While the headlines around LY Corporation's (formerly Z Holdings) recent earnings focused on the security incident and the company's efforts to shore up governance, a less-noticed but potentially seismic shift is occurring: LY Corporation is quietly and systematically untangling its technological reliance on NAVER. This move, largely overshadowed by the security incident aftermath, could signal a fundamental strategic change with massive implications for the company's future.

On the surface, LY Corporation's commitment to security enhancements – including a hefty JPY 15 billion investment in FY 2024 – appears to be the driving force behind severing the NAVER outsourcing relationship. But a deeper look at the transcript reveals a calculated, pre-emptive strategy at play. The company isn't just reacting to the security breach; it's seizing the opportunity to redefine its technological independence, potentially paving the way for greater operational freedom and, crucially, future strategic partnerships.

The telltale signs are subtle, but significant. LY Corporation's announcement about terminating the NAVER outsourcing relationship for the development and verification of Yahoo! JAPAN search is a major signal. While the transcript notes that "most of the outsourcing has ended and brought in-house, or alternate measures being found," the emphasis on search – the company's core revenue driver – underscores the significance of this shift.

Furthermore, the repeated references to "disciplined investments" and a focus on "improving both the numerator and denominator in order to recover adjusted EPS" paint a picture of a company laser-focused on optimizing its financial performance. This emphasis on capital efficiency, coupled with the decision to disclose adjusted EPS guidance for the first time, suggests a company preparing for a future where external scrutiny, and potentially market valuation, will be paramount.

The postponement of the LINE and PayPay account linkage, initially planned for FY 2024, adds another layer to this hypothesis. While attributed to prioritizing security enhancements, the delay also buys LY Corporation time to fully integrate its systems and refine its data utilization strategies independently. This could lead to a more robust and potentially more valuable proposition for future PayPay IPO plans, free from the constraints of NAVER's involvement.

Financial Implications of the Strategic Shift

Here's where the numbers come into play. Consider the JPY 15 billion security investment. While a significant expense, it represents less than 1% of LY Corporation's FY 2024 projected revenue. This suggests a calculated risk, one that the company believes will yield long-term benefits.

Let's break down the numbers:

Source: LY Corporation (OTCPK:YAHOF) Q4 2023 Earnings Conference Call Transcript

Now, let's look at LY Corporation's projected adjusted EBITDA growth. Excluding the JPY 9.4 billion one-time gain from ASKUL, the company is forecasting 6% to 8.5% growth. Factor in the JPY 15 billion security investment (which will impact EBITDA), and the underlying organic growth could potentially be closer to 10%. This robust growth, driven by core businesses like advertising, commerce, and PayPay, further supports the idea that LY Corporation is positioning itself for a future of sustained profitability, possibly even with a view towards a future independent of NAVER.

Strengthening Corporate Governance

The move to increase the number of outside independent directors on the board, giving them a majority, reinforces this notion. By strengthening its corporate governance, LY Corporation is signaling a commitment to transparency and accountability, qualities that would be attractive to potential future investors or partners.

A Glimpse into the Future

The question remains: what does this future hold? It's too early to definitively say, but the pieces are falling into place. A technologically independent LY Corporation, armed with a strong financial foundation, a revamped suite of products, and a focus on data utilization, could become a highly attractive target for strategic partnerships or acquisitions. Imagine, for instance, a scenario where LY Corporation, having successfully established its own data utilization framework, partners with a global technology giant seeking to enter the lucrative Japanese market.

While speculation, it's a scenario supported by the company's strategic moves. By disentangling itself from NAVER, LY Corporation isn't just mitigating security risks; it's planting the seeds for a future where it can chart its own course, one potentially far more lucrative than the market currently recognizes.

"Fun Fact: Did you know that LINE, LY Corporation's flagship messaging app, boasts over 94 million monthly active users in Japan alone, making it the country's dominant messaging platform? This vast user base, coupled with the reach of Yahoo! JAPAN, gives LY Corporation a formidable presence in the Japanese digital landscape."