Kakao Corp. (035720.KS) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. Thank you all for joining today. We will now begin Kakao's Q2 2025 Earnings Conference Call. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] I will now turn it over to Kakao.

[Interpreted] Hello. I'm Jeffrey from Kakao IR. Let's begin with the second quarter 2025 Earnings Conference Call. Today, I am joined by Shina Chung, the CEO; and Jayden Shin, the CFO. Please be reminded that the earnings results are consolidated estimates under the K-IFRS basis and are subject to change upon the auditor's review. Also, forward-looking estimates are based on assumptions. So actual results may differ from figures included in today's presentation. Now we will have a presentation from CEO, Shina Chung.

[Interpreted] Good morning. This is Shina, CEO of Kakao. This quarter, Kakao recorded the highest quarterly revenue in our history driven by the solid growth of Talk Biz and visible business performance from our affiliates. In addition, thanks to the ongoing company-wide cost optimization efforts initiated last year, operating profit also reached an all-time high. With a stable financial structure now in place, we will begin sequentially launching various new services starting in Q3, focused on our 2 key pillars, Kakao Talk and AI to once again deliver the kind of top line growth expected of a leading growth company. Let me begin by sharing updates on Kakao Talk's transformation. Rather than chasing short-term trends, Kakao has been deeply analyzing user behavior data from a long-term perspective. As a result, we are now preparing a large-scale overhaul of services and feature enhancements across all 5 parts of Kakao Talk. From a UI/UX standpoint, we are working to enhance consistency and natural connections between various services. By eliminating unnecessary complexity, we aim to deliver a more intuitive and seamless service experience. As we've consistently communicated with the capital market, Kakao Talk is evolving beyond a simple messenger. It will grow into a platform encompassing content delivery, exploration and relationship-based social features. Starting in September and continuing through the end of the year, new services will be launched sequentially. Today, I would like to briefly introduce the changes coming to the first and third tab, key pillars of these renewals, which will serve as most critical turning point for expanding Kakao Talk's traffic structure and user time spend. First, Friends tab, which is the first hub in Kakao Talk, will evolve from a simple contact list into a feed-based space space for daily life sharing. After the renewal, the frequently used updated profile features will be improved and a new feed section will be added below. This section will highlight birthday friends, daily live content shared by friends and media content such as photos and videos from group chat. We plan to turn this into a space where users can continuously consume and interact with various relationship-based content. Based on our internal analysis, an average of 13.4 million monthly users actively update their profile and checked in on friend's updates via Kakao Talk. We believe this clearly shows that social needs within the app are already well established. By making it easier to view friend's updates in a single depth through this renewal, we expect to see a significant boost in natural interaction within the Friends tab and improved convenience and usability of the service. Looking at the bigger pictures of Friends tab, which has largely functioned as a contact list for purposeful traffic will now become a space where users can casually visit, explore and discover various contents from their daily lives. Next, I will update you on the status of a short-form video service planned for the third tab. For this, we are diversifying content sourcing channels and building a studio environment that enable creators to easily produce content. Additionally, we plan to secure both exclusive content available only on Kakao and original content produced using the capabilities of Kakao's affiliates in order to build a rich and differentiated content library. We are also preparing a revenue-sharing ecosystem where creators are fairly compensated for their work, ensuring sustained creative activities. Kakao short-form video service will leverage the strength of the messenger enabling users to share videos directly within chat room and watch them without leaving the conversation, delivering a seamless user experience. This network-based viability will serve as a key competitive edge in rapidly scaling the creator ecosystem. Going further, Kakao aims to provide a differentiated experience by focusing on relationships and context rather than following the path of explore-driven or self-promotional media platform. We are designing Kakao Talk to naturally connect and not only close relationships, but also lose their ties, expanding the network from friends to creators. This way, content consumption will evolve beyond passive viewing into relationship-based discovery. The transformation I briefly explained today for the first and third tab will be revealed in more detail, including the visual and functional design at if kakao event scheduled for September. In last quarter's earnings call, we shared our goal to increase time spent on Kakao Talk by over 20% through this renewal and to drive more than 10% year-over-year growth in Talk Biz ad revenue in Q4. These are not just stretched goals but must-achieve targets based on conservative prelaunch assumptions. Once we validate strong early results, we plan to actively pursue more ambitious growth strategy. Above all, we believe that Q4 double-digit growth will mark the starting point of long-term structural improvement, not just a one-off success. We will continue to build a virtuous cycle where traffic growth on Kakao Talk naturally leads to monetization. Next, I'd like to talk about AI, the other core pillar of Kakao Group's business. As mentioned earlier this year, Kakao's goal is to bring AI into the daily lives of everyone. Over the years, Kakao has transformed daily lives across various verticals starting with Kakao Talk expanding into fintech, mobility and content. As a result, many of Kakao's services have become deeply embedded in users everyday routine. Beginning in the second half of this year, Kakao aims to build daily AI touch points center around Kakao Talk. And once again, we intend to redefine daily life with AI for everyone. Until now, many may have associated Kanana solely with the stand-alone app, currently in CBT. Going forward, however, we decided to brand all AI-related elements under the name Kanana. This includes infrastructure, language models, middle layer components like MCP and agents and even B2C AI services that we experienced by users. Just like the Kakao Talk renewal, the if kakao event scheduled for September will provide concrete visualization of various Kanana services that we've described only verbally so far. Starting in October, we will begin launching these services sequentially. First, the joint products being codeveloped with OpenAI is being prepared with urgency as the release date is drawn near. Our goal is to build on the familiar ChatGPT user experience while adding Kakao's unique assets and insights into Korean users. As previously mentioned, we will reveal the product forms and features and features at the if kakao events. And at the latest, before our next earnings call, we expect that all of you will be able to try the product yourself. For the second half of the year, we anticipate that the world's largest AI services and Kakao's most powerful mobile platform will come together, enable Kakao to quickly gain ground in the Korean B2C AI market. In parallel, we are also preparing AI services that operate within Kakao Talk especially in the context of conversation based on relationships which is at the core of talk experience. Rather than functioning as a stand-alone service occupying a fixed space, [indiscernible], AI services will act more like a middle layer operating across various areas in Kakao Talk to recommend context-aware actions aligned with the users intent. Eventually, these actions will be completed seamlessly within the app. The service will be powered by Kakao's in-house SLM on-device AI model, which will allow user data to be managed with the highest level of privacy and at the same time, significantly reduce large-scale inferencing costs on our end. Excluding a few mobile device manufacturers, Kakao's will be the first in Korea to launch an on-device model. We will start with a small scale launch to gather early feedback and prepare for a broader deployment as this technology becomes mainstream. Lastly, we are preparing to build an AI agent platform ecosystem. In the past, mobile ecosystem centered around app, required users to manually visit each app to fulfill specific tasks. Now as protocols like MCP and agent-to-agent interactions become more common, users will be able to access services and achieve their goals without needing to open separate apps by interacting with agents instead. Just as Kakao played a central role in the mobile era, we aim to be a powerful platform player in the agent era. We will begin laying the foundation for this ecosystem starting in the second half of the year. Initially, users will experience agents within Kakao Talk that connects with selected Kakao-owned services. Later, we plan to integrate with a wider range of verticals working with both Kakao affiliates and external partners. On the model side, in May, we rebuild both the medium-sized and SLM versions of our proprietary Kanana 1.5 language model. The SLM version, in particular, is optimized for on-device environment with 2.1 billion parameters, enabling fast and efficient responses. This model is a key component powering the new AI services within Kakao Talk. In July, we also released our multimodal model and mixture of experts MOE model. As AI continues to evolve around into agent capable of autonomous decision making and action, we've open sourced our MOE model to receive real-world validation. Meanwhile, a 1.5 version multimodal achieved top scores among similarly sized open models in both Korea and abroad based on Korean language benchmark. Kakao's focus is on enhancing AI multimodal understanding user instruction execution and inference capabilities all necessary for building agentic AI. In the second half, we will also announce results related to our inference model, which is a core requirement for enabling agent-like behavior. With a specialized model lineup we've built for agents and Kakao Talk's unmet messaging protocol capabilities, we are confident that Kakao will be the strongest platform within the agentic AI ecosystem, especially as agentic AI interactions become more widespread. Finally, regarding infrastructure, as announced in June, Kakao will invest KRW 600 billion to construct a second data center in Namyangju, Gyeonggi Province. Construction will begin next year with a completion targeted for 2029. This will be next-generation high-density data center capable of supporting AI and future technology. As data security and service reliability grow increasingly important, this move will shift us away from rented data centers towards operating our own infrastructure, enabling both greater control and cost efficiency in the long term. We believe 2025 mark the beginning of Kakao's fourth-grade scale AI transformation. As the first mover in the mobile era, Kakao successfully built ecosystem across numerous verticals. Now we aim to launch a series of AI services on Kakao's most dominant mobile platform, becoming the first B2C AI provider serving the general public. Moreover, by being the first company in Korea, excluding device manufacturing to launch on device AI, we plan to, once again, see the first-mover advantage in the AI era. Next, Jayden, our CFO, will present the second quarter 2025 financial highlights.

[Interpreted] This is Jayden, Kakao's CFO. I'll be presenting on consolidated financials for the second quarter. Consolidated revenue for the second quarter came in at KRW 2,028 billion, up 1% Y-o-Y and 9% Q-o-Q. Platform revenue was KRW 1,055 billion, rising 10% Y-o-Y and 6% Q-o-Q. Kakao's core business, Talk Biz reported KRW 542 billion in revenue, up 7% Y-o-Y but down 2% Q-o-Q. Talk Biz ad revenue for the second quarter was KRW 321 billion, going up 4% Y-o-Y, driven by solid growth in Business Messaging and up 12% Q-o-Q due to seasonality. Business Messaging revenue rose to 16% Y-o-Y, sustaining a double-digit growth on greater revenue contribution from advertisers in the financial sector. We are expanding the scope of usage and types of messages that advertisers can send by offering wide-ranging template. We, thus, expect there still is greater mid- to long-term upside in top line revenue. Also, our brand message that rolled out mid-May has driven high ad efficiency metrics, thanks to strong message delivery rate and clear sender identification feature. And the recipients need not be concerned about the risk of smishing when receiving the message, so we expect robust growth will continue in the second half, underpinned by broader service awareness. For display ads, there was 5% Y-o-Y revenue decline due to the base effect from first half of last year when there was a temporary surge in marketing spend by Chinese e-commerce players. Our plan, thus, is to strengthen the new product lineup, including in-feed adds and video adds in time for the upcoming Kakao Talk revamp in September and also continue with enhancing the efficiency of the current suite of products. Next, our second quarter combined commerce GMV was KRW 2.5 trillion, up 6% Y-o-Y and down 4% Q-o-Q. Gifts service achieved record high traffic in July, backed by a differentiated line up of exclusive products, the launch of dedicated section for self-use purchases and strengthen daily promotions featuring new limited edition items. As a result, the number of self-purchase users rose 10% Y-o-Y driving a 43% Y-o-Y increase in self-purchase GMV, which, in turn, led to overall GMV growth. Total GMV for the gift service also grew 8% Y-o-Y. GMV for self-purchasing showed sizable growth of 43% Y-o-Y, driving the entire GMV uptrend while Talk Gift GMV increased 8% Y-o-Y. Next, our commerce revenue reported KRW 221 billion, up 10% Y-o-Y and fell 17% Q-o-Q due to seasonality of Talk Gift. Talk Gift revenue rose 13% Y-o-Y, backed by a higher share of directly sourced exclusive products and increased transactions of high-value vouchers, which, in turn, led to a rise in average order value. Meanwhile, Talk Store revenue declined 6% Y-o-Y, impacted by extended promotional activity. Next, our portal revenue was down 11% Y-o-Y on the back of decline in search queries and following preparation for a swift transfer business. In regards to Q-on-Q, it was up 6% to KRW 78 billion, due to the impact of major events, such as the presidential election. We plan to transfer business operations to the new entity AXZ by the end of the year. Finally, our platform and other revenue was up 21% Y-o-Y and 19% Q-on-Q to KRW 435 billion. Kakao mobility saw solid Y-o-Y growth as parking and quick delivery business expansion drove total top line uptrend. Also, supported by high growth from financial and platform services and cost efficiency, Kakao Pay reported a double-digit revenue growth Y-o-Y, sustaining the profit-making streak for 2 consecutive quarters. Now moving on to our content business, which recorded KRW 973 billion in revenue, down 7% Y-o-Y, but up 12% Q-o-Q. First, our Story business revenue in quarter 2 was up 1% Y-o-Y and 3% Q-on-Q to KRW 219 billion. Amid fierce competition, Piccoma has been focusing on laying the basis for sustainable growth by strengthening core competitiveness of its IP content. So despite the Golden Week holiday being the busiest season of the year, Piccoma maintained efficient marketing execution, a shift from previous years and as a result, achieved its highest ever quarterly operating profit. On the backdrop of slowing growth of the market, Kakao Entertainment Story business is maintaining a key focus on profitability. We are in the midst of reorganizing our global strategy to build a more competitive and agile Story IT business. Overall, we expect for the Story business to gradually drive results from the efforts placed behind enhancing IP competitiveness as we move into the second half of the year. We will continue to diversify our IP pipeline, sourcing compelling content across a wide-ranging genre while actively broadening the user pool through strategic markets. Next, our Music revenue was up 1% Y-o-Y and 18% Q-on-Q, reporting KRW 518 billion. Performance was driven by good album sales of RIIZE and NCT WISH despite the slump in the music label market. With anchor IP activities and new artists debuts scheduled for the third quarter, we plan to further strengthen our lineup. Lastly, Media revenue was up 5% Y-o-Y and 25% Q-o-Q to KRW 94 billion. This is due to revenue recognition of title carried over from the previous quarter and concentration of production activity during the first half of the year. Moving on to our operating expenses. Second quarter operating expense was up 5% Q-o-Q but fell 2% Y-o-Y, reporting KRW 1,842 billion. Labor costs edged up 2% both Y-o-Y in Q2, reaching KRW 489 billion. Corporate-wide, we continued our stance with conservative hiring, resulting in a flat Y-o-Y. Marketing expense declined 19% Y-o-Y while flat Q-on-Q at KRW 88 billion, accounting for 4.3% of quarter 2 consolidated revenue as we continued our focus on efficient spending. Revenue-linked expenses decreased 10% Y-o-Y on high base effects following reclassification of subsidiary accounts, but rose 2% Q-o-Q at KRW 717 billion due to rise in revenue from Content business, accounting for 35% of consolidated revenue. Outsourced and Infrastructure expense was KRW 233 billion, up 19% Y-o-Y and 13% Q-o-Q on the back of account reclassification and rise in costs following strong album sales at SM Entertainment. Depreciation and amortization was KRW 220 billion, up 7% Y-o-Y and 8% Q-o-Q due to Kakao Entertainment amortization of license rights and consolidation of DearU, which led to an increase in amortization for intangible assets. As a result, quarter 2 consolidated operating profit recorded KRW 186 billion with OP margin improving by 2.5 points Y-o-Y to 9.2%. Going forward, based on optimized operational leverage, we will do our utmost to sustain structural profitability. Next, nonoperating income for quarter 2 fell KRW 22 billion Y-o-Y and KRW 78 billion Q-o-Q to KRW 9 billion. Other nonoperating income was KRW 3 billion, up KRW 4 billion Y-o-Y but down KRW 73 billion Q-o-Q. This was due to a high base in the previous quarter from equity method gains related to the sale of DearU and also reflects a loss from the disposal of intangible assets and other businesses during quarter 2. Financial loss came in at KRW 175 billion. The loss increased KRW 217 billion Y-o-Y due to a decline in FX gains from the early redemption of exchangeable bonds, a narrowed KRW 49 billion Q-o-Q. Lastly, equity method income was KRW 235 billion, down KRW 44 billion Y-o-Y and KRW 108 billion Q-o-Q, reflecting changes in affiliate performance. Next, our second quarter corporate income tax reflects adjustment effect from the recognition of additional deferred tax assets resulting in consolidated net profit of KRW 172 billion. Lastly, on CapEx. Total CapEx for quarter 2 was KRW 98 billion, comprising of KRW 72 billion investment in tangible assets and KRW 26 billion CapEx per intangible. CapEx decreased KRW 72 billion Y-o-Y and KRW 41 billion Q-o-Q mainly due to the base effect from in-house data center investments made last year and large-scale AI investments, including GPU in the previous quarter. This ends the presentation on quarter 2 2025 earnings. We will now move on to Q&A because we have limited time, please, we ask that you refrain from asking more than 2 questions.

[Interpreted] [Operator Instructions] The first question will be provided by Eric Cha from Goldman Sachs.

[Interpreted] I would like to ask two questions. The first one has to do with the government's recent initiative to undertake the AI foundational model, and there were a short list of private companies that will join in on that effort, but Kakao's name was not on that list. So my question is, I would like to understand what the difference is between the government-led sovereign AI strategy compared to Kakao's AI strategy? Second question, I understand that you will soon be launching your AI services. Already out there in the market, there are multiple AI-driven services that's been provided. I would like to understand as to what your differentiating point is for you to attract the users to your AI service?

[Interpreted] Yes, this is Shina. I will respond to that question. The way we see it is that the government sovereign AI direction and Kakao's AI strategy are both aligned towards expanding AI into the domains of services and providing AI for everyone for universal and ease of access. We think focusing on sovereign AI is an important strategic point beyond simple model development. Global AI service providers, as you know, are very quickly taking hold of user experience and user engagement as we speak. So Kakao is moving fast to adopt advanced technology to integrate such technology to domestic services to strengthen the lock-in effect. So in that vein, we're investing into high-performance SLMs, multimodal models and MOE models as well, investing into language models that are specialized for agentic AI services. Starting the second half, underpinned by Kakao Talk as our key pillar, we will be leveraging lightweight models, the SLM models to introduce and launch wide-ranging services, thereby expanding the agentic AI ecosystem, enabling users to familiarize themselves with and experience AI services. Also, model orchestration, if I were to just talk about from the model perspective, which we've been pushing forward is a strategy where collaboration with the outside partner and the internal development are leveraged in parallel. So depending on the type of the query or the question on the level of complexity or difficulty, you do not necessarily need to always be using the LLMs, so optimization is an important element to be mindful of. So once the model performance of Kakao sovereign AI is well enhanced and polished, we will be integrating such capabilities into our services to facilitate the formation of domestic AI ecosystem and contribute to technology solvency. So we brought to life the future that was beyond our imagination at Kakao by transforming people's everyday lives. In that sense, second half of the year will be another turning point for us, where we once again bring innovation to people's everyday lives, being a torchbearer of transformation towards AI-based basic society. That basically is the goal that we have at Kakao. And we believe that in that sense, we are aligned with sovereign AI. Responding to your question about potential cannibalization with other services like ChatGPT and the potential there being any undermining of user experience, my answer is this. Currently, we do not have any significant concern internally about potential cannibalization with a stand-alone ChatGPT service. The direction that Kakao and OpenAI are jointly pursuing is to popularize AI services for the entire population. However, given that Korea's 50 million users vary widely in terms of their understanding and acceptance of AI, we believe this goal may be difficult to achieve through a single service alone. For example, on the web, some users may seek to conduct complex research, whereas in the mobile environment, many users may simply want to look up quick information. From this perspective, we expect that the stand-alone ChatGPT service and the AI service that we are jointly developing will target different user segments. In addition, we anticipate a trickle-down effect where users with no prior AI experience may naturally become interested and begin using the service. When ChatGPT results are shared during conversations with friends or when they encounter ChatGPT on core services, they visit on the multiple times a day. We are also putting significant thought into the UI and UX design to ensure that even users who are unfamiliar with AI can use the service easily. Lastly, since the stand-alone ChatGPT servers and the codeveloped service by both companies will be designed to support each other, we expect that rather than causing cannibalization, the 2 services will work together to expand the overall user base. Both companies are working closely to optimize the user experience by ensuring broad accessibility at scale. ChatGPT also provides some level of free functionality and Kakao, too, will build service in a way that maximizes ease of access and use -- usage flexibility, targeting to embed habituation of new user experience in Kakao's ecosystem.

[Interpreted] The following question will be presented by Kim from CGSI.