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Edited Transcript of 035420.KS earnings conference call or presentation 25-Jul-19 12:00am GMT

Q2 2019 Naver Corp Earnings Call

Gyeonggi-do Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Naver Corp earnings conference call or presentation Thursday, July 25, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Min Kim;Team Leader of Investor Relations

* Sang-Jin Park

NAVER Corporation - CFO

* Seong-Sook Han

NAVER Corporation - President, CEO & Director

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Conference Call Participants

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* Minuh Cha

Goldman Sachs Group Inc., Research Division - Analyst

* Moonjong Lee

Shinhan Investment Corp., Research Division - Economist and Analyst

* Seungjoo Ro

CLSA Limited, Research Division - Research Analyst

* Seyon Park

Morgan Stanley, Research Division - Equity Analyst

* Soyun Shin

Crédit Suisse AG, Research Division - Research Analyst

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

* Sung Eun Kim

Macquarie Research - Analyst

* Taewon Kim

UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming

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Presentation

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Operator [1]

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[Interpreted] Good morning and good evening. Now we will begin the conference of the fiscal year 2019 second quarter earnings results by Naver. Today's conference call will be consecutively interpreted for the convenience of domestic and international investors. The conference call will include a summary of second quarter earnings, followed by a Q&A session.

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Min Kim;Team Leader of Investor Relations, [2]

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[Interpreted] Good morning. I am Kim Min, Director of IR. Thank you for joining Naver's Q2 2019 earnings presentation. With us today are CEO, Han Seong-Sook; CFO, Park Sang-Jin; and COO, Choi In-Hyuk.

The earnings results are K-IFRS-based provided for the purpose of timely communications and are yet to be audited by an independent auditor and are, therefore, subject to change after the review.

With that, CEO, Han will now present on the business highlights.

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [3]

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[Interpreted] Good Morning. I am Han Seong-Sook, CEO of Naver. Thank you for joining us for the earnings release.

Naver has continued its growth in Q2 based on solid search business which underpins the expansions into commerce, content and B2B businesses. Along with AI and data-driven search and expansions into commerce, we are steadfast in growing the domestic business. And supported by our content expertise built in the domestic market, we've made inroads into the global market, creating new sources of revenue. And as we pioneer into B2B frontier, leveraging our internal infrastructure, we are committed to securing next-generation engine for growth.

As we respond to various opportunities in store for us and to gain a foothold for continuous growth, we are making a solid -- a system whereby people, entrepreneurial leaders are fostered from inside the organization, in turn, developing into a CIC, company-in-company, and eventually, becoming a separate entity so as to bring greater corporate value for Naver in its totality.

Under this goal, since Q2 to the end of last year, we have carefully selected 7 business divisions as CICs and have now decided to spin off K-CIC as a separate entity. After the spin-off, we expect acquiring licenses and finance will become easier. And by minimizing regulatory risk, which naturally follows new endeavors, we'll be able to create a business structure where decisions could be made expeditiously.

We can also cooperate with different financial service providers to secure their investments, so that we may strengthen our competitive edge in the new frontier of digital financial markets.

Based on the 10 million monthly users, NAVER Pay is expanding into offline space and it's strengthening loyalty of the users by leveraging the point system. We plan to gradually expand the trend; where users search for 2.6 million small local businesses registered at Play's CNA research, make reservations and continue the process up until making the payment, and strengthen the offline payment for Pay by linking with booking features.

First off, we will start with restaurants for services like booking, on-site payments, to-go orders, seamlessly combining O2O service and Pay, which will drive user value. We are currently testing Table Order, which is an on-site payment service nearby Naver HQ vicinity, which will launch officially in Q2 with the takeaway, the to-go order feature on top.

Point system originally adopted as a way to enhance user loyalty is now a convenient mode of payment offering more than just benefits and reward. The size of point top-up in June has quadrupled since the beginning of the year, and we expect tweaked growth to continue. Although still early, underpinned by convenience brought from close link between rewards and Naver shopping and booking services, we plan to continue to grow the size of the points top-ups. And this will, in turn, have a lock-in effect, binding users to many payment type services on the Naver platform and will be used as a basis, when we decide to enter consumer-bound financial business.

After the spin-off, we will expand into various different financial businesses. Our objective is to evolve into an efficient financial platform, where we use Pay's database and traffic to recommend financial products most befitting the user, and also offer convenience for people to easily and securely buy financial products, and provide them with an integrated view and a view and search of such products.

As we engage in businesses around various financial products, we expect to generate revenue from brokerage fees in the long run. Just as we were able to sort through constraints and member sign-ups, transactions and track record access in the early days of online shopping. Pay will be able to navigate through comparable problems in online financial services and gain a superior market position. We also see the need for strategic alliance with a competitive financial institution in order for us to make earnest expansion into financial business. So accordingly, after the spin-off, Pay will receive more than KRW 500 billion of investments from its strategic partner, Mirae Asset, aligning core capabilities of both companies to quickly enter the financial market and to establish the basis for aggressive expansion.

Another pillar of commerce is shopping, which is spearheading the growth of Naver. And it continues to build on the connection between users and sellers, supported by the use of AI and data. AI-based product recommendation technology, which first started off as AiTEMS, has further evolved to be more personalized via the launch of [For You] search this January. We made further upgrades in Q2 so that recommendations will be based on real-time feedback from the clicks the person is making. As a result, for fashion, we've seen 15% growth in click-through rate for the recommended product as opposed to the total product clicks.

Going forward, we will adopt different logic for each product categories and strengthen AI recommendation features best fit for the context as in discovery, search, comparison, shopping card and payment stages, so that we can be a shopping service of choice and the first place users visit when they make purchases.

Thanks to such endeavors, number of smart stores in Q2 was up 30% year-on-year, and 50% of stores are grossing in more than KRW 500 million, with stores doing more than KRW 1 billion increasing double as more and more stores become successful within the Naver platform.

Going forward, on top of nurturing smart stores, who are small to medium in size, we plan to strengthen cooperation with branded manufacturers to bring great diversity to Naver Shopping. And by developing smart store tools, we plan to provide smart store tools optimized for -- so that they may directly control price and run marketing campaigns. And by offering marketing insights based on purchase data and the use of analytical tools, we will strengthen the tie so that Naver Shopping will become their main online channel.

On top of small to medium online merchants, we plan to also broaden cooperation with retail, fashion, household product brands so that we may develop into a healthy commerce ecosystem which best embodies Naver's philosophy of coexistence and diversity.

Along with domestic growth driven by commerce, global expansion and monetization underpinned by capabilities in content is going as planned. Headed by U.S., NAVER Webtoon has seen increase in brand awareness and loyalty in key markets like Japan, Indonesia, Thailand and Taiwan. Especially in the global market, share of local titles is increasing with the use of Canvas, which is a program for talent discovery. Even in the U.S., known to be a content stronghold, more than top half rankings are local webtoons, and we see signs of quite natural global expansion of the platform into Europe and Latin America.

After successful monetization test overseas end of last year, global GMV is reporting a steep growth of more than 50% Q-on-Q. And in particular, U.S. has displayed close to triple Q-on-Q growth. As such, we've been successful -- we've been successfully setting up a positive loop from nurturing of artists all the way to monetization and look forward to solidifying our position as global #1 webtoon platform through stronger brand awareness in the second half of the year.

Secondary and derivative content creation and distribution is also bringing visible results. Studio N is currently working on producing more than 20 popular webtoons and web novels for the screen. Justice is a Drama on KBS and it has just started airing 17th of July. Hell is Other People, (inaudible), Story of the [Do] are also lined up for airing in the second half. Also, game platform maybe is one of many cases that uses the IP and is creating derivative content. As such, content is being shared cross-border, and we plan to solidify and differentiate our creator's ecosystem distinct to Naver that offers various monetization opportunities spanning from previews, ads and derivative content production.

In V LIVE, we launched pay-for-fee FANSHIP service last March, and the number has increased to 44, where we see not only idols but celebrities like musicians and actors from various different fields participate and foreign celebrities from Vietnam have also joined.

Last June, BTS' Wembley concert and fan meeting concert in Seoul was live broadcasted worldwide, signaling the launch of pay-for-fee live concert product.

For the Wembley concert, we provided stable services, supporting 140,000 global concurrent connected users. For the Seoul fan meeting, we used a total of 5 multi camera angles, delivering rich, live experience, winning great comments from the fan base, production companies and the press.

Live concert is a product we newly introduced this time around, offering fans, at a competitive price, an opportunity to enjoy lively concerts in the comfort of their rooms; and to the talent company and the stars offered additional monetization opportunities. As such, I believe this was a meaningful first step that can transform the landscape. We will further grow this market by expanding to foreign artists' concerts who are visiting Korea and to music festivals as well.

V LIVE revenue in Q2, therefore, was up by more than double year-over-year on one-off impact from first-ever live concert sales. We will leverage V LIVE's content, technology and data capacity to strengthen benefits and improve usability and control features in order to reach 1 million paying subscribers by the end of the year and become a global flagship membership program, living up to the expectations of both fans and the stars.

In B2B, which is the next growth engine, following the content business, cloud is on a smooth sail reporting twofold annual revenue growth in the second quarter. Related secure basis for operation of financial services as we complied with all the requirements set forth by Financial Security Institute security assessment. On the back of joint MOU with COSCOM early this year, cloud zone will open in Yeouido specialized for the financial industry, so that we may focus on onboarding financial institution customers ahead of others and gain a leading position in the financial cloud.

This quarter has matched API became for a fee service, number of paying customers increased 30% Q-on-Q. We plan to offer distinct value by bringing AI technology and solutions Naver has, such as voice, chatbot, OCR and recommendation algorithms into convergence with our cloud services. We will also increase the number of cloud products and strengthen product competitiveness concurrently, so as to gain leadership in key markets, such as in public, financial and health care segments.

Naver will continue to take on the challenge of strengthening its growth engine and provide timely investment and support in line with the growth stage and outcome so that each business division can grow independently. Also, in line with the growth phase of the business, we will do our best to deliver the value to market and for that value to be well reflected in the overall corporate value.

I look forward to your continued interest and support, and I now turn it over to CFO, Park Sang-Jin for financial results.

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Sang-Jin Park, NAVER Corporation - CFO [4]

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[Interpreted] Good morning. I am CFO, Park Sang-Jin. Q2 consolidated operating revenue was up 19.6% year-over-year and 7.9% Q-on-Q to KRW 1,630.3 billion. Consolidated operating profit was down 48.8% and -- year-on-year, excuse me, and 37.8% Q-on-Q to KRW 128.3 billion, and operating profit margin was 7.9%.

Breakdown for Naver's core business shows record-high operating profit of KRW 322.5 billion, and operating profit margin of 31.1%. While LINE and other businesses reported operating loss of KRW 194.1 billion on one-off expenses used for LINE Pay's P2P transfer campaign being booked in total during Q2.

Q2 net profit was down 90.1% year-over-year and 68.3% Q-on-Q to KRW 27.8 billion, and net profit margin was 1.7%. As mentioned last quarter, Naver's core businesses, which are subject to domestic corporate tax rate as is, saw robust profit. And hence, effective tax rate on a consolidated basis remained high compared to consolidated operating profit.

Breakdown of Q2 consolidated operating revenue comprises of ads at 10%, business platform, 44%; IT platform, 7%; content service, 3%; LINE and other platform, 36%. Breakdown of consolidated operating expense comprises of platform development and operation at 16%; agency and partner commission, 20%; infrastructure, 5%; marketing, 7%; LINE and other platforms, 52%.

By operating revenue breakdown, ads revenue was up 12% year-over-year and 17.1% Q-on-Q, reporting KRW 166.6 billion, driven by product improvements and higher demand for ad execution from customers. Business platform was up 17.1% year-over-year and 7% Q-on-Q to KRW 715.9 billion on robust growth of NAVER Shopping and search upgrade using AI technology.

For the IT platform, despite solid GMV growth for NAVER Pay and credit card fee reduction for small to medium merchants, revenue was up 22.6% year-over-year and 6.8% Q-on-Q, reporting KRW 105.9 billion. Owing to steep growth in Webtoon, a deFacto global platform and successful live broadcast of music concert, which drove up V LIVE revenue, content service was up 61.4% year-over-year and 43% Q-on-Q to KRW 50.1 billion.

LINE and other platform was up 21.8% year-over-year and 4.7% Q-on-Q to KRW 591.8 billion on the back of advertisement-led business growth.

Next is on the expense. Platform development, operational expense was up 21.7% year-over-year and 7.4% Q-on-Q to KRW 234.6 billion on the back of labor cost increment from previous year's new hires and 20th anniversary event-related expenses.

Agency partner commission was up 13.7% year-over-year and 7.7% Q-on-Q to KRW 298.2 billion, an increase in revenue-linked commission.

Infrastructure expense was up 31.2% year-over-year and 6.1% Q-on-Q to KRW 80.4 billion, due to higher depreciation costs in line with the equipment purchases made the previous year.

Marketing expense was up 21.1% year-over-year and 56.3% Q-on-Q to KRW 102.9 billion, owing to NAVER Pay's points, global expansion of Webtoon and TV commercial for the Mobile [Read] app.

Lastly, due to one-off expenses used by LINE Pay's P2P campaigns, LINE and other platform expense was up 53.5% year-over-year and 17.7% Q-on-Q to KRW 785.9 billion. Excluding such one-offs, operating profit margin on a consolidated basis was 13%, flat Q-on-Q. As of today, we do not have any additional investments or marketing spend to add on top of the initial plans set at the start of the year.

This ends the financial results of Q2. We will now entertain your questions.

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Questions and Answers

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Operator [1]

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

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Sung Eun Kim, Macquarie Research - Analyst [2]

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[Interpreted] I would like to submit 2 questions with first question regarding your spin-off of NAVER Pay. I understand that in your previous cases, you have not really -- there wasn't a case where you've received outside investments when you spun off your CIC. I think NAVER Pay, this will be an opportunity for you to further up the value through receiving such investments. My question is do you have further plans to spin off your other businesses, such as Naver Shopping or V LIVE and also any plans to attract investment for those independent CICs?

My second question has to do with your top line growth performance which was quite good for your business platform. Is this top line growth mainly driven by your search ads? Or is it because of the CPS-based shopping-related ads? And do you think that this trend of high growth in business platform top line can continue in the second half of the year?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [3]

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[Interpreted] I'm the CEO. I would like to respond to your first question. As you know, the CIC system that we have in place at Naver is something that we have been operating for some time. And we currently have 7 CICs within the organization. And back in 2017, we had a previous experience of spinning off NAVER Webtoon. And that Webtoon division became a wholly independent entity.

Basically, the whole philosophy is to really nurture entrepreneurial leaders within the organization and give them the opportunity to grow that specific business unit independently as a separate entity. So that's why we've decided to spin off Pay as we have done for Webtoon. And all these businesses, once they reach a certain level of phase in terms of their development and growth, and once we are able to achieve a certain meaningful level, then that CIC will be open to the possibility of becoming an independent entity.

Once again, that decision will be in consideration of the growth stage of that business as well as the leader who is spearheading that business. And that is the -- and that was the basis on which we decided to spin off Pay.

In terms of your question on business platform top line, in Q2, we were able to grow by 17%, which was quite a strong figure. Basically, it is partially driven by the CPS base, the shopping-related revenues. But also, because we offer many different types of search ad products, basically, we've also seen a quite even growth and robust growth across all of those different types of search ad products.

So the shopping mall CPS growth is higher compared to the average growth rate. However, the business platform top line, the size of the -- the sales volume itself is, in absolute terms, quite significant. So shopping mall CPS is only a part of it. And also, therefore, the growth is also driven by the overall search ads growth as well.

In the first half of the year, we made improvements on the quality of the ad products as well as the services. We think that this trend will continue on into the second half of the year, so we can project double-digit growth for 1 year or 2 years to come.

Just to add on top of the first question regarding attracting investment for the spin-off of Pay. And your question also implied whether we would have plan to try to get outside investment for other CICs. Last year, as we have actually spun off SNOW, the China subsidiary, that was a case where we received investment for the Chinese business. And as NAVER Pay has spun off as Naver Financials, we have yet put in place a plan to attract strategic investment.

Going forward, if this is of help to our CICs or subsidiaries and the process of spinning them off as separate entities, yes, there would be a possibility for us to attract investments.

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Operator [4]

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

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Moonjong Lee, Shinhan Investment Corp., Research Division - Economist and Analyst [5]

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[Interpreted] I would like to pose a question. First, it has to do with your IT Platform growth. The growth rate was relatively slow. And I would assume that this is an impact from the credit card-related merchant fee cut. Can you provide some rough idea as to what the impact of that was? And also, can you give some color on -- in terms of the GMV for Pay business?

Second question is, as NAVER Pay enters into financial services, although the -- certain characteristics are different, you will be bound to compete with companies like TaLK and KakaoPay. How are you going to differentiate NAVER Pay or NAVER financial services?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [6]

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Responding to your first question on IT platform revenue. This line item actually combines both the cloud and NAVER Pay figures. As you know, last January, there was a cut in the credit card payment-related fees that are paid up by the small to medium-sized merchants. And that impact amounted to around KRW 10 billion. But if you look at NAVER Pay, in terms of the amount of transaction as well as the frequency of transaction, we're seeing a very robust growth of more than 40%. And NAVER Pay also currently was -- has around 300,000 merchant base as of end of Q2.

Responding to your question about NAVER Pay's financial services, competitive landscape and how we plan to distinguish ourselves amongst the peers. Basically, NAVER, it's fintech -- or finTech and NAVER wishes to promote, it's based off of strengthening the financial connection, supported by the commerce platform. The biggest difference that we have as a platform is that we are supported by 10 million Pay-related users. And basically, key differentiator is in the depth of the data that we wield. Eventually, we would like to provide support to the sellers who're providing the financial services and basically, by attracting more users and more points that's incurred by those users. We believe that this could have a positive impact to the NAVER commerce platform. So in that aspect, NAVER Pay is clearly distinguished from other services.

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Operator [7]

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

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Stanley Yang, JP Morgan Chase & Co, Research Division - Analyst [8]

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[Interpreted] I understand that Jin Park, who's taking part in this conference call is going to be the new CEO of NAVER financials. So as a potential -- as a future CEO of NAVER Pay, can you share with us the growth strategy and business goal that you have in mind for this business? And also maybe talk about the potential IPO plans going forward.

In terms of NAVER financials, I understand that NAVER's original stance was that you will not be starting the Internet, the online-based banking business. So the launch of the NAVER financials, is that a signal to a change in that stance?

And my second question has to do with the shareholder value, your domestic business has been performing quite well. I'm wondering whether with the cash flow that's been generated, aside from share buybacks, would you have any plans to adjust your payout policies? What are some of the ways that you are currently thinking in order to enhance shareholder value?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [9]

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[Interpreted] I will respond to all the questions you raised relating to the growth strategy, the potential IPO plans and our plans relating to the online-based Internet bank. NAVER Pay, as I have mentioned previously, our NAVER financials, basically, it is a -- its core competitiveness lies in the fact that it is underpinned by a sensitive commerce platform. We have no intention to pursue banking business. Our financial services will be, once again, supported by and underpinned by the commerce platform that we have. It is through that approach that we will be providing support to the sellers on the shopping sites and provide different financial benefits to the users of that commerce platform. So that will be a differentiating factor for us that distinguishes us from the peer group.

I understand that companies like the CoBank, they're doing well in the online banking arena. But once again, NAVER Pay's interest does not reside in starting a banking business, but we can expand into various different types of payments and lending and other new types of financial services and products. And that's why we have decided to join hands with Mirae Asset and have had them onboarded as a -- as an investor, strategic investor, as an aside.

Within NAVER, there are many CICs, and basically, one of the reasons why we're spinning them off and having them become an independent entity is the eventual goal of having to -- eventual goal of reaching an IPO stage. As we establish ourselves as a payment service platform but actually go a step higher from that and become a daily life financial platform for our users once we have reached those levels as we shoot for those levels, of course, our destination or the objective will be set as an IPO of the company.

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Sang-Jin Park, NAVER Corporation - CFO [10]

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[Interpreted] I'm the CFO. Regarding your question on shareholder return, as you know, we've stuck to our basic stance, which is to pay out 30% of free cash flow and cash dividend or share buybacks and other forms. In terms of payout ratio, that is about 5%. We understand that with the change in environment and the performance and earnings that we're making from the domestic market, we are, at this point, very proactively reviewing some adjustments to our payout policy. We are looking at which ways or what resources to use. Once we make a confirmed decision, we will come back and share that with you.

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Operator [11]

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[Interpreted] The next question will be provided by Seungjoo Ro from CLSA.

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Seungjoo Ro, CLSA Limited, Research Division - Research Analyst [12]

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(foreign language)

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Operator [13]

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[Interpreted] The next question will be provided by Taewon Kim from UBS.

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Taewon Kim, UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming [14]

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So in the second half, you did, during the presentation, talk about the marketing expenses and one-off items for the second half of the year. But as we see your endeavors into the financials through NAVER Pay, and V Live is performing and expanding quite well, and Webtoon is well as well. So can you give some guidance as to the expenses going forward for the second half? Would we see a similar level that we've seen in the second quarter? Or would it be higher or lower?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [15]

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[Interpreted] Responding to your question about the second half marketing expense, in Q2, and you have currently pointed out, due to NAVER Pay's point accumulation as well as Webtoon going global and TV commercial for the mobile revamp, there was about 21% year-over-year increase. In the second half, we do continuously project that there will be broadening of the NAVER Pay platform as well as global planning for trending related marketing activities or Webtoon. So in Q2, so you will be seeing about the same level of increase, year-over-year increase, as you've seen during the Q2. On a per annum basis, in the second half, the marketing expenses will be marginally higher compared to the first half.

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Operator [16]

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

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Minuh Cha, Goldman Sachs Group Inc., Research Division - Analyst [17]

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[Interpreted] I would like to ask a question. Your content revenue has gone up quite significantly and your performance and results from Webtoon was also very good. In terms of the Webtoon, can you explain as to what the business model is, and also provide some color on the geographical breakdown and the growth trends going forward?

Second question relates to your platform development and operational expense which was up by 7% Q-on-Q. You mentioned 20th anniversary event-related expenses. We'd like to understand how much of this increase was attributable to one-off expenses. And also, in terms of the net addition for the headcount on the NAVER platform side, what was the size of that net partition?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [18]

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[Interpreted] So if you look at NAVER Webtoon in the second half, we're starting -- the second half of last year, we've seen increases in the sales coming from the paid content. And also, as we applied the overseas monetization model, since then, we've seen a very steep growth in terms of the top line. And also, the -- also, there is a bit of an impact from the end store, which was merged back in April 1. The Series on related sales is included in this figure.

The key driver behind the increase in the paid content revenue is that we had actually held the biggest contest ever in order to source high-quality content. And also, we've introduced previews for different titles and have reuploaded certain serials that have already been ended, thereby, being able to actually increase basically the business model in monetizing content.

And also, we've used AiRS' recommendation technology to further strengthen the retention of the users. And in the overseas market, we've started a program called Canvas, which is a nurturing program for artists and creators, thereby, applying a business model that is very much focused on sourcing local content and applying a monetization model or business model that will help that. So we were able to really lay a positive loop in the whole global content-related flow.

In terms of the MAU, basically, we that the overseas breakdown is -- compared to the domestic on 20 -- 70%. So we think that there is a greater room for additional contribution to our earnings.

Responding to your second question on platform development and operation. In Q2 the 20th anniversary event-related one-off expense was around KRW 10 billion. In terms of the NAVER platform headcount, and on year-over-year basis, there was 7% to 8% increase. But since the end of the previous year, basically, that growth -- or the trend has slowed quite significantly. So in the first half of the year, the addition, net addition that is, was not significant at all.

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Operator [19]

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[Interpreted] The next question will be presented by Soyun Shin from Crédit Suisse.

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Soyun Shin, Crédit Suisse AG, Research Division - Research Analyst [20]

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[Interpreted] I would like to ask a question. Can you give us an update on the traffic figure after the launch of the new NAVER application back in April? And according to a disclosed financial statement for NAVER financials. I understand that the turnaround days for working capital was -- the cycle for working capital was 12 days. Does that have to do with collecting certain funds from the merchants? Can you provide some more elaboration on this working capital line item?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [21]

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[Interpreted] Responding to your question about the new NAVER app, we now see the percentage of users using this new app at 78%. Since the deployment back in April, there has been a gradual increase in the percentage of users. And now we're seeing around 78% or 80%. In terms of the overall page views, time spent as well as click rate, overall, there has been an increase, also in light of the fact that we have newly installed the West Lab page. And in the second half, as we add more videos and beauty pages on the West Lab, we expect there to be a more increase in the usage.

Regarding your question on the working capital ratio and the disclosed NAVER financials statement. This was a statement that was disclosed yesterday, and it complies with the relevant disclosure standard. And as such, the data is as of end of March. If you look at the asset and liability of NAVER financials, basically, this reflects the amount of money that needs to be paid by the trades that it is dealing with and also the expenses that it needs to pay the merchant base.

In terms of the current asset ratio, now there are certain requirements, an independent entity, as a financial entity needs to comply with in terms of the debt to ratio, liability ratio, et cetera, in order for it to receive a financial business-related license. So please keep that in mind as you look at the current asset ratio. Those aspects were considered and is reflected as well. The final disclosure on the financial statements, the update to the disclosure will come after the General Shareholders Meeting approved. And that timing would be around September 20.

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Operator [22]

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

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Seungjoo Ro, CLSA Limited, Research Division - Research Analyst [23]

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[Interpreted] I would like to ask a question. First, regarding the upgrade of your AI search. How much help does it or support does it give to your business platform revenue? Is it correct to understand that as you make this product recommendation algorithm more sophisticated, that actually helps boost CTR and that drives the top line growth? Is this a correct logic or understanding? And also, is search ad CTR, therefore, going up at this point?

My second question is, can you compare the trend of business query, whether it's going up or down, if you were to compare before and after the launch of the new app?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [24]

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[Interpreted] In terms of the use of the AI technology helping us with our advertisement, basically, it helps in a way that the most appropriate ad component can be selected for each type of search query. And if this is located in the most optimal location and exposed to the users, then the satisfaction of the users in terms of the advertisement information is going to go up, and also it's going to drive higher CTR as well as conversion rate. This is something that NAVER has been doing all along. But with the help of the AI technology, we can be much more segmented, and also it could bring higher level of optimization. So by bringing machine learning to shopping search advertisement, we can further enhance CTR and conversion rates, which will help also the advertisers to improve their cost efficiency.

And also, we can remove any low-quality images, thereby increasing the overall advertisement quality. And we are currently upgrading the technology as we speak, so that there could be automated processes to automatically identify the most appropriate advertisement component, depending on the context and depending on the user group. It would be difficult to say what the impact of AI technology usage is in specific quantities -- in a quantitative term, but we are seeing overall improvement in different indicators, such as CTR and conversion rates. And as we improve -- and that will have an impact on basically optimizing the search ranking as well as ad component optimization, which will overall enhance the search-related quality. And that basically is having a positive impact on our top line.

So we are not just seeing increases in CTR rate. But basically satisfaction rate for search is also improving, and more partners are working with us, and we see more increases in the number of shopping contents that are exposed. And they are showed much effectively to the users and -- which is leading to an increase in shopping query as well. So with the increase in satisfaction, basically that is having a positive impact on our business platform.

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Unidentified Company Representative, [25]

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[Interpreted] Due to the time constraints, we will take the final and last question. If you have other questions, please contact our IR team.

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Operator [26]

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[Interpreted] The next question will be provided by Seyon Park from Morgan Stanley.

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Seyon Park, Morgan Stanley, Research Division - Equity Analyst [27]

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[Interpreted] I have a question on NAVER Pay. If Mirae -- we've mentioned the Mirae Asset effectively investing at minimum KRW 500 billion, so if we think about the equity structure, we would then assume that NAVER would, obviously, make a similar level of investment or even more. And that means that NAVER Pay's shareholder equity is at least going to be minimum KRW 500 billion, but if NAVER makes other equity investment then it will be at least KRW 1 trillion in size. You said that you are not going to go for a banking license, then this capital is quite excessive or is quite large in sum. So what are your plans? Or if that assumption is correct, what are your plans? What are your plans in terms of use of this capital?

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Seong-Sook Han, NAVER Corporation - President, CEO & Director [28]

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[Interpreted] Now NAVER Pay is actually doing a physical spin-off. So this is not whereby you're setting up an entity and then attracting or making equity investment. Basically, it is separating from NAVER and in that process, taking its assets, its people and its capital. So once, as of November 1, if this -- once the spin-off is complete, NAVER Pay, on its own, will have an asset that will amount to more than about KRW 600 billion as a separate entity. And then it will be after that point in time, Mirae Asset is going to start the valuation process and join as an investor once that spin-off is complete.

So aside from the capital that NAVER Pay is taking out from NAVER, at this point, we do not -- we're not planning for any additional equity investments into NAVER Pay.

In terms of the amount of capital as spin-off, basically, in order for us to engage in the digital financial-related business, there is a minimum capital requirement of KRW 5 billion. So that would be the starting point. And then Mirae Asset would later on come in with a premium in valuation. And so, yes, as you've mentioned, we will have surplus capital of around KRW 500 billion in cash. Now this will be used as a source of investment for coming 2 to 3 years in areas where we need to make investments for us to actually expand into the financial platform business. So NAVER financial will be engaging in those investments.

Thank you. That ends the Q2 2019 earnings call for NAVER, I look forward to your continued support and encouragement. Thank you.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]