NAVER Corporation (A035420) Earnings Call Transcript & Summary

[Interpreted] Good morning. We will now start NAVER's 3Q 2022 Earnings Conference Call. In today's conference call, NAVER will give a presentation. And after which, there will be a Q&A session for those of you participating today. [Operator Instructions] Now we will -- NAVER will start their presentation.

Good morning. I am Kwon Kim Min from the IR team. Thank you for joining NAVER's 3Q 2022 Earnings Conference Call. Joining on our call today, we have Soo-yeon Choi; and CFO, Nam-Sun Kim. In addition, please note that the presentation today is based on K-IFRS. In order to provide the results in a timely manner, the content has yet to be audited by a independent auditor and thus may be subject to change after such review. Now first, I will turn it over to the CEO, Soo-yeon Choi, to present the business highlights.

Good morning. I'm Soo-yeon Choi, the CEO of NAVER. As macro uncertainties in Korea and abroad increase, there is increasing concern about the slow down and growth of internet platforms. In a challenging external environment, we understand many investors are providing sincere feedback about the growth direction of the company. The CFO and myself also continue to think about how NAVER can continue sustainable growth in the mid- to long term. And to achieve this goal, we do believe that short-term results are important, but they need to be balanced with preemptive investments for the mid- to long-term stability and also growth. And this importance is something that we have been able to show you through our growth across the past 2 decades. In 2013, NAVER was the first in Korea to build its own data center, Gak Chuncheon. This data center has been the backbone of NAVER's wide variety of services that have been provided to users in a stable manner. Due to a high level of data backup and redundancy, even during the recent crisis, we were able to recover services within a number of hours. Gak Sejong, which will be completed next year is also a preemptive investment to further solidify the stability of NAVER services. In addition to [ infrastructure ] investments, we will continue to review investment opportunities that have high growth potential and create synergies with our core businesses. Thus, as announced in October, we decided to acquire Poshmark. Over the mid- to long term, we hope this investment will become a meaningful driver of growth 5 to 10 years down the road. Looking back on our journey, NAVER successfully introduced local UCG (sic) [ UGC ] content, [ blogs ], which were the start of community services and cafe services. Then it went to expand its content via BAND, V LIVE and global webtoon services. We did not stay complacent as a search provider generating stable profits but became the only company to successfully transfer -- transform into a commerce player. By challenging ourselves again, connecting this to NAVER Pay, we have been able to continue both high revenue growth and core business profits. To continue NAVER's growth in the future or at the center of more significant growth going forward is our community services. Through the Poshmark acquisition, we have taken a meaningful step towards establishing community commerce as a new retail format. As thus, in Korea, we continue to contemplate the community services changes that we want to create. Against this backdrop, the company launched a new community service called Open Talk and Issue Talk in the NAVER Sports category last September. Users with a common interest can open a chat room to talk, recommend specific subject to small group chat rooms and provide a wide variety of content to create an immersive communication platform. In only one month since launch, the Sports Open Talk has around 2,000 chat rooms and 42% of the participants are young users under 30, showing potential for high growth in the future. Going forward, we will expand this service to a variety of other service areas, including dramas, stocks and other issue keywords, which have a need for real-time community. This service will increase the activity and hours that users stay at NAVER. And over the mid- to long term, it can be linked to other businesses such as ads, commerce and place to enhance business and financial synergies. In addition, we will also strengthen NAVER's unique community-based contents, which is leading the growth on the global stage and the B2B business, which is expected to become more important in the future. First, -- now let me discuss the search platform business. So third quarter is a traditional low season as working days are less due to the Chuseok holidays and amid a tighter macro environment, NAVER search platform grew 8% Y-o-Y. In particular, search ads grew more than 10% Y-o-Y, outperforming major global SA platforms in North America. Due to concerning -- continuing macro uncertainties, it is very difficult to accurately forecast the ad market, but we will focus our efforts on outperforming the average market growth in Korea. Since the end of COVID restrictions and summer vacation seasons, Place ads have shown rapid growth in the areas of restaurants, sports and leisure activities. In particular, since introducing competitive bidding in November last year, we have seen continuous growth in the number of active local businesses, PPC and revenue, resulting in positive performance. Though it still accounts for only a small portion of research revenue as of September, paid advertisers doubled Y-o-Y to 86,000. Since the total registered NAVER Place businesses are around 2.24 million, we believe it has significant growth potential. On display ads, third quarter growth weakened a bit, which was mainly due to the high base effect of 2021, driven by performance ad growth. And due to many large advertisers freezing or cutting their back marketing budget on the back of concerns about an economic slowdown. Going forward, with some limited budget, more and more advertisers are focusing on a limited number of media platforms for their online ads. Therefore, we expect the demand or expected demand for efficient marketing will increase. In order to actively address the evolving demand of ad clients, NAVER is expanding the variety of our products lineup to include video and premium tech products. For example, mobile full screen ads launched in full this quarter has gained interest from fashion, luxury brands, movies and large-sized commerce advertisers who prefer video advertisements. As a fresh, new ad product that has not been seen on any local or international media before, we are getting positive feedback. In addition, dynamic ads, which use AI recommendation technology to provide precise targeting have a much higher ad response rate and conversion efficiency than existing performance ad. It is being used by more than 200 brand stores per month. And from 2023, these ads will be applied to a wider group of areas, including NAVER Place. Though it is a challenging environment with mounting uncertainties, we have secured the broadcasting rights for the Qatar World Cup games scheduled in the fourth quarter. With this, we will actively catch the ad demand that is being concentrated on a limited number of media outlets and continued efforts to release competitive ad products that fit this environment. Next, let me move on to commerce. The e-commerce growth rate has weakened slightly with the so-called endemic, but our third quarter commerce total growth grew by 19.1% Y-o-Y to KRW 10.5 trillion, it has shown significant growth. Product GMV, the NAVER platform including Smart Store and KREAM was KRW 7.1 trillion, up by 18.2% Y-o-Y, while service GMV, such as travel and booking posted KRW 1.2 trillion, 2.1x that of last year. Brand Store GMV jumped 70% Y-o-Y to reach KRW 840 billion and it continues to represent an increasing portion of total Smart Store GMV. As of the third quarter, the total number of Brand Stores is 1,206. This quarter, we had 241 new brands joined in the areas of leisure, beauty and fashion. KREAM, the limited good sales platform is expanding into categories outside of sneakers. In this quarter, many brands that are popular with the millennials and Gen Z have opened a brand tab so that they can directly meet users on the platform. As a result, third quarter GMV grew 2.7x that of last year. As of 3Q end, KREAM's total take-rate is 3%, which is 1% point higher than the second quarter. By the end of the year, we plan to improve it to the 5% level. We will continue to secure the sustainability of the platform and improve its profitability. Together with Poshmark, which will be consolidated into NAVER next year, NAVER Commerce will be focusing on fashion, C2C and community elements that appeal to millennials and Gen Z to address consumer trends that we want as a new retail format that strengthened the discovery function. As people engage in more outside activities in the third quarter, the total GMV for travel and bookings grew 2.1x year-on-year to set a new historic record of KRW 1.2 trillion in particular, plane tickets and hotels and travel and key categories such as leisure, lodging and beauty & booking showed high growth, which translated into higher contribution and related fee revenue. In addition to existing tools such as reservations, order and reviews, NAVER Place is focusing on upgrading its services to become an integrated website for off-line businesses. As announced during our Brand Partners Day on November 3, NAVER Shopping within December will fully launch its NAVER-guaranteed delivery solution with the NAVER fulfillment alliance to further expand its quick delivery service. This is the result of a project on infrastructure expansion and technical cooperation conducted during the past year with key logistic providers like CJ Logistics. NAVER will establish a central platform to collect data along the logistics value chain to connect the service, sellers and users. For a limited time, following the launch, we will have a free promotion for the solution fee. But as time passes, the fee table will be gradually increased to ensure the take-rate can be expanded. Based upon the alliance with logistic partners, NAVER delivery guarantee will maintain the asset-light model of quick delivery services. But for the additional burden of guaranteeing delivery, we will improve the take-rate and using branded tags, consumers will be able to check product and delivery information more intuitively and receive a guarantee on their delivery date. With the launch of this service, our delivery competitiveness in the FMGC (sic) [ FMCG ] category, which requires next-day delivery will outpace that of others. In the next 3 years, our target is to have quick delivery account for 50% of this category. It will be stronger competition between platform and logistics technology from the existing 1PL focused business model in Korea. In addition, fueled by membership-based shopping and holiday booking GMV, GMV growth in the third quarter for Naver Pay, TPV stood at KRW 12.4 trillion, a Y-o-Y increase of 27.7%. Of this amount, non-captive TPV grew 49% Y-o-Y to KRW 4.8 trillion due to a new large merchants such as [indiscernible] and online store game, leading total TPV growth. In line with the end of covered restrictions to stimulate offline TPV, we have linked up large merchants, integrated student membership benefits and built a [ Kyung Hee University ] NAVER Pay campus zone. As a result, off-line TPV doubled Y-o-Y to record KRW 800 billion. The fintech financial service lineup is also expanding steadily. Last October, for the first time in the industry, we launched a self-employed loan comparison service that covers all financial products to ensure user convenience and the accuracy of credit limits and loan pricing. Leveraging the same strength, we are planning to launch a personal loan comparison service within the year. In the beginning, the scope of our financial institutions tied to our personal loan comparison service will be similar to that of the leading platform in the industry, but will gradually be upgraded over time. Moreover, on November 3, we launched the NAVER Pay Money Hana Account and check card, which was selected as an innovative financial service. It enables users to keep their NAVER Pay top-up points at the bank so that they can receive interest, depositor protection and bonus points. In addition, from January 1, NAVER securities and real estate services will be transferred to NAVER Financial. With this, we will enhance the efficiency of the fintech business and strengthen the link between financial services and economics content to grow into a differentiated and integrated fintech service platform. Now let me discuss our webtoon. This quarter, again, NAVER Webtoons maintained its solid #1 position in key markets, including Korea, Japan and the U.S. Q3 global GMV was up 18.1% Y-o-Y and 11.9% Q-o-Q at KRW 457 billion. Global Integrated paid users reached 8.9 million users. And in Japan, especially, the users and profitability indicators are all growing rapidly. The number of paying users in Japan was up 29.2% Y-o-Y and 12.7% Q-o-Q. GMV for series type content exclusive to LINE Manga has grown 47% versus the start of the year. And high-quality content is increasing, coupled with marketing focused on research reengagement, which has translated into high growth. The Ebook Japan LINE Manga system integration is going smoothly. From early next year, we are planning to increase original content. And at the end of the day, we will evolve one step further as a daily app through which users can enjoy a wide genre of work created by 6 million creators around the world active in the webtoons and also web novel space. In North America, last October 7, we launched Wattpad's premium Webnovel platform, Yonder. Wattpad is a community platform that supports the growth of metro creators and enables them to actively communicate with users. Yonder, on the other hand, is a base for users that launch premium paid content. It is a business model that carries local content proven on Wattpad, but also popular local web novels and externally sourced content. Users that are communicated with writers and enjoyed light content on Wattpad will move over to the higher quality content of Yonder and global Webtoons to become locked in as loyal users. High-quality IPs discovered in this process will be turned into videos through Wattpad studios creating a value chain. The launch of Yonder is an example of NAVER applying its successful business model and know-how in Webtoon's web series to Wattpad which is the largest web novel platform in the English-speaking world, but still lacks a strong business model. It is the first example of synergy that can be generated with NAVER adding value to Wattpad. For the past couple of years, NAVER's Webtoon series successfully bought Munpia series and Webtoon services to Korea and entered Japan to become the largest webtoon provider in the market. Now it will take this formula of success to be created on the world stage, including North America, where NAVER Webtoon has already produced many popular networks. Wattpad is a storage of unique IPs, some of which have been New York Times bestsellers. More than half of the revenue is generated from outside of Korea. And in order to create a virtuous cycle between Webtoon's unique business model and global IP production and to elevate the global position of Webtoons, the company is planning to exert its best efforts to successfully IPO in the U.S. in the next couple of years. Lastly, let me explain the cloud organization restructuring that will be announced today. For the AI functions that sat in different businesses and individual B2B businesses like Works Mobile, Clova CIC, Papago and Whale, we are planning to combine them under a new cloud that is centered on NAVER Cloud. This will not only gather the technical expertise that was scattered across the organization, but will enable us to create a more optimal and better integrated business across infrastructure, platform and solution. Strengthening cloud-based technology is also an important part to increase NAVER Japan's sales. As NAVER Works is already emerging as a leading SaaS provider in the Japanese market, in the future by exploring opportunities to cooperate with Z Holdings and SoftBank, we are planning to actively support the Japan business expansion of new cloud. Amid concerns about an economic recession and a slowdown in online growth, the company was able to record solid performance in the third quarter, again, based on its diversified business portfolio. Macro uncertainties are expected to continue for the time being, but NAVER will continue to generate stable cash flow from its existing business, identifying new growth drivers and develop new markets to continue our growth momentum. We ask for your interest and support. And next CFO, Nam-Sun Kim, will walk you through the financial performance of the third quarter.

Good morning. I am the CFO Nam-Sun Kim. Let me talk about the third quarter business performance. Recent concerns about the global tech industry have realized somewhat in global peers, leading to a slowdown in sales growth and weaker margins. However, NAVER has increased its top line by 20% Y-o-Y. Moreover, the profit generation capabilities of its core business, including search platform, commerce and fintech has led to meaningful Q-on-Q improvements and performance. NAVER's Q3 revenue was up 19.1% Y-o-Y and 0.6% Q-o-Q at KRW 2,057.3 billion. Though the significant revenue growth due to the COVID-high from the second half of 2020 to 2021 is normalizing and the fact that this quarter is a traditional low season due to the Chuseok holidays, NAVER's core businesses, which are search platform, commerce and fintech still outperform with its global peers. Moreover, the new acquisition on the content business also contributed to our overall top line growth. Third quarter consolidated operating profit decreased 5.6% Y-o-Y, and 1.8% Q-o-Q to KRW 330.2 billion. Operating profit dropped a little due to infrastructure expenses for the second data center and higher development operation expenses, but we are seeing some of our cost-cutting efforts started this year take a bet. There was a slight improvement in marketing reward expenses related to search, commerce and play. In addition, as a result of resource control according to business priority, total labor costs were flat to the second quarter. As a result, the adjusted EBITDA margin, which excludes depreciation on infrastructure investments and stock-based compensation that changes according to the share price, our adjusted EBITDA margin improved 1.4% Q-o-Q to 22.5%. Next, let me discuss our revenue by business line. In the third quarter, search platform was up 8.0% Y-o-Y, but down 1.0% Q-o-Q at KRW 896.2 billion. Search ad revenue grew 10.6% Y-o-Y and 0.6% Q-o-Q, while DA revenue grew 2.3% Y-o-Y, but dropped 5.3% Q-o-Q. In addition, when taking into consideration the tighter macro environment and decrease in business days due to the Chuseok holidays, we believe the overall performance was sound. In particular, amid increasing global macroeconomic uncertainties due to a broad, long tail based advertising pool and stable business model that includes flexible bidding, SA was able to address market volatility and outperformed global peers. In the case of display ads, growth moderated as large advertisers cut their overall marketing budget and because of the high base effect of performance ad that recorded a record high growth in 2021. However, NAVER will strengthen its NAVER only high-efficiency product lineup and increased ad serving pages and expand ad sales to off NAVER domains to once again fuel growth momentum. Commerce revenue was up 19.4% Y-o-Y and 4.3% Q-o-Q to KRW 458.3 billion. By area, commerce ads grew 12.3% Y-o-Y and dropped 2.1% Q-o-Q. Shopping DA revenue dropped temporarily due to macroeconomic tightening and the winter fashion low season, but SA drove growth by increasing 13.2% versus the previous year. Commission and sales revenue grew 28.8% Y-o-Y and 13.2% (sic) [ 10.2% ] Q-o-Q because of strong GMV and new verticals, including brand stores. As the GMV contribution of brand store and travel booking, which have a higher take-rate and KREAM increase while take rates gradually increase, commission and sales revenue growth is outpacing GMV growth. The subscription revenue from memberships jumped 41.4% Y-o-Y and 42.7% Q-o-Q with an increase in paid users. As users were locked-in after subscribing, membership-based shopping GMV is also growing steadily. Fintech revenue was up 22.5% Y-o-Y and 0.2% Q-o-Q at KRW 296.2 billion. Non-captive and off-line TPV were much higher than the previous year, but flat on a Q-o-Q basis due to the low season, including the Chuseok holidays. Content revenue increased 77.3% Y-o-Y and 3.9% Q-o-Q to KRW 311.9 billion. In particular, Webtoon sales which accounts for 86% of total content revenue, grew by 106.7% Y-o-Y and 6.9% versus the previous quarter. This includes the consolidation of acquisitions like Ebook Japan and Munpia. And when excluding this, the growth was 26.4% Y-o-Y and 7.3% Q-o-Q. In addition, there was also a change in the accounting treatment and revenue as webtoon writers were signed. From the last year-end, as new contracts are signed or existing contracts renewed, a portion of revenue is recognized on a gross basis from the previous net basis. When eliminating this change, webtoon sales increased 13.1% Y-o-Y and 2.4% Q-o-Q. Cloud and B2B revenue maintained a growth of 10% Y-o-Y, but due to a temporary suspension in global device shipments, Future Tech R&D revenue decreased. Next, let me move on to expenses. Within development and operation expenses, labor cost was up Y-o-Y to new acquisitions in the second quarter and third quarter and new hires for business expansion. But due to efforts to slow down the pace of hiring, the absolute amount was flat Q-o-Q. The others within development and operating expenses increased due to new space related expenses, such as the 1784 HQ depreciation cost and lease fees for [ Pangyo Techno Valley ]. Partner expenses, which mostly is revenue-linked expenses such as ads, payment and content fees increased 31.6% Y-o-Y due to the acquisition of Ebook Japan last quarter, but was flat on a Q-o-Q basis. And infrastructure expenses increased 19.3% Y-o-Y and 7.6% Q-o-Q to KRW 152.2 billion because of depreciation related to the data center and other costs. The fact that NAVER was not complacent on essential infrastructure investment, such as redundancy, which is key during a crisis, is the proof of the stability and robustness of NAVER services. While keeping top priority on service and safety, we will continue to explore ways to increase the efficiency of our infrastructure expenses. Lastly, marketing increased due to the acquisition of Ebook Japan and the global business expansion of contents, but due to efforts to optimize search, commerce and reward programs that -- the growth has slowed to 17.5% Y-o-Y. On a Q-o-Q basis, it was actually down 0.6% at KRW 331 billion. In the second quarter call, we shared the P&L by segment so that you would be able to understand the current status of each business line better. This quarter, I believe the improvement in our core business P&L is a more important story than the fact that we were able to keep our top line growth. First, to talk about the segment margin for search platform and commerce combined, it improved 0.9% Q-o-Q to 33.9%, showing a rebound. In detail, search platform maintained a high segment margin similar to the second quarter while margins in commerce improved on the back of efforts to cut marketing spend. Reward points are strategically being granted mostly on programs that can achieve high ROI. For shopping SA and certain shopping live programs, which have weaker additional revenue uplift versus the points payment, we have selectively lowered the percentage points of points that are granted in these programs. The segment margin of fintech improved due to an increase in seasonal booking revenue, higher financial ad revenue and one-off decrease in operational expenses. The optimization of certain reward and promotional programs has also helped the improvement. However, from the fourth quarter, we believe the margins will be back in line with more normal levels. With the launch of our self-employed loans and personal loan comparison services in the second half of 2022, we are planning to expand our premium high value-add financial service portfolio. In content, the loss increased due to an increase in marketing and labor costs for Webtoons and SNOW and an increase in expenses related to acquired companies. Going forward, we will continue efforts to rationalize operating expenses, including marketing, Webtoon marketing was used to activate Ebook Japan and LINE Manga users in which new user acquisition is taking place. And as a result, in the third quarter, Japan paid users grew 29.2% Y-o-Y and 12.7% on a Q-o-Q basis. For your reference, Webtoon marketing efforts will be focused on reactivating profitable users rather than acquiring new users in the future. In particular, the P&L profile of Webtoons may go up and down in the short term, due to global business expansion and newly acquired companies. But as the CEO mentioned before, in order to successfully IPO Webtoons globally, our business target would be to maintain healthy growth and gradually improve profitability quarter-over-quarter to reach breakeven at the time of the IPO. So that is how we will be operating our business. This quarter, cloud P&L was flat to the second quarter when excluding the reversal of stock compensation expenses. Externally, market growth is slowing and the environment is challenging. But by continuing the expense optimization efforts, that we showed effect in the third quarter, we will do our best to maintain a full year margin of 16%. Our consolidated profit declined to 28.3% Y-o-Y but increased 46.1% Q-o-Q to KRW 231.6 billion. In addition to the Y-o-Y decline in the operating profit on the nonoperating side, nonoperating items such as a decrease in equity method income from Z Holdings and FX-translated [ actions ] on foreign currency bonds issued by NAVER had a large year impact. The Q-on-Q increase was due to the valuation gains on financial assets and equity assets that were more than enough to offset less equity method valuation gains and higher FX translation losses on foreign currency bonds. Q3 free cash flow increased KRW 111.9 billion in Q-o-Q to record a negative KRW 77.8 billion, which is due to an increase in adjusted EBITDA and Q-on-Q decreases in income tax payments. Next, I would like to talk about the financial impact and funding plans of the Poshmark acquisition to be closed in January 2023. As mentioned before and as we have shared, the acquisition cost will be financed with some of the [ $500 million ] cash of Poshmark and NAVER's excess cash balance and NAVER's also available debt. In order to minimize the impact of the exceptionally weak Korean won against the U.S. dollar, the company is planning to use U.S. dollars held or hedged and also U.S. dollar-based borrowings to decrease the debt that has increased due to the acquisition. We are planning to securitize future operating cash flow and certain investment assets. We expect the leverage ratio increased due to this acquisition to return to the current level within the next 2 years. And thus, we believe the impact on our financial metrics will be limited. In order to improve the efficiency of NAVER's stretched balance sheet, which has been the concern of many investors, we have already become -- we have already started to securitize some investment assets with limited strategic value. In addition, cash outflows for fund investments, which has increased during the past couple of years are also being curved. Lastly, let me discuss our shareholder return policy. The value of shareholder return efforts in the second half of 2022 is a total of KRW 137.1 billion which will be executed in a special quarterly dividend in November. As mentioned during the second quarter, this includes KRW 85.7 billion and unused balance from the total FY 2021 shareholder return resources of KRW 162 billion and KRW 51.4 billion deferred shareholder return from the fiscal year of 2020. Our new shareholder return policy to start next year will be announced at the beginning of 2023. This concludes my presentation, and we will now start the Q&A session. Thank you.

[Interpreted] [Operator Instructions] The first question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] I have a question relating to your advertisement business and your global business. First, relating to your search platform, the growth rate has been quite robust or your search ad above 10% and display ad above 2%. But it seems like the macro headwind had an impact mostly on the display ad. I would like to understand what your outlook is as you enter into Q4 regarding the advertisement business, and also to respond to the slowing down macro backdrop, what are your strategies to counter the challenge? Could you explain whether -- especially around your new product? Because it seems in the past, when there was slower growth, the company launched new products to fuel additional growth. So it will be helpful if you could provide some elaboration there. And also at the same time, can you share with us what your outlook is for that segment. Second question relates to your global strategy. In the domestic market, NAVER underpinned by its capabilities in search was able to grow its dominance in other segments such as commerce and Webtoon but if we look at your capital allocation plan, it seems that going forward, you are putting more emphasis on growing your global overseas business. I would like to understand what you foresee as a potential synergy that you will be generating, especially from the new acquisitions. And it will be helpful if you could also mention because currently, the investors are slightly concerned about the relatively high user acquisition costs that we're seeing from Poshmark your recent acquisition. Can you explain as to how you're going to manage that?

[Interpreted] I will respond to your first question. It is true that if you look at the overall macro environment, there are uncertainties and the economic growth outlook has been downgraded recently and also the global peers also for the second half in 2023 have adjusted their growth trend. And also the market sentiment is degrading as well. We see that there are growing uncertainties on the external side, and we see a lot of companies are slashing their budgets as well but still we're going to do our best to bring about double-digit growth in the fourth quarter. And regarding the outlook for 2023 due to quite a bit of uncertainty that still exists. Once we get more color on our plans, and we will then come back to you and provide you with more specifics on the guidance.

[Interpreted] And regarding NAVER's strategy to overcome these challenges, we believe that advertisers are going to be much more concentrating on specific advertising media like the online platform. And we believe the NAVER is well positioned to leverage this opportunity by introducing highly efficient advertising products as well as premium products. And in the fourth quarter, we also won the broadcasting rights for the World Cup games, and hence, we believe we will be able to cater to the needs of our advertisers. So under search through place advertisement and for display ad through performance ads, we plan to further expand NAVER off-platform or noncaptive base of customers and users. And in that regard, we plan to also expand our inventory of advertisement. And regarding the global business, yes, you are right. From a mid- to long-term horizon, our overseas and global business is going to be one of our very essential pillars. What we plan to do is we have accumulated know-how in terms of technology tools as well as services that NAVER has built within the domestic market. And we believe that there will be a lot of synergistic opportunities for us to drive top line revenue growth and bring down costs in terms of cost savings through our acquisitions such as Poshmark and Z Holdings.

[Interpreted] Well, you asked about the user acquisition cost for Poshmark. Regarding more details, I think it will be helpful if you could refer to the script and the relevant materials which we shared on October 4th during the 1-hour session where we presented and where we received questions regarding Poshmark acquisition and the following synergies. Now specifically going to the user acquisition cost, if you were to compare Poshmark with other C2C peers in the global market and in North American market, you will see that, that figure is not necessarily high at all. Recently in the press, there was a mention of Poshmark's marketing expense being elevated. But if you really look at the specific data, you will see that compared to Poshmark its competitors actually entail bigger extent of loss and also its competitors are much more dependent on marketing spend as well as they're experiencing more inefficiencies in that expense.

Just to add one more point on the user acquisition cost. If you look at the cost per new user, after the change in Apple's iOS privacy-related policies as a function to that, there has been an across-the-board increase in the user acquisition cost for all of the players. Now this was similarly seen in all of the platforms that do business off of the Internet platform. But if you look at Poshmark, its CAC did not rise and it actually converged at around $7 per user, the Poshmark was able to successfully control that increase within a certain limit.

[Interpreted] Going forward Poshmark is a platform that really leverages its capabilities as in engaging the community, and we will focus more on retaining our user base rather than overly focusing on new user acquisition. Competitors to Poshmark are also adopting similar strategies, but we expect that as we are able to elevate user retention, we will be able to reduce marketing dependency and also trigger organic growth.

[Interpreted] The next question will be presented by Stanley Yang from JPMorgan.

[Interpreted] I would like to pose 2 questions. I would like to understand what your estimates for labor cost rises for next year. If you could give us a breakdown between your core businesses of ad and commerce versus other business segments, that would be helpful. And also looking at the OP margin trend. In Q3, we saw a rebound for ad and commerce. Do you expect there to be a gradual uptrend going forward? Second question relates to your NFA, the fulfillment strategy. It's now become very important for the e-commerce business to be to be able to provide an effective delivery service because users are now really looking at delivery as an important decision-making factor for selecting which e-commerce they're going to use. So can you give us an update as to what your midterm assessment is for your NFA strategy? And also do you continue to really focus on asset-light model in the future? And also, please an update on quick commerce as well.

[Interpreted] Regarding the labor cost increase because we're currently in the process of writing up the business plan. Please understand that I won't be able to give you the specific growth rate or the breakdown between ad and commerce. But since labor cost rise follows the number of hires, I could share with you the trend for new hires. This year with the acquisition of new entities and expanding our businesses, there were some essential need for hiring drove up the total number of headcount, but we are in the process of normalizing or slowing down that hiring process. Hence, going forward, we will continue to focus on headcount management from the mother company level. And also, we will make sure, however, we do appropriate hiring so that we do not lose on the growth momentum of our subsidiaries. Regarding the ad and commerce business margin, it is encouraging to see that our margin is showing a rebound trend, and that is thanks to our strategic investment as well as the cost efficiencies that we are gaining. Rather than really being bogged down by specific margin figure, what's important is for us to continuously drive top line revenue and bring about cost efficiencies so that we lay the basis for continuous expansion of the margin, and we will do our utmost to bring that. Just although cautiously, hence, I believe that I will be able to say that we do expect a continuous uptrend in margin figure. Regarding the question on NFA, our logistics strategy is very closely mirroring and linked to our overall ecosystem strategy. Naver wishes to not dominate all of the business areas, but rather focus on growing the overall ecosystem that basically is the GIST of our strategic approach and same applies to our logistics. Therefore, we decided to partner up with multiple number of providers and so the speed may not have been as fast, but thanks to such efforts in December, we will be launching the guaranteed delivery service under NAVER. We will continue to be asset-light and be able to provide the strength that NAVER has to our user base in terms of the extensive merchandise database and the lowest price possible and the guaranteed delivery to our users. And to the SMBs, we will be able to provide them the advantage of a relatively lower commission in the take rate and also provide users with more choice, which also includes quick delivery. So NAVER's platform are basically -- and also, eventually, we will also be providing data-related solutions, the merchant solutions so that we could eventually improve on the take rate. Now for the quick service, we are also adopting a similar strategy. What we will be doing is that rather than doing all the logistics services on our own, we are partnering up with hypermarket and we are providing various different types of delivery formats, the early morning delivery, the same-day delivery and the day after D+1 delivery. And also, we are, at this point, developing a new format, which we are to release by the end of the year in collaboration or in partnership with supermarkets, we plan to also allow a delivery within 1 hour.

[Interpreted] The next question will be presented by [ Jin Do Kim ]from [ Kim Securities ]

[Interpreted] I would like to ask 2 questions. First, regarding the trends in terms of the advertisers. Since the beginning of the year on the back of post-COVID and macro uncertainties, I would like to understand the extent of the advertisers advertising budget cut and their focus on digital use. So have you seen any changes in fluctuations in the allocation of such budget with the digital advertisement? And also what do you think is going to be the direction going forward? And secondly, give us a guidance for the performance next year. If you could also share per business segment, that will be helpful. And recently, we've seen a press coverage on NEOM City. Can you tell us as to what you're expecting from that participation?

[Interpreted] Regarding the advertisers budget, as you've clearly seen globally and also in Korea since Q1 of this year, there's been a clear cut in the budget that they're employing, but it's not necessarily any strategic change between the allocations of digital versus offline, the digital penetration already for countries like Korea, which is highly mature, is around 60% to 70%. So actually, this is not a matter of an allocation of the budget, but it's more of responding to the macro headwind. Also, if you look at -- if you compare between global versus Korea, we see a very similar signs of that. Looking at Google, their search ad growth had significantly plummeted, and search ad is an indicator that really shows the intent of the consumers when it comes to the advertising market because basically, the decline actually starts from the top of the funnel, which is the display ad, and then it trickles down to SA, search ad. So the fact that Google is seeing only about 4% growth from search ad and also YouTube is posting a negative minus growth. So we are -- we can get quite a bit of implications from this global phenomenon. Of course, YouTube the fact that it's recorded a negative growth, the management -- one of the key thesis or the hypothesis is that short-form content advertisement-related inventory issue as well as the mismatch between demand and supply is the main driver of that negative growth, but it's more of the fact that there exists a structural difference between DA and SA and we believe that the key driver behind that is due to the structure of SA. So comparing to that, the fact that NAVER was able to bring about more than 10% growth in its search ad is very encouraging, very much encouraging. And we could say that the Korean macro backdrop had a less impact as versus global. Now having said that, one can never avoid the macro trend. In Q4, we believe that the combined search platform growth is going to underperform the growth rate we've seen in Q3. But once again, we won't be able to share with you any specific figure on that. Now usually, we do not give out guidances for the following year. But as mentioned during our 5-year plan that was shared at the beginning of the year. For next year, our target is to bring about mid-teens mid-10% growth.

[Interpreted] Regarding the Saudi visit recently, basically, this will be an opportunity for us to showcase to our global partners, the cutting-edge ICT technology that NAVER owns in relation to the smart buildings and smart cities, which include the robots, cloud, AI and digital twin. However, it is too early for us to share any specific agreements or contract. It's hard to say whether that is in the pipeline.

[Interpreted] Since we were running out of time, we will take the final question. The last question will be presented by Jae-min Ahn from NH Investments and Securities.

[Interpreted] I'm Ahn Jae-min from NH Securities. I would also like to ask 2 questions. First, relating to your commerce business in Japan. Since last year, you've been testing the SmartStore but we don't yet see any visibility in terms of the official launch. So can you give us an update? Second, I personally believe that Poshmark going forward for mid- to long-term perspective can become a very strong driver of NAVER's global business growth. But as investors, we are concerned about the profitability and the P&L. You did mention in the last conference call that you don't foresee any significant improvement in year 2023. Poshmark was making profit in '21. And then in '22, it was making a loss. When do you expect to see a turnaround from Poshmark earnings?

[Interpreted] Regarding the My SmartStore business, we are, as we speak collaborating together with Line for the release of this product, and we have a road map in place whereby we will be bringing My SmartStore to Yahoo Shopping and PayPay continuously. So for our approach for Japanese market is quite similar to what we have achieved in Korea and that across search, commerce and payment. What we're doing is we are not just making the take rate as our key revenue source of Smart Stores. But Smart Store is the most optimized search tool that works as a means for us to acquire the database relating to the shopping of the users. So the key revenue source of this business model is the shopping search ad. That is through which we make up or we generate the significant portion of the revenue, and that really differentiates NAVER's business model. And as we speak, we are collaborating and cooperating with Z Holdings and once again, on that collaboration, most important element is the shopping search ad. We want to be able to bring that and apply that to Yahoo Shopping. And as we speak we are conducting live test against the Yahoo search users. So what we are planning to do is that by next year, we are making the preparation so that we could see the shopping search ad come up and the search results of Yahoo by next year. Just to provide some more elaboration regarding what NAVER's vision is with regards to Z Holdings, I hope -- I'm sure we will have an opportunity later on to be able to share with you more detailed plans but just to briefly share with you 2 major drivers is that NAVER is positioning itself as a technology and solutions provider in the B2B area, and that will be the source of revenue through search ad as well as SmartStore we would be the technology provider to Yahoo, which will form a additional revenue stream for us. In terms of the progress of this arrangement because it's currently bound by confidentiality, we won't be able to share any specifics. But in terms of the key contract terms and conditions, we are currently working to come to an execution of the contract by the -- will be within the year. The second driver is, as you've seen from our balance sheet, Z Holdings is one of the key assets of our company. And also Z Holdings has an extensive internet-related portfolio within the Japanese market. And we believe that it will be important and that it will be possible for us to bring NAVER's capabilities that we've accumulated in the domestic market regarding search and advertising content as well as pay and implant that to Z Holdings. And also Z Holdings has a very strong market share even in Messenger, which NAVER doesn't in the domestic market. And so we believe that in terms of the business performance, we would also have an opportunity to benefit from the equity method gains as well.

[Interpreted] Now responding to questions about the Poshmark. If you're thinking about -- when you think about the pro forma impact, you have to think about the proportionality if you look at Poshmark and the acquisition, basically, their net corporate enterprise value is less than 5% of NAVER's total capitalization. And also, Poshmark is a company that is using a proven business model, but its revenue contribution is about slightly higher than 5%. Also, looking at the operating loss of Poshmark on an absolute value basis, it is small. You've seen from our segment P&L of other NAVER subsidiaries. There are new businesses of NAVER. They entail -- some businesses entail a bigger extent of deficit or loss. So on a relative basis, basically, it's mix out of our pro forma profit is relatively low. Now in terms of our short-term and mid- to long-term improvement in profitability, we share with you the details on October 4. So I will not repeat myself. But in 2 to 3 years' time, what we will be doing is striking a very good balance between growth and profitability. And hence, we do expect we will be able to reach turnaround.

[Interpreted] Well, this brings us to the end of the Q3 2022 earnings presentation. Thank you very much to investors for joining us this morning, and we look forward to your continued support. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]