NAVER Corporation (A035420) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Now we will begin the conference of the fiscal year 2020 second quarter earnings result by NAVER. Today's conference call will be consecutively interpreted for the convenience of domestic and international investors. The conference call will include a summary of second quarter earnings followed by a Q&A session.

[Interpreted] Good morning. I am Kim Min, Director of IR. Thank you to joining NAVER's second quarter 2020 earnings presentation. In today's call we have CEO, Han Seong-Sook; COO, Choi In-Hyuk; and CFO, Park Sang-Jin. The earnings result are K-IFRS based provided for the purpose of timely communication and are yet to be audited by an independent auditor and therefore, are subject to change after the review. With that, CEO, Han will present on the business highlights.

[Interpreted] Good morning. I am Han Seong-Sook, the CEO. Thank you to investors for joining us today. Since the outbreak early this year, COVID-19 is changing people's way of life and is also impacting NAVER's business and services. Through many efforts during Q2, NAVER endeavored to quickly normalize its business and identify opportunities in the changing world in order to bring good performance. As mentioned during the last call, we definitely felt the negative impact on the advertising business over the months April and May as the pandemic spread. But in June, we started to see online marketing demand come back for certain sectors and efforts such as launching of the performance ad, strengthening of the commerce ecosystem had positive impact bringing business normalization. If COVID-19 impact is kept at the current level in the second half of the year, we expect to achieve targets set at the beginning of the year. Performance ads, which started with Smart Channel and is expanding, is driving NAVER's ad growth by appealing to small to mid advertisers as it offers flexibility in spending in LINE with what the advertisers want in terms of impression and number of clicks. It made significant ad revenue growth contribution in the second quarter even when the impact of the pandemic was fully felt. In the second half, starting with bringing Smart Channel inside the BAND app in July, we plan to bring performance ad to many other services so as to expand our advertisement coverage. We also plan to upgrade automatic bidding and targeting to improve platform competitiveness so as to increase ad performance and advertiser satisfaction. We will continue to accommodate marketing needs of brands and SMEs across all of the ad and business platform businesses. And will develop products that naturally converge with the flow of content consumption, search and shopping. On top of the existing ad business, commerce, pay, content and B2B businesses, which NAVER has been making investments proactively, are seeing accelerated growth underpinned by the spread of B on tech culture. On the back of COVID-19, as we provided technology and data-related support, keeping abreast of increases in online start-ups and demand for conversion, NAVER's commerce recorded a growth higher than versus the first quarter. Number of new Smart Stores reported 3-month average of 33,000, growing 61% year-on-year with the total number of small stores at 350,000. Especially, there are more than 26,000 sellers with over KRW 100 billion of sales per year with SMEs average sales volume showing an up trend. We are making NAVER's technology and services available for anyone to start up a company online and grow their businesses with ease and speed. Our support includes Partner Square training, offering of insights via the bid -- Biz Advisor, product featuring by using AI algorithms and providing operational support to these vendors. These efforts to grow together with SMEs have become a critical engine for growth. As a result, sales volume of SMEs continued to increase, and Q2 Smart Store GMV posted a 64% growth versus 2019. As we grow together with the SMEs through brand store, we are expanding cooperation with branded companies as well. As of the first half, we now have a total of around 95 brands, including LG Household & Health Care, Maeil Dairies and -- Maeil Dairies Co and other household goods companies, AMOREPACIFIC for beauty products. As well as Samsung Electronics, LG Electronics and Apple, both domestic and global brands. Since users can easily look up product and content on certain brands on NAVER platform, and since the companies can use data analytics and statistics provided by NAVER, we are receiving positive feedback from the branded companies. Going forward, we will continue to closely cooperate with brands and bring enhancements to analytics and other brand store features so that in the long run it can become an e-commerce channel that best represents a brand. LIVE Commerce first introduced in March is writing success cases supported by both sellers and users. There were 44,000 viewers who watched national sale live last June for Daegu and Chungbuk area. Live for d'Alba, a beauty product, had 50,000 viewers. And in July, [Foreign Language] live session grossed around KRW 400 million of sales in just 1 hour. Supported by such popularity, number of sellers using LIVE Commerce in June and number of live programs increased by seven and eightfold, respectively, versus March, growing at a fast pace. To respond to growing demand, we introduced live broadcast feature to the seller center app for the Smart Store launched at the end of June and upgraded SELECTIVE, a space for live content, to shopping live so that more SMEs end users can communicate live. We will continue to bolster various live functions and features in order to support SME merchants so that they can expand their online sales channel more effectively. Aside from supporting sellers, we are offering many benefits through plus membership to our users further bringing up their loyalty level. Since its launch in June, number of Plus members are growing as planned. Purchases by the members rise at the time of subscribing to the membership. What is noteworthy is that customers who made less than KWR 200,000 purchases per month who account for half of the total base have increased their purchase volume by 3x, positively impacting the commerce growth. This shows that plus membership not only impacts the overall user base for shopping, but also strengthens loyalty to NAVER's platform and is really activating purchases by users who had shown relatively lower purchase frequency. We, therefore, expect that in the long run, this will form a strong basis for expansion of the commerce ecosystem. Driven by growth in commerce and outside merchant base, NAVER Pay saw number of users record 13 million in June and GMV surpassing KRW 6 trillion in the second quarter, up 56% year-on-year. We don't, however, plan to rest here, but we'll grow the size of the transaction with a focus on top merchants by sector, i.e., shopping malls, restaurants, financial institutions. And further expand on the business scope by strengthening the linkages with the shopping and the payment flow. We have built and is running a test on ACSS, alternative credit scoring system, based on broad and in-depth payment and commerce data, i.e., real-time revenue trends and reliability of sellers so as to support Smart Stores SMEs' working capital needs. And in order to bring consistent growth, we plan to offering that competitive terms to SMEs who used to face interest rate and credit LINE constraints in the past. Such financial support will bring growth to Smart Store and the SMEs, which will, in turn, lead to growth of NAVER Shopping and Pay, and data that is built up along the process would provide competitive edge to NAVER Financial completing a virtuous cycle. NAVER Financial will focus on thin filers, who are underserved by the current financial services institutions and provide them with undivided support regarding faster transfer of payments, data analysis and making funds available for use so that they may gain their footing in NAVER's commerce ecosystem and that we could all grow together. With the recent on-tech culture spreading, there is greater demand for online commerce and payment as well as for online business solutions. With more people working contactless, there is more demand for online business collaboration tools. And LINE Works in this regard is receiving much attention and growing as a collaborative solution boasting of great usability and security system. In Japan, usage is increasing in various sectors, including education, securities, insurance and the health care center -- sector. We have also won 4 insurance companies as customers out of Japan's top 10 insurers. As a result, number of paying and nonpaying IDs in Q2 increased 1.8x versus last year. And number of global customers continued its up trend, increasing twofold year-on-year since surpassing 100,000 last quarter. In Korea, after running a campaign on the light product, providing support free of charge since May end, we are offering LINE Works free to Smart Store and other SMEs not on the Smart Store platform. By offering collaborative tools like business messengers, bulletin and calendar free of charge, we are supporting SMEs to operate their businesses more efficiently in the on-tech environment and at the same time, increase awareness and experience for LINE Works. Demand for online business solutions expand beyond collaborative tools to other segments, and hence, demand for cloud service is also accelerating as it forms the basic foundation for such solution offerings. NAVER Cloud has been on top of this trend as it was at the forefront pioneering the domestic market, with its revenue, Q2 revenue, growing 83% Q-on-Q and 141% year-on-year. We built Cyber Learning System, an integrated online learning service for remote learning, where millions of students nationwide will access altogether ahead of back-to-school year and to support remote learning. In Q2, operation was stable, so it was a good opportunity to attest to Naver Cloud's infrastructure capabilities. We also provided cloud solutions to 3 affiliate hospitals under the Korea University Medical System. Through this experience, we want to be able to present direction for telemedicine by starting out with medical cloud business that spans from provision of infrastructure, big data analytics, diagnostic and prescription solutions. In the second half, we will be launching Neurocloud, which is a hybrid system that can organically connect servers and database that companies are already using to NAVER's cloud service so that we may quickly expand to the market for companies who faced constraints in migrating to the cloud base. Going forward, aside from LINE Works, we will continue to provide NAVER's distinct technology and services to cloud and bolster synergies with various other business and services that we have internally in order to gain global standard competitiveness. Lastly, on Webtoon, we added users from France and South America, which are the new geographies, with Q2 global MAU at $64 million. And GMV was up 57% year-on-year, and global GMV has increased to account for 27% of the total. In the U.S., which is the core market, due to COVID-19 pandemic, off-LINE creators have massively entered Canvas, which is the self-publishing platform, bringing up the number of authors and episodes by almost 50%. This, in turn, led to higher payment conversion rate and repeat visit rate with U.S.'s monthly number of paying users growing twofold year-on-year with ARPPU up 50% driving the GMV growth. Contents that are well recognized for its quality in the U.S. market, which is the most influential market of all, are also ranked at the top of the Europe and South America, working as a fuel behind global expansion. To maximize these effects, we are currently reshuffling the government infrastructure centering around the U.S., and we'll focus our efforts more on the U.S. market and increase synergies across U.S., Korea and Japanese platform under a unified leadership. Through these efforts, we will explore bigger opportunities in the global market and leap forward as a true global content provider. Under such rapidly changing environment, NAVER will use its technology and service capability to respond to such changes. And we'll continue to grow together with our users and SMEs in the NAVER ecosystem as well as with creators. We look forward to your continued support and interest. I would like to now turn it over to our CFO, Park Sang-Jin, who will present on the financial highlights.

[Interpreted] Good morning. This is CFO, Park Sang-Jin. Consolidated operating revenue for Q2 was up 16.7% year-on-year and 9.8% Q-on-Q coming in at KRW 1.9025 trillion. Consolidated operating profit was up 79.7% year-on-year and 4.1% Q-on-Q to KRW 230.6 billion. Out of this, from NAVER's core business, we recorded an operating profit of KRW 338.9 billion. Q2 net profit was up 226.7% year-on-year, reporting KRW 90.7 billion. Looking at the operating revenue breakdown. For business platform, despite lower advertiser budget on greater online shopping demand, which led to robust shopping-related revenue growth, revenue was up 8.6% year-on-year and 3.7% Q-on-Q to KRW 777.2 billion. On the back of strong online shopping revenue, which led to higher growth of paid GMV and growth in Cloud and LINE Works revenue, IT platform revenue was up 70.2% year-on-year and 21.6% Q-on-Q, reporting KRW 180.2 billion. For Ads, lackluster performances from certain sectors due to COVID-19 pandemic was offset by higher revenue from performance ads, with revenue going up 4.9% year-on-year and 21.3% and Q-on-Q to KRW 174.7 billion. On growth in global Webtoon GMV and V LIVE revenue from artists coming back to the scene, content service revenue was up 58.9% year-on-year and 43.8% Q-on-Q, reporting KRW 79.6 billion. Next on expense items. Platform development and operations expense was up 12.4% year-on-year and 1.7% Q-on-Q to KRW 263.7 billion on labor cost increases led by headcount growth. Agency and partner expense was up 21.1% year-on-year and 12.6% Q-on-Q, reporting KRW 361 billion on increases in revenue-linked expenses such sales and payment commission. Driven by increase in depreciation cost on the back of CapEx investment on servers and others and new hires for the cloud business, infrastructure expense was up 36.8% year-on-year and 23.3% Q-on-Q to KRW 111 billion (sic) [ KRW 110 billion ]. Marketing expense was up 34.2% year-on-year and 14.4% Q-on-Q reporting KRW 138.1 billion on greater volume of NAVER Pay points and higher level of global marketing execution for NAVER Webtoon and BAND. LINE and other platform expense was up 1.7% year-on-year and 10.9% Q-on-Q to KRW 799.1 billion on marketing spend. With the fallout of COVID-19 still persisting, both economically and socially all around the world, NAVER's connectivity revenue increased KRW 170.2 billion versus last quarter. What's particularly encouraging is speedy recovery of ads and business platform revenue on top of well-balanced growth from commerce, pay, content and B2B businesses that would dictate both NAVER's near future as well as future far off. I believe we were able to do so because of NAVER's solid capabilities and our prudence in managing risk in the midst of changing world caused by COVID pandemic and because we proactively responded to newly emerging opportunities. We will continue to make efforts to continue on such trends. With that, I will end our second quarter financial highlights, and we'll now entertain your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Sung Eun Kim from Macquarie.

[Interpreted] I would like to post 2 questions. First is on your display ads-related business. In the second quarter, the advertising market was not that favorable. Despite that, you were able to achieve above 5% growth. Can you provide some background to this growth? And also for the Smart Channel, since it is making quite a bit of a contribution on your performance, what is your guidance for ad revenue growth going forward? And also second question is on your Smart Store. The GMV, you've mentioned, has grown by around 64%. Can you also share with us what the CPS revenue growth was like in the business platform?

[Interpreted] First of all, responding to your first question on the advertisement growth and the guidance. Due to the impact of the COVID-19, our performances from certain sectors like the films, the services were quite lackluster. However, starting in May, we have seen good performance come through, through performance ads, including the Smart Channel, that's really offset-ted or compensated for the demand -- the lackluster demand that we saw from the impression type of products. And hence, we were able to achieve year-on-year growth of 5%. Other than the Smart Channel, we've been really giving momentum behind the performance ad products. And therefore, we were able to see a very fast recovery from the month of May and June. In the second half of the year, we do expect that although the first quarter was slow, we do expect with the expansion and growth of the performance-based ad, we will be able to offset any negative impact, and we expect and hope that we will be able to achieve our initial target of a double-digit annual growth.

[Interpreted] A follow-up question to that is that you've mentioned your display ad growth target. You feel that you'll be able to achieve double-digit growth. But if you look at first half, it was only 3%. And are you expecting high-teens growth in the second half?

[Interpreted] As I said previously, I did mention a double-digit growth we do expect will be possible. You could run some numbers, and that's -- I feel that it will be possible. Now you've asked there also a question about the Smart Store GMV going up and also what the CPS revenue looks like within the business platform. Under our shopping-related revenue, we have shopping search ads and CPS revenue. CPS revenue is driven by growth in GMV had posted in the second quarter above around 37% year-on-year growth. And so it really drove the overall business platform revenue. Shopping CPS revenue, therefore, was able to post a quite good performance.

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

[Interpreted] I have a couple of questions. First on your business platform. Your second quarter growth figure seems to have moderated compared to -- on a year-on-year basis. Has there been an impact from COVID-19? And you've mentioned that your advertisement performance has started to show recovery since the month of June. Could you provide some more color on the month-on-month trend? And also just like the display ad, the second half would be -- do you think that mid-teen growth is possible? My second question relates to your business integration for the LINE company. I understand that you've made the disclosure that because of the COVID pandemic, there's been some delay in this process. Could you provide some update with regards to also the KFTC approval process?

[Interpreted] Responding to your question, over the months of March and April, there was an overall, I guess, a decline in the consumption sentiment. And there was slowness in the economy. And as a result, a lot of advertisers cut their advertising budget and the click-through rate also saw a decline. So yes, there was a negative impact. But we tried to respond to that by optimizing our advertisement product. And also with the whole COVID situation recovering slightly, we've seen recovery on our top LINE revenue side starting from May. So in terms of our business platform business, we were able to bring about a growth on a year-on-year basis of around 9%. Looking into the second quarter, we believe that there will be some negative impact persisting on some of our search-related -- search ad-related products. But as we are able to continuously increase our shopping revenue and also make improvements on our advertisement products, we plan to offset those negative impacts. Hence, we believe that for the business platform business in second half of the year, we will be able to achieve a double-digit growth. And for the D.A. business, as I previously answered, we still expect that double-digit growth will be possible. You also asked the question about the business integration for LINE. Due to COVID-19, there's been some delay in the scheduled conference and we, therefore, made a disclosure on that. If there are any additional changes, then we will update you through a separate disclosure. In terms of any impact on the current status of this whole process, there aren't any issues or any impact as of this point in time. There has been some delay at the Fair Trade Commission authorities of Taiwan and Japan, but all the related parties are doing their best to come through with the process -- go through with the process.

[Interpreted] the following question will be provided by Eric Cha from Goldman Sachs.

[Interpreted] I think you've answered just previously, but I just want to double check. For your CPC product, excluding the shopping search, what was the monthly revenue trend like for the second quarter? You've mentioned that you saw performances start to improve in May, and you saw recovery in June. Then compared to before COVID-19, what was the -- what is the revenue trend like? And also based off of that, for the second half of the year, what is your revenue growth outlook for CPC, excluding and carving out the shopping search portion? Second question is, previously, when you met the analysts, you've mentioned that with the launch of the plus membership, you saw positive shopping behavior changes. But that was during the promotional period. Now you have switched to a paying mode. I would like to understand whether you are able to see a good retention of those previously subscribed members. And also are their shopping behavior same as what you have witnessed during the promotional 1 month period? And also, if you can, can you share with us the number of subscribers or users to this membership.