Kakao Pay Corp. (A377300) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. Thank you all for joining this conference call, and now we will begin the conference about our Fiscal year 2022 Fourth Quarter Earnings Results by Kakao Pay. This conference will start with the presentation, followed by additional Q&A session. [Operator Instructions] Now, we shall commence the presentation on the Fiscal Year 2022 Fourth Quarter Earnings Results by Kakao Pay.

[Interpreted] Hello. This is Allen Shin, Kakao Pay's CEO. I'd like to thank the analysts and fund managers for joining the company's fourth quarter fiscal year 2022 earnings release. Today, I'd like to begin with the key metrics for the Q4 2022, including the TPV, consolidated operating revenue and expense, P&L and key performance, after which I'll talk about the company's strategies for 2023. The first, the key TPV performance. Annual TPV for 2022 recorded KRW 118 trillion, a 19% increase year-on-year. Revenue TPV grew faster than the total TPV at 26%, accounting for 29% of total TPV at KRW 34 trillion. Consolidated revenue posted KRW 521.7 billion, which is a year-on-year increase of 14%, and in particular, payment service revenue grew 27% year-on-year. EBITDA for year 2022 continued on a defensive path, recording negative KRW 22.4 billion due to the impact of subsidiary losses. However, the U.S. net income recorded a surplus of KRW 27.5 billion, thanks to an increase in financial income from our cash holdings. Next, an overview of our business performance. As of end of 2022, the company recorded 39.44 million registered users, a 5% increase from 2021, while monthly active users increased 7% to hit 23.02 million persons. Transaction per user recorded 101, a Y-o-Y increase of 7%, while monthly transaction amount per user posted KRW 447,000 showing higher growth than the transaction per user metric. As for the number of merchants, an important metric to measure growth in the payment business, the number grew 29% year-on-year to reach 1.88 million. Next, Aiden, our CFO, will brief you on the Q4 total payment volume.

[Interpreted] Hello, I'm Aiden, the CFO. In Q4, the total payment volume of the TPV grew 17% year-on-year and 1% quarter-on-quarter to record KRW 30.9 trillion, the last 1% being the result of the fire at the Pangyo IDC. During the second half, total TPV crossed the KRW 60 trillion mark. Payment and Finance grew 18%, respectively, while other services such as money transfer, 17%. Revenue TPV took up 28% of total TPV. This quarter's payment TPV was similar to that of the previous quarter due to growth being lower than our goal because of the Pangyo IDC fire. However, all areas, including online and off-line payment, cross-border payments and daily payments recorded a double-digit growth year-on-year, showing potential for further expansion of the payment market. However, Finance TPV decreased by 2 digits Q-on-Q due to the effects of the abrupt interest rate hike on the credit loan market, but the trend is on an increase year-on-year basis. In 2023, Kakao Pay will continue to provide services that are more convenient and beneficial for users and drive up our TPV growth. And the company will obtain the level of convenience and universality, best in the industry in the payment market, and diversify its financial products' intermediary service, contributing to the revenue TPV growth. The Q4 revenue was down 3.6% Y-o-Y and 13% Q-o-Q to record a KRW 122.9 billion. Payment revenue increased in all areas, including online, offline, cross-border and daily services, recording 14.3% Y-o-Y and 4.4% Q-o-Q. In Finance, revenue dropped by 52.3% Y-o-Y and 58.0% Q-o-Q due to Kakao Pay Securities changing its accounting method for its derivative valuation of foreign currency assets and the decrease in executed loans. And regarding the loans, supply of credit loan has overall fallen due to the abrupt interest rate hike and tapping of the total loan volume of the financial institutions and capital adequacy ratio-related issues and other restrictions, and they have led to an across-the-board decrease in the supply of credit loans. Kakao Pay Securities regarding its overseas stock brokerage services has seen an FX loss due to the rate fluctuations of its dollar assets, and also changes the accounting method of derivatives trading related to its FX hedging activities. And in other services, with the December implementation of the free service on money transfer to My Account, revenue decreased 14.5% Q-o-Q, but card intermediary revenue posted a 0.5% increase year-on-year. The Q4 operating expenses were down 7.1% Y-o-Y and 3.9% Q-o-Q at KRW 145.1 billion. Commissions are impacted by an upward trend in card payments, while labor cost decreased 28% Y-o-Y and 5% Q-o-Q. Marketing expenses increased 29% Q-o-Q due to year-end events and offline promotions for merchants in Korea and abroad. Other expenses decreased Q-o-Q due to the effects of the Kakao Pay Securities' FX loss on its dollar assets and also the accounting method change for its FX hedging derivatives valuation in relation to its overseas stock brokerage. And the FX loss was hedged similar to the expense, and thus, the impact of the income was limited. The Q4 consolidated operating loss was KRW 22.3 billion, EBITDA, negative KRW 15.7 billion, and net income, KRW 34.1 billion, And the consolidated operating loss continued as a result of subsidiary losses. However, the company recorded an increase in financial profit from -- financial income from its cash holdings as well as increase in the tax income by recognizing deferred tax assets this quarter, which have not been recognized previously due to uncertainties regarding future capital income. And thus, the Q4 net income posted KRW 34.1 billion. Fourth quarter stand-alone revenue recorded KRW 121.0 billion, which is a decrease of 9.5% Y-o-Y and 1% Q-o-Q. And due to the data center fire, payment revenues in October and November fell short of our yearly forecast. However, December saw revenue recovery, posting a 4.4% growth Q-o-Q. Market circumstances led loan brokerage revenue to drop by 2 digits compared to the previous quarter, and stand-alone revenue also decreased Q-o-Q. Fourth quarter stand-alone operating profit reached BEP, with 2022 stand-alone operating profit margin being 6.9%. Next, Jason, Head of Business, will give you a briefing on the key performance for the fourth quarter.

[Interpreted] Hello, I'm Jason, Head of Business. Q4 MAU was up 7% Y-o-Y at 23.02 million persons. Transaction per user was 101, which is similar to the previous quarter, while monthly transaction amount per user was KRW 447,000. From Q4, Kakao Pay started including users of additional services such as loan management in the number of active users, in addition to those using the conventional services, thereby leading to the proportion of users using 3 or more services to hike to 77% of total users. In payments, user retention rate recorded an average of 86% at end of 2022, attesting to Kakao Pay being a platform with proactive users. To allow users to more systematically view their various asset details, Kakao Pay expanded its asset management service to include real estate and crypto assets. By adding real estate, which tends to take up a high proportion among the asset classes, to the company's asset management service, Kakao Pay is now able to utilize the real estate and loan-related data of our users to provide a comprehensive service that's more convenient and preemptive. And although our crypto assets have become an important part of users' asset portfolio, there was no major platform where a user could view all of his or her crypto assets that tend to be scattered across various exchanges. Kakao Pay, for the first time in Korea, has gained access to the trading information of Korea's top 5 exchanges and has linked in one go, crypto assets of 4 exchanges to Kakao Pay, thereby allowing users to view all of their crypto assets at a single glance. As a comprehensive asset management platform, the company will continue to strengthen its asset management service features. Let me now move on to our performance in cross-border payment. During 2022, cross-border payment TPV greatly increased in areas such as duty-free shops, department stores and in Japan, in addition to the conventional merchants. Cross-border payment TPV doesn't constitute a large part of the total TPV, but we're expecting a significant growth in 2023 since both inbound and outbound foreign travel are gradually increasing, while Kakao Pay's on and offline cross-border payment coverage is expanding. And the company is now increasing the number of global offline merchants in Japan, Macau, Singapore and in France, and in 2023, we plan to launch our service in new markets and increase the number of merchants. We will also enhance convenience for cross-border payment users. In fact, Kakao Pay is the first foreign cross-border easy payment service provider that is allowed in China. And with China's travel ban lifting, we're hopeful that Korean Kakao Pay users using offline easy payment in China will increase their revenue contribution. During Q3, Kakao Pay Securities started its investment content service, and during this quarter, launched stock discussion chat rooms where users can share information about the stock. It also started its new notification service, allowing users to immediately check news regarding a stock of interest. With these new convenience services that boost interest and excitement in stocks, all matrices of Kakao Pay Securities in Q4, such as the number of cross-border stock transactions, monthly average trade and the MTS activity level, are all on the rise. And in addition, Kakao Pay Securities started, in January 2023, new services with gamification features. Many users are showing their interest, and the daily number of participants is on the rise. Users, having enjoyed the service, are voluntarily sharing it with their friends, driving up the number of new users as well as the MTS activity level of existing subscribers. In 2023, Kakao Pay Securities plans to enhance user access to stock trading service and to sophisticate the service to make investments easier, convenient and a part of everyday life. Next, Allen will go through the company's ESG activities and strategies for 2023, and then round up today's earnings release.

[Interpreted] Hello, once again, I'm Allen, the CEO. Kakao Pay, ever since establishing its ESG Committee last May, has implemented ESG activities that match the company's business. It has provided free subscription to natural disaster insurance for small businesses in Seoul City through the Kakao Pay platform and planned a financial education program for small-scale, self-help enterprises, thereby promoting sustainable growth together with the local communities. The ESG report will be published during the first half of 2023 to show our broader stakeholders how the company continues to fulfill its responsibilities and obligations as a sustainable company. Next, let me talk a bit about Kakao Pay's 2023 strategy. In 2022, Kakao Pay's revenue didn't grow as much as market expectations and profit didn't improve as fast as Kakao Pay had intended. The economic downturn and the negative opinion of the company and several external audits just after the IPO, the rapidly changing macro economy and the Q4 data center fire all had an impact. But we don't want to make excuses for these circumstances. In fact, such results are being used as an opportunity for not just myself, but for the entire Kakao Pay crew to internally reflect upon the essence of our business and our innovation potential. In 2023, Kakao Pay, as an everyday financial platform and with the aim of making users confidently say yes Kakao Pay in the broader financial circumstances, we'll firstly, improve user convenience, and secondly, give more real monetary benefit to the users by providing more convenient and useful asset management services that promote financially rewarding lives. Furthermore, Kakao Pay will show its stakeholders much improved profitability and growth by exploring profit-generating and new business opportunities. In payment, user benefits will be diversified, and the number of merchants increased across the core venues, and cross-border payment increased especially in China, Japan and Southeast Asia. In Finance, loan products will be diversified, direct and indirect investment services such as equity and fund trading strengthened, and insurance comparison service sophisticated by preemptively responding to regulatory improvements. So these are some new business opportunities that are expected to diversify Kakao Pay's revenue pipeline. For example, Kakao Pay's unique advertisement business using 2 channels, Kakao -- excuse me, Talk Pay and Pay App, and its data selling business using the KCSS. And also, internal cash holdings will be used to find promising companies with the potential to forge business synergy with Kakao, thereby promoting inorganic growth. Based on our experience of 2022, during which we strengthened the basics of our services, Kakao Pay's entire crew would exert our best to add innovation to our fortified fundamentals to drive more meaningful growth during this year. Thank you very much.

[Interpreted] Now, Q&A session will begin. [Operator Instructions] The first question will be presented by John Yu from Citi.

[Interpreted] So I have 2 questions. The first question relates to the advertising business. So I know that you'll be implementing some new advertising businesses, so I'd like to know the timeline for the new businesses? And also, what kind of form will it take? So if it's going to be mainly a display, then can you also tell us where you would like to use the display advertisements? And the second question relates to your loan business and your projections for this area. So what -- how do you view the growth circumstances and the regulatory environment and also the competition environment, and what's Kakao Pay's response to these circumstances?

[Interpreted] So I'm Allen, I'm going to be answering your question about the advertising business. So the first part of business, advertising business, we'll be doing, we'll be using the Kakao Bizboard DA. And so we started to expose some of our accounts starting from September, so this was a pilot test advertisement. And the second type of advertising business will be our actual, own DA. And so in fact, we will be using this kind of display in the transfer confirmed banners, and also, we will be using this kind of advertising in some of our internal own accounts. And so we will be combining that with our data services, and therefore, we'll be able to promote it as an advertising product. So we did a pilot in December, and we've had very good reaction from the advertisers. And in fact, the revenue from this type of advertising has outrun the revenue from the Kakao Bizboard advertising that I had talked about previously. So I think we'll be able to combine this very well into a product. The third type of advertising business we're thinking about is actually the native advertising, and so I won't be able to give you details at this moment in time. But it's a service where we'll be using our traffic-building services that are very customized into our platform, and so we'll be able to use that to build upon or advertising business. So for now, we have some candidates in place, and we are expecting it to become a very high value-added advertising business, and it's going to start full fledged beginning with the second quarter. And the fourth type of advertising is the direct advertising related to our various financial products, and so we'll be allocating the various advertising products according to some of the areas in our financial services. And at the moment, we are selectively using some of these method in some of our banners, but we will be systemizing it and we'll be able to put it in the market as any type of an advertising product. And so based on these kind of new advertising businesses that we have in the pipeline and also based on the lessons learned from the pilot testing that we had done last year, we will be able to build upon our advertising business this year, and thereby bring up Kakao Pay's profitability overall.

[Interpreted] So this is Jason, and I'll answer your question about the loan referral service. So according to the loan behavioral index from the BOK, in 2023, the household loan market will witness a variety of different challenges. For example, the interest rate hike and the regulatory strengthening regarding the household debt, and so we will see a slowdown in the growth in the market. And in the first quarter of 2023, many NBFIs, for example, the savings banks and credit card companies and mutual finance co-ops, will also witness an increase of the interest rate burden due to the interest rate hike, and thereby, we believe that the credit risk index is going to rise. And also because the uncertainties regarding the economy at home and abroad is going to continue, I think that the borrowed burden, due to the interest rate hike and the slowdown of the growth, will continue to grow. And loan screening will be strengthened in order to better manage the loan's [indiscernible]. And I think overall, the loan business of many financial institutions is going to shrink. In the case of the NBFIs, due to the interest rate hike and the issues related to asset soundness, we will see a slowdown of the household debt or household loan growth rate for a while longer. And so the supply side challenges are going to exert some influence on Kakao Pay's loan referral business. However, regarding the household and mortgage loans, I think the regulatory environment is going to ease somewhat going forward. And so commensurate to this kind of situation, Kakao Pay is also preparing to launch new services. And regarding the competition environment, we know that a few new competitors since the end of 2022 are partnering with the credit loan companies and have started intermediary services. But the performance, as we know, seems to be low as yet. So while we believe that these kind of regulatory circumstances and the competition environment will impact our company somewhat, but we do believe that there are market opportunities ahead. So for example, in May 2023, a refinancing platform is going to be launched, and so the users who are burdened by the high interest rate will want to refinance their loans to a lower interest rate loans. And so we believe that these needs are going to grow, and thereby, that allows us to reap new opportunities rather than just compete in the existing market. Let me talk a little bit about our projections and prospects for the loan service in 2023, so we have basically 3 strategies. The first is to go beyond our core loan business of the credit loan. And so we are thinking of diversifying our product pipeline to include, for example, the secured car insurance or asset insurance and also insurance -- excuse me, loans for the lower income families and asset loans, and also personal recovery loans, and so we're diversifying our pipeline. And also based on this kind of diversification, we will be fortifying our customer experience, and thereby actually enhance the loan execution. We are also looking into developing and adopting new technologies to enable electronic documentation and also private certification. And also, as new services, we are looking into the feasibility of mortgage loans as well as auto financing, and we will also be coming up with some products to enhance the customers' purview of convenience.

[Operator Instructions] The next question will be presented by Dong Woo Kim from Kyobo Securities.

[Interpreted] So you had foreseen that in the payment market, the growth will be on a downturn in 2023. And so, what does the Kakao Pay think its new growth driver will be under these circumstances in order to foster the growth? And another question is, you said that you'll be diversifying the credit products. But what do you think is Kakao's competitive advantage when it comes to credit intermediary services?