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Edited Transcript of 035720.KQ earnings conference call or presentation 7-May-20 12:00am GMT

Q1 2020 Kakao Corp Earnings Call

SEOUL May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Kakao Corp earnings conference call or presentation Thursday, May 7, 2020 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eleanor Lee

Kakao Corp. - Manager of IR

* Jae-Hyun Bae

Kakao Corp. - EVP

* Min-Soo Yeo

Kakao Corp. - Co-CEO

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Conference Call Participants

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* Dong-hee Kim

Meritz Securities Co., Ltd., Research Division - Analyst

* Minuh Cha

Goldman Sachs Group Inc., Research Division - Analyst

* Soyun Shin

Crédit Suisse AG, Research Division - Research Analyst

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

* Yang Jae Kim

KTB Investment & Securities Co., Ltd., Research Division - Analyst

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Presentation

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Operator [1]

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[Interpreted] Good Morning. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal Year 2020 first quarter earnings results by Kakao. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions)

Now we shall commence the presentation on the fiscal Year 2020 first quarter earnings results by Kakao.

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Eleanor Lee, Kakao Corp. - Manager of IR [2]

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[Interpreted] Good morning. I am Eleanor from Kakao's IR team. We would like to now begin Kakao's Q1 2020 Earnings Release Call. With me today are our CEO, Mason Yeo; and Chief Investment Officer, Jae Bae. Please be reminded that the earnings results are consolidated estimates under the K-IFRS basis and, hence, are subject to change upon the auditor's review.

Let me now invite Mason for key business highlights.

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Min-Soo Yeo, Kakao Corp. - Co-CEO [3]

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[Interpreted] Good morning. This is Mason. Thank you for joining our earnings release presentation. In the face of unprecedented pandemic and economic uncertainties around the world, this first quarter was a very distinct juncture as Kakao Platform's competitiveness became ever more important. Under the crisis situation, Kakao and its affiliates undertook their business in Unity. And as a result, we once again recorded historical revenue and operating profit. 2020 marks the 10th anniversary of Kakao Talk. Over the past decade, Kakao led the way in transforming people's daily lives by supporting connections amongst users in many different forms. In the coming decade to come, we will work hard to solve myriad of social problems at the users face by leveraging technological progress and Kakao's innovation.

I would also like to take this opportunity to thank our investors for always supporting us and thank you to the Kakao crew for your dedication in this difficult time.

Let me begin with the overview of our platform business. This quarter, due to the pandemic, face-to-face in person communication became difficult. And so we saw more active communication via the Kakao Talk Messenger. Especially in February, when COVID-19 was at its peak, time spent on the chatting tab recorded weekly highs with greater volume of messages spent. Voice talk and face talk call traffic recorded a sizable increase, of which length of Groupo was double versus the previous quarter as it served a useful function during the time of social distancing. Also, we felt that providing reliable information real-time would be critical under the current circumstances. So we set up COVID-19 tab under Kakao Talk's Shop tab, effectively delivering relevant information. We also provided new spots so that users can receive news alerts via the messenger.

As frequency of usage increase for Kakao Talk messengers, Shop Tap page views and content consumption recorded historical highs. While shop search, which sits inside the chat window also increased, and this trend is continuing into Q2.

For the down portal, all measures show year-on-year increase, while the down mobile apps of 30% year-on-year growth in daily average run count. There was also a significant rise in the number of users visiting the site every single day. Thinking of the post-COVID world, real-time communication and delivery of product information will continue to be critical. Kakao will continue to utilize its assets and resources, and we do our best to position Kakao as users' first window of choice, they will resort to use at any moment in their life.

Moving on to Talk Biz. Advertisement business for Kakao was somewhat impacted on greater economic uncertainties during the first quarter. For the top Board, with slow seasonality for ads and COVID-19 impact, some advertisers' marketing demand seemed dampened. But others, even amid uncertainties, focus more on efficiencies, which led to continued rise in demand with number of advertisers making ad spend on Talk Boards growing to more than 5,400 on a cumulative basis, and such growth trend is showing signs of gradual recovery since the month of March.

Although it's difficult to make projections for the future, as we don't know when COVID-19 will end and the level of the fallout, after the pandemic, the speed at which our lives will turn digital will only accelerate. Kakao withstand at the very center of such digital transformation by optimizing our product portfolio and migration technologies that can fulfill our partners' demand and also will actively support marketing so as to bolster our platform competitiveness, which is distinct to Kakao.

Next is on Talk Biz, the commerce business. Q1 total GMV of Kakao Commerce, which includes gift, Talk Store, makers and others, expanded 55% year-on-year as they develop into a comprehensive integrated shopping platform that caters to different commerce-related needs of Kakao users. Q1 GMV for Gift was up 46% year-on-year, as we saw increases in gift deliveries and categories such as health care, hygiene and indoor activities on the back of COVID-19 outbreak. As such, the service scope of Kakao Gift is expanding from a simple gift vouchers to actual delivery of gifts. Driven by popularity of Talk deal, which is a new commerce service on the messaging platform, Q1 Talk Store GMV was up 5x year-on-year and 65% Q-on-Q, with number of buyers of more than threefold year-on-year and 50% Q-on-Q. Although it doesn't have high share out of the total commerce GMV, we are seeing up trends in repeat purchases with number of payment transactions expanding almost 7x year-over-year and 70% Q-on-Q as it adds new growth momentum behind Kakao Commerce.

GMV for Kakao pay in Q1 was KRW 14.3 trillion, up 39% year-on-year. An upgrade from Kakao Pay money account to securities brokerage account, which started in February, with close to 1 million users opening accounts spurred momentum to Money 2.0 strategy, underpinned by the real name account system. On April 28, we launched automatic fund investment and coin saving services, which we believe will be a good catalyst in helping to form a habit of investing for users who are not accustomed to making investments by starting out with a small sum of money. Meanwhile, Kakao Bank introduced Kakao Bank app 2.0 on the 27th, taking another LEAP as a financial form. App 2.0 brought further enhancements to user experience enabled by data analytics and is equipped with scalability so that we may nimbly respond to various different businesses that will unfold in the future. We recently launched credit card business and opened stock trading accounts, which posted a deep -- steep growth and started the service of connecting customers to loan services provided by other financial companies. All of which are driving up Kakao Bank's platform revenue. For information purposes, Kakao Bank's total asset as of Q1 end was KRW 23.4 trillion, up 44% year-on-year from previous year KRW 16.3 trillion. Loan and deposit balances were KRW 16.7 trillion and KRW 21.3 trillion, respectively.

Next is on the mobility business. Once we return to our daily lives from the current hiatus, we expect demand for mobility will be the first to witness recovery in demand. And when that time comes, users will be looking for mobility where safety is ensured. Kakao T Blue, therefore, has partnered up with a special quarantine company, disinfecting the vehicle before and after passenger comes on board to provide peace of mind to our customers. Also to meet users' need for premium services, we are planning to expand geographical service coverage of Kakao T Blue. Also, we are planning to expand on a more convenient and future-proof parking service, starting with major landmarks in Korea like the[co X & The Evolent] by Using Kakao T parking, users will be guided to the nearest parking space, pay parking fees without needing to stop to pay and will experience innovative smart mobility across the entire parking flow.

Next is on the update for our content business. In terms of the paid content, Q1 global platform GMV was up 51% year-on-year, reporting KRW 139.3 billion. We are seeing more than a double growth every year for Piccoma of Kakao Japan, since the launch of the platform back in 2016. And so we expect global GMV ratio, including Japan and Indonesia to surpass domestic GMV in the second half of this year. Such a pronounced global GMV growth is underpinned by competitiveness of K Story IPs will be by Kakao page. This year, we will go full force with K Story IP business by gaining a strong foothold Taiwan, Thailand and even China.

In music, Melon's Q1 paying subscribers was up 50,000 Q-on-Q, reporting a total of 5,070,000 subscribers. Notwithstanding slow seasonality in Q1 and competitions among music platforms, pain subscriber number went up because of the unique experience (inaudible) offered. So we consider this to be a quite meaningful outcome. In games, online PC Blockbuster title early on serviced by Kakao Games and developed by crafting successfully completed 3 trials last April and is fully ramping up for a domestic market launch. Supporters of this game, who took part in the pretrial phase raved about the game's high immersiveness, superb enhancements to the battle scenes and graphic, building up expectations around the launch of the game. Also, there was a global soft launching of mobile game, Guardian Tail in Southeast Asia and North America and it's under preparation for Global grand launch in the second half of the year. Last March, Kakao M also successfully won KRW 210 billion in investment from well-regarded global investors such as anchor equity based on its valuation of KRW 1.7 trillion. We expect this large-scale investment will help drive music, video, digital, live entertainment and production of original content with greater speed.

Lastly, I will walk through our enterprise business. Last year, we launched Kakao Enterprise, which -- and we're now entering into the B2B enterprise business. As we all experienced during this pandemic in the future world, remote working and nimble workplaces will become a norm. As Koreans biggest platform company, our goal is to grow into a leading provider in the B2B enterprise segment, leveraging Kakao Distinct know-how and technology. We project Korea's enterprise market to have more than 10 million end users and once Kakao work, which is the way we envision innovative working becomes the universal B2B solution, we expect it will entail great business opportunities and the new platform. To this end, we are currently in discussions with many different business partners. And for the time being, we'll officially launch Kakao Work, an integrated enterprise platform in the second half of the year. This ends key business highlights. We'll now turn over to Jae for (inaudible) financial.

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Jae-Hyun Bae, Kakao Corp. - EVP [4]

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[Interpreted] Hello this is Jae Bae, allow me to present on the financials. Despite the COVID-19 impact, as businesses continue to post growth, Q1 consolidated operating revenue was up 2% Q-on-Q and 23% year-on-year, reporting KRW 868.4 billion. First, the platform business revenue was down 1% Q-on-Q, but up 41% year-over-year, reporting KRW 441.8 billion. In terms of the breakdown, for the top bid revenue, despite dampened ad market, there was onboarding of new small to medium-sized advertisers, which supported stable talk board revenue. And with solid commerce growth, revenue inched up 1% Q-on-Q and 77% year-over-year, coming in at KRW 224.7 billion. Portal Biz revenue was directly impacted by cutting marketing budgets by major brand advertisers on the back of COVID pandemic and flu seasonality. As a result, revenue was down 13% Q-on-Q and 8% year-over-year, reporting KRW 116.6 billion. For new businesses, we see higher revenue contributions from Mobility's new business on expansion of franchise business of the premium taxi service Kakao T Blue. Also driven by Kakao Pay's sustained GMV growth, new business revenue in Q1 was up 14% Q-on-Q and 68% year-over-year, recording KRW 100.5 billion.

Content revenue was up 6% Q-on-Q and 8% year-over-year to KRW 426.6 billion. In terms of the music content, despite the fact that this was low seasonality, thanks to the sustained growth of Melon's subscriber base and also more stronger competitiveness of Kakao and digital content distribution capabilities, we were able to bring about robust growth. Therefore, it was down 2% Q-on-Q, and up 10% year-over-year, reporting KRW 150.7 billion. In terms of the revenue for the paid content, due to the base effect from previous quarter, the Q4 changes to the accounting standards of Kakao Japan, there was a 97% Q-on-Q increase. And also driven by a higher level of global GMV as well as increased number of paying users. The revenue on an year-over-year basis posted a 30% growth with the figure coming in at KRW 97 billion. Game content revenue was down 9% Q-on-Q due to the top line base effect from the launch of the Moonlight Sculptor in Q4 and was up 3% year-on-year, recording KRW 96.8 billion. Lastly, on the back of COVID-19 outbreak and dampened business environment for Kakao IX's Retail business, and Kakao M's performance and talent management business, IP business other revenue was KRW 81.9 billion, down 14% Q-on-Q, and 6% year-over-year.

Next is on consolidated operating expense and operating profit. Consolidated operating expense for Q1 was up 2% Q-on-Q and 15% year-over-year, reporting KRW 780.2 billion. In terms of the breakdown, labor costs fell 3% Q-on-Q on the base effect from yearly bonus in Q4, but on higher headcount from inclusion of consolidated affiliates and time-based recognition or normalization of the early bonus from Q1, labor cost increased 24% year-on-year, recording KRW 198.7 billion. Revenue-linked expenses went up 12% Q-on-Q due to the base effect of lower content commissions previous quarter on the back of changes in the accounting standard for Kakao Japan. And growth and paid content and distribution business led to 15% year-over-year increase, with total sum reporting KRW 381.7 billion. Outsourcing infrastructure expense was down 14% Q-on-Q on the base effect of one-off increases in outsourcing commissions in Q4. While there was 2% year-over-year increase on -- driven by increases in paid commissions from revenue growth of new businesses, including taxi service, with the total expense coming in at KRW 92.1 billion. Marketing expense was down 28% Q-on-Q, and 9% year-over-year to KRW 29.9 billion, as we downsized marketing versus the plan due to the changes in the external environment and the wake of COVID-19 outbreak. All in all, Q1 operating profit was up 11% Q-on-Q, and 219% year-over-year, posting KRW 88.2 billion with operating profit margin at 10.2%.

Next is on the nonoperating revenue and expenses. Nonoperating revenue was flat Q-on-Q, while on gains from disposition of equity method holding, there was 146% year over (sic) year-over-year increase with this figure reporting KRW 21.7 billion. Due to the base effect of recognizing impairment loss on intangibles last quarter, other expense was down 98% Q-on-Q and 41% year-over-year with the figure reporting KRW 9.5 billion. Financial income was KRW 36.8 billion, up 782% Q-on-Q, and 62% year-over-year because of dividends received from investor companies, including SK Telecom in the first quarter as well as gains from sales of foreign currency.

Financial expense was KRW 15.9 billion, which is down 5% Q-on-Q, and up 178% year-over-year on valuation losses from financial pressure.

Q1 corporate income tax expense was KRW 46.7 billion with effective tax rate at 36.9%. Q1 consolidated net profit came in at KRW 79.9 billion. Lastly, Q1 CapEx comprises several intangibles investments of KRW 43.2 billion. IPR and intangible investment of KRW 8.6 billion, with a total Q1 CapEx spend at KRW 51.8 billion. This ends the presentation on Q1 2020 performance. We will be happy to take your questions. But please be reminded to limit your questions to 2 per person.

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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 Eric Cha from Goldman Sachs.

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Minuh Cha, Goldman Sachs Group Inc., Research Division - Analyst [2]

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[Interpreted] My first question relates to the revenue trends per month basis for your top Board business. Could you share with us the data? And the second question is that you've mentioned that the increases in the number of small to mid advertisers who focus on efficiency have really offsetted the dampening of the demand from larger advertisers, so could you share with us what your ad learning rate was? And also, due to this impact of COVID-19, do you have plans to adjust your revenue target for this year.

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Min-Soo Yeo, Kakao Corp. - Co-CEO [3]

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[Interpreted] This is Mason. I will respond to your question. Your first question with respect to the monthly revenue trends for towards the ad-loading rate and the impact of COVID on our top line. Let me begin with -- let me begin by sharing with you on how we foresee the ad market to play in the second quarter. As you know, due to the impact of COVID pandemic, some impact was felt during the first quarter. The Korean government has changed its strategy from social distancing to distancing in daily life as of the May 6. And at -- however, at this point in time, it's very difficult to predict when the real economy is going to start to recover. And also, in light of the fact that the cut in the advertisement budget, actually took place in the second quarter of the year. I would have to cautiously say that the impact on the overall measures could be bigger in the second quarter as compared to the first quarter. Now having said that, once we see recovery in the real economy, we believe that demand for advertisement is also going to rebound. Considering the fact that in the first half of this year, the marketing activities was very much dampened. I believe that there is some pent-up demand for advertisement, for the high season, which is on our way. So to this end, basically, in order to respond to a gradual recovery and the demand for advertisement, we are going to make full preparations. And hence, at this point, we're really focusing on further bolstering our ad competitiveness. That is unique to Kakao.

In terms of the daily revenue, due to the low seasonality impact and the COVID-19 impact, it is true that the month of January and February posted a lower daily revenue as compared to December. But as we entered into the month of March, we are seeing gradual recovery. And if you look at the total Q1 top Board revenue, basically, we've recovered to the level of Q4 of last year, which actually was the highest season. So we expect that as we go into the second quarter, we will be able to report a higher revenue than compared to the first quarter.

So in terms of the 2020 guidance, notwithstanding this unprecedented crisis, we are still seeing a very sound traffic and efficiencies relating to this top world product. Therefore, we believe that we will be amply, we will sufficiently be able to achieve our annual guidance of 50% growth, which we communicated at the beginning of the year.

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Jae-Hyun Bae, Kakao Corp. - EVP [4]

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[Interpreted] This is Jae. To respond to your question on Q2 outlook and the status of Q1. If you look at this quarter, due to the impact of COVID pandemic, the ad market was dampened as well as consumption was impacted. So there were a lot of changes surrounding our business backdrop. But if you look at Talk Biz, which is one of our key growth engines for Kakao, we see a very steady revenue creation from top Board and messaging ad. And also, we've seen quite solid growth from our commerce business, including Kakao Gift and Talk Store. Thanks to all of these factors, despite the fact that Q4 of last year was a high season, and it really had a big -- high level of base effect, we were able to continue to post a Q-on-Q top line growth. Also, if you look at our new businesses. Thanks to diversified revenue sources of Kakao Pay, we've seen significant rise in our platform revenue. And for our content business, Piccoma of Kakao Japan, had hosted a very steep growth rate, and all of these factors contributed to a very positive top line growth. Amid, overall, quite difficult business environment, Kakao's Q1 operating profit on a Q-on-Q basis has posted a significant increase. And that is thanks to our very stringent control of cost and also a reduction in the marketing spend. But at the same time, starting last year, we have really pursued a flexible and diversified business structures and really pertain all of efforts to bring about monetization of our new businesses. We think that all of these efforts really paid off.

And therefore, we -- going forward, we believe a better growth rate is possible, and we have no plan to adjust on our annual guidance.

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Operator [5]

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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 [6]

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[Interpreted] I would like to first congratulate you on your good results. My first question relates to your guidance. You've mentioned that for the Talk Biz, you're looking to achieve 50% yearly growth. But previously, I also heard on other occasions, you mentioned KRW 1 trillion of top line. Is this a possible figure? And is this KRW 1 trillion still hold or still stands in light of the COVID impact to come in the second quarter. And also, you've mentioned the standby demand for advertisement as we go into the second half.

So after reflecting all of these factors, could you give us some more color with regards to this KRW 1 trillion figure, the target that you've previously communicated? And also, your operating profit margin guidance is 10%. Q1 figure, you actually have outperformed that guidance. Do you have plan to increase the initially communicated guidance on op margin?

Second question has to do with your advertisement product. First, on Bizboard, if you look at the life cycle of this product, it's been launched less than a year ago, and the top line is continuously rising. When do you see the peak will come? And also your cumulative advertiser number, is that 5,400? What is your long-term target? And if you could also specify the ad load rate, the current and the potential that will be appreciated. So basically, I'm asking for your mid- to long-term visibility when it comes to your Bizboard product.

And lastly, you've also mentioned shop tap. The traffic is rising very steeply. In your own -- and good way to monetize this product. Do you have, however, a plan to add and introduce another advertising product?

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Min-Soo Yeo, Kakao Corp. - Co-CEO [7]

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[Interpreted] Yes. This is Mason. Thank you for asking many questions. With respect to top base revenue, the 50% growth target and around KRW 1 trillion of revenue, as we think that we are optimistic that we will be able to achieve those goals.

And the reason why I have that optimism is because of how our Talk Biz revenue is comprised. The revenue is basically generated off of our Kakao Talk messenger platform. And if you look at the ad load rate or the inventory, we're currently using low double-digit utilization of that inventory. And this second half topic is continuously rising. So we actually do have quite ample inventory in place to use as an appetite.

And also under the Talk Biz, we also have Kakao Talk Gift, the commerce element. With the coming of this whole untapped culture, we are expanding the gift -- gift, I guess, behavior, premier exchange of gift vouchers or coupons to an actual delivery of gift goods. And this actually is another driver behind the revenue growth of Talk Biz.

And also, if you look at our Biz message, we have a category called business message, which includes information talk, friends talk as well as support talk. We've seen the demand for these services increased in line with the whole trend of digital transformation. And this is a key driver behind additional growth. And these are some of the reasons why we are quite optimistic that we will be able to achieve our Talk Biz guidance.

So to provide more color on the overall Talk Biz landscape, basically, our strategy is to very actively broaden Kakao Talk's in-landing campaign, which cuts through TalkBoard, Kakao Talk Channel, the Support Talk and Talk Store, et cetera. If you look at the ratio of in-lending percentage for TalkBoard as of end of Q1, it's actually surpassed 20%. And we've seen that the return on ad spend, ROAS, significantly improve on cases where there's been connections where people landed into the Talk Store.

So this type of in-landing strategy is going to help us secure long-term growth for TalkBoard and also help us to expand on the advertiser pool, and it also accelerates the growth of Kakao's Business solution.

Now on the life cycle of the TalkBoard product, yes, it's been less in a year, and your question was how far do we think that this product will go? In terms of our inventory trend as well as the traffic trend, we are quite optimistic. And in terms of number of advertisers, we are targeting around more than 10,000 advertisers by the end of the year, especially because small to medium advertisers prefer to the use of the performance-based ad market. And there is a good growth to become from -- good growth to come from this performance ad market. And with the expansion of the performance-based ad market, we expect number of advertisers will also rise. And we're only at the beginning stage of the formation of this market.

You've also asked about the shop tap. What plans we have to monetize the traffic that we see under that tap? Please be reminded that TalkBoard, basically, is a product that is based off of our performance advertisement platform called Kakao Moment. And so whether it's shop tap or any other location, wherever there is traffic, there's always possibility for us to actually apply TalkBoard. So I can definitely say that this is a product that has scalability.

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Jae-Hyun Bae, Kakao Corp. - EVP [8]

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[Interpreted] This is Jae, responding to your question on operating profit margin. In Q1, we recorded a double-digit OPM. And although we have room to further grow operating profit margin in the second half of the year rather than profitability, for the time being, we want to focus a little more on the growth of our business. So we maintain our OPM guidance at this 2-digit figure.

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Operator [9]

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[Interpreted] The next question will be provided by Meritz Securities from -- by Kim Dong-hee.

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Dong-hee Kim, Meritz Securities Co., Ltd., Research Division - Analyst [10]

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[Interpreted] I would like to ask 2 questions. First, on your paid content. You mentioned that in the second half of the year, your global GMV could surpass or could be higher than domestic. But what about profitability? Can you share with us what your projections are? And also, comparing your incumbent business with the new business, can you give us a profitability or P&L breakdown for Q1? And also what is your outlook going forward?

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Jae-Hyun Bae, Kakao Corp. - EVP [11]

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[Interpreted] This is Jae, responding to your paid content question. If you look at Q1, paid content GMV, global platform GMV was up 12% Q-on-Q and 51% year-over-year with the content revenue reporting KRW 139.3 billion. We've seen a very fast and sizable GMV growth, not only in the domestic market, but also Japan and Indonesia. So we are seeing a quite meaningful growth.

If you look at Kakao Japan, Piccoma, it's a service that we're providing in Japan. Recently, we've seen daily GMV surpass KRW 1 billion. And compared to the overall digital manga market in Japan, the growth rate is much faster. And also continuing on from the growth trend of Q4 already also in Q1, operating profit has reported a plus figure, and we are seeing a very qualitative growth, and that's why it's more meaningful.

And especially webtoon, which is showing a very pronounced growth within Piccoma. Q1 revenue was up 59% Q-on-Q and 225% year-over-year, really expanding on its exposure. K-webtoon is a content that people could very casually enjoy, and it is optimized for mobile environment and really preferred by the young generation. So based on the cooperation with Kakao Page, we're going to further strengthen sourcing of high-quality story IPs, and we will very closely cooperate with local partners who have shown great amount of interest in Korea's webtoon and so that we may continue to bring about growth.

This is Jae, giving you the breakdown between our existing business and new business operating profit. On a consolidated op basis, Kakao's operating profit reported KRW 88.2 billion, and if we break that down from existing businesses, OP was KRW 110.5 billion. From new business, there was operating loss of negative KRW 22.3 billion.

Looking at the new business, or operating loss, basically on a Q-on-Q basis, it was less by KRW 20.6 billion year-over-year, less by KRW 29.9 billion of operating loss. Kakao Japan has turned positive in operating profit since Q4 of 2019. Also Kakao Pay and Kakao Mobility, they're expanding their monetization models and are currently strengthening their operational leverage and underpinned by these factors, they are very quickly reducing the size of operating losses. All in all, from existing business, our operating profit is expanding. And from our new businesses, we are narrowing the operating loss margin.

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Operator [12]

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[Interpreted] The next question will be presented by Kim Yang Jae from KTB Investment & Securities.

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Yang Jae Kim, KTB Investment & Securities Co., Ltd., Research Division - Analyst [13]

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[Interpreted] I would like to ask 2 questions. First, what is your Q1 GMV for commerce? And what is your mid- to long-term growth strategy for your commerce business? Second question relates to your Tech-Fin businesses. For Kakao Bank, Kakao Pay and Kakao Securities, what is your strategy for growth? And how do you foresee to bring about synergies across these different entities?

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Jae-Hyun Bae, Kakao Corp. - EVP [14]

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[Interpreted] If you look at Kakao Commerce, basically, we built and expanded on a -- on our own commerce business portfolio that there is much to take as it is based off of our Kakao Talk messenger platform. Currently, the online shopping market is growing very fast as compared to the offline market, but it's very difficult to gain a highly loyal user base. Because there is a greater level of expectations that is levied on these players by the consumers.

Under this very difficult competitive environment. Basically, we were able to develop a Kakao Talk Gift, which really embeds the social factor that best befits the messenger platform that Kakao has. And also, we established Kakao Makers, which truly changes the paradigm of manufacturing. And so we've been quite successful in these new attempts at applying a new concept based commerce business.

And with such experiences, we also launched Talk Deal and Talk Store, really moving away from the existing price competition paradigm. We are expanding our commerce relations to based on the relationship that we have with the sellers and the buyers. By introducing Talk Deal, users can really discover Talk Store products, and we are seeing purchase numbers actually go up and especially repeat purchases. People who come back to repurchase within 1 week is also going up. So we have high hopes for this business.

Kakao Commerce going forward is going to bring about a stronger bind with Kakao Moment, advertisement and other key marketing solutions like Talk Channel and Info Talk. And so we don't want to just give push messages out to users. We want to give them the feel that they're receiving very useful content, and we want to help the sellers gain highly loyal customers.

If you look at the click-through rate of the commerce messages that we've recently sent out through our Talk Channel as well as the purchase conversion rate, there's a very meaningful uptrend. And I think this really shows the interactive nature that Kakao Talk users have. Going forward, we're going to really focus on enhancing the quality of the shopping experience and we want to make sure that our platform is an essential platform for them.

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Min-Soo Yeo, Kakao Corp. - Co-CEO [15]

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[Interpreted] This is Mason. I will respond to your question about the synergies between -- with Kakao Bank, Kakao Pay. Up to now, we've been -- Kakao and Kakao Bank and Kakao Pay, we've been very closely cooperating and generating synergies.

To sight a couple of examples, basically, if you look at Kakao Bank, a lot of users who really loved the products that we introduced for a very simple P2P transfer and a back book for groups. And by introducing support chatbot at Kakao Bank, basically, it replaced the existing call center traffic to 30% -- by 30%. And really increased customer satisfaction and improved on efficiencies.

And also, we received consent from Kakao Bank customers who took up loans from Kakao Bank, basically, making use of these users' information -- their purchase information via Kakao shopping and Kakao mobility and also their taxi onboarding related information. By taking these data, we developed our own credit risk models and we are currently using this information in setting credit risk related threshold for these users.

And as you know, Kakao Pay as a Tech-Fin company, based on 40 million Kakao Talk messenger users, it's currently providing very innovative mobile financial services in areas such as mobile payment, P2P transfer, investment and insurance. And Kakao Bank, as it holds banking license, it's really creating and bringing about innovation to banking services based off of the financial products that it provides.

So starting this year, we are really going to discuss different ways to leverage all of these user experiences that exist and arise from the Kakao affiliates, the Kakao Bank and Kakao Pay. Basically, by -- if you look at the user base that we have, that actually was a key driver behind the growth of Kakao Bank, and we believe that it's going to play a bigger role as we go forward.

Just to help you better understand, if I may cite an example for Kakao Pay and Kakao Bank, I mean, these 2 companies have become a company that is -- it's a Tech-Fin company based off of the Mega traffic. If you look at the banking business, for a bank NIM -- net interest margin-based business is a key traditional approach to banking. But on top of that, Kakao Bank has laid the basis to actually bring about the platform business as well.

Now if you look at the NIM business side of Kakao Bank, as it was announced via the press last, on the 6th, Q1 Kakao Bank's net profit was KRW 18.5 billion. Basically, it posted a significant growth compared to KRW 6.6 billion the previous period. Its net interest income posted KRW 84.4 billion, which is also a significant growth compared to the previous quarter's KRW 54.5 billion. Basically, this is driven by a continuous user expansion as well as quite solid loan asset growth.

On top of the interest income that the bank is making, we have high potential coming in from Kakao Bank's platform revenue. Underpinned by its superb user base customer base, and with the provision of innovative solutions, there is now bigger opportunity for us to really make use of the platform business. That leverages the significant traffic that a business has. Thanks to the expansion of the platform business in the first quarter, net fees and commissions loss was only KRW 3.1 billion, so which is a significant improvement compared to the previous quarter's KRW 14.8 billion.

Now this improvement is driven by a continuous growth from a loan recommendation service and also the setup of securities brokerage accounts, which we started since last year. And NH investment security was onboarded as a new partner in that business. And also, we started a credit card issuance service on the 27th, which is quite well received by the user base. As such, we expect platform revenue growth for Kakao Bank to continue and accelerate going forward.

So just like Kakao Bank, we also have similar case example to share with you for Kakao Pay. In February, we officially launched Kakao Pay securities brokerage account upgrade program. And despite the fact that we didn't really engage in much marketing because of COVID-19, as of today, we've seen more -- around 1 million accounts being issued. So we've done some analysis on users who've upgraded from the Money 1.0 virtual account to a 2.0, which is a real name based account. And the data shows that their average balance is actually 10x that of the past. And also, we see high level of usability of such accounts. And so we expect that the overall financial product trading as well, overall financial product trading as well as investment to go up in the future.

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Operator [16]

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

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Soyun Shin, Crédit Suisse AG, Research Division - Research Analyst [17]

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[Interpreted] My first question is on the back of the COVID-19, do you see any changes to the growth potential of the e-commerce market compared to the beginning of this year? And also what impact would that have on your business expansion approach?

And your commerce profitability was actually better last year compared to your peers. Would that still continue? And also, what is your Q2 marketing spend plans?

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Jae-Hyun Bae, Kakao Corp. - EVP [18]

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[Interpreted] Yes. This is Jae, responding to your question on commerce. Basically, the overall GMV for Q1 for Kakao Commerce, including Gift, Talk Store and Makers, it was up 55% year-on-year, and it's really growing to become a very comprehensive shopping platform that satisfy the needs of the users.

If you look at Kakao Talk Gift, Q1 GMV was up 46% year-over-year. And with the impact of COVID-19, that was at its peak in February. We've seen significant increases in the gift deliveries. With -- in the categories of health care, hygiene, indoor activities, et cetera. And so we see that the overall trend is actually expanding from a mere exchange of gift vouchers to actual delivery of gift.

And looking at Talk Store, Q1 Talk Store GMV, thanks to the Talk Deal, the new product, the GMV has gone up 5x year-over-year and 65% Q-on-Q. Number of buyers went up by 3x and 50% -- 3x year-over-year and 50% Q-on-Q. And especially, we've seen high level of repurchase rates and the amount of payment transactions that were made increased 7x year-over-year and 70% on a Q-on-Q basis, and it's really working as a new growth engine for Kakao Commerce.

Yes, it is true that online shopping is growing and there is higher demand, but a lot of e-commerce companies are engaging in price competition and they're aggressively expanding their logistic system in order to gain a market upper hand. But Kakao Commerce, we're going to leverage the strong buyings that we have, the Kakao Talk messenger, and really separate ourselves from the competitive landscape where there are multiple number of e-commerce players. And we are doing a good job of positioning ourselves as a very specialized services.

And also our service platform is specialized based off of relationship, and it has been very effectively spread to the user base. So even without high level of marketing investments, we are able to sustain our high-growth rate. So with such growth potential of Makers and also very solid ad revenue of shopping how, we actually have a structure where we are able to actually bring about high level of profit from Kakao Commerce as a whole.

Now last year, Kakao Commerce, on a stand-alone basis, its op margin was 25.6%, up to Q1 since the commerce GMV continues to show an up trend. And because all the indicators are quite solid, we think that their contribution to Kakao's overall operating profit is going to increase.

For the marketing planning for the entire year, we have currently budgeted about 5% of our total revenue as our marketing budget. And this resources is going to be used in expanding financial services of Kakao Pay and also to really bring about global growth for our paid content, including Kakao Page and Piccoma. So that will be the key uses for our marketing budget.

For Kakao Pay in Q1, because of the unstable financial market and the overall uncertainties, we stayed away from aggressive service expansion. We've focused more on normalizing of the new services. But in the second quarter, we are going to restart our promotion on Money 2.0.

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

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[Interpreted] Thank you. This brings us to the end of Q1 2020 earnings presentation. Thank you to our investors, analysts and members of the press for joining us this morning. Thank you.

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