U.S. Markets open in 4 hrs 26 mins

Edited Transcript of 035720.KQ earnings conference call or presentation 8-Aug-19 12:00am GMT

Q2 2019 Kakao Corp Earnings Call

SEOUL Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Kakao Corp earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Eleanor Lee

Kakao Corp. - Manager of IR

* Jae-Hyun Bae

Kakao Corp. - EVP

* Min-Soo Yeo

Kakao Corp. - Co-CEO

================================================================================

Conference Call Participants

================================================================================

* Jae-min Ahn

NH Investment & Securities Co., Ltd., Research Division - Internet and Media Analyst

* Seungjoo Ro

CLSA Limited, Research Division - Research Analyst

* Seyon Park

Morgan Stanley, Research Division - Equity Analyst

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

* Sung Eun Kim

Macquarie Research - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [1]

--------------------------------------------------------------------------------

(foreign language)

[Interpreted] Good morning. I am Eleanor from Kakao's IR team. Thank you for joining Kakao's Second Quarter 2019 Earnings Release Call. With me today are CEO, Mason Yeo; and VP of Business Strategy, Jae Bae. Please be reminded that the earnings results are consolidated estimates under the K-IFRs basis and are -- and subject to change upon the auditor's review. Let me now invite Mason for key business highlights.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [2]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [3]

--------------------------------------------------------------------------------

[Interpreted] Good morning, this is Mason. Thank you for joining our earnings call today. Kakao has been building on its influence as a platform through years of investments, and with Q2 as a turning point, has entered a phase of structural earnings growth. I would like to take this opportunity to really deliver my deep gratitude to our partners, who spared no efforts right by our side, and also to Kakao's staff who've worked hard night and day.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [4]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [5]

--------------------------------------------------------------------------------

[Interpreted] Let me begin with the platform business. Talk Biz, which is Kakao's core growth driver, is opening up new horizons for Kakao Talk as a business platform for 40 million users who use the messenger on a daily basis as we launched Talk Bizboard -- or also called just TalkBoard -- at the start of the closed beta test last May. TalkBoard is basically located where most number of people come most frequently of all the media spaces out there, and so has been getting a lot of interest from advertisers since the launch. As this is the first time an ad is being placed on a platform used by the entire nation, based on data and user feedback, we are currently testing target users, frequency, location, targeting and optimization algorithms to broaden the scope of application in stages. From June, we've been expanding the scope of TalkBoard's testing to 300 advertisers from key sectors, i.e. commerce, fashion, beauty, retail, finance, education and films. By analyzing how advertisers are using the TalkBoard, such as looking at the patterns, user clicks and purchase indicators, we're making improvements to the performance of the platform to better the efficiency of ad campaigns.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [6]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [7]

--------------------------------------------------------------------------------

[Interpreted] TalkBoard has seen higher than industry average [click per view] and based on competitive CPC have won the interest of both branding and performance-driven advertisers. Advertisers with big budgets are interested in how they can run a campaign with scale against a 40 million base. And those with smaller budgets expect to find efficient ways to attract their potential customers by use of targeting algorithms.

In recent days, TV viewership is on a rapid decline. And with more time spent online, there is growing advertiser demand for a more efficient online advertisement. Kakao, through TalkBoard, is offering a platform for businesses to meet new customers, engage them and send relevant messages at the right moment, enabling advertisers to develop business solutions that best befit new user experience requirements on the mobile platform. To allow this to happen in the second half through Kakao Moment, the ad platform, we will open the platform and start the beta test, so that all advertisers can freely use the TalkBoard.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [8]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [9]

--------------------------------------------------------------------------------

[Interpreted] [Average] transformation in the digital trends, we are thinking hard about the usability aspect of the Kakao Talk Messenger. Kakao profile, for instance, was a place for an individual to express oneself. And in the new profile, which underwent a revamp, first time in 4 years, we've made visual improvement for UI, allowing people to express oneself better and added music and video elements to show the special side they desire to express. As Talk profile evolves into a more interactive space, user profile's value as content has expanded. And as users consider the messenger as a tool to expect oneself, usability, loyalty and lock-in effect is growing. After Talk profile revamp last July, total of 19 million users have adopted profile changes, with people in their teens and 20s showing a significant usage increase.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [10]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [11]

--------------------------------------------------------------------------------

[Interpreted] Messenger users' distinct communication culture is also seen in the Talk Biz commerce business. First off, Kakao Talk Gift, loved by many, has seen Q2 GMV grow more than 55% year-over-year, driving the growth in scale for commerce. People who received gifts through friends' birthday tab over last year are now gifting others, which led to growth in number of buyers and GMV as well. And in May, gifting was enabled in open chatting and so the use case is increasing beyond friends. Starting August, we plan to add popular global brands to offer more choices to users.

And in Q2, by leveraging the relationship aspects unique to Kakao Talk, we began Talk Deal, which is a new online group buying services. During the 1-month beta test in June, a total of 45,000 transactions were initiated with 17,000 products offered. And success rate for transactions for the last week of June was over 94%. Through such new accounts like the Talk Deal, we will broaden the scope of commerce business, which is unique to Kakao.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [12]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [13]

--------------------------------------------------------------------------------

[Interpreted] Next is on businesses under platform. Kakao Mobility continued a robust growth in Q2. First, Kakao Driver is enhancing service quality through adopting a price optimization system. Thanks to such efforts, we saw both demand and supply rise in Q2 with 32% increase year-over-year in daily average driver attendance and 41% increase in completed requests, with revenue up 58%. Under more stringent regulations against DUI, driving under influence, we expect such growth to continue in the second half as well.

Another recent MOLIT plan for taxi regulation changes for inclusive growth, Kakao Taxi now has the environment ready for it to seek inclusive growth for the taxi industry, while offering more convenient and innovative services to users and expand its business at the same time. Waygo Blue, which is a franchise-based platform taxi -- since its official service launch last April, brought high user satisfaction with number of calls sharply rising. Collaborating taxi companies recognize the business feasibility as well, and so we expect more partners to join as we go forward. On a side note for Kakao T app, more than 8 million have registered their credit card information, and we expect the introduction of premium service that supports the convenience will enhance synergies for Kakao Pay, quickly leading to monetization of mobility.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [14]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [15]

--------------------------------------------------------------------------------

[Interpreted] Next is on Kakao Pay. Q2 GMV was KRW 11.4 trillion with first half GMV reaching KRW 22 trillion, overtaking last year's annual GMV of KRW 20 trillion in just a semester. This quarter with the launch of Kakao Pay app, we introduced integrated financial management, receipt and delivery service, setting itself as a trusted lifestyle financial platform for all with 30 million total users and 19 million active monthly users who can engage in financial services with just Kakao Pay alone. According to a recent survey done by Korea Consumer Board, Kakao Pay ranked #1 in consumer satisfaction for mobile simple payment, once again proving its competitiveness.

Particularly noteworthy from the rapid growth of Kakao Pay is the growth of the money payment. GMV growth for transfer was driven by ease of P2P transfer, which led to growth in the use of money payment with a positive feed into bill payment, investment, delivery and many other verticals, greatly supporting user retention as well as monetization of pay. For investment, product lineup continues to expand with around 70,000 investments executed in July with average investment size growing more than 50% compared to the early days of launch. In line with such success, we expect solid growth from soon to be launched insurance service as well.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [16]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [17]

--------------------------------------------------------------------------------

[Interpreted] Next is update on content business. In games, Princess Connect! Re:Dive, launched end of March, is quite popular in both app markets. And Path of Exile, a PC game launched early June, is also showing good results as Kakao Games, once again, proves itself as a global game publisher in both PC and mobile space. TERA Classic, which is an MMORPG game to be launched on the 13th; and Legendary Moonlight Sculptor, which is scheduled for the second half, will help Games broaden its competitiveness as a publisher for the relevant genres of titles. Also, proprietary character IP-based games will help to add lineup of games as a developer and complete a diverse array of game portfolio for Kakao Games.

For music, absent any mega content in Q2, which is unusual, number of Melon's paying subscribers continued to be at around 5,080,000. Melon had placed strategic focus on user retention in Q2, focusing on efficiency, which led to 5% Q-on-Q music revenue growth, recording a historical high. With Talk Music Player, newly placed on the top menu in the messenger and revamp of Talk Profile, messenger users' use of music content is growing significantly. As such, we expect to lead the market growth by offering differentiated music experience, enabled by strong platform synergies between Melon and Kakao Talk.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [18]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [19]

--------------------------------------------------------------------------------

[Interpreted] In terms of paid content, Kakao Page continues to expand value chain investments around outstanding story IPs to build K-story competitiveness in global markets, not limiting itself to the boundaries of domestic market. Underpinned by unrivaled content edge in the second half, we plan to further build on traffic for individual titles through Page original featuring new well-made and immersive stories with the add-on of AI-based recommendation features. We will continue to strengthen loyalty of our solid user base, which we've been gaining since last year and will work under the goal of achieving growth in both GMV and profitability terms. Kakao Page's Indonesian business has seen sustained monthly GMV growth since service revamp in April. Our business approach will be such that we can bring K-wave in the story business, as we've done so in music and drama.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [20]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [21]

--------------------------------------------------------------------------------

[Interpreted] Lastly, I am happy to say that Kakao Bank will be part of Kakao's affiliate community. On July 24, with the approval of the holding shares in excess of the ownership limit, Kakao can now own up to statutory limit of 34% of KakaoBank of Korea Corp. to become the majority shareholder. This will be a first for an ICT company like Kakao to become a majority shareholder of an online-based bank, and we plan to expand cooperation in technology and in terms of investment at the group level so that Kakao Bank may bring innovation in a new frontier of finance and banking and grow into a bigger bank in the future.

(foreign language)

That ends the key business highlights. I now invite Jae to present on Q2 financial results.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [22]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [23]

--------------------------------------------------------------------------------

[Interpreted] Good morning, this is Jae. I will begin now with 2019 Q2 financial results. Q2 consolidated operating revenue was KRW 733 billion, up 4% Q-on-Q and 24% year-over-year. First, on high season for ads and balanced growth from both Talk Biz and Portal Biz, platform revenue was up 4% Q-on-Q, while year-over-year on Talk-based ads and outstanding growth from commerce and revenue growth from new businesses, such as Mobility and Pay, year-over-year growth was 30% with revenue reporting KRW 326.8 billion.

In more detail, Talk Biz revenue was up 9% Q-on-Q on expanded ad inventory within Kakao Talk and higher ad revenue driven by large increases in Gift GMV. There was 42% year-over-year growth with revenue reporting KRW 138.9 billion. Driven by high seasonality, which drove up mobile banner ad revenue, Portal Biz revenue was up 8% Q-on-Q and with sustained mobile ad revenue growth and adoption of new ad platform Moment, Y-o-Y growth was 7%, with revenue reporting KRW 136.9 billion. For new businesses, although Mobility and Pay posted a solid growth, [as some subsidiary] has been removed from consolidated statement from Q2, reflected 15% Q-on-Q decline. On higher Kakao T driver revenue from Mobility and Pay's on- and offline payment revenue, year-over-year growth was 103% with revenue coming in at KRW 51 billion.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [24]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [25]

--------------------------------------------------------------------------------

[Interpreted] In terms of content revenue, there was balanced growth from game, music, paid content bringing 3% Q-on-Q growth underpinned by higher paid content revenue, both domestic and overseas, and new consolidation impact from IP businesses. There was 20% year-over-year growth with content revenue reporting KRW 406.2 billion. For the game content revenue, despite lower domestic overseas PC game revenue on the back of low seasonality, new mobile titles such as Princess Connect! Re:Dive and Friends Town had a popular run, leading to 5% Q-on-Q growth. And due to the base effect from PUBG, which started commercialization in the PC cafes at the second quarter of last year, there was 12% year-over-year decline, with game revenue reporting KRW 98.4 billion.

Music content revenue was up 5% Q-on-Q and 11% year-over-year to KRW 144.6 billion, on efficient promotional strategy for Melon platform and good performance from digital distribution channels, which led to an overall growth in topline.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [26]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [27]

--------------------------------------------------------------------------------

[Interpreted] Paid content revenue was up 9% Q-on-Q due to growth in domestic, overseas paid users and GMV and was up 60% year-over-year to KRW 81.5 billion. Lastly, IP Business/Other revenue in Q2 was down 6% Q-on-Q on decline in mega artist record launches and on impact from addition of new subsidiary of Kakao in the consolidated statement. And online revenue growth from Kakao IX revenue was up 82% year-over-year to KRW 81.7 billion.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [28]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [29]

--------------------------------------------------------------------------------

[Interpreted] Next is on consolidated operating expense and profit. Q2 consolidated operating expense was up KRW 13.9 billion Q-on-Q and KRW 131.2 billion year-over-year to KRW 692.6 billion.

Key items are, labor costs was flat Q-on-Q basis, but due to aggressive new hiring in 2018, it was up KRW 33.1 billion year-over-year to KRW 159 billion.

Revenue-linked expense was up KRW 11.2 billion, reporting KRW 341.9 billion, on increase in commissions related to higher ad and paid-content revenue. Underpinned by continued growth in commerce revenue and higher new business revenues, including Pay, Mobility and global, it was up KRW 81.1 billion year-over-year.

Outsourcing/Infrastructure expense was down KRW 5.5 billion to KRW 84.4 billion on the back of deconsolidation effect. And was up KRW 10.7 billion year-over-year, on increase in commission not linked to the revenue.

Marketing expense was at KRW 7 billion on promotional spend with the launch of new game titles but was down KRW 6.1 billion year-over-year to KRW 39.9 billion due to the base effect from mass marketing for paid content spend in the second quarter of last year. All in all, Q2 operating profit was up 46% Q-on-Q and 47% year-over-year to KRW 40.5 billion with operating margin at 6%.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [30]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [31]

--------------------------------------------------------------------------------

[Interpreted] Next is on nonoperating revenue and expense items. First, Q2 other income was up KRW 4.6 billion Q-on-Q to KRW 13.5 billion due to recognition of KRW 7.1 billion of gains from disposition of shares of equity method companies previously invested by the company. Other expense was down KRW 5.1 billion Q-on-Q to KRW 11 billion due to the base effect from impairment loss from companies under equity method treatment, which was booked in Q1. On decline in valuation gained from invested companies classified as AFS Securities, financial income was down KRW 9.5 billion Q-on-Q to KRW 13.3 billion. And financial expense was up KRW 8 billion Q-on-Q, reporting KRW 13.8 billion.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [32]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [33]

--------------------------------------------------------------------------------

[Interpreted] Q2 consolidated net income was up KRW 13.4 billion Q-on-Q and KRW 8.5 billion year-over-year, marking KRW 31 billion with net income margin of 4%. For your information, Q2 corporate income tax recorded KRW 22.6 billion with consolidated basis effective tax rate of 42%. However, considering tax impact from subsidiary losses and impairment losses from invested equity, readjusted effective tax rate is closer to the statutory rate at 24%.

Lastly, Q2 CapEx breakdown is KRW 26.1 billion for service intangible assets and KRW 15.1 billion for intangible CapEx, amounting to a total of KRW 41.2 billion.

The ends the presentation on second quarter 2019 earnings. We will now take your questions. Please limit your questions to 2 per person, as we are mindful of the time.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(foreign language)

The first question will be presented by Sung Eun Kim from Macquarie.

--------------------------------------------------------------------------------

Sung Eun Kim, Macquarie Research - Analyst [2]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [3]

--------------------------------------------------------------------------------

[Interpreted] My first question relates to your Bizboard. You've mentioned that in the second half, with the start of the open beta, we would -- we could expect an increase in the number of advertisers. So can you provide some guidance with respect to how things will play out in the -- as we go forward into the second half? And would you be able to achieve the 20% advertisement growth, which you've communicated at the beginning of the year?

Second is with the deconsolidation of some of the subsidiaries, it seems there was some impact on your new business and related expenses. Can you provide some more details on this aspect?

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [4]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [5]

--------------------------------------------------------------------------------

[Interpreted] I will respond to your first question on Bizboard. The question relates to after the open beta test, will we be able to see increase in number of advertisers and can we achieve the 20% growth that we have committed. As you know, TalkBoard is only at its initial stage and based on the feedback that we're getting from the advertisers and the responses from the users, we're in the process of adjusting the inventory in a staged manner. I understand there is high expectations on the TalkBoard revenue and its potential growth possibilities. We've gone through a certain level of test -- initial phase, although -- in the month of June and July. And based on that learning, I would like to share with you a couple of points.

Despite some limited impressions that we are seeing from TalkBoard, we are currently seeing around KRW 200 million to KRW 300 million of daily revenue -- that's an average figure. Basically, we are currently focused on which advertisers to expose -- which advertisement to expose to which target customers as we conduct the campaign and as we conduct the test as against the 300 advertisers who are taking part in the closed beta test, rather than focusing on a short-term revenue generation. So we're basically adjusting. We're basically making adjustments to the amount of impressions that are being placed on this space. And even if there exists a demand from the advertiser side, we believe that it's very important for us to determine the level of inventory that we would need to sell through this channel. So up to Q3, we will continue to conduct the test. And from the fourth quarter, we will be adjusting the inventory for Talk Board and match the revenue as well as the operating profit trends.

Moving onto a more fundamental question about the potential growth for TalkBoard as we go forward. In order for us to clearly understand the value of an advertisement product, we require -- it requires a lot of assumptions. But just simply and intuitively put, basically, you will be able to calculate the value of an ad product based on the number of users, the impression, the cost and the duration. If we were to make consideration based on these elements, for TalkBoard, every day 40 million people are using this space on a very frequent basis. And therefore, the advertisement revenue is going to be determined based on the number of impression frequencies as well as cost per impression. At this point, we are applying various different tests on the total maximum and minimum impression frequencies required for the TalkBoard. And basically, Talk Chatting tab is the place where people visit on a frequent basis. So we believe that rather than the frequency itself, what's more important is the location of the advertisement as well as the brand and the interest that the people have for certain brands.

In light of all these factors, rather than focusing on how much revenue TalkBoard can actually regenerate, we're more focused on how can the mobile ad campaign be improved in an efficient manner and also free from the constraints of inherent media that we've previously experienced, how can one run a campaign that's most creative with flashy messages. And also, focus will be placed on the type of support that a platform could give for such efficient advertisement practice. Lastly, we will focus on building our business solution, including the TalkBoard, the Plus Friend, and Notification Talk of Talk Biz and also further grow the commerce aspects, including Kakao Gift.

Basically, Talk Biz revenue, we're expecting 50% growth this year. And by the end of the year, our revenue is going to grow to more than KRW 600 billion, and we expect such growth rate to continue on into next year.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [6]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [7]

--------------------------------------------------------------------------------

[Interpreted] Hello, this is Jae. Responding to your second question with the deconsolidation effect of a subsidiary that had an impact both on the revenue as well as the cost line items. So all in all, in terms of P&L impact, there was actually no impact.

(foreign language)

We'll take the next question please.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(foreign language)

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

--------------------------------------------------------------------------------

Seyon Park, Morgan Stanley, Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [10]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. First, on Kakao Pay. Can you give us an update as to your license or acquisition-related efforts regarding borrowed securities? Would we be able to see this issue resolved by the end of this year? Second question, if you look at Pay GMV, it seems like Q2 GMV was flat Q-on-Q or maybe slightly lower. What are the key reasons behind such sluggishness?

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [11]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [12]

--------------------------------------------------------------------------------

[Interpreted] This is Jae responding to your question about Baro Investment and Securities acquisition. As we have communicated in previous quarter, as of April 9, FSC has actually completed their deliberation and review on the eligibility as a majority shareholder. And we're currently waiting for the review -- or the final review by the authorities. We are a party that is receiving this review. So it is a bit difficult for us to make any projections. So I would like to ask for your understanding on that aspect.

But irrespective of this specific case, Kakao Pay actually is very aggressively broadening its portfolio as a financial service provider under the partnership with many banks, credit card companies, securities, brokerages and insurance companies. And it is really establishing itself as a lifestyle financial platform, and things are going as planned.

Once the acquisition is complete, based upon the experience built so far, we expect that Kakao Pay would be able to very quickly expand on its product portfolio. I do understand that many people have interest on this acquisition. So whenever relevant information become available, we will share those information with you.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [13]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [14]

--------------------------------------------------------------------------------

[Interpreted] Continuing on to respond to your second question. If you look at Q2 GMV of Kakao Pay, it was KRW 11.4 trillion. So compared to KRW 10 trillion of the first quarter, you could make that comparison.

This basically is more than 30x growth compared to the time in Q1 of 2017 when Kakao Pay received the investments and financials. So it is quite an outstanding performance.

Basically, P2P transfer has grown very steeply, thanks to the network effect from Kakao Talk messenger, and it has now become a key monetization lever for Kakao Pay.

Now recently, Kakao Pay has been expanding into pay money and transfer and also money payment element is growing quite rapidly and is entering into new businesses such as investment and delivery as well. So we are seeing overall improvement in the operating leverage. As a result, Q2 revenue was off by more than 2x on a year-over-year basis.

Looking at the payment business. Of course, we see a very outstanding growth on the online payment growth, mostly around large franchises. But starting last year, we focused on the offline growth as well in -- through expanding the merchant base and also strengthening the brand awareness. As a result, on a Q-on-Q basis, the total payment-related GMV as well as a number of transactions have all gone up on a Q-on-Q basis once again.

And also, Kakao Pay's e-document features, whereby people can actually make their income tax filings through NTS and can receive other local tax-related notifications. They can receive mobile notifications as well. And people are making Kakao Pay for paying up their taxes and bills. And as a result, the use case of Kakao Pay has gotten much more stronger.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [15]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [16]

--------------------------------------------------------------------------------

[Interpreted] Also to elaborate on the second half. Basically starting this year, our objective is to achieve balanced growth in our process of achieving monetization as pay is underpinned by a sound traffic and also improving earnings. And our financial fundamental is also improving as well.

In the second half, we will be expanding our financial product lineup including insurance products and also launching new affinity services which will accelerate a top line growth. So on a per annum basis, we are basically expanding -- expecting reduction in the deficit. It's a bit early for us to tell you the timing of BEP. However, in light of the fact that our new business is growing quite quickly, we expect that the profitability will also improve in a quite steep manner.

(foreign language)

Interpreted Next question please.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(foreign language)

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

--------------------------------------------------------------------------------

Stanley Yang, JP Morgan Chase & Co, Research Division - Analyst [18]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [19]

--------------------------------------------------------------------------------

[Interpreted] I would like to post 2 questions. First on Talk Board you mentioned the daily average revenue of KRW 200 million to KRW 300 million, which is much higher than market expected. As you go through open beta phase and commercialization, how further would you be -- would you expect that your daily revenue would go up?

Second is the Talk Board is growing in a quite steep manner. Then would you be adjusting your advertisement growth guidance of 20%, which you shared with us previously? Or is Talk Board business cannibalizing your other ad products?

Second question also relates to Naver -- excuse, Pay, Kakao Pay. Naver has recently announced that it's going to focus its efforts on payment business and focus on growth strategy of Pay based upon its favorable cost structure in place.

Now Kakao Pay's key strategy is underpinned by your P2P transfer strength. Now how then on the cost side what are your plans to improve your cost structure, especially considering the fact that the government is expecting the phone banking commission rates to actually go down to 1/10 of what it is today? Do you think that, that could actually be achieved? And if so, when will the timing be?

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [20]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [21]

--------------------------------------------------------------------------------

[Interpreted] This is Mason. Responding to your question, the Talk Board revenue is yes, showing a quite sound growth. And you also asked about our guidance of 20% ad growth and also some cannibalization related to this. So I will respond to all of those.

As you know, this year, we've seen a very exclusive growth in Kakao Talk ads. And so last quarter, we gave you a growth guidance of 50% for Talk Biz revenue. In light of the growth rate in the first half, despite the fact that Talk Board product really didn't make big contributions to the first half figure, there was a sound growth of Plus Friends, Notification Talk as well as #Tab revenue. So as a result, year-over-year, Talk Biz's revenue was up 43%.

Now starting the second half, Talk Board product, in part, is going to start to feed in. And despite August being a low season, the speed at which the revenue is going up is quite sound. And if we really accelerate our business up to Q4, we can, we believe, safely achieve that 50% sales target which we promised at the beginning of the year. Basically for Talk Board, we believe that making a very -- success case is quite important, and we place a strategic priority on that initiative. And basically, we will do our best to make sure that from a mid- to long-term perspective, Talk Board could bring about business value.

Moving on to your question about the potential cannibalization and competitiveness of [the] competitors. As you know, as of 2018, the digital ad market, market share is only at 14%. And of that digital ad market, Kakao's share is only 12%. Going forward, we believe that the offline ad market is going to start to migrate to a digital base. And with that, Kakao's market share is going to go up in a salient manner.

If you look at digital ad market, market share, U.S. has [50%] and China has 60%. And so we believe domestic online ad market has a potential for growth. And Talk Board is going to be a catalyst that bring about that change. And I believe that it will play an important role in that process.

In terms of cannibalization, we do receive some questions about potential cannibalization between the ad products that Kakao offer. But after the launch of the Talk Board, if you look at the trend of our DA, the display ad, basically we're seeing a very stable upward growth trend for both the Talk Board as well as just the typical DA. So that means that the advertisers are not shifting their budget from DA to Talk Board. But basically, they're allocating higher amount of budget to the entire Kakao platform-based advertisement.

So overall, with the launch of this very competitive product called the Talk Board, we are seeing much more number of business partners come onboard to Kakao platform. And basically, the existing advertisers' interest on Talk Board is actually going up, and it's giving a very positive signal to Kakao's display ad as well.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [22]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [23]

--------------------------------------------------------------------------------

[Interpreted] This is Jae. On Kakao Pay's competitiveness, basically Kakao Pay is connected to Kakao Talk, which is used by 40 million every day. And basically, it has unrivaled base of subscribers and GMV. Over many years, we've made investments. And as a result, out of the Kakao Talk users, 30 million have actually converted or have adopted the Kakao Pay. And out of those people, 19 million are using Kakao Pay on a daily basis, and they are the ones that are generating monthly KRW 4 trillion of GMV.

Kakao Pay, underpinned by the platform competitiveness that Kakao Talk the messenger has, is offering very innovative and creative services. With just the use of the Talk, one can very easily make payments both online and offline and can make P2P transfers quite easily as if you're just sending a simple message and also can receive e-receipt as well as e-document and is also organically connected to those services that's close to our daily life like Kakao Taxi and Kakao Gift. So it's offering new experience at every moment.

And this type of connectivity is something that only Kakao Pay can provide. And that basically is the key differentiating competitive edge that Kakao Pay wields. Basically, the service that Kakao Pay offers actually steps over the realm of online. Even in the offline, there is various different bill payment, delivery and integrated point mileage accumulation service verification and as well as financial management service that's being offered. So it's at the very core of the user's financial life.

It offers convenience. And also, it has -- it is underpinned by a strong financial soundness that can -- who can securely protect the assets of the users. And basically, Kakao Pay is equipped with technology as well.

Kakao Pay was able to break the prejudice that finance is something difficult for everyday users. And hence with the introduction or launch of its investment services, it was well received by the user base. And it's opening up a new financial ecosystem. We will soon be launching an insurance service, and this product will also be easy to understand. And this will be a reasonable product which will significantly help with the monetization of Kakao Pay.

Thanks to the financial services that Kakao Pay offers, we expect that the monthly KRW 4 trillion of GMV is going to grow further as we go into the future, and it will help Kakao Pay establish itself as a very sound financial platform.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [24]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [25]

--------------------------------------------------------------------------------

[Interpreted] In terms of the transfer-related banking commissions and marketing expense-related aspects, let me provide some more elaboration there. In terms of the transfer commission, as we communicated previously, basically out of the KRW 89.2 billion of -- KRW 9 billion are paid commissions. And under the audited report of last year's pay statement, phone banking commission accounted for a lion's portion.

Basically when it comes to specific numbers, please understand that we won't be able to disclose them as they are subject to individual contracts and agreements with the banks. However, with a very stellar growth that we are seeing from Kakao Pay as well as increase in GMV, the absolute amount of phone banking commission is bound to go up. However, from the second quarter, we've been conducting a campaign in order to entice people to top up their money points on a monthly basis. And we've made revamps on the transfer-related policy.

So through many different efforts, we are trying to save on -- or reduce the phone banking costs. As a result, we expect that cost to go down continuously. And if you -- even look at our quarterly GMV amount, in recent days we've seen more growth from payment and investment compared to the P2P transfers. So I think that would also have some positive impact as well.

Especially through -- especially at the end of February through the financial payment infrastructure innovation plan, open banking -- open banking master plan was announced by the authorities. And at this point, the banking industry as well as the fintech companies are collaborating. And they are in the process of devising a more detailed plan which will lay the guideline in terms of the security as well -- security aspect as well. And we believe that, that initiative will help to relieve the burden that Kakao Pay has in the commissions that it is required to pay.

So that whole direction is quite positive. And with the pilot in the banking sector starting October, this whole initiative will spread and will come under full swing in month of December. And Kakao Pay is therefore also considering adopting the open banking regime. And once that open banking regime is adopted, we expect starting next year the phone banking commission burden is going to be relieved quite significantly.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [26]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [27]

--------------------------------------------------------------------------------

[Interpreted] And on marketing, in order for us to accelerate balanced growth and monetization of our earnings, our marketing approach is going to be based on maximizing efficiency. Up to now, we've conducted discount promotions, the use of promotions, providing discount at the point of payment, and also at the merchant level, providing also a discount on the credit card. But recently, we've shifted that focus, and we are much more emphasizing providing more benefits in terms of different services, for instance, through the use of the Kakao Pay money. So -- and also, Kakao Pay reward is a good case in point. That really represents the type of marketing activities that we're currently focusing on.

Going forward, we'll be quite flexible in responding with the marketing budget and the marketing spend. But in light of the fact that Pay's financial fundamentals is becoming much more sounder, we believe that such marketing-related expense is not going to translate into a deficit for the company.

(foreign language)

Interpreted Next question, please.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

(foreign language)

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

--------------------------------------------------------------------------------

Seungjoo Ro, CLSA Limited, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [30]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. On Talk Board, what is your monthly number impressions? And once that impression figure becomes stabilized, can we expect introduction of video ads, which has higher cost or higher price?

And can you give us an update on Plus Friends? On the -- and also on the commerce side, what's the number of merchants? And what is the GMV trend like? I asked this question because I believe that these will be the key levers behind the Kakao Pay's GMV.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [31]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [32]

--------------------------------------------------------------------------------

[Interpreted] This is Mason. I thank you for your interest on Talk Board. I see we're getting a lot of questions there. At this point, so the impressions are being operated at a very limited basis. Against the 40 million Kakao Talk users, what we're doing right now is basically coming up with a more balanced way to expose the advertisers -- advertisement for each of the target segment, and we are monitoring the responses of the user group. The entire user base of this ad, Talk Board, is of course 40 million. But at this point, we're operating this in a very limited impression and page view basis.

So how can we actually drive up that impression as we go forward? As mentioned previously, through increasing the click-through rate, the conversion and looking at the user responses and also improving the landing pages, which are all scheduled to happen in the second half. We will be considering various different elements all in combination to come up with a way that is most efficient. And with that, we believe that we will be able to further enhance the impression.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [33]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [34]

--------------------------------------------------------------------------------

[Interpreted] Responding to your question. When it comes to the Talk Board, basically people are using Talk Board. It's a good tool for people to add their Plus Friends. So basically, there are advertisements that are targeting for that to actually happen.

So what we are seeing is that the advertisers have now understood, and they actually need the help of the Plus Friends. They know the effectiveness of it. And they're making use of Talk Board to increase that -- increase in the Plus Friends aspect.

When it comes to Plus Friends, in Q2, the Plus Friends revenue was a 30% Q-on-Q and also was 53% up year-over-year. So it has shown a quite steep growth. Basically, we were able to prove the effectiveness of marketing that utilizes Plus Friends messages. And initially, we started with the large advertisers, but we have expanded to include the smaller SMBs as well. We've seen continuous increase in the number of partners. And the outbound messaging has gone up as well.

And also we -- there is something called smart message. In the second quarter, basically 60-or-so Plus Friends have actually experienced the very high efficiency of the smart message. What message does is to select the most efficient element and send it to a group of people that has a higher level of positive responses. And that could actually help with the success of Plus Friends as we go forward.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [35]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [36]

--------------------------------------------------------------------------------

[Interpreted] On Talk Store, basically we are continuing to upgrade the Talk Store platform. And we've set up a new sales organization. And once the connection to EC Hosting companies is complete, the connection to selling tools is going to be more strengthened.

Basically through the Talk Store, people could actually land to Talk Board. And once they come onto this platform, they could receive support. And also, sales can be closed upon this platform as a messenger-based one-stop shopping channel. And also in the second quarter, basically the new Talk Stores have actually grown to more than 10x compared to the past.

(foreign language)

Interpreted Because of the time, we will take the last and the final question.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

(foreign language)

[Interpreted] The last question will be provided by Jae-min Ahn from NH Investment & Securities.

--------------------------------------------------------------------------------

Jae-min Ahn, NH Investment & Securities Co., Ltd., Research Division - Internet and Media Analyst [38]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [39]

--------------------------------------------------------------------------------

[Interpreted] Just a very simple question. So when will you be booking revenue from Talk Board? Would that be at the timing of commercialization? So can we expect you to recognize revenue from Q3?

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [40]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [41]

--------------------------------------------------------------------------------

[Interpreted] When it comes to Talk Board, when an advertisement product is launched, what's most important is checking the user acceptance. And we believe that we've completed that over the months of May, June and July.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [42]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [43]

--------------------------------------------------------------------------------

[Interpreted] And secondly from the advertiser's perspective, we have to review and check the usability aspect, meaning the efficiency aspect. But where is the focus at? Is it at branding? Or is it at performance? If it's branding, does this really increase the brand awareness? If it's at performance, have we seen much more number of clicks? So over the past 3 months, these were the aspects that we've been checking and we've been monitoring.

--------------------------------------------------------------------------------

Min-Soo Yeo, Kakao Corp. - Co-CEO [44]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [45]

--------------------------------------------------------------------------------

[Interpreted] And also after August, we mentioned that we've been -- we will be doing an open beta test. And if I were to just share with you some of the advertisers who've been on board, and you've probably seen their names on our Talk Board, such as Market Kurly, [Mags] Securities, Volvo, Coca-Cola, Kia, Hyundai Motors, Samsung (inaudible). Now advertisers from all different industry sectors have been on board. And hence, we were able to really monitor and confirm the branding and performance-related impact.

What's left to do for us in the third and the fourth quarter is to make additional improvements on the landing page which will drive also the expansion of the -- or the increase of the impression, which we believe will lead to the overall increase in revenue as well.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [46]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [47]

--------------------------------------------------------------------------------

[Interpreted] This is Jae. I will respond to your second half revenue-related outlook question, and then we will close the Q&A session.

At the beginning of the year, our growth target in terms of top line was 23%. And on the first half basis, we were able to achieve 26% year-over-year. So things are going quite well. And in the second half, Talk Board is going to start to really contribute to our top line. And also, commerce ecosystem is expanding. And with the high growth rate of Talk Biz revenue, hence we are -- we expect that we will be able to achieve high growth for Talk Biz revenue.

And also because Kakao Pay's GMV is growing and our financial services portfolio is expanding and with the growth of the content platform revenue which includes games, music and paid content, and in light of the fact that in the first half there was solid growth rate, we think that in 2019, Kakao's revenue as a whole will be within the KRW 3 trillion range. And we will be able to outperform the targets that we communicated at the beginning of the year.

--------------------------------------------------------------------------------

Jae-Hyun Bae, Kakao Corp. - EVP [48]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Eleanor Lee, Kakao Corp. - Manager of IR [49]

--------------------------------------------------------------------------------

[Interpreted] In terms of operating profit, cumulative OP as of first half of the year actually was 93% of 2018's per annum OP. And so our efforts are really materializing. The key driver behind the improvement in Q2 OP is underpinned by the earnings growth of Kakao Talk's base businesses as well as the growth rate from the new businesses as well as cost efficiencies that we were able to achieve, which is all contributing to building a positive virtual cycle.

If you look at Q2, Kakao's existing business operating profit was at KRW 87.5 billion, which is actually a record high on a quarterly basis since 2018. And also for the new businesses, our operating loss was at 47%, which is a significant improvement from Q4 of last year at KRW 65 billion.

From a mid- to long-term perspective, we believe that Q3 is actually the starting point of our earnings improvement cycle. In the coming 2 to 3 years, we're going to further expand our influence in the digital advertisement market. And also, we'll achieve growth in terms of size from our new business areas including finance, mobility and IP. And we believe that with the improvement of profitability in our new business initiative, which we've been building so far, we think that there is ample room for additional operating profit growth.

(foreign language)

Interpreted Thank you. That brings us to the end of 2019 second quarter earnings conference call. I thank the analysts, the investors and the members of the press for joining us this morning.

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