Z Holdings Earnings: Tough 2023 but Hope for Recovery After Line-Yahoo Merger; Fair Value Unchanged

Z Holdings’ 4689 March-quarter results and guidance for the fiscal year ending March 2024 were somewhat disappointing, as they suggest that the negative impact of the economic slowdown will continue throughout this fiscal year, which is longer than we had anticipated. The company expects revenue growth in the advertisement business to be limited this year, dragged down by the sluggish growth in display ads, which are more susceptible to economic fluctuations. In addition, the company expects negative growth in Yahoo Shopping’s gross merchandise value this fiscal year due to a reduction in incentives as it prioritizes allocating marketing expenses to more profitable services such as Zozo and travel e-commerce. As such, while growth in its core businesses is likely to be limited, the company is focusing on (1) reducing fixed costs by JPY 30 billion this fiscal year through cost-cutting initiatives such as closing unprofitable businesses and (2) realizing synergies by accelerating the integration of Line and Yahoo. Despite lowering our 2023 forecasts, we maintain our fair value estimate of JPY 440 for Z Holdings, as our midterm outlook remains largely unchanged with these initiatives.

Both Yahoo’s and Line’s March-quarter display advertisement revenues were worse than expected, declining 6.6% and 10.4% from the previous year, respectively. We expect display ad revenue growth to remain weak in 2023 and have lowered our growth assumptions to low single digits, in line with management guidance. Meanwhile, we broadly maintain our midterm outlook, as we expect advertisement demand to gradually recover as the Japan economy recovers. We also look forward to seeing more cross-selling of advertising products between Line and Yahoo, as well as cost synergies after the ID integration process begins in October, but we refrain from including the impact in our forecasts until more details are disclosed.