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

[Interpreted] Good afternoon. This is Allen Shin, CEO of Kakao Pay. Thank you, everyone, for joining Kakao Pay's Second Quarter 2024 Earnings Call. I will begin with key metrics for the second quarter, including TPV, consolidated basis, revenue and expense and P&L and will end with key business highlights for the second quarter of 2024. First, key performance metrics for the second quarter. Q2 '24 TPV was up 20% year-over-year, recording KRW 41.1 trillion. Revenue TPV was up 22% year-over-year to KRW 12.1 trillion, while growing the share out of total TPV to around 30%. Second quarter revenue increased 25% on year, reporting KRW 185.5 billion. And net profit for the quarter was KRW 0.6 billion with a turnaround in EBITDA at KRW 1.8 billion. Financial income came in at KRW 15.8 billion. Next on business metrics. Kakao Pay's MAU as of end of second quarter 2024 was 24,650,000 users with 101 transactions per user across different services. As we wrapped up certain services with low profit contribution, number of transactions decreased marginally versus last year. But if you home in on the company's core businesses during the same period, you will see that there was 87 transactions per user for payment, financial and money transfer, which is a rise of 11% year-over-year. We now have, at this point, 1.07 million domestic on and offline merchants, which is an increase of 17% year-over-year. Next, Aidan, our CFO, will run through the details of the second quarter TVP.

[Interpreted] Hello. This is Aidan in charge of finances. TPV for second quarter was KRW 41.9 trillion, up 20% year-over-year. Revenue TPV was KRW 12.1 trillion, up 22% year-on-year, accounting for 30% of total TPV. TPV for digital payment increased 23% versus last year. Starting January, we consolidated Paymint, as a subsidiary, which is a company specializing in O2O payment online to off-line payment that is such as payments made at private education institutes. Also, off-line payment TPV [ has been growing ], as Kakao Pay interlinking with -- as Kakao Pay interlinked with Samsung Pay and Zero Pay since April. TPV for digital finance was up 18% year-over-year. We saw evenly spread growth from the Tier 1 and Tier 2 financial markets in terms of credit loan growth, which drove TPV for loan services. Stock trading volume rated TPV, which is not included, and digital finance TPV has shown a steep year-over-year uptrend, both domestic and overseas stock trading volume increased expanding 74% year-over-year. Other services, including money transfer posted 19% TPV increase on the back of continuing impact from policy on free offerings of money transfer services. As such, we saw a double-digit year-over-year TPV growth across the entire service domain. Underpinned by evenly spread growth coming from all of the business domains, Q2 revenue was up 24.6% on year and 5.2% on the quarter, reporting KRW 185.5 billion. Digital payment was driven by off-line and cross-border revenue, posting an increase of 12.3% year-over-year, reaching KRW 121.4 billion in revenue. Digital finance achieved above KRW 50 billion in revenue for the first time, up 59.6% year-over-year and 10.5% Q-over-Q, reaching KRW 55.2 billion. Top line growth was seen from all businesses, including loans, investments and insurance with their contribution to total revenue growing to around 30%. Driven by credit loan TPV growth and rise in revenue from Kakao Pay Insurance on launch of overseas travel insurance, as well as other new products, coupled with rise in cross-border stock trade volumes, total digital finance revenue was driven upwards. And on the back of higher advertisement revenue and greater use of cards recommendation services, other service revenue increased 44% year-over-year and 37.4% Q-over-Q. Supported by a new revenue record for 6 consecutive quarters based on well-balanced growth across all of the services, we've been able to sustain an uptrend. Operating expense for Q2 increased 19.4% year-over-year to KRW 192.8 billion. This increase is less compared to the second quarter revenue increase of 24.6% year-over-year. Marketing expense was up 17.6% on year on promotions related to off-line payment expansion. But against the revenue-based marketing expense ratio was 9%, which shows that our positioning on cost efficiency is being kept unchanged. Commissions was up 14.6% on year due to increases in revenue from our core services. Other expense was up 106% on year due to higher revenue from Kakao Pay Securities and Kakao Pay Insurance. Most of such increases are from service fees from cross-border trading, interest expense from growing deposit balance and service costs from insurance product sales. Operating expense quarter-over-quarter basis was up 3.6%, driven by marketing expense and commissions. Consolidated operating loss for the second quarter narrowed to KRW 7.3 billion. And on the back of breakthrough performances from financial services, including loans and insurance and turnaround achieved by [ Paymint ] losses from subsidiaries narrowed with EBITDA turning positive to KRW 1.8 billion. Net profit came in at KRW 0.6 billion, continuing 2 consecutive quarters of profit making. We plan to improve mid- to longer-term profit structure through efficient cost structure and by sustaining our top line growth. Second quarter separate basis revenue increased 13.5% on year, reporting KRW 154.2 billion. Q2 stand-alone operating profit was KRW 11.3 billion and net profit came in at KRW 19.3 billion. As of June end '24, separate basis, accumulated deficit decreased to the range of KRW 5 billion. Next, I will invite Jason, who heads our business division, who will run through our key business performances for the second quarter.

[Interpreted] Hello. This is Jason. Let's first take a look at the digital payment business. Since the year 2022, we started expanding off-line point of payment, completing the onboarding of Samsung Pay and Zero Pay on to Kakao Pay's payment platform in May, enabling a nationwide coverage. As such, number of off-line payment users surpassed 2 million in March of 2022, 3 million in March '23 and 4 million in December of '23, and we expect to have more than 5 million off-line user base by the end of the year. Also, Kakao Pay is the sole EasyPay provider that can issue K-pass, which is MOLIT, which is Ministry of Land, Infra and Transportation refund program for users of matched transportation. Because of the convenience and applying an immediate issuance over the mobile device, 100,000 subscribers were acquired right after its release. We expect all-time payment activity, thus will also benefit from the universality and convenience offered by the transportation card. And as a matter of fact, off-line user count has been up trending mostly around payment activities seen at convenience stores, PC cafes and gas-based hypermarkets, restaurants and for transportation. We will also soon introduce additional functions, which will boost new off-line user acquisition. This month, we will link up to Samsung Pay, supporting the payment method inside the talk pay screen, meaning any Android Kakao Pay users may also use Samsung Pay from both the talk pay and the pay app. Since QR, barcode and [ MST ] method will all be supported on the KakaoTalk platform, we expect cross usage will take place more frequently from online to offline payment. Next, I will talk about hyper personalized financial services using MyData. We at Kakao Pay see MyData business, as the gateway to our financial business and a key resource for the future of our data business. MyData subscribers at Kakao Pay reached above 10 million, as of end of September '23, with July end number at [ 16,500,000 ] subscribers. We expect to have more than 20 million Kakao Pay MyData subscribers by the first half of 2025. Kakao Pay's financial assistance is designed to provide sophisticated connection in the context of investment advisory intermediating our financial product and insurances on the foundation of users, financial data analytics. We used [ Tashigi ] one of Kakao's characters, as the user's personal assistant to help users gain insight on one asset flow, financial status, and what one should do financially to gain monetary benefit to arrive at the most rational financial decisions. For instance, on the day of receiving your paycheck, the assistant will calculate your income, net of credit card payment recommending smart solution to help users manage their monthly income. So as such, financial assistant will offer monetary benefits and convenience to MyData users, and we would carry out further upgrades to strengthen the connection with Kakao Pay's financial services to further grow the benefits that users will enjoy. Next, I will turn it over to Jeff, heading the services division to run through key highlights of Kakao Pay Securities and Kakao Pay Insurance and their second quarter performance. [Interpreted] Hello. I'm Jeff heading the company's services. Let me run through performance highlights of first Kakao Pay Securities. Driven by growth in stock services, deposit asset continued to trend upwards, repeating growth every quarter. Total deposit assets, including funds, stocks and deposits increased 65% year-over-year, reaching KRW 2.9 trillion and broke KRW 3 trillion level in early July. Q2 TPV for stock trading was KRW 11.7 trillion, up 74% year-over-year. Number of stock trades were up 175% year-over-year. And as entry barriers for cross-border trading was lowered with the introduction of fractional trade and stock collection features, a number of cross-border training has become clearly more prominent versus domestic trades, and we are reorganizing our cross-border [ fee ] scheme with a view towards improving profitability. And on the back of increases, therefore, in number and volume of stock trading, Kakao Pay Securities revenue increased 51% year-over-year, narrowing the size of losses and on track towards bottom line improvement. At Kakao Pay Securities in order to provide relevant investment information in a more intuitive manner, we revamped the market tab to discovery tab. And by delivering differentiated investment insights through features like market status by sector, the medic stocks by country, real-time information feed and stock search upgrades, we are aiming to extend users' time spent and to facilitate easy conversion to trading. Next is on key results from Kakao Pay Insurance, who is continuing on with an uptrend in revenue by diversifying into daily insurance products. This quarter, Kakao Pay Insurance reported KRW 8.9 billion of revenue, driving 30x top line growth in just 1 year. Kakao Pay Insurance has so far launched financial safety insurance, oversees travel insurance, phone insurance, drivers' insurance and toddlers' insurance for parents with young children. Toddler insurance is Kakao Pay Insurance's first long-term product line, providing coverage of everyday sicknesses for a maximum of 3 years for infants and toddlers up to 7 years of age. We will sustain the growth trajectory in the second half by improving the current product, as well as through adding new products such as the toddler insurance and other long-term insurance lines. Next, I will invite back Allen to share with you our ESG plan before we end the presentation.

[Interpreted] Hello. This is Allen again. With the setup of the ESG Committee back in 2022, Kakao Pay has engaged in activity that are close to what we do in order to live up to our social responsibilities and have been strengthening communication with other stakeholders, and last May, we published our second ESG report. And in the report, we included environment and social data disclosures for not just Kakao Pay, but also its affiliates, Kakao Pay Securities and Kakao Pay Insurance, taking an active approach in responding to upcoming ESG information disclosure mandate. We also joined in on abatement efforts for the environment. In July of '24, we purchased 1,000-megawatt hour of renewable energy, so that we may achieve RE100 requirements for the Pangyo office by the second half of 2024. And since last year, we've been running a project called Together Forever Store, providing support in terms of financial education, marketing, sales and having small vendors enter online malls and offline pop-up stores, enabling them to connect better with more consumers and showcase their competitive brands. All of these efforts earned us the status of Sustainability Yearbook Member of S&P Global back in July, as domestic and global ratings agencies acknowledged our ESG performance. So far, I have provided you with an update on Q2 '24 performances. In the first half, we were able to grow our revenue by 25% versus last year and also narrowed the size of operating loss translating business performance into financial outcomes of net profit and EBITDA plus on a consolidated basis. Also, on a stand-alone basis, first half revenue increased 14% on year, while operating profit was up 25% compared to the first half of last year. Kakao Pay will not stay complacent, but build on the performance that every crew at Kakao Pay has worked to achieve and will continue our efforts in the remainder of the year to be the financial platform that -- which provides benefits to everyone. Thank you.

[Interpreted] [Operator Instructions] The following question will be presented by HeeYeon Lim from Shinhan Financial Investment.

[Interpreted] Thank you very much for the good results this quarter. I have 2 questions relating to the recent TMON, and WeMakePrice price incident because Kakao Pay is a payment provider, I assume -- I presume that you will also be impacted by this incident. So I have 2 questions, I would like to ask. The first thing, what is the extent of your financial damage? And second question, in order to make sure that such problems do not repeat itself in the future, what are some of the countermeasures that the company will put in place in terms of risk management?

[Interpreted] This is Jason. In charge of businesses at Kakao Pay responding to your question. As you've mentioned, as a simple pay or EasyPay provider in Korea, we believe what is utmost important in the long run is protecting the consumers affected by this incident. To that end, notwithstanding risks of sizable expense in respect to cancellation requests made by consumers of TMON and WeMakePrice, we are going through the process of checking with TMON and WeMakePrice and making advanced payments to consumers. Now to provide a bit more detail, we're at this point, processing the cancellation request from consumers and confirming with TMON and WeMakePrice about the size of the exposures relevant to these transactions. And we are in the process of collating the amount and checking the recoverable amount in regard to these transactions. At this point, therefore, it's difficult to tell you the exact amount of potential damages, and we will provide further information once we have relevant information. And following the incident, Kakao Pay has been working hard to minimize the impact of this issue on the consumers. We quickly detected the issue, continuously checked the situation and the status with TMON and WeMakePrice and are taking measures to protect our users such as by actively guiding them and accepting their cancellation requests. We also opened up contingency channels with other relevant financial institutions so as to monitor the issue in real time until the problem is resolved and to minimize the impact as much as possible. Now regarding your second question about potential solutions, we are planning to take legal action, such as making an indemnity claim. However, since TMON and WeMakePrice filed for court receivership and rehabilitation on July the 30th, we will first have to wait for the court's decision before we can offer a specific answer. Internally, in terms of risk management and to strengthen our risk management capabilities, we will review and strengthen different policies related to, for instance, buying guarantee insurance depending on the financial position of the merchant or withholding payments or adjusting settlement cycles and limiting or -- and engaging in limits management. We will also communicate with the relevant authorities and identify potential legal and institutional shortcomings or loopholes, so that we may eventually be able to reduce the risk. Well, we have to -- while we have to bear the risk that is triggered externally, we believe that it will also serve as an opportunity for Kakao Pay to gain more trust from our users and ultimately power and solidify the basis of our growth going forward.

[Interpreted] The following question will be presented by Sinyoung Park from Goldman Sachs.

[Interpreted] I would like to ask you a question relating to your financial services revenue. I see that the results have been quite good. And if we look at the quarterly trend, I believe that as you increase the share of financial services revenue out of your total revenue, moving from early 20% to up to 30%, we believe that that's going to drive up profitability of the company, the bottom line that is. So I would like to get some explanation regarding how the sales mix is going to change going forward? And also, through increasing the share of financial services revenue, can you accelerate the timing in which you turn positive in terms of your operating profit?

[Interpreted] Hello. This is CFO, Aidan. I will respond to your question. As you've pointed out, we continue to see strong growth from our financial services in the second quarter as well. First, if you look at Q1, financial services revenue reached KRW 50 billion for the first time, and while Kakao Pay Securities and Kakao Pay Insurance revenue more than doubled year-over-year. This continue -- this trend actually continued into the second quarter as well, growing twofold on a year-over-year basis and achieving 10% Q-o-Q growth. So as a result, now the share of financial service revenue has expanded from previous 23% and now it reaches around 30% against the total revenue, as of the second quarter. Our new services, which includes securities and insurance are driving the financial services revenue growth, and insurance is rapidly expanding its share of revenue on the back of expanded product lineup and higher sales. And also, in terms of the revenue mix over the longer term, we are aiming to increase the proportion of non-payment business, including financial services, to account for more than 50%. We still expect further upside from securities retail and insurance writing business, as a non-life insurer, and we are also planning on new businesses, which will power bigger top line growth. Now as for the question on turning around our operating loss, I'm going to focus on the medium to longer term, excluding the potential financial risk and impact from the recent TMON situation on our second half results. So we can consider 2 different aspects and thinking about how we achieve our turnaround. First is top line growth; and second approach is structural distinction, which we have of our P&L structure. If you look at Kakao Pay Securities and Kakao Pay Insurance, both are mobile-based digital financial players, which means less overhead expense compared to legacy financial institutions. In the case of Kakao Pay Securities, initial infrastructure investment is largely complete by now, and we are experiencing growth of brokerage services and rapid growth of sales and operating leverage, which is underpinned by increases in deposits, which are all supporting a gradual reduction of operating loss. For Kakao Pay Insurance, as we are building a stable product pipeline, we recognize that it requires investments in technology and investment into infrastructure, but with a very solid market share of our short-term products, such as overseas travel insurance and a steady addition of long-term lines such as toddler insurance, we expect that we can quickly accelerate the transition to a turnaround in consolidated operating profit if we can stabilize the loss ratio and set up an efficient business cost structure, as a digital insurance provider.

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

[Interpreted] I have a question on your insurance business. Although the size of your insurance business is relatively small, I see that the growth has been quite impressive. I would like to understand what your growth strategy is. And from a more mid- to a longer-term perspective, can you provide us with what the revenue growth guidance could be and also on the OP, if possible? And how big do you think your insurance business will grow going forward?

[Interpreted] Hello. This is Eddie in charge of Operations at Kakao Pay, and thank you very much for your question. Now Kakao Pay Insurance is seeking to offer a distinctive insurance product experience to as many users as possible. To this end, we've been introducing insurance that provide coverage against our everyday risk in leisure, digital and other domains of our daily life and have secured more than 2 million policyholders up to date, supported by the viral effect and repurchases. In order to achieve this sustainable growth, Kakao Pay Insurance will aim at enhancing existing product offerings and services and launching new market -- new and marketable products and strengthening infrastructure competitiveness with the view towards achieving 10x growth in 3 years' time. Now share of the insurance business out of the financial services domain could increase by more than 2x, which is up to 30%, depending on the future growth of the insurance business also, which will be impacted by the growth of the securities and loan business as well.

[Interpreted] The following question will be presented by Min Wook Na from DS Investment & Securities.

[Interpreted] My question relates to the upcoming revision on and the implementation of the EFTA, the Electronic Financial Transactions Act and how it will impact the EasyPay service provider, which will going forward mandate registration of a payment gateway license. And I understand that some of the retailers are at this point, making relevant preparation, and they are -- and they may result to the use of an outsized payment gateway agency, but this may bring some cost and expense related issues. And so, there's a concern that the merchants may start to terminate contract with the payment providers such as Kakao Pay. So we'd like to understand whether you've seen any expression of intent by the merchants on terminating the contract. And also, I would like to understand as to what measures you have in place to counter the implementation of this act?

[Interpreted] This is Jason in charge of business. I will respond to your question about the Electronic Financial Transactions Act implementation. What I can tell you is that at this point, no merchant have expressed their intent to terminate the contract that we have with us, but we do recognize that this revised Act is an important issue for us. So we are looking into the potential impact and coming up with detailed plans by individual partners, merchant partners that we have based upon their current situation and being in full consideration of their respective situation. And we're closely communicating with the merchants and discussing ways to hedge this issue. To provide you with a bit more color, I understand that large retailers have already registered themselves as [ PGs ] in compliance with the law and others, who aren't yet registered are considering to use external payment servicing agencies, so concrete plans are, I understand already in place. So impact on Kakao Pay, I believe, is going to be very limited.

[Interpreted] No, since we do not have that much -- because of the time constraints, we would like to take the final question.

[Interpreted] The last question will be presented by John Yu from Citi Securities.

[Interpreted] This is Yu Incheol from Citi. I have 2 questions that I would like to ask. First is on possible restructuring of the non-core businesses because if you look at the recent news spikes relating to the Kakao Group and its subsidiaries, we've seen quite a bit of talk about the restructuring of your non-core businesses. And I'm wondering whether Kakao Pay also has plans to go through rationalization of their non-core businesses. And if so, what would be the area of that restructuring. And since you mentioned about cost efficiency quite a bit during your presentation, I would just like to ask for more color on this topic. Second question is the recent trend on the use of the pay app users. If you consider the fact that there's been an off-line link up with Samsung Pay and Zero Pay starting at the end of April, I presume that this had a positive impact on your pay app user count. So I would like to understand as to what your strategies are to further power your app user base, as opposed to the talk user base because I would think that the app user base would have to be further activated in order for you to push more of your non-payment and non-money transfer businesses, which is the financial services.

[Interpreted] This is Allen, the CEO. I will take your first question. Now Kakao Pay has also set select and focus, as our major initiative, and we've been running diagnostics on the health of our business and services and carrying out activities making necessary adjustments. So for some services, we minimize their service coverage or for other services have been discontinued. We've made the decision to discontinue the other services. And we took the same approach of organizational efficiency and reorganization for the subsidiaries as well. So for example, if you look at KP Insurance Service, which is a sales subsidiary, they discontinued sales through the digital channel during the first half, focusing only on sales brokerage by telemarketers and have been able to cut their head count by 70%. In defining our core business areas, we consider market attractiveness, our competitive edge and financial and strategic contributions based on which we operate in easy payment, financial product brokerage and intermediating non-financial products related to payment and financial services and engineering distinctive products for bolstering our platform competitiveness by working through our subsidiary company. For the wholesale business of Kakao Pay Securities, we plan to focus on areas that bring tangible growth and profit, and that which will generate synergies with our retail business. And even as we speak, we discontinued corporate sales, which we thought will be difficult to secure profitability considering the cost incurred, and we will sharpen our approach in identifying business areas that we will be focusing on in full consideration of the status and cost structure for Kakao Pay Securities.

[Interpreted] Hello. I'm Jeff responding to your question on -- about the pay app. Now pay app went through major updates in the second quarter of '24, and its usability was significantly enhanced. We set up a new payment tab, revamping the payment window and customized the payment benefit, including giving up to 3% point benefit and strongly coupled the CPC ad with the benefit, focusing on conversion to financial services on key services and incorporated various features to encourage users to switch from KakaoTalk to the pay app. As a result, pay app user activity metrics improved, looking at MAU, as well as WAU, the weekly active user count. They both reached new highs, as of July of 2024. And WAU, weekly active user count especially went up 30% in July compared to January. In the second half, we will continue to build on the redesign, expanding connections to financial services and further upgrade the accessibility to and benefits of the offline payment, enhance financial discovery and conversion in the home, the benefit and the payment tab, an update will start from August, and this will help us continue to drive more activity among the pay app user base.

[Interpreted] So this brings us to the end of the second quarter earnings call by Kakao Pay. Thank you very much for joining us today. And if you have any more questions, please do not hesitate to contact us at the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]