NAVER Corporation (A035420) Earnings Call Transcript & Summary

[Interpreted] Good morning. Now we will begin the conference of the fiscal year 2020 Third Quarter Earnings Results 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 third quarter earnings followed by a Q&A session.

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

[Interpreted] Good morning. I am Han Seong-Sook, and thank you for joining our earnings release call this morning. In the third quarter, in order to respond to fast-changing market, characterized by the untapped market and digital transformation, NAVER focused on offering new experience and convenience to both our domestic and global users while we made choices to bring change and a new leap forward. Last August, LINE and Z Holdings gained the approval from antitrust authorities. And early this week, we announced partnerships with CJ Logistics CJ ENM and Studio Dragon. In order to accelerate growth in the fast-changing world, we need, on top of our organic efforts, very close cooperation with outside partners through which we can quickly enhance our required capabilities. In order to further complete the fulfillment flow of shopping, payment and logistics and to strengthen global content competitiveness, we entered a strategic partnership and treasury share swap with CJ Logistics, CJ ENM, Studio Dragon on the 26th of this month. CJ Logistics have #1 delivery infrastructure and Asia's biggest fulfillment base. By bringing NAVER's technology and data to this, we plan to digitalize the process spanning from ordering, delivery and notifications and eventually build out high-quality logistics based on smart logistics underpinned by logistics automation, inventory optimization and autonomous driving and logistics robotics. In terms of content, we will use IPs to create new content. And by supporting creators, we will gain IPs with global edge, and will bolster global content distribution through cross-platform collaborations between NAVER's Webtoon, V LIVE line and TVING. Through these collaborations, NAVER will endeavor to provide differentiated services to the domestic and the global market and find collaboration opportunities with partners so as to bolster our competitiveness. There were changes to the operating revenue classification as we executed partnerships with the CJ Group and with the approval of the merger of LINE and Z Holdings. In order to reflect the expansion of the commerce ecosystem, fintech growth, global Webtoon business supported by LINE Manga integration and B2B synergies from NAVER Cloud, we have reclassified our operating revenues into search platform, commerce, fintech, content and cloud. These will make up our core areas of growth going forward. For the search platform, through upgraded search and recommendation technologies, we have met users' need for information and consumption. And by offering automation tools and solutions to creators and SMEs, we facilitated content production. Based on our vision to provide seamless flow from content and information to final conversion, we were able to bring service enhancements and expansions and monetization opportunities, which formed a basis for diversification into commerce, fintech, content and cloud. Search platform will continue to help the growth of creators, who will provide good content to users. We will also deepen our new attempts like knowledge and expert, influencer search in order to open up new business opportunities for these creators. In Q3, influencer search saw 60% on quarter increase in monthly average unique visitors reaching 32 million. Thanks to service improvement efforts to diversify touch points with users. We plan to create an ecosystem where they can collaborate with different brands, receiving incentives in a transparent manner for us to facilitate services. Going forward, we will upgrade existing services by overlaying new technologies and trends, i.e., global search, knowledge and expert, block market to explore new opportunities in both domestic and global markets and evolve them accordingly. For NAVER Commerce underpinned by philosophy of diversity, we've created an ecosystem where users, SMEs and brands can connect and form relationships. From shopping search, leading up to payment, we wanted to provide seamless flow and that is why we've been introducing Smart Store, brand store, Shopping LIVE!, and other tools and solutions, and are also bolstering benefits in order to enhance user loyalty and SMEs and brands based on NAVER's ecosystem. On COVID-19 impact, online shopping demand has risen, triggering heightened interest on digital transformation for SMEs and brands. So for Smart Store, we are trying to lower the entry barrier by providing reasonable cost bases, convenience and effective operating tools. As a result, a number of sellers increased 30,000 on quarter to 380,000 with GMV of 72% on year, speeding up the pace of growth. In particular, up to Q3, 54% of the sellers grossing in revenue were set up in less than a year ago. And small merchants with less than KRW 300 million in revenue reported 91% growth, far above the average range. We will continue to support them in terms of data and technologies to SMEs, who are particularly hit by the COVID pandemic so that they can go through digital transformation and realign their businesses. Brand store, which was introduced in order to foster cooperation with branded companies is also on a smooth growth trajectory. As of September, we completed the opening of 160 branded stores and the GMV is sustaining an uptrend. In Q2, many brands made use of NAVER's tools and solutions quite organically, such as brand store, brand day, Shopping LIVE! and special DA. [indiscernible], which is a high-end consumer electronics and [ Slow ], which is a sleep-related brand growth KRW 600 million in GMV on the day of the new product launch. Xbox had an exclusive online launching in its brand store and completely sold out on 3,000 units. As you can see, NAVER Commerce will continue to lay the basis for total solution offerings that can holistically support both SMEs and branded companies underpinned by Smart Store and branded stores. Shopping LIVE!, which was launched last July, has seen many success cases, drawing in quite a bit of interest from the industry in terms of marketing new product launches, collaboration and limited edition introductions. Number of sellers and live sessions in September increased twofold month-on-month, live views was up 1.6x, and GMV was up 2.5x, a such steep up trend is translating into market strength. In September, 700 SME sellers streamed 1,900 live sessions reporting a steep growth versus the brands. After -- about half of the vendors had more than 2 live sessions per month and merchants who regularly communicate with their frequent buyers seem to be gaining stronger viewership base. To give more momentum to this trend, we will provide tools for SMEs, training and space and equipment for LIVE Commerce as we expect more vendors to use this platform. LIVE Commerce market is only at its nascent stage in Korea. By strengthening its link to NAVER's commerce platform, brand and SMEs can gain bigger exposure, and we will continue to offer various support programs. Since launching Plus Membership in June, subscribers reached above 1.6 million with member-originated GMV accounting for 15% against total NAVER shopping, making positive impact on the growth of the total GMV. Customers who purchased less than KRW 200,000 per month before, increased their purchase amount by threefold after subscribing to the membership, which is supporting higher loyalty to NAVER's commerce ecosystem. We plan to add more membership benefits from NAVER's internal services and expand outside partnership creating a positive feedback loop for subscriber growth to achieve 2 million target by the end of the year. Through broadening our commerce ecosystem, we will continue to support the relationship between users and vendors and based on our domestic successes, will embark any challenge towards global expansion. Driven by growth in NAVER Commerce and outside partner base, NAVER Pay GMV was up 62% on year, reporting KRW 6.8 trillion. NAVER Bankbook, which was launched in June, saw its user base grow with more people topping up points and using points for payment. In Q4, to further expand on the ecosystem that support the use of the NAVER point, we will launch point-based QR payment offline. By offering payment solutions that are cost-effective and interoperable with NAVER's ecosystem, we expect merchants will benefit in terms of marketing and operations. In November, together with Mirae Asset Capital, we started business loans for Smart Store vendors, and we'll expand on this service offering as we go forward. By using an alternative credit scoring system based on NAVER's database, we can provide initial or operational funds for SMEs who previously had difficulty accessing the incumbent banking sector. We will make sure NAVER search, commerce, booking, payment flow will connect well to the fintech platform so that we may grow together with our SMEs. Webtoon is our key global business pillar. And thanks to U.S. and European markets on content growth and marketing activities, user and payment measures are all showing a positive trend. MAU in Europe and Latin America surpassed 5.5 million with global MAU at above 68 million. Monthly paying users were up 28% year-on-year, and total GMV was up 40%, overachieving KRW 220 billion. From August for LINE Manga, by bringing our know-how in planning and development in Webtoon, we're moving to a series-based featuring rather than services around a single publication. We will leverage popular IPs, i.e. True Beauty, How to Fight, Omniscient Reader and strengthen our marketing to expand the user base. In Q3, a number of LINE Manga's paying users was up 46% on year and GMV was up more than 40% as we broaden our leadership in the publication market into series-feature market, which is growing rapidly. In Korea, we are seeing Webtoon, Web Novel cross-platform successes like for Omniscient Reader solidifying our #1 positioning in the Web Novel segment as well. In the North American market with COVID-19 and upcoming election, marketing activities have been quite constrained. But with Canvas, which is the creator ecosystem, had really taken off and higher loyalties from the Z generation had been gained. And thanks to that, GMV was up 86% year-on-year. We plan to add momentum to series-based services in Japan, which is the biggest Webtoon market, and we'll continue to expand the users from U.S. and Europe so that we can grow into a major global entertainment platform. In Q3, NAVER Cloud platform revenue was up 36% Q-on-Q and 156% on year driven by the untapped environment, which accompanied higher demand for services. We also became a member of LG CNS consortium for a Smart City project for Sejong City, making new references in public, education, finance and gains. Works Mobile, which provides collaboration tools is also growing smoothly. In Japan, it's keeping to its #1 position for 4 consecutive years. And for Korea, we did rebranding to NAVER Works in order to create B2B synergies and to broaden our business horizon. For Clova, we opened NAVER AI lab early October to lead the AI research initiative. By the end of this year, we plan to build a high-performing supercomputer to secure next-generation AI technologies. Through such efforts, we will develop tools that support companies, SMEs and creators in their business and endeavors, expand the ecosystem and continue -- and we'll continue to provide differentiated solutions to users and creators underpinned by AI leadership. As such, NAVER is endeavoring to respond to B2B needs through Cloud, Works Mobile and Clova. It is important to understand the complex needs of the B2B customers and respond to their needs holistically, which will determine NAVER's competitiveness. We have, therefore, decided to develop and provide B2B services and product offerings based on our cloud platform and change NBP to a new name, NAVER Cloud, which is more intuitive as of October 15. NAVER Cloud has chosen this year as an important juncture for its B2B business by integrating shopping, labs, [Foreign Language] and other services, technology data and know-how of NAVER. We will build specialized vertical solutions in education, commerce and gain. Based on which, we hope to distinguish ourselves against global players. Lastly, I would like to share NAVER's ESG direction forward. I believe NAVER's growth was driven by creation of new value through harmonious growth we pursued with many different stakeholders. This year, in particular, due to the untapped environment brought on by COVID-19, there is greater call for platform companies, social responsibilities. In this context, NAVER is devising its mid to long-term ESG strategies to enhance our efforts and investments for the purpose of generating social and environmental value. NAVER, at its core competitive edge, will set up green e-commerce ecosystem that can bring on new opportunities and attract and foster talent, support the growth of partners and enhance shareholder value. We will also upgrade risk management framework for climate change, information security, fair trade and ethical management as these factors can greatly undermine enterprise value. In order to mitigate the impact from climate change, we understand that industry effort is essential. Hence, we are committed to joining in on the efforts and transition to green business and low-carbon economy. As such, we plan to adopt carbon-negative target by 2040 to significantly cut carbon emissions. With the coming of the 5G and the untapped world, data usage has exploded. We expect carbon emissions by NAVER in the coming decades will rise sharply considering our data centers and the upcoming completion of the second IDC in Sejong. NAVER already operates data centers and offices that are energy-efficient based on global standards. However, we believe there needs to be additional efforts and investments to make sure operational risk does not deepen due to climate change. Therefore, we will invest more in renewable energy and emission reduction solutions to improve on data center energy efficiency and will actively expand our exposures to green businesses and investments there, too. We will continue to communicate with shareholders and stakeholders regarding our future activities and plans through different occasions. So as such, NAVER will continue to endeavor to live up to its social and environmental responsibilities, which will form the basis of our long-term growth, continue to bring business performance by growing together with companies, SMEs and creators. With that, I would like to now turn it over to our CFO to give you the financial highlights.

[Interpreted] Good morning. I am Park Sang-Jin, the CFO. As LINE and Z Holdings received authorization on merger from the antitrust authorities, LINE's earnings formally represented in the consolidated statement will now be classified under P&L from discontinued operations under K-IFRS standards. In line with these changes, we reclassified our operating revenue to better reflect our strategy and business directions. As commerce has become critical in terms of its contribution within NAVER, we separated commerce revenue, which was previously rolled up in this platform and ad revenue. And we combined search and display under a search platform, which forms the basis of NAVER's business. NAVER Pay and Financial Services, which was part of IT platform and Cloud and Works for B2B have been reclassified, respectively, under fintech and cloud. By grouping financial revenue from NAVER Pay and NAVER under fintech, we will be able to highlight the trajectory of growth into fintech above and beyond NAVER Pay. And by classifying B2B revenues from Cloud, NAVER Works and Clova under Cloud, we also wish to show how the platforms are generating synergies and are expanding their business reach. Under this new classification, NAVER's Q3 consolidated operating revenue was up 24.2% year-on-year and 6.6% on quarter reporting KRW 1,360.8 billion. Year-on-year growth of 24.2% is by far the biggest quarterly top line growth since 2017. Based on the previous classification, including LINE's P&L from discontinued operations, operating revenue was up 23.7% on year, reporting KRW 2,059.8 billion, breaking for the first time, the $2 trillion mark. Consolidated operating profit was up 1.8% year-on-year, but down 5.3% Q-on-Q to KRW 291.7 billion, with adjusted EBITDA of 13.5% on year and 3 -- and down 3% on quarter, coming in at KRW 389.8 billion. Starting this quarter, we're also presenting adjusted EBITDA figures, which is an important internal measure, which adds stock-based compensation to EBITDA. I believe this is a measure that can accurately and reliably show NAVER's cash flow generating capabilities from its business operations. Lastly, Q3 net profit was up 176% on year, reporting KRW 235.3 billion. This figure includes disposition gains arising from third-party investments secured for Thailand's lineman, which was booked under the account for discontinued operations. Breakdown of operating revenue is as follows. Despite concerns over a new wave of COVID-19, search platform has seen pronounced top line recovery, growing 8.2% on year and 4.7% on quarter, reporting KRW 710.1 billion. Driven by performance ads, display revenue went up 26.3% year-on-year, fueling the growth of the search platform. Commerce revenue, newly classified this quarter, saw its revenue up 40.9% year-on-year and 11.4% on quarter to KRW 285.4 billion driven by uptrend in online shopping demand. Fintech was up 67.6% on year and 5.7% on quarter to KRW 174 billion on growth in Pay GMV growth. Content revenue was up 31.8% year-on-year and 1.8% on quarter to KRW 115 billion driven by Webtoon Global GMV growth. Cloud revenue, which now includes all of NAVER's B2B services, thanks to balanced growth from all of the service segments including NAVER Cloud, was up 66.2% on year and 19.1% on quarter to KRW 76.3 billion. Next is on expense items. Development and operational expense was up 25% year-on-year and 7.6% on quarter to KRW 311.7 billion on the back of new hires from new business expansion. Partner expense was up 30.9% on year and 6.9% on quarter to KRW 457 billion due to increase in revenue-linked expenses, i.e., sales and payment commissions. Infrastructure expense was up 36.3% on year and 6.4% on quarter to KRW 144.8 billion on higher depreciation expense from more investments in new hires relating to the cloud business. Marketing expense was up 48.6% on year and 35.7% on quarter to KRW 155.6 billion on NAVER Pay point promotion in global marketing for Webtoons, including LINE Manga. As mentioned earlier, NAVER's consolidated top line growth for Q3 was record high since 2017, and this is a result of our efforts to invest in new business and explored opportunities even amid difficulties of COVID-19. We, therefore, made changes to revenue classification to clearly show to investors how NAVER is focusing on new businesses and to show their growth trajectory. On top of such shareholder-friendly efforts, we will continue to invest for sustainable growth by placing priority on ESGs, emphasizing the value of society and the environment. We look forward to the investors as our partners in NAVER's journey towards growth and challenge, and that's bring me to the end of my presentation, and we will now take your questions.

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

[Interpreted] I would like to submit 2 questions. First is on commerce. We've seen quite robust growth trend for your Smart Stores over the past 3 quarters. Could you elaborate on this trend and share with us what your projections are for Q4? Second question, if we look at your display-related revenue, Q3 revenue was higher than expected. I would like to understand the contributions made by your performance ad as well as what your outlook is for the display-related revenues for the fourth quarter?

[Interpreted] I'm the CFO, and I will first respond to your question about the robust growth that we're seeing from the Smart Store solution. If you look at the third quarter, because of the COVID pandemic as well as the monsoon season, it was difficult for people to actually engage in outdoor activities. As a result, we've seen quite salient growth from product categories such as household goods, health care, furnitures and interior products. And also, we've seen increases of purchases relating to home training as people found it difficult to go on a long-term travel. There were more activities, family-based activities, that's now taken -- that has now become a mainstream, I guess, trends these days. And we've also seen, therefore, a quite big purchases and sales from sports and leisure category. So if you look at our Smart Store GMV since the first quarter, we've seen a very steep growth, especially after the end of February after the outbreak of the COVID. We've seen significant increases in the number of buyers with the number actually surpassing 10 million when we arrived at the month of March. And if you look at figures as of end of the third quarter, we have a total number of 380,000 sellers, and we are seeing a very robust inflow of new additional sellers on a monthly basis in the amount of KRW 30,000. In terms of what we project for the Q4, yes, in October, there is the Chuseok Holiday and other holidays. So we think there could be some of the impact. However, we expect that the continuous robust uptrends for Smart Stores will sustain into the future.

[Interpreted] I'm the COO. I will respond to your question about our display business. As we entered into the third quarter because of COVID, the new way of COVID as well as the impacts from typhoon, we've seen the impression-based ad market quite subdued. However, the driver behind the revenue growth in Q3 is actually from the performance-based ad, and we were able to actually bring 26.3% year-on-year growth. And in Q3, we added additional services for performance ads by adding band in July and [ Cafe ] Mobile web in September, and we were able to really increase the amount of volume. We also onboarded new advertisers. And in order to improve on the ad efficiency, we also made some upgrades to the platform. In terms of our outlook for Q4, the fourth quarter typically is the high season for these types of products, but there is a base effect that we have to account for. And especially the [ 2 felt ] impact because last year, it was in September, whereas this year, it was in October, also needs to be considered. Having said that, we continue to really push for performance ad. And we think that, therefore, the growth trends will continue into the future. So as we've communicated in the first half of the year, we expect achieving a double-digit growth on a per annum basis would be not that difficult.

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

[Interpreted] I am Ahn Jae-min from NH Securities. We've seen the heightened competition in Japan around the Webtoon services. And I think the company wasn't able to really give a big push because you were also involved in the FTC-related review process. Having said that anyhow, what is your Webtoon strategy for the Japanese market? And what is your projection for Q4 and next year? Second question is on the LIVE Commerce. The CEO has mentioned this during the presentation, but how far do you think you can actually expand this market? And there are other competitors entering this market. What are the strengths that NAVER has? And how can you differentiate yourself from other players?

[Interpreted] I'm the CFO. Let me respond to your question on the Webtoon business. Up until -- I mean, starting the second half of last year, we've seen competition really flare in Japan around Webtoon. And also because of that, we've seen a steep growth of this market as well. If you look at LINE Manga, before we change the governance structure, the business model was much more geared towards a single publication base. But there is higher profitability to be gained from a series-based feature model. Therefore, we've been increasing our volume and efforts towards the series-based business model, and we feel that there needs to be more efforts in migrating towards that direction. So in the month of early August, we've made some governance-related changes. And since then, what we were able to do was really bring in the know-how and capabilities that NAVER Webtoon has accumulated over the years, and we were able to make enhancements on the services that we provided. And also around very popular IPs, we were quite active in conducting promotions. As a result, we saw our paying users actually grow by 46% year-over-year, and GMV was also up by 40%. So although we are only at the beginning phase of this changed approach, we now see the contribution that is made by a series-based feature model making its contribution to GMV actually growing. So we will continue on with this transition, and we also will make use of the NAVER Webtoon's very popular IPs. We will utilize them so that we are -- we can actually strengthen the lineup of the content. And also, we will make use of the global brand awareness at the high level of brand recognition that NAVER Webtoon naturally wheels on the global stage, so that we can really power charge the cross-border impact. And so we will also be very much focused on developing new content from the local markets by making use of already established creator communities. So we will continue to employ such a strategy in the Japanese market this year and also next year as well. And so through these transitional approaches, we think that come next year, we will be able to clearly and uniquely distinguish ourselves against our peers.

[Interpreted] I'm the CEO. Responding to your question on LIVE Commerce. Regarding the size of this market, because we're only at the very initial phase, it's quite early to say how -- what the size is going to be. However, if we look back at the data that we've been gathering over the past couple of months and the feedback that we are getting, I think that compared to our expectations, the signs could actually be bigger and more diverse. So internally, we've been comparing this market to the TV home shopping channel. But if you look a little deeper in terms of the customer groups, the mix as well as the usage patterns, it is quite different from the customers that use TV home shopping. At this point, the LIVE Commerce is writing quite a bit of success cases. And now the industry is recognizing that this is a channel that they must employ. So we do expect that going forward, the different brands and companies will start to use this channel as a key avenue of their marketing and promotion activities. Especially, we are seeing many use cases of this channel for new product launches and introduction of limited editions and collaborations across different brands. So it's really creating new types of purchase patterns. And also on the NAVER platform, we have a promotional platform called brand day. And when we combine the existing promotional platforms like brand day with LIVE Commerce, we've seen a significant uplift to the sales that's been generated. So we will continue to try to utilize the existing marketing and promotion platforms as well as LIVE Commerce going forward. And how can they distinguish itself? What is its strength? Because we already have an experience of running V LIVE services against the global stage, so we were able to actually build our experience against having such a massive live streaming. And we have the technical infrastructure that could actually support this. So other companies, while they are only able -- for instance, able to stream a live session, only 1 session per hour. For us, we can actually run multiple number of live sessions at the same time because we have a very robust live streaming platform. And that is supported by technology, data and infrastructure. So in terms of sending out and streaming out these live sessions, I think that NAVER is quite well positioned. And also secondly, we are providing these live streaming tools to Smart Store vendors. And so we see that these SMEs actually employ these live tools very effectively so that they are actually streaming more frequently, and they are using this on a sustained basis. And we are providing this life tool to branded stores as well. So all the indicators are quite positive. And lastly, after a live session actually ends, it doesn't actually end there. We now see behavior where users go back and look for that the VoD, that video on an on-demand basis. So this is a video data. Basically, for the live session, we can get snippets of those live sessions and people could actually search for these video -- snippet video files, and that could actually lead to conversion to purchases. So people could rewatch it or they could search it and so that could actually connect once again to more purchases even after the live session ends, and it could be used for marketing and promotional purposes.

[Interpreted] The next question will be presented by Lee Moonjong from Shinhan Investment Corporation.

[Interpreted] I would like to ask 2 questions. First is on shopping. After you launched the NAVER grocery shopping, what is the metrics -- I mean, what are the performances that you're seeing? And what's your strategy for this service going forward? Secondly, I see that your partnership with CJ Logistics has deepened. We'd like to understand the scope, the applicable scope of this fulfillment base. Second question is on Z Holdings. I think that now they're going to be reflected on your equity method gains from when would we see that number come in, and what is the size of that equity method gain.

[Interpreted] In terms of the grocery shopping, where we first launched this services, there was a lot of interest that we gained from users, and actually ranked #1 in terms of the themes that people -- in terms of the ranking. And we got a lot of questions about people who showed interest in wanting to actually onboard these services. What was quite interesting was that for the shopping cart service, for our town shopping cart service, before it was -- the service was opened, compared in July, basically, the amount of orders have gone up by 2.5x. And I think we now see that the actual sellers and vendors, their satisfaction level of the service is quite high. So what we want to do is we want to make sure that we can actually connect to all the marketplaces, nationwide, and we also would need to develop solutions to make sure that the delivery system can actually also provide -- to provide satisfied services to the user base. We would need to continuously collaborate towards the specialized shopping cart companies. Only then, we will be able to see some meaningful performance and measures, which we would be able to share with you. For the scope of the fulfillment with CJ Logistics, we have -- we were first starting off with 5 major branded companies, including LG Household Company. So we will start here and make sure that we come up with a structure that is optimal. And after that point in time, we will be able to further expand on the fulfillment scope.

[Interpreted] So in terms of the Z Holdings, as we gained the authorization from the Japanese antitrust authorities in August on the approval of the merger of the 2 entities, the LINE related to P&L, which had been categorized under the P&L from discontinued operations, basically, on the -- however, on the net profit line, there is not going to be much change. It's still going to reflect the LINE-related P&L. But come March of next year, the business integration process will actually be completed. Then we think that from the first quarter, we will be able to reflect 32.5% of the Z Holdings gains on the equity method line item. So in terms of the size of that equity method gain, if you look back at the past track record of 2019, that can add up the net profit of Z Holdings in line. We -- the estimate will be around [ 30% ]. And if you do that, then in Korean won, what we will actually account for as an equity method gain would be above KRW 100 billion. Now if we look at our half year data up to -- of this year between LINE and Z Holdings, and make projection until the end of this year, then the estimate will be JPY 50 billion, which is above KRW 150 billion. So once again, these are just estimates, of last year and for this year. But the actual consensus of the 2 companies regarding the profit for next year is actually higher than these estimates that I have just shared with you. So I think that there will be a significant amount of equity method gain where we will actually book on our statements.

[Interpreted] The next question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] Can you provide some explanation regarding the fact that your content revenue growth seems flat as compared to the GMV growth of Webtoon? Can you explain why that is? And second question is on margin. With commerce really showing structural growth and you being quite active in pushing for Webtoon, and also in light of the SNOW business, it seems that there is some compression on the margin side. So I would like to understand what your outlook is for your margin going forward. We have understanding about your Webtoon and commerce business but in terms of SNOW, there seems to be less of a visibility. So could you share with us what your strategies are for your SNOW business?

[Interpreted] So your question on why the content revenue seems quite flat compared to the growth of Webtoon GMV? Well, the first reason is because, as I previously explained in the third quarter, we actually transitioned into applying a new model for LINE Manga. And in so doing, we had made some promotional spending in the form of giving out coins to the user base. So as a result, that number actually had contributed to the growing up -- increasing of the GMV figure, but it did not contribute to revenue. Therefore, if you look at NAVER Webtoon, which had a 7% growth, Manga on a Q-on-Q basis, although its GMV increased, the revenue contribution from more activities was because we had given out the free coins was, therefore, negative. So that's on the accounting side. But through this marketing drive, we were able to bring about more than 20% MAU growth in Japan. And also by giving out these free coins, we had people actually experienced the payment process. So there was a 46% increase of that. So from a long-term perspective, in terms of revenue and service for Manga, we believe that the outcome is quite positive. And if you look at the content revenue on a Q-on-Q basis, I think that another driver behind this is because of the V LIVE-related revenue, in Q3, on a year-over-year basis, yes, the revenue was significantly higher. But on a Q-on-Q, because during the second quarter, there was this massive live streaming of Beyond LIVE, which grossed in significant amount of sales. That's why in Q3, it looks as if the figure had actually declined. So that's why compared to the GMV growth, the revenue figure looks flat or lower. In terms of margin, unlike our past business configuration where our core of our business was from search platform, right now, if you look at NAVER's business platform, we are seeing rapid growth from commerce, fintech, content and cloud. So it's really time for us to make investments. And also for the Webtoon in Japanese market, we will continue to make investments to really gain and strengthen our leadership position. And also from a long-term perspective, we also need to continuously grow and develop our cloud and fintech business and hence, investments will be accompanied. We want to make sure that we gain a competitive market leadership. So from a long-term perspective and from a short-term perspective, rather than focusing on margin itself, we will be mindful of making investments that are efficient and reasonable. So that from a long-term perspective, we can continue on with the growth. Now for SNOW. SNOW is like NAVER Labs in technology, and SNOW is equivalent to NAVER Labs in our service arena. So this was launched in order to really target global users in their teens and 20s. And this is considered to be a very trendy service. So we will continue to explore new growth opportunities. So where, at this point, we're continuously making investments and challenging ourselves through this new business. So the outcome of our investment effort is translating into various different services and applications that are being developed. Currently, with 250 million global MAUs that are -- as well as ZEPETO, which has 118 million user bases, we will be able to really make use of different advertisement, and we're trying to make this more effective. So right now, SNOW is -- there is no investment on SNOW that is being made. And basically, once again, this is a service that targets people in their teens and 20s on the global market. So we are continuously going to stick to our long-term perspective. And we think that eventually, it will become a new growth engine for us like LINE.

[Interpreted] The following question will be presented by Ro Seungjoo from CLSA.

[Interpreted] My first question relates to your search ad. You, for the first time, share with us what the revenue mix is. And you've shown that it's 3.6% growth. And that may look low. However, in light of the service ad market and the COVID situation, the figure may be quite robust. I would like to understand what your thoughts are on the limit or the potential for the growth of this search ad space and what your outlook is for next year. Second question, you also shared with us, for the first time, your commerce-specific revenue. Can you also give us more breakdown of what the GMV is for commerce and for Smart Store? If that's difficult, can you actually share with us what the Smart Store mix is out of the total commerce revenue?

[Interpreted] Yes. In terms of the surcharge, shopping-related revenue is very robust. But on the nonshopping side, the recovery seems to be slow, but we are seeing continuous increases in the number of mobile queries, and we have made more optimization efforts around our Power Link advertisement. So as a result, PPC that was previously plummeted has somewhat rebounded. So as a result, in Q3, we were able to bring in about 3.6% Q-on-Q revenue growth. In terms of the Q4 outlook, once again, because of COVID, the visibility on economic situation is not all that clear. However, despite that difficulty, from October, we've also increased our advertisement coverage by starting our advertisement exposures over the outside media, which is MS Bing. And we are continuing on with the optimization efforts. In terms of the Q4 guidance, I think we will be able to share that with you early next year because right now, we're working on that. So your second question on commerce and the mix of the Smart Stores. As you know, Q3 was the first quarter where we actually shared with you more specific figures and calculations regarding the commerce revenue. So please understand, it will be difficult for me to give you that specific breakdown that you've asked for. Having said that, to provide you with some color, if you look at the GMV, out of the total GMV, Smart Store mix is actually -- has gone up, and at least 10% on a year-over-year basis. And Smart Store GMV itself had posted a growth of above 70%. So the total NAVER GMV growth level would be lower than that.

[Operator Instructions] The following question will be presented by Stanley Yang from JPMorgan.

[Interpreted] I have a couple of questions. First is on your OP margin. It's continuously on a declining trend. And on an absolute basis, your year-on-year growth rate is also not up to the expectation of the market. When do you think that this market decline is going to continue? Up until when? And also investors are very much interested in your commerce margin as opposed to the search margin. What do you think is going to be the trend for commerce margin? What's your outlook? And also, what are your monetization strategy to actually support and buttress the commerce margin, for instance, i.e., like using the shopping search, et cetera?

[Interpreted] So on operating profit, under the new classification, we have represented our data since the Q3 of last year. And you will see that from then on, the OP margin had been on a downtrend. In terms of this quarter, that extent was a little bigger. And it's because of the need for us to make investments in terms of our strategic business and also strengthening our positioning in the market. Also in Q3, LINE Manga, which had quite a bit of marketing activity, that -- those numbers were consolidated into NAVER's financial statement, and that also had an impact. Anyhow, for the time being, we think that this downtrend for margin will continue because of the need for investment and -- the imperative need for investment, which will help us gain market leadership. Yes, operating profit margin is important. But from NAVER's long-term perspective, we -- in expanding our businesses and in attempting a different strategy, we are focused on the side of the operating profit per se. And also, we internally keep EBITDA margin rate as one of our key targets. And the volatility of this internal EBITDA margin is much lower compared to that OP margin movement. So it is under that figure that we make sure that we can manage our investment and the use of the available resources in actually expanding our business and making different initiatives. And you've mentioned -- yes, for the search platform, its margin rate is higher compared to commerce. But search is completely advertisement, whereas, commerce, about 50% is ad and the remaining is intermediary commissions or membership-related fee income. So compared to the past when search platform was 50%, 60% of the mix, if we start increasing the mix of the commerce, yes, it's going to be inevitable that the margin level will decline. Currently, the [ tourist ] revenue is not yet half of that of surcharge, and it's growing quite rapidly. And also on top of the commissions' income that we can make from a shopping search ad as well as Smart Store, we are creating new models and really expanding different strategies and models. So we are at this point, very much -- very closely studying into different product portfolio strategies for both domestic and overseas market.

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

[Interpreted] So some follow-up question on margin. Could you share with us the margin figures for individual revenue breakdown? And also, you used to have profit from the Webtoon's business from Japan and Korea. But in Q2, have that figure turned into red and did it record a deficit? And when do you think you're going to continue on with this aggressive marketing for the Japanese market, even at the expense of making loss?

[Interpreted] Now the margin breakdown, please understand, we won't be able to share that with you until the time we -- our business models are more robust and until the time that we have them well established. For Webtoon -- domestic Webtoon is making profit. With U.S. plus global, it's making a small loss. LINE Manga, up until last year, it was making profit. But in the second quarter due to the aggressive marketing, it is making -- it is loss-making. In terms of the aggressive marketing, for the time being, we expect that we will continue on with this aggressive approach because the competition from the market has gone very fierce.

[Interpreted] The following question will be presented by Kim Taewon from UBS Securities.

[Interpreted] You -- during the presentation, you mentioned that you will be originating or giving out loans to the Smart Store vendors. Your credit scoring system that you've developed, I would like to ask some questions about that because if you look at -- if you look at other Internet commerce platforms, it takes -- actually takes them very long time to develop and perfect a credit scoring system for at least about a year or 2. So I would like to understand what your projection is. And how big of a loan book are you going to actually carry? And are you -- would you just be an intermediary entity that just gives up the loan? Or would you be actually taking on the credit risk of that loan?

[Interpreted] In terms of our credit scoring and credit assessment for the Smart Store vendors, we are making use of their real-time top line sales data and also the reliability factor for the vendors. Based on those data, we have already developed an alternative credit scoring system, and that system will be used starting Q4 in November, December, when we start this lending process or a lending product, for the vendors of the Smart Store. Basically, these loans are year-based and also the vendors would need to repay on their interest and principle. So as that happens, we would be also continuously upgrading our credit scoring system. So it will take some time and until it actually goes through that upgrading process. And also with more untapped behavior spreading, we've seen greater number of Smart Store vendors as well as their behaviors change. So in line with that, the credit scoring system would also start -- would also need to start to reflect those changes. So the upgrade methodologies for the system have already been developed but the upgrade processing would need to continue. So in terms -- your question about the size of the loans in the year or 2 a period of time. Basically, we do have some internal estimates, but we will have to wait and see once we open this service. We want to see how many vendors are actually applying for this loan service. But what's clear is that, if the GMV for the Smart Store actually increases, then loan size, loan volume, of course, will also go up. Regarding the second question, we will be collaborating with Mirae Asset Capital. And basically, our preference is to continuously collaborate and cooperate with financial institutions. And also, our credit assessment and credit scoring system has to be quite robust and of high quality. So we will continuously test that system as we go forward and validate that system as we go forward.

[Interpreted] The following question will be presented by Kim Jingu from KTB Investment Securities.

[Interpreted] I would like to understand what the blueprint for the integrated entity of NAVER and SoftBank is for the e-commerce and synergies thereof. And also -- and in the global market, what are some of the new business areas that you are interested in tapping into from a mid to long term?

[Interpreted] So after integrating with Z Holdings, we do expect there will be many areas where we could actually collaborate, particularly on commerce, regarding Smart Stores and shopping search. We believe that there will be a lot of opportunity for the entities to actually collaborate. So we are reviewing and tapping into different ideas, but it is too early to say and specify on the specific model of that cooperation. Having said that, under e-commerce, we will fully utilize the assets that NAVER has as well as the capabilities that LINE and Yahoo! could bring to the table. The second question, any new business areas that we're interested in? As you know, NAVER through many efforts, through LINE, SNOW, its Webtoon's and V LIVE, we've really made a lot of efforts for global expansion. And with the integration of Z Holdings, not only for Japanese market, but for the global market, we expect there to be many such collaborative opportunities going forward. And as the CEO has mentioned, not only the commerce, but there will be other opportunities. But at this point, it's difficult for us to share with you any specifics. But once these ideas actually materialize, we will be able to communicate back with you.

[Interpreted] The following question will be presented by Angela Hong from Nomura Securities.

[Interpreted] My 2 questions are, number one, in the presentation, you said that in Q4, you will be introducing a point-based QR payment method for the off-line market. We also saw in the news article that in October, NAVER Pay registered to provide debit services. It seems like NAVER Pay is trying to expand its presence in the off-line market? Is that the plan? I just would like to confirm whether for NAVER Pay, you will be moving more towards off-line from shopping and online payment. And then, should we also expect a higher level of marketing spend in Q4? And also a second question on ESG. You also mentioned shareholder value to the -- or can we expect more improvement towards that direction going forward?

[Interpreted] Yes, we plan to introduce QR payment in November. That's because for us to actually provide a debit payment services, we need to get a license. So that's why we're starting off with a point initially. So it's not that NAVER Pay was solely intending to focus on online or shopping. Basically, NAVER Pay strategy is to provide our user base a mode of payment whenever they wish and the necessary means that they need. So it's the convenience and usability factor that we are most focused on. And that also means that we will be able to support that use in the off-line space. In terms of convenience, in order to enhance convenience, we started providing smart ordering services, which allowed people to pick up the food that they ordered quite conveniently. And also, we decided to expand our presence in off-line. And we are starting with a point-based system. But then starting next year, we will also be providing credit card-based services. And of course, we will be making some marketing spend, but it's not of a significant range that will impact our -- in light of our operating profit numbers. So you asked of how then are we actually going to enhance shareholder value from an ESG perspective? I mean at the end of the day, we believe that without having a transparent governance system in place, and also having our core competitiveness arise from the environmentally-friendly e-commerce ecosystem, and fostering of the relevant people as well as growing together with the partners, it will actually undermine the enterprise value of the company. So without the framework that could withstand the challenges brought on by climate change, information security, security, privacy and ethical management, it will actually hurt the value of the company. So the specific agenda items that the company will tackle in our strategic direction will be included in the year-end report, which will soon be published. In terms of the shareholder return policy, as we communicated at the beginning of the year, basically, we will be either making share buybacks or cancellations of [indiscernible], the scope of the surplus cash flow, and that position will be kept.

[Interpreted] That ends NAVER's Q3 2020 Earnings Release. Thank you for joining us this morning. And also thank you for your support and encouragement. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]