Kakao Corp. (A035720) Earnings Call Transcript & Summary

[Interpreted] Good morning, ladies and gentlemen. Thank you for joining Kakao's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] For your information we'll be providing simultaneous interpretation for the earnings presentation and then switch to consecutive during the Q&A session.

[Interpreted] Good morning. I am Eleanor from Kakao's IR team. Let's begin Kakao's Second Quarter 2021 Earnings Release Conference Call. With me today are CEO, Mason Yeo; and Chief Investment Officer, Jae Bae. Please note that the earnings results are consolidated estimates under the K-IFRS basis and are subject to change upon the auditor's review. Let me now invite Mason for key business highlights.

[Interpreted] Good morning. This is Mason. It's now been 1.5 years since the new normal brought on by the COVID-19 pandemic. All of us in our respective domain are still trying our best to go back to our daily lives as we know it. Kakao has also joined in on the efforts to bring healthy and ordinary life back to the people by offering real-time vaccine booking on the Talk platform, QR check-in and Kakao digital wallet that carries the vaccine certificate. When we first mentioned Kakao digital wallet, I'm sure many of you had a hard time picturing what it actually does. Booking for leftover vaccines and vaccination certificates was a good use case example of Kakao digital wallet and digital identification. Users can make vaccination appointments simply by making digital IDs, and the wallet will store vaccination certificates and allow QR check-ins, all of which gave firsthand experience of the limitless usability of the digital wallet. With COVID-19 and ensuing digitalization as the trigger, digital wallet use case has become diverse across on and off-line, including simple sign-ons for tax returns, vaccine appointments, access control for unmanned CVS, which drove number of wallet subscribers above 18 million in August. We expect to reach 25 million subscribers by the year-end, truly becoming a nationwide wallet service with greater usability used in all places that require identity certification. Kakao is at the forefront of digitalizing our everyday lives, and we now want to add a new perspective to content consumption as we move into the second half of the year. To create a sustainable ecosystem for content underpinned by the interactions between creators and users, on August 3, we introduced Kakao View on the third tab of Kakao Talk. It is a content curation platform where View editors, who are the creators, can express their own perspectives in creating new content and users can proactively consume such content from this space that resonates with one's own perspective. With the launch of Kakao View, we've now completed the greater subscription-based platform comprised of Subscription ON and digital item subscription models, i.e., Emoji Plus and Talk Driver plus. Subscription ON offers subscription of tangible products, such as food and household goods as well as services like cleaning and laundry. And it enables easy-to-use subscription process on the Talk platform. And so we received great feedback from both users as well as partners. In terms of Plus products, which provide monthly paid subscription for Emojis and Talk Driver have seen high conversion and repeat rates, supporting the growth of paid subscriber base and expanding new revenue drivers. As we now have strong pillars for subscription across products, service and content, we expect subscription ecosystem to rapidly expand through the Kakao Talk Channel. The relationship between users and partners was formed around Kakao Talk Channel. And as user engagement and traffic grows, we expect growth momentum to build around Talk Biz, including for advertisement and commerce. Well, let's then turn over to the update on the platform business. Q2 Talk Biz ad revenue was up 56% on year, continuing high growth. As more and more advertisers from different sectors shared their successes, there was increase in advertiser inflow, driving up Bizboard revenue to a record peak above Q4, which was the high season for advertising. As for Kakao Talk Channel, driven by Talk Channel openings by advertisers who adopted Sync and Talk Channel message marketing, revenue was up 83% on year. In July, more than 10,000 advertisers adopted Sync, which supports simple sign-ups and connection to Talk Channel members. Also, we are seeing higher conversion rate from users who came by way of Talk Channel's marketing messages versus other ads. And so we expect advertisers to continue to have interest in using this tool and expect that the revenue uptrend will continue. Next is on Talk Biz commerce business. Entire business, including Gift, Talk Store and Makers all gained growth with Kakao Commerce Q2 GMV, up 48% on year. With the pandemic, people in certain age groups, who previously did not use Kakao Talk Gift, came on board very quickly. And it earned a solid place in the gifting culture that cuts across entire generation of people. In Q2, number of users in 40s and 50s age group making a purchase was up 40% on year. With such diversified customer segment and ensuing higher purchasing power, more luxury brands are joining in, driving up value per basket. As a result, Q2 Gift delivery GMV was up 68% on year, greatly surpassing the growth rate of Gift vouchers. In Q2, Kakao Talk Gift GMV was up 44% on year, and we expect Gift delivery to grow quickly, sustaining the high uptrend. On high rate of growth with Talk Deal, Talk Store Q2 GMV was up 66% on year. Especially repeat purchases for Talk Deal is around 86%, which shows anyone who experienced Talk Deal seem quite satisfied with its relationship and discovery-driven commerce experience. Talk Deal continues to show steep growth, breaking the monthly GMV and buyer record in June following May. In the meantime, to strengthen Kakao's competitiveness in commerce, where competition is deepening, we felt it critical to combine Kakao Talk and Commerce. So we decided to merge Kakao Commerce in Q2. Through this merger, the link between Talk Biz advertisement and Commerce will be made stronger to drive mid- to long-term growth of Talk Biz. Next is on mobility. Taxi service in Q2 reported highest record in number of calls while we identified greater need around enhanced customer experience and different types of services, which led to a clear demand growth for premium taxis, like the Kakao T Blue and Venti. With more options being offered, completion rate of travel requests for premium taxi has gone up by more than 3x year-on-year. And Kakao T Blue fleet has increased to 26,000 vehicles as of Q2. In Q2, there was also higher usage of driver-for-hire services on Kakao T platform. And with efficiency improvements and matching supply and demand following driver acquisition promotions, Q2 GMV for Kakao Driver broke historical record. Also last June, by launching air travel-related services following express bus, trains, shuttle, Kakao Mobility took one step further in completing a comprehensive platform for transportation and have expanded its business to mobility for objects with the start of beta services for parcel delivery. Kakao Mobility will continue to build smart mobility, a single platform that connects all modes of mobility for people, objects and services. Next is on Kakao Pay. Second quarter GMV for Kakao Pay was up 65% on year to KRW 24.5 trillion. For payment services on growth in online as well as more outdoor activities and expanded merchant base, off-line payments increased sharply, driving up GMV 5% year-on-year. Financial Services GMV reported 13x performance growth year-over-year. Currently, more than 5 million users have Kakao Pay Securities account, which is supporting sustained growth of fund investors and assets under management. For loans, we've entered into partnerships with more than 40 financial institutions in the banking sector to offer unsecured loans and are maintaining our solid position as #1 lending intermediary in the fintech industry. We've also increased users for Kakao Talk Channel real-time credit info alert service to proactively respond to potential and rising demand for loans. Kakao Pay is in the process of preparing for modification to securities filings, which will include Q2 earnings. And for further update on schedule, please refer to the upcoming filing. Next is on our story business. Q2 GMV from domestic and overseas story platform was up 55% year-on-year to KRW 268 billion. First, Kakao Japan's Piccoma successfully ran 5-year anniversary promotion since the end of April with its Q2 GMV up 2x year-on-year to KRW 174 billion. Every day, more than 4.2 million visit Piccoma. And early May, highest GMV per day surpassed 4.5 billion. And on top of sharp rise in new users, conversion to billing and spending per user also went up, driving up revenue twofold year-over-year. Piccoma as a service provider of comics for a single market became top 7 grossing app in both the global ad market on par with the likes of TikTok, YouTube and other global content houses last quarter. In Japan, the mobile content consumption has become mainstream. And we believe that the content market that Piccoma can actually enter into is much bigger. So we believe that we have placed enough priority on expanding the market share, and we plan to expand that ecosystem. Kakao Entertainment's combined GMV of both the story platform and IP distribution was KRW 184.5 billion, up 55% on year, out of which global-bound IP distribution GMV increased twofold year-over-year. Last June, Kakao Webtoon global service made a successful debut in Southeast Asia, while in July, we acquired Tapas and Radish, which are North America-based content platforms as we carry on with expanding network of global platforms. In Korea, on August 1, Daum Webtoon was newly launched as Kakao Webtoon. With innovative UI and UX, Kakao Webtoon will set itself up as a standard platform that deliver the same level of experience to users across the globe. For the media business, content from various drama and formats, such as Vincenzo, Mad For Each Other, Change Days and Kingdom: Ashin of the North, which we coproduced, gained much popularity on both global -- on both domestic and global OTTs, including Kakao TV, yet again highlighting Kakao Entertainment capacity in planning and production. Kakao Entertainment will be merged with Melon Company as of September 1. Once Melon Company becomes part of Kakao Entertainment's IP value chain, we expect it would form a solid foundation for story, media and the Music business. Last but not least, I will provide updates on Kakao's ESG efforts. Last May, we published our first ESG report titled 2020 Kakao's Commitment and Responsibility. Also, we added ESG menu on the company's website, published English translation and through voluntary disclosure made it easy for stakeholders to look up Kakao's ESG activities. Kakao has in place organization and system for environmentally friendly operations. And as part of these efforts, undertook green digital campaign during the second quarter. Regarding the social element, last May, we launched a research group to develop self-regulation standards around hate speech. Also, Kakao's efforts to overcome the COVID pandemic, together with the greater society, was featured as a best practice of public/private corporation in July's [ APEX ] global conference. We also decided to assign stock options to all of our crew from year 2021 to '23 every year as they are the ones bringing growth to Kakao. We are also trying to improve HR system by reflecting the feedback we receive from our crew members. Kakao will implement ESG-driven management on the basis of our commitment and responsibilities. Today is day 1 of Kakao Bank's share trading in the securities market. Of the Kakao affiliates, Kakao Bank was the second company to go public following Kakao Game. It was a successful IPO with KRW 18.5 trillion corporate valuation based on the IPO pricing. As the first online bank in Korea, Kakao Bank has more than 16,150,000 customers and is changing the financial paradigm as we speak. We ask for your continued support and interest in the growth of the bank. And Kakao and its affiliates will also cooperate and join in on the efforts to bring synergies and to grow together.

[Interpreted] Good morning. This is Jae. Before going to the financial highlights, I will first explain reclassification of revenue following the divestiture, merger and other restructurings, which took place in the first half of last year. In order to integrate value chain of global IT business and to aggressively, with scale, expand into global market in all areas of the content industry, Kakao has made the decision to merge 3 entities, which are Kakao Page, Kakao M and Melon. In line with the changes starting this quarter, we reclassified the revenue breakdown to provide more performance details on each of the business areas. First, Kakao Entertainment revenue breakdown, which used to be paid content, music, IP business and others have been renamed as story, Music and media, making the classification more intuitive. Kakao Friends-related domestic online revenue, which used to be under IP business and others, was reclassified under Talk Biz, while the rest came under platform and others. For more details, please refer to the company's IR material. Now on the financials. Q2 consolidated operating revenue was KRW 1.3522 trillion, which was up 7% on quarter and 42% on year. Platform revenue was up 10% on quarter and 47% on year to KRW 761.8 billion. Talk Biz revenue was up 5% on quarter and 52% on year to KRW 390.5 billion. Advertisement revenue recorded high -- historical high as Bizboard, Talk Channel and Notification Talk all positively fed into one another. For commerce revenue. On the base effect from New Year holiday in Q1, gift revenue dipped marginally Q-on-Q. But year-on-year, with greater variety in the product lineup and growth in the user base, revenues from Talk Store and Makers showed steady uptrend. Driven by seasonality and expanded display ad services, Portal Biz revenue was up 7%, both Q-on-Q and year-over-year, reporting KRW 125.1 billion. For platform and other revenue on strong taxi revenue as Kakao Mobility expanded platform Taxi and GMV growth from Kakao-based payment and financial services, revenue was up 20% Q-on-Q and 73% year-on-year to KRW 246.2 billion. Content revenue was up 5% on quarter and 35% on year to KRW 590.4 billion. First, for the story revenue, thanks to Piccoma, which became #1 top-grossing comic app globally and on higher GMV from global platform, which drove global-bound IP distribution GMV, story revenue was up 7% on quarter and 57% on year to KRW 186.4 billion. Reclassified Music revenue, which includes Melon platform, music titles, distribution and music performance, saw Melon platform increase in paid subscribers and distribution and performance revenue grow with Music revenue up 2% Q-on-Q and 11% year-on-year, reporting of KRW 188.1 billion. Media revenue comprises of production of original content, drama, movies and talent management. In Q2, on growth and production of media content and activities of our artists, media revenue was up 20% on quarter and 112% on year to KRW 87.4 billion. For the Game revenue, despite service termination of PC game Black Desert, Odin's performance in just 2 short days after its launch in June 29 was quite significant. Supported by global expansion of its major game titles and updates, Game revenue was down 1% on quarter, but up 20% on year to KRW 128.6 billion. Next is consolidated operating expense and operating profit. Q2 consolidated operating expense was up 8% Q-on-Q and 39% year-on-year, coming in at KRW 1.1896 trillion. Looking at key expense items. On new hires for Kakao Entertainment, Kakao Games, Kakao Pay, our major affiliates, and increase in stock-based compensation, labor cost was up 3% on quarter and 39% on year, reaching KRW 301 billion. Q2 stock-based compensation was in total KRW 38.6 billion, up KRW 17.1 billion Q-on-Q and KRW 27.1 billion year-on-year. This is due to Kakao's rising share price and increase in valuation of Kakao Pay, which is currently going through IPO process, which all led to KRW 10.6 billion of cash settled stock-based payment and one-off expense of KRW 12.1 billion arising from changes in the stock option conditions in the process of divestiture and merger of Melon. For revenue-linked expenses, on higher top line across all businesses, commissions paid for app market, content and ad agency were all up, and production costs for Kakao Entertainment's drama, movie and other media content were up as well, driving up revenue-linked expense, up 8% on quarter and 29% on year to KRW 530.3 billion. For your information, share of revenue-linked expense against total revenue was flat Q-on-Q at 39.2%. Outsourcing infrastructure expense on higher content business-related commissions was up 14% on quarter and 55% on year, coming in at KRW 164.9 billion. On greater marketing for Kakao Japan, Pay, Mobility and Games marketing expense was up 36% on quarter and 136% on year to KRW 91.1 billion. Share of marketing spend as against the revenue in Q2, for your information, was 6.7%. All in all, Q2 operating profit was up 3% on quarter and 66% on year, reporting KRW 162.6 billion, with operating profit margin at 12%. Next is nonoperating revenue and expenses. The revenue was KRW 66.1 billion, impacted by disposition gains from shares subject to equity method, which was up 21% year-over-year, while Q-on-Q, it declined 38% due to the base effect from disposition gains from subsidiaries. Other expense on the back of donation was up 191% Q-on-Q and 32% year-on-year, coming in at KRW 19.2 billion. On growing profit from Dunamu and Kakao Bank, who are subject to equity method treatment, there was sizable increase in equity method gains reporting KRW 205.8 billion. Equity method loss reported KRW 19.1 billion arising from losses from some of the invested companies. Financial revenue was KRW 18.3 billion. Following weakening dollar translation gains from foreign currency, deposit declined, leading to 62% Q-on-Q decrease. On a year-over-year basis, there was a base effect from valuation gains from financial assets of investment companies, leading to 14% year-on-year decline. With weakening dollar, there was a decline in translation loss from foreign currency, which drove down financial expense, 7% Q-on-Q. On higher returns from invested companies and funds gained -- gains attributable to noncontrolling shares increased, leading to fund-related expenses, which pushed our financial expense year-on-year to KRW 64.7 billion. Q2 corporate income tax expense was KRW 33.8 billion, with consolidated net profit at KRW 315.9 billion. Lastly, Q2 CapEx investment comprises KRW 56 billion of tangible assets. Including service investment into intangible assets, including IPRs, was KRW 38.6 billion, with a total KRW 94.6 billion spent on investment activities. Present earnings highlights for Q2 '21. We will now move on to questions. [Operator Instructions]

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] I would like to ask you 2 questions. Could you provide what your outlook is for the second half of the year regarding your Bizboard business and Kakao Talk Channel, especially in the second half? And also from mid- to long term, what is the growth outlook regarding Talk Channel? Second question relates to your commerce business. What is the background as to the reason why you've decided to merge back Kakao Commerce. And could you also elaborate more on the strategy for your commerce business?

[Interpreted] This is Mason. I would respond to your question regarding Bizboard and Talk Channel. So I would like to paint a brief picture on how we see the outlook for these 2 products. As you know, the 2 very important pillars that's driving the growth of Kakao's advertisement are Bizboard and Talk Channel message. Bizboard is an advertisement product that allows for us to reach the entire nation. And also, it really helps people to discover the brand that they like under the Talk platform. With regards to how far this Bizboard could actually grow going forward, I understand that a lot of people have interest in this topic. And in today's conference call, I would like to just provide you with more detail as to the potential growth of the Talk Channel messaging. If Bizboard was a tool that was used to discover certain products and brands, Talk Channel messaging has a more focus on making a sustainable relationship. Basically, as people who discover certain brands that they like on the Bizboard, could add those brands and companies as their Talk Channel friend and can receive periodic and regular messages from those advertisers. So from an advertiser that is using a performance ad, they could use these tools to actually trigger the most important action of the users, which is a repeat purchase. And for advertisers who wants to advertise their brand, they could actually create a sustainable and long-lasting relationship rather than having a one-off event. So once people actually receive a message, then the users will click on to that message, and by using Kakao Sync, you can very easily log on to that service. And that log-in process is extremely simplified. And then you could use Kakao Pay to make a very easy payment. And after that payment is complete, you can double check on what you have paid through the Notification Talk. So basically compared to a very typical display ad conversion rate, using this Kakao Talk Channel message is significantly higher, and advertisers have really felt the difference. So what they are doing is that they are using Bizboard to make their brand known, and then they're attracting their potential customers as their Talk Channel friend. And this virtuous cycle had been put in place. And also for branding advertisers, they're utilizing Talk Channel messages to advertise, not just text or image, but also to showcase mobile videos, which is one of the most preferred format of today. And they can also carry out streaming events, and can use Talk Biz forum to complete the entire process of people taking part in these different promotional events. As a result, we are seeing a very good result in terms of Talk Channel messaging. In Q2, their Y-o-Y growth rate was 83%. And if you look at the top -- if you look at Talk Messenger's annual revenue, which adds the Notification Talk as well as the Talk Channel messaging, we expect that this is going to surpass the level of Bizboard annual revenue of last year. And hence, we expect, together with the Bizboard, we believe that Talk Channel is also going to grow into a key driver behind the advertisement revenue of Kakao.

[Interpreted] This is Jay. Responding to your second question on why we've decided to merge back Kakao Commerce after we've spun it off previously. As you know, before we split off this division, it was merely a business division. But the importance of commerce was so great that we thought that it was necessary to speed up the decision-making process and in order to trigger further growth, that splitting that commerce business would be quite important. So we've done that. And since the split off, commerce business has gained a significant growth as we were able to accelerate the decision-making process and really strengthen the independence of this business operation. Under the current situation, we've seen the overall commerce landscape really change very quickly. And in order for us to leap yet again into the future, we really felt the need for a strategic change. And hence, we've made the decision to merge back commerce business. Through the merging of Kakao Commerce, we believe that we will be able to provide more synergies to the partners, who are currently operating on top of the commerce platform whereby they will be able to more actively make use of Kakao Talk Channel. And since the pandemic, we've seen a significant growth in the number of commerce users, including Kakao Talk Gift and Talk Deal as well as other commerce services. And hence, Talk Channel had also recently attested to the fact that it really entails a high level of conversion rate. And we believe that if we combine these 2 elements, we will be able to further speed up the platformization of our commerce business and also can look forward to more meaningful growth going forward.

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

[Interpreted] I would like to also ask you some questions on your commerce business. It really helps for us to see the reclassification of the commerce revenue breakdown. But looking at the specific figures compared to Q1, in Q2, there was a 3% dip in the revenue. And on a year-over-year basis, the growth was around 48%. So it seems like the overall speed of top line growth had slowed compared to or also the growth rate of your advertisement revenues. So do you expect that as we enter into the second half of the year, the growth of the commerce could once again pick up speed? And can you also elaborate and share with us what the size of that GMV is? Second, I understand that your prior strategies on commerce business was more of a masstige focus with an underpinning of profitability. But as you've now, once again, merged your subsidiary and also acquired ZigZag, has your strategy changed to one that focuses more on the marketplace, including Talk Store and others?

[Interpreted] So this is Mason. If you look at Q2, Kakao Gift GMV, it was up 44% year-on-year, continuing a very solid growth trend. But on a Q-on-Q basis, it did decline 5%, and this is due to the base effect. Because in Q1, there were holidays, like the New Year's and other events, where more high-ticket-priced gift has been traded. And in Q2, there were seasonal -- it was a low season or off season in that there were no major events that required gifting. So that had an impact. However, if you look at the GMV trend for July, we expect that starting in the third quarter, we will see some recovery in the growth trend. And in terms of the -- on the user side, with more people giving gifts online, we see that the repeat visit rate by these users have gone up quite significantly. And also, number of purchases per user have gone up as well. So in terms of other metrics like number of visitors, the price and the frequency, we see a quite positive loop, and that is the basis for us thinking that there will be a continuous growth going forward. This year, we have really strengthened the product lineup to include premium and masstige brands lineup of product so that we could complete our product offerings. That will be on par with what people can get at the department store. And also, we will move away from or we will expand from a very conventional B2C area to a more B2B segment. And so for this year, we will try a -- we will try something new called Kakao Gift for business. This is something that was newly released recently.

[Interpreted] So this is Jae. Responding to your question on Kakao Commerce, we will continuously try different innovations while placing priority on customer experience at every different interface of the service offerings. What we mean by that is that if you look at Kakao Talk Gift, we will provide more occasions for our customers to gift one another and help them find the gift that's most appropriate, and delivering that product that befits a gifting culture. For Talk Store, we will provide opportunity for people to purchase high-quality product at discounted price. Makers will be a place where people could come to find out about new products. It will be a place where they first meet certain new products. And live commerce will be a place where people can actually experience the -- whole experience of shopping, whereby they could come and really pick and choose the products that they like. In terms of the ZigZag impact, well, as you know, after we have merged ZigZag with Kakao Style business unit, we are, at this point, trying to pinpoint different areas where we could maximize synergy. And we expect that in the near future, we will be able to share with you good result and good performance from these initiatives. Now for your information, we are currently targeting to achieve a total GMV of ZigZag at KRW 1 trillion, and we're expecting top line revenue growth of 70% on a year-over-year basis. And you've mentioned whether our strategic direction is to go into a marketplace model after the acquisition and merger of the commerce entities based off of our Talk Store. In terms of our existing platforms, such as Kakao Talk Gift, Makers and Talk Store, we will continuously trigger and give momentum behind their growth. And there will be additional growth engine that will be created from the synergies between the Talk Channel and the Store.