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 Q3 2025 Earnings Conference Call. This conference will start with the 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 third 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. Before going into the details of our third quarter results, let me first briefly touch on the Kakao Talk revamp that took place in September. As this was the largest revamp since Kakao Talk launched 15 years ago, users have shared a wide range of feedback. Kakao is carefully listening to those voices and will continue to make ongoing improvements, including the Friends tab rebound scheduled for the fourth quarter. At the same time, since Kakao's routes, lives and messaging, we will also actively enhance the core messaging experience by gradually introducing many of the customized convenience features that users have long requested. First, we plan to further strengthen the custom folder feature, which allows users to organize numerous chat rooms within the chat tab according to purpose and view different type of conversations at a glance. Similar to the unread folder that has already been introduced, users will soon be able to categorize their chat room into various folders such as family or work according to their own needs. Within those folders, favorite rooms will be automatically sorted for easier access, providing a more comfortable and organized user experience. Also, we applied the AI summary service to the unread folder and are currently monitoring user reaction. Once its utility is verified, we plan to gradually expand it to additional areas. This service allows AI to summarize the vast number of messages exchanged across multiple chat rooms so that users can easily grasp the flow and key points of conversation across different chats without having to open each one individually, creating a far more efficient messaging environment. Through the remainder of this year and into 2026, Kakao will continue to humbly listen to user feedback, striving to find the right balance between preserving the stability of the existing service experience and driving platform innovation that fuels sustainable business growth. Next, I'd like to talk about AI, another key pillar driving Kakao's growth. Last quarter, Kakao announced its vision of AI for everyone with the goal of enabling all users in Korea to experience AI seamlessly within Kakao Talk. As a result of these efforts, we are proud to introduce 2 significant milestones in October, the one on-device AI service, Kanana in Talk and ChatGPT for Kakao jointly developed with OpenAI. Over the past year, Kakao has transformed its organizational work structure into an AI studio designed to encourage diverse experimentation. Small, agile teams now build MVPs, rapidly validate user feedback and market potential and continuously experiment with new AI services. Last week, we launched ChatGPT for Kakao, a powerful integration between Korea's most dominant messenger platform and the world's most widely used AI service. Located directly within Kakao Talk's chat, where millions of users engage multiple times a day, ChatGPT for Kakao offers unmatched accessibility, allowing anyone to use it quickly and easily. This service is powered by the GPT-5 model. And as ChatGPT models are updated in the future, those upgrades will be applied simultaneously, ensuring that users can always experience the latest version of ChatGPT within Kakao Talk. ChatGPT for Kakao is deeply integrated into the chat experience. Whenever a user has a question during a conversation, they can instantly ask ChatGPT and share its response directly within the chat room. In addition, through Kakao's proprietary agent Kakao tools, users can connect seamlessly to a wide range of Kakao services and perform desired actions immediately without complex menu navigations or switching between apps, offering a truly integrated agent experience. Although still in its early stage, ChatGPT for Kakao has already shown strong momentum with cumulative user numbers rising rapidly. The average number of messages set per active user and overall time spent within the service are also clearly trending upwards. As Kakao tool becomes connected to more services, we expect AI experience in users' daily lives to expand further, leading to a greater use of user engagement and longer time spent within Kakao Talk. Kakao's ultimate goal for its AI services is to realize agent to AI on an autonomous and proactive intelligence, they can set its own goals, plan ahead and act flexibly based on context and circumstances. While a conventional AI is a unit-type artificial intelligence designed to precisely carry out a single goal or task, Agentic AI can precisely understand users' intent within context, combine multiple agents to determine the best path towards achieving higher level objective and make its own decision to act accordingly. This year, Kakao took its first important step towards realizing this vision of Agentic AI. To begin with, Kakao has established 2 key services touch points, Kanana in Talk and ChatGPT for Kakao that enable accurate understanding of user intent within conversational context. Kakao Talk already holds a uniquely rich conversational data set that no other platform can replicate. Kanana in Talk powered by Kakao's on-device AI model can proactively understand users' needs in the safest possible way and suggest relevant informations or actions even before being explicitly asked. Meanwhile, through ChatGPT for Kakao, users can directly request informations or actions from the AI agent whenever they need to. Next year, Kakao will continue expanding those touch points between users and agents, introducing additional services such as Kanana Search, which will further enhance our ability to understand user intent and context. As explained earlier, once user intent is identified across various service touch points, numerous specialized agents, each with its own area of expertise, communicate and collaborate to perform the necessary actions to fulfill users' needs. For this reason, the active participation of agents specialized in different verticals within the ecosystem represents another key pillar in building Agentic AI. The Kakao tools introduced alongside last week's launch of ChatGPT for Kakao represents an early form of Kakao's AI agent. Currently, agents from Kakao Map, Kakao Gift and Melon are already integrated, and we plan to expand connections to key B2C verticals within the group, such as finance and mobility in the near future. Furthermore, through PlayMCP, an agent builder, Kakao is establishing an open platform for AI agent and technological foundation that allows anyone regardless of size or capability to participate in the Agentic AI ecosystem under Kakao's trusted authentication and security framework. Building on this foundation, starting next year, we plan to rapidly expand the AI ecosystem by connecting a diverse range of external tools and agents beyond the Kakao Group. We take great pride in being ahead of anyone else in realizing Agentic AI. As mentioned last quarter, we are moving beyond a time when users had to search for apps and navigate complex menus. We expect a rapid shift to models where services are delivered and executed simply through conversations with Agentic AI agents. Starting this quarter, Kakao will connect more users with a broader range of services, building Agentic AI that enables users to accomplish tasks and complete actions through conversations alone. Once users experience this level of convenience, it will become an irreversible way of interacting with services. Though we are still in the early stages, we will advance step by step and firmly establish Kakao as Korea's leading growth company in the AI era. Next Jayden, our CFO, will present the third quarter 2025 financial highlights.

[Interpreted] In the third quarter, Kakao recorded its highest ever quarterly revenue for 2 consecutive quarters, driven by continued solid growth in the Platform segment and better-than-expected performance in the Content segment. Furthermore, we are delivering on our commitment to achieve growth worthy of a true growth stock with consolidated revenue growth to around 9% for the first time in 6 quarters. In line with this momentum, operating profit surpassed KRW 200 billion for the first time ever, driven by group-wide efforts to enhance operational efficiency and accelerated top line growth, bringing our operating margin to 10%, the highest level in 4 years. Now moving on to our revenue for this quarter. Consolidated revenue for the third quarter was KRW 2,086 billion, up 9% Y-o-Y and 3% Q-o-Q. Platform revenue for the third quarter was KRW 1,059.8 billion, growing 12% Y-o-Y and remaining at a similar level Q-o-Q. First, Kakao's core business, Talk Biz, recorded KRW 534 billion, up 7% Y-o-Y, but down 1% Q-o-Q. Under Talk Biz advertising, business messaging continued its strong momentum, while display ads, which had been sluggish, rebounded, resulting in revenue of KRW 325.4 billion, up 11% Y-o-Y and 1% Q-o-Q. Business Messaging revenue grew 22% Y-o-Y, achieving another record high quarterly revenue following last quarter, as we continue to expand the range of message formats available for advertisers, particularly in the financial sector. And as Kakao Talk was widely utilized as a major marketing channel for local incentive programs led by the government, which drove a notable increase in message volume. We believe business messaging has now entered a virtuous growth cycle as not only the number of advertisers is increasing meaningfully, but existing advertisers having experienced the efficiency of message ads are also significantly expanding their message volumes. Accordingly, we expect the strong growth trend of business messaging to continue into next year rather than being a one-off in the third quarter. Meanwhile, display ad revenue posted a meaningful turnaround, returning to growth for the first time in 5 quarters despite the third quarter being a seasonally weak period. This was driven by enhancements to the competitiveness of existing ad inventory and diversification of ad products within Kakao Talk. Next, total commerce GMV reached KRW 2.5 trillion, up 4% Y-o-Y and 1% Q-o-Q. Revenue came in at KRW 208.7 billion, remaining similar Y-o-Y, but decreasing 6% Q-o-Q. Talk Gift GMV increased 1% Y-o-Y despite the Chuseok holidays, a seasonal peak happening in October this year, shifting the seasonal effect from the third quarter to the fourth. Additionally, as some orders placed at the end of September were delivered and recognized in October, revenue recognition was also affected. In the fourth quarter, we expect both GMV and revenue growth to accelerate again, reflecting deferred transactions from the third quarter and the additional boost from year-end seasonality. Meanwhile, self-purchases, the new growth driver of Talk Gift, maintained solid growth. In the third quarter, we strengthened promotions by introducing exclusive product lineups and new items from popular brands for the first time. As a result, the number of self-purchase users increased 19% Y-o-Y and self-purchased GMV rose 40% Y-o-Y. As the share of self-purchased GMV continues to rise meaningfully within Talk Gift, we will continue to drive growth in commerce centered on the 2 growth pillars of stable gifting demand and expanding self-purchases. Moving on, Portal revenue was KRW 72.7 billion, down 5% Y-o-Y and 7% Q-o-Q. The Portal business plans to complete the transfer of operations to the newly established subsidiary, AXZ, by year-end without delay, after which we will share more detailed strategic directions. Next, revenue for Platform-Other was KRW 452.7 billion, up 24% Y-o-Y and 4% Q-o-Q, mainly driven by solid performances from Kakao Mobility and Kakao Pay. In the third quarter, Kakao Mobility continued its model of growth of providing its platform and operational know-how to regional taxi operators, enabling them to operate their own franchise businesses. Also, Kakao Pay achieved its highest ever quarterly operating profit, driven by accelerated revenue growth from financial subsidiaries, including securities and insurance as well as strong performance from data-driven platform services. Now moving on to the Content segment. The consolidated revenue was KRW 1,026.7 billion, up 5% Y-o-Y and 6% Q-o-Q. The overall story business revenue of Kakao Entertainment and Piccoma recorded KRW 211.4 billion, down 3%, both Y-o-Y and Q-o-Q. For Kakao Entertainment, to remain focused on maintaining its profitability-oriented management approach. Second, amid intensified competition in Japan's comic market since last year, Piccoma has been leveraging its unique platform competitiveness to build a foundation for sustainable growth. This quarter, Piccoma strategically refrained from excessive marketing and instead focused on selective campaigns aimed during the summer vacation period, enhancing user engagement and spending within the platform. As a result, Piccoma achieved its highest ever quarterly revenue in yen, maintained its position as the #1 grossing app in Japan's app market year-to-date and nearly doubled its operating profit Y-o-Y. Secondly, the music revenue within the Content division was KRW 565.2 billion, up 20% Y-o-Y and 9% Q-o-Q. Solid performances by major artists, coupled with growth from newer artists helped smooth quarterly activity fluctuations and drive consistent results. In addition, our Music division strengthened project-based merchandise and off-line pop-ups to expand fan experiences, thereby establishing a virtuous cycle in our IP business. Lastly, media revenue was KRW 95.8 billion, up 75% Y-o-Y and 2% Q-o-Q. This growth was driven by the recognition of deferred works and higher production progress, resulting in a significant Y-o-Y increase from a low base while remaining at a similar level Q-o-Q. Wrapping up on our revenue, operating expenses for the third quarter were KRW 1,878.5 billion, up 5% Y-o-Y and 2% Q-o-Q. Labor cost was KRW 477.4 billion, up 4% Y-o-Y, but down 2% Q-o-Q. The Y-o-Y increase was due to higher bonuses reflecting subsidiaries first half performance and higher employee-related costs, including social insurance, while the Q-o-Q decline reflects our continued conservative hiring stance across the group. Marketing expense was KRW 101.8 billion, down 3% Y-o-Y, but up 16% Q-o-Q as marketing activities expanded across subsidiaries. Marketing accounted for 5% of consolidated revenue, both in the quarter and cumulatively year-to-date, in line with our initial annual guidance within the 6% range. Revenue-linked costs were KRW 747.7 billion, similar Y-o-Y, but up 4% Q-o-Q, reflecting higher settlement expenses linked to increased content revenue. The ratio of revenue-linked costs to consolidated revenue stood at 36%. Outsourcing and infrastructure costs totaled KRW 260.7 billion, up 34% Y-o-Y and 12% Q-o-Q due to subsidiary account reclassifications from last year and higher infrastructure spending related to the launch of AI services. Depreciation and amortization expenses were KRW 208.3 billion, down 1% Y-o-Y and 6% Q-o-Q. The Y-o-Y decline reflects partial reversal of bad debt expenses, while the Q-o-Q decrease is due to the high base from content license amortization at Kakao Entertainment in the previous quarter. Overall, consolidated operating profit for the third quarter was KRW 208 billion with an operating margin of 10%, improving by 3 percentage points Y-o-Y. Going forward, we will continue to pursue structural improvement in profitability based on an optimized cost structure. Nonoperating income for the third quarter was KRW 46.6 billion, up KRW 41.4 billion Y-o-Y and KRW 37.6 billion Q-o-Q. The Y-o-Y improvement was mainly due to the base effect from one-off bad debt expenses at Kakao Pay last year and reduced interest expenses following the repayment of exchangeable bonds. Equity method gains were KRW 19.6 billion, similar to both the previous quarter and the same period last year. Corporate income tax for the third quarter was KRW 61.8 billion and consolidated net income was KRW 192.9 billion. Lastly, CapEx totaled KRW 178.4 billion, including KRW 144.1 billion for tangible assets and KRW 34.3 billion for intangible assets. CapEx increased KRW 89.8 billion Y-o-Y and KRW 78.9 billion Q-o-Q, mainly due to new asset purchases by subsidiaries and expanded server investments required for Kakao Talk service operations. This ends the presentation on quarter 3 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 Hee-Seok Lim from Mirae Asset Securities.

[Interpreted] I do have 2 questions. Number one, since the September Kakao Talk renewal, I would like to ask what the user engagement was like. And also moving on to the second question. As in the third quarter, is double-digit growth in the advertising business achievable in the fourth quarter, in line with the initial guidance?

[Interpreted] Yes. I would like to take your first question. Let me briefly update you on the key changes in user engagement following the Kakao Talk revamp. Even during the exceptional period of the COVID-19 pandemic, the average daily time spent on Kakao Talk user increased by only about 10 seconds. Based on that experience, we internally assessed that it would be quite challenging for a messenger type platform to increase user time spent. However, after the update, we confirmed a rebound in user time spent, a key KPI. Compared with the pre-revamped third quarter average, the average daily time spent has increased from the 24-minute range to a level nearing 26 minutes. We consider it meaningful that time spent, which had been steadily stabilizing downward has begun to turn upward for the first time. While traffic in the chatting tab remains robust, time spent in the Friends tab and the Now tab, which largely consists of content exploration and discovery traffic has increased by more than 10% compared with the third quarter average after the revamp. We view it as particularly positive that platform traffic, which had previously been heavily concentrated within chat rooms is now expanding into non-chat tabs, thereby improving the overall quality of traffic across the Kakao Talk platform. As noted in my opening remarks, we will continue to enhance Kakao Talk's core chat functionality by providing greater convenience to users and by incorporating diverse feedback to continuously improve the platform. Through these efforts, we aim to reinforce various usage contexts that encourage users across the country to spend more time on Kakao Talk. Last but not least, we believe that the post revamp increase in time spent is now just starting. We will do our utmost to achieve the 20% increase in Kakao Talk time spent that we communicated at the beginning of the year.

[Interpreted] I will address the question regarding the achievability of our Q4 advertising guidance. To state the conclusion upfront, we expect to comfortably deliver the double-digit year-over-year growth in Talk Biz advertising revenue for the first -- for the fourth quarter that we committed to at the beginning of the year. As evidenced in our Q3 results, advertising growth has reaccelerated as a result of the solid fundamentals we have steadily built within the platform. First, with respect to business messages, as mentioned in my opening remarks, we believe the current high growth trajectory is sustainable. In addition, despite the prolonged slowdown in the domestic advertising market during the Q3, it is meaningful that display advertising exited its 5-quarter trend of negative growth and returned to an upward trajectory. This stems from our continued efforts to enhance the competitiveness of advertising products within Talk. In addition, during the Q3, we observed some advertisers reallocating budget previously assigned to competing platforms to Kakao. Since the Kakao Talk revamp at the end of September was rolled out to users progressively over the course of a week, the impact of the new product lineup optimized for the newly created inventory for Kakao Talk was barely reflected in Q3. Nonetheless, Kakao's advertising business achieved a record high quarterly revenue in the third quarter and September recorded the highest monthly revenue on record. Based on this momentum, we expect that starting in the fourth quarter, our growth rates will demonstrate that Kakao's advertising business has entered a structural growth phase.