NAVER Corporation (A035420) Earnings Call Transcript & Summary

Good morning. This is [ Chae-Hun Kang ] from Investor Relations. Thank you for joining NAVER's 4Q 2022 Earnings Conference Call. Joining our call today, we have CEO, Soo-yeon Choi; and CFO, Nam-Sun Kim. Please note that the presentation today is based on K-IFRS. In order to provide the results in a timely manner, the contents have yet to be audited by an independent auditor, and hence, may be subject to change after such review. Now first, I will turn it over to the CEO to present the business highlights.

Good morning. This is the CEO, Choi Soo-yeon. 2022 was a year in which externally the endemic and global economic slowdown led to more uncertainties while internally, the CFO and myself, took steps leading to a lot of changes and growth. From a corporate culture perspective, we conducted regular assessments on our organization and established a dedicated organization for human rights-based management under the BoD, which will act as the control tower on this topic, and we created a foundation for deeper communication and trust building among employees. For our users, we improved search quality by launching Smart Block, Open Talk and Issue Talk, while continuing efforts to improve services by starting loan comparison services and guaranteed delivery. In addition, the NAVER AI and B2B business organization announced plans to merge with a focus on NAVER Cloud, indicating a change in growth strategy focused on AI. As a global company, we also strengthened our fundamental for future investment and growth. In the first quarter, NAVER Webtoon completed a successful merger with eBOOK Japan, Locus and Munpia, solidifying its position as the global #1 story tech platform. As a result, global GMV adds and the IP business showed balanced growth. This year, with more paying users and better efficient marketing efficiency which began in the second half of last year, coupled with broad operational efficiency, we will focus on not only the top line but also improving monetization. The Poshmark acquisition signed in the second half closed this January. This deal represents NAVER's expansion into community commerce, which has high growth potential, and also business synergy opportunities with NAVER's core businesses. In the short term, we will be strengthening services that use NAVER technology like Shopping Lens and LIVE Commerce, and over the mid to long term, we will explore ways to achieve meaningful performance such as creating ad synergies that fit with Poshmark's core functions. It will be the first year of numerous business issues and strategy implementation. With that, let me go over the performance of each core business area. First, let me discuss the Search Platform business. NAVER is making many efforts to increase user service satisfaction, and in addition, we continue to improve our search quality. By increasing the use of Knowledge Base, which identifies the users' intention and provides the right answer, and Knowledge Snippet, which immediately summarizes and shows content body in the research results, we have enhanced user search satisfaction and reliability. In addition, by improving the match and ranking technology algorithm in web search, search quality in the long tail space improved by more than 15%. In terms of monetization, Smart Block, which provides customized search results categorized by topic keyword searches, was more broadly applied in the local segment such as local travel and restaurants and in shopping, resulting in business queries increasing 15% from last year's average. This year, it will be applied to travel, health and finance to increase Smart Block's coverage and integrated search from the current 20% level to up to 40%, which will create new monetization opportunities. In addition, we are also preparing to address new search trends like generative AI, which is in the recent spotlight. NAVER is not only the service provider with the most high-quality search data for Korean, but also Korea's best search technology company, boasting a world-class technology for a hyperscale AI model. We are confident that we will be able to address issues like generative AI's lack of reliability and recency, and the lack of accuracy when overseas company take an English-based developer model and translated it for Korean, in a relatively cost-efficient manner by using our vast user data and applying NAVER's technology and also our know-how. For searches such as Seoul subway fees, which require an answer that summarizes information, we show highly reliable, recent content data in summary and with sources. And for searches like the cheapest way to buy a laptop, which require recommendations, we will show results that use a wide variety of content. These internal tests to enhance search quality and the user's experience is underway, with the goal of releasing within the first half of this year, Search GPT and NAVER unique upgraded search experience. As a slower global economy and weaker sentiment continues to drag marketing activities, fourth quarter search platform grew 2.3% Y-o-Y. In detail, search ads increased 5% Y-o-Y due to initiatives including improvements in ad space exposure and launch of expandable ads. Even though more public attention on social issues such as the Itaewon tragedy and the World Cup games had a negative impact. We believe we outperformed the global trends. And due to macro uncertainties, it is difficult to forecast advertiser demand, but we continue to increase business queries in new segments like travel, health and finance, and to look for a wide variety of options for growth, including new product releases. Place ads is expanding mostly from restaurants to other areas including lifestyle, health, medical services and service industry. As of December end, the number of paying advertisers doubled Y-o-Y to 99,000, exceeding our target for the year. From last November, we have started to show ads in Smart Place Home. And this year, we expect an increase in off-line activity to result in better user indicators and are planning to identify new growth drivers through more advanced ad matching and broadening of search coverage. For display ads, the full impact from a global recession and weaker consumer sentiment leading to less marketing went in play, resulting in fourth quarter revenue dropping 2.9% Y-o-Y. Uncertainties may continue this year again, so the company is planning to launch new services to strengthen its platform power while also exerting efforts to actively address advertisers' demand and provide competitive ad products. For example, during the World Cup games in December, we tested a new premium product on the mobile search home that received positive response from advertisers. We plan to look into commercializing this product to actively address evolving client demand. In addition, as we acquired new inventory by launching community services like Open Talk and Issue Talk within Sports services, we will continue to identify new ways to convert new service traffic into ad avenue in line with quickly changing media trends. Next, let me go over our Commerce business. Though the e-commerce market slowed slightly due to the endemic and weaker consumer sentiment, Q4 NAVER Commerce GMV maintained strong and was up 13.7% Y-o-Y at KRW 11.2 trillion. Of this amount, on platform GMV, including Smart Store and KREAM, was KRW 7.6 trillion, an increase of 13.6% Y-o-Y, while service-related GMV such as Travel/Booking, posted KRW 1.3 trillion, which is 2.1x that of the previous year. Brandstore GMV grew 59% Y-o-Y to KRW 930 billion, and its share of total GMV continues to rise also. As of the fourth quarter, we have a total of 1,333 brand stores, of which 146 brands in the areas of fashion, beauty and daily necessities newly opened this quarter. 2023 will be the first year that the company will fully engage in expanding into the D2C market, which is where Brandstore is. This means not only opening additional new Brandstores, but starting with NAVER Guaranteed Delivery, releasing a wide variety of CRM and marketing solutions that brands need. In addition, upgrading the brand exploration experience within Search will also lock in more brands in NAVER Shopping. NAVER's Guaranteed Delivery has entered the stabilization phase at 1 month from the beta launch. Things are going smoothly, with the number of sellers and GMV growing faster than expected. The Guaranteed Delivery tag/ tab enables users to quickly identify quick delivery products and the guaranteed delivery date. In addition, sellers use a single platform that shows all data for the delivery process. By using this service, some sellers have enjoyed a marketing boom, resulting in GMV doubling month over month. Going forward, we will upgrade the delivery -- the Guaranteed Delivery data platform and exclusive page while continuing to increase the number of categories and sellers. In addition, for our Guaranteed Delivery groceries, starting with Home Plus Express at the end of last year, we are providing the 1-hour delivery services of major hypermarkets. This is just 1 example of how we will strengthen the delivery competitiveness of neighborhood shopping across different services. KREAM is expanding into categories outside of sneakers, and more sellers in the brand hub drove GMV up 1.9x versus the previous quarter. KREAM has become the platform leading new consumer culture with a focus on the Millennial and Gen Z population and is posting high growth in luxury goods also. The take rate since the beginning of the year has been gradually increased. This ensures the sustainability of the platform and improves profitability. As the endemic fully played out in the fourth quarter, outside activity increased, driving total GMV for Travel and Booking to grow 2.1x Y-o-Y to KRW 1.3 trillion, setting another new record. Driven by more alliance partners and seasonal promotions, flights and hotel reservations within Travel services, Beauty within Bookings and the Leisure/Fun category showed a strong upswing. Due to the expansion of non-captive affiliated stores at the end of the year shopping season, Q4 NAVER Pay TPV reached KRW 13.2 trillion, an increase of 21% Y-o-Y and 6% Q-o-Q, driven by new merchants such as Watcha and TMoney and the boom in Shopping and Travel/Booking related transaction, non-captive TPV recorded KRW 5.1 trillion, up by 38% Y-o-Y, leading total TPV growth. Even as the high season for booking services in Q3 ended, an increase in the number of large brands and vertical stores and campus pay zones created within major universities resulted in off-line TPV sitting at KRW 680 billion, up 68% year-over-year. The business and retail loan comparison services launched in last October and November respectively, has shown solid initial performance despite the challenging business environment, where our interest rate hikes have restricted new loan application by borrowers. The retail loan comparison service, within 1 month of its release, reached the #4 position in the industry based on GMV and the number of inquiries, showing its high growth potential. Based on accumulated data, we will provide more accurate credit inquiry results and providing differentiated services such as loan care insurance and repayment incentivize events to ensure the sustainability of partnerships, which have been well received by financial institutions and users. Going forward, we plan to continue to expand our financial institution partner network and upgrade our services. In addition, the NAVER Pay Money Hana Bank-affiliated demand deposit and debit, credit card products launched in November last year, providing interest income and on-off points reward benefits to users and improved payment usability. With then the Millennial and Gen Z users accounting for 77% of subscribers, it also enables us to secure highly loyal customers who represent the main consumers of the future. In the future, we will launch various affiliated financial products to further expand the NAVER Pay ecosystem. Next, let me talk about Webtoon's Q4 performance. Total GMV grew 4.1% Y-o-Y to KRW 403.3 billion, and revenue surged 133.1% Y-o-Y. Even when excluding the effect of the accounting treatment change, it was 79.7% Y-o-Y showing faster revenue growth and GMV growth. In Japan, users have been growing rapidly, fueling the growth in total paying users. The percent of exclusive LINE Manga content continues to grow, driving high-quality content supply and demand, and the number of Japan combined paying users increased 25% Y-o-Y. The process of integrating eBOOK Japan and LINE Manga is also going well, with a target of completing by the end of the first half. Thereafter, we are planning to increase original content distribution with an emphasis on original series. In addition, we will apply a wide variety of tools proven in our Korean operations to convert users to paying users, thus focusing on strengthening monetization. This quarter again presented a challenging business environment with the economic slowdown and also endemic. In the fourth quarter, in light of the macro environment, the company has focused on taking more caution on costs, which we believe led to the solid performance. In 2023, we believe macro uncertainties will persist, but NAVER will maintain stable growth in existing businesses and develop new markets to fuel growth momentum while exerting efforts to ensure that we become the most preferred platform by stakeholders once external uncertainties have subsided. Next, our CFO, Nam-Sun Kim, will walk you through the fourth quarter and full year financial performance in more detail.

Good morning. I am the CFO, Nam-Sun Kim. Let me present the Q4 and full year financial performance. Before diving into the details, let me talk about the accounting treatment changes that we have had made for Webtoons. As the contract for Webtoon creators change, we completed the process of recognizing Korea revenue on a net basis to a gross revenue basis, which led to a onetime reflection in revenue and costs in the fourth quarter. In addition, the number of contracts has increased, in which revenue related to IP created by Studio N is recognized according to the rate of progress from the start of production instead of being recognized upon IP delivery. The impact of these changes will be discussed in more detail during the presentation of each business area. The overall 4Q revenue was up by 17.9% Y-o-Y and 10.4% Q-o-Q at KRW 2,271.7 billion. For the full 2022 in total, revenue grew 20.6% Y-o-Y to KRW 8,220.1 billion. Though external uncertainties due to the global slowdown continue, we were still able to achieve solid growth in main businesses including Content, Commerce and Search platform. Q4 consolidated operating profit declined 4.2% Y-o-Y, but increased 1.9% Q-o-Q to KRW 336.5 billion. For the full 2022, operating profit decreased 1.6% Y-o-Y to KRW 1,304.7 billion. The base effect of stock-based compensation, recognition of year-end bonuses and one-off content acquisition costs related in the OPM to be 14.8%. Due to efforts to control the pace of hiring and increasing marketing efficiency, 2022 OPM was around 16%. While excluding the Webtoon accounting changes, in the fourth quarter, our operating margin was 15.7% and for the full year 2022, 16.2%, so at slightly higher level. 4Q adjusted EBITDA, which excludes volatility like stock-based compensation and asset depreciation, this was up by 0.6% Y-o-Y and 4.9% Q-o-Q to record KRW 486.6 billion. When excluding Webtoon accounting changes, the adjusted EBITDA margin was 22.7%. The adjusted EBITDA margin has increased for 4 consecutive quarters, which is the result of successful efforts to control cost items such as marketing and labor costs. Next, let me discuss our revenue by each business area. If you look at Q4 revenue by business, Search platform grew 2.3% both Y-o-Y and Q-o-Q to KRW 916.4 billion. Amid negative impact from the Itaewon tragedy and trends of less marketing spending by advertisers, search ad revenue still grew by 5% on a year-on-year basis. This year, we are planning to achieve top line growth and strengthen business competitiveness by growing business queries and launching new products, including expanding new services. Due to continued global macro contractions and less spending by advertisers, display ad revenue decreased 2.9% Y-o-Y. On a Q-o-Q basis, it grew 9.3% due to broadcasting of the World Cup games. Against a challenging macro environment in 2023, we will continue to seek new growth drivers by strengthening our high-efficiency product lineup, expanding advertising services and expanding ad sales to off-NAVER domains. Commerce revenue was KRW 486.8 billion, actually, up 18.3% Y-o-Y and 6.2% Q-o-Q. By sector, commerce ads grew 4.0% Y-o-Y and 3.3% Q-o-Q. The impact of global tightening resulted in a weaker Y-o-Y display ad revenue, but on the other hand, search ads increased 5.8% Y-o-Y, maintaining the growth and defending growth. Due to solid GMV growth and stronger contribution of higher take rate segments like Brandstore, Travel and KREAM, commission and sales revenue increased 29.4% Y-o-Y and 10.4% quarter-over-quarter. This year again, in addition to the increase in contribution and take rate by verticals, contributions from new services such as Guaranteed Delivery, Fashion Town and Merchant Solutions are expected to lead to commission revenue growth exceeding that of GMV growth. Subscription revenue from memberships went up 211.7% Y-o-Y and 10.4% Q-on-Q on the back of a larger number of subscribers. Subscription revenue and membership related GMV continued to show growth. FinTech revenue posted KRW 319.9 billion, an increase of 8.4% Y-o-Y and 8.0% Q-o-Q. Non-captive TPV led the growth in overall market, and off-line TPV continued growth driven by an increase in new large-scale outlets and increase in booking payments and an increase in membership program benefits. In the presentation material, we have added more retail and business loan comparison services which we launched this quarter and, NAVER Pay Money Hana account to our key fintech business areas, further strengthening our lineup. The Pay service business still accounts for the lion's share of revenue, but by closely integrating digital finance, ads and content services to the Naver Pay Point ecosystem, we will be able to generate significant synergies. In addition, leveraging the traffic generation capability only NAVER enjoys as a platform, in addition to payment services, we will continue to enhance revenue contribution from high-margin, value-added services such as ads, product comparison and commission. Content revenue surged 100% Y-o-Y and 40.3% Q-o-Q to KRW 437.5 billion. Webtoon revenue stood for 88% of total content revenue and increased 133% Y-o-Y and 42% Q-o-Q. When excluding the accounting change, Webtoon revenue was up 79.7% Y-o-Y and was slightly down on a Q-o-Q basis. Global Webtoon GMV totaled KRW 403.3 billion, which is an increase of 4% plus on a Y-o-Y basis. Due to an increase in free sales promotions conducted in the previous quarter, it dropped by more than 11% Q-o-Q. Marketing spend was focused on user reactivation and executed strategically. As a result, global paying users continue to grow, and in particular, the number of combined paying users in Japan increased 25% Y-o-Y, driving total paying user growth. Cloud revenue increased on a Y-o-Y basis 3.9% and 17.1% on a Q-o-Q basis to KRW 111.1 billion. Of that amount, B2B revenue grew 9% Y-o-Y, continuing solid growth and the shipment of some CLOVA devices that have been suspended last year resumed this quarter, resulting in the normalization of Future Tech R&D revenue. Next, let me go over the expense items. Development and operation expenses, including labor costs, saw a slower rate of increase Y-o-Y as the speed of hiring continued to moderate. While the base effects from stock-based composition and recognition of year-end bonuses led to the increase of 7.6% Q-o-Q. On the back of World Cup broadcasting fees and changes in Webtoon accounting treatment, partner expenses were up by 40.7% Y-o-Y and 24% Q-on-Q, which were all one-off in nature. Driven by a rise in data center-related depreciation costs and related expenses, infrastructure expense was up by 10.6% Y-o-Y and flat Q-o-Q, coming in at KRW 154.2 billion. And lastly, our slower marketing activities for the content business and continuous efforts behind making Commerce and Pay rewards more efficient, the uptrend in marketing expenses has slowed, going up to 5.9% Y-o-Y but down 2.8% Q-o-Q to KRW 321.6 billion. Next, let me discuss the P&L by segment. From 2022, NAVER, for the first time, started disclosing P&L by segment, which has greatly improved our level of disclosure at the company. In 2022, total operating profit was KRW 1,304.7 billion, of which Search and Commerce combined was KRW 1,789.3 billion and Fintech was KRW 96.1 billion. However, the Content segment saw operating losses of KRW 359.9 billion, while Cloud and Others amounted to around KRW 200 billion. Since taking office in 2022, the CEO and myself have focused on slowing the pace of hiring and increasing marketing efficiency. Thanks to which, despite macro headwinds, we successfully defended against further declines in profitability of NAVER's core businesses such as Search, Commerce and Fintech. This year's goal and focus is to maintain margins in core businesses such as Search, Commerce and Fintech while growing the absolute size of profit and reducing launches from the Content and Cloud business to a significant amount. Next, let us take a look at the fourth quarter. First, combined segment margin of Search platform and Commerce was down by 2.4 percentage points quarter-on-quarter to 31.4%. In the fourth quarter, year-end bonus recognition had a relatively greater impact on the Search platform and Commerce margins, as they contribute the most to the top line. In addition, in 2022, there were some one-off expenses related to the World Cup broadcasting rates, which further drove down Q-o-Q numbers. When excluding the World Cup rates, even though there were some bonuses, combined operating profit margin remained at the 33% level. When eliminating one-off factors, the combined margin of Search and Commerce was more or less flat on a quarter-on-quarter basis. Following the third quarter, thanks to strategic use of the reward program underpinned by ROI analysis, despite lower marketing spend of Commerce revenue, the GMV continues to grow and to be strong. For Fintech margins, a lagging effect and one-off operational expenses last quarter and also the timing of certain non-regular items such as year-end bonuses and the shift of the weighting average curve towards off-line payments in the total payment mix resulted in margins falling by 3.9 percentage points. But once the one-offs are adjusted for the segment, operating profit margin only marginally fell by 0.8 percentage points, which is similar to that of last year. Once we expand the lineup of digital financial services, including the newly rolled out loan comparison service, and continue to optimize marketing, we expect meaningful improvements to take place over the mid to long term. Driven by marketing and labor cost efficiencies from core businesses like Webtoon has now, content profitability improved, narrowing the loss on a quarter-over-quarter basis. Amid an uncertain external backdrop, Webtoon in particular significantly scaled down on marketing but still achieved growth in total paying users. Moving away from just growing the top line user account, this is the outcome of stronger reactivation-driven marketing that takes profitability into consideration. We will take the tools that encouraged paying user conversion into Korea to global markets so as to work towards achieving breakeven for the global business. Q4 Cloud B2B profit, when excluding the effect of stock-based compensation reversals, saw a slight Q-o-Q improvement due to one-off expense reversal. And despite deteriorating circumstances with heightened uncertainties, we drove efficiencies in marketing and labor costs following the efforts during the third quarter and reported a 2022 full year margin of 16%. Consolidated net profit was down 49% Q-o-Q at KRW 122.6 billion, largely due to a decline in nonoperating income following higher Q-o-Q valuation losses from [indiscernible] on financial products. Q4 free cash flow was up by KRW 349 billion Q-o-Q, reporting KRW 271.3 billion due to higher adjusted EBITDA and less income tax paid than the previous quarter. Lastly, a new shareholder return plan which is incorporating different external drivers and our mid- to long-term business plan is upcoming, and we will announce it once the details are finalized. This ends the presentation on the fourth quarter, and we will now start the Q&A session. Thank you.

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

[Interpreted] My first question relates to the Search GPT, which you mentioned you're planning to release and roll out in the first half of the year. I would like to understand how that new service is going to fit with your existing overall Search environment? And also, is your focus at this point mostly to generate traffic and bring about user engagement, or do you think that this product will also have a positive financial impact? So I would like to understand what the company's long-term vision is with regards to Search GPT. Second question, I see that the company has put in a lot of efforts to bring about cost efficiencies. As you go through this quarter, I would like to understand what impact it had on your top line revenue? I would like to gain your insight as to what this cost effort had -- what kind of an impact it had on your growth? And also, has that given you any signal for potential changes in your future efficiency-related plans? For example, I see that for your Content business, you were able to reduce the loss, but at the same time, the overall transaction level had also slowed. So it is from that background, I'm asking you this question.

[Interpreted] Relating to your first question -- this is the CEO. I will respond to that question. Rather than taking Search GPT at this point and applying that directly to the outcome of the search, what we're doing is we're providing a venue for experiment and beta phase, really thinking deep and hard together with our user base in really improving the past limitations that we've seen when it came generative AI in terms of lack of, for instance, reliability and recency. So once we are able to reach a certain level of user satisfaction and once we build up ample amount of data, we will then review possibility of adding this element to the final outcome of the Search for information provision purposes. So at this point in time, our objective is not necessarily focused on driving the overall traffic or improving the user engagement. I think it will be more appropriate for you to view it as part of our R&D effort with respect to this new and upcoming search technology. As you know, globally, ChatGPT is receiving a lot of interest and spotlight, so it is from that sense that we are also very closely reviewing the potential impact it will have on the overall Search market. And at this point, we still need more improvement in terms of improving the reliability as well as recency of this technology. And also, there are many aspects to be revisited in respect to improving cost efficiency. Now having said that, NAVER already has built-in HyperCLOVA. This is a hyperscale AI model which we continue to evolve, underpinned by which we will be able to diversify and further develop B2B solutions on a paying platform. We have, at this point, cloud-supported AI call, Care Call, as well as other slew of products which we believe, with the adoption of GPT, we will be able to further monetize.

[Interpreted] This is the CFO responding to your question about marketing expense. Marketing expense is comprised of 2 key elements, first being Commerce and Fintech. These are expenses for building royalty-based points. Second is on the Content segment, used for user acquisition. Now with regards to the first element, we did not make changes or modifications to the core, which is the royalty system itself. What we did is we made more efficient the point program, the ones that actually surround the royalty system, the one-off point programs, and we believe that this did not impact the core revenue growth feature. Regarding Content, the marketing spend for user acquisition, this is something that impacts the long-term user growth trend. Not necessarily impacting or bringing down the revenue. So not the revenue side, but if you look at the ups and downs of the fluctuation on the GMV, this is attributable to the fact that in the previous quarter, Q3, we actually expanded on the free promotion of freely giving out bitcoins. So this actually, the figure that you see is not necessarily that in Q4, we've seen a significant drop, it's just a Q3, the base effect, the GMV was high. Now having said that, user acquisition cost does have a mid- to long-term growth impact. So we will not just look at this from just bringing or maximizing cost efficiency, but also considered a strategic aspect so that we could appropriately leverage it for growth going forward.

[Interpreted] The next question will be presented by [ Shin Goo-gin from Kim Securities ].

[Interpreted] I have 2 questions. First, I would like to get some understanding as to the AI, cloud and solution-based products that you're currently utilizing in your new building, 1784, what is the potential for its commercialization going forward? And also what potential synergies can we expect with -- in relation to your Commerce business and Metaverse business? And also for your -- expanding your commerce solution products and business going forward, what are your detailed strategies for the domestic market in Japan and with regards to Poshmark? And also, can you share with us when and whether it is possible for you to further disclose some of the key pillars like -- and the indicators like the GMV numbers, sellers and KPIs. Would you be able to disclose that going forward, and if so, when?