Business Performance, Outlook & Return to Shareholders
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(1)Business Performance & Outlook
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Contributing to the growth of the Internet under the corporate motto “Internet for Everyone”

The following graphs represent Net Sales and Operating Profit trends since 2010 together with guidance for the 2017 fiscal year.

There is no change to management themes in 2017. We remain committed to enhancing our strengths and enhancing weakness with number one products. As a growing company, we make strategic investments to support our own growth and to make our customers smile while providing number one products. We remain committed to continuing to achieve our business targets.

●In 2017, we forecast double digit growth.

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(2) Return to Shareholders
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1. Total Shareholder Return Ratio
-The company will continue to invest in corporate growth as needed, but with the objective of returning greater value to shareholders, we have a dividend payout ratio objective stated in our articles of incorporation that aims to payout 33% of consolidated net profit in dividends.

-In addition to the current payout of 33% the remainder of the 50% total shareholder return ratio will be put toward share buybacks.

In June 2005, we entered the loans and credit business when we acquired a consumer loans business. Shortly after the supreme court reached a decision in regard to the overcharging of interest and the Japanese Institute of certified public accountants implemented changes to accounting standards related to provisioning allowances. This caused significant damage to our balance sheet. In order to compensate for the losses incurred by shareholders at this time, total shareholder return ratio has been raised to 50%, part of which is being put toward share buybacks.
. We believe that a share buyback of the shares issued during this time is an appropriate means to return profits to shareholders. In order to achieve this, the company will implement this new total shareholder returns policy that includes share buyback plans over the long term.

The company will take a flexible approach and any share buyback decision will take into account company performance, financial condition and current share price.

We completed the retirement of treasury shares.
The amount was approximately 17% of our net profit in FY2015.

2. Dividends
In 2016, the total dividend per share had an increase of 1 yen, bringing it to 21 yen.In 2017, the forecast for the total dividend per share will increase to 23 yen. We will execute the share buyback as shown below.

Notice of Acquisition of Treasury Shares


Under our current policy of ”Strengthening Strengths” and ”Reinforcing weaker segments with number one products,” we will continue to offer number one products with sophisticated technology and ambition.

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In Closing
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– We aim to be a comprehensive Internet services group that provides industry-leading services in four business segments Internet Infrastructure, Online Advertising & Media, Internet Securities and Mobile Entertainment.
– We will continue to build an Internet group that contributes to the growth of the Internet based on the concept “Internet for Everyone”

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Disclaimer
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* This presentation document includes predictions based on expectations, premises and plans for the future that are accurate as of February 6, 2017. These predictions may differ from actual results due to factors including changes in the global economy, competition and exchange rates or unforeseen events such as natural disasters. Some of the figures given such as market share are based on our own calculations. These figures may differ from research agency figures.

* Information published on this site is provided for information purposes only and does not constitute a solicitation of investors. Further, the results forecasts and other forward-looking statements contain factors that are uncertain. Please understand that actual results may differ significantly as a result of forces including economic conditions and market environment. No responsibility is accepted for any damage sustained as a result of actions taken based on this information regardless of the reason.

*1 Segment name changed from Internet Securities to Internet Finance in Q1 FY2017.
*1 According to on our own research
*2 ForexMagnate

Q1 2017 business results (latest quarter)

Older business results (here)