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

[Interpreted] Good morning, and good evening. Thank you all for joining the conference call for the earnings results of Kakao Pay. This conference will start with the presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on Kakao Pay's First Quarter Earnings Results of Fiscal year 2024.

[Interpreted] Good afternoon. I'm [ Allen ], CEO of Kakao Pay. Thank you all for joining the company's First Quarter 2024 Earnings Conference Call. I will begin with the key metrics for the first quarter, starting with TPV, consolidated revenue and expense, P&L followed by performance highlights of Q1 of 2024. First, on performance metrics for the first quarter of 2024. First quarter TPV for 2024 broke KRW 40 trillion [indiscernible] for the first time, reaching KRW 40.9 trillion, which is up 26% year-over-year. Revenue TPV increased 31% year-on-year to KRW 11.9 trillion, coming close to KRW 12 trillion level. Full year revenue was KRW 176.3 billion, which is up 25% Y-o-Y. Q1 net profit reported KRW 200 million with EBITDA at minus KRW 1.3 billion. KRW 15.8 billion of financial income drove net profit turnaround reaching close to the breakeven point. Next is on business metrics. Kakao Pay's MAU count as of end of first quarter ‘24 stood at 23,620,000 with number of transactions per user at 103. We saw a robust MAU growth across core businesses of money transfer, payments and asset services. And upon our strategic decision to replace or fade out services like the [ receipt ] and focus more on other areas, there was short-term downward impact constraining MAU and monthly active user count to levels similar to that of last year. Domestic on and off-line merchant count reached above 1 million, recording 1.03 million merchants. Kakao Pay services is now linked up to 3 million Samsung Pay and 1.1 million Zero Pay payment locations. So out of all of the easy pay providers, we now have the most comprehensive off-line point of acceptance. As we have built an environment where Kakao Pay can be used without any constraints of payment method or devices, we expect an uptrend in business metrics and that it will continue in 2024. Next, I will invite CFO, [ Aidan ], who will run through the details of Q1 TPV.

[Interpreted] Hello, this is [ Aidan ]. First quarter TPV was KRW 40.9 trillion, up by 26% year-over-year. Revenue TPV increased 31% year-over-year with its share at 29% of total TPV. Compared to last year, digital payment grew by 25%. In cross-border and off-line, TPV sustained a steep year-over-year growth, whilst the inclusion of payment and our consolidated statements drove growth in off-line payment TPV. For Digital Finance, rollover and mortgage loan demand drove loan TPV growth of 61% year-over-year, while other services, including money transfer posted 24% growth. All in all, total first quarter TPV is well within the annual guidance and plans. Q1 revenue reported KRW 176.3 billion, up 24.7% year-over-year and 6.1% Q-on-Q on the back of balanced growth across the business domain. And driven by cross-border and offline payment growth, digital payment was up 14.5% year-over-year, reporting KRW 120 billion in revenue. Digital Finance saw more than a double-digit revenue growth year-over-year across loan, investment and insurance with its quarterly revenue nearing KRW 50 billion for the first time. Other services revenue, however, was flat Q-over-Q due to the base effect from advertisement revenue last quarter. But we expect to quickly regain the uptrend as we will be further expanding ad business category before the end of the year. Q1 operating expense increased 20.4% year-over-year, reporting KRW 186.1 billion. Due to increasing commissions paid to card companies following higher card payment revenue and shared costs from My Data operations in 2024 as well as commissions from Kakao Pay Securities and Kakao Pay Insurance, total commission increased 14.9% year-over-year. There was also a 13.2% year-over-year increase in labor costs on headcount increase from Kakao Pay Insurance as well as expansion of our financial services business. Other expense, which was up 152.2% year-over-year was driven by higher revenue from Kakao Pay Securities and Kakao Pay Insurance. Kakao Pay Securities' revenue increased 52% year-over-year, accompanying an increase in commissions and interest expense on the back of increases in deposit balance and overseas stock trading volume. Kakao Pay Insurance also saw its year-over-year revenue growth by around 19-fold, which led to an increase in service-related expense. Operating expense was down 0.8% Q-on-Q. And due to the base effect of booking bonus and employees' sabbatical leave expenses in Q4, labor cost in the first quarter was down 12.6% Q-over-Q. And share of marketing expense as of the first quarter against the revenue was 7.6%, keeping in line with our stance and efficient cost control. Operating expense is being spent under strategic judgment of the company and any sort of investments, including the likes of marketing spend will be made strategically depending on business needs such [ recreating ] momentum for off-line as we move into the second and the third quarter. Consolidated operating loss for Q1 was KRW 9.7 billion, while EBITDA was minus KRW 1.3 billion and net profit at KRW 0.2 billion. Q1 consolidated net profit turned positive, reaching a breakeven. We're strategically executing spending, fully considering the speed of growth of each of our businesses, and we plan to continue to gradually improve their profit structure. First quarter stand-alone revenue reported KRW 147.8 billion, up 14.8% year-over-year. Q1 stand-alone operating profit was KRW 11.8 billion; net profit, KRW 21.2 billion, with [ OP ] margin at 8% and net profit margin at 14.4%. As of end of March 2024, separate [ basis ] accumulated deficit narrowed to KRW 24 billion. At the end of '21, immediately after the IPO, accumulated deficit was well above KRW 200 billion. After that, we've seen the deficit come down quickly on sustained level of net profit, and we expect to report a surplus before the end of the year. We will continue to manage the company based on a discipline of reasonable spending from the perspective of profit expansion. Next, Jason, in charge of business division will present in key performance highlights from the first quarter.

[Interpreted] Hello, this is Jason heading the business division. I will first talk about digital payment. In April, Kakao Pay expanded its merchant coverage nationwide by supporting the payments of Samsung Pay and Zero Pay. For the ultimate payment convenience, we refreshed the payment screen so that users can use Kakao Pay intuitively and deeply, whichever payment method they choose across all off-line payment locations. And starting June, we will roll out a benefit program where up to 3% of pay point is given so that we can give back more benefits when people choose Kakao Pay to make their payments. We can also now offer partners promo events right inside the Payment tab, which will create a virtuous feedback loop between payment and advertising revenue. We will also make sure such innovation and change translate into a definite growth in terms of payment TPV and our top line revenue. Next, I will turn it over to [ Jeff ], Head of Services, to give an update on key highlights from Kakao Pay Securities and Kakao Pay Insurance for the first quarter.

[Interpreted] Hello, I'm Jeff, heading the Service division. I will start with key highlights of Kakao Pay Securities. The company's quarterly growth trajectory continues, underpinned by growth from MTS and funds under Kakao Pay Securities account. Assets under Kakao Pay Securities' account, including funds, stocks and deposits increased 80% year-over-year, recording KRW 2.7 trillion. Outstanding stock balance increased 2.5x versus last year, reaching KRW 1.4 trillion, and funds under Kakao Pay Securities' account increased by 1.7x, surpassing KRW 800 billion. TPV in Q1 for stock trading was at KRW 11.8 trillion, up 154% year-over-year and 23% Q-over-Q. We see that number of transactions is higher for overseas stock trading versus domestic, which is a key contributing factor to [ see ] income growth. Kakao Pay Securities opened and is currently servicing day market service, extending the trading time to 21.5 hours for U.S. stock investment. With better investment convenience, we made it easier for people trading U.S. stocks to better and nimbly respond to changes that are happening in the market. Collecting stocks, which was introduced last October, very quickly attracted more than 300,000 subscribers, gaining positive responses from its user base. This collection service allows recurring investment, investing automatically at minimum 1001 in stocks that one prefers, at a predetermined investment cycle. As a result, we see more users transitioning from casual investment experience to becoming more active investors, which is gradually fueling the growth of our MTS service. Next, just to give you a brief update on Kakao Pay Insurance, whose growth trajectory continues, powered by its innovative unique selling point, in just 10 months since the rollout of Travelers' Insurance, cumulative subscriber count went above 1 million. We are broadening the service scope, adding new lineup of products such as mobile insurance and driver's insurance. We also released a long-term insurance product with monthly premium, which we expect will drive steep top line growth, underpinned by a basis for stable generation of earnings. Next, I will invite back Allen, and he will run through the ESG plan before we close today's earnings presentation.

[Interpreted] Hi, this is Allen. Kakao Pay will actively join in Kakao's Active Green Initiative and is getting ready to implement RE100, converting the use of electricity to 100% renewable sources and achieve net zero, which means zero carbon emissions by 2040. Starting the second half of 2024, our plan is to transition to 100% renewable energy for Kakao's Pangyo Agit and have set RE100 as the target to use renewable energy sources for all of the 100% of annual electricity used at the office starting 2025. Through such efforts, we seek to join in on carbon mitigation efforts. There is also a project we're running this year to improve accessibility for everyone to enjoy the benefits of financial services by incorporating an enhanced user interface design for the visually impaired. We are also improving digital access through IT and financial education programs for the vulnerable segment of the population, i.e., the senior, the disabled and those hospitalized over an extended period of time. Kakao Pay's dedication, as such in making a better society doing what it does best, continues as we speak. Well, that brings me to the end of the Q1 highlights for 2024. We are looking forward to turning earnings surplus on a stand-alone basis before the end of the year. And this quarter, we were able to ascertain a quick pace to top line growth coming from our consolidated financial subsidiaries. In terms of business performance, we expanded offline network of acceptance points. Kakao Pay Securities continued on with quarterly growth trajectory, while Kakao Pay Insurance fueled by its innovative insurance services drove fast-paced revenue growth. All of the crew at Kakao Pay will do its utmost to make a leap forward and sustain the growth every quarter to be the nation's #1 daily financial platform. Thank you.

[Foreign Language]

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Sinyoung Park from Goldman Sachs.

[Interpreted] This is Sinyoung Park from Goldman Sachs Securities. I have 2 questions. First one relates to your digital payment business. We've also seen your peer in the industry post a quite steep growth through partnerships and alliances. And I would like to understand as to what are your differentiating points if you look at these partnerships that you've entered into in April? And also up to how high do you think you will be able to increase the share of your offline payment from a mid to longer-term perspective? And what impact will that have on your margin? My second question relates to your digital finance services. In the previous earnings presentation, you've mentioned that the growth from financial services will be driven by your Kakao Pay Securities and insurance subsidiaries. I would like to know as to what specific segments under Kakao Pay Securities you are currently thinking of that you think is going to fuel growth as we go forward? And also from a longer-term perspective, could you provide us with what the revenue breakdown is going to look like under your Digital Finance?

[Interpreted] This is Jason, in charge of the overall business at Kakao Pay, I will respond to your first question. Now Kakao Pay has secured the widest reach in terms of our off-line acceptance points out of all of the Korean payment companies through its partnerships with Samsung Pay and Zero Pay. In addition to Kakao Pay's own 1 million merchant base, we expanded payment coverage to 3 million Samsung Pay merchants and 1.1 million small vendor merchants of Zero Pay. And now people can choose Kakao Pay as a payment method at any store nationwide. So the reason why such business alliance was possible this year is because we were well prepared to provide optimal user experience and benefits when people chose to use Kakao Pay. And at the same time, we built a clear revenue model from Kakao Pay's business point of view, which required a more careful and thorough process of negotiations and discussions than a simple payment alliance. To explain the uniqueness of Kakao Pay, we came up with a structure that allows customers to use various payment methods such as Samsung Pay and others. And through this, they could make use of Kakao Pay money, Kakoki Pay points and Kakao Pay gift certificate in addition to the card payments, thus expanding the customer's choice. And we were able to create a substantial revenue base for Kakao Pay with this approach. And in Q3, we will expand the entry point to access these payment methods such as Samsung Pay, even through KakaoTalk. iPhone users can also pay with Kakao Pay at 1.1 million Zero Pay merchants. Small businesses can now accept payments with Kakao Pay using Zero Pay QR without the need to install a separate Kakao Pay barcode scanner. We've also expanded user benefits by offering up to 2% in points when Kakao Pay money is used. And also in major traditional outdoor markets where Zero Pay is available, we're also actively promoting Kakao Pay usage in such traditional markets by talking to merchant associations and informing and exposing Kakao Pay to the sellers. There were also big functional changes as well. The onboarding process, for instance, for both Samsung Pay and Zero Pay has been greatly simplified to lower the entry barrier by allowing users to use the 2 payment method immediately without additional sign-up or verification process or card registration. We also revamped the payment window to make the experience simple and pleasant, which could have been cluttered when we added these additional payment methods. And although our online share is still high in absolute terms, we have been continuously building up off-line payment merchants, and we expect Samsung Pay and Zero Pay partnership to be an important juncture for us. Therefore, we expect the share of offline payment to gradually increase in the future, and we are targeting an online offline mix of 7:1 in the short term and 50-50 in the mid to longer term.

[Interpreted] This is Eddie, responding to your second question, particularly about our Kakao Pay Securities business. And as we mentioned in our last earnings call, we do expect a significant contribution from financial services behind Kakao Pay's revenue growth in '24. In particular, top line growth from Kakao Pay Securities and Kakao Pay Insurance will be quite distinguished. Kakao Pay Securities is a digital securities company started off by a tech company. And in the 4 years since it's launched in 2020, it very quickly attracted and activated its user base, laying the foundation for Kakao Pay's next growth engine. It has the largest number of securities account in Korea at 6.5 million, and it also ranks first among securities companies having more than 2 million fund accounts. The domestic and international stock trading service started a little later than its competitors and in a less favorable market environment, but it too has been rapidly expanding its user base and gaining market share. In 2024, we aim to build on Kakao Pay's huge user base and wealth management customers to attract, retain and activate those who are willing to trade stocks by providing right offerings at the right time for them to experience optimal services. By doing so, we aim to strengthen our presence in the security services market and are looking forward to high revenue growth backed by brokerage fee income. And as of the end of Q1 '24, Kakao Pay money balance was approximately KRW 1.4 trillion, of which Kakao Pay's securities account deposits exceeded KRW 800 billion, which is a 45% Y-o-Y increase. And we expect total [ top-up ] balance to continue to grow in 2024 as Kakao Pay money continues to improve its usability. In addition, interest income from credit transactions continues to grow in line with the increase in stock trading, so we expect interest income to grow strongly as well. As for the revenue breakdown of financial business, we expect loan brokerage, securities and insurance to grow rapidly over the medium to longer term, and we expect securities and insurance to grow faster and account for a larger proportion of revenue within the financial services business.

[Interpreted] Thank you. We'll take the next question.

[Interpreted] The following questions will be presented by Dong Woo Kim from Kyobo Securities.