Kakao Corp. (A035720) Earnings Call Transcript & Summary

Good morning. Thank you all for joining today. And now we'll begin Kakao's Q4 2023 and Annual Earnings Conference Call. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] I will now turn it over to Kakao.

[Interpreted] Hello. I'm Eleanor from Kakao's IR. Let's begin with the fourth quarter 2023 and annual earnings conference call. Today I'm joined by Simon Hong, the CEO; and [ Kali Choi ], the CFO. 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. So now begin with business highlights for Kakao, the parent, the major business results of the platform business.

[Interpreted] Good morning and good evening, everyone. I am Euntaek Hong, the CEO of Kakao Corp. Over the course of past year, Kakao has been consistently focusing on optimizing the cost of new initiatives and enhancing the growth and profitability of the existing businesses over there. The results have become clearly evident from Q4. Let me first begin the call with Kakao Talk. So Kakao Talk, initially a messaging app, has been evolving into a comprehensive communication service through a service revamp. As a result, by the end of last year, our domestic monthly active users reached 48 million, solidifying our position as a national platform. The traffic, which was primarily for chatting with acquaintances, has expanded to interaction with strangers based on common interests. In December, the daily active users of the Friends Tab and the Open Chat Tab increased to 37 million and 12 million, respectively, indicating a steady uptrend in Kakao Talk's overall user time spent. Through these changes, we believe we have successfully laid the foundation for generating stable revenue in other spaces than Chatting Tab within Kakao Talk for the mid to long term. Recently, we have been experimenting with integrating AI into Kakao Talk to enable everyone to experience AI in their daily lives. In December, utilizing a smaller-size language model developed by Kakao Brain, we launched features for summarizing unread messages and changing the tone of messages in chat rooms. Within a month of release, 1.5 million users experienced Kakao Talk's AI tools. It is particularly positive that the young users in their 20s and 30s are actively using Kakao Talk's AI tools. As Kakao holds the widest B2C touch point in the nation, just as Kakao popularized mobile services, we will lead the way in spreading AI services in the daily lives of the nation. From a business perspective, we are intensifying our efforts to expand the pool of advertisers. Last year, through partnerships with major external platforms, a significant number of SME advertisers opened Talk Channels, resulting in the total number of talk channels increasing to 2.2 million by the end of the year. As a result, annual revenue of Talk Channel messaging app surpassed that of Bizboard app for the first time. This year, our goal is to increase the number of active advertisers among all Talk Channel accounts, and by active advertisers, I mean advertisers who actively use business solutions like Talk Channel message, local news, orders and reservations. For local news, which began as a pilot service in specific areas, we plan to increase its visibility and usability to spread benchmarkable cases for SME advertisers throughout the year. Additionally, we are launching local advertising product package for the first time, which allow SME advertisers to use various platforms such as Talk Channel, Kakao Map and Open Chat with less effort and time at an affordable price. This initiative is aimed at contributing to the mutual growth of local advertisers and Kakao together. In the commerce business, amid the worsening consumption polarization due to the economic downturn, we are continuing to achieve stable growth based on a differentiated business model. Talk Gift is strengthening its global high-end brand lineup by being the first in the domestic e-commerce industry to feature Valentino and [ Luxta ], Following Tiffany & Co. and Fred. The high-end brands that joined us have not only introduced various limited edition products for the holiday season, but also conducted brand advertising campaigns across various advertising inventories within Talk Gift. As a result, GMV of luxury brands in Q4 grew by 14% year-on-year, with sales categories expanding from luxury beauty to jewelry and fashion. For Talk Store, nationally recognized brands are actively utilizing various Kakao commerce's solutions, including [ friends deals ], and are making efforts to increase the number of channel friends. As a result, the number of official brand stores expanded up to 500 by 2023 and the GMV of popular brands in the Talk Store has increased along with the rise in messaging advertising revenue as well. This year, we plan to strengthen differentiated relationship-based commerce, completing a virtuous cycle from marketing to commerce within Kakao Talk, where personalized promotions and benefits lead to purchases. Moving on to global contents business. For the content division, we are accumulating global success stories based on music and story IP. In music business, IVE's third full album released last October, recorded sales of 1.9 million copies, becoming a triple million seller. Starting from the first half of this year, we will focus on expanding the foundation of K-pop globally by officially launching a global tour in major cities in Asia, including Japan and 6 major cities in United States with the capacity of 15,000 seats. In story business, Piccoma was ranked #1 in annual sales among all apps, even including games in Japan last year. Moreover, it became the first comic app in the world to surpass an annual GMV of JPY100 billion, once again proving its competitiveness. This year, we plan to actively discover more impactful blockbuster IPs and further expand our user base to strengthen our position in Japan. In North America, Tapas has introduced a multi-episode purchase option and a new watch ads for free business model while undergoing a phased app redesign. Tapas has continued efforts to stabilize the platform, resulting in recording the highest daily GMV in January. In 2024, the global story business will continue efforts to strengthen its user base. Foreign media business, the global tent-pole IP Gyeongseong Creature was successfully released and a more robust revenue structure was established through stable supply negotiations across movies, dramas and variety shows with global OTT partners. Based on this, we will further strengthen our global portfolio by concentrating on the internalized production assets of Kakao Entertainment throughout this year. Moving on to Kakao's future growth engine, new initiatives. First on Kakao Healthcare. Kakao Healthcare launched a real-time blood glucose management service called PASTA on February 1. Kakao Healthcare aims to gain recognition for its expertise and reliability from diabetic patients and the medical community before entering into the broader health care market. PASTA is the only service in South Korea that lets users to monitor their blood glucose levels in real-time through SDK connection with CGM devices from Dexcom and i-SENS. Additionally, having received Class 2 software as a medical device certification from the Ministry of Food and Drug Safety, medical institutions can now receive and analyze patients' blood glucose information, aiding in effective blood sugar management not only during medical visits but also in daily life. Moving forward, Kakao Healthcare will actively lead in addressing the serious socioeconomics costs associated with diabetes and related chronic diseases, which nearly half of the population is at risk for, and plans to expand into the global health care market. Following up, Kakao Enterprise restructured last year to focus more on its cloud business and has completed preparation to continue its operations stably this year. In the second half of last year, Kakao Enterprise successfully migrated some servers of Kakao Games ArcheAge War from a global CSP to Kakao Cloud. Given that game servers require high performance and stability, this transition is deemed to have proven the technical capabilities of Kakao Cloud at a global CSP level. This year, we plan to further migrate some of the global CSP-run service to Kakao Cloud within Kakao Group. By possessing global top-tier technical capabilities and offering it at a competitive pricing policy, when expanded within Kakao Group, Kakao Cloud will lead the optimization of community of Kakao Group infrastructure cost. Moreover, since last year, Kakao Enterprise has decided to focus entirely on the CSP aspect of the cloud business. Based on various references within Kakao's diverse industries, we intend to strengthen collaboration with major domestic MSPs and accelerate the expansion of external partners. Moving on to Kakao Brain, Kakao Brain has been developing various size of foundation models using the large-scale AI training infrastructure provided by Kakao Enterprise since the second half of last year. As briefly mentioned earlier, the smaller language model developed by Brain has been applied to Kakao Talk's AI features and has been in service since December. Brain's KoGPT 2.0 also has a technical capability sufficient for actual application of Kakao services and is currently undergoing refinement through various field tests within Kakao Group. Since many services within Kakao ecosystem target the entire population, we prioritize cost-competitiveness and service applicability. We aim to adopt a hybrid strategy that flexibly considers both our own developed foundation models and those of global big techs. As we close the financial statements for 2023, Kakao has applied a more conservative accounting policy based on a more conservative forecast, taking into consideration the recent changes in the macroeconomic environment. Firstly, assets acquired through past M&As have been revalued strictly in light of the current macro situation. Additionally, revenue and expense items have also been treated with a more conservative accounting policy to enhance financial soundness from the perspective of capital market participants and users of financial information. For more detailed information on changes to the accounting policy and its impacts, our new CFO, Kali will provide further explanation on each item later. Lastly, I would like to discuss the reformation efforts currently underway at Kakao. We are acutely aware of the need for growth direction and management system suitable for the company's stature. Thus, centered around the Compliance and Trust Committee and the reorganized Corporate Alignment Council, we are not only undertaking a reformation of personnel, but also pushing for comprehensive reformation efforts that include governance, brand and corporate culture. In December, the Kakao's BoD and the Compliance and Trust Committee reviewed the internal control process for Kakao's investment activities. This was to ensure that the appropriateness of the investment transaction amount and potential risks could be fully considered, thereby strengthening the review and approval procedures. As many of you might know, today marks my last earnings call as the CEO of Kakao. I sincerely thank all the analysts and investors who have made considerable efforts to understand Kakao and have not hesitated to offer critical advice on the direction of the company. I ask for your continued support for the comprehensive reformation efforts that will be led by the new management team at Kakao.

[Interpreted] Next CFO Kali will go over the key financial highlights.

[Interpreted] Hello. This is Kali Choi, the CFO of Kakao Corp. Thank you for entrusting me with the significant role of CFO at Kakao. Personally, I am grateful for the opportunity but also feel a sense of responsibility during these challenging times. I'm committed to working with the Board of Directors and our new CFO to ensure Kakao owns trust from all the stakeholders and fulfills its social responsibility. As the CFO, I will strive to minimize financial risk through transparent and ethical financial operations contributing to the company's sustainable growth and development. I ask for your support as I fulfill my duties as a conscious steward for Kakao's shareholders. Let me begin with the key financial highlights for Q4. Kakao's Q4 revenue was KRW 2,171 billion, up 23% Y-o-Y while excluding SM consolidation, revenue reported KRW 1,941 billion, up 10% Y-o-Y. Platform revenue in Q4 was KRW 1,121 billion, driving -- driven by double-digit growth across all of key businesses, that is, ad, commerce, mobility and payment. We saw growth of 17% Y-o-Y and 10% Q-o-Q. Talk Biz revenue -- Talk Biz ad revenue was KRW 304 billion, up 11% Y-o-Y and 9% Q-o-Q. Despite Bizboard being somewhat seasonal, Bizboard CPT product launched last year in Friends Tab drove higher interest and ongoing demand from advertisers. There was 12% Y-o-Y growth. For the message business, on sustained uptrend in the number of advertisers adopting Talk Channels, number of Talk Channel friends increased 20% on year while total revenue recorded 17% Y-o-Y growth, thanks to product enhancements that better meet the needs of advertisers in the financial sector. For the subscription business, which includes Emoticon Plus and Talk Drive Plus, on the back of interest and engagement from loyal Kakao top user base combined number of subscriber count at the end of the year was above 3.7 million, while top line revenue was up 23% Y-o-Y, building a robust basis for earnings. Talk Biz commerce revenue came in at KRW 277 billion, up 16% Y-o-Y and 20% Q-o-Q. Total combined commerce GMV was up 9% Y-o-Y, reaching KRW 2.6 trillion. Our Talk Gift revenue in Q4 posted 19% Y-o-Y growth on the back of premium gift lineup expansion and rollout of gift reservation feature during Christmas, which helped drive users' choice and convenience, while scaled up CRM marketing, including commerce ad, drove meaningful growth in ticket size and number of transactions. Just to note that starting this quarter, Gift revenue will be recognized on -- not on when cost payment was made, but on the accrual of usage. And we're working with outside experts and reviewing whether revenue should be booked as a net basis rather than gross basis for certain products from Talk Gift and Makers business. Any accounting change that may follow has no bottom line impact and we will complete the review before the disclosure of the business report in March. If we change to net basis, we will share separate material for the purpose of comparability of financial statements dating back from 2022. Portal revenue fell 10% Y-o-Y but up 6% Q-o-Q reporting KRW 88 billion slowing the downward trend. Portal business was converted into a separate entity inside the company and since then launched a strong effort behind P&L improvement. Q4 was a turning point as we started to collaborate with outside advertising partners and expect that starting second half of this year, Portal revenue can shift its trajectory upwards, ending the downfall we've seen over the past several years. Platform and other revenue, which includes mobility and pay, was up 30% Y-o-Y and 6% Q-o-Q reaching KRW 452 billion. Mobility revenue was supported by steep end-of-the-year demand rise and pay has seen rise in online TPV following year-end high season and top line contribution from the insurance service. The way in which revenue for Franchised Taxi of Kakao Mobility currently is under -- on gross basis and is represented as such in the financial statement, but we are considering net versus growth in light of the consolidation approach. Change in accounting treatment, if there is any, will have no impact on the P&L. Content revenue in Q4 was KRW 1,049 billion, achieving a 30% Y-o-Y growth and 7% decrease Q-o-Q. Music revenue amounted to KRW 499 billion witnessing a substantial 117% increase Y-o-Y and a slight 3% decrease Q-o-Q. After adjusting for the KRW 230 billion effect from the consolidation of SM, the adjusted revenue stands at KRW 270 billion. Music revenue increased by 5% Q-o-Q and 17% Y-o-Y. On a Q-o-Q basis, thanks to stable revenue from Moment and the increase in activities of our own artists including IVE, some effects of the shrinking album markets were mitigated. Story revenue was KRW 213 billion, down 4% Y-o-Y and 14% Q-o-Q. Kakao Entertainment's story business in domestic and North American markets continued on with the profit-driven approach. As [indiscernible] top line growth was placed under check, revenue decline Y-o-Y could not be avoided. Revenue also fell Q-o-Q due to the base effect from school breaks, but over the last year, we focused on quality and placed our efforts behind improving the business fundamentals while strengthening profitability and the user base through service enhancements. Following the turnaround to profit in third quarter, there was meaningful profit reported in the second half of the year. Piccoma saw its GMV on NIM basis increase 14% Y-o-Y and revenue was up 2% Y-o-Y. But due to summer season impact Q-o-Q and end of the extended promotion this quarter, GMV fell 10% while revenue was down 9%. Media revenue while it was down 15% Y-o-Y came flat in Q-o-Q at KRW 107 billion. Due to difference in the progress of production versus last year, media revenue fell, but with the sizable lineup of new titles, revenue was stable Q-o-Q, while profitability also improved. Kakao's Q4 consolidated operating expense recorded KRW 1,982 billion, 18% Y-o-Y increase. Starting this quarter for the convenience of information for users, Kakao has undertaken the task of converting some of the commission fee of SM, which originally were included in cost of revenue on the Kakao's consolidated basis into labor and outsourcing. As a result, cost of revenue was decreased while the total amount of labor and outsourcing cost has increased. Q4 labor costs recorded KRW 477 billion, a 16% on-year increase. However, excluding the impact of KRW 88 billion from the consolidation of new subsidiaries including SM, Q4 labor costs in fact decreased by 5% on year. On quarter, as mentioned earlier, the conversion of SM commission fees into labor costs led to 2% increase. Excluding SM Entertainment, labor costs in fact decreased by 13% on quarter. Cost of revenue amounted to KRW 770 billion, representing a 9% on year increase, decrease by 12% on quarter due to a reduction in [ at market ] commission and SM cost account conversion. For your reference, the cost of revenue to revenue ratio for Q4 was 13.5%, a decrease of 5 percent point on quarter. Outsourcing and infrastructure cost amounted to KRW 324 billion, an on year increase of 32% and on quarter increase of 12%. This increase was mainly due to higher franchised taxi commission following an increase in Kakao Mobility sales and efforts -- effect of cost account conversion. Excluding SM cost account conversion, outsourcing and infrastructure costs increased 22% Y-o-Y and 4% Q-o-Q. Marketing expense were KRW 125 billion, marking a 15% on year. The primary reason for this increase was the base effect of Piccoma intentionally reducing the marketing expense last Q4 for the purpose of marketing cost efficiency verification. On quarter, marketing expense remained flat. For your reference, marketing expense to total revenue for Q4 was 5.8%. For the fiscal year 2023, it was 6%. Depreciation expense recorded KRW 206 billion, which was 28% increase Y-o-Y. This increase is mainly due to KRW 16 billion in PPA depreciation expense for investment companies such as SM. Additionally, due to increased investment in data centers and other areas, the depreciation expense, including for machinery, increased by 4% on quarter. Kakao's Q4 operating profit reached KRW 189 billion, excluding SM at KRW 195 billion. The operating margin in Q4 improved steadily from the lowest level of 4% in Q1, achieving 9%. This marks a clear recovery trend Q-o-Q since the low point in Q1 last year and we expanded operating margin in Q1 this year to improve compared to the Q1 of last year. Kakao's 2023 consolidated revenue was KRW 8,106 billion, up 14% Y-o-Y with revenue excluding SM at KRW 7,381 billion, a 4% increase from the previous year. Operating profit for annual 2023 was KRW 502 billion, a 11% decrease from the previous year with an annual operation -- operating margin at 6.2%. The somewhat disappointing operating income in the first half of 2023 was partially offset by improvement in the second half of the year. As I will explain in more detail later, due to the impairment losses on intangible asset, the consolidated net loss amounted to KRW 1,497 billion. Kakao has recognized the urgency of the situation and has made considerable efforts throughout 2023 to improve all business division across the board. To address the loss of KWR220 billion recorded last year on the new initiative, we swiftly restructured the Kakao Enterprise business, which recorded the largest loss to focus more on cloud-oriented operations, thereby reducing operation burden as well as concentrating more on areas where Kakao Enterprise can excel. Although continuous investment in AI and health care division is necessary this year, we anticipate that the overall loss from the new initiative will improve compared to last year due to the operation efficiency gains in Kakao Enterprise. In story business, structural profit improvements were being realized through the efficient allocation of cost while music business is evolving to announce its content IP capabilities on global stage, moving away from domestic center business structure. As we have laid the foundation for expanding the scale of our business and profits, we believe we have entered into a phase where the contribution of Kakao Entertainment to profit will begin to increase. More importantly, 2023 was a meaningful year in which we were able to confirm the potential for business growth inherent in Kakao through the revamp of Kakao Talk, expanding the foundation for monetization in both advertising and commerce. In 2024, we expect to see the profit generated from content and IP businesses become more visible alongside robust performance from Kakao Talk Biz. As the operating losses from the new initiative has significantly reduced, we have laid the groundwork for evenly increasing operating profit across all the divisions. Next, other expenses for this year has significantly increased to KRW 1,989 billion, including an impairment of goodwill of KRW 1,388 billion and a PPA impairment of KRW 270 billion. The substantial impairment recognized this quarter differs in nature from the impairments routinely recognized at the end of the year, each based on accounting standards in the past. This impairment resulted in process of Kakao reevaluating and reconfirming [ the best impairment ] process of itself, which has been somewhat lenient. The impairment loss includes approximately KRW 889 billion for goodwill related to Kakao Entertainment, including Tapas, Melon and its video production studio, with SM accounting for KRW 255 billion of impairment. Kakao Games, including Lionheart, adjusted expected sales due to intensified competition in the MMORPG game market, resulting in an impairment of goodwill and PPA amounting to approximately KRW 431 billion. While impairments of approximately KRW 1,590 billion occurred in the Entertainment and Gaming business, it does not significantly change the competitive strength, business outlook and the company's strategies in the Entertainment and Gaming sectors that Kakao entered. The current remaining goodwill stands at KRW 4,177 billion and the remaining PPA balance of KRW 1,082 billion. Among this, the goodwill related to the Internet portal service down, which is approximately KRW 1 trillion, is considered to have a low possibility of impairment. The remainder of the goodwill includes about KRW 1.1 trillion for Lionheart, KRW 710 billion for Kakao Entertainment, KRW 473 billion related to Kakao Entertainment. The value of the remaining goodwill for Lionheart and SM Entertainment may vary depending on future business performance and stock price. We plan to further strengthen the regular monitoring of appropriate intangible asset values and if a possibility of significant intangible asset impairment is identified, we intend to disclose it timely to the capital markets through quarterly and mid-year reports. Q4 '23 total capacity was KRW 237 billion, of which tangible asset is KRW 194 billion, intangible CapEx is KRW 42 billion. 2023 CapEx annual was KRW 725 billion, up 13% Y-o-Y. This mostly compromises of constructions in progress for IDC centers, an increase in machinery and equipments including service and GPUs. CapEx for 2024 is expected to expand from our own data center, which will start operation from this year, an investment into server and for AI and cloud service network equipments and GPUs. With the completion of IDC construction, we expect construction in progress will fall. [ This data ] and details regarding the CapEx plan has some variability, so we will continue to communicate relevant details once the size of the investment becomes more concrete. Kakao will continue to invest in AI and CapEx in which we can strive under a steady cash flow and continue to decrease the operating loss coming from new initiatives. Lastly, on shareholder return, since 2021 for 3 years, Kakao implemented a mid to long term shareholder return plan for returning 15% to 30% of standalone basis free cash flow. For 2023, BOD on February 14 decided on KRW 134 billion of shareholder return package equivalent of 30% of standalone free cash flow. There'll be a cash dividend of KRW 27 billion and cancellation of treasury shares amounting to 0.44% of total outstanding. For your information, cumulative cash payout for the past 2 years in total was KRW 76 billion and share cancellation amounted to 1.9% of total outstanding up to KRW 530 billion. During last AGM, [ AOI ] was modified which affected a change in the record date of dividend payout, enabling investors to first check the size of return before making their investment decisions. The record date for 2023 dividend is February 29, 2024. Together with the CEO, we will be -- who will be appointed in March and the newly formed BOD, we will make the decision on shareholder return plan for 2024 as quickly as possible and inform the shareholders in due course. Kakao's finance department will continue to strive to provide reliable financial information to its stakeholders as we navigate 2024 and will solidify Kakao's financial position. We will also strive for growth that benefits the shareholders and generate steady cash flow. In 2024, we'll continue to focus on generating steady operational cash flow from Kakao Talk and also to continue with an efficient business operation. We will come to investors and address the capital markets sometime in April or May with a new strategy for future business under the new management and the company's equity story.

[Interpreted] [Operator Instructions] The first question will be provided by [ Dong-jun Kim ] from CLSA.

[Interpreted] I am [ Kim Dong-jun ] from CLSA. Before I ask my question, I just would like to first congratulate you on posting a very good result this quarter. And I would also like to thank Simon for all of your hard work and the good earnings that you are able to bring. Now, moving on to the 2 questions that I have. The top line revenue was in line with the market consensus, whereas if you look at your operating profit, the results were quite good. If you could provide some more color on the specific details that drove that operating profit performance that would be quite helpful. My second question is, thanks to all of the efforts within Kakao to reform and to bring about revamping of the organization. I know that you've put in efforts to make your organization more slim and more efficient and I would presume that there would have been some cost savings and also headcount reductions. And would like to understand as to what their contributions are to your operating profit line, and also if you could provide further guidance on that, that would be greatly appreciated.

[Interpreted] Well, thank you, Mr. Kim Dong-jun for that warm message. I will respond to your first question and I will turn the second question over to our CFO. Now, regarding Q4 operating profit, it reported KRW 189.2 billion, which is up by KRW 56.2 billion Q-o-Q and it is a rise of KRW 98.5 billion on a Y-o-Y basis. There are main -- 2 main reasons behind such a significant increase in operating profit and the first is underpinned by the growth of the core business of Kakao, which is advertisement and commerce. We've been able to bring about an improvement in the basic fundamentals of the company. And the second being is that we were able to gain efficiencies from the consolidated entities, which are namely Kakao Entertainment and Kakao Enterprise. So if you look at Kakao on a separate basis, the operating profit for Q4 reported KRW 197.1 billion and OP margin came in at 28%. So this is record high OP margin for the Company, and there are many reasons behind this result. And the first being if you look at Talk Biz revenue for Q4 on a Y-o-Y and Q-on-Q basis, the operating profit actually posted a growth of 14%. And if you look at versus the previous quarter, there's been a decline of labor cost including the impact of bonuses in the amount of KRW 31.3 billion. So those were the key reasons behind the increase in the operating profit. Now for Kakao Entertainment, driven by monetization efforts as well as our restructuring efforts and making the marketing more efficient, in Q4, across all of the businesses of music, story and media, we were able to bring about a turnaround into profit and we are seeing a quarterly improvement in terms of operating profit. Now looking at new initiative, it reported a quarterly deficit or loss of KRW 41.4 billion, but this is actually a P&L improvement of KRW 21.4 billion on a Q-over-Q basis. And mostly this is attributable to Kakao Enterprise's revamping the business structure to have a clear focus on the cloud business. And also for your information, if you look at SM Entertainment, the operating profit was KRW 10.9 billion. But if you were to reflect the KRW 15.9 billion of PPA amortization as well as adjustments into the consolidation impact, in effect, there was an operating loss of KRW 5.6 billion. So if you were to take out the SM Entertainment factor, then on a consolidated basis, the operating profit reported KRW 194.7 billion.

[Interpreted] Moving on to your second question on operating expense, particularly on the headcount, I will elaborate on the labor cost outlook for this year. So for Q1 and 2024 full year, we -- in 2024, we'll continue to have a conservative approach and focus on gaining headcount efficiencies. And we believe that the labor cost increase is going to be restrictive. Now, having said that, for the Q1 figures due to the base effect of the year-end payout of the bonuses and also with increase in the labor cost per se or the wage per se, we believe that on an absolute basis, there will be a slight Q-o-Q increase. Moving on to marketing spend, which take up a lion's portion of the overall operating expense, just as we've done in 2023, we're going to continue to have a cost-control approach and we are planning for an efficient marketing spending as we go forward. If you look at the webtoon market, the competition is deepening. So we do need to expand on strategic marketing spend for Piccoma and Entertainment and also for Kakao Games, they have new title lineup in the pipeline. So aside from these 2 areas, we are going to be quite prudent in making our marketing spending decisions. And so in Q1, once again, we are going to stick to our conservative spending approach. Now in terms of the infrastructure-related expenses, as of '23, it was about KRW 340 billion, which is around 20% increase on a year-over-year basis. Out of the operating expense, we have outsource and infrastructure expense and depreciation which comprises of lease asset and depreciation and amortization. So they account for -- these 2 accounts account for about 1/2 and 1/2. And also as we operated our own Ansan IDC center, there was purchase of servers and relevant depreciation costs that was incurred and also higher infrastructure-related fees based on the more higher usage of the shelf space or the racks. And hence we expect there is going to be -- there will be an increase in the full year infrastructure-related spending. We will make sure that for the infrastructure spending that we are mindful of sustainability from a longer-term perspective and we will do our best to optimize efficient GPA usage and also really focus on AI foundational model development in a very cost-efficient manner.

[Interpreted] Next question, please.

[Interpreted] The following question will be presented by Incheol Yu from Citi Securities.

[Interpreted] I am Yu Incheol from Citi. I have 2. First one has to do with your app revamp initiatives. Since we are beginning a new year and there's going to be a new executive team coming in, can you shed light on the future direction forward? And also for instance, any monetization approaches for your Open Chat Tab and also whether you have plans to expand on the coverage of your local-based services? And any upside either for this year and also mid to longer term, when it comes to your advertisement and commerce business? Second question relates to your new initiative. How much of a reduction in loss are you envisioning for this year when it comes to your new initiative businesses? And also, in terms of your AI, cloud, and healthcare business, can you share with us the projected, I guess, revenue going forward or the timing in which you are expecting to see that revenue being generated?

[Interpreted] Thank you, Mr. Yu Incheol for your question. I'll take the first question and I'll hand it over to our CFO. So with the new incoming CEO, Chung Shina, I've been talking to her quite often and we've -- we see eye to eye on the business direction that the company has undertaken last year coming into this year. So I think that you can expect to see continuity going forward. I think your question focuses specifically on our ad and commerce business. And in terms of what I've communicated previously during the Analyst Day, our business direction and approach has been such that we will shift the focus from a messenger application-based chatting services amongst the acquaintances to focusing more on the offline side, which is the local service, and a micro vertical which is based upon common interest of the individuals and also expanding to the relationship and connection with strangers. So regarding this direction, I think that this will stay intact. However, in terms of the speed at which such businesses are undertaken and the level of emphasis will have to be determined by the new incoming CEO. Regarding the local news and the local tab, in the second half of the year, I think you can expect to see more wider coverage of localities and regions. And for the Open Chatting, you could also expect to see some subscription models be embedded come second half of the year. Previously, because we saw low efficiency rate from our View Tab, we've decided to convert that into an Open Tab and as a result of that we were able to increase the advertisement inventory and we were able to form a basis whereby once the fill rate of the ad actually increases, we'll be able to see concrete result come forward. So I believe that -- I believe that those -- so we are right now -- regarding the Open Tab, we do not have any immediate need to fish out or find a new monetization BM at this point. You also asked about the projection of the upside for our advertisement and commerce business, and of course, that will depend on how quickly the overall economy actually rebounds. But if you look at our online -- if you look at our performance, vis-a-vis, the online ad market and compared to our peers, we've been able to outperform on a Y-o-Y growth basis and we expect that going forward, meaning this year, we will also be able to display that outperformance. We are about halfway into the first quarter of the year and our growth is in line with our target. As I've mentioned previously in other occasions, basically I believe that the second quarter of '23 was the bottom and we look forward to a more sound growth as we continue on into Q1 and into 2024.

[Interpreted] This is the CFO responding to your question about how we can narrow the operating loss that we see from the new initiative businesses. From new initiative, our Q4 operating loss was KRW 41.4 billion. This is about KRW 21.4 billion improvement in the figure on a Q-over-Q basis. So full year basis, the loss came in at KRW 220.3 billion. We expect for Kakao Enterprise, which has shifted its business focus on cloud business is going to be able to narrow their loss in 2024 and in 2023 -- and hence, we expect that 2023 loss that we've seen from new initiative will be the peak, although I maintain my caution. In 2024, I believe that and also this amount of loss that we've seen on a full year basis from new initiative was amply covered -- is a size that could be sufficiently covered if you look at the operating cash flow that Kakao as an entity generates. And also I believe that with regards to the specific questions about the timing and the profit, the size of the profit for the cloud business, health care and AI, once our investment plans are more finalized, we will be able to communicate that to you either in the month of April or May.

[Interpreted] Next question, please.

[Interpreted] The following question will be presented by Jae-min Ahn from NH Investment & Securities.

[Interpreted] My first one relates to the amortization of PPA and goodwill. I know you did provide some explanation, but if you could also share some details, that would be quite helpful. Second is, what is the impact of AliExpress and [ Tmalls ] expanding into the domestic market on your commerce business?

[Interpreted] Just want to emphasize once more, just because there was an impairment loss that was booked doesn't mean that it signals any change in our strategic approach and direction as well as outlook regarding our Entertainment or Game business. Now, having said that, an important driver behind the reason why we've decided to do this impairment is because of the changes and the value that we see coming out of the changes in the operational backdrop, and also because we applied a more conservative approach for our forward-looking investment process. Now, first, regarding the goodwill of Melon and PPA-related amortization, I mean, compared to the timing when it was first acquired, because Melon was acquired when the market was quite booming, but starting -- but last year, we've seen a sudden change in the macro environment and as a result, we booked impairment loss of KRW 40 billion and there was about KRW 190 billion booked due to the changes in the competitive landscape. So for Melon, most of the goodwill have been fully amortized and the residual PPA value for Melon brand currently stands at KRW 249.1 billion. And then for the merged entity Tapas in Wuxiaworld, already in 2022, we booked a goodwill impairment of KRW 534.9 billion, and for this quarter, the impairment amount is KRW 459.8 billion. Now, this was due to the fact that compared to when we first entered the business, despite the meaningful Tapas-related earnings that I shared previously, currently that whole earnings coming through has been delayed. And so we have applied a more conservative global business strategy assumptions and also some of the share price falls that we've seen from SM equity have also been part of that, have also been booked as an impairment loss. Also, for Lionheart Studios, there was goodwill impairment booked in the amount of KRW 137.7 billion and also PPA impairment was at around KRW 251.9 billion, which is attributable to the changes in its relations with its client or customer. So as you can see from the document that we've circulated, the residual PPA currently stands at KRW 1,082.2 billion. And regarding the Melon and Tapas and Lionheart, the PPA impairment -- through the PPA impairment booking on a quarterly basis, we expect that on a quarterly basis the amortization is actually going to fall by around KRW 10 billion. Now, responding to your question about AliExpress and Tmall's expansion into the domestic market and what impact that will have on the commerce business. If you look at commerce business, you can -- there are 2 types of consumption, which is value driven and the other is price driven. So there would definitely be a direct impact on platforms, that is price driven. But if you look at Kakao, it's more of a value driven consumption and spending. So I believe that there is not going to be any direct impact. Now, so from a short term perspective, the so-called comprehensive shopping malls where the consumption is more price driven, in Korea, the market had been dominated by dual players. But with the entrance of a new player, we believe that this is actually going to trigger a more marketing-related demand, which is going to translate into a higher level of advertisement spending. So some of these players we are seeing are running advertisement on our Kakao platform at this point, although the size is not all that big. Now, if you look at what U.S. has gone through, once the Chinese e-commerce platforms and players have expanded into the U.S. market, we've seen that the logistics and retailers and the online marketplaces in the United States have been impacted and the existing players have significantly cut their marketing spend. So we have to be a bit cautious and observe and monitor how things play out. So from a mid to longer-term perspective, whether if the market is going to be realigned based on AliExpress and Tmall, there may be a reduction in the overall marketing spend, but that is an aspect that we need to closely monitor.

[Interpreted] Since it's been about an hour and 10 minutes, we would now like to take the final question before we close.

[Interpreted] The last question will be presented by Dong Hwan Oh from Samsung Securities.

[Interpreted] I just have one question on PASTA. I know it's only been launched recently. Can you share, however, any performance or indicators regarding DAU, the daily active user count or your top line revenue?

[Interpreted] So, thank you, Mr. Oh Dong Hwan for your question. Yes, you're right. It's only been about 2 weeks since our initial launch. So I hope you could understand that at this point, it will be difficult for me to share with you any traffic-related specific details. Now, having said that, this service actually targets everyone who has diabetes or is on a pre-diabetic stage. This is considered to be a very differentiated services. Although there would be many aspects that needs to be further enhanced, the overall feedback that we are getting at this point is quite positive. A key difference when it comes to health care business compared to the Internet and the mobile business in terms of the user servicing is that these other -- it's not about actually finding the monetization business model by expanding the user base, we also have to target the supplier of the service, in this case, which is the health care providers. So what's important is that we need to gain trust from the supplier, as well as from the user base, who are the patients of these specific disease. So this service provides glucose monitoring, blood sugar monitoring to diabetic patients. And once we are able to gain their trust, we believe that this will bring us a very solid springboard into targeting next upcoming segment, which health care is considered to be the next big market. So, at this point, we believe that we are on target and we -- our start had been quite good.

[Interpreted] Thank you very much. This brings us to the end of the earnings conference call for FY '23. I would like to thank the analysts, investors, and members of the press for joining us this morning. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]