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 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 2020 fourth quarter earnings results by Kakao.

[Interpreted] Good morning, I am Eleanor from Kakao's IR team. Let's begin Kakao's Q4 and full year 2020 earnings release conference call. With me today are our CEO, Mason Yeo; and Chief Investment Officer, Jae Bae. Please also note that the earnings results are consolidated estimates under the K-IFRS basis and are subject to change upon the auditor's review process. Let me now invite Mason for key business highlights.

[Interpreted] Good morning. This is Mason and thank you for joining our earnings release call today. In 2020, Kakao was a platform of choice for users and partners as we offer connectivity and a window of communication to people's lives in the midst of the pandemic crisis. By providing business tools, big and small to corporate and SME merchants, we broadened the digital-based business opportunities and supported a speedy digital migration of users' daily lives. For 2021 as well, Kakao is making slew of preparations to make our digital lives more easy and convenient. As a first step, we launched Kakao Talk Wallet on December 15, a digital wallet service easily allows identification in this digital contact era by allowing QR check-ins, storing of authentications, IDs and certifications. And in just a month since the launch, more than 7 million signed up, building its position as an essential service for daily living. In the same, we also adopted multiprofile feature, where users can set multiple number of profiles to express one's self depending on the type of relationship they have with friends. And we also added a feature where the users' information stored in the wallet can be added to the profile at moments when they are needed. We're also actively developing services for users whose identity are authenticated within Kakao Talk. For instance, we launched a subscription service in Q4, where users can subscribe to products and services of various providers by simply signing up on Kakao -- on Talk Channel. And in January, we introduced plus product, which is a flat rate pricing scheme to talk drawer and emojis. In addition, we plan to launch subscription platform for content and reorganize Kakao Talk channel this year. Through many such changes, we hope to provide enhanced service experience to our users and offer opportunities to partners so that they may fundamentally shift the way they conduct business in the digital age. Underpinned by our brand, Kakao Talk and Kakao the company, Kakao has been able to identify new business opportunities and grow them into core businesses over the past several years. We were quick to spin-off promising businesses into separate entities and secured investments and listed entities placed at the juncture of a greater growth. To date, global investors have acknowledged the high corporate value of Kakao and its affiliates, which drove Kakao's shareholder value. And the shareholder structure of Kakao has also diversified with Korean investors accounting for 68%; U.S., 9%; and European investors, 9%, attesting to a broad base of global investors. As mentioned, this year, we will aggressively expand business around Kakao Talk to further enhance competitiveness of the main entity of Kakao. And by taking Kakao affiliates public through IPOs, we do our outmost to further scale up growth and shareholder value. We look forward to your continued interest and encouragement going forward. I will first update you on our platform business. As more and more advertisers and merchants within Kakao Talk's business ecosystem showcased their products and services and enjoyed meaningful business results, Talk Biz revenue in Q4 displayed a solid growth. First, for the Talk Biz ad. As Bizboard successfully laid its footing in the domestic advertisement market as daily average revenue for December was up twofold versus last year, reaching KRW 1 billion. Kakao's ad model is grounded on performance ad platform that seeks low cost and high efficiency for the partners. By bringing ad technology to the top platform used by 46 million people, we bring ads that best cater to users' interest with high rate of click-throughs so that our business partners can launch an effective campaign with even small budget. With the expansion of Bizboard, there has been an increase in users, adding brand Kakao Talk Channel that they like to their friends list, which drove Talk Channel revenue of 42% over last year. Starting March, we will roll out business tools such as membership sign up, purchase and booking, which will broaden the role of Kakao Talk channel as a business platform. As the use of Kakao Talk Channel becomes more activated, usability of the Bizboard as a tool for discovering friends will be enhanced and in turn, we expect growth potential for Bizboard to rise as well. For the transactional commerce business of Talk Biz, Q4, Kakao Commerce GMV, which includes Gift, Talk Store and Makers was up 71% year-on-year, sustaining a high uptrend. First, as we offered highly reliable platform to high-end sellers of beauty, food and living goods while keeping their brand prestige intact, Kakao Talk Gift posted a growth of 61% year-on-year. Talk Store Q4 GMV showed a whopping threefold year-on-year growth as a result of providing broader avenues for SMEs to sell their products during Korea sales and cooperation with local governments and public agencies towards a win-win. Kakao Shopping Live is a new commerce platform that can deliver and communicate the ambience of space product properties and experience, which are difficult to convey via online. With high-quality live content planning and customer acquisition through Kakao Talk, Kakao Shopping Live is hitting 140,000 average views, which in terms of efficiency per program is, by far, the highest compared to other platforms. All in all, Q4 GMV was up fourfold Q-on-Q. Next is on Mobility. With 28 million cumulative subscribers, we are building towards smart mobility, being mindful of all modes of mobility for not only people but objects and services to make our daily lives more leisurely and worthy. We've seen demand for premium, high-quality safe taxis grow, driving an increase in Kakao T Blue to 16,000 vehicles, a number of calls for premium taxis, including Venti and Black have risen by a large margin. Kakao T Parking, which guides the driver to a parking spot, reserves the spot and supports automatic payment was adopted by Everland, the amusement park last year and COEX parking this year as it is in the middle of an aggressive service expansion. Underpinned by smart parking system and technology, it will offer seamless mobility experience to users from the beginning to the end point of that experience which is parking. And to our partners, we expect to write a new service standard for parking services through the use of data and innovative platform. Next is the Tech-Fin business. Q4 Kakao Pay GMV was up 47% on year to KRW 19.9 trillion. Particular, payment and financial services posted a high-growth rate as GMV growth, excluding P2P transfer, reported 125% growth on year driving volume growth for Kakao Pay. Kakao Pay's annual GMV was up 40% on year to KRW 67 trillion. In payment, growth from both online and off-line drove Q4 GMV up 84% on year. We will continue to expand off-line coverage in 2021 and bolster global partnership so that we may make complete Kakao Pay's payment ecosystem. In financial services, there were more than 1 million Kakao Pay Securities and account openings in Q4 with cumulative accounts of 3.2 million as of December end. We also offered fund products like egg and coin collection, allowing small investments for novices investing in these markets for the first time. As a result, in December alone, there were more than 9.6 million fund investments, and fund subscription surpassed 1.2 million people, spreading the value of fund investment as part of daily living. Supported by Kakao Pay Securities brokerage services, launch of digital nonlife insurance and other innovative services that will strengthen its financial service capabilities, we expect this year will be a year for the company to emerge as everyday financial platform for the people that seamlessly provide services across transfers, payment up to financial services. Kakao Bank in 2020 recorded a net profit of KRW 113.6 billion, a significant growth from previous year's KRW 13.7 billion net profit. On the traditional interest income business, profitability continued to be solid, while we are seeing platform business growth taking off for the noninterest income side. We've seen improvement in fee and commission income based on the collaboration with the incumbent financial institutions on securities account openings and credit card issuances. And we were able to test and confirm the scalability of this platform on the back of successful partnerships with nonfinancial partners like [ e-mind ] and Market Kurly, utilizing our 26-week installment savings campaign. Also, in line with its vision set when the company first started, Kakao Bank is growing the mid-price lending market for users who had limited access to the institutionalized financial market. The company supplied around KRW 2.4 trillion in mid-priced loans over the past 2 years, upgraded proprietary credit scoring system based on its operational experience. And as such, we plan to develop into a more inclusive financial platform. Next on paid content. Q4 global platform GMV was up 85% on year to KRW 234.5 billion, up 79% for year basis, reporting KRW 769.4 billion. Kakao Japan's Q4 GMV was KRW 140.3 billion, up by more than 3x on year. Also, full year GMV was up 188% on year to KRW 414.6 billion, clearly gaining its ground as #1 grossing digital comic app since last July, in not only Japan, but the entire group. For Kakao Page through aggressive global expansion of original IP distribution, IP aggregates GMV was up 76% on year to KRW 157.6 billion while full year GMV was also up 64% on year, reaching KRW 528.5 billion. Kakao Entertainment, which is a merged entity between Kakao Page and Kakao M, is set to launch in March. Through the merger, we will combine IP business capabilities of the 2 companies under Kakao Entertainment to set out a value chain unmatched by peers, which will underpin value-add created by the IP business. We expect synergies to arise across the ecosystem once the merger is complete and will lead the growth and innovation of the entertainment industry as a whole. Last but not least, let me elaborate on Kakao's ESG efforts for this year. The whole idea of ESG, namely environment, society and governance, is not too different from Kakao's reason for being of wanting to make -- of wanting to creating a better world. So Kakao's ESG efforts will be governed by Kakao's promise and responsibility for making a better world, and we have selected 4 key areas: first, we will endeavor to solve social problems through Kakao's way; second, Kakao will grow together with our partners, crew and people who share the IT ecosystem; third, we will be a company that fully live up to its responsibility in this digital society; and fourth, we will be at the forefront of making a sustainable planet. To bring ESG management under full swing, we will start with establishing ESG committee so as to live up to Kakao's commitment and responsibilities. To this end, we have internally set 12 action items and are running 80 tasks and projects. For more details on our objective and road map forward, we will communicate once the ESG report is published in the first half of the year. In addition, as was released yesterday in the press, founder and largest shareholder of Kakao, Chairman Brian Kim, said he will give back 50% of his stock back to society. We hope this decision can show how intense corporate value of Kakao can form a bedrock for making a better society and environment, and can work as a catalyst for enabling advanced corporate management practices and culture of philanthropy.

[Interpreted] This ends the business highlights. Now our Chief Investor Officer, Jae Bae, will present on Q4 and full year financial results.

[Interpreted] This is Jae, I will present on the financials. Q4 consolidated operating revenue was KRW 1,235.1 billion, up 12% on quarter and 46% on year, while 2020 full year figure came in at KRW 4,156.7 billion, up 35% year-on-year. First, platform revenue was up 19% on quarter and 48% on year to KRW 657 billion. And in terms of the breakdown, Talk Biz revenue reported highest quarterly record and strong seasonality for Kakao Bizboard and growing demand for our messaging ads. Also, robust product lineup for Gift and Talk Stores drove commerce growth with revenue up 27% Q-on-Q and 63% year-on-year, reporting KRW 360.3 billion. Despite higher performance display ad revenue, COVID-19 impact led slight decline in search ads revenue driving Q4 Portal Biz revenue up 1% on quarter but down 9% on year to KRW 122.7 billion. For the new business, on strong taxi revenue on the back of franchise business expansion for Mobility's T Blue and steep top line up trend for Kakao Pay's financial services like investments, loans as well as payment services, revenue was up 17% on quarter and 97% on year, reporting KRW 174 billion. Content revenue was up 6% on quarter and 43% on year to KRW 578.1 billion. First, paid content revenue reported KRW 163.6 billion, up 10% Q-on-Q driven by growth from Japan and Kakao Page's IP business GMV. And on a year-over-year basis, the growth was 233%. Supported by more than 5 million stable base of paying users, music content revenue was KRW 155.1 billion, which was flat both year-over-year and Q-on-Q. Despite successful launch of new PC game Elyon in December, base effect from Guardian Tales, which drove growth previous quarter, drove down game content revenue by 6% on quarter while there was year-on-year growth of 33% with the revenue coming in at KRW 140.8 billion. Lastly, IP business and other revenue was up 30% on quarter and 25% on year to KRW 118.6 billion driven by increase in revenue for Kakao M's drama original content and other video content and strong music distribution. Next is on the consolidated basis operating expense and operating profit. Q4 consolidated operating expense was up 11% on quarter and 41% on year to KRW 1,085.2 billion. Full year 2020 operating expense was up 29% on year to KRW 3,700.7 billion. Key expense items are: first, labor cost, which was up 11% Q-on-Q on higher year-end bonus for major subsidiaries, including Kakao who reported good performances; and on new hiring of developers by Kakao Enterprise, Kakao Pay and Kakao Games; and the impact of consolidation of subsidiaries that was 30% year-on-year increase to KRW 265.5 billion. And for your information, as of end of 2020, total head count for entire Kakao and its affiliates is at 10,644, breaking the 10,000 mark for the first time, with more than 2,000 head count increase every year, including the new recruits and as we created many jobs in the midst of difficulties brought on by the COVID pandemic. Revenue-linked expense was up 6% on quarter on higher cost for Kakao M's music and video production, and increase in ad agency fees on the back of strong Talk Biz ad performance. And due to the base effect of K-IFRS application for Kakao Japan's Q4 2019, revenue-linked expense was up 44% on year to KRW 491.6 billion. Driven by an increase in infrastructure expense and commissions paid on the back of expansion of the mobility business, outsourcing infrastructure expense was up 27% on quarter and 36% on year to KRW 145.1 billion. Marketing expense was up 15% on quarter and 111% on year to KRW 87.5 billion driven by promotions for Kakao [indiscernible] payment and investment products and Kakao Japan's aggressive marketing for user expansion. All in all, Q4 operating profit was up 25% on quarter and 88% on year to KRW 149.8 billion with Q4 OP margin of 12.1%. Full year operating profit was up 121% year-on-year to KRW 456 billion with OP margin at 11%. Next is on nonoperating revenue and expenses. First, other revenue came in at KRW 180.5 billion, up 276% Q-on-Q and 744% year-on-year and disposition gains from shares, subject to equity method treatment following the revaluation of Kakao Bank who recently completed rights offering. Other expense was KRW 493.2 billion due to a sizable increase Q-on-Q and impairments on intangible assets relating to revaluation of Melon business in light of the rise in right holders royalty shares and due to booking of goodwill and PPA impairment from some of the entities acquired by Kakao M, Games and Mobility. Equity method gain was KRW 19 billion driven by increased profit from Kakao Bank and other companies subject to equity method treatment. Equity method loss was KRW 21.3 billion on losses generated from invested companies by Kakao investments, including [indiscernible]. On valuation gain from financial assets of KRW 60 billion, and FX translation gain of KRW 14 billion, financial revenue was up 164% Q-on-Q and 2,261% year-on-year reporting KRW 98.6 billion. Financial expense also was up 189% on quarter and 132% on year reporting KRW 35.2 billion due to FX translation loss of KRW 14.6 billion and interest expense and valuation loss on financial assets. Q4 corporate income tax expense was KRW 100 billion with consolidated net loss of KRW 201.8 billion. Lastly, CapEx spend for Q4 was KRW 14.3 billion for server and tangible asset investments, and around KRW 33.8 billion for IP and nontangible asset investment, and in total, KRW 48.1 billion of investment activity. That ends Q4 2020 highlights, we will now begin the Q&A. [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. First is on your commerce business. It seems like your commerce is less highlighted in the viewpoint of the investors. So if you could share with us some specific indicators like the amount of transaction value, number of users, number of paying users or frequency. Or at least, if you could just paint overall general trend in terms of your commerce business, that would be quite helpful. And also, what are your strategies to really bring differentiation to your user base? Second question is with regards to Bizboard, it seems like the focus currently is on increasing the price within the second half of Bizboard. How far do you think that, that price increase can actually take place? And also, in terms of your -- the Bizboard, in terms of the ad impression, how much of a portion do you think, outside the second half, the ex second half services could account for in terms of the Bizboard and in terms of ad impression?

[Interpreted] So this is Jae. Responding to your question on Kakao Commerce. If you look at Kakao Commerce's GMV for, it posted a total growth of 64%. Kakao Gift and Makers services all posted a growth of 52% and 60%, respectively, all displaying a very good performance. And on top of that, Talk Store, the new services showed the highest growth rate at 292%, showing the highest growth rate within the e-commerce market. If you look at the key growth drivers, the most encouraging aspect was that we were able to introduce a more stronger product lineup that really addressed the wide spectrum of users' preferences and taste. And based on a very successful landing of the Talk Store platform, which is underpinned by the Talk Deal marketing, we were able to broaden our user base by providing a differentiated commerce experience. Just for your information, as of December of last year, if you look at the MAU for each of our platforms for: Gift was around 21 million; Talk Store, 13 million; and Makers, 6 million. If you look at Talk Store, the growth rate had been quite steep recently, and the number of stores had gone up by 12% on quarter and 72% on year. Now Kakao Talk is a -- the so-called first app that people use with -- the first app that they use when they wake up in the morning. And basically, Kakao Commerce, through the Kakao Talk Channel, can deliver the message the most quickly compared to other types of tools to as many people as possible. And we think that, that is the unmatched differentiating factor of our product. If you look at our Kakao Talk Gift and Kakao Talk Channel, we can reach to more than 28 million users. And we have 35 million Kakao Shopping members who can discover products very quickly and purchase them very conveniently without the need to sign up as a member or without the need to log in. Although we are a late entrant in the e-commerce market, if you look at the online shopping penetration of the domestic market, it is still below 50%, so there is still 50% of the market that is left. And so we believe that there are a lot of shopping segments where there's high level of user engagement. For instance, the high-end products, specifically embody the taste of the users in the online commerce platform. So we think that Kakao Commerce can start to yield competitive edge in these areas. Now from the seller's perspective, for Kakao Gift, basically, it allows different sellers to not compete on the price platform. They can actually keep the prestige of their brand intact, and it is a very easy channel for them to sell high-end products, also selling good price products as compared to the quality. So this has become a channel of choice by the sellers who are in the luxury and the masstige segment. Looking at Talk Store, basically, this allows the sellers and vendors to convert their buyers to their Kakao Talk Channel friends, underpinned by that strong relationship that Kakao Talk provides. This helps the merchants to actually build the customer relationship as their assets, and it really provides a competitive edge and that they could continue on with their targeted marketing against those buyer base. In terms of Makers. Now because it provides made-to-order broader products, the sellers basically can reduce their inventory burden. And so for a lot of small to medium brands, when they are first and initially launching their new product, they make use of the Makers platform to receive feedback and to understand and explore the needs of big consumers.

[Interpreted] So this is Mason. I will respond to your question on Bizboard. Your question basically was, how far can we go up in terms of the unit pricing of the Bizboard product? And the second, what is the additional impression-related opportunities we can gain outside the second half? Now we launched Bizboard back in 2019. And as of December of previous year, our daily revenue hit KRW 1 billion, which is actually a twofold growth on a year-over-year basis. Because Bizboard is a performance-based ad product, depending on the inventory, the pricing or the conversion rate, we do not have any specific targets that we've set for ourselves. We believe that in light of the efficiencies, the pricing trend and the user experience, if we continue to upgrade what we provide and make it more sophisticated, we believe that this will just naturally drive pricing increases and revenue increases. So rather than really trying to come up with ways to increase inventory, what we want to do is we want to be able to give more reasons for people to use Bizboard. Now Bizboard previously had been used as an effective entry point for people to discover Talk Channel, to increase the Talk Channel trends and also increase marketing based off of that trends list. And with all of these activities, the marketing activities being expanded and improved, the Kakao Talk Channel revenue had actually posted a growth of 42%. Going forward, you will be able to see from the Kakao Talk Bizboard models and catch phrases like shop through store channel, order through Kakao Talk Channel, rent through Kakao Talk Channel. So these will be the type of phrases you will see more often in Bizboard. And also for your information, all the surfaces that we have utilized for Bizboard, on top of the chatting tab, we are currently expanding our Bizboard to other major services like the sharp tab down, Kakao Page and Kakao T. So we would like to integrate this forward with other areas that could actually further enhance the convenience and the advertisement efficiencies from the perspective of the advertisers.

[Interpreted] The next question will be provided by Kim Dong-hee from Meritz Securities.

[Interpreted] I have 2 questions. First, your growth rate for the mobility business has been quite steep. Could you share with us what the number of vehicles would look like for your Kakao T Blue services, and what your guidances are in terms of the top line revenue and OP margin? Second question, the Kakao MyData license approval had been delayed for your Kakao Pay business. What impact would this have on Kakao Pay's business? And what measures do you have to respond to this?

[Interpreted] This is Jae responding to your Kakao T question. Currently, if you look at Kakao T Blue taxi, we have focused on key metropolitan cities like Seoul, [ Gyeonggi ] and Incheon area, and have also successfully expanded to other regional cities including Busan. So as of end of Q4, there are currently 16,000 vehicles in operation. We were able to very smoothly expand the franchise business. And with the higher use of the B2B taxi services, taxi service in general is really driving the growth of mobility business. Based on the data that we have, we are able to bring more efficient taxi operations and really helping with the improvements of the profitability of the taxi operators. Through continuous innovation in services, we plan to provide more continuous and reliable taxi service to the users. This year, our objective is to maintain a good level of quality that we were able to achieve, and also expand cooperation with the business. So if you look at 2020 performance compared to 2019, top line revenue growth was more than twofold, and we were also able to show profitability improvement. On top of the solid taxi business, the driver business as well as the parking business, this year, we will be able to show you a bigger growth in terms of the volume and size. Just for your information, in 2021, with the start of the parking slot operations for COEX and Everland, we believe there will be a meaningful growth. For this year, we expect there will be a meaningful growth. And we are expecting above KRW 50 billion of top line revenue. Now in terms of profit, we achieved quarterly profit for the first time in Q3. And in Q4, despite high level of marketing and one-off incentives and a lot of aggressive investments, the level of loss had declined quite significantly. In the first half of this year, we will continue to expand on premium taxi services like Kakao T Blue and Venti. And we'll be quite aggressive in doing our new businesses including parking. So we think that there will be meaningful improvement in operating profit starting second half of the year. And so on a full year basis, we will be able to turn profit. From a mid- to long-term perspective, for taxi franchise business, there has been increases in a lot of expenses like infrastructure investment and promotions. But as the business stabilizes, we will be able to bring top line growth and also make the cost structure more efficient, which we believe will contribute to profitability improvement. Now responding to your question on MyData, Kakao Pay has submitted all the relevant document that's necessary for the review of this application for MyData preliminary approval. And due to some of the items that needed to be checked on the second largest shareholder, there's been some delay in the communication process. So it is currently under review. But the issue that we're facing is a procedural-related issue. And we see that there is no cause for disqualification of Kakao Pay. Kakao Pay is currently making preparations with the objective of launching MyData services in the second half of the year. And once all the corporation and discussions end, and once the main official approval gets released, we think that Kakao Pay will be able to lead the MyData market as a daily financial platform.