Kakao Corp. (A035720) Earnings Call Transcript & Summary

[Interpreted] 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 2020 Third 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 2020 third quarter earnings results by Kakao.

[Interpreted] Good morning. I am Eleanor from Kakao's IR team. Let's begin Kakao's Q3 2020 Earnings Release Presentation. With me today are our 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. I will now invite Mason for key business highlights.

[Interpreted] Good morning. This is Mason, and thank you for joining our earnings release today. In the crisis brought on by COVID-19, the entire society is trying hard to lead and safeguard our daily lives as we know it. By using our digital assets and services, Kakao is also helping to solve problems users face from this sudden change upon all of us. Since September, we've been publishing Kakao's COVID-19 white paper by analyzing Kakao's data in the hope that we can understand the new normal brought on by the COVID and help find ways to better respond to future crisis and changes. For the first time in Kakao's history, we achieved quarterly revenue of KRW 1 trillion and operating profit of above KRW 100 billion in the third quarter. I believe this is the result of our distinct way of doing business amid unprecedented crisis of the pandemic that enabled us to quickly understand the digital flow and expand and innovate our products and services. I would like to thank the investors, analysts and Kakao's crew for being a partner in this journey into the unchartered frontiers. Let me start with the platform business update. Kakao Talk's Q3 domestic MAU was 46 million. Daily domestic net unique visitors, which is a measure for user activity, was up 12% year-on-year with message traffic of 31%. I believe this shows that the importance of Kakao platform as a reliable channel for sharing up to the minute information for people in an untapped world. We also saw changes in the user metrics for sharp tab, which is the third tab in Kakao Talk, with record high new user traffic, following the launch of Kakao TV and QR code check in, in the third quarter. Since the launch of Kakao TV, we are seeing encouraging signs of content consumption around younger users in their teens and 20s. Going forward, we expect content consumptions on the top platform will spread much faster through Kakao TV. Although still at an early stage, vertical video contents, Face ID, the retail investor 101, key words that all age groups can relate to and log revolution, a successful transformation from webtoon as well as other variety of contents were featured through Kakao TV, driving more than 10 million unique views in just a month since the launch. We will continue to improve features for quality service offerings and through impactful content, will open up a new horizon for Kakao M. Next is on Talk Biz performance, first on the Talk Biz ad business. Our initial advertiser target was 10,000 by the end of the year for this board. But as of September, cumulative number of advertisers of more than 12,000, as we are growing the advertiser pool much faster than our original expectations. And robust growth in advertisers and higher budget spend per campaign, we achieved highest monthly revenue in Q3 despite the slow seasonality. Bizboard is meaningful, not only as a new revenue source, but it is an important entry point for diverse business solutions that Kakao offers. For example, one of our business solution, which is Kakao Talk Channel, we are seeing increases in users who make friends with channels as Bizboard helps to expand the interface with user base. Especially there were increase in marketing by advertisers, targeting customers who are moving from offline to online to make purchases, as top channel is used more actively in communicating with their customers, there was 17% on-air increase in number of channel profiles, subject to billing, with 36% increase in number of channel friends, which all drove steep top line rise in message ads. Next is an update on Talk Biz commerce business. Q3 total GMV for Kakao Commerce, including gift, Talk Store and makers, was up 68% year-on-year, posting higher growth every quarter. For Kakao Talk Gift, GMV was up 54% year-on-year in Q3. GMV for delivery products increased more than twofold year-on-year. And we believe this is a result of better satisfying varied user preferences with the onboarding of luxury brands to the Gift platform, as we won the trust of these highly sophisticated brands. During the Thanksgiving holidays, due to the untapped nature of it, we saw significant rise in the number of customers, above 50 years of age, supporting the spread of Kakao Talk Gift to all age groups. Talk Store GMV in Q3 posted a 4x growth on year, as number of buyers' repeat purchases improved driving a steep price in GMV. As a result, we expect Talk Store GMV to account for a meaningful portion out of the total category this year. Makers is also working well as a showcase for new quality products by being agile and responding to social and environmental issues and enhancing product offerings, its GMV posted a twofold growth. We will continue to build on distinct commerce experiences through the Talk platform, which is unique to Kakao and strengthen our position in the online commerce market. Kakao Mobility is bringing improvements to the entire market based on the immense volume of data built since 2015 and sophisticated technology. Kakao T Taxi worked new standards for good quality taxi. It captures data on experience and based on technology, offers differentiated experiences before, during and after onboarding a cab. Kakao Mobility's AI dispatch system shifted the paradigm from simply grabbing a cab to calling a cab, and we will continue to bring more choices to the users going forward. Kakao T Blue is at the forefront of such change in efforts, and we were able to increase the number of premium taxi demand on Kakao T app by threefold year-on-year and expanded the Kakao T Blue taxi fleet to 13,000 amid the growing demand. Underpinned by the smart technology and data generated by 27 million Kakao T app users, we would redefine mobility experience for not only taxi, but also drivers for higher parking and bikes. Next is the Fintech's business. Kakao Pay's Q3 GMV was up 38% year-on-year, reporting KRW 17.9 trillion. Payment and financial services continued a high-growth trend with GMV, excluding P2P transfer, posting a twofold growth on year. Against the COVID-19 backdrop with contactless payment modes being preferred, Kakao Pay saw increased use, not only online, but also from offline household merchants and overseas with payment GMV rising 72% versus last year. In financial services, as of October, brokerage accounts surpassed above 2.5 million accounts. Although it is still a small portion, we are seeing meaningful behavioral changes with number of transactions through these accounts taking 20% of the total money transaction. We involved in the journey to provide convenient financial services through Kakao Pay, and we are only just beginning. By introducing different services and technologies, we will strengthen Kakao Pay solution as a major daily financial platform in the untapped world. Kakao Bank continued to post profit following the first half of the year, with Q3 net income reporting KRW 40.6 billion. Interest income is robust and profitable, while the noninterest income business are expected to drive bottom line improvement as the platform business starts to ramp up, underpinned by 13,250,000 highly active customer base. As a result, Q3 net fees and commissions income reported KRW 4.1 billion of quarterly profit for the first time on the back of higher revenues following setting up of brokerage accounts, credit card acquisition, service provision and tech card usages. On October 27, Kakao Bank made the decision to issue KRW 750 billion of new common shares to current and new shareholders. As the capital increases for the purpose of raising capital for sustainable growth of the bank, Kakao Bank, the bank's IPO plan approved by the September BOD will also go as planned. Lastly, on paid content. Q3 Global platform GMV was up 29% year-on-year and 102% Q-on-Q to KRW 222.9 billion, as the trend continued this quarter. Kakao Japan's Piccoma is also writing a new chapter on growth in Japan with MAU and daily GMV hitting new records and became top grossing #1 content platform for comics and novel apps, not only in Japan, but also the global market as of September. Explosive growth trends, combined with marketing drove Q3 GMV up 44% on quarter and 247% on year to KRW 130 billion. Paying conversion rate for new users also continued an uptrend. And so despite aggressive marketing investments, Kakao Japan continued to post positive operating profits since Q4 of last year. Since Japan has the biggest comic market and longest history, success from Japan is opening up new opportunities in other geographies. We are seeing Kakao Page's IP being more actively distributed in many countries across platforms and that there is conversion to different genres, we see increases in the value of such IPs. Supported by tested and proven story IP for Kakao Page, we were focused not only on Korea and Japan, but also establish a foothold for global expansion. Just to note, for your information, in Q3, the overall GMV for Kakao Page, which includes platform GMV and IP distribution GMV, came in at KRW 148.7 billion, of 25% Q-on-Q and 78% versus last year.

[Interpreted] That ends the business highlights. We now invite Jae Bae to walk through Q3 earnings.

[Interpreted] Hello, this is Jae. Let's take a look at the financial results. Q3 consolidated operating revenue was up 15% Q-on-Q and 41% year-on-year to KRW 1,124 billion on the back of even growth from platform and content business. Firstly, platform revenue was up 13% on quarter and 58% on year to KRW 554.4 billion. In more detail, on the back of steep growth from the Bizboard and key commerce services, Talk Biz revenue was up 14% Q-on-Q and 75% on year, reporting KRW 284.4 billion. For Portal business, although portal service visitor number remained elevated due to COVID-19, advertisers from certain sectors experienced slower demand recovery in total revenue, although, up 3% Q-on-Q was down 4% year-on-year to report KRW 121.2 billion. On the back of higher revenue from Mobility's taxi platform and high-growth for payment and financial services from Kakao Pay, new business revenue was up 70% on quarter and 139% on year to report KRW 148.8 billion. Content revenue was up 19% Q-on-Q and 26% year-on-year to KRW 546 billion. Game content revenue was up 40% Q-on-Q and 52% year-on-year to KRW 150.4 billion, supported by Guardian Tales, a hit, new mobile game. For music content on reduced promotional price discounts from Melon and sustained growth in Kakao M revenues from digital music distribution, revenue was up 3% Q-on-Q and year-on-year, reporting KRW 155.7 billion. For your information, number of Melon's paid subscribers was at 5.1 million as of Q3 end. Paid content revenue was up 25% Q-on-Q and 61% year-on-year to KRW 148.4 billion, driven by accelerated global GMV growth of mostly in Japan. Lastly, with Kakao M solidifying its #1 position in domestic music distribution market, which led to good performances with more activities from number of orders, IP business and other revenue was up 11% Q-on-Q and 2% year-on-year, reporting KRW 91.5 billion. Next is our consolidated basis operating expense and operating profit. Q3 operating expense was up 15% on quarter and 35% on year to KRW 980.2 billion. Labor costs was up 11% Q-on-Q on new hires for Kakao Enterprise, Kakao Page and et cetera, and the increase in stock-based compensation, while it was up 35% year-on-year to KRW 239.3 billion due to the consolidation impact of subsidiaries, including Kakao Pay Securities and production Studios of Kakao M. For revenue-linked expenses, there were increases in fees and expense paid to market and content providers following the rise in paid content and mobile game revenue. Kakao Pay payment processing fee, which is linked to GMV growth also inched up as well. All in all, revenue-linked expense increased 13% on quarter and 31% on year to KRW 463.7 billion. Outsourcing and infrastructure expense started reflecting the impact from Kakao Pay's brokerage account promotions and firm banking expense declines with the faced adoption of open banking. The Mobility business expansion temporarily pushed up commissions, resulting in 7% Q-on-Q and 44% year-on-year increase to KRW 113.9 billion of expenses. On the back of strong momentum behind paid content business and promotional activities with new game titles, marketing expense was up 98% Q-on-Q and 107% on year, reporting KRW 76.3 billion. All in all, Q3 operating profit was up 23% on quarter and 103% on year, reporting KRW 120.2 billion, with operating margin at 10.9%. Next is on the nonoperating revenue and expenses. Other revenue account for gains from Kakao and its affiliates disposal of financial assets. Hence, Q3, other revenue was down 52% Q-on-Q, but up 16% year-on-year, reporting KRW 48 billion. Other expense includes Kakao Games listing fees on the cost of market and was up 21% Q-on-Q and 45% year-on-year to KRW 17.6 billion. Equity method gains reported KRW 18.5 billion on higher Kakao Bank profit, among other factors, while equity losses were KRW 14.7 billion. Overall equity earnings was up 334% Q-on-Q, but down 143% year-on-year to KRW 3.8 billion. Financial revenue was up 37% Q-on-Q on valuation gains from financial assets of invested equities, but due to the base effect of FX translation gain, revenue dipped 2.9% on year to KRW 29.2 billion. Financial expense was up 101.7% Q-on-Q due to the losses incurred from venture capital funds. But as equity price increases, there was a write-back from public shares that we own. And financial expense of 57.2% on year, reporting KRW 4 billion. Q3 corporate income tax was KRW 35.9 billion with effective tax rate of 20%. And Q3 Kakao-related net income reported KRW 143.7 billion. Q3 CapEx amounted to a total of KRW 60.4 billion, including KRW 50.4 billion for tangible assets and service and intangible investments, including IPRs of KRW 10 billion. Thank you. That ends the presentation on Q3 2020 results. We will now take your questions. [Operator Instructions]

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

[Interpreted] I would like to ask 2 questions. The first is one the Bizboard. First, from a short-term perspective, can you share with us what the trend was like for your advertisement fill rate and the unit cost or unit pricing, what the trend looked like and also share with us what do you think the outlook is going to be for Q4? And also, could you compare the unit pricing between the Bizboard and other platforms. Based on the assumption that the fill rate is not really going to shoot up, do you think that this is likely to play ad on your portal, is it possible for the fill rate to actually reach 100%?

[Interpreted] This is Mason. I will be responding to all of your 3 questions. The first, if you look at Bizboard, based on Q3 numbers, as mentioned during the presentation, our initial, beginning of the year target was to achieve 10,000 advertisers, but we were able to hit cumulative number of advertisers at 12,000. So that was a great performance. And things are going very well versus the plan. And also to prepare for the high season in Q4, we did our best to make sure that we can secure as much inventory as possible, and we have very steadily and gradually increase the amount of inventory used. We've seen the usage rate of the inventory, starting October really increased, and we are actually utilizing all the inventory that is possible. And now Bizboard has become a permanent surface at the very top of the chatting tab. And so -- and also moving on -- and in terms of the pricing, as mentioned, we've seen a very steep growth in the number of advertisers. And with the high seasonality coming up in Q4, we are seeing a steep rise in demand as well. So we expect that starting Q4, pricing for Bizboard will start to gradually increase. Just to elaborate a little more. If you look at our monthly revenue for Bizboard in Q3, we've been hitting new record every single month. And also, the daily average revenue has shown a very steep up trend recording the highest figure in the month of September. And also the seasonality upcoming in Q4, and we are seeing daily revenue showing a robust growth. And so underpinned by the number of advertisers we were able to onboard, we have seen a gradual increase in the budget spend per advertisers. So we think that come December, we will be able to achieve monthly KRW 1 billion of revenue -- excuse me, daily average revenue of KRW 1 billion in the month of December. Comparing that to last year December of last year, daily average revenue was around KRW 500 million level, but we were able to, as you know, acquire many more advertisers and also, we've made enhancements to the platform. So we have been able to really double that daily average revenue over that period of time. And we expect to continue on with such good performance next year as well.

[Interpreted] The next question will be presented by Jingu Kim from KTB Investment & Securities.

[Interpreted] I'd like to ask few questions. First, I would like to understand what your strategy is for Kakao Pay to continuously increase the ratio of payment portion out of your total GMV, both for online and offline? And also based on the payments related or Kakao-related data, what are the performances that you're seeing at this point, in terms of loans, investment and other financial services? And what will be your mid- to long-term strategy for the business? Second question relates to Kakao Bank. What are the key drivers or strategies that's going to continuously drive up, as the fees and commission income for Kakao Bank, and do you also have strategies to bring about synergies with Kakao Pay?

[Interpreted] This is Jae. I will respond to your question. Now for Kakao Pay, we are making sure that we don't tilt to a small number of sectors. We want to make sure that we keep a balance across all the areas that users frequently visits. So that will be our merchant strategy. So we are not limiting ourselves to just online and offline merchant basis. We want to be able to expand our scope so that we can seamlessly cover the geographies and devices. In terms of the online payment, basically, it is very conveniently connected to all of the Kakao services that it provides and people frequently use like taxi, driver for hire, gift and page. Including online commerce, we already have a quite large merchant coverage in the offline as well in terms of delivery and accommodations. And also recently, we have really made -- been in close collaboration with Alipay, being able to really expand on our global payment capabilities based on the Alipay's merchant network. In terms of the offline, we actually have a network in place where people could actually easily use our payment modes in all of the areas, including department stores, CVS' and cafes. Starting next year, we plan to introduce a fees in for merchants that favor more towards the smaller scale merchants. This type of a differentiated fees, can we believe, is going to help us expand our offline coverage, but at the same time, share the burden that the smaller merchants are currently enduring due to the impact of COVID-19. The second question relating to our lending services. In June, we've been designated by the FSC on the service called My Loan Limit, which has been designated as an innovative financial service. Basically, this provides information to people who want to take out a loan on possible institutions that they could go to. And also, it provides the exact amount of the loan limit, the credit limit as well as the interest rate. So it gives you, the users, the breakdown and is really growing as a very robust revenue source. Currently, we are providing product information, including secured loans and unsecured loans from banking sector as well as 21 other financial institutions. So this is an information that is not just an advertisement. It actually provides necessary information in terms of credit as well as financial-related needs and potential -- and possible choices that the users could choose when selecting a loan And so that benefits the user base. At the same time, from the financial provider perspective, they are making use of this as a very effective online channel since it is based on a platform that has high engagement and activity of users. So we expect this to be a very good growth engine going forward. As a result, in the month of September, we were able to record the highest volume of lending intermediation. And thanks to that, we have been able to increase the GMV of financial -- the total GMV from financial services by 5x. Moving on to Kakao Pay related investments. After we opened Kakao Pay brokerage account, end of February, we've seen a very steep price with the accounts hitting 2.5 million. And also, the outstanding balance as well as number of transactions are all very meaningfully increased. So we will continue to really focus on implementing promotions so that we can further expand on the number of accounts, as that number of brokerage accounts is an important metrics for us. In terms of the account conversion for Kakao Pay Securities, we've seen a very steep rise in financial services, including fund investment as well as loans. If you look at Q3 investment-related metrics, we have 3 equity funds that we've introduced and offered 2 fixed income funds. And as a result, in September, we've seen more than 5.2 million fund investments take place with people actually making fund investment, subscribers of that fund reaching 800,000. Now moving on to Kakao Bank. Basically, Kakao Bank is really solidifying its base as a platform with high level of activities. This year, we partnered up with many financial institutions. And based on that strategic partnership, we've seen increases in number of applications for setting up brokerage accounts. And also launched a credit card service, which all drove up platform business and which will continuously be a strong momentum for Kakao Bank's platform business growth going forward. The account application services, which we launched, we've increased our financial partners from KIC to NH Investment & Securities and KB Securities. And as a result, end of September, we have over 2.6 million brokerage accounts. And also, starting April, we have collaborated with 4 credit card companies and launched a credit card application service. And as of September, there has been 400,000 credit card applications that have been submitted. Through such active strategic partnerships with other entities, we will continuously introduce products and services. And we think that this type of -- this will help bring about growth of our platform business and really drive the net profit of Kakao Bank. In terms of the possible synergies between Kakao Pay and Kakao Bank, we're currently at a transitional period where the meeting of ICT and FinAid is creating a new form of techfin, a new form of financial services. We've been at the very forefront, being very agile and responding quickly to such transformation. Kakao Bank has a banking license, which is protected by regulation. And based on financial products, it's really bringing new innovation to the banking services. And also for Kakao Pay, underpinned by 40 million Kakao Talk users, it's providing innovative mobile finance, tech-based finance and services in areas such as payments, remittances or transfers, investment and insurance. And these 2 entities are really filling the open space or the vacuum that had existed through innovative approaches. Kakao Bank and Kakao Pay have really reported a short growth in each of its business segments. But at this point in time, their share in absolute basis is not that significant. And there could be some overlap in terms of the products and services that they provide. However, underpinned by their core competitiveness, our priority is to make sure that they increase their market share in their respective market and also further solidify the market positions as they could actually enhance their market influence that would be a priority for us.

[Interpreted] The next question will be presented by Seungjoo Ro from CLSA.

[Interpreted] My first question relates to what your overall strategy is for your commerce business? Because I would assume that the commerce business could really give momentum to and create synergies to your ad and Pay business. So is your strategy to really focus like your peers dealing on the open market investment. So they could fuel growth for ad and Pay? Or would you be focused more on the profitability aspect and just expect very natural and organic growth within Kakao Pay ecosystem? Second question is on tab because I think this could also contribute to your advertisement business growth. Can you share with us more detail on user metrics? For instance, a number of -- the number of users for your application's DA, display ad, the time spent, for instance, what the page view is or the percentage out of the total Kakao figure. This breakdown information will help us with the analysis.