Kakao Corp. (A035720) Earnings Call Transcript & Summary

Good morning. Thank you all for joining this conference call, and now we'll begin the Conference of the Fiscal Year 2022 Fourth Quarter and Full Year Earnings Results by Kakao. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]. For reference, the announcement of management performance is made through simultaneous interpretation. And the question and answer is made through sequential interpretation. Now we shall commence the presentation of the fiscal year 2022 fourth quarter and full-year earnings results by Kakao.

Hello, I am Eleanor from Kakao IR team. Now let's begin the fourth quarter and the full year 2022 earnings conference call. I'm joined by Simon Hong, CEO; and Jae Bae, CIO of Kakao Group. 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. Also forward looking estimates are based on assumptions. So actual results may differ from figures included in today's presentation. I will now invite Simon to present on business highlights for Kakao, the parent and the major business results of the platform.

Good morning. I'm Simon Hong, CEO of Kakao. Last year was indeed a challenging year for our company, as external factors such as macro uncertainties and the pandemic had an impact on the growth of our core businesses. Additionally, the failure incident that occurred in October caused significant concerns for our users and stakeholders. Thanks to the dedication and hard work of our Kakao crews, we were able to overcome the challenges we faced. Despite this, we anticipate that growth may be limited in the first half of this year due to the current economic outlook. This year we will reflect on problems that happened overlooked during 10 years of compressed growth and improve our business management from structure to organizational culture. We will continue to provide more useful services for those who use KakaoTalk and create a solid business model. On that note, let me highlight some of the changes we have planned for Kakao. KakaoTalk has driven significant growth over the years, due in large part to its strong traffic. While the inbound and outbound traffic generated from the chatting tab has grown significantly and is almost reaching its limit, but we believe that there is still significant potential for improvement when it comes to the communication features of KakaoTalk and its traffic. As such, our top priority for KakaoTalk this year is 2 [ segments ] different modes of communication, providing the best fit in terms of features and format depending on the relationship and identity of the counterpart thereby improving the quality of communications. For example, I'm a person who enjoys swimming, reading books and talking to others online who share similar interests. During work hours, I am an employee of Kakao and when I return home, I am a father and husband. While I as a person remain the same, I would adopt different modes of communication depending on my role and situation. I believe that KakaoTalk should evolve into a platform that can support a wide range of modes of communication among its users as they interact and communicate within their network of relationship which may include family, friends, colleagues and people with shared interests. Last December we rolled out stickers on the profile domain, offering a lighthearted way for people to share messages, even with friends who they don't frequently speak to. We are also thinking of ways to change the order the names are shown in the friends tab, which is currently in alphabetical order to, for instance, order of importance or frequency. We also plan to connect multi-profile with digital ID, so that it can be used in situations where credibility is required. Open chatting service will also go through some changes, so that information and emotional exchanges among users of same interest can take place in a safer manner. We will strengthen open chatting feature, centering on a variety of topics including drama, movies and large-scale promo events, and we'll set it up as a separate tab, carving it out from the chatting tab, so that we can provide real-time updates and contents more quickly to users. This year we will focus on bringing changes to KakaoTalk's essence, which is communication and on making a solid foundation. On top of reinforcing our core business, we are exploring new growth opportunities through our focus on AI and Healthcare. We see hyperscale AI model, including ChatGPT, which has recently been the buzz, will be both an opportunity and a threat to Kakao. I say this because services developed based on AI are not differentiated by innovative ideas, but by the size of the model which is determined by the amount of investment you put in. And because the quality is dictated by investment, global companies with their large sum of capital and technologies have an absolute upper hand in this battle. Rather than competing head-on with global companies in hyperscale AI model, which require an astronomical amount of investment, we plan to leverage KoGPT, a Korean specialized AI model of Kakao Brain, so that we may focus on what we do best, which is vertical AI services. We will quickly introduce AI power services before the end of the year and buildup on our AI capabilities in a very cost-efficient manner. In the Healthcare sector, Kakao Healthcare is developing solutions and platforms to digitize standardize medical records and clinical data held by hospitals. We will continue to collaborate with these healthcare institutions, so that in the mid to long term, they can use medical Big Data to improve clinical care efficiency. For our users, we plan to launch real-time self-monitoring services, enabling individuals to track their health data without any time or location constraints. Kakao Healthcare will serve as a bridge between high-quality healthcare providers and individuals seeking to improve their health. With this goal in mind, we will continue to introduce services that contribute to the overall health and well-being of our [ suitors ]. Before going into highlights of business performance, I would like to take a moment to highlight our efforts in ESG management over the past year. For environmental efforts, we replaced the entire power consumption of Jeju office, with ecofriendly solar energy throughout last year and achieved RE100 for our Jeju office. In addition, the Active Green Initiative announced in April, announced plans to convert 100% of Kakao's total power consumption to ecofriendly energy by 2040. For social efforts, we are focusing on improving digital accessibility for visually impaired people on Kakao services, with the appointment of the first Digital Accessibility Officer in the IT industry in April. In July we established the human rights and technology ethics team as a dedicated human rights management organization, providing directions for our human rights friendly management activities within the Kakao community. Starting in November, we launched the Kudos for Credos merchant project to help traditional market merchants easily transition to digital and are implementing programs to assist them. For governance efforts, we were the first company to set up Tech Ethics Committee last July and also baked in Tech Ethics team inside key Kakao affiliates to implement measures to comply with AI code of ethics, inspect risks and strength and transparency of algorithms. As such, we are doing our utmost to live up to our social responsibilities. Our efforts in ESG management have been recognized by various external entities as we were included in the Dow Jones Sustainability World Index for 2 consecutive years and received a AA rating from MSCI. In 2023, Kakao will remain steadfast in our commitment to sustainable growth and fulfilling our ESG responsibilities. Next, is on key highlights of each business. First the Platform for Talk Biz ad YoY growth was 3%, as the strong growth of the Talk Channel offset the slower growth of the Bizboard. However, the ongoing economic recession led to advertisers reducing their marketing spend and the delay in counter service recovery because of the Q4 incident caused a significant decrease in Q4 revenue growth. We expect difficulties to continue on ongoing uncertainties, but we are committed to finding ways to overcome this challenge and bring sustainable growth. First, as we are able to use videos for Bizboard, CPT and message products, we expect competitiveness of branding advertising products to rise further. With strong coupling of Talk Store, store management platform ordering, booking and other business tools for the small to medium advertisers, we expect adoption and usability of Talk ad products to increase by such advertisers. We will focus on making Talk Channel product #1 Kakao advertising product, so as to further strengthen our competitiveness as a medium of advertisement. For Talk Biz Commerce including Gift, Talk Store, Makers, Web and Zigzag, Q4 combined GMV was up 7% YoY while 2022 annual GMV was up 17% YoY. We saw 12% YoY growth of Gift GMV which drove overall GMV growth of Talk Gift. Luxury brands, beauty and fashion products were well received by users who've made purchases for their own use, with Q4 the self-purchase rate for the luxury fashion category reporting 48%. This year on top of luxury fashion and beauty, we plan to expand into premium segment of the food category, frequented by older age population equipped with higher purchasing power, so as to drive continuous growth of the business. For Talk Store we plan to showcase Kakao's unique advertising-based commerce business model, by integrating Talk Channel and Talk Store this year. In the first half of the year, we will improve the service by launching a commerce-specific channel messaging feature, allowing Talk Store sellers to send targeted ads based on their purchase data to users, while confirming brand news through Talk Channel and building a virtual cycle that connects to the purchase directly from Talk Store.

Next Jae, CIO of Kakao group will walk through Q4 key business highlights of subsidiaries, as well as the financial results.

Hello, this is Jae Bae. Let me start with the key business highlights of subsidiaries. I'll begin with the platform and others business. In Q4 mobility business showed YoY growth of 28%, while full year reported growth of 46% backed by the solid growth of -- from the taxi and driver for hire following the endemic, and with the parking business making the [ rest ]. For the taxi business, due to government's price hike policy to mitigate the late night shortage, the number of providers increased. While for the parking business more than 1 million people registered parking pass, which provides automatic payment, eliminating the need to pay on the spot, all of which drove a stronger coupling of car owner services including Kakao T's navigation. Going forward Kakao T platform will become a vehicle lifecycle platform, supporting car maintenance to car selling. Next Kakao Pay's Q4 TPV was up 17% YoY to KRW 31 trillion with annual TPV growing to KRW 118 trillion. In Q4, MAU recorded high at 23 million, and with the higher activity rate of loyal users, the proportion of users using more than 3 services increased to 77%. In 2023 Kakao Pay will strengthen user benefit and increase global merchants for its payment business, while expanding financial product lineup to further upgrade services. Before going into Content business earnings results, let me first provide some color on Kakao Entertainment's recent investment of KRW 1.2 trillion. Kakao entertainment is driving the vision of beyond Korea, underpinned by its global value chain and unparalleled IP portfolio spending into story, media and music. Based upon this investment and business capabilities built up so far, we'll generate added value across story, music and the media business and lay the basis for robust global growth. Next is on global story business performance. In Japan, the manga market showed slower growth rate of 9% YoY, but excluding the FX impact Kakao Piccoma's annual GMV increased by 27% YoY, driving the overall growth of the industry. In Q4, to validate the efficiency of marketing spend, we lowered the marketing budget over a specified period, which drove down the revenue temporarily. But with the year-end holiday campaign and resumption of marketing spend in December, December revenue broke the record. Backed by marketing efficiency, profitability also improved and recorded a record high operating profit in Q4. We are focusing on identifying new growth momentum since the setup of a globally integrated organization. In terms of services, in North America after the introduction of [ free after three ] hours, which we first tested in the domestic market, daily average number of views and user metrics showed a robust uptrend. In terms of IP lineup, as key contents are gaining greater influence and accounts for 85% of total GMV and we plan to broaden the market base by increasing the supply of proven key IPs. In domestic market, we are planning to introduce strong improvement IPs one by one, given that we own more than 10,000 original IPs, which is the largest count in Korea. In Q4, The Villainess Is A Marionette gained popularity with more than 150 million cumulative views, while this year we plan to showcase anchor IPs from various genres, starting with the mega IP Solo Leveling. We were also planning to introduce spin-off of anchor IPs in the forms of games, animation and web novels to strengthen the proven IPs leverage. The webtoon Love Alarm which grossed 6 billion cumulative views globally last year was made into a drama and a variety show successfully extending the lifecycle of the IP. Story business will continue to seek -- balance growth with profitability, furthermore will offer a stronger experience for content consumption to our user base, based upon proven IPs from both domestic and global markets. Next is Media business. The film Hunt received great reviews after the release in North America, while the drama of The First Responders ranked #1 in TV ratings and domestic remakes using global IPs were well recognized in the global market. This year we have more than 3 [ temple ] IPs to be released in key global OTT platforms, and The First Responder and Gyeongseong Creature have decided to go into Season 2 production. As such, we will showcase franchise of IPs in various different genre. Next is on Kakao's equity investment into SM Entertainment. For quite some time, the 2 companies have discussed ways to cooperate and we executed a comprehensive business cooperation agreement. Via stake acquisition, Kakao and SM Entertainment have agreed to bring together both company's IPs, content and technological capabilities into a strong tie-up. First, we'll work together in global distribution and music to maximize IP revenue, while integrating the global network to strengthen global competitiveness. Also, through co-production of K-Pop artistes will bolster competitiveness of K-Pop on the global stage. We will also build up a strong lineup focusing on artist's IP capabilities on the fan platform and adopt OSM new strategy to make webtoons and characters based on the IP. Furthermore, we will also utilize [indiscernible] which Kakao is building jointly, carry forward new business that leverages AI, metaverse and blockchain technology. For the game, Kakao Games backed by stable performance of Odin and the release of new title from various genres, Eversoul launched early in January, is showing some meaningful early results, while ArcheAge War which will be launched in Q1 is expected to successfully attract high level of standby demand for MMORPGs. Underpinned by such lineup with diverse genres, we plan to drive revenue growth while investing and internalizing original IPs with high hit ratio that can bring global results. Next is on Q4 financial performance. In Q4, consolidated operating revenue was KRW 1.8 trillion down by 5% QoQ and flat YoY. In 2022, consolidated operating revenue was KRW 7.1 trillion, up by 16% YoY. On a quarterly basis, platform revenue was down by 2% QoQ and 4% YoY to KRW 967 billion. Talk Biz revenue was up 11% YoY and 9% QoQ to KRW 520 billion. Of Talk Biz, despite of economic slowdown leading to advertiser's budget cut and opportunity costs following the fire incident, ad revenue was up 5% QoQ and 3% YoY, driven by the sustained growth of messages. Commerce revenue backed by the expansion of highly profitable items in Kakao Gift, including delivered and 1P products, revenue showed a growth of 19% Q-o Q and 17% YoY. Portal Biz revenue was down 11% QoQ and 25% YoY to KRW 98 billion, due to the consolidation of subsidiaries and overall decline in Daum Portal's ad Revenue. Despite steady growth from Mobility business notwithstanding negatives, such as cool weather and World Cup, platform and other revenue decreased by 16% QoQ, due to decline in KakaoPay's Financial Service revenue and pay securities change in accounting treatment for FX hedging. On a YoY basis, due to the base effect from blockchain and cost service, revenue declined by 13% reporting KRW 349 billion. Next, Content business revenue was down 7% QoQ and up by 3% YoY to KRW 808 billion. Due to the delay in new launches and low seasonality of non-game business, game revenue was down 22% QoQ and 17% YoY reporting KRW 231 billion. Music revenues did 8% QoQ due to the base effect of [ higher ] concert revenue and [ via ] new album releases, but on a YoY basis increased by 14% to KRW 231 billion, thanks to more concerts and album releases following the endemic. Story revenue was down 4% QoQ on the back of delay in Solo Leveling release, which is a highly anticipated IP, as well as Piccoma's downsized marketing, while posting 5% YoY growth to KRW 222 billion backed by North American platform and rise in IP distribution revenue. Lastly on rising number of titles booking production revenue like Gyeongseong Creature and The Worst of Evil, Media revenue increased by 33% QoQ and 39% YoY reporting KRW 125 billion. Next is on consolidated operating expense and profit. In Q4, consolidated operating expense was down by 2% Q-o Q and flat YoY reporting KRW 1.7 trillion. In 2022 full year consolidated operating expense was KRW 6.5 trillion, up by 18% YoY. To run through each separate item, labor costs was down 6% QoQ due to one-off accounting adjustment in Q4 on quarterly booked incentives, while it decreased by 21% YoY reporting KRW 408 billion on the back of one-off base effect from Kakao Venture's incentives. On the back of increase in headcount from subsidiaries and consolidation, and the company increases in labor-related expenses, on yearly basis, labor cost was up by 19% YoY to KRW 1.7 trillion. Revenue linked expense was flat QoQ and up by 9% YoY to KRW 705 billion, backed by increase in 1P products of Kakao Gift and content production costs were driven up, while decrease in mobile game revenue drove the decline in marketplace fees. Driven by increase in infrastructure fees following expansion of businesses across all of Kakao and its affiliates, outsourced infrastructure expense increased by 3% QoQ and 5% YoY, reporting KRW 246 billion. Marketing expense, thanks to the corporate wide efficiency efforts, decreased by 3% QoQ and 16% YoY to KRW 109 billion. Marketing spend ratio against revenue for Q4 was 6.1%, and on an annual basis, it was 6.8%. Depreciation increased by 6% QoQ and 35% YoY reporting KRW 162 billion due to increase in depreciation of list assets following the move into new office. All-in-all, Q4 operating profit was KRW 100 billion with OP margin of 5.7%. In yearly basis, operating profit decreased by 2% YoY to KRW 581 billion, with operating profit margin of 8.2%. For your information, Kakao separate basis revenue comprising adding commerce business reported KRW 651 billion, with operating profit of KRW 170 billion and OP margin of 26%. Next is on non-operating revenue and expense; other revenue was KRW 76 billion due to disposition gains from sale of stake in subsidiaries, mostly in non-core businesses. Other expense was KRW 1.6 trillion, including goodwill impairment of KRW 691 billion, with that of Tapas Entertainment; and one-off accounting expense related to Lionheart stake and valuation losses from decreased market price of listed companies. Equity-method gain was KRW 21 billion, declining KRW 3 billion in QoQ basis on dropping Kakao Bank's net profit. Equity-method loss was up KRW 11 billion QoQ to KRW 42 billion, due to increase in losses from equity-method companies. Financial revenue was KRW 128 billion on the back of rising interest income from rate hikes and rising valuation gain from financial assets related to equity held by subsidiaries, which drove KRW 65 billion increase in QoQ basis. Financial expense was KRW 9 billion, down by KRW 59 billion QoQ on decline in liabilities and financial expenses, non-controlling stake from invested funds. In Q4, there was income tax refund of KRW 349 billion and consolidated net loss of KRW 539 billion. In yearly basis, net profit was KRW 1.02 trillion. Lastly on CapEx, with investments into building datacenters, including machineries and constructions in progress, CapEx for tangible assets was KRW 145 billion and CapEx for intangibles including Content related copyright was KRW 41 billion, amounting to a total CapEx of KRW 185 billion. This ends the earnings highlights for Q4 and full year 2022. We will now begin the Q&A.

[Operator Instructions] The first question will be presented by Soyun Shin from Credit Suisse.

I would like to ask you 2 questions after your decision to acquire 9% stake at SM Entertainment, there has been a slew of news. Would like to understand to what extent you're foreseeing synergies with SM Entertainment, together with your Kakao Services? And how is that going to be unique compared to other companies or your peers, and when will we be able to see the start of this collaboration between the 2 companies and also the realization of the synergies. Second question is regarding your advertisement revenue guidance, can you provide us with some color on your ad revenue guidance? And also specifically regarding your open chatting, is this going to be add or replacing the third tab or are you going to be making a new tab or would there be any changes to your previous plan to introduce a separate open chat application.

This is Jae, I will respond to your question about SM Entertainment. Kakao and SM Entertainment have been discussing with one another over a quite long period of time to find ways to further our cooperation. And in terms of bringing the capabilities and competitiveness of each of the companies, in relation to platform, IT technology, and IP power, we will be coupling those in order for us to maximize synergy going forward. To be a little more specific regarding each of the business areas where we will be cooperating, first we will cooperate in the business of global music distribution. Each of the companies have strength in their own IPs and supported by Kakao's music distribution capabilities, we will be able to expand our influence across the global music market. At this point we are engaging in discussions as to find the most optimal way forward. And we believe that by leveraging the strong bargaining power that the companies have, we will be able to maximize the revenue from global music business. We are also talking about ways to cooperate in the global talent management business. Currently, we are thinking of integrating our domestic and global network that spans across U.S., Japan, and other countries, so that we can engage in and implement our Global Talent Management business together. So we will not only explore new K-Pop artists and also debut them, but we will also find ways to further strengthen the tie between the competitiveness of the two company's IPs. Also in terms of the webtoon and web novel and character goods business that Kakao is involved in, we will also be onboarding SM's IP and we will try to increase the use of -- or leverage them much more actively going forward. So in terms of the fan based platform business, we have the artists and talent IP that Kakao owns and also we have IT capabilities, which can be actively utilized in line with the currently established fan based platform that SM has. Also currently Kakao is building an arena in Seoul. Once this arena is completed, we will be able to have large scale concerts of SM Entertainment's artists, and we will be able to provide a very unique experience to the audience. The first aspect that we are also collaborating is on the areas of AI, metaverse and blockchain. We will be able to take Kakao's technologies in these areas and we could cooperate and co-develop businesses together with SM. Also going forward, we are open to other ideas, we will actively explore new business items, so that we can carry out a very comprehensive cooperation in different businesses.

This is Simon. I will respond to your question about the advertisement revenue guidance. In light of the overall macroeconomic outlook as well as how quickly our new businesses are deployed, the outcome may differ. But our internal objective is to make sure that we achieve a profitability growth that is at least on par with what we've seen last year. In the first half of the year, we expect that due to the fall in the demand that we are seeing coming in from the advertisers that there will be some limited top line growth from the existing advertisement product. However, starting Q1, we believe that since we're going to be upgrading some of our key ad products including Bizboard and also we will be strengthening the Talk Channel and the my Friends tab inside the Kakao Talk platform including the open chatting, we will be expanding new advertisement services with an objective of recovering our advertisement growth starting the second half of the year. Responding to your second question about open chatting. With regards to the timing of the launch of the application, at this point in time we do not yet have a specific timeline in place. And also whether we're going to go separately with a separate tab or to release it under a new tab, that will be a decision that will be made before the end of this month. So once we make the decision, we will come back to you and share that information with you. Now open chatting, if you look at it, is a very activated service that bring together people of same interest in the form of a community chatting. And we want to make this into a service where people could use very trendy cue words to help them discover and to explore Kakao Talk. As the feature of open chatting becomes much more strengthened, we want to make it into a place where people are not just engaging in simple conversations on a real-time basis, but we believe that this could lead to and become a place where people could very actively engage in discoveries and exploration of different ideas.