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 percentage point- 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, [Non-English content] 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 three 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.
This was mainly due to growth in card receivables and loans as our payments and financial services business expanded. The increase in securities following our acquisition of shares in Seven & i Holdings in August also contributed. Adjusted ROE increased to 18.5% from 14.9% in the fourth quarter last year, driven by growth in net income. We will continue to maintain the balance between financial soundness and capital efficiency. This is the last page. Let me turn to our financial guidance. Based on our strong first half performance, which exceeded our initial expectations, we are broadly revising our full-year guidance. First, let me explain our Q3 outlook. We expect the underlying business growth trend to remain largely unchanged. While we expect GMV in the payment segment to continue growing, we are strengthening controls in online payments to enhance security.
As a result, we have factored in temporary downward pressure on take rate due to a change in the mix of payment fees. In the financial service segment, we expect deposit growth to remain solid. However, given the high comparison base following the sharp increase in corporate deposits in Q3 last year, we expect the year-on-year growth rate of interest income to normalize. At the same time, we will remain committed to disciplined cost management across the group. Next, let me turn to our full-year outlook. We expect the underlying business trends I just described for Q3 to continue. However, we anticipate that the adjusted EBITDA margin in Q4 to be lower than in Q3, partly due to seasonal increase in expenses. Specifically, we expect higher funding costs in our credit card and banking business, assuming additional policy rate hike.
We also anticipate seasonal increase in expenses, including taxes and charges and promotional costs. Going forward, we will continue to focus on sustainable revenue growth and disciplined cost management while further improving our profitability. This concludes my presentation. Before Q&A session, I would like to explain one more point. At this morning meeting, Ms. Nagasaka, JP Morgan, asked about the significant increase in interest expense for the financial service segment from JPY 1.6 billion in Q1 to JPY 4.1 billion in Q2, an increase of JPY 2.5 billion. Approximately JPY 0.8 billion of the Q2 amount resulted from a change in the accounting classification for the segment P&L. This adjustment is eliminated from the consolidation process, so the consolidated figure reflects the actual amount. We apologize for the presentation, which may have caused confusion. Now, I will hand over to Oishi-san, Head of IR, for the next session. Thank you.
Thank you, Kagechika-san. We will now move on to the Q&A session. We will take questions from participants who have registered in advance and are connected via Zoom. We will respond in the same language as your question, either English or Japanese. Please limit your questions up to two questions per person and wait for our response before asking your second question.
[Non-English content ] If you have a question, please click the raise hand button on Zoom. If you would like to withdraw your question, please click the raise hand button again. When we call on you, we will announce your company name and your name. At that time, we will ask you to unmute yourself, so please unmute on Zoom. After asking your question, please remain unmuted until our response is completed. We will now take the question. Mizuho Securities, Dan Dolev, please unmute yourself and ask your question.
Hi, can you hear me? Good evening.
Good evening, Dan.
Hey, how are you?
Good.
Really, really nice results. We love the guidance increase, so great job here. I just had two quick questions on ARPU and on take rates. ARPU is looking really strong. Just how should we think about your ARPU for the next, say, 12 months-18 months, and where is it going to come from? On take rates, just maybe some more color on the trajectory of take rates. Those are my two questions. Thank you very much.
Thank you for the questions. Regarding the 1.74% take rate for the Q2, was somehow the too good force, which includes the special one-off factors, like the sales from the municipalities and also the revision for the point reward system. Now we somehow conservatively estimate the Q3 and the Q4 numbers, eliminating the special items but reflecting the continuous items. Overall, I think the take rate will be somehow down from this number for Q3 and Q4. The ARPU, still, our model is our user starts the journey from the transaction or settlement, and then move to the other products, like the bank accounts or deposit or the loan or the securities. So far, the main driver for the ARPU growth is from the increase of the GMV per user.
But now, we are preparing for more better usability for other financial items or products, and we will accelerate the growth of the ARPU. That is our current thought about the growth of the ARPU going forward. Thank you.
Thank you, and congratulations again on a very strong 2Q and the guidance increase.
[Non-English content] Thank you for the question. I would like to take the next question. Next from Goldman Sachs, Makoto Kuroda-sama. Please unmute yourself and ask your question.
Color on what was the beat from? What was the unexpected beat vs second quarter guidance? The second question is on the financial service segment yield, where the loan yield is up something like 20 basis points quarter-on-quarter, but then yield on interest-earning assets overall is maybe up 10 basis points quarter-on-quarter. So, the difference might be marketable securities. Could you maybe comment to what, if anything, is going on with marketable securities, and is that affected by the Seven & i acquisition? Thank you.
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Ms. Kuroda, we lost the first part of your question.
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If you could please rephrase your questions. The first question, please.
Yes. Can you add some color on what was the beat against the second quarter quarterly guidance from? [Non-English content]
The gain compared to your guidance for the second quarter's operating income and EBITDA.
Yes.
Could you hear my second question?
Oh, yes, I think so.
Okay.
May I answer in Japanese?
Sure.
Well, to answer your first question, we beat the guidance because regarding revenue, the main factor is from payment segment. JPY 3 billion upside from our guidance, and majority of that came from payment segment. As I mentioned, because of the bad weather, offline GMV did worse than expected, but online GMV, it was better than we expected. Take rate improvement factor, as I mentioned, were quite strong in the second quarter. Regarding financial service segment, we were on track, but interest rate hike happened earlier than we had expected, so that became a factor for upside. EBITDA vs the guidance, JPY 3.6 billion better than we had expected, and majority of that is because of the growth in the revenue. The rest of that has to do with the personnel cost, licenses-related cost.
Other OpEx we were able to control quite well that quarter.
Thank you.
To answer your second question, I am sorry, if you could please say it in different way. If you could please state your second question, especially the second half of your second question, please.
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Regarding financial service segment.
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Just a moment. If you could please ask your question in English, because I think you have joined English channel in Zoom.
Yeah.
So we need you to ask your question in English. I am sorry. I am sorry. Please speak in English.
Yeah. So, in terms of the interest income from financial service segment, the yield on interest-earning assets, I believe, is up 10 basis points quarter-on-quarter, while within that, the loan yield is up about 20 basis points quarter-on-quarter. So, wondering if the marketable securities yield moved in the opposite direction. So just wondering if marketable securities yield, if anything is going on there? I could also ask afterwards.
Okay. Yeah. Which is a timing issue, because last year we increased the deposits so rapidly, and a certain portion of the deposits are invested to the medium-term or long-term, the JGBs or other safer yen-denominated bonds. Which is obviously the fixed income asset, and which does not reflect the policy interest rate hike. So, that is reflected to our yield on our total assets somehow. So, we will have the deferred effect on the marketable, the bonds portfolio.
Oh, that is clear. Thank you.
Kuroda-san, just one thing to add to what Kagechika-san just mentioned. Investment in Seven & i was recognized under the payment segment, not the—
Oh, right.
—financial service segment. This is just one correction.
Got it. Thank you.
Okay. Just a housekeeping statement from my end. If you are on Japanese line, please ask questions in Japanese, and if you are on English line, please ask your questions in English. Thank you.
[Non-English content] We would like to take next question. From Deutsche Bank Securities, Nate Svensson-san, please unmute and ask your question. Nate Svensson, please.
Hi. Thank you for the question. Was just hoping for an update on the outlook for credit losses and provisions. Look like both of those numbers came up a little bit this quarter. I think in the prepared remarks, you said that this was intentional, but would love to hear more about the expanded credit limits you mentioned, and if there are any associated changes in product mix, underwriting, or anything else. Then, I guess more broadly, can you talk about how you're controlling credit risk exposure, particularly in a rising rate environment in Japan?
Thank you for the question. Yeah, actually, we increased the approval rate for the relatively lower credit users, and also we increased the credit limits for broader range of the users in the beginning of this year. About a half year has passed, and we recorded the certain amount of the credit loss, but which was planned. Now, we have seen the symptom that the credit loss rate has been gradually declining because most of the bad loan happens in first six months, especially the four to six months. So, I think that we can reduce the credit loss for the coming Q3 and Q4 because the intentional credit initiative, it's well controlled and will be the, y eah, and what was the one-time effect on our P&L.
Understood. Thank you. For my follow-up, I wanted to ask on cybersecurity, maybe a specific question and then a general question. The specific question, you mentioned tighter controls you are taking in online payments to enhance security, and that is going to impact payment mix and take rates. Could you just explain a little more about that decision and what security concerns you are trying to address with that decision? Then maybe more generally, obviously cybersecurity has been a hot topic with the rise of AI, so wondering if you could speak to how you feel about your cybersecurity capabilities, how they stack up, and how you are positioned to deal with new AI-related fraud vectors.
Thank you for the question. Actually, the cyberattack is one of the most important issues for all the players in this space. We are now shifting our management resource to attack that, and we believe that the safety will be one of the most important differentiators for the payment companies to survive and to take the opportunity going forward. Looking at some online merchants, some part of the merchants are struggling by the cyberattack and close their operation. Also, the others, some of them were suffering from the fraud also. To secure the safety of our user payments, we voluntarily or through the discussion with the merchants, we temporarily close some accounts and making the countermeasure for the attack or fraud or other problems happening in Japan. That is somehow implemented in our Q3 and Q4 outlook.
Thank you. Congrats on the results.
[Non-English content] Would like to take the next question. Next question from Cantor Fitzgerald, Ryan Campbell-sama. Please unmute yourself and please ask us your question.
Hi. Congrats on another strong quarter, and thanks for taking my question today. PayPay Balance is still over half of GMV and grows a bit slower than credit. What are the main levers to move Balance users onto PayPay Credit, and how large is that pool that you think you can ultimately convert? In other words, is there a longer-term target for credit as a share of GMV? Thank you.
Thank you for the questions. Yes, one good thing, because even though we've already covered the over 76 million registered user out of 100 million smartphone users in Japan. But when looking at the monthly active user base, the number is about 42 million for the recent figure. That means that we have more room to cultivate going forward as our primary service user. And typical user journey starts from the PayPay Balance, and then they're realizing how convenient our app is and subscribe their credit cards. Even though we have been actively promoting the usage of credit cards and encourage user to tie the credit card function to our app, but the more and more users start to use our app from Balance.
You may think that our shift from Balance to credits has been somehow sluggish for you, but we think this is the optimized process for us when looking at the optimal usage of our customer acquisition and promotion. The important number is lifetime value added should be more than four times of the costs. And now, we are confident that our usage of the promotion cost and CAC, it's well optimized, and we realize this growth rate for PayPay Balance and PayPay Cards.
Great. Thank you, and congrats again on a strong quarter.
[Non-English content ] We would like to take the next question. JP Morgan Securities, Koki Sato. Please unmute and ask your question.
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I am Sato of JP Morgan. Can you hear my voice? Yes. Thank you. I have two questions. First is related to the previous conversation. In June, the point program was reduced, and is there any analysis that you can share on the user behavior related to eKYC? The MTU QoQ increase shows 520,000 people. Compared to the past, the pace seemed to have slowed. Is it hinting the further slowdown going forward? According to today's material, the disclosure of eKYC user was not shown, but if you have that number you can share, please share that. Second point is the collaboration with Seven & i. The joint campaign is running from October on PayPay screen and Seven-Eleven stores. The exposure is quite obvious.
The progress of the past month, the expansion of the physical store share is your target, and it is still one month, but any assessment of the progress? Related to that, the dividend income from Seven & i, is it included in the third quarter plan? That is all.
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Thank you for the question.
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On your first question, after the revision of the PayPay STEP, our user base, the impact to our user base, we have been closely monitoring, and our assessment is that the impact is way more limited than what we have expected. Right now, the MTU growth seems to be slowing down. As we have explained, that is due to the weather, impact of the weather, 9%. This number we have not been monitoring closely lately, but we expect this number to come back. The eKYC user as of the end of September, 44.3 million, and it is 59% vs the registered user. The second question, the partnership with Seven & i and ID integration. As you know, next year in FY 2027, in the second half, we are to start. That is the target timeline, and we are preparing for that.
The progress is in line with the plan, but we cannot keep people waiting until that time. So, we have started the joint campaign from this month. From the start of the campaign, it is only three days. Evaluation of the measures are yet to be made, but looking at the initial speed, we believe it made a good start. The GMV through Seven & i is 18% growth year-on-year. So, compared to pre-integration, the number is quite good, especially coupon measures. Through coupons, it is contributing to the increase of the number of transactions. The dividend is factored into our numbers. Understood. Thank you very much.
[Non-English content] Next, we would like to take another question from BofA Securities. Yoshitaka Nagao-sama, please unmute yourself and ask us your question.
Hello, this is Nagao from BofA. Thank you for taking my question. My first question is the third quarter take rate. It is on page 13 of your presentations. Because of strengthening of control in the online areas, take rate will experience, at the moment, a downward pressure. Would you please elaborate what does stronger control means? Measures for anti-fraud, or you are focusing on some initiatives for particular sets of merchants or for focus categories? How much impact are you expecting to the take rate because of the strengthening of control? Then you said it is one-off. So, do you think this will no longer be there on the fourth quarter onwards? That is my first question, please.
Thank you very much for your question. [Non-English content] At the moment, the big issue is cyberattacks, and amongst our merchants, there are those that we have some questions about whether they are able to extend the protection for their users. So, we are proceeding cautiously. The kind of merchants I am talking about are the online merchants, so of course, high take rate. So, that is something that you need to take that into account a bit. Even if we close for the time being, after they take the countermeasures, we will open them. So, I would expect that those that experience the stronger control will come back in Q3 onwards, but I am not able to say much more than that at this moment.
Okay, thank you very much. My second question is related to your infrastructure cost. Payment frequency quarterly is what, 2.7 billion times? Even if it is growing 14%-15% year-on-year, depreciation now is increased to 8%. You can say that it is operational leverage, but the infrastructure cost per transaction, I just would like to make sure that it is definitely going down. When you launch a large campaign, you have a massive traffic, right? How are you able to process for the peak demand? I wonder whether you have enough capacity. That is related to your CapEx plan as well for infrastructure.
Thank you for your questions. In the consolidated basis, our CapEx and depreciation, when you compare one and the other, our current depreciation is bigger than our CapEx spent at the moment. So, we have been able to control our costs. In the recent past, we are converting, bringing a PayPay Bank system to cloud and adding more functionality. Depreciation will impact us as soon as we launch a new system, cloud-based system, but it will not be so significant. So, this depreciation will not have a major impact to our overall P&L. Regarding capacity, that is very important for us. We have been building our infrastructure to make sure that we have ample capacity, and we believe, we are quite confident that that is one of our strengths.
Thank you very much for your answer. I understand.
[Non-English content ] Moving on. Next will be the last question. Any other questions you would like to raise? If you are to raise a question, please press raise hand button. [ Non-English content ] With this, we would like to close the Q&A session. Thank you very much.
This concludes our investor briefing for the second quarter of fiscal 2026. Thank you again for joining us today.