Kakao Corp. (A035720) Earnings Call Transcript & Summary

Good morning. I am NK, Kakao. Since the beginning of the year, there were concerns over a global economic slowdown and macro drop back -- backdrop has been challenging. High base of earnings seen over the past 2 years during the pandemic weighed down heavily as a burden in terms of growth, and I expect that will continue to be a burden in the second half. In the face of a difficult environment, it's important to clearly identify and define our strength and the core, and we came to the conclusion that to us, it is ad and commerce. As mentioned during the last call, Kakao will move beyond the limits of Kakao Talk by moving from real-time communication tool to becoming an interaction-based service free from the bounds of 1 single objective, allowing a lighter touch and casual interaction while expanding into connecting with strangers beyond friends who share a common interest. We have already started to redefine the tabs on the Talk platform as we embarked on this evolution. I will go into a little more detail on the strategy and changes that are upcoming in the second half of the year. There will be a revamp of profile and friends tab on Kakao Talk with an addition of social interaction elements, allowing people to casually interact with friends going beyond a simple real-time-based conversation. Profile was where people express themselves, but it was 1 directional through the changes, which will happen this year, friends after discovering your status or messages on the profile can leave behind for instance, a sums of emoji or other interesting emojis making the profile segment in place for a sympathetic and interactive communication. These changes will also allow people to express more things under profile segment if they want to receive encouragement or to be congratulated for certain events. Friends who come by that message can leave behind their reactions or even send gifts without having to leave the profile page to go to the gifting services. Also, we see that people are reluctant to update their profile, all that often because on Kakao Talk, you have friends who are very close, not so close and others who you've never even met before. So we decided to create a new segment where people can upload content more frequently about what they're doing during the day and what they feel at a certain moment. Introducing a new feature, allowing users to share such information to predefined group of friends. This will encourage people to frequently update their content sharing, what they're doing during the day and what they're feeling and users can visit their friends profile and consume such shared content. So this first half in Kakao Talk, the Friends tab, we evolved into a window through which you discover what your friends are up to, whenever you're feeding board and a place you express yourself. Through such changes, we expect number of profile views and time spent and other user activity metrics will increase. And through a strong coupling with Talk Biz, which include advertisement, gifts and emojis, we can look forward to additional monetization opportunities. Before the end of the year, we plan to expand this board surface in the friends tab, helping to connect more advertisers with users. We also expect our Emoticon Plus business to further expand as people use it as a tool for interaction inside not just the chatrooms, but in the profile segment. Bigger potential will be seen from synergies with gifting. Kakao Talk Gift saw a rapid growth following the addition of birthday friends and the first half of Kakao Talk. But apart from birthdays, there was lack of connection between events, either for a celebration or for consolation and the very act of gifting. So if it's made easier for people to discover how their friends are or what they are up to by looking at the profile segment of the Friends tab, the active gifting for even minor occasions can reinforce the context around gift giving working as another trigger for growth for us. Kakao Talk having been a tool connecting friends has the open chat, a feature which is for connecting strangers who share the same interest. Although we didn't run any special promotions for open chatting, it became a very strong service with a DAU of 9 million users. From the second half of the year, we plan to make improvements for better user entry into open chatting while making upgrades to broaden the user base and further activate the services. We will start by expanding entry points for the open chat in various services within the Kakao ecosystem. Just last month, we added open end shortcut to Kakao Talk more tab and down search results. And this month, we will add an entry point on the uppermost part of the chatting tab. Once we create a nexus between open chat and content platform like Kakao Page, Melon or large-scale events like the MMA, I believe there will be greater inflow of users engaging in open chatting from respective friend. By way of strong coupling between the open chat and Kakao's extensive content and platform that supports mega traffic, open chatting will continue to develop as Korea's biggest interest-based service. Eventually, we will also plan to launch a stand-alone application called Open Link and Go Global after we lay down solid basis in the domestic market. In the near future, I hope global fans can talk about their favorite Kakao Webtoon by coming together on the Open Link platform. Kakao Talk's Gift tab will also get a new facelift. This tab works as a nexus connecting with services across greater Kakao affiliates. We plan to redesign the tab to make it a convenient channel through which we reach out to the world, enabling users to connect to services inside the Kakao ecosystem as well as access everyday service from all platforms, making the tab another reason for users to come and use Kakao Talk every day. Enhanced user activity will also eventually form the basis for Kakao's core businesses, i.e., advertisement, commerce business, notching up profit generation capability of the Talk Biz. Next, I will elaborate on Talk Biz. First is platform. Our Talk Biz ad driven by inventory optimization on Bizboard and surface expansions outside the talk, revenue was up 20% on year. We plan to aggressively expand Bizboard's services in the second half as we go into the second half of the year. Now we have plans to introduce Bizboard and the friends tab that is the first half and expand into Kakao Pay and Kakao Bank. We also expanded ad services of platform like PayMe, BGZG, Every Time and L-Point. We are getting increase from companies who wants to adopt Bizboard. And so we expect our inventory to grow going forward. Kakao Talk channel, there was 27% rise in number of large channels who have more than 100,000 friends as revenue posted a 47% growth. Kakao Friends continues to support the increase in talk channel friends for advertisers to which advertisers are engaging in active marketing communication. And this linkage is becoming stronger. As of the second quarter, there are now 20,000 advertiser who adopted this thing, and this uptrend is expected to continue, supported by the e-commerce platform connections. And for the entire year, we are looking forward to a solid growth from the Talk channel. Next is on the Talk based commerce business. Second quarter Talk based commerce total GMV was up 19% on year, reporting KRW 2.1 trillion. Talk Gift GMV was up 19% on year, while Talk Store posted a 7% growth. On full lifting of social distancing measures in the second quarter, there were signs of slowdown across domestic e-commerce market. As impact was felt by our major business verticals and the commerce business, including Gift and Talk Store. High base from special demand during the pandemic period is expected to weigh down heavily on commerce growth for Q2 in the second half of the year. But as I've mentioned before, from the second half, as social interaction elements will become stronger on the Talk platform and gifting seen expands to include minor everyday occasions and through strong coupling with open chatting, which can activate active gift giving to people who aren't necessarily friends, we will -- will all be leveraged as a new driver for growth for Kakao Talk Gift. Talk Store, which has developed based on Talk Deal will evolve into B2B2C commerce platform. Unique to Kakao, which combines a real-time message type ad, which is the talk channel and through a new expansion into commerce, search ad business model, we will secure foothold for another growth forward. Next, Senior Vice President of CAC, Jae Bae will walk through Q2 highlights of our key affiliates.

Hello. This is Jae. Let's begin with the global performances for the Q2. Let's begin with Global Story business results first. In North America, we are ramping up growth by taking our K-Webtoon which is proven and tested.Tapas, the Webtoon platform from North America is gradually expanding original IPs, which led to more than 75% of revenue coming from IPs of Kakao Entertainment. In August, with finalization of the Radish, Tapas and [indiscernible] mergers, we now have a more solid platform network. We plan to further build on the synergies through integrated marketing strategy underpinned by content library across K-Webtoon, English native web novels and content that cater mostly to male audiences. Through such originals IPs and synergies with the platform, we are targeting about KRW 500 billion of North American platform GMV in 2024. In Japan, Kakao Piccoma has a solid #1 position in Japan's ad market with monthly users surpassing 9.5 million in Q2, driving a record high monthly GMV of above JPY 8 billion. Kakao Europe with its launch in France last March is seeing steep growth in number of downloads and users by competitiveness of having both K-Webtoon and Japanese manga very quickly solidifying its market position. In Southeast Asia, services in Thailand and Indonesia went through a renewal as Kakao Webtoon. AAA IPs that had a successful domestic run are being showcased in sequence, and we will endeavor to become a #1 platform in the ASEAN market by speeding up offering of competitive titles on the ASEAN platform. Kakao's Global Story business is strengthening its global positioning underpinned by extensive content library, advanced platform and specialized marketing strategies. As a result, global mix out of the total story platform, including Piccoma and Entertainment in Q2 went up to around 80%, continuing its growth trajectory as truly a global business. In our media business, the film Hunt was invited to can and Toronto Film Festival and had a presale run in 144 countries, attesting to Kakao Entertainment's global content production capacity. With the release in the second half and featuring of lineup of content through a global OTT platform, including Director [indiscernible], we expect to continue on with a steep up trend in media business. Global OTTs have announced that they plan to continue to invest in Korea as its drama, films and entertainment contents are at the forefront of the content market. With the content capabilities of Kakao Entertainment, aligned with market opportunities, we expect growth to further speed up. For the music business, a global fandom for K-Pop expand, music revenue is growing fast, was also a supporting of a solid Melon revenue and artists like IVE, Monsta X and Boys are planning on going global to U.S. and Japan, and we expect will also drive the growth of the music business and will also expand the global fan base. Kakao Games on the back of a successful run of the mobile games, Oden and Uma Musume Pretty Derby we proved yet again the company's acumen in running the game business. Uma Musume was launched in June '20. And with a major update in July, became a top-grossing title in both marketplaces and the day of the update recorded the highest daily revenues and rebound in user metrics. The game will serve as an important underpinning of the gain lineup for the company. And in the second half, it will bring visible performance from the global market. We will also release new titles, including Eversoul and Destera, and will launch Oden in Japan, North America and Europe sequentially starting the first half of the year -- first half of next year, that is. The global expansion of K-Content cut across story, music, media and games, which is building a global fandom base, and we believe this will open up opportunities for our global commerce business. We are hence making preparations to take our commerce business global, starting with ZigZag and Grip, and we're testing ZigZag Global for an official launch in September, targeting Japan, North America and Canada. . We are also planning on supporting Korea's fashion and beauty businesses so that they may go global with Korea's highly competitive fashion and beauty K-Style merchandisers, elevating their brand awareness in step with K content. Now for the mobility business, since the lifting of social distancing, last April, we are seeing an explosive growth in demand for mobility. This drove solid growth for taxi and driver for higher business, which make up the key revenue stream. And parking business, which is a new revenue source has hit record high quarterly revenue and is up trending the following the foot steps of taxi and driver for hire. With recovery in demand, daily average completion rate for Taxi was up 38% on year, while driver for hire saw demand recover. As users largely preferred app-based driver service, total revenue was up 46% on year. Parking is a new business area for us. And after acquiring a parking management company, we also bought a specialized operator called GS Park24 last June, gaining a meaningful basis for growth and becoming a car owners platform. Also, in order to prepare for the age of future mobility, we are making investments into autonomous driving and urban air mobility. Also in partnership with Splyt, a global mobility platform company. We launched mobility roaming services sequentially across global markets, supporting the use of Kakao-T app signaling a start the full-fledged attempt at global expansion. For Kakao Pay, we continue to increase acceptance points and universality by increasing core merchants on off-line for payment. And following the launch of loan comparison service and MTS, we opened the insurance marketplace last July, diversifying revenue stream for financial services. Kakao Pay achieved operating profit margin of 10% on a separate basis entering a stable profit growth phase, and we expect growth to continue on diversification of business models for financial services. It is also worth noting that total TPV was up 19% on year to KRW 29.1 trillion and revenue TPV, which includes payment and financial services showed steeper growth versus the total TPV accounting for 29% of the total TPV. Also, a number of transactions per user was up 25%, hitting above 100 transactions for the first time. Lastly, let me run through the update on ESG management. Kakao has been aligned with the greater society in setting sustainable growth as our objective, and we wish to further advance it. To make a system where ESG is embedded in Kakao and its affiliates, we appointed Simon Hong as a co-CEO of Kakao. We announced our net-zero pledge last April and was the first clean Internet company to join the SBTI a global initiative and guided by our mission that everyone should from equal access to all of Kakao's service offerings. We were the first to create a DAO showed for Digital Accessibility Officer. We will also actively engage in human rights base management and also in ethics for technology, which are areas that we can excel in. To that end, we launched Technology Ethics Committee, which was a first attempt by a local tech company. The committee will explore ways to contribute to greater society through promoting transparency for algorithms, monitoring compliance of AI code of ethics and lowering the risk that technology may entail. For more details, please refer to our ESG report titled, Kakao's Pledge in Responsibility 2021, where we list our goals and results, and we will build on the trust side living up to these objectives. I will now move to key financial highlights for the second quarter. Q2 consolidated operating revenue was KRW 1,822.3 billion, up 10% on quarter and 35% on year. Platform revenue was up 5% on quarter and 22% on year to KRW 930.7 billion. Talk Biz revenue was down 2% on quarter and up 16% on year to KRW 453.2 billion. Despite economic slowdown, thanks to optimized inventory onboarding of big advertisers, ad revenue was up 28% on year. While Kakao Bizboard reported 20% and talk channel, a 47% growth. Talk Biz commerce revenue was impacted by limited growth from the online commerce market on the back of the endemic. And on top of the high base effect, we saw slower GMV growth. Due to the decline in GMV from directly sourced merchandise, which are booked on a gross revenue basis and termination of noncore services like hair shop, revenue growth came in at 2% on year. With the Portal Biz, due to changes in accounting treatment for revenue and exclusions to the consolidated statement, revenue was down 10% on quarter and 18% on year to JPY 102.4 billion. Aside from such accounting changes, Q2 revenue was up 6% on quarter on the back of high seasonality and down 4% on year due to slower traffic from subdued online activities. With platform and other revenue with the easing of social distancing leading to demand recovery, taxi and driver for higher revenue reported a robust growth. And with Kakao Pay's steady earnings expansion from Payment and Financial Services business, revenue was up 21% on quarter and 52% on year to JPY 375.1 billion. Content revenue was up 16% on quarter and 51%-on-year, reporting KRW 891.7 billion. The game revenue reflects Oden launch in Taiwan for the full quarter and new revenue from Uma Musume release. And thanks to positive top line performance of new businesses in Kakao VX. Revenue increased 37% on quarter and 162% on year, reporting KRW 336.8 billion. Supported by solid Melon platform revenue, Global Distribution revenue was up and on good performance from the company's artists. Music revenue was up 2% on quarter and 11% on year to KRW 209.3 billion. Story revenue on the back of increase in outdoor activities weighing down on domestic user activity and weak yen impact for Piccoma. Revenue was down 5% on quarter and up 22% year-over-year, reporting KRW 227.6 billion. Piccoma revenue was down 4% on quarter and up 17% on year, but carving out the weaken FX impact, the growth was 5% Q-on-Q and 27% Y-o-Y. Lastly, an expanded lineup of production content underpinned by our internal capabilities, media revenue was up 57% on quarter and 35% on year to KRW 118 billion. Let me now move on to consolidated operating expense and operating profit. Q2 consolidated operating expense was up 11% on quarter and 39% on year to KRW 1,651.3 billion. In terms of the key expense items, labor cost was flattish Q-on-Q. On headcount increase, followed by a rise in wages and bonus, labor cost was up 42% Y-o-Y to KRW 426.2 billion. Driven by rise in production cost and commissions paid on the back of strong game revenue, revenue-linked expense was up 12% on quarter and 23% on year, reporting KRW 654.8 billion. Online and taxi-related commissions for mobility, outsource infrastructure expense was up 15% on quarter and 43% on year, coming in at KRW 235.8 billion. Driven by strong marketing on global expansion of the story business and launch of new game titles and MTS launch from Kakao Pay, marketing spend was up 31% on quarter and 65%-on-year to KRW 150.3 billion. For your information, marketing spend ratio against the revenue was at 8.2%. Amortization from intangibles such as original video content declined by an increase in depreciation of lease assets from the new office building lease, depreciation expense was up 4% on quarter and 72% on-year to KRW 135.6 billion. All in all, operating profit for Q2 reported KRW 171 billion with OP margin of 9.4%. Kakao's stand-alone revenue comprising ad and commerce business reported KRW 596.4 billion of revenue and KRW 137 billion of operating profit with OP margin of 23%. And expanded operating leverage from the core biz is the Talk Biz, the profitability continues to improve. Next is on nonoperating revenue and expense. With the final closing of Lionheart acquisition by Kakao Games last June, there was disposition gain from equity method shares with other revenue reporting KRW 138.6 billion, and due to reclassification of accounts for Tunamu Holdings and base effects thereof, there was a decline of KRW 1,526.7 billion Q-on-Q. Other expense came in at KRW 34.4 billion on the back of disposition loss from equity method shares following the sales of invested holdings. Q2 corporate income tax was KRW 135.3 billion, with consolidated net profit of KRW 101.2 billion. Lastly, for CapEx, server and tangibles for KRW 116.2 billion, intangibles, including IP, around KRW 54 billion, amounting to a total of KRW 170.3 billion of CapEx. This ends the presentation and business highlights. We will now begin the Q&A. Please be mindful and limit your questions to 2 per person.

[Operator Instructions] The first question will be presented by Sung Jong Hwa from eBest Investment and Securities.

I would like to ask you 2 questions. First question relates to your Talk Biz. I see that your year-over-year growth trajectory is easing as we move from Q1 to Q2. I would like to get some color as to what your outlook is for the second half of the year growth prospects? Looking at the current trend, do you have any plans to adjust your year-over-year growth guidance for your Talk Biz? And where do you see key growth drivers coming in for this business as we enter into the second half of the year? My second question, if you look at -- since the fourth quarter of 2019, there's been quite sizable impairment loss that has been booked under other expenses. I would like to understand what is the current outstanding goodwill that you still will need to further impair going forward? And should we also expect about KRW 400 billion of impairment losses for the fourth quarter of this year. And if that is the case, what will be the timing for us to see the end of the incurrence of impairment loss going forward?

This is Jae. I will respond to your first question, and I will begin with what our second half outlook is. If you look at our Q2 top line growth, it was year-over-year 35%, which was above what we've seen in Q1. But against a very volatile macro environment. And on the back of the endemic, basically, the volatilities of the user metrics have also gone up. So we do expect top line growth to somewhat slow in the second half of the year. In light of heightened uncertainties, we are at this foot point to very closely revisiting our business plan in terms of the investment plans and risk management and we are in the process of making some internal adjustments. We will do our utmost to make sure we bring a fundamental based growth in the second half of the year. Because of the macroeconomic uncertainties, we've seen advertisers cut their marketing budget. And with the overall consumption sentiment, degrading as well as on the back of endemic, the online commerce market grew at a much slower speed. Because of these unexpected external factors, well, if you look at the year-over-year growth in the first half of the year, the growth rate only was at around 20%. But as mentioned during our presentation on the earnings, starting the second half of the year, we are going to bring about a very special service offerings under Kakao Talk. Once again, just to emphasize, Bizboard is going to expand into the Friends tab, and we will see fundamental changes in our profile tab whereby we will be able to expand on gifting, and we will also strengthen synergies with our Emoticon business. Through gaining of such additional growth drivers, our objective is to bring about a higher year-over-year growth compared to that of the second quarter.

This is NK. Responding to your question. Now if you look at Kakao's overall advertisement business, about 1% of our advertisers are generating 70% of the revenue. Basically, these are large-sized advertisers based off of our Kakao Talk platform. And so it is true that when these large companies are tightening their belt, it is going to be less favorable for us in terms of our advertisement business. Now before moving on, I think it will be helpful if I define some of the terminologies that are used in the advertising industry, there's DA, display ad and SA search ad. Mostly Kakao's advertisement business is structured around DA, display ad, and our plan going forward is to expand into the SA segment, the search ad segment. Now search ad, as the name implies, is based off of -- has a strong underpinning of search. So basically, the origin of this advertisement model goes back to the search itself but now we are seeing a trend where we are expanding into not mere search, but to area of interest. So it's more of a discovery and exploration concept that is being added on to this advertisement definition. So going forward, I mean as of today, we do have search ad with that happened or that's being used within the down platform. But going forward, by our Kakao Talk platform. We believe that we will be able to expand our advertising in not just the search segment, but in the overall discovery segment. Starting with the second half of the year, we are going to introduce in the open chatting service basically an advertisement that has the strong underpinning of search plus content and open chatting is where there is high level of traffic. We will conduct and run multiple number of tests and really enhance the level of completeness of this service offering that we are currently planning for. And just like people do shopping on Kakao Talk or search for a certain location by using the Kakao map, I believe that the advertiser will feel a sufficient appeal to want to also run a search ad marketing in places and in space where the users come together under a common interest. So we will be testing many different products as we develop and release them going forward. Another fundamental improvement that we need is to move away from a static image to a video image as part of our advertising in expressing or in servicing the advertising itself. Despite the fact that we have a very strong traffic and we have the broader space of users, the reason why we have been unable to gain the majority of the wallet share of large advertisers is because other players have gained an upper hand in video-based advertising. For this board, we are mostly using performance ads. And starting last year, we've launched and released Bizboard expandable which uses video as the key advertising element, and we've been receiving very positive responses from the advertisers. And we think that this is going to help us increase our wallet share within the video advertisement segment. And we plan to further expand our advertising space for such video-based advertising, which has good efficiencies and high level of appeal. Now the question on goodwill as of the second quarter, consolidated basis, goodwill totaled KRW 5,432.5 billion, which is about JPY 464.9 billion Q-on-Q increase. As we finalize on the terms and conditions of Lionheart Studio acquisition, there was about JPY 260 billion increase in goodwill. And with the acquisition of GS Park by Kakao Mobility, there was some additional goodwill that has been booked. Now in terms of the size of the goodwill or the size of the impairment loss, we would have to closely follow the market value as well as the market situation and the business overall conditions and would need to wait for the opinion of the auditor. So it will be difficult for us to provide you with any specific number at this point. Next question, please.

The next question will be presented by John Yu from Citi Securities.

I would like to ask you 2 questions. Can you provide a bit more color on the timing during which you will be adopting a business model and additional features for the open chatting, it will be helpful if you could also provide some detailed examples of the business model, the monetization model that you are currently thinking of? Second question relates to the in-app payment by Google. There's recently been a new surgical on this as well. I would like to understand if there is any changes in your pricing policies for each of the services that you offer, such as Webtoon music, et cetera, and any initial user reactions for that against that?