WEBTOON Entertainment Inc. ($WBTN)

All right. Great. Good morning, everybody. We'll get started. I'm Dae Lee JPMorgan's Internet analyst. And we're pleased to have with us Webtoon's, COO, David Lee. So WEBTOON is a leading global storytelling company that connects 27 million creators, 245 million monthly active users and web to pioneered a new form of digital storytelling with long stories that are serialized into short-form, vertically scrolling, image-based webcomics, WEBTOON'S mission is to be the world's storytelling technology platform in power and creation by anyone, for everyone. And Dave joined Web 2023 prior to wetted leadership roles at various consumer and tech companies, including as Founder and CEO of Inevitable Tech, the COO and CFO of Impossible Foods and CFO at Zynga. So welcome, David.

Great. Nice to be here.

All right. So David, for investors less familiar with WEBTOON. Can you walk us through the flywheel the creators, users content monetization and what makes this platforms competitive also difficult to replicate?

Yes. Well, first, I think you did a pretty good job, Dave. So I appreciate that you know the company well. But let me back up many who may be listening in may not fully appreciate who we are. But if they have any Gen Z friends, I bet their friends are actually already on the platform at patter WEBTOON. So what we really are is we're a storytelling engine. On the 1 hand, over the last 20 years, our founder, Yongsoo Kim, started with a mission to cultivate creators, and we have 27 million creators, the vast majority of whom are amateurs. They have day jobs. Later, I'll give this example in greater detail, but 1 that I'll mention, it was a great creator in New Zealand as an example, named Rachel Smith. And so for those 27 million creators, we have all of this technology. Right now, we recently announced an upgrade to our Canvas platform. So if you got a story in your head and you got a full-time job in the case of Rachel Smythe, full-time graphic designer in New Zealand with a story that she didn't know anyone would want to hear or understand, frankly, I would never have guessed her story called Laura limbus, would resonate. But she created a story on Canvas, like many of our 27 million creators. And then we can see because we have 145 million monthly active users who spend an average of 30 to 60 minutes day looking for the next hit story, we can see who in the world loves it. And these monthly active users are, the majority of whom are not in our country of origin, Korea or in Asia. And then in between all of it is this flywheel where we can use our tech to personalize recommendations for that -- those readers. We can create tools that allow our creators to be successful, and once they are, they become franchise stars. Their lives are changed. Rachel Smythe became 1 of them. These franchise stars are -- have the ability to have a global voice and oftentimes, they live outside our platform. The Rachel Smythe Laura Olympus became a New York Times best-selling book in print. She was just recently announced as being a featured animation release on Amazon Prime. And she's just 1 example of that flywheel that I mentioned. Let me briefly just also cover that flywheel is now large enough to be self subsidizing and sufficient. So last year, we did about $1.4 billion in GAAP revenue. In the last 3 years, we've had positive operating cash flow, there will be a quarter or 2 when there's some fluctuation. And we're excited to be publicly listed because it gives us global governance, and it shows that where we are just starting to get going, the largest TAM, what we call rest of world, places like North America, we're just getting traction and we're getting traction with Gen Z, the most desirable consumers who want to find a story from an unexpected source out in the world. So let me pause there just as a quick intro before we continue on.

No, that's great. And not quite Gne Z probably not in your main demographic, but I can attest to spending more than 30 minutes a day consuming interesting stories on your platform. So you guys should all try it out. Okay. That's great. So when you look across your business, you operate across Korea, Japan and stable. And we talked about 145 million month of active users. So like when you look across your geos, like where do you think -- where do you see the biggest opportunities from today.

Well, it's great to have a global portfolio. Let me kind of cover what we describe as Korea, Japan and then this very big geo rest of world. As I mentioned, Yongsoo Kim, our CEO, founder, started this thing initially out of Korea 20 years ago. And so if you look at Korea, it plays a really great role. It's a foundation for the company. We have nearly 50% market penetration. We -- if you're in Korea, we are arguably an everyday part of your lives in digital entertainment. We're like the Kleenex of storytelling if you're in Korea, articles have been written that not only are we that penetrated on labor Web2 and our platform there. But some have said that we create more than half of the major hit K dramas on streamers like Netflix. They start as stories on our platform. So there, in Korea, where you have so much market penetration, it's critical to create a healthy ongoing source of growth. I'm proud that Korea as, for example, in the last quarter, first quarter grew 13.9% on a constant currency basis in paid content. It grew it through strong NPU growth. I'm pleased with the health of the app MAU, sometimes total MAU doesn't reflect the actual business health of the business. We look at things on an app basis and on a web comic basis. And it's a great source of motivating content and creators that can be exported to all other parts of the world because people no longer think about origin as a liability, actually -- we've said nearly 120,000 stories arrive every day to our platform. And our Gen Z consumers in the U.S., for example, are looking for the next hit story even if it comes from a foreign language or a foreign part of the world. So that's Korea. If you look at Japan, Japan is where we essentially around the time of our IPO in mid-June, said, let's show that we are relevant beyond our country of origin. And Japan, which has 3x the population of Korea, we're now -- we've grown to be a little less than 20% of the market penetration. As you saw, if you knew us back in the 2024 time period, it was a rocket in growing double digits. For the last 3 quarters, we said, okay, we got to keep this rocket engine growing into perpetuity because we think it's a big market for us. And so as a result, we took a few quarters to invest in what we call infrastructure. It meant that we couldn't invest our people and time and growth, and it meant that we -- you see a pause in Japan's growth. We thankfully have announced that infrastructure is complete. That project as of the end of the last quarter, Q1. And so we're excited to show that we can deliver what we already have in a really interesting market. What's great about Japan, just to cover it, is if you think about like consumer dynamics reflected in ARPU, you know that where we've been for 20 years, people spend about $7.80. This is the ARPU in Korea on a monthly basis. But in Japan, it's $22.50. Japan grew so fast as our second demonstration geo that it is now 48% of the total company revenue. It's contributing on a constant currency basis, $121.6 million out of the $326.4 million in Korea but Japan is $ 158.7 million. So Japan is bigger than Korea. And what we're seeing in the rest of the world, which is everywhere else is that our total MAU is about $100 million in Q1 of our MAU out of the $145 million in rest of world. A lot of that we don't choose to monetize. It's from parts of the world where we love that people are writing stories that can turn into hit movies. But if you focus on our English platform, where we really care people writing in English consuming, for example, in North America, -- we have set that up for growth, too, because we're seeing English webcomic, MAU grow 3%. And where we don't disclose the English web comic app -- sorry, that's MPU. MPU grew 3%. We don't disclose the MAU. It's great to see first the MAU grow for our English platform. And then the MPU grow for that same part of the world. So that eventually, it turns into a very large business. But we're sub-5% penetrated in rest of world. And so unlike a lot of other businesses, I think we have a lot of upside geographically. As we know, the consumer in the U.S. really wants the stories we create from anywhere in the world.

Okay. That's great. I guess with that said, when you look at the platform from an engagement perspective on the consumer side, how do you feel about the health of the platform, meaning you said you've done some, I guess, plumbing work in Japan to make sure that platform is better suited in Korea, it's a stable market. Rest of the world, you're still growing. So like are there other work that needs to be done to see would say a more stable engagement growth from an MAU perspective. And then following up on that, like how do you feel about the MAU potential of those or NPU potential of those MAUs?

Yes. Good question. Let's talk about paid content for a second. I want to put advertising to the side. We'll come back to that. We have largely completed, I believe, the foundational work to see the bread and butter, Paid Content is 80% of our revenue of our Paid Content business continue to grow geographically, and let me explain why. First, we talked about Korea being the most robust that 13.9% concurrent pay content growth, you've heard about Japan. We announced for Rest of World an overhaul to our our creator facing tech stack, we call it Canvas. So this is a pretty big rollout for everywhere other than Japan and Korea, where we've improved the ability for creators to be able to write stories that can turn into hits. This is really important for scaling Paid Content globally because it's the heart of the reason why we have unique content. Those 120,000 stores arrive every day. They come from these 27 million creators who oftentimes are imagers on Canvas. Having that completed and rolled out in May is a critical infrastructure piece that we need to speed growth in rest of world. And when you think about things like external deals that we're now ready to support with this proven product market fit, we'll probably come to it later, but the deal we announced with Disney. Disney took a 2% stake at $12.29, and we're on track to announce the launch of a brand new to the world consumer platform that leverages all of their content. They're amazing content later this year. But we've already been hard at work creating new vertically scrolling. We call them reformatted, webComics from Disney. On our U.S. platform, I think in the last quarter, we can point to a few examples a couple from Star Wars, from Daredevil and original that featured Micky and the F1 series. So you only get to partner with world-class folks like Disney, when you have the readiness and infrastructure product market fit to take that next step of growth. So we're excited. Now recognize, I'm not guiding to that growth in Q2 because it's out ahead of us. So from a source of content from these indie creators on Canvas and then kind of an indication of readiness on our platform with partnerships like the folks at Disney, and then I was recently just in Vancouver with Warner Bros. Animation. Another example is we're making progress off our platform. So in Japan, we announced a slate of 20 anime that is on track for development in 2025. We announced the deal with on our brothers animation, as I just mentioned, with a slate of 3 and now recently broke news with another slate of 4 great projects. These 4 projects are not traditional sourced from Asia projects but great animation projects from our world in partnership with them that our focus on young adults and oftentimes have genre focus that may surprise you. So when you have external deals set up, you have internal infrastructure that's ready and you have product market fit. You have MPU growing and a true desire by Gen Z, for example, in North America to find their next hit story. I think we're setting up the flywheel for growth.

Okay. I guess at a higher level, do you think there's more opportunity on the MAU side, meaning could you get more consumers to read your content? Or is it more about monetizing those users better?

Well, again, I think the answer depends on geography. I think Korea will continue to be a source of health and growth but it does not require going higher than the 50% market penetration in MAU. I think there's so much that we can do as a strong player there in terms of the 3 areas that Junkoo has mentioned in his most recent shareholder letter, focusing on digital characters that can interact more and create engagement with between readers and between readers and creators. This idea of focusing on the social community part, which is yet to really be developed, has great upside in my mind as well, is another kind of important area of future growth. And then this example of how our stories can be off platform in the form of animation and anima, which then can drive strength back to our flywheel. I think you're going to see those drivers across all regions, but particularly start where we're really strong, which is in Korea. In Japan, I suspect you will see both app MAU and MPU and revenue all grow because we're very competitive there. It's the consumer there is well accustomed to digital content consumption. And I think we've proven actually in the '24 period that we know what it takes to have double-digit growth. And then Rest of World, it's all of the above. The TAM is so large, but we are so underpenetrated. We're market penetration in Korea, sub-20% in Japan, we're sub-5%, maybe even sub-3, however you define rest of world. So there, I think you're going to see us grow. And you're going to see consumers be introduced to our stories on Amazon Prime and Netflix or in partnership with Warner Bros. or Disney and then come to the platform as much as you're going to see organic growth from our platform in places like Rest of World.

Okay. All right. That's great on the consumer engagement side. And you touched on the creator side a little bit or, I guess, the bigger creator in Disney. But when we look at the creator ecosystem more broadly across all of your creators, you paid out I think last quarter, you said $2.7 billion to creators over 5 years. and you're investing roughly $50 million this year in creator support. So like can you like walk us through those numbers a little bit, like what they mean and how the Reshaworks with the creators and why do create or choose you guys over other platforms?

Yes, that's a great question. So first, we are very different than a lot of people talk about creator economy and creative rev share. We benefit from the vision of our Founder and CEO, Junkoo Kim, where he said, we will fair share revenue on future success we can't yet estimate. So creators really feel aligned to us whether they're amateurs on Canvas, where they have no idea if anyone would like their story and graduate to become franchise stars or not. It allows us, by the way, to embrace new technology together too. I think a lot of other companies don't have that alignment on the IP, the source of the IP. We'd like to give our creators fair share upside in a rev share, which shows up in our variable costs, our cost of revenue, it shows up in a gross profit margin. And we're going to come back to the numbers. But that's where that $2.7 billion number of creative rev share comes, it's because we're growing incremental growth for the company and sharing a portion of it. Now on the one hand, you say that is incredibly generous. And I think it's critical and it is generous. It's why we continue to be the destination of choice. That's why creators choose us. No other ecosystem has that level of commitment. And no other ecosystem has proven track record. So we've had 900 adaptations of stories that start on our platform. They become hits in multiple languages on our platform and then they become movies or games, think 100 of those 900 are rich film adaptations. I think 2 of Netflix's all-time top projects ever came from us, 1 in the Spanish language and the other in Korean. So a creator can look at us and say, my gosh, they're going to empower me, they're going to use their tech. They're going to set me up for success because they're light and they have a proven track record of allowing me to be successful in this emerging format called a webcam or WebNovel but also any way a story can be told. Now let's get to the numbers. I think what people don't understand from the release, and I want to clarify this, is the $50 million that we talked about is already fully funded and invested in our existing cost structure. There's no incremental investment inherent in the financials of the company for years now, has been that enduring commitment. We're just highlighting what it's already fully funded. And in fact, if you look at gross profit in the most recent quarter, this 25% gross profit margin improved by 390 basis points year-on-year, in part because as we grow a business for a creator, let's say, they start in Korea, and they're not sure if their story as residents and they discover through us, it does, and we help them take it globally. Well, we benefit disproportionately more financially because we do more of the heavy lifting. So as pay content grows everywhere outside of Korea, my gross profit margin should improve from a mix standpoint. And so as a result, when I think about the total company financials, I don't feel like we have to overburden the P&L. I think we love the fact that we have cash and marketable securities, short-term marketable securities were that $600 million and operating cash flow has grown for the last few years. But that still includes investing the accretion that naturally occurs to the P&L as we grow outside of Korea. In our advertising business, if you think about the cost structure is paid for, so we can share the revenue upside with our creators and still improve the profitability for Web2 because the engagement, the eyeballs, the engine of new content that is already paid for, so to speak. So I think there's natural accretion for the company despite a very deep preexisting commitment to share with creators our future upside.

Okay. That's great. Kind of me to my next questions, which were about the numbers, revenue growth and profitability. But I mean, before that, we covered, I think, in good detail of your flywheel on the creator side and the consumer side. So let's dive into the numbers a little bit further. So looking a bit more near term, you talked about growing double digits by 4Q. You guys are in the low single-digit percent rate right now. So could you like bridge what you're growing at right now to that double digit? And what are, I guess, like 2 or 3 biggest swing factors in that aspiration?

Yes, that's right. I think, first of all, this double-digit growth by the end of calendar 2026 is the reference from the Q call. And as I mentioned, I think of growth as having 2 different dimensions. One is the heart of the company is pay content. And we've already described and you now know how big Japan and Korea are. And I think my confidence, one, UC Korea already operating at 13.9% paid content constant currency growth in the post quarter. Japan admittedly has been focused more on setting up for future growth and infrastructure. But I have confidence in the return to the growth in Japan because we've demonstrated it before it's a pretty strong market for us, and there's a lot more room to run. And I don't know that I need to have a huge sudden increase in growth in Japan despite its size. Because when you think about advertising and the impact of crossover IP, while they may be only roughly 20% or so, give or take, in 1/4 of our total revenue, we are lapping periods in the back half of the year, that allow me to feel very confident about that commitment. But beyond just a set of numbers for a given quarter, even if it's towards the end of the year, I think what it reflects is a belief that we're setting this business up for growth beyond in '27 and '28. We talk about the investment in Canvas the deals yet to be launched like the collaboration with Disney, the anime and the animation where slates have been picked and are being developed. We're trying to run the business for long-term shareholder value, which I believe, does test the patients for many of our investors. But I think this commitment to double-digit growth isn't just about Q4. It's about realizing the upside for investors longer term as well.

Okay. And is it fair to think that all 3 segments of your business, so pay content, advertising and IP adaptation all kind of equal contribution to that double digit? Or is there an area where you feel particularly more confident about that.

Well, I don't -- I haven't given disclosure in depth, but I would say I would invite as the investors look at the composition of the revenue today. 80% is paid content and 20% is advertising crossover IP. And in previous quarters, cross over IP, even though we have a great slate, we're very excited about our slate. There's variance in that number quarter-to-quarter. You saw even last year, we had a huge or sample but those arrive in a quarter versus another. I think I would look at the composition overall because advertising, for example, is the part of the business and the rest of the world that we are taking more time to deliver because we really want to pay off more creators and more consumers for example, in North America in the paid content flywheel first. But that's 80% of our business. So I think if you look at our composition today, it will give you an indication of the composition of growth down the road.

Okay. That's fair. Then just quickly on the IP adaptation side. It's historically been pretty lumpy. So how -- I guess, one, like, what kind of visibility do you have in the IP adaptations pipeline? And is there a way to think about like what a potentially normalized growth rate of that business could be given the lumpiness?

Well, I think there's no getting around the fact that launching hit feature films is lumpy. The ability for anyone to call whether it's in 1 month or another is hard to reduce fundamentally in the nature of the business. For us, having it be roughly 7% to 8% of the revenue base, has meant that it's more the lowest form of customer acquisition costs than it is an area of focus for accretive revenue in the sense that when someone sees a hit story, like maybe it's a sideline the quarter back at me, which came out as a hit in the U.S. on Tubi, that was originally a Waad story or at SQL, we think it's a healthy way to increase attractiveness for the creator in a really low-cost way to create awareness for the platforms and new markets. So that's why we're committed to it. I think our line of sight to the impact on our revenue from these projects is getting better. But I don't want to discount the fact that, that is a fundamentally lumpy business. We're committed to it because we think it has so much upside for our creators and our consumers and for us financially. But with the cost of that is you are going to see some quarterly change in volatility.

Okay. All right. That's helpful. Let's talk about profitability next. So you already talked about gross margins, but -- so that line has been some of Alta as well. 1Q, like you said, you guys expanded that by almost 400 basis points. Where do you -- like where does gross margin go from that level? Is this kind of like a stable base from which you'll continue to expand given your cross-border content translation and all of that, or like, I guess, give us a way to think about your gross margin going.

Yes. It's a fair question. It's a little bit challenging because I don't have long-term guidance out, but let me see if I can answer it in the context of the quarter. So let's talk about quarter 1 gross profit margin. That 390 bps improvement year-on-year in the script, we kind of talked about having 3 pieces, 2 of which I think investors should consider to be ongoing and estimate on their own, how much it will grow or not. We talked about a $3 million improvement, specifically in Japan associated with Smartphone Act that was passed by their government in December 2025. It's just lower app store fees not just for us. By the way, it's a wonderful thing for me to see a tailwind like that emerge without having any pressure or negotiating leverage exerted by me. This is just a wonderful tailwind that we will benefit from. I want to be clear, the gross profit margin accretion that I mentioned here, we will likely want to reinvest back for accretive growth in Japan because I'm very bullish there. But if you look at the numbers, that was a portion of that $390 million. But more importantly, think about the business model, we talked about a second portion, which is what we call mix, but it's -- as our revenue mix grows in pay content outside Korea, and eventually, while delayed, our advertising will grow in rest of world, they're highly accretive to the model. And so part of the answer to your question is, folks have to estimate how fast will we grow outside of Korea? I believe it's an enormous part of the long-term investor story, which is why I believe that as we grow in the U.S. as we materially deliver on this 3% NPU growth in Webcomic english, our platform here, for example, you will see improvement to gross profit margin. And if you think below the line, we're not a heavy CapEx PPE company. I'm not building cloud infrastructure personally. So -- and we're already heavily investing in marketing. So I think a lot of that question on profitability is, do you think we can grow outside Korea? And if you do, I believe that means it drops to the full bottom line. Starting with gross profit margin will reinvest. You already saw us invest time and effort and infrastructure. But from a financial standpoint, this is not a heavy spend to grow below the GP line. So the 2 questions are tied.

Okay. And like I said, I'm not asking you for a long-term guidance. But when we look at the 2Q adjusted EBITDA guide, it does imply reinvestment back towards a breakeven level relative to your 1Q results. So like given the 1 you just said, like how should we think about the near-term context or drivers of margins? And like what that means? I mean I guess you heard talked about margin expansion down the line. But like what does that look like in the near term? As you go towards that double digit.

Again, you always ask good questions. But before I give you the specific answer on Q2, let's take a step back. I think in disclosure, it's important to recall that we talk about double-digit growth by the end of the year in revenue but we talked about some clear things that we're cycling through, finishing the infrastructure project in Q1 in Japan so that we can turn to growth, completing and launching the relaunch of CANVAS setting up the infrastructure for more creative content for rest of world. seeing the turnaround in Korea already emerged with 13.9% constant currency growth in Create. But yet, we're not saying all of that happens in Q2 because the revenue guide, as you know, is within this range of 332% to 342% or roughly a midpoint of 3.1%. So I believe we're managing for the right long-term growth of the company, but long term is not our Q2 guide. And then on the bottom line. If you think about -- let's look at Q1 for a second. In Q1, we had guided to kind of flat revenue. And on a constant currency basis, we were actually flat year on revenue minus 1.5% on a reported basis due to FX. We had previously guided Q1 to 0 to $5 million positive adjusted EBITDA and delivered $9.5 million. And I said on the call, gosh, I wish I had invested some of that over-delivery back into long-term growth. and that I would do it in Q2. So once again, we're guiding to $0 million to $5 million adjusted EBITDA in Q2, I mean. And I think that reflects the commitment to grow this thing for the long term. That said, it's not negative adjusted EBITDA, and I do enjoy having posted positive operating cash flow in the last 3 years. And I do think this is -- this will grow on its own steam in a financially prudent way. But I don't think the investor will be rewarded by dropping short-term adjusted EBITDA even though we will find accretion as we grow outside of Korea.

Okay. That's great. We have about 2 minutes remaining but I do want to touch on 2 exciting initiatives or changes. So let's talk about Disney first. There's 2 components of that partnership. One is content on your platform, and then the new app or new platform that you're launching with them in 2026. So like when we look at those 2 pieces, like how does Disney contribute to your overall P&L?

Yes. Again, I'm letting reiterate, I think we're extremely grateful to be able to partner with someone like Disney. And I think it reflects the fact that we are ready to really grow globally because they would not have picked a partner like us without that belief. There are really 3 -- I think it's 3 components with Disney, and let me go through them. One is bringing the vertical skill format we have innovated and pioneered the webcomic format for great stories they have on our platform. And we've already begun and are well down the path. In fact, as you know, like since our last release, having 2 Star Wars stories in that bucket along with wings of Starlight and Daredevil and an original making mouse and 1 collaboration, just we will continue to do that. And I think that's great. But the second component is we're really excited about doing what we call an original story with Disney. I'm not committing to the story. This will require a mutual agreement by both sides. But I take your favorite back story from your favorite Disney Pixar, Star Wars 20 Century Universe. Maybe it's someone in the Tony Stark circle that becomes from being a back story to being a protagonist, having an original story like that, I think, has a significant strategic and financial upside beyond just that first bucket of reformatted titles. And then the third is having a new consumer-facing platform that has the leverage of all of their content. That will not happen until we launch it within. We said this calendar year. So like I said in a game changer but I don't think it is a short-term game changer. I think it's something that's going to accelerate for the long term.

Okay. That's great. And we only have 20 seconds. And this question is not going to be -- it's going to be too big to answer in that second but I want to ask it anyways, AI, like what does AI mean for you guys?

We may be the greatest AI story not told. We believe human creators are the best storytellers but we are using AI for personalization recommendation engines showing up in real results in Korea to protect creators to improve their productivity. We'll talk about it more and more but we are an AI beneficiary. And I think we're set up with our rev share to have a unique ability to partner really quickly with creators to their benefit.

Okay. Great. That's it. All right. Thanks, David.

Thanks.