Kakao Corp. (A035720) Earnings Call Transcript & Summary

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2019 Fourth Quarter Earnings Results by Kakao. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]. Now we shall commence the presentation on the Fiscal Year 2019 Fourth Quarter Earnings Results by Kakao.

Good morning. I am Eleanor from Kakao's IR team. We would like to begin Kakao's Q4 and 2019 Full Year Earnings Release Call. With me today are CEO, Mason Yeo; and Chief Investment Officer, Jae Bae. 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. Let me invite Mason for key business highlights.

Good morning. This is Mason Yeo. Thank you for joining us. In 2019, Kakao has sought to bring many improvements and changes with a focus on meaningful relationship expansion moving forward from a simple connection that Kakao Talk Messenger provides. In this context, Kakao Bizboard provides a totally new way for business partners to meet their customers and offer new flow to consumption, while Kakao Talk Channel allows for a forging of a positive relationship thereof. And Kakao Sync is a service that provides information and convenience to build on relationship with users outside the boundary of Kakao Talk. So last year, we brought changes to not only our core businesses but also established a stable financial basis by building workable revenue models and new businesses. As a result of that, we were able to achieve record sales and profit. I would, hence, like to take this opportunity to sincerely thank the investors for your encouragement and also thank the Kakao crew for committing to such endeavors. Next, let me walk through key business highlights of the fourth quarter, beginning with the platform business. TalkBoard, a new growth engine for Talk Biz, saw a rapid traction of new advertisers since its open beta phase last October, securing more than 3,000 advertisers. These big advertisers, who experienced the effectiveness of TalkBoard since the closed beta phase, continues to up their budgets, while new advertisers, mid to small, have also made increasingly large ad spending, enabling a robust revenue for TalkBoard even in Q1, which is typically a slow season. Thanks to such growth trend of TalkBoard, overall Kakao ads are receiving significantly greater amount of interest. This year, as we leverage TalkBoard as an entry point to Kakao Channel, this message of -- to Pay, we plan to maximize the complete business experience so as to drive overall growth of the Talk Biz business. Broadening of such business action is quite prominent in the growth of the commerce business as well. To start off, Q4 GMV of Kakao Talk Gift was up 41% year-on-year with a number of users making purchase growing 29% year-on-year as we see growth from all of the age groups. We now have more than 25 million users who've registered their birthday to Kakao Talk, and Kakao Talk Gift is fully building on its potential as a commerce platform for the entire population. Our recent Talk Deal, which is a way for people to buy discounted merchandise through group purchases, has more than doubled the amount of products showcased every quarter, underpinning the growth of the Talk Store. This year, we plan to further bolster the connection between ads in Talk Biz and transactional commerce. We want to provide a business platform for convenience to everyone where sellers can run ads, sell and care for customers all inside the Talk platform and where users can discover products, buy and manage their orders with just a simple touch of their screen Kakao is also speeding up innovation in mobile finance in the field of TechFin. Kakao Pay's Q4 GMV was KRW 13.5 trillion, up 75% year-on-year, as we see online payments driving the overall GMV growth with an 82% year-over-year growth. On February 5, Kakao Pay received FSC approval on the eligibility as majority shareholder of Baro Investment and Securities. We closed the acquisition a day after and changed the corporate name to Kakao Pay Securities. We are currently receiving early application for Kakao Pay money upgrade, based on which we plan to implement Money 2.0 strategy, which is a real name-based account program from this year. Kakao Bank has also positioned itself as a mobile bank useful in any and all situations for our 11 million users, enabled by the use of centric and innovative technologies. Over last year, we offered more than KRW 1 trillion of mid-priced loans for consumers who didn't have financial track record and who are, therefore, sidelined from the institutionalized financial market. In this light, we are pioneering a new market frontier. For this year, we will adopt Kakao Bank's first strategy and make sure customers choose Kakao Bank's products and services over others with a view to setting it apart as a financial app most favored by domestic users. Next is on the content business. In 2020, by expanding our global business, which was a key focus area for us since last year, we will maximize revenue from all of the content segments, including paid content, IP business, gains and so forth. Currently, out of our global businesses, Kakao Japan's Piccoma is showing the most visible results. Piccoma is the fastest-growing cartoon and manga platform in Japan, whose Q4 GMV was up 134% year-on-year, and it reported a quarterly turnaround. This year as well, we expect Piccoma to further solidify its standing as a platform that sells to the best in the Japanese market, known to have the greatest potential for growth. Kakao Page also broke the record with its Q4 total domestic GMV surpassing over KRW 70 billion. At the beginning of the year, we completed rebranding of Indonesia's WebComics into Kakao Page Global. And supported by monetization know-how, Page has built in Korea over the years as well as our original IPs, we are witnessing a fast-paced growth in the global market as well. This year, preparations are underway for business expansion in Taiwan, Thailand and China, and we expect 2020 will be a key milestone in global expansion for K content. Just to note, Kakao's 2019 paid content global GMV, which combines Kakao Page, Daum Webtoon and Piccoma platform, adds up to around KRW 430 billion with a 47% year-on-year growth, which is quite encouraging. This year, Kakao M will be in full gear to showcase media content by leveraging our competitive story IPs, production capabilities and celebrity IPs and make contents that can be loved by many, both domestically and globally. Through a strong binding of our content businesses, Kakao will leap forward as a global content provider, enabling users to read stories they like in the form of web novels, enjoy them yet again through web tunes and view video formats and engage interactively. Lastly, on February 11, we've made a decision to acquire XLGAMES led by CEO Song Jae-kyung. And by securing development capabilities for hard-core [ jong ], we have equipped ourselves with a competitive edge to be a formidable player in terms of channel, publishing and game development. Based on outstanding game IPs and proven development capacity of XLGAMES, we will gain competitiveness in PC and mobile games and make solid our position as a multi-platform global game company.

That ends the key business highlights, we will now have Jae go through Q4 and 2019 full year results.

Good morning. This is Jae. Let me present on the financial results. Q4 consolidated operating revenue was KRW 867.3 billion, up 11% Q-on-Q and 29% year-on-year. 2019 full year consolidated operating revenue was KRW 3,089.8 trillion, up 28% year-on-year. First, platform business revenue was up 27% Q-on-Q and 47% year-on-year to KRW 444 billion. In terms of the breakdown, on successful landing of TalkBoard and record-high commerce GMV, Talk Biz revenue was up 36% Q-on-Q and 73% year-on-year to KRW 221.6 billion. Despite some decline in ad inventory on the back of banning of the comments section of the entertainment news, Portal Biz revenue was up 6% Q-on-Q, driven by high seasonality impact. And by making ad placements more efficient, thanks to the support of an enhanced Kakao Moment, there was 3% year-over-year growth with revenue reporting KRW 134.2 billion. Lastly, driven by the year-end seasonality for mobility's driver service and expansion of the taxi business leveraging Kakao T Blue, which kicked in full gear from Q4, new business revenue was up 42% Q-on-Q. And year-over-year growth was 95% with revenue reported KRW 88.2 billion, thanks to mobility business expansion, Pay GMV growth and financial product introduction. Content revenue was down 2% Q-on-Q but up 14% year-over-year to KRW 423.3 billion. Game content revenue was up 7% Q-on-Q and 6% year-on-year to KRW 105.9 billion, supported by the launch of the Legendary Moonlight Sculptor last October, which drove overall games revenue. And based on the 5,020 million paying subscribers, music content revenue continued its top line growth, posting KRW 153.3 billion, which is up 1% Q-on-Q and 9% year-over-year. For paid content revenue, Kakao Japan's Piccoma revenue in Q4, as it is now subject to K-IFRS and not J GAAP, annual adjustment of KRW 54.4 billion has been reflected in Q4 figures at once. This led to 48% Q-on-Q decline in paid content revenue, and it was down 25% year-over-year, reporting KRW 47.8 billion. For your information, both Kakao Page and Piccoma all recorded highest quarterly GMV with paid content revenue based on GMV up 13% Q-on-Q and 52% year-on-year to KRW 124.7 billion. Lastly, IT business and other revenue was up 29% Q-on-Q on the consolidation of new talent management company of Kakao M in the financial statements and growth in music distribution revenue. While on Kakao M's revenue growth and Kakao IX's global sales and online store sales growth underpinned by the utilization of Friends IP, the revenue was up 75% year-over-year, marking KRW 116.3 billion. Next is on the consolidated operating expense and profit. Q4 consolidated operating expense was up 9% Q-on-Q and 18% year-over-year to KRW 787.9 billion. 2019 annual operating expense was up 23% year-on-year, reporting KRW 2,883.2 trillion. For the labor costs, due to the impact of yearly bonus reflected in Q4, there was a 16% Q-on-Q increase, reporting KRW 205.2 billion, which is also up 30% year-on-year on business expansion that led to new hires and on the consolidated impact from subsidiaries. Because of the change in the accounting basis for Kakao Japan, content commissions showed a steep decline, leading to only around 2% Q-on-Q increase in revenue-linked expenses despite the top line growth in all of the businesses. On a year-over-year basis, due to the growth in music revenue, an increase in revenue share with artists, following the growth in the management business, expense was up 18% year-over-year, recording KRW 359.8 billion. Outsourcing and infrastructure expense was up 35% Q-on-Q on increase in outsourcing commissions paid out at the year-end. And driven by overall increase in paid commissions following the expansion of new businesses, expense was up 22% year-over-year to KRW 106.8 billion. Marketing expense was up 13% Q-on-Q as there was Melon Music Award event and many promotional activities for paid content and the mobility business, in line with the highest seasonality of the year. On the back of corporate-wide efforts towards cost efficiency, marketing expense was down 26% year-over-year, reporting KRW 41.5 billion. All in all, Q4 operating profit was up 34% Q-on-Q and 1,750% year-over-year, reporting KRW 79.4 billion with Q4 operating profit margin of 9.2%. 2019 full year operating profit was up 183% year-on-year to KRW 206.6 billion with OP margin at 6.7%. Next is on the nonoperating revenue and expense items. We've actively taken the position to reflect the recent trends of applying a more conservative accounting treatment in valuation of intangible assets and recognized the impairment loss on some of the intangibles, including Melon's goodwill. As a result, there was a sharp increase in one-off expense on the accounting basis, which led to KRW 481.8 billion of other expenses in Q4. Financial income was down 49% Q-on-Q to KRW 15.5 billion on decline in valuation of foreign currency deposit, which stems from FX rate changes. Financial expense was up 176% Q-on-Q to KRW 25.9 billion. Q4 corporate income tax was KRW 29.6 billion after adjusting for expenses not recognized under the tax code, i.e., the goodwill impairment, and there was KRW 439.8 billion of consolidated net loss in Q4. Just to note, 2019 full year consolidated net loss stands at KRW 339.8 billion. And after removing the one-off impairment loss, consolidated basis, net profit, stands at KRW 85.2 billion. Lastly, Q4 CapEx breaks down into several intangible assets at KRW 38.9 billion; intangible assets, KRW 43.1 billion; with a total CapEx investment at KRW 82 billion. This ends our presentation on Q4 and 2019 full year performances. We will now take your questions. [Operator Instructions].

[Operator Instructions] The first question will be provided by Kyung Il Lee from Cape Investment & Securities.

I would like to pose 2 questions. My first has to do with your top 4 business. For this year, what is your projection in terms of the growth and the -- provide some more color on what your business goal is for Kakao Pay for this year 2020. You've completed acquisition of Baro Securities and you also have plans to launch a digital insurance company. I would like to also -- so I would like to understand what your future plan is for Kakao Pay business and also would like to understand what you consider as the market universe for Kakao Pay asset management services and products. How do you define that market universe that you want to target?

This is Mason. I will respond to your first question about the daily revenue for TalkBoard and also our upward potential in terms of the number of advertisers. If you look at our December revenue for TalkBoard, I think we have overachieved our previous guidance of achieving more than daily revenue of about KRW 500 million. And basically, this has contributed quite significantly to the growth of the advertisement revenue within the Talk Biz by more than twofold on a year-over-year basis. Because the advertisement space within the TalkBoard really attracts a high level of interest of a lot of the consumers, it has -- it had received a very strong interest from the large-scale or the big-size advertisers. And at the same time, we are also seeing a very strong increase in the number of small to midsized advertisers. As I've mentioned previously, we have more than 3,000 advertisers who have experienced this advertisement product. We will continuously make improvements on the platform, and we will open up the sales to all of the channels. And we think that we will be able to go and achieve around 10,000 of advertisers. And from a long-horizon perspective, we were able to also confirm that we have the potential to increase the number of advertisers even up to the 100,000 level.

This is Jae Bae. I will respond to your question about Kakao Pay. In 2020, we believe that this is going to be an important watershed and important milestone as we implement our Money 2.0 strategy, which is underpinned by a real name account-based financial services. During the previous Money 1.0 era, basically Kakao Pay engaged in a limited scope of business in terms of payment, P2P transfer and also in brokering or providing intermediary services when it comes to financial products as it was based on a prepaid top-up business model. And hence, we were exposed to the fee burden coming from fair banking. And also, there were difficulties and constraints in Kakao Pay actually implementing its business as a true TechFin business provider. But with the coming of the Money 2.0 strategy, we believe that this will be an important turning point for Kakao Pay to actually be able to set itself apart as a leading provider in the TechFin industry by achieving the true wallet-less society, and that brings the convergence between -- in payment, securities and insurance. With regards to the Baro Investment and Securities acquisition, as you know, as of February 6, we've acquired 60% of equity stake in Baro Securities, which is equivalent to KRW 30 billion, and we have completed the change of the corporate name to Kakao Pay Securities. So with this process complete, now users can -- with just a simple touch of their screen, can convert their Kakao Pay account to a securities brokerage account. So the real name-based account-setting process has begun. So based on this, we are planning to -- first to launch a fund product services, allowing people to very easily make investments based off of their newly set-up deposit account. Kakao Pay Securities is a company that has a brokerage license and that, hence, it will be able to provide various different financial connected services to people who haven't really benefited from the financial institution services in the past. So we're making preparations to that end. And also, by expanding such real account-based financial services, we are hoping for a reduction in the P2P transfer-related -- remittance-related fees. Of course, even if the Kakao Pay account is converted to a real name-based account, still, there is going to be some banking-related fees that will be incurred. However, there will no longer be a limit on the balance on the prepayment account, and there will be more benefits that users could enjoy when it comes to the balance that they hold in these accounts, hence, we believe that the frequency of topping up their account is going to decline, whereas the outstanding balance in the account of these users, we expect, is going to go up. And also, in terms of the digital insurance consortium, Kakao Pay wishes to be a -- merely more than just a party that provides a platform, but we want to further up our capabilities as a developer of insurance products. And hence, we're in the process of setting up a digital insurance. And this digital insurance company will be based on the insured tech concept and innovative ideas. So there, we could provide services to people who have been sidelined, and we wish to make use of our technology and data analysis in the process of product development, marketing, operations and claims provision. So we will do our best to bring about innovation in this digital insurance. With regards to any preliminary approval from the authorities, we will share with you any updates going forward.

The following question will be presented by Eric Cha from Goldman Sachs.

I would like to ask a little more detailed question when it comes to your TalkBoard product. You've mentioned that in Q4 that you've overachieved your guidance. Can you provide some color as to the trend behind such growth, the drivers that have actually affected this growth? For instance, like the ad loading rate, CTR or eCPM. What do you expect the trend will be like going forward? And also, can you share with us what your year-end target for these different measures are, that would be helpful. Second question is, in your Talk Biz, there is other elements other than TalkBoard like the Info Talk or the Notification Talk. Can you share with us what the growth trend of those other elements that comprise the Talk business, what the growth rate was in Q4 and what you project in 2020?

So this is Mason. I understand your question relates to the growth trend for the TalkBoard as well as the business. And you specifically asked about the ad loading rate, CTR and eCPM. I mean, overall, basically, we've seen a solid growth as per our expectations. And we expect the trend for 2020 will also be more or less the same, meaning the solid trend will continue. In terms of the overall -- more of a future directional response. If you look at the TalkBoard ad by characteristics, the price factor, the price element is expressed through the eCPM measure. And in order for us to have a very positive dynamic behind the price element, the number of advertisers, meaning the quantity, is quite critical. We believe that in this aspect, there is a -- it's a formula between P and Q. It's a function between P and Q. And we believe that we must drive up the Q, the quantity, element, and then naturally the P aspect will just naturally follow. So then how do we drive up quantity? It's all about increasing the long -- number of long tail advertisers. And how do we increase that? It's going to be driven by our efforts to improve our platform and also to make more sophisticated targeting available. So once again, through our effort, which is going to be focused in Q, the key element is going to just naturally follow this as an outcome. And then moving on to your question about the Notification Talk, the Talk channel. For this Notification Talk, we -- currently about 39,000 partner companies are making use of this function. And we believe -- and basically, on a Q-on-Q basis, this is about 2,600 increase. And we see a lot of credit card companies are making a very active use of the Notification Talk, and hence, the Biz revenue -- Biz message revenue that is, as a whole, had posted a growth of 46%. Talk Channel also is displaying a very solid growth and results. In terms of our Talk Biz, our objective is to achieve KRW 1 trillion in top line revenue in 2020, and this will be equivalent to a 50% year-on-year growth.

The next question will be presented by Stanley Yang from JPMorgan.